GLOBAL SMALL CAP FUND INC, POS 8C, 1997-10-03

GLOBAL SMALL CAP FUND INC
POS 8C, 1997-10-03

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<PAGE>

As filed with the Securities and Exchange Commission on October 3, 1997

Securities Act File No. 33-64808
Investment Company Act File No. 811-7814
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------------
FORM N-2

Registration Statement Under the Securities Act of 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 5 /X/
and
Registration Statement Under the Investment Company Act of 1940 /X/
Amendment No. 8 /X/
(Check appropriate box or boxes)

---------------------

GLOBAL SMALL CAP FUND INC.
(Exact name of Registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (212) 713-2000

---------------------

DIANNE E. O'DONNELL, ESQ.
Vice President and Secretary
GLOBAL SMALL CAP FUND INC.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)

---------------------

Copies to:

ROBERT A. WITTIE, ESQ. ROSEANNE HARFORD, ESQ.
JENNIFER R. GONZALEZ, ESQ. MITCHELL HUTCHINS ASSET
KIRKPATRICK & LOCKHART LLP MANAGEMENT INC.
1800 Massachusetts Avenue, N.W. 1285 Avenue of the Americas
Washington, D.C. 20036-1800 New York, New York 10019

-----------

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: /X/

It is proposed that this filing will become effective (check
appropriate box)

/X/ when declared effective pursuant to Section 8(c)

This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.

- --------------------------------------------------------------------------------

<PAGE>

Global Small Fund Inc.
Form N-2 Cross Reference Sheet
<TABLE>
<CAPTION>

Part A
Item Number Caption Prospectus Caption
- ----------- ------- ------------------
<S> <C> <C>

1 Outside Front Cover............................. Outside Front Cover of Prospectus
2 Inside Front and Outside Back Cover Page........ Inside Front and Outside Back Cover Page of
Prospectus
3 Fee Table and Synopsis.......................... Fund Expenses; Prospectus Summary
4 Financial Highlights............................ Financial Highlights
5 Plan of Distribution............................ Outside Front Cover; The Offering; Management
of the Fund; Description of Capital Stock
6 Selling Shareholders............................ Not Applicable
7 Use of Proceeds................................. Use of Proceeds; Investment Objective and
Policies; Other Investment Practices
8 General Description of Registrant............... Prospectus Summary; Trading History; The Fund;
Investment Objective and Policies; Other
Investment Practices; Special Considerations
and Risk Factors; Description of Capital Stock
9 Management...................................... Management of the Fund; Description of Capital
Stock; Custodian, Transfer and Dividend
Disbursing Agent and Registrar
10 Capital Stock, Long-Term Debt and Other
Securities...................................... Dividends and Other Distributions; Dividend
Reinvestment Plan; Taxation; Description of
Capital Stock
11 Defaults and Arrears on Senior Securities....... Not Applicable
12 Legal Proceedings............................... Not Applicable
13 Table of Contents of the Statement of Additional
Information..................................... Further Information

<CAPTION>
Part B
Item Number Caption Statement of Additional Information
- ---------- ------- -----------------------------------
<S> <C> <C>

14 Cover Page...................................... Cover Page of Statement of Additional
Information
15 Table of Contents............................... Outside Back Cover Page of Statement of
Additional Information
16 General Information and History................. Not Applicable
17 Investment Objective and Policies............... Investment Policies and Restrictions; Hedging
and Other Strategies Using Derivative
Instruments; Portfolio Transactions
18 Management...................................... Directors and Officers

19 Control Persons and Principal Holders of
Securities...................................... Control Persons and Principal Holders of
Securities
20 Investment Advisory and Other Services.......... Directors and Officers; Investment Advisory
Arrangements; Additional Information;
Management of the Fund (in Prospectus);
Custodian, Transfer and Dividend Disbursing
Agent and Registrar (in Prospectus)
21 Brokerage Allocation and Other Practices........ Portfolio Transactions
22 Tax Status...................................... Taxation
23 Financial Statements............................ Financial Statements

</TABLE>

<PAGE>
GLOBAL SMALL CAP FUND INC.
COMMON STOCK

------------------------

Global Small Cap Fund Inc. (the 'Fund') is a diversified, closed-end
management investment company. The Fund's investment objective is long-term
capital appreciation. To seek to achieve this objective, the Fund normally
invests primarily in equity securities of small capitalization ('small cap')
companies located throughout the world, including Asia, Europe, the Far East,
the Middle East, North Africa, and the Americas. For purposes of the foregoing,
small cap companies are companies that, at the time of investment, have market
capitalizations of $1 billion or less. No assurance can be given that the Fund
will achieve its investment objective.

Investment in the Fund involves special considerations and risks that are
not normally present in investments in funds that invest solely in the
securities of U.S. issuers. The Fund may invest in equity securities of foreign
companies located in emerging market countries. Many foreign securities markets
are characterized by a relatively small number of equity issues and low trading
volumes, resulting in comparatively greater price volatility and less liquidity.
SEE 'SPECIAL CONSIDERATIONS AND RISK FACTORS.'

The Fund's common stock ('Common Stock') is listed and traded on the
American Stock Exchange, Inc. ('Amex') under the symbol 'GSG.' NO ADDITIONAL
SHARES OF COMMON STOCK WILL BE ISSUED IN CONNECTION WITH THIS OFFERING. The
Common Stock may be offered pursuant to this Prospectus from time to time in
order to effect over-the-counter ('OTC') secondary market sales by PaineWebber
Incorporated ('PaineWebber') in its capacity as a dealer and secondary
market-maker at negotiated prices related to prevailing market prices on the
Amex at the time of sale. The closing price for the Common Stock on the Amex on
November 14, 1997 was $ . See 'Trading History.' The Fund will not receive
any proceeds from the sale of the Common Stock offered pursuant to this
Prospectus.

Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins') serves as the
Fund's investment adviser and administrator. GE Investment Management
Incorporated ('GEIM') serves as the Fund's sub-adviser. This Prospectus
concisely sets forth certain information an investor should know before
investing and should be retained for future reference. A Statement of Additional
Information ('SAI') dated December 1, 1997 has been filed with the Securities
and Exchange Commission and is incorporated by reference in its entirety into
this Prospectus. A Table of Contents for the SAI is set forth as the last
section of this Prospectus. A copy of the SAI can be obtained without charge by
writing to the Fund, by contacting your PaineWebber investment executive or
PaineWebber correspondent firms or by calling toll-free (800) 852-4750.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

------------------

PAINEWEBBER INCORPORATED

------------------

The date of this Prospectus is December 1, 1997.

<PAGE>
FUND EXPENSES

The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price).... None(1)
Dividend Reinvestment Plan Fees................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON STOCK)(2)
Investment Advisory and Administration Fees....... 1.00%
Other Expenses.................................... 0.53%
----
Total Annual Expenses........................ 1.53%
----
----
</TABLE>

- ------------------
(1) Prices for shares of Common Stock traded in the OTC secondary market will
reflect ordinary dealer mark-ups.

(2) See 'Management of the Fund' for additional information. 'Other Expenses'
have been estimated based upon expenses actually incurred for fiscal year
ended July 31, 1997.

EXAMPLE

An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return and (ii)
reinvestment of all distributions at net asset value:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -------- ----------- ---------- ---------
<S> <C> <C> <C>
$16 $47 $80 $174
</TABLE>

This Example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown (except that Annual Expenses have
been reduced to reflect the completion of organization expense amortization
after five years from the commencement of investment operations). The above

tables and the assumption in the Example of a 5% annual return and reinvestment
at net asset value are required by regulation of the Securities and Exchange
Commission ('SEC') applicable to all closed-end investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Common Stock. In addition, while this
Example assumes reinvestment of all dividends and other distributions at net
asset value, participants in the Fund's Dividend Reinvestment Plan ('Plan') will
receive shares of the Common Stock purchased by the Plan's agent at the market
price in effect at that time, which may be at, above or below net asset value.

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES,
AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.

<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and in the 'SAI.' Investors
should carefully consider information set forth under the heading 'Special
Considerations and Risk Factors.'

<TABLE>
<S> <C>
The Fund.................. Global Small Cap Fund Inc. is a diversified,
closed-end management investment company. See 'The
Fund.'

The Offering.............. No additional shares of the Fund's common stock will
be issued in connection with this offering. Shares
of Common Stock may be offered pursuant to this
Prospectus from time to time in order to effect
OTC secondary market sales by PaineWebber in its
capacity as a dealer and secondary market-maker at
negotiated prices related to prevailing market
prices on the Amex at the time of sale. The Common
Stock is listed and traded on the Amex under the
symbol 'GSG.' See 'The Offering' and 'Trading
History.'

Investment Objective and
Policies................ The Fund's investment objective is long-term capital
appreciation. To seek to achieve this objective,
the Fund normally invests at least 65% of its
total assets in equity securities of small cap
companies located throughout the world, including
Asia, Europe, the Far East, the Middle East, North
Africa, and the Americas. For purposes of the
foregoing, small cap companies are companies that,
at the time of investment, have market
capitalizations of $1 billion or less. While the
Fund is not restricted in the portion of its
assets that may be invested in a single country or
region, it is anticipated that, in normal market
conditions, the Fund's assets will be invested in
issuers in at least three countries. In managing
the Fund's portfolio, the Fund's sub-adviser seeks
to identify those small cap companies, both in the
United States and abroad, that are likely to
benefit from long-term trends as they develop in
the global economy. The Fund's investment policies
are designed to enable it to capitalize on unique
investment opportunities presented throughout the
world and in international financial markets
influenced by the increasing interdependency of

economic cycles and currency exchange rates. The
Fund may invest up to 35% of its total assets in
other securities, including equity securities of
companies with higher market capitalizations and
in debt securities. It may invest up to 25% of its
assets in convertible debt securities of domestic
and foreign issuers and up to 10% of its assets in
non-convertible debt securities of domestic and
foreign issuers, including obligations issued or
guaranteed by the U.S. or foreign governments or
their agencies or instrumentalities. The Fund may
engage in hedging strategies to attempt to reduce
the overall risk of its investment portfolio,
including foreign currency transactions in an
attempt to manage the Fund's
</TABLE>

3
<PAGE>

<TABLE>
<S> <C>
foreign currency exposure. No assurance can be
given that the Fund will achieve its objective.

Investment Adviser and
Administrator........... Mitchell Hutchins, a wholly owned asset management
subsidiary of PaineWebber, serves as the Fund's
investment adviser and administrator. Mitchell
Hutchins provides investment advisory and
portfolio management services to investment
companies, pension funds and other institutional,
corporate and individual clients. As of October
31, 1997, total assets under Mitchell Hutchins'
management were approximately $ billion. As of
that date, Mitchell Hutchins served as investment
adviser or sub-adviser to 27 registered investment
companies with 63 separate portfolios having
aggregate assets of approximately $ billion.
See 'Management of the Fund.'

Sub-Adviser............... GEIM serves as the Fund's sub-adviser under a
Sub-Advisory Contract with Mitchell Hutchins. See
'Management of the Fund.'

Custodian,Transfer and
Dividend Disbursing
Agent................... State Street Bank and Trust Company serves as
custodian of the Fund's assets. PNC Bank, National
Association (the 'Transfer Agent') serves as
transfer and dividend disbursing agent and as
registrar for the Fund. See 'Custodian, Transfer

and Dividend Disbursing Agent and Registrar.'

Dividends and Other
Distributions........... The Fund distributes as dividends all of its net
investment income and net short-term capital gain,
if any, at least annually. The Fund distributes
substantially all of its net capital gain (the
excess of net long-term capital gain over net
short-term capital loss) with the regular annual
dividend. The Fund also distributes any net
realized gains from foreign currency transactions
with such dividend. The Fund may make additional
distributions if necessary to avoid a 4% excise
tax on certain undistributed income and capital
gain. See 'Dividends and Other Distributions;
Dividend Reinvestment Plan' and 'Taxation.'

Dividend Reinvestment
Plan.................... The Fund has established a Dividend Reinvestment
Plan ('Plan') under which all stockholders whose
shares of Common Stock are registered in their own
names, or in the name of PaineWebber (or its
nominee), have all dividends and other
distributions on their shares of Common Stock
automatically reinvested in additional shares of
Common Stock, unless they elect to receive cash.
Additional shares of Common Stock acquired under
the Plan are purchased in the open market, on the
Amex or otherwise at prices that may be higher or
lower than the net asset value per share at the
time of the purchase. Stockholders who hold their
shares in the name of a broker or nominee other
than PaineWebber (or its nominee) should contact
such broker or other nominee to determine whether,
or
</TABLE>

4
<PAGE>

<TABLE>
<S> <C>
how, they may participate in the Plan. The Fund
will not issue any new shares of Common Stock in
connection with the Plan. See 'Dividends and Other
Distributions; Dividend Reinvestment Plan.'

Special Considerations and
Risk Factors............ Small Cap Companies. Small cap companies may be
more vulnerable than larger companies to adverse
business or economic developments. Small cap
companies may also have limited product lines,

markets or financial resources. Securities of such
companies may be less liquid and more volatile
than securities of larger companies or the market
averages in general and, therefore, may involve
greater risk than investing in larger companies.
In addition, small cap companies may not be
well-known to the investing public, may not have
institutional ownership and may have only
cyclical, static or moderate growth prospects.

Foreign Securities. Investments in foreign
securities involve risks relating to political,
social and economic developments abroad as well as
those that result from the differences between the
regulations to which U.S. and foreign issuers and
markets are subject. Individual foreign economies
also may differ favorably or unfavorably from the
U.S. economy. Interest and dividend income on
foreign securities may be subject to non-U.S.
withholding and other taxes that, if not
recoverable by the Fund, may reduce the Fund's
return. In addition, substantial limitations may
exist in certain countries with respect to the
Fund's ability to repatriate investment, capital
or the proceeds of sales of securities. Further,
changes in foreign currency exchange rates will
affect the Fund's net asset value, the value of
interest and dividends earned and gains and losses
realized on the sale of securities denominated in
foreign currencies. Foreign securities may be
traded on non-U.S. securities exchanges or
markets. Securities of many foreign issuers are
less liquid and their prices more volatile than
securities of comparable U.S. issuers. These risks
are often heightened for investments in emerging
markets. The smaller capitalization and lower
trading volume of certain of those securities
markets may result in greater market volatility
and illiquidity of such foreign securities as
compared to securities of U.S. small cap companies
that are traded on U.S. markets. Accounting,
auditing and financial reporting standards in many
countries may, in some instances, be less rigorous
than such standards in the United States, and less
information may be available to investors
investing in countries other than the United
States than is available to investors investing in
the United States. There is also generally less
governmental regulation of the securities markets
in most other countries than in the United States.
The operating expense ratio of the Fund can be
expected to be higher than that of an investment
company investing exclusively in U.S. securities
because

</TABLE>

5
<PAGE>

<TABLE>
<S> <C>
certain expenses of investing in foreign
securities, such as transaction, settlement and
custodial costs, are higher.

Illiquid Securities. The Fund may invest up to 20%
of its net assets in illiquid securities. A
security is termed 'illiquid' if the Fund cannot
sell it within seven days at a price that is close
to the price at which the Fund has valued it.
Illiquid securities include, among other things,
restricted securities (other than Rule 144A
securities which GEIM has determined are liquid
pursuant to guidelines established by the Fund's
board of directors) and repurchase agreements
maturing in more than seven days.

Hedging and Other Strategies Using Derivative
Instruments. The Fund may use derivative
instruments, such as options (both exchange traded
and OTC), futures contracts and forward foreign
currency contracts, in strategies intended to
reduce the overall risk of its investments (hedge)
or to enhance income or realize gains. The Fund's
use of derivative instruments involves certain
special risks, including (1) the fact that skills
needed to use derivative instruments are different
from those needed to select the Fund's securities,
(2) possible imperfect correlation, or even no
correlation, between price movements of derivative
instruments and price movements of the related
investments, (3) the fact that, while derivative
instruments can reduce the risk of loss, they can
also reduce the opportunity for gain, or even
result in losses, by offsetting favorable price
movements in related investments and (4) the
possible inability of the Fund to purchase or sell
a portfolio security at a time that otherwise
would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the
need for it to maintain 'cover' or to segregate
securities in connection with the use of
derivative instruments and the possible inability
of the Fund to close out or to liquidate its
position in a derivative instrument. Derivative

instruments are also subject to the risk that, if
GEIM incorrectly forecasts interest or currency
exchange rates, market values or other economic
factors in utilizing a strategy for the Fund, it
would have been in a better position had it not
used that strategy at all. The Fund may enter into
options and futures that approximate (but do not
exceed) the full value of its portfolio, at which
point up to 100% of the Fund's portfolio assets
would be subject to derivative instruments and the
risks associated therewith.

Lending of Portfolio Securities. The Fund may lend
its securities to qualified broker-dealers or
institutional investors in an amount up to 33 1/3%
of the Fund's total assets. Lending securities
enables the Fund to earn additional income, but
could result in a loss or delay in recovering
these securities.

6
<PAGE>

<TABLE>
<S> <C>
transactions and (3) the ability of the Fund's
directors or stockholders to amend the Articles of
Incorporation. These provisions of the Articles of
Incorporation may be regarded as 'anti-takeover'
provisions.

See 'Investment Objective and Policies,' 'Other
Investment Practices,' 'Special Considerations and
Risk Factors,' 'Taxation' and 'Description of
Capital Stock.'

Market Price and Net Asset
Value of Shares......... As is common with shares of closed-end investment
companies, the Fund's Common Stock has historically
traded at a discount to its net asset value.
Whether an investor will realize gains or losses
upon the sale of shares of the Common Stock will
not depend upon the Fund's net asset value, but
will depend upon whether the market price of the
Common Stock at the time of sale is above or below

the investor's purchase price for the shares. This
market risk is separate and distinct from the risk
that the Fund's net asset value may decrease.
Accordingly, the Common Stock is designed
primarily for long-term investors and investors
should not view the Common Stock as a vehicle for
trading purposes. See 'Trading History,' 'Special
Considerations and Risk Factors' and 'Description
of Capital Stock.'

Common Stock Repurchases
and Tender Offers;
Conversion to Open-End
Fund.................... In recognition of the possibility that the Common
Stock might trade at a discount from net asset
value, the Fund's board of directors, in
consultation with Mitchell Hutchins, intends to
review at least annually the possibility of open
market repurchases of Common Stock and tender
offers for Common Stock at net asset value. There
can be no assurance that the board of directors
will decide to undertake either of these actions
or that, if undertaken, such actions will result
in the Common Stock trading at a price equal to or
close to net asset value per share. The board of
directors also may consider from time to time the
conversion of the Fund to an open-end investment
company. See 'Description of Capital Stock.'
</TABLE>

<PAGE>
FINANCIAL HIGHLIGHTS

The table below provides selected per share data and ratios for one share
of Common Stock for the periods shown. This information is supplemented by the
financial statements and accompanying notes appearing in the Fund's Annual
Report to Shareholders for the fiscal year ended July 31, 1997, which are
incorporated by reference into the Fund's SAI and can be obtained by
stockholders upon request. The financial statements and notes and the financial
information in the table below have been audited by Ernst & Young LLP,
independent auditors, whose report thereon also is included in the Annual Report
to Shareholders.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31, FOR THE PERIOD
-------------------------------------------------- OCTOBER 15, 1993+
1997 1996 1995 TO JULY 31, 1994
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period............................. $ 12.64 $ 11.61 $ 13.28 $ 14.18
-------------- -------------- -------------- -----------------
Net investment income (loss)......... (0.02) (0.01) 0.08 (0.05)
Net realized and unrealized gains
(losses) from investment
transactions....................... 4.41 1.04 (0.95) (0.80)
-------------- -------------- -------------- -----------------
Net income (loss) from investment
operations......................... 4.39 1.03 (0.87) (0.85)
Distributions from net realized gains
from investments................... -- -- (0.80) --
-------------- -------------- -------------- -----------------
Offering costs charged to additional
paid-in capital.................... -- -- -- (0.05)
-------------- -------------- -------------- -----------------
Net asset value, end of period....... $ 17.03 $ 12.64 $ 11.61 $ 13.28
-------------- -------------- -------------- -----------------
-------------- -------------- -------------- -----------------
Market value, end of period.......... $ 14.50 $ 10.38 $ 9.25 $ 12.13
-------------- -------------- -------------- -----------------
-------------- -------------- -------------- -----------------
Total investment return (1).......... 39.69% 12.22% (17.64)% (14.46)%
-------------- -------------- -------------- -----------------
-------------- -------------- -------------- -----------------

Ratios/Supplemental Data:
Net assets, end of period (000's).... $ 64,729 $ 48,068 $ 44,137 $50,474
Expenses to average net assets....... 1.53% 1.76% 1.69% 1.79%*
Net investment income (loss) to
average net assets................. (0.14)% (0.10)% 0.62% (0.46)%*
Portfolio turnover................... 50% 64% 187% 71%
Average Commission rate paid (2)..... $ 0.0204 -- -- --
</TABLE>

- ------------------
+ Commencement of operations.

* Annualized

(1) Total investment return is calculated assuming a purchase of common stock at
market value on the first day and a sale at the current market price on the
last day of each period reported. Dividends and distributions, if any, are
assumed for purposes of this calculation to be reinvested at prices obtained
under the Fund's dividend reinvestment plan. Total investment return does
not reflect sales charges or brokerage commissions. Total investment returns
for periods of less than one year have not been annualized.

(2) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.

8
<PAGE>
THE FUND

The Fund is a diversified, closed-end management investment company and has
registered as such under the Investment Company Act of 1940 ('1940 Act'). The
Fund was incorporated under the laws of the State of Maryland on June 22, 1993
and commenced investment operations on October 15, 1993. The Fund's principal
office is located at 1285 Avenue of the Americas, New York, New York 10019, and
its telephone number is (212) 713-2000.

THE OFFERING

The Common Stock may be offered pursuant to this Prospectus from time to
time in order to effect OTC secondary market sales by PaineWebber in its
capacity as a dealer and secondary market-maker at negotiated prices related to
prevailing market prices on the Amex at the time of sale. No additional shares
of Common Stock will be issued in connection with this offering. Costs incurred
in connection with this offering will be paid by PaineWebber. PaineWebber's
principal offices are located at 1285 Avenue of the Americas, New York, New York
10019. Mitchell Hutchins is a wholly owned asset management subsidiary of
PaineWebber.

USE OF PROCEEDS

The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by PaineWebber as a
result of its OTC secondary market sales of the Common Stock will be utilized by
PaineWebber in connection with its secondary market operations and for general
corporate purposes.

TRADING HISTORY

The Common Stock is listed and traded on the Amex under the symbol 'GSG.'
The following table sets forth for the Common Stock for each fiscal quarter
within the two most recent fiscal years and each fiscal quarter since the
beginning of the current fiscal year: (a) the per share high and low sales
prices as reported by the Amex; (b) the per share net asset values, based on the
Fund's computation as of 4:00 p.m. on the last Amex business day for the week
corresponding to the dates on which the respective high and low sales prices
were recorded; and (c) the discount or premium to net asset value represented by
the high and low sales prices shown. The range of net asset values and of
premiums and discounts for the Common Stock during the periods shown may be
broader than is shown in this table. The Fund's Common Stock has historically
traded at a discount to its net asset value. On November 14, 1997, the closing
price per share of Common Stock was $ , the Fund's net asset value per share
was $ and the discount to net asset value was ( )%. See 'Description of
Capital Stock-- Common Stock Repurchases and Tender Offers' as to methods that
may be undertaken by the Fund to reduce any discount.

<TABLE>
<CAPTION>
(DISCOUNT) OR
PREMIUM
NET ASSET TO NET ASSET
MARKET PRICE VALUE VALUE
-------------- -------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
10/31/95..... $ 9.38 $ 8.50 $11.61 $10.88 (19.25)% (21.88)%
1/31/96...... 10.38 8.38 11.70 10.85 (11.28) (22.81)
4/30/96...... 10.63 10.00 12.92 12.60 (17.76) (20.63)
7/31/96...... 12.25 10.13 13.37 13.02 (8.38) (22.24)
10/31/96..... 11.50 10.25 13.74 12.64 (16.30) (18.91)
1/31/97...... 12.38 11.00 14.82 13.85 (16.50) (20.45)
4/31/97...... 12.88 11.75 15.31 15.14 (15.90) (22.39)
7/31/97...... 14.75 12.13 17.20 15.03 (14.24) (19.33)
10/31/97.....
</TABLE>

9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is long-term capital appreciation. The Fund
normally invests primarily in equity securities of small cap companies located
throughout the world, including Asia, Europe, the Far East, the Middle East,
North Africa and the Americas. For purposes of the foregoing, 'small cap'
companies are companies that, at the time of investment, have market
capitalizations of $1 billion or less.

Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of small cap companies located throughout the world.
While the Fund is not restricted in the portion of its assets that may be
invested in a single country or region, it is anticipated that, in normal market
conditions, the Fund's assets will be invested in issuers in at least three
countries. In managing the Fund's portfolio, GEIM seeks to identify those small
cap companies, both in the United States and abroad, that are likely to benefit
from long-term trends as they develop in the global economy. The Fund's
investment policies are designed to enable it to capitalize on unique investment
opportunities presented throughout the world and in international financial
markets influenced by the increasing interdependency of economic cycles and
currency exchange rates.

GEIM believes that, over time, investment in a composite of securities of
U.S. and foreign small cap companies is less risky than portfolios comprised
exclusively of securities of one country's small cap companies and provides
investors with potential to earn a higher return than portfolios invested
exclusively in U.S. small cap securities. No assurance can be given that the
Fund will achieve its objective.

The term 'equity securities,' as used in this Prospectus, includes common
stocks, convertible and non-convertible preferred stock (whether or not voting
stock), and limited partnership interests.

The Fund may invest up to 35% of its total assets in other securities,
including equity securities of companies with higher market capitalizations and
in debt securities. It may invest up to 25% of its assets in convertible debt
securities of domestic and foreign issuers and up to 10% of its assets in
non-convertible debt securities of domestic and foreign issuers, including
obligations issued or guaranteed by the U.S. or foreign governments, or their
agencies or instrumentalities. The Fund will not invest more than 5% of its net
assets in debt securities rated below investment grade. See 'Special
Considerations and Risk Factors--Investments in Debt Securities.'

OTHER INVESTMENT PRACTICES

strategies may be limited by market conditions, regulatory limits and tax
considerations. In addition, in some countries, the market for derivative
instruments may be too small to permit effective hedging. The SAI contains
further information on these derivative instruments.

The Fund may enter into forward currency contracts, buy or sell foreign
currency futures contracts, write covered call options and buy put and call
options on securities, foreign currencies and such futures contracts. In
addition, the Fund may buy or sell interest rate futures contracts and stock
index futures contracts, purchase put and call options or write covered call
options on such contracts, and write covered call options and buy put and call
options on stock indices. The Fund may write covered put options on securities,
foreign currencies and futures contracts. Because the Fund intends to use
options and futures for risk management purposes, the Fund may enter into
options and futures that approximate (but do not exceed) the full value of its
portfolio, at which point up to 100% of the Fund's portfolio assets would be
subject to derivative instruments and the risks associated therewith.

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<PAGE>
The Fund may enter into forward currency contracts for the purchase or sale
of a specified currency at a specified future date either with respect to
specific transactions or with respect to portfolio positions. For example, when
GEIM anticipates making a currency exchange transaction in connection with the
purchase or sale of a security, the Fund may enter into a forward contract in
order to set the exchange rate at which the transaction will be made. The Fund
also may enter into a forward contract to sell an amount of a foreign currency
approximating the value of some or all of the Fund's securities denominated in
such currency. The Fund may use forward contracts in one currency or a basket of
currencies to hedge against fluctuations in the value of another currency when
GEIM anticipates there will be a correlation between the two and may use forward
currency contracts to shift the Fund's exposure to foreign currency fluctuations
from one country to another. The purpose of entering into these contracts is to
minimize the risk to the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies.

The Fund might not employ any of the strategies described above, and there
can be no assurance that any strategy used will succeed. If GEIM incorrectly
forecasts interest or currency exchange rates, market values or other economic
factors in utilizing a strategy for the Fund, then it would have been in a
better position had it not used that strategy at all. The use of these
strategies involves certain special risks, including (1) the fact that skills
needed to use derivative instruments are different from those needed to select
the Fund's securities, (2) possible imperfect correlation, or even no
correlation, between price movements of derivative instruments and price
movements of the related investments, (3) the fact that, while derivative
instruments can reduce the risk of loss, they can also reduce the opportunity
for gain, or even result in losses, by offsetting favorable price movements in
related investments and (4) the possible inability of the Fund to purchase or
sell a portfolio security at a time that otherwise would be favorable for it to

do so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for it to maintain 'cover' or to segregate
securities in connection with derivative and the possible inability of the Fund
to close out or to liquidate its position in a derivative instrument.

New financial products and risk management techniques continue to be
developed. The Fund may use these instruments and techniques to the extent
consistent with its investment objective and regulatory and federal tax
considerations.

Depository Receipts. In addition to purchasing securities of foreign
issuers in foreign markets, the Fund may invest in American Depository Receipts
('ADRs'), European Depository Receipts ('EDRs'), Global Depository Receipts
('GDRs'), or other securities evidencing ownership of securities of issuers
based in foreign countries. These securities may not necessarily be denominated
in the same currency as the securities into which they may be converted.
Generally, ADRs are in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities market. ADRs are receipts typically
issued by a U.S. bank or trust company evidencing ownership of underlying
securities. EDRs are European receipts evidencing similar arrangements but
generally are in bearer form, may be denominated in other currencies and are
designed for use in European markets. GDRs are similar to EDRs and are designed
for use in several international financial markets. For purposes of the Fund's
investment policies, ADRs, EDRs, and GDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, EDR or
GDR evidencing ownership of common stock will be treated as common stock.

Convertible Securities. The Fund may invest up to 25% of its assets in
convertible debt securities and without limit in convertible preferred stock. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on the convertible security until it matures
or is redeemed, converted or exchanged. Convertible securities have unique
investment characteristics in that they generally (1) have higher

11
<PAGE>

yields than common stocks, but lower yields than comparable non-convertible
securities, (2) are less subject to fluctuation in value than the underlying
stock because they have fixed income characteristics, and (3) provide the
potential for capital appreciation if the market price of the underlying common
stock increases. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than the
issuer's common stock, although the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed income security.

Illiquid Securities. The Fund may invest up to 20% of its net assets in
illiquid securities. The term 'illiquid securities' for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, restricted securities (other than
Rule 144A securities which GEIM has determined are liquid pursuant to guidelines
established by the Fund's board of directors) and repurchase agreements maturing
in more than seven days. Limited partnership interests determined to be illiquid
under this definition will be included in this limitation. The lack of a liquid
secondary market for illiquid securities may make it more difficult for the Fund
to assign a value to those securities for purposes of valuing the Fund's
portfolio and calculating its net asset value. To the extent the Fund invests in
illiquid securities, the Fund may not be able to readily liquidate such
investments, and would have to sell other investments if necessary to raise cash
to meet its obligations.

Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ('1933 Act'). Such
securities include those that are subject to restrictions contained in the
securities laws of other countries. However, securities that are freely
marketable in the country where they are principally traded, but would not be
freely marketable in the United States, will not be considered illiquid. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.

Not all restricted securities are illiquid. In recent years, a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.

U.S. and Foreign Government Securities. The Fund may invest up to 10% of
its assets in non-convertible debt securities, including but not limited to U.S.
government and foreign government securities. The U.S. government securities in

which the Fund may invest include direct obligations of the U.S. government
(such as Treasury bills, notes and bonds) and obligations issued or guaranteed
by U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the U.S. government and securities
that are supported primarily or solely by the creditworthiness of the issuer.

The foreign government securities in which the Fund may invest generally
consist of obligations issued by national, state or provincial governments or
their political subdivisions or agencies ('Sovereign Debt'). Foreign government
securities also include debt obligations of supranational entities, which
include international organizations designated or supported by governmental
entities to promote economic reconstruction or

12
<PAGE>

development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
World Bank), the European Coal and Steel Community, the Asian Development Bank
and the Inter-American Development Bank.

Foreign government securities also include debt securities of
'quasi-governmental agencies' and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). An example of a
multinational currency unit is the European Currency Unit. An European Currency
Unit represents specified amounts of the currencies of certain member states of
the European Community. Debt securities of quasi-governmental agencies are
issued by entities owned by either a national, state or equivalent government or
are obligations of a political unit that is not backed by the national
government's full faith and credit and general taxing powers. Foreign government
securities also include mortgage-related securities issued or guaranteed by
national, state or provincial governmental instrumentalities, including
quasi-governmental agencies.

Reverse Repurchase Agreements. The Fund may enter into reverse repurchase

agreements with banks and broker-dealers up to an aggregate value of 10% of its
total assets. Such agreements involve the sale of securities held by the Fund
subject to its agreement to repurchase the securities at an agreed-upon date or
upon demand and at a price reflecting a market rate of interest. Reverse
repurchase agreements involve the risk that the buyer of the securities sold by
the Fund might be unable to deliver them when the Fund seeks to repurchase. In
the event that the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Such agreements are considered to be borrowings and may be entered
into only for temporary or emergency purposes. While a reverse repurchase
agreement is outstanding, the Fund will maintain with its custodian, in a
segregated account, cash or liquid securities, marked to market daily, in an
amount at least equal to its obligations under the reverse repurchase agreement.

When Issued and Delayed-Delivery Securities. The Fund may purchase
securities on a 'when-issued' basis or may purchase or sell securities for
delayed delivery, i.e., for issuance or delivery to the Fund later than the
normal settlement date for such securities at a stated price and yield. The Fund
generally would not pay for such securities or start earning interest on them
until they are received. However, when a Fund undertakes a when-issued or
delayed-delivery obligation, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the Fund on a when-issued or delayed-delivery basis may
result in the Fund's incurring or missing an opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and
delayed-delivery purchase commitments could cause its net asset value per share
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.

Lending of Portfolio Securities. The Fund is authorized to lend up to
33 1/3% of its total assets to broker-dealers or institutional investors that
Mitchell Hutchins deems qualified, but only when the borrower maintains

13
<PAGE>

collateral with the Fund's custodian in an amount, marked to market daily, at
least equal to the market value of the securities loaned, plus accrued interest
and dividends. Acceptable collateral is limited to cash, U.S. government
securities and irrevocable letters of credit that meet certain guidelines
established by Mitchell Hutchins. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The Fund will
retain authority to terminate any loans at any time. The Fund may pay reasonable

fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The Fund will regain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights, when regaining such rights is considered to be
in the Fund's interest.

Pursuant to procedures adopted by the board governing the Fund's securities
lending program, the Fund's board of directors has approved retention of
PaineWebber to serve as lending agent for the Fund. The board also has
authorized the payment of fees (including fees calculated as a percentage of
invested cash collateral) to PaineWebber for these services. The board
periodically reviews all portfolio securities loan transactions for which
PaineWebber acted as lending agent.

Temporary and Defensive Investments. When GEIM believes unusual
circumstances warrant a defensive posture, the Fund temporarily may commit all
or any portion of its assets to cash (U.S. dollars or foreign currencies) or
money market instruments of U.S. or foreign issuers, including repurchase
agreements. A portion of the Funds's assets also may be invested in money market
instruments for temporary cash management purposes. The Fund's investments in
money market instruments may be made indirectly through investments in a cash
management investment fund established and managed by GEIM at no additional cost
to the Fund. The Fund also may engage in short sales of securities 'against the
box.' The Fund also may borrow money for temporary or emergency purposes (e.g.,
clearance of transactions or payments of dividends to stockholders) in an amount
not exceeding 10% of the value of the Fund's total assets (not including the
amount borrowed). The Fund will not purchase securities while borrowings
(including reverse repurchase agreements) in excess of 5% of the value of its
total assets are outstanding.

Portfolio Turnover. The Fund's portfolio turnover rate may vary greatly
from year to year and will not be a limiting factor when GEIM deems portfolio
changes appropriate. Higher portfolio turnover (100% or greater) will result in
higher Fund expenses, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on reinvestments in other
securities. The portfolio turnover rate is calculated by dividing the lesser of
the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of the long-term securities
in the portfolio during the year. For the fiscal years ended July 31, 1997 and
July 31, 1996, the Fund's portfolio turnover rate was 50% and 64%, respectively.

Other Information. The Fund's investment objective and the investment
limitations as described in the SAI are fundamental policies that may not be
changed without stockholder approval. All other investment policies may be
changed by the Fund's board of directors without stockholder approval.

SPECIAL CONSIDERATIONS AND RISK FACTORS

Small Cap Companies. Small cap companies may be more vulnerable than
larger companies to adverse business or economic developments. Small cap
companies may also have limited product lines, markets or financial resources.
Securities of such companies may be less liquid and more volatile than
securities of larger companies or the market averages in general and, therefore,
may involve greater risk than investing in larger

14
<PAGE>
companies. In addition, small cap companies may not be well-known to the
investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects.

Foreign Securities. Investments in foreign securities involve risks
relating to political and economic developments abroad, as well as those that
result from the differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, limitations on the use or transfer of Fund assets,
difficulty in obtaining or enforcing a court judgment abroad, restrictions on
the exchange of currencies, and political or social instability or diplomatic
developments. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments positions. Securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
U.S. issuers. These risks are often heightened for investments in emerging
capital markets.

In addition, substantial limitations may exist in certain countries with
respect to the Fund's ability to repatriate investment income, capital or the
proceeds of sales of securities by foreign investors. The Fund could be
adversely affected by delays in, or a refusal to grant, any required government
approval for repatriation of capital, as well as by the application to the Fund
of any restrictions on investments.

The securities markets of many of the emerging countries in which the Fund
may invest are substantially smaller, less developed, less liquid and more
volatile than the securities markets of the United States and other more
developed countries. Disclosure and regulatory standards in many respects are
less stringent than in the United States and other major markets. There also may
be a lower level of monitoring and regulation of emerging markets and the
activities of investors in such markets, and enforcement of existing regulations
has been extremely limited.

Many of the foreign securities held by the Fund will not be registered with
the SEC, nor will the issuers thereof be subject to SEC reporting requirements.

Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by the Fund than is available concerning U.S.
companies. Foreign companies, and in particular, companies in smaller and
emerging markets are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Legal remedies for defaults and disputes may
have to be pursued in foreign countries, whose procedures may differ
substantially from those of U.S. courts. The Fund's net investment income and/or
capital gains from its foreign investment activities may be subject to non-U.S.
withholding taxes that, if not recoverable by the Fund, would reduce the Fund's
return.

Additionally, because foreign securities ordinarily will be denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value per share, the value of dividends
and interest earned, gains and losses realized on the sale of securities and net
investment income to be distributed to stockholders by the Fund. If the value of
a foreign currency rises against the U.S. dollar, the value of Fund assets
denominated in such currency will increase; correspondingly, if the value of a
foreign currency declines against the U.S. dollar, the value of Fund assets
denominated in such currency will decrease. The exchange rates between the U.S.
dollar and other currencies can be volatile and are determined by factors such
as supply and demand in the currency exchange markets, international balances of
payments, government intervention, speculation and other economic and political
conditions. Any of these factors could affect the Fund adversely.

The costs attributable to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing. For
example, the cost of maintaining custody of foreign securities exceeds custodian
costs for domestic securities, and transaction and settlement costs of foreign
investing also frequently are higher than those attributable to domestic
investing. Costs associated with the exchange of currencies also

15
<PAGE>

make foreign investing more expensive than domestic investing. Tax treaties
between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign tax to which the Fund would be subject.

Brokerage commissions, custodial services and other costs relating to
investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging capital markets.
Foreign markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when assets
of the Fund are uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement problems could cause
the Fund to miss attractive investment opportunities. Inability to dispose of a

portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.

Investments in Debt Securities. The Fund may invest up to 25% of its
assets in convertible debt securities of domestic and foreign issuers and up to
10% of its assets in non-convertible debt securities of domestic and foreign
issuers. The value of the debt securities held by the Fund generally will
fluctuate with (i) movements in interest rates, (ii) changes in the relative
values of the currencies in which the Fund's investments are denominated with
respect to the U.S. dollar and (iii) changes to the perceived creditworthiness
of the issuers of those securities. The market value of debt securities
generally varies inversely with interest rate changes. The extent of the
fluctuation will depend on various other factors, such as the average maturity
of the Fund's debt securities, the extent to which the Fund holds debt
securities denominated in foreign currencies and the extent to which the Fund
engages in hedging strategies. Substantially all of the Fund's investments in
debt securities (including foreign government securities and convertible debt
securities) will be rated at least investment grade by Standard & Poor's Ratings
Service, a division of The McGraw-Hill Companies, Inc. ('S&P') (BBB or better),
or Moody's Investors Service, Inc. ('Moody's') (Baa or better), or, if unrated
by either, determined by GEIM to be of comparable quality. Moody's considers
securities rated Baa to have speculative characteristics. In addition, in the
opinion of S&P, changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity for securities rated BBB to make principal
and interest payments than is the case for higher-rated securities. The Fund may
also invest up to 5% of its net assets in debt securities rated as low as B+ by
S&P or B1 by Moody's. These securities are deemed by those agencies to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
The Fund is also permitted to purchase debt securities that are not rated by S&P
or Moody's but that GEIM determines to be of comparable quality to that of rated
securities in which the Fund may invest. Such securities are included in the
computation of any percentage limitations applicable to the comparable rated
securities. In the event that, due to a downgrade of one or more debt
securities, an amount in excess of 5% of the Fund's net assets is held in
securities rated below investment grade and comparable unrated securities, GEIM
will engage in an orderly disposition of such securities to the extent necessary
to ensure that the Fund's holdings of such securities do not exceed 5% of the
Fund's net assets. Ratings of debt securities represent the rating agencies'
opinions regarding their quality, are not a guarantee of quality and may be
reduced after the Fund has acquired the security. GEIM would consider such an
event in determining whether the Fund should continue to hold the security.
Credit ratings attempt to evaluate the safety of principal and interest payments
and do not evaluate the risk of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's financial condition may be better or
worse than the rating indicates. See the SAI for more information about S&P's
and Moody's ratings.

<PAGE>

Investment by the Fund in Sovereign Debt involves special risks. The issuer
of the debt or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal and/or interest when due in
accordance with the terms of such debt, and the Fund may have limited legal
recourse in the event of a default. Sovereign Debt differs from debt obligations
issued by private entities in that, generally, remedies for defaults must be
pursued in the courts of the defaulting party. Legal recourse is, therefore,
somewhat limited. Political conditions, especially a sovereign entity's
willingness to meet the terms of its debt obligations, are of considerable
significance. Also, there can be no assurance that the holders of commercial
bank loans to the same sovereign entity may not contest payments to the holders
of Sovereign Debt in the event of default under commercial bank loan agreements.

Anti-Takeover Provisions. The Fund's Articles of Incorporation contain
provisions limiting (1) the ability of other entities or persons to acquire
control of the Fund, (2) the Fund's freedom to engage in certain transactions
and (3) the ability of the Fund's directors or stockholders to amend the
Articles of Incorporation. These provisions of the Articles of Incorporation may
be regarded as 'anti-takeover' provisions. These provisions could have the
effect of depriving the stockholders of opportunities to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. The
overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a stockholder who
owns beneficially more than 5% of the Common Stock. They provide, however, the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's management, investment objectives and policies. See
'Description of Capital Stock--Certain Anti-Takeover Provisions of the Articles
of Incorporation.'

Market Price of Shares. Shares of closed-end investment companies,
including the Fund, frequently trade at a discount to their net asset values.
For information regarding recent trading history of the Common Stock, see
'Trading History.' Whether investors will realize gains or losses upon the sale
of Common Stock will not depend directly upon changes in the Fund's net asset
value, but will depend upon whether the market price of the Common Stock at the
time of sale is above or below the original purchase price for the shares. This
market risk is separate and distinct from the risk that the Fund's net asset
value may decrease. The market price of shares of the Common Stock is determined
by such factors as relative demand for and supply of such shares in the market,
general market and economic conditions, changes in the Fund's net asset value
per share and other factors beyond the control of the Fund. The Fund cannot
predict whether its shares of Common Stock will trade at, below, or above net
asset value in the future. Accordingly, the Common Stock is designed primarily
for long-term investors, and investors in the Common Stock should not view the
Fund as a vehicle for trading purposes.

MANAGEMENT OF THE FUND

The overall management of the business and affairs of the Fund is vested
with its board of directors. The board of directors approves all significant
agreements between the Fund and persons or companies furnishing services to it,
including the Fund's agreements with its investment adviser and administrator,
custodian and transfer and dividend disbursing agent and registrar. The
day-to-day operations of the Fund are delegated to its officers, to Mitchell
Hutchins and to GEIM subject to the Fund's investment objective and policies and
to general supervision by the board of directors.

Subject to the supervision of the Fund's board of directors, investment
advisory and administration services are provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
October 6, 1993 ('Advisory Contract'). Mitchell Hutchins' principal business
address is 1285 Avenue of the Americas, New York, New York 10019. Mitchell
Hutchins is a wholly owned asset management subsidiary of PaineWebber, which is
a wholly owned subsidiary of Paine Webber Group Inc., a publicly held financial

17
<PAGE>

services holding company. Mitchell Hutchins provides investment advisory and
portfolio management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of October 31, 1997, total
assets under Mitchell Hutchins' management were approximately $ billion. As
of that date, Mitchell Hutchins served as investment adviser or sub-adviser to
27 registered investment companies with 63 separate portfolios having aggregate
assets of approximately $ billion.

GEIM serves as sub-adviser pursuant to a Sub-Advisory Agreement with
Mitchell Hutchins dated July 10, 1995. GEIM's principal business address is 3003
Summer Street, Stamford, Connecticut 06905 and is a wholly owned subsidiary of
General Electric Company. GEIM is a registered investment adviser, and its
principal officers and directors serve in similar capacities with respect to
GEIC, also a registered investment adviser and a wholly owned subsidiary of
General Electric Company. As of October 31, 1997 GEIM and GEIC together provided
investment management services to various institutional accounts with total
assets in excess of $ billion, of which more than $ billion is
invested in mutual funds.

Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities; Mitchell Hutchins has delegated
these responsibilities to GEIM subject to the supervision of Mitchell Hutchins.
Mitchell Hutchins supervises all matters relating to the operation of the Fund
and obtains for it corporate officers, clerical staff, office space, equipment
and services. As compensation for its services, Mitchell Hutchins receives a
fee, computed weekly and paid monthly, in an amount equal to the annual rate of

1.00% of the Fund's average weekly net assets. Mitchell Hutchins (not the Fund)
pays GEIM a fee at an annual rate of 0.50% of average weekly net assets.

The Fund incurs various other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and stockholder meetings, fees and expenses relating to registration of
the Common Stock, taxes and governmental fees, fees and expenses of the
directors, costs of obtaining insurance, expenses of printing and distributing
stockholder materials and organizational expenses, including costs or losses to
any litigation. For the fiscal years ended July 31, 1997, July 31, 1996 and July
31, 1995 the Fund's total expenses, stated as a percentage of net assets, were
1.53%, 1.76%, and 1.69%, respectively.

In accordance with procedures adopted by the Fund's board of directors,
brokerage transactions for the Fund may be conducted through PaineWebber or its
affiliates and the Fund may pay fees to PaineWebber for its services as lending
agent in the Fund's securities lending program.

Since March 1995, Ralph R. Layman and, since July 1996, Judith A. Studer
have been primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Layman is a Chartered Financial Analyst and an Executive Vice
President and a senior investment manager of GEIM and GEIC. From 1989 to 1991,
Mr. Layman served as Executive Vice President, partner and portfolio manager of
Northern Capital Management Co., and prior thereto, served as Vice President and
portfolio manager of Templeton Investment Counsel, Inc., and Vice President of
the Templeton Emerging Markets Fund. Ms. Studer is a Senior Vice President and
Portfolio Manager with GEIM's International Equities Team. She has more than 12
years of investment experience and has held positions with GEIM and GEIC since
1984. She has been involved in the investment operations of the Fund's portfolio
since March 1995.

Mitchell Hutchins and GEIM investment personnel may engage in securities
transactions for their own accounts pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.

<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN

Dividends and Other Distributions. The Fund distributes as dividends all
of its net investment income and net short-term capital gain, if any, at least
annually. The Fund distributes substantially all of its net capital gain with
the regular annual dividend. The Fund also distributes any net realized gains
from foreign currency transactions with such dividend. The Fund may make
additional distributions if necessary to avoid a 4% excise tax on certain
undistributed income and capital gain.

The Fund may change its distribution policy if its experience indicates, or
the board of directors for any other reason determines, that changes are
desirable.

Dividend Reinvestment Plan. Each stockholder may affirmatively elect to
receive all dividends and other distributions in cash paid by check mailed
directly to the stockholder by the Transfer Agent, as dividend disbursing agent.
Under the Plan, stockholders not making such election and whose shares of Common
Stock are registered in their own names or in the name of PaineWebber (or its
nominee) will receive all such distributions in additional shares of Common
Stock. Stockholders who hold their shares in the name of a broker or nominee
other than PaineWebber (or its nominee) should contact such broker or other
nominee to determine whether, or how, they may participate in the Plan. The
ability of such stockholders to participate in the Plan may change if their
shares of the Common Stock are transferred into the name of another broker or
nominee.

The Transfer Agent serves as agent for the stockholders in administering
the Plan. After the Fund declares a dividend or determines to make another
distribution, the Transfer Agent, as agent for the participants, receives the
cash payment and uses it to buy shares of Common Stock in the open market, on
the Amex or otherwise, for the participants' accounts. Such shares may be
purchased at prices that may be higher or lower than the net asset value per
share of the Common Stock at the time of purchase. The number of shares
purchased with each distribution for a particular stockholder equals the result
obtained by dividing the amount of the distribution payable to that particular
stockholder by the average price per share (including applicable brokerage
commissions) that the Transfer Agent was able to obtain in the open market. The
Fund will not issue any new shares of Common Stock in connection with the Plan.

The Transfer Agent maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in the accounts, including
information needed by stockholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Transfer Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy will include the shares of Common Stock purchased pursuant to the Plan.

There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions will be paid by the Fund. However, each participant pays a pro
rata share of brokerage commissions incurred with respect to the Transfer
Agent's open market purchases of shares of Common Stock in connection with the
reinvestment of distributions.

The automatic reinvestment of dividends and other distributions in shares
of Common Stock does not relieve participants of any income tax that may be
payable on such distributions. See 'Taxation.'

A stockholder who has elected to participate in the Plan may withdraw from
the Plan at any time. There is no penalty for withdrawal from the Plan, and
stockholders who have previously withdrawn from the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Transfer Agent and
should include the stockholder's name and address as they appear in the
Transfer Agent's records. An election to withdraw from the Plan, until such
election is changed, will be deemed to be an election by a stockholder to take
all subsequent distributions in cash. An election will be effective only for
distributions declared and having a record date at least ten days after the date
on which the election is received by the Transfer Agent.

19
<PAGE>
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent to
Plan participants at least 30 days before the record date for such distribution.
The Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all Plan participants. All correspondence concerning the
Plan should be directed to the Transfer Agent at PNC Bank, National Association,
c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware 19899.

TAXATION

The Fund intends to continue to qualify for treatment as a regulated
investment company ('RIC') under the Internal Revenue Code. For each taxable
year that the Fund so qualifies, the Fund (but not its stockholders) will be
relieved of federal income tax on that part of its investment company taxable
income (consisting generally of net investment income, net short-term capital
gain and net gains from certain foreign currency transactions) and net capital
gain that is distributed to its stockholders.

Dividends from the Fund's investment company taxable income (whether
received in cash or reinvested in additional Fund shares) are taxable to its

stockholders as ordinary income to the extent of the Fund's earnings and
profits. Distributions of the Fund's net capital gain (whether received in cash
or reinvested in additional Fund shares) are taxable to its stockholders as
long-term capital gain, regardless of how long they have held their Fund shares.
Under the Taxpayer Relief Act of 1997 ('Act'), different maximum tax rates apply
to capital gain depending on the taxpayer's holding period and marginal rate of
federal income tax--generally, 28% for gain on capital assets held for more than
one year but not more than 18 months and 20% (10% for taxpayers in the 15%
marginal tax bracket) on capital assets held for more than 18 months. The Act,
however, does not address the application of these rules to distributions by
RICs, including whether a RIC's holding period can be 'passed through' to its
stockholders. Instead, the Act authorizes the issuance of regulations to do so.
Accordingly, stockholders should consult their tax advisers as to the effect of
the Act on distributions by the Fund to them of net capital gain.

A participant in the Plan will be treated as having received a distribution
in the amount of the cash used to purchase shares of Common Stock on his behalf,
including a pro rata portion of the brokerage commissions incurred by the
Transfer Agent. Distributions by the Fund to its stockholders in any year that
exceed the Fund's earnings and profits generally may be applied by each
stockholder against his or her basis for shares and will be taxable to any
stockholder only to the extent the distributions to the stockholder exceed the
stockholder's basis for his or her Common Stock.

An investor should be aware that, if shares of Common Stock are purchased
shortly before the record date for any dividend or other distribution, the
investor will pay full price for the shares and could receive some portion of
the price back as a taxable distribution. Shareholders who are not liable for
tax on their income and whose shares of Common Stock are not debt-financed are
not required to pay tax on dividends or other distributions they receive from
the Fund.

The Fund notifies its stockholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed paid)
that year or any portion of those dividends that qualifies for the corporate
dividends-received deduction. Under certain circumstances, the notice also may
specify a stockholder's share of any foreign taxes paid by the Fund.

Upon a sale or exchange of shares of Common Stock (including a sale
pursuant to a share repurchase or tender offer by the Fund), a stockholder will
generally recognize a taxable gain or loss equal to the difference between his
adjusted basis for the shares and the amount realized. Any such gain or loss
will be treated as a

<PAGE>

capital gain or loss if the shares are capital assets in the stockholder's hands
and will be subject to federal income tax at the rates indicated above; provided
that any loss realized on a sale or exchange of shares of Common Stock that were
held for six months or less will be treated as long-term, rather than as
short-term, capital loss to the extent of any capital gain distributions
received thereon. A loss realized on a sale or exchange of shares of Common
Stock will be disallowed to the extent those shares are replaced by other shares
of Common Stock within a period of 61 days beginning 30 days before and ending
30 days after the date of disposition of the shares (which could occur, for
example, as the result of participation in the Plan). In that event, the basis
of the replacement shares will be adjusted to reflect the disallowed loss.

The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other non-corporate stockholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
dividends and capital gain distributions paid to such stockholders who otherwise
are subject to backup withholding.

The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its stockholders; see the SAI
for a further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective stockholders are
therefore urged to consult their tax advisers.

DESCRIPTION OF CAPITAL STOCK

The Fund is authorized to issue 100 million shares of capital stock, $.001
par value, all of which currently is classified as Common Stock. The board of
directors of the Fund is authorized to classify and reclassify any unissued
shares of capital stock from time to time by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or terms and conditions of redemption of such shares
by the Fund. The description of the capital stock and the description under
'Description of Capital Stock--Certain Anti-Takeover Provisions of the Articles
of Incorporation' are subject to the provisions contained in the Fund's Articles
of Incorporation and Bylaws.

Common Stock. Shares of the Common Stock have no preemptive, conversion,
exchange or redemption rights. Each share has equal voting, dividend,
distribution and liquidation rights. The outstanding shares of Common Stock are
fully paid and nonassessable. Stockholders are entitled to one vote per share.
All voting rights for the election of directors are noncumulative, which means
that the holders of more than 50% of the shares can elect 100% of the directors
then nominated for election if they choose to do so and, in such event, the
holders of the remaining shares will not be able to elect any directors.

Under the rules of the Amex applicable to listed companies, the Fund is
normally required to hold an annual meeting of stockholders in each year. If the

rules of the Amex no longer require annual meetings of stockholders or if the
Fund is converted to an open-end investment company or if for any other reason
the Fund's shares are no longer listed on the Amex (or any other national
securities exchange the rules of which require annual meetings of stockholders),
the Fund may decide not to hold annual meetings of stockholders.

Any additional offerings of the Common Stock, if made, will require
approval of the Fund's board of directors and will be subject to the requirement
of the 1940 Act that shares may not be sold at a price below the then current
net asset value, exclusive of underwriting discounts and commissions, except,
among other things, in connection with an offering to existing stockholders or
with the consent of a majority of the holders of the Fund's outstanding voting
securities.

21
<PAGE>

The following chart indicates the shares of the Common Stock outstanding as
of November 14, 1997:

<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
REGISTRANT OR FOR ITS HELD BY REGISTRANT
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT OR FOR ITS ACCOUNT
- ---------------- ----------------- --------------------- -------------------
<S> <C> <C> <C>
Common Stock.... 100,000,000 0 3,801,667
</TABLE>

Common Stock Repurchases and Tender Offers. In recognition of the
possibility that the Common Stock might trade at a discount from net asset value
and that any such discount may not be in the best interest of stockholders, the
Fund's board of directors has determined that it will from time to time consider
taking action to attempt to reduce or eliminate any discount. To that end, the
board may, in consultation with Mitchell Hutchins, from time to time consider
action either to repurchase shares of the Common Stock in the open market or to
make a tender offer for shares of the Common Stock at their net asset value. The
board currently intends at least annually to consider making such open market
repurchases or tender offers and at such times may consider such factors as the
market price of the Common Stock, the net asset value of the Common Stock, the
liquidity of the assets of the Fund, whether such transactions would impair the
Fund's status as a RIC, general economic conditions and such other events or
conditions that the board believes may have a material effect on the Fund's
ability to consummate such transactions. Under certain circumstances, it is
possible that open market repurchases or tender offers may constitute a
distribution under the Internal Revenue Code to the remaining stockholders of
the Fund. The board may at any time, however, decide that the Fund should not
repurchase shares or make a tender offer. The Fund may borrow to finance

repurchases and tender offers. Interest on any such borrowings will reduce the
Fund's net income. See 'Additional Information--Common Stocks Repurchases and
Tender Offers' in the SAI.

There is no assurance that the board will decide to undertake repurchases
or tender offers or that these actions, if taken, will result in the Common
Stock trading at a price that is equal or close to its net asset value per
share. Nevertheless, the fact that the Common Stock may be the subject of tender
offers at net asset value from time to time may reduce the spread that might
otherwise exist between the market price of the Common Stock and net asset value
per share. In the opinion of Mitchell Hutchins, sellers may be less inclined to
accept a significant discount if they have a reasonable expectation of being
able to recover net asset value in conjunction with a possible tender offer.

Although the board of directors believes that share repurchases and tender
offers generally would have a favorable effect on the market price of the Common
Stock, it should be recognized that the Fund's acquisition of shares of the
Common Stock would decrease the Fund's total assets and, therefore, have the
effect of increasing the Fund's expense ratio. Because of the nature of the
Fund's investment objective, policies and portfolio, under current market
conditions Mitchell Hutchins anticipates that repurchases and tender offers
generally should not have a material, adverse effect on the Fund's investment
performance and that Mitchell Hutchins generally should not have any material
difficulty in disposing of portfolio securities in order to consummate share
repurchases and tender offers; however, this may not always be the case.

Conversion to Open-End Investment Company. The Fund's board of directors
will consider from time to time whether it would be in the best interest of the
Fund and its stockholders to convert the Fund to an open-end investment company.
If the board of directors determines that such a conversion would be in the best
interest of the Fund and its stockholders and is consistent with the 1940 Act,
the board will submit to the stockholders, at the

22
<PAGE>
next succeeding annual or special meeting, a proposal to amend the Fund's
Articles of Incorporation to so convert the Fund. Such amendment would provide
that, upon its adoption by the holders of at least a majority of the Fund's
outstanding shares entitled to vote thereon, the Fund will convert from a
closed-end to an open-end investment company. If the Fund converted to an
open-end investment company, it would be able to continuously issue and offer
for sale shares of the Common Stock, and each such share could be presented to
the Fund at the option of the holder thereof for redemption at a price based on
the then current net asset value per share. In such event, the Fund could be
required to liquidate portfolio securities to meet requests for redemption, the
Common Stock would no longer be listed on the Amex and certain investment
policies of the Fund would require amendment.

In considering whether to propose that the Fund convert to an open-end
investment company, the board of directors will consider various factors,
including, without limitation, the potential benefits and detriments to the Fund
and its stockholders of conversion, the potential alternatives and the benefits
and detriments associated therewith, and the feasibility of conversion given,
among other things, the Fund's investment objective and policies. In the event
of a conversion to an open-end investment company, the Fund may charge fees in
connection with the sale or redemption of its shares. There can be no assurance
that the board will conclude that such a conversion is in the best interests of
the Fund or its stockholders. As an open-end investment company, the Fund may
reserve the right to honor any request for redemption by making payment in whole
or in part in securities chosen by the Fund and valued in the same way as they
would be valued for purposes of computing the Fund's net asset value. If payment
is made in securities, a stockholder may incur brokerage expenses in converting
these securities into cash.

Certain Anti-Takeover Provisions of the Articles of Incorporation. The
Fund has provisions in its Articles of Incorporation that have the effect of
limiting: (1) the ability of other entities or persons to acquire control of the
Fund; (2) the Fund's freedom to engage in certain transactions; or (3) the
ability of the Fund's directors or stockholders to amend the Articles of
Incorporation. These provisions of the Articles of Incorporation may be regarded
as 'anti-takeover' provisions. Under Maryland law and the Fund's Articles of
Incorporation, the affirmative vote of the holders of at least a majority of the
votes entitled to be cast is required for the consolidation of the Fund with
another corporation, a merger of the Fund with or into another corporation
(except for certain mergers in which the Fund is the successor), a statutory
share exchange in which the Fund is not the successor, a sale or transfer of all
or substantially all of the Fund's assets, the dissolution of the Fund and any
amendment to the Fund's Articles of Incorporation. In addition, the affirmative
vote of the holders of at least 66 2/3% (which is higher than that required
under Maryland law or the 1940 Act) of the outstanding shares of the Fund's
capital stock is required generally to authorize any of the following
transactions or to amend the provisions of the Articles of Incorporation
relating to such transactions:

(1) merger, consolidation or statutory share exchange of the Fund with
or into any other corporation;

(2) issuance of any securities of the Fund to any person or entity for
cash;

(3) sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets having an
aggregate market value of less than $1,000,000); or

(4) sale, lease or exchange to the Fund, in exchange for securities of
the Fund, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)

if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a 'Principal Shareholder'). A similar vote also would be required for
any amendment of the Articles of Incorporation to convert the Fund to an
open-end investment company by

23
<PAGE>
making any class of the Fund's capital stock a 'redeemable security,' as that
term is defined in the 1940 Act. Such vote would not be required with respect to
any of the foregoing transactions, however, when, under certain conditions, the
board of directors approves the transaction, although in certain cases involving
merger, consolidation or statutory share exchange or sale of all or
substantially all of the Fund's assets or the conversion of the Fund to an
open-end investment company, the affirmative vote of the holders of a majority
of the outstanding shares of the Fund's capital stock would nevertheless be
required. Reference is made to the Articles of Incorporation of the Fund, on
file with the SEC, for the full text of these provisions.

The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its shares could have the
effect of depriving the stockholders of opportunities to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. See
'Description of Capital Stock--Common Stock Repurchases and Tender Offers.' The
overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a Principal
Shareholder. They provide, however, the advantage of potentially requiring
persons seeking control of the Fund to negotiate with its management regarding
the price to be paid and facilitating the continuity of the Fund's management,
investment objective and policies. The board of directors of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interest of the Fund and its stockholders.

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian of the Fund's assets. State Street Bank
and Trust Company employs foreign subcustodians approved by the Fund's board of
directors, in accordance with applicable requirements under the 1940 Act, to
provide custody of the Fund's foreign assets. PNC Bank, National Association,
whose principal business address is Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19110, is the Fund's transfer and dividend disbursing agent and
registrar.

FURTHER INFORMATION

Further information concerning these securities and the Fund may be found
in the Registration Statement on file with the SEC of which this Prospectus and
the Fund's SAI constitute a part.

The Table of Contents for the SAI is as follows:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions................... 1
Hedging and Other Strategies Using Derivative
Instruments.......................................... 6
Directors and Officers................................. 15
Control Persons and Principal Holders of Securities.... 21
Investment Advisory Arrangements....................... 21
Portfolio Transactions................................. 22
Valuation of Common Stock.............................. 24
Taxation............................................... 25
Additional Information................................. 27
Financial Statements................................... 28
Appendix A............................................. 29
</TABLE>

<PAGE>

================================================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
PAINEWEBBER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses...................................................... 2
Prospectus Summary................................................. 3
Financial Highlights............................................... 8
The Fund........................................................... 9
The Offering....................................................... 9
Use of Proceeds.................................................... 9
Trading History.................................................... 9
Investment Objective and Policies.................................. 10
Other Investment Practices......................................... 10
Special Considerations and Risk Factors............................ 14
Management of the Fund............................................. 17
Dividends and Other Distributions; Dividend Reinvestment Plan...... 19
Taxation........................................................... 20
Description of Capital Stock....................................... 21
Custodian, Transfer and Dividend Disbursing Agent and Registrar.... 24
Further Information................................................ 24
</TABLE>
================================================================================

================================================================================

GLOBAL SMALL CAP
FUND INC.

COMMON STOCK

------------------------

P R O S P E C T U S
------------------------

PAINEWEBBER INCORPORATED

------------------------

DECEMBER 1, 1997

================================================================================

(COPYRIGHT)1997 PaineWebber Incorporated

<PAGE>
GLOBAL SMALL CAP FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019

STATEMENT OF ADDITIONAL INFORMATION

Global Small Cap Fund Inc. (the 'Fund') is a diversified, closed-end
management investment company. The Fund's investment objective is long-term
capital appreciation. No assurance can be given that the Fund will be able to
achieve its investment objective.

Shares of the Fund's common stock ('Common Stock') may be offered from time
to time in order to effect over-the-counter ('OTC') secondary market sales by
PaineWebber Incorporated ('PaineWebber') in its capacity as a dealer and
secondary market-maker. PaineWebber may (but is not obligated) to make such a
secondary market.

Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly
owned asset management subsidiary of PaineWebber, serves as the Fund's
investment adviser and administrator. GE Investment Management Incorporated
('GEIM') serves as the Fund's sub-adviser. This Statement of Additional
Information ('SAI') is not a prospectus and should be read only in conjunction
with the Fund's current Prospectus, dated December 1, 1997. Capitalized terms
not otherwise defined herein have the same meanings as in the Prospectus. A copy
of the Prospectus may be obtained by calling any PaineWebber investment
executive or correspondent firm or by calling toll-free (800) 852-4750.

The date of this Statement of Additional Information is December 1, 1997.

INVESTMENT POLICIES AND RESTRICTIONS

The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.

SPECIAL RISK CONSIDERATIONS

Investments in Foreign Securities. The Fund's brokerage transactions
involving securities of companies headquartered in countries other than the
United States are conducted primarily on the principal exchanges of such
countries. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment, may expose a Fund to increased risk in the event of a failed trade or
the insolvency of a foreign broker-dealer. Transactions on foreign exchanges are
usually subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions, although the Fund will endeavor to achieve the
best net results in effecting its portfolio transactions. There is generally
less government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.

Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Fund would be subject.
<PAGE>

Foreign Currency Transactions. Although the Fund values its assets weekly
in U.S. dollars, it does not intend to convert its holdings of foreign
currencies to U.S. dollars on a weekly basis. The Fund's foreign currencies may
be held as 'foreign currency call accounts' at foreign branches of foreign or
domestic banks. These accounts bear interest at negotiated rates and are payable
upon relatively short demand periods. If a bank became insolvent, the Fund could
suffer a loss of some or all of the amounts deposited. The Fund may convert
foreign currency to U.S. dollars from time to time. Although foreign exchange
dealers generally do not charge a stated commission or fee for conversion, the
prices posted generally include a 'spread' which is the difference between the
prices at which the dealers are buying and selling foreign currencies.

Illiquid Securities. Illiquid securities may, but do not necessarily,
include certain restricted securities. To facilitate the increased size and
liquidity of the institutional markets for unregistered securities, the
Securities and Exchange Commission ('SEC') adopted Rule 144A under the
Securities Act of 1933 ('1933 Act'). Rule 144A establishes a 'safe harbor' from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to liquidate an
investment. Such markets include automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc. ('NASD'). An insufficient number of qualified buyers interested in
purchasing Rule 144A-eligible restricted securities held by the Fund, however,
could affect adversely the marketability of such portfolio securities and the
Fund might be unable to dispose of such securities promptly or at favorable
prices.

The Fund may sell OTC options and, in connection therewith, segregate
assets to cover its obligations with respect to OTC options written by the Fund.
The assets used as cover for OTC options written by the Fund will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.

The board of directors has delegated the function of making day-to-day
determinations of liquidity to GEIM pursuant to guidelines approved by the

board. GEIM will take into account a number of factors in reaching liquidity
decisions, including but not limited to (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers for the security and (5) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). GEIM will
monitor the liquidity of restricted securities in the Fund's portfolio and
report periodically on such decisions to the board of directors.

Sovereign Debt. Investment by the Fund in debt obligations issued by
foreign governments or their political subdivisions or agencies ('Sovereign
Debt') involves special risks. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal and/or interest when due in accordance with the terms of such
debt, and the Fund may have limited legal recourse in the event of a default.

Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is, therefore, somewhat limited. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the

2
<PAGE>
same sovereign entity may not contest payments to the holders of Sovereign Debt
in the event of default under commercial bank loan agreements.

A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.

The occurrence of political, social or diplomatic changes in one or more of
the countries issuing Sovereign Debt could adversely affect the Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While GEIM manages the Fund's portfolio in a manner that
is intended to minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause the Fund to suffer a loss of

interest or principal on any of its holdings.

Yield Factors and Ratings. Moody's Investors Service, Inc. ('Moody's') and
Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc.
('S&P'), are private services that provide ratings of the credit quality of debt
obligations. A description of the ratings assigned to corporate debt obligations
by Moody's and S&P is included in Appendix A to this SAI. The Fund may use these
ratings in determining whether to purchase, sell or hold a security. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, securities with the same maturity, interest rate and
ratings may have different market prices.

As noted in the Prospectus, rating agencies may fail to make timely changes
in credit ratings in response to subsequent events. Consequently, the rating
assigned to any particular security is not necessarily a reflection of the
issuer's current financial condition, which may be better or worse than the
rating would indicate. The rating assigned by a rating agency does not reflect
an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security.

OTHER INVESTMENT PRACTICES

Convertible Securities. As described in the Prospectus, the Fund may
invest in convertible securities. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but may be
subordinated to comparable nonconvertible securities. The value of a convertible
security is a function of its 'investment value' (determined by its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege) and its 'conversion value' (the
security's worth, at market value, if converted into the underlying common
stock). The investment value of a convertible security is influenced by changes
in interest rates, with investment value declining as interest rates increase
and increasing as interest rates decline. The credit standing of the issuer and
other factors also may have an effect on the convertible security's investment
value. The conversion value of a convertible security is determined by the
market price of the underlying common stock. If the conversion value is low
relative to the investment value, the price of the convertible security is
governed principally by its investment value, and generally the conversion value
decreases as the convertible security approaches maturity. To the extent the

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market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value. In addition, a convertible security generally will sell at

a premium over its conversion value determined by the extent to which investors
place value on the right to acquire the underlying common stock while holding a
fixed income security.

Repurchase Agreements. Repurchase agreements are transactions in which the
Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date or upon demand and at a price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased securities.
The Fund maintains custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the repurchase
price on the date agreed to is, in effect, secured by such securities. If the
value of these securities is less than the repurchase price, plus any
agreed-upon additional amount, the other party to the agreement must provide
additional collateral so that at all times the collateral is at least equal to
the repurchase price plus any agreed-upon additional amount. The difference
between the total amount to be received upon repurchase of the securities and
the price which was paid by the Fund upon acquisition is accrued as interest and
included in the Fund's net investment income. Repurchase agreements carry
certain risks not associated with direct investments in securities, including
possible declines in the market value of the underlying securities and delays
and costs to the Fund if the other party to a repurchase agreement becomes
insolvent.

The Fund intends to enter into repurchase agreements only with banks and
dealers in transactions believed by GEIM to present minimum credit risks in
accordance with guidelines established by the Fund's board of directors. GEIM
will review and monitor the creditworthiness of those institutions under the
board's general supervision.

When-Issued and Delayed Delivery Securities. As stated in the Prospectus,
the Fund may purchase securities on a 'when-issued' or delayed delivery basis. A
security purchased on a when-issued or delayed delivery basis is recorded as an
asset on the commitment date and is subject to changes in market value generally
based upon changes in the level of interest rates. Thus, upon delivery, its
market value may be higher or lower than its costs, and this may increase or
decrease the Fund's net asset value. When the Fund agrees to purchase securities
on a when-issued or delayed delivery basis, its custodian will set aside in a
segregated account cash or liquid securities, marked to market daily, in an
amount at least equal to the amount of the commitment. Failure of the issuer to
deliver the security may result in the Fund's incurring a loss or missing an
opportunity to make an alternative investment. The Fund purchases when-issued
and delayed delivery securities only with the intention of taking delivery, but
may sell the right to acquire the security prior to delivery if GEIM deems it
advantageous to do so, which may result in capital gain or loss to the Fund.

Lower Rated Debt Securities. The Fund may invest up to 5% of its net
assets in debt securities rated as low as B+ by S&P or B1 by Moody's. Lower
rated debt securities generally offer a higher current yield than that available
for higher grade issues. However, lower rated securities involve higher risks,

in that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress, which
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. The market for lower rated debt
securities generally is thinner and less active than that for higher quality
securities, which may limit the Fund's ability to sell such securities at fair
value in response to changes in the economy or financial markets. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market.

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Short Sales 'Against the Box.' The Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales 'against the
box'). To make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of the Fund, and the Fund is
obligated to replace the securities borrowed at a date in the future. When the
Fund sells short, it will establish a margin account with the broker effecting
the short sale and will deposit collateral with the broker. In addition, the
Fund will segregate with its custodian the securities that could be used to
cover the short sale. The Fund will incur transaction costs, including interest
expense, in connection with opening, maintaining and closing short sales against
the box. The Fund currently does not intend to have obligations under short
sales that at any time during the coming year exceed 5% of the Fund's net
assets.

The Fund might make a short sale 'against the box' in order to hedge
against market risks when GEIM believes that the price of a security may
decline, thereby causing a decline in the value of a security owned by the Fund
or a security convertible into or exchangeable for a security owned by the Fund.
In such case, any loss in the Fund's long position after the short sale should
be reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of the securities the Fund
owns, either directly or indirectly, and in the case where the Fund owns
convertible securities, changes in the investment values or conversion premiums
of such securities.

INVESTMENT LIMITATIONS OF THE FUND

FUNDAMENTAL LIMITATIONS. The following fundamental investment limitations
cannot be changed without the affirmative vote of the lesser of (a) more than
50% of the outstanding shares of the Fund, or (b) 67% or more of such shares
present at a stockholders' meeting if more than 50% of the outstanding shares

are represented at the meeting in person or by proxy. If a percentage
restriction is adhered to at the time of an investment or transaction, later
changes in percentage resulting from a change in values of portfolio securities
or the amount of total assets will not be considered a violation of any of the
following limitations.

The Fund may not:

(1) purchase securities of any one issuer if, as a result, more than
5% of the Fund's total assets would be invested in securities of that
issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Fund's total
assets may be invested without regard to this limitation, and except that
this limitation does not apply to securities issued or guaranteed by the
U.S. government, its agencies and instrumentalities or to securities issued
by other investment companies.

(2) purchase any security if, as a result of that purchase, 25% or
more of the Fund's total assets would be invested in securities of issuers
having their principal business activities in the same industry, except
that this limitation does not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities or to municipal
securities.

(3) issue senior securities or borrow money, except as permitted under
the 1940 Act and then not in excess of 33 1/3% of the Fund's total assets
(including the amount of the senior securities issued but reduced by any
liabilities not constituting senior securities) at the time of the issuance
or borrowing, except that the Fund may borrow up to an additional 5% of its
total assets (not including the amount borrowed) for temporary or emergency
purposes.

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(4) make loans, except through loans of portfolio securities or
through repurchase agreements, provided that for purposes of this
restriction, the acquisition of bonds, debentures, other debt securities or
instruments, or participations or other interests therein and investments
in government obligations, commercial paper, certificates of deposit,
bankers' acceptances or similar instruments will not be considered the
making of a loan.

(5) engage in the business of underwriting securities of other
issuers, except to the extent that the Fund might be considered an
underwriter under the federal securities laws in connection with its
disposition of portfolio securities.

(6) purchase or sell real estate, except that investments in
securities of issuers that invest in real estate and investments in
mortgage-backed securities, mortgage participations or other instruments
supported by interests in real estate are not subject to this limitation,
and except that the Fund may exercise rights under agreements relating to
such securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real

estate can be liquidated in an orderly manner.

(7) purchase or sell physical commodities unless acquired as a result
of owning securities or other instruments, but the Fund may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.

NON-FUNDAMENTAL LIMITATIONS. The following investment limitations are not
fundamental and may be changed by the Fund's board of directors without
stockholder approval.

The Fund will not:

(1) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that the Fund
may make margin deposits in connection with its use of financial options
and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments.

(2) engage in short sales of securities or maintain a short position,
except thtat the Fund may (a) sell short 'against the box' and (b) maintain
short positions in connection with its use of financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments.

All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above and the Fund's investment
objective, the other investment policies described in the Prospectus and this
Statement of Additional Information are not fundamental and may be changed with
approval of the board of directors.

HEDGING AND OTHER STRATEGIES USING DERIVATIVE INSTRUMENTS

As discussed in the Prospectus, GEIM may use a variety of financial
instruments ('Derivative Instruments'), including certain options, futures
contracts (sometimes referred to as 'futures'), options on futures contracts and
forward currency contracts, to attempt to hedge the Fund's investments or
attempt to enhance the Fund's income or return. The Fund may use the Derivative
Instruments described below:

OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES. A call
option is a short-term contract pursuant to which the purchaser of the

option, in return for a premium, has the right to buy the

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security underlying the option at a specified price at any time during the
term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option
term to deliver the underlying security or currency against payment of the
exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the option term. The
writer of the put option, who receives the premium, has the obligation,
upon exercise of the option during the option term, to buy the underlying
security or currency at the exercise price.

OPTIONS ON STOCK INDICES. A stock index assigns relative values to
the stocks included in the index and fluctuates with changes in the market
values of those stocks. A stock index option operates in the same way as a
more traditional stock option, except that exercise of a stock index option
is effected with cash payment and does not involve delivery of securities.
Thus, upon exercise of a stock index option, the purchaser will realize,
and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the stock index.

STOCK INDEX FUTURES CONTRACTS. A stock index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the
other party agrees to make, delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the stocks
comprising the index is made. Generally, contracts are closed out prior to
the expiration due of the contract.

INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS. Interest rate
and foreign currency futures contracts are bilateral agreements pursuant to
which one party agrees to make, and the other party agrees to accept,
delivery of a specified type of debt security or currency at a specified
future time and at a specified price. Although such futures contracts by
their terms call for actual delivery or acceptance of debt securities or
currency, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.

OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are
similar to options on securities or currency, except that an option on a
futures contract gives the purchaser the right, in return for the premium,
to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put), rather than to
purchase or sell a security or currency, at a specified price at any time
during the option term. Upon exercise of the option, the delivery of the
futures position to the holder of the option will be accomplished by
delivery of the accumulated balance that represents the amount by which the

market price of the futures contract exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.

FORWARD CURRENCY CONTRACTS. A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future
date, which may be any fixed number of days from the contract date agreed
upon by the parties, at a price set at the time the contract is entered
into.

GENERAL DESCRIPTION OF HEDGING STRATEGIES. Hedging strategies can be
broadly categorized as 'short hedges' and 'long hedges.' A short hedge is a
purchase or sale of a Derivative Instrument intended partially or fully to
offset potential declines in the value of one or more investments held in the
Fund's portfolio. Thus, in a short hedge the Fund takes a position in a
Derivative Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged. For example, the Fund might
purchase a put option on a security to hedge against a potential decline in the
value of that security. If the price of the security declined below the exercise
price of the put, the Fund could exercise the put and thus limit its loss below
the exercise price

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to the premium paid plus transaction costs. In the alternative, because the
value of the put option can be expected to increase as the value of the
underlying security declines, the Fund might be able to close out the put option
and realize a gain to offset the decline in the value of the security.

Conversely, a long hedge is a purchase or sale of a Derivative Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Derivative Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.

Derivative Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the Fund
owns or intends to acquire. Derivative Instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad equity
market sectors in which a Fund has invested or expects to invest. Derivative
Instruments on debt securities may be used to hedge either individual securities

or broad fixed income market sectors.

Income strategies include the writing of covered options to obtain the
related option premiums. Return strategies include the use of Derivative
Instruments to increase or reduce the Fund's exposure to an asset class without
buying or selling the underlying instruments.

The use of Derivative Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded,
and the Commodity Futures Trading Commission ('CFTC'). In addition, the Fund's
ability to use Derivative Instruments will be limited by tax considerations. See
'Taxation.'

In addition to the products, strategies and risks described below and in
the Prospectus, GEIM expects to discover additional opportunities in connection
with options, futures contracts, forward currency contracts and other hedging,
income and return strategies. These new opportunities may become available as
GEIM develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new options, futures contracts, forward currency
contracts or other techniques are developed. GEIM may utilize these
opportunities to the extent that they are consistent with the Fund's investment
objective and permitted by the Fund's investment limitations and applicable
regulatory authorities. The Fund's Prospectus or SAI will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.

SPECIAL RISKS OF STRATEGIES USING DERIVATIVE INSTRUMENTS. The use of
Derivative Instruments involves special considerations and risks, as described
below. Risks pertaining to particular Derivative Instruments are described in
the sections that follow.

(1) Successful use of most Derivative Instruments depends upon GEIM's
ability to predict movements of the overall securities, currency, and
interest rate markets, which requires different skills than predicting
changes in the prices of individual securities. While GEIM is experienced
in the use of Derivative Instruments, there can be no assurance that any
particular hedging strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation,
between price movements of a Derivative Instrument and price movements of
the investments being hedged. For example, if the value of a Derivative
Instrument used in a short hedge increased by less than the decline in

value of the hedged investment, the hedge would not be fully successful.
Such a lack of correlation might occur due to factors

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unrelated to the value of the investments being hedged, such as speculative
or other pressures on the markets in which Derivative Instruments are
traded. The effectiveness of hedges using Derivative Instruments on indices
will depend on the degree of correlation between price movements in the
index and price movements in the securities being hedged.

(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of
favorable price movements in the hedged investments. For example, if the
Fund entered into a short hedge because GEIM projected a decline in the
price of a security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Derivative Instrument. Moreover, if
the price of the Derivative Instrument declined by more than the increase
in the price of the security, the Fund could suffer a loss. In either such
case, the Fund would have been in a better position had it not hedged at
all.

(4) As described below, the Fund might be required to maintain assets
as 'cover,' maintain segregated accounts or make margin payments when it
takes positions in Derivative Instruments involving obligations to third
parties (i.e., Derivative Instruments other than purchased options.) If the
Fund were unable to close out its positions in such Derivative Instruments,
it might be required to continue to maintain such assets or accounts to
make such payments until the position expired or matured. These
requirements might impair the Fund's ability to sell a portfolio security
or make an investment at a time when it would otherwise be favorable to do
so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to close out a position in a Derivative Instrument
prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ('contra party') to enter
into a transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time and price
that is favorable to the Fund.

COVER FOR STRATEGIES USING DERIVATIVE INSTRUMENTS. Transactions using
Derivative Instruments, other than purchased options, expose the Fund to an
obligation to another party. The Fund will not enter into any such transactions

unless it owns either (1) an offsetting ('covered') position in securities,
currencies or other options or futures contracts or (2) cash or liquid
securities, with a value sufficient at all times to cover its potential
obligations to the extent not covered as provided in (1) above. The Fund will
comply with SEC guidelines regarding cover for such transactions and will, if
the guidelines so require, set aside cash or liquid securities in a segregated
account with its custodian in the prescribed amount.

Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Derivative Instrument is open, unless they are
replaced with similar assets. As a result, committing a large portion of the
Fund's assets to cover positions or to be maintained in segregated accounts
could impede portfolio management or the Fund's ability to meet redemption
requests or current obligations.

OPTIONS. The Fund may purchase put and call options, and write (sell)
covered call options, on equity and debt securities, stock indices and foreign
currencies. The purchase of call options may serve as a long hedge, and the
purchase of put options may serve as a short hedge. In addition, the Fund may
purchase options to enhance return by increasing or reducing its exposure to an
asset class without purchasing or selling the underlying securities. Writing
covered put or call options can enable the Fund to enhance income by reason of
the premiums paid by the purchasers of such options. Writing covered put options
serves as a limited long hedge because increases in the value of the hedged
instrument would be offset to the extent of the premium received for writing the
option. However, if the market price of the security underlying a covered put
option declines to less than the

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exercise price of the option, minus the premium received, the Fund would expect
to suffer a loss. Writing covered call options serves as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. If the covered call option is
an OTC option, the securities or other assets used as cover would be considered
illiquid to the extent described under 'Investment Policies and
Restrictions--Illiquid Securities.'

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.

The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, the
Fund may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction. The Fund may write put options to effect closing sale transactions.
Closing transactions permit the Fund to realize profits or limit losses on an
option position prior to its exercise or expiration.

The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities and foreign currencies exist but
are relatively new, and these instruments are primarily traded on the OTC
market. Exchange-traded options in the United States are issued by a clearing
organization affiliated with the exchange on which the option is listed which,
in effect, guarantees completion of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its contra party
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the contra
party to make or take delivery of the underlying investment upon exercise of the
option. Failure by the contra party to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected benefit of the
transaction.

Generally, the OTC debt and foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.

The Fund's ability to establish the close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the contra
party, the Fund might be unable to close out an OTC option position at any time
prior to its expiration.

If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.

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FUTURES. The Fund may purchase and sell stock index futures contracts,
interest rate futures contracts and foreign currency futures contracts. The Fund
may also purchase put and call options, and write covered call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, using a
strategy similar to that used for writing covered call options on securities or
indices. Similarly, writing covered put options on futures contracts can serve
as a limited long hedge. In addition, the Fund may purchase or sell futures
contracts or purchase options thereon to enhance return by increasing or
reducing its exposure to an asset class without purchasing or selling the
underlying securities.

In certain circumstances, it may be less expensive for the Fund to create a
synthetic futures contract than to buy a futures contract. A synthetic futures
contract is created when the Fund buys a call option on a futures contract and
writes a put option on the same futures contract with the same strike price and
expiration date. Because the Fund will receive a premium for writing the put
option (which will offset in whole or in part the premium it pays for buying the
call option), it may, under certain market conditions, be less expensive for the
Fund to create a synthetic futures contract than to pay the transaction costs
required to buy the underlying futures contract. The Fund will engage in this
strategy only when it is more advantageous to the Fund than is purchasing the
futures contract.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, obligations of
the United States or obligations that are fully guaranteed as to principal and
interest by the United States, in an amount generally equal to 10% or less of
the contract value. Margin must also be deposited when writing a call option on
a futures contract, in accordance with applicable exchange rules. Unlike margin
in securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment, and initial
margin requirements might be increased generally in the future by regulatory
action.

Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather

represents a daily settlement of the Fund's obligations with respect to an open
futures or options position. When the Fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In contrast, when
the Fund purchases or sells a futures contract or writes a call option thereon,
it is subject to daily variation calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.

Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades

11
<PAGE>
may be made that day at a price beyond the limit. Daily price limits do not
limit potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.

If the Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.

Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and options markets are
subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.

GUIDELINE FOR FUTURES AND OPTIONS. To the extent that the Fund enters into
futures contracts, options on futures positions and options on foreign
currencies traded on a commodities exchange, which are not for bona fide hedging
purposes (as defined by the CFTC), the aggregate initial margin and premiums on
these positions (excluding the amount by which options are 'in-the-money') may
not exceed 5% of the Fund's net assets. This guideline may be modified by the
Fund's board of directors without a stockholder vote. Adoption of this guideline
cannot be guaranteed to limit the percentage of the Fund's assets at risk to 5%.

FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. The Fund may
use options (both exchange-traded and OTC) and futures on foreign currencies, as
described above, and foreign currency forward contracts, as described below, to
hedge against movements in the values of the foreign currencies in which the
Fund's securities are denominated. Such currency hedges can protect against
price movements in a security that the Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.

The Fund might seek to hedge against changes in the value of a particular
currency when no Derivative Instruments on that currency are available or such
Derivative Instruments are more expensive than certain other Derivative
Instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using Derivative Instruments on another
currency or a basket of currencies, the values of which GEIM believes will have
a positive correlation to the value of the currency being hedged. The risk that
movements in the price of the Derivative Instrument will not correlate perfectly
with movements in the price of the currency being hedged is magnified when this
strategy is used.

The value of Derivative Instruments on foreign currencies depends on the
value of the underlying currency relative to the U.S. dollar. Because foreign
currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such Derivative
Instruments, the Fund could be

12
<PAGE>
disadvantaged by having to deal in the odd-lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the

interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Derivative Instruments until they reopen.

Settlement of Derivative Instruments involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.

COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and any
combination of futures and options transactions ('component transactions'),
instead of a single Derivative Instrument, as part of a single or combined
strategy when, in the opinion of GEIM, it is in the best interests of the Fund
to do so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
are normally entered into based on GEIM's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.

FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts to purchase or sell foreign currencies for a fixed amount of U.S.
dollars or another foreign currency. Such transactions may serve as long
hedges--for example, the Fund may purchase a forward currency contract to lock
in the U.S. dollar price of a security denominated in a foreign currency that
the Fund intends to acquire. Forward currency contract transactions may also
serve as short hedges--for example, the Fund may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.

As noted above, the Fund may seek to hedge against changes in the value of
a particular currency by using forward contracts on another foreign currency or
a basket of currencies, the value of which GEIM believes will have a positive
correlation to the value of the currency being hedged. In addition, the Fund may
use forward currency contracts to shift exposure to foreign currency
fluctuations from one country to another. For example, if the Fund owns
securities denominated in a foreign currency and GEIM believes that currency
will decline relative to another currency, it might enter into a forward
contract to sell an appropriate amount of the first foreign currency, with
payment to be made in the second foreign currency. Transactions that use two
foreign currencies are sometimes referred to as 'cross hedging.' Use of a

different foreign currency magnifies the risk that movements in the price of the
Derivative Instrument will not correlate or will correlate unfavorably with the
foreign currency being hedged.

The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying

13
<PAGE>
currency at the maturity of the contract. Failure by the contra party to do so
would result in the loss of any expected benefit of the transaction.

As is the case with futures contracts, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in securities denominated in the foreign
currency or to maintain cash or securities in a segregated account.

The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.

<PAGE>
DIRECTORS AND OFFICERS

The directors and executive officers of the Fund, their business addresses
and principal occupations during the past five years are:

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Margo N. Alexander**; 50 Director and Mrs. Alexander is president,
President chief executive officer and
a director of Mitchell
Hutchins (since January
1995) and also an executive
vice president and director
of PaineWebber. Mrs.
Alexander is president and a
director or trustee of 28
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Richard Q. Armstrong; 62 Director Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA En-
Greenwich, CT 06830 terprises (management
consulting firm) (since
April 1991 and principal
occupation since March
1995). Mr. Armstrong is also
a director of Hi Lo
Automotive, Inc. He was
chairman of the board, chief
executive officer and
co-owner of Adirondack
Beverages (producer and
distributor of soft drinks
and sparkling/still waters)
(October 1993-March 1995).
Mr. Armstrong was a partner
of The New England
Consulting Group (management
consulting firm) (December
1992-September 1993). He was
managing director of LVMH
U.S. Corporation (U.S.
subsidiary of the French
luxury goods conglomerate,
Luis Vuitton Moet Hennessey
Corporation) (1987-1991) and

chairman of its wine and
spirits subsidiary,
Schieffelin & Somerset Com-
pany (1987-1991). Mr.
Armstrong is a director or
trustee of 27 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

E. Garrett Bewkes, Jr.; 71** Director and Mr. Bewkes is a director of
Chairman of PaineWebber Group Inc. ('PW
the Board of Group') (holding company of
Directors PaineWebber and Mitchell
Hutchins). Prior to December
1995, he was a consultant to
PW Group. Prior to 1988, he
was chairman of the board,
president and chief
executive officer of
American Bakeries Company.
Mr. Bewkes is also a
director of Interstate
Bakeries Corporation and
NaPro BioTherapeutics, Inc.
Mr. Bewkes is a director or
trustee of 28 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Richard R. Burt; 50 Director Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. International Equity
Washington, D.C. 20036 Partners (international
investments and consulting
firm) (since March 1994) and
a partner of McKinsey &
Company (management
consulting firm) (since
1991). He is also a director
of American Publishing

Company and
Archer-Daniels-Midland Co.
(agricultural commodities).
He was the chief negotiator
in the Strategic Arms
Reduction Talks with the
former Soviet Union
(1989-1991) and the U.S. Am-
bassador to the Federal
Republic of Germany
(1985-1989). Mr. Burt is a
director or trustee of 27
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Mary C. Farrell**; 47 Director Ms. Farrell is a managing
director, senior investment
strategist and member of the
Investment Policy Committee
of PaineWebber. Ms. Farrell
joined PaineWebber in 1982.
She is a member of the Fi-
nancial Women's Association
and Women's Economic
Roundtable, and appears as a
regular panelist on Wall
$treet Week with Louis
Rukeyser. She also serves on
the Board of Overseers of
New York University's Stern
School of Business. Ms.
Farrell is a director or
trustee of 27 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

Meyer Feldberg; 55 Director Mr. Feldberg is Dean and
Columbia University Professor of Management of
101 Uris Hall the Graduate School of
New York, New York 10027 Business, Columbia
University. Prior to 1989,
he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of K-III
Communications Corporation,
Federated Department Stores,
Inc. and Revlon Inc. Dean
Feldberg is a director or
trustee of 27 investment

companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

George W. Gowen; 68 Director Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington,
New York, New York 10017 Bartholow & Miller. Prior to
May 1994, he was a partner
in the law firm of Fryer,
Ross & Gowen. Mr. Gowen is a
director of Columbia Real
Estate Investments, Inc. Mr.
Gowen is a director or
trustee of 27 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Frederic V. Malek; 60 Director Mr. Malek is chairman of
1455 Pennsylvania Ave., N.W. Thayer Capital Partners
Suite 350 (merchant bank). From
Washington, D.C. 20004 January 1992 to November
1992, he was campaign
manager of Bush-Quayle '92.
From 1990 to 1992, he was
vice chairman and, from 1989
to 1990, he was president of
Northwest Airlines Inc., NWA
Inc. (holding company of
Northwest Airlines Inc.) and
Wings Holdings Inc. (holding
company of NWA Inc.). Prior
to 1989, he was employed by
the Marriott Corporation
(hotels, restaurants,
airline catering and
contract feeding), where he
most recently was an
executive vice president and
president of Marriott Hotels
and Resorts. Mr. Malek is

also a director of American
Management Systems, Inc.
(management consulting and
computer-related services),
Automatic Data Processing,
Inc., CB Commercial Group,
Inc. (real estate services),
Choice Hotels International
(hotel and hotel
franchising), FPL Group,
Inc. (electric services),
Integra, Inc. (bio-medical),
Manor Care Inc. (health
care), National Education
Corporation and Northwest
Airlines Inc. Mr. Malek is a
director or trustee of 27
investment companies for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.

Carl W. Schafer; 61 Director Mr. Schafer is president of
P.O. Box 1164 the Atlantic Foundation
Princeton, NJ 08542 (charitable foundation
supporting mainly oceano-
graphic exploration and
research). He is a director
of Roadway Express, Inc.
(trucking), The Guardian
Group of Mutual Funds, Evans
Systems, Inc. (motor fuels,
convenience store and
diversified company),
Electronic Clearing House,
Inc. (financial transactions
processing), Wainoco Oil
Corporation and Nutraceutix,
Inc. (biotechnology
company). Prior to January
1993, he was chairman of the
Investment Advisory
Committee of the Howard
Hughes Medical Institute.
Mr. Schafer is a director or
trustee of 27 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

Ann E. Moran; 40 Vice President Ms. Moran is a vice president
and and a manager of the mutual
Assistant fund finance division of

Treasurer Mitchell Hutchins.
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS*; AGE WITH THE FUND DURING PAST FIVE YEARS
- -------------------------------- -------------- ------------------------------
<S> <C> <C>
Ms. Moran is a vice
president and assistant
treasurer of 28 investment
companies for which Mitch-
ell Hutchins or PaineWebber
serves as investment
adviser.

Dianne E. O'Donnell; 45 Vice President Ms. O'Donnell is a senior vice
and president and deputy general
Secretary counsel of Mitchell
Hutchins. Ms. O'Donnell is a
vice president and secretary
of 27 investment companies
and a vice president and as-
sistant secretary of one
investment company for which
Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Emil Polito; 37 Vice President Mr. Polito is a senior vice
president and director of
operations and control for
Mitchell Hutchins. From
March 1991 to September 1993
he was director of the
mutual funds sales support
and service center for
Mitchell Hutchins and
PaineWebber. Mr. Polito is
also vice president of 28
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Victoria E. Schonfeld; 46 Vice President Ms. Schonfeld is a managing
director and general counsel
of Mitchell Hutchins. Prior
to May 1994, she was a

partner in the law firm of
Arnold & Porter. Ms.
Schonfeld is a vice
president of 27 investment
companies, and a vice
president and secretary of
one investment company for
which Mitchell Hutchins or
PaineWebber serves as in-
vestment adviser.

Paul H. Schubert; 34 Vice President Mr. Schubert is a first vice
and president and director of
Treasurer the mutual fund finance
division of Mitchell
Hutchins. From August 1992
to August 1994, he was a
vice president at BlackRock
Financial Management L.P.
Prior to August 1992, he was
an audit manager with Ernst
& Young LLP. Mr. Schubert is
a vice president and
treasurer of 28 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

Barney A. Taglialatela; 36 Vice President Mr. Taglialatela is a vice
and president and a manager of
Assistant the mutual fund finance
Treasurer division of Mitchell
Hutchins. Prior to February
1995, he was a manager of
the mutual fund finance
division of Kidder Peabody
Asset Management, Inc. Mr.
Taglialatela
</TABLE>

18
<PAGE>

which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Mark A. Tincher; 42 Vice President Mr. Tincher is a managing
director and chief invest-
ment officer--equities of
Mitchell Hutchins. Prior to
March 1995, he was a vice
president and directed the
U.S. funds management and
equity research areas of
Chase Manhattan Private
Bank. Mr. Tincher is a vice
president of 13 investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.

Keith A. Weller; 36 Vice President Mr. Weller is a first vice
and president and associate gen-
Assistant eral counsel of Mitchell
Secretary Hutchins. Prior to May 1995,
he was an attorney in
private practice. Mr. Weller
is a vice president and
assistant secretary of 27
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.

Ian W. Williams; 40 Vice President Mr. Williams is a vice
and president and a manager of
Assistant the mutual fund finance
Treasurer division of Mitchell
Hutchins. Prior to June
1992, he was an audit senior
accountant with Price
Waterhouse LLP. Mr. Williams
is a vice president and
assistant treasurer of 28
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>

- ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.

** Mrs. Alexander, Mr. Bewkes and Ms. Farrell are 'interested persons' of the
Fund as defined in the 1940 Act by virtue of their positions with PW Group,
PaineWebber and/or Mitchell Hutchins.

The Fund pays directors who are not 'interested persons' of the Fund $1,000
annually and $150 for each board meeting and each separate meeting of a board
committee. Each chairman of the audit and contract review committees of
individual funds within the PaineWebber fund complex receives additional
compensation aggregating $15,000 annually each from the relevant funds. All
directors are reimbursed for any expenses incurred in attending meetings.
Because PaineWebber and Mitchell Hutchins perform substantially all the services
necessary for the operation of the Fund, the Fund requires no employees. No
officer, director or employee of Mitchell Hutchins or PaineWebber presently
receives any compensation from the Fund for acting as a director or officer.

The table below includes certain information relating to the compensation
of the Fund's current directors who held office with the Fund or with other
PaineWebber funds during the Fund's last fiscal year.

19
<PAGE>
COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM THE
COMPENSATION FUND AND THE
FROM FUND
NAME OF PERSON, POSITION THE FUND* COMPLEX**
- ------------------------------ ------------ -------------

<S> <C> <C>
Richard Q. Armstrong,
Director.................... $1,750 $59,873

Richard R. Burt, Director..... 1,600 51,173

Meyer Feldberg, Director...... 2,700 96,181

George W. Gowen, Director..... 1,750 92,431

Frederic V. Malek, Director... 1,750 92,431

Carl W. Schafer, Director..... 1,750 62,307
</TABLE>

- ------------------

Only independent members of the board of directors are compensated by the Fund;
directors who are 'interested persons,' as defined by the 1940 Act, do not
receive compensation.

* Represents fees paid to each director during the fiscal year ended July 31,
1997.

** Represents total compensation paid to each director during the calendar year
ended December 31, 1996; no fund within the fund complex has a bonus,
pension, profit sharing or retirement plan.

20
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of November 14, 1997, Cede & Co. (the nominee for The Depository Trust
Company, a securities depository) owned of record of the Fund's shares
of Common Stock or % of the outstanding Common Stock. To the knowledge of
the Fund, no person is the beneficial owner of 5% or more of its Common Stock.

As of November 14, 1997, the directors and officers of the Fund as a group
beneficially owned less than 1% of the outstanding shares of Common Stock.

INVESTMENT ADVISORY ARRANGEMENTS

Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated October 6, 1993 with the Fund ('Advisory
Contract'). Pursuant to the Advisory Contract, Mitchell Hutchins provides a
continuous investment program for the Fund and makes investment decisions and
places orders to buy, sell or hold particular securities. Mitchell Hutchins has
delegated these responsibilities to GEIM subject to the supervision of Mitchell
Hutchins. As administrator, Mitchell Hutchins supervises all matters relating to
the operation of the Fund and obtains for it corporate, administrative and
clerical personnel, office space, equipment and services, including arranging
for the periodic preparation, updating, filing and dissemination of proxy
materials, tax returns and reports to the Fund's board of directors,
stockholders and regulatory authorities. Pursuant to a separate contract with
Mitchell Hutchins, dated as of July 10, 1995 ('Sub-Advisory Contract'), GEIM
serves as the Fund's sub-adviser. GEIM makes investment decisions and places
orders to buy, sell or hold particular securities for the Fund.

In addition to the payments to Mitchell Hutchins under the Advisory
Contract described in the Prospectus, the Fund pays certain other costs,
including: (1) the costs (including brokerage commissions) of securities

purchased or sold by the Fund and any losses incurred in connection therewith;
(2) expenses incurred on behalf of the Fund by Mitchell Hutchins; (3)
organizational expenses of the Fund, whether or not advanced by Mitchell
Hutchins; (4) filing fees and expenses relating to the registration and
qualification of the Common Stock under federal and state securities laws; (5)
fees and salaries payable to directors who are not interested persons of the
Fund or Mitchell Hutchins; (6) all expenses incurred in connection with the
directors' services, including travel expenses; (7) taxes (including any income
or franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and any other insurance or fidelity bonds; (9)
any costs, expenses or losses arising out of a liability of or claims for
damages or other relief asserted against the Fund for violation of any law; (10)
legal, accounting and auditing expenses, including legal fees of special counsel
for the independent directors; (11) charges of custodians, transfer agents and
other agents; (12) costs of preparing share certificates; (13) expenses of
printing and distributing reports to stockholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Fund;
(15) fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of stockholders, the board and any
committees thereof; (17) the costs of investment company literature and other
publications provided to directors and officers; (18) costs of mailing,
stationery and communications equipment; (19) interest charges on borrowings;
and (20) fees and expenses of listing and maintaining any listing of the Fund's
shares on the American Stock Exchange, Inc. ('Amex') or any other national
securities exchange.

The Advisory Contract was approved by the Fund's board of directors and by
a majority of the directors who are not parties to the Advisory Contract or
interested persons of any such party ('Independent Directors'), on June 23, 1993
and by its initial stockholder on September 27, 1993. Unless sooner terminated,
the Advisory Contract will continue automatically for successive annual periods,
provided that such continuance is specifically approved at least annually: (1)
by a majority vote of the Independent Directors cast in person at a meeting
called for the purpose of voting on such approval; and (2) by the board of
directors or by vote of a majority of the outstanding voting securities of the
Fund.

21
<PAGE>
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in
the performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. The Advisory Contract is terminable by
vote of the board of directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to Mitchell Hutchins. The Advisory Contract may also be
terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The
Advisory Contract terminates automatically upon its assignment.

The Sub-Advisory Contract was approved by the Fund's board of directors and

by a majority of the directors who are not parties to the Sub-Advisory Contract
or interested persons of any such party, on March 22, 1995 and by the
stockholders of the Fund on July 10, 1995. Under the Sub-Advisory Contract, GEIM
is not liable for any error of judgment or mistake of law or for any loss
suffered by the Fund, its stockholders or Mitchell Hutchins in connection with
the Sub-Advisory Contract, except any liability to the Fund, its stockholders or
Mitchell Hutchins to which GEIM would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on the part of GEIM in the
performance of its duties or from reckless disregard by GEIM of its obligations
and duties under the Sub-Advisory Contract. The Sub-Advisory Contract terminates
automatically upon assignment or upon termination of the Advisory Contract and
is terminable by vote of the Fund's board of directors, or by the holders of a
majority of the outstanding voting securities of the Fund, at any time without
penalty, on 60 days' written notice to GEIM. The Sub-Advisory Contract may be
terminated by Mitchell Hutchins: (1) upon material breach by GEIM of its
representations and warranties; (2) if GEIM becomes unable to discharge its
duties and obligations under the Sub-Advisory Contract; or (3) on 120 days'
notice to GEIM. GEIM may terminate the Sub-Advisory Contract at any time on 120
days' notice to Mitchell Hutchins.

For the fiscal years ended July 31, 1997, July 31, 1996 and July 31, 1995,
the Fund paid or accrued to Mitchell Hutchins $559,511, $456,664 and $469,312,
respectively, in investment advisory and administration fees. Mitchell Hutchins
(not the Fund) paid or accrued to GEIM $279,755, $228,332 and $76,013,
respectively, in investment advisory fees during the fiscal years ended July 31,
1997, July 31, 1996 and July 31, 1995.

Mitchell Hutchins personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders of the PaineWebber funds and other Mitchell Hutchins' advisory
accounts by all Mitchell Hutchins' directors, officers and employees, that
establishes procedures for personal investing and restricts certain
transactions. For example, employee accounts generally must be maintained at
PaineWebber, personal trades in most securities require pre-clearance and
short-term trading and participation in initial public offerings generally are
prohibited. In addition, the code of ethics puts restrictions on the timing of
personal investing in relation to trades by PaineWebber funds and other Mitchell
Hutchins advisory clients. GEIM personnel may also invest in securities for
their own accounts pursuant to a comparable code of ethics.

PORTFOLIO TRANSACTIONS

Subject to policies established by the board of directors, and oversight by
Mitchell Hutchins, GEIM is responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage transactions. In executing
portfolio transactions, GEIM seeks to obtain the best net results for the Fund,
taking into account such factors as the price (including the applicable
brokerage commission or dealer spread), size of the order, difficulty of
execution and operational facilities of the firm involved. Prices paid to
dealers generally include a 'spread,' which is the difference between the prices
at which the dealer is willing to purchase and sell a specific security at the

time. The Fund may invest in securities traded in the OTC market and will engage
primarily in transactions with the dealers who make markets in such securities,
unless a better price or execution could be obtained by using a broker. While
GEIM

22
<PAGE>
generally seeks competitive commission rates and dealer spreads, payment of the
lowest commission or spread is not necessarily consistent with obtaining the
best net results.

The Fund has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Fund contemplates that, consistent
with obtaining the best net results, brokerage transactions may be conducted
through Mitchell Hutchins or any of its affiliates, including PaineWebber. The
Fund's board of directors has adopted procedures in conformity with Rule 17e-1
under the 1940 Act to ensure that all brokerage commissions paid to Mitchell
Hutchins or any of its affiliates are reasonable and fair. Specific provisions
in the Advisory Contract authorize Mitchell Hutchins and any affiliate thereof
which is a member of a national securities exchange to effect portfolio
transactions for the Fund on such exchange and to retain compensation in
connection with such transactions. Any such transactions will be effected and
related compensation paid only in accordance with applicable SEC regulations.

Transactions in futures contracts are executed through futures commission
merchants ('FCMs'), who receive brokerage commissions for their services. The
Fund's procedures in selecting FCMs to execute the Fund's transactions in
futures contracts, including procedures permitting the use of GEIM and its
affiliates, are similar to those in effect with respect to brokerage
transactions in securities. For the fiscal years ended July 31, 1997, July 31,
1996 and July 31, 1995, the Fund paid no commissions to FCMs.

Consistent with the Fund's interests and subject to the review of the board
of directors, GEIM may cause the Fund to purchase and sell portfolio securities
from and to dealers, or through brokers which provide the Fund with research,
analysis, advice and similar services. In return for such services, the Fund may
pay to those brokers a higher commission than may be charged by other brokers,
provided that GEIM determines in good faith that such commission is reasonable
in terms either of that particular transaction or of the overall responsibility
of GEIM to the Fund and its other clients and that the total commissions paid by
the Fund will be reasonable in relation to the benefits to the Fund over the
long term. For purchases or sales with broker-dealer firms which act as
principal, GEIM seeks best execution. Although GEIM may receive certain research
or execution services in connection with these transactions, GEIM will not
purchase securities at a higher price or sell securities at a lower price than
would otherwise be paid if no weight was attributed to the services provided by
the executing dealer. Moreover, GEIM will not enter into any explicit soft
dollar arrangements relating to principal transactions and will not receive in
principal transactions the types of services which could be purchased for hard
dollars. GEIM may engage in agency transactions in OTC equity and debt
securities in return for research and execution services. These transactions are
entered into only in compliance with procedures ensuring that the transaction

(including commissions) is at least as favorable as it would have been if
effected directly with a market-maker that did not provide research or execution
services. These procedures include GEIM receiving multiple quotes from dealers
before executing the transaction on an agency basis.

Research services furnished by dealers or brokers with or through which the
Fund effects securities transactions may be used by GEIM in advising other funds
or accounts and, conversely, research services furnished to Mitchell Hutchins or
GEIM by dealers or brokers in connection with other funds or accounts that
either of them advise may be used by GEIM in advising the Fund. Information and
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by Mitchell Hutchins under the Advisory
Contract and by GEIM under the Sub-Advisory Contract.

Investment decisions for the Fund and for other investment accounts managed
by GEIM are made independently of each other in the light of differing
considerations for the various accounts. The same investment decision, however,
may occasionally be made for the Fund and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
averaged as to price and allocated between the Fund and such other account(s) as
to amount according to a formula deemed equitable to the Fund and such
account(s). While in some cases this practice could have a detrimental effect
upon the price or value of the

23
<PAGE>
security as far as the Fund is concerned or upon its ability to complete its
entire order, in other cases it is believed that coordination and the ability to
participate in volume transactions will be beneficial to the Fund.

The Fund will not purchase securities that are offered in underwritings in
which GEIM or any of its affiliates is a member of the underwriting or selling
group except pursuant to the procedures adopted by the Fund's board of directors
in conformity with Rule 10f-3 under the 1940 Act. Among other things, these
procedures require that the commission or spread paid in connection with such a
purchase be reasonable and fair, that the purchase be at not more than the
public offering price prior to the end of the first business day after the date
of the public offering and that Mitchell Hutchins, GEIM and their affiliates not
participate in or benefit from the sale to the Fund.

For the fiscal years ended July 31, 1997 and July 31, 1996, GEIM directed
$1,967,511 and $3,870,114 in portfolio transactions to brokers chosen because
they provided research services for which the Fund paid $5,834 and $16,016 in
commissions. For the period March 23, 1995 to July 31, 1995, GEIM directed
$251,361 in portfolio transactions to brokers chosen because they provide
research services, for which the Fund paid $2,419 in commissions. For the period
August 1, 1994 to March 23, 1995, Mitchell Hutchins directed $117,616 in
portfolio transactions to brokers chosen because they provide research services,
for which the Fund paid $331 in commissions. For the fiscal years ended July 31,
1997, July 31, 1996 and July 31, 1995, the Fund paid $385,844, $304,144 and
$442,612, respectively, in total brokerage commissions.

VALUATION OF COMMON STOCK

The Fund determines the net asset value of the Common Stock weekly as of
the close of regular trading (currently 4:00 p.m., Eastern time) on the Amex on
the last day of the week on which the Amex is open for trading. The net asset
value of the Common Stock also is determined monthly as of the close of regular
trading on the Amex on the last day of the month on which the Amex is open for
trading. The net asset value per share of Common Stock is computed by dividing
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received and earned
discount) minus all liabilities (including accrued expenses) by the total number
of shares of Common Stock outstanding at such time.

Securities that are listed on U.S. and foreign stock exchanges are valued
at the last sale price on the day the securities are being valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange considered by GEIM as the primary market. Securities
traded in the OTC market and listed on The Nasdaq Stock Market, Inc. ('Nasdaq')
are valued at the last available sale price on Nasdaq at 4:00 p.m., eastern
time; other OTC securities are valued at the last bid price available prior to
valuation. Securities, including limited partnership interests, and assets for
which reliable market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Fund's board
of directors. The amortized cost method of valuation generally is used to value
debt obligations with 60 days or less remaining until maturity, unless the board
of directors determines that this does not represent fair value.

All investments quoted in foreign currency are valued weekly in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined by the Fund's custodian. Foreign currency
exchange rates are generally determined prior to the close of trading on the
Amex. Occasionally events affecting the value of foreign investments and such
exchange rates occur between the time at which they are determined and the close
of trading on the Amex, which events will not be reflected in a computation of
the Fund's net asset value on that day. If events materially affecting the value
of such investments or currency exchange rates occur during such time period,
the investments will be valued at their fair value as determined in good faith
by or under the direction of the Fund's board of directors. The foreign currency
exchange transactions of the Fund conducted on a spot (that is, cash) basis are
valued at the spot rate for purchasing or selling currency prevailing on the
foreign exchange market. This rate under normal market conditions differs from
the prevailing

24
<PAGE>
exchange rate in an amount generally less than one-tenth of one percent due to
the costs of converting from one currency to another.

TAXATION

General. In order to continue to qualify for treatment as a regulated
investment company ('RIC') under the Internal Revenue Code, the Fund must

distribute to its stockholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions) ('Distribution Requirement') and must meet several additional
requirements. Among these requirements are the following: (1) the Fund must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ('Income
Requirement'); (2) through the end of its current taxable year, the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities, or any of the following, that were held for
less than three months--options, futures or forward contracts (other than those
on foreign currencies), or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) ('Short-Short Limitation'); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with these other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets and that does not represent more than 10% of the issuer's
outstanding voting securities; and (4) at the close of each quarter of the
Fund's taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. government securities or the securities
of other RICs) of any one issuer. If the Fund failed to qualify for treatment as
a RIC for any taxable year, it would be taxed as an ordinary corporation on its
taxable income for that year (even if that income was distributed to
stockholders) and all distributions out of its earnings and profits would be
taxable to its stockholders as dividends (that is, ordinary income).

Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to stockholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
stockholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to stockholders for the year in which that December 31 falls.

A portion of the dividends from the Fund's investment company taxable
income (whether received in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. corporations. However, dividends received by a corporate stockholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.

The Fund will be subject to a nondeductible 4% excise tax ('Excise Tax') to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
For these purposes, any such income retained by the Fund, and on which it pays

federal income tax, will be treated as having been distributed.

Foreign Taxes. Dividends and interest on foreign securities received by
the Fund may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield on those securities.
Tax conventions between certain countries and the United States may reduce or
eliminate these taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of

25
<PAGE>
investments by foreign investors. If more than 50% of the value of the Fund's
total assets at the close of any taxable year consists of securities of foreign
corporations, the Fund will be eligible to, and may, file an election with the
Internal Revenue Service that will enable Fund stockholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions income taxes paid by the Fund for that year. Pursuant to the
election, the Fund would treat those taxes as dividends paid to its stockholders
and each stockholder would be required to (1) include in gross income, and treat
as paid by him, his proportionate share of those taxes, (2) treat his share of
those taxes and of any dividend paid by the Fund that represents income from
foreign or U.S. possessions sources as his own income from those sources and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. If the Fund makes the election, it will
report to its stockholders shortly after the end of each taxable year their
respective shares of the Fund's income from sources within, and taxes paid to,
foreign countries and U.S. possessions.

Passive Foreign Investment Companies. The Fund may invest in the stock of
'passive foreign investment companies' ('PFICs'). A PFIC is a foreign
corporation--other than a 'controlled foreign corporation' (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by 'U.S.
shareholders,' defined as U.S. persons that individually own, directly,
indirectly, or constructively, at least 10% of that voting power) as to which
the Fund is a U.S. shareholder (effective after October 31, 1998)--that, in
general, meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances, the
Fund will be subject to federal income tax on a portion of any 'excess
distribution' received on the stock of a PFIC or of any gain on disposition of
that stock (collectively 'PFIC income'), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its stockholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its stockholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a 'qualified electing fund,' then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital gain

over net short-term capital loss)--which most likely would have to be
distributed by the Fund to satisfy the Distribution Requirement and to avoid
imposition of the Excise Tax--even if those earnings and gain are not
distributed to the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.

Effective for its taxable year beginning August 1, 1998, the Fund may elect
to 'mark to market' its stock in any PFIC. 'Marking-to-market,' in this context,
means including in ordinary income each taxable year the excess, if any, of the
fair market value of the PFIC's stock over the Fund's adjusted basis therein as
of the end of that year. Pursuant to the election, the Fund also will be allowed
to deduct (as an ordinary, not capital, loss) the excess, if any, of its
adjusted basis in PFIC stock over the fair market value thereof as of the
taxable year-end, but only to the extent of any net mark-to-market gains with
respect to that stock included by the Fund for prior taxable years. The Fund's
adjusted basis in each PFIC's stock with respect to which it makes this election
will be adjusted to reflect the amounts of income included and deductions taken
under the election. Regulations proposed in 1992 would provide a similar
election with respect to the stock of certain PFICs.

Hedging Strategies. The use of hedging strategies, such as writing
(selling) and purchasing options and futures and entering into forward
contracts, involves complex rules that will determine for income tax purposes
the amount, character and timing of recognition of the gains or losses the Fund
realizes in connection therewith. These rules also may require the Fund to 'mark
to market' (that is, treat as sold for their fair market value) at the end of
each taxable year certain positions in its portfolio, which may cause the Fund
to recognize income without receiving cash with which to make distributions
necessary to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax. In that event, the Fund might have to liquidate securities to enable
it to make

26
<PAGE>
the required distributions, which would cause it to recognize gains or losses
and might affect its ability to satisfy the Short-Short Limitation.

Gains from the disposition of foreign currencies (except certain gains that
may be excluded by future regulations), and gains from options, futures and
forward currency contracts derived by the Fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures (other than those on foreign currencies) will be subject to
the Short-Short Limitation if they are held for less than three months. Income
from the disposition of foreign currencies, and options, futures and forward
contracts on foreign currencies, that are not directly related to the Fund's
principal business of investing in securities (or options and futures with
respect to securities) also will be subject to the Short-Short Limitation if
they are held for less than three months.

If the Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not so qualify, it may be
forced to defer the closing out of certain options, futures, forward contracts
and foreign currency positions beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to continue to qualify as a RIC.

ADDITIONAL INFORMATION

Common Stock Repurchases and Tender Offers. As discussed in the
Prospectus, the Fund's board of directors may tender for Common Stock to reduce
or eliminate the discount to net asset value at which the Common Stock might
trade. Even if a tender offer has been made, it will be the board's announced
policy, which may be changed by the board, not to accept tenders or effect
repurchases (or, if a tender offer has not been made, not to initiate a tender
offer) if: (1) such transactions, if consummated, would (a) result in the
delisting of the Common Stock from the Amex (the Amex having advised the Fund
that it would consider delisting if the aggregate market value of the
outstanding shares is less than $1,000,000, the number of publicly held shares
falls below 200,000 or the number of round-lot holders falls below 300), or (b)
impair the Fund's status as a RIC (which would eliminate the Fund's eligibility
to deduct dividends paid to its stockholders, thus causing its income to be
fully taxed at the corporate level in addition to the taxation of stockholders
on distributions received from the Fund); (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objective and policies in order to repurchase the Common
Stock; or (3) there is, in the board's judgment, any material (a) legal action
or proceeding instituted or threatened which challenges such transactions or
otherwise materially adversely affects the Fund, (b) suspension of trading or
limitation on prices of securities generally on the Amex or any foreign exchange
on which portfolio securities of the Fund are traded, (c) declaration of a
banking moratorium by federal, state or foreign authorities or any suspension of
payment by banks in the United States, New York State or foreign countries in
which the Fund invests, (d) limitation affecting the Fund or the issuers of its
portfolio securities imposed by federal, state or foreign authorities on the
extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States or other
countries in which the Fund invests or (f) other events or conditions that would
have a material adverse effect on the Fund or its stockholders if Common Stock
was repurchased. The board of directors may modify these conditions in light of
experience.

Any tender offer made by the Fund will be at a price equal to the net asset
value of the Common Stock on a date subsequent to the Fund's receipt of all
tenders. Each offer will be made and stockholders notified in accordance with
the requirements of the Securities Exchange Act of 1934 and the 1940 Act, either
by publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the

27
<PAGE>

rules and regulations promulgated thereunder. When a tender offer is authorized
to be made by the Fund's board of directors, a stockholder wishing to accept the
offer will be required to tender all (but not less than all) of the shares owned
by such shareholder (or attributed to him for federal income tax purposes under
section 318 of the Internal Revenue Code). The Fund will purchase all Common
Stock tendered in accordance with the terms of the offer unless it determines to
accept none of them (based upon one of the conditions set forth above). Each
person tendering shares will pay to the Fund's Transfer Agent a service charge
to help defray certain costs, including the processing of tender forms,
effecting payment, postage and handling. Any such service charge will be paid
directly by the tendering stockholder and will not be deducted from the proceeds
of the purchase. The Fund's Transfer Agent will receive the fee as an offset to
these costs. The Fund expects the cost of effecting a tender offer will exceed
the aggregate of all service charges received from those who tender their
shares. Costs associated with the tender will be charged against capital.

Tendered shares that have been accepted and purchased by the Fund will be
held in the treasury until retired by the board. If treasury shares are retired,
Common Stock issued and outstanding and capital in excess of par will be
reduced. If tendered shares are not retired, the Fund may hold, sell or
otherwise dispose of the shares for any lawful corporate purpose as determined
by the board of directors.

Custodian. State Street Bank and Trust Company, serves as custodian of the
Fund's assets held in the United States. Rules adopted under the 1940 Act permit
the Fund to maintain its securities and cash in the custody of certain eligible
banks and securities depositories. Pursuant to those rules, the Fund's portfolio
of securities and cash, when invested in securities of foreign countries, is
held by its subcustodians who are approved by the directors of the Fund as in
accordance with the rules of the SEC. Selection of the subcustodians is made by
the directors of the Fund following a consideration of a number of factors,
including, but not limited to, the reliability and financial stability of the
institution, the ability of the institution to capably perform custodial
services for the Fund, the reputation of the institution in its national market
and the political and economic stability of the countries in which the
subcustodians will be located. In addition, the 1940 Act requires that foreign
subcustodians, among other things, have shareholder equity in excess of $200
million, have no lien on the Fund's assets and maintain adequate and accessible
records.

Auditors. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
serves as the Fund's independent auditors.

Counsel. The law firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036-1800, counsel to the Fund, has passed upon
the legality of the Common Stock offered by the Fund's Prospectus. Kirkpatrick &
Lockhart LLP also acts as counsel to PaineWebber and Mitchell Hutchins in
connection with other matters.

FINANCIAL STATEMENTS

The Fund's Annual Report to Shareholders for the fiscal year ended July 31,
1997 is a separate document supplied with this SAI and the financial statements,
accompanying notes and report of independent auditors appearing therein are
incorporated by reference in this SAI.

<PAGE>
APPENDIX A

DESCRIPTION OF MOODY'S LONG-TERM DEBT RATINGS

AAA. Bonds which are rated 'Aaa' are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as 'gilt edged.' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues;

AA. Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the 'Aaa' group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat greater than the 'Aaa'
securities;

A. Bonds which are rated 'A' possess many favorable investment attributes
and are considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future;

BAA. Bonds which are rated 'Baa' are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well;

BA. Bonds which are rated 'Ba' are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class;

B. Bonds which are rated 'B' generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from 'Aa' through 'B.' The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.

DESCRIPTION OF S&P'S CORPORATE DEBT RATINGS

AAA. Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to

pay interest and repay principal is extremely strong;

AA. Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree;

A. Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories;

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<PAGE>
BBB. Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories;

BB, B. Debt rated 'BB' and 'B' is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. 'BB' indicates the lowest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions;

BB. Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating;

B. Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'BB' or 'BB-' rating.

Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.

R. The 'r' is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest is indexed to equities, commodities or
currencies; certain swaps and options; and interest only and principal only
mortgage securities.

The absence of an 'r' symbol should not be taken as an indication that an

obligation will exhibit no volatility or variability in total return.

NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.

DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS

'AAA'. An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks;

'AA'. An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future;

'A'. An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classification, earnings and asset protection are nevertheless expected
to be maintained at adequate levels;

'BAA'. An issue which is rated 'baa' is considered to be medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time;

30
<PAGE>
'BA'. An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class;

'B'. An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small;

'CAA'. An issue which is rated 'caa' is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments;

'CA'. An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments;

'C'. This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking

and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.

DESCRIPTION OF S&P PREFERRED STOCK RATINGS

'AAA'. This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations;

'AA'. A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA';

'A'. An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions;

'BBB'. An issue rated 'BBB' is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category;

'BB', 'B', 'CCC'. Preferred stocks rated 'BB', 'B', and 'CCC' are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.

Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'CCC' may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

PRIME-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of senior short-term debt obligations. P-1
repayment capacity will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed;

31
<PAGE>
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; well-established access to a range of
financial markets and assured sources of alternate liquidity.

PRIME-2. Issuers (or supporting institutions) rated Prime-2 (P-2) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more

subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.

DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS

A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1. This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.

A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.

A-3. Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.

B. Issues rated 'B' are regarded as having only a speculative capacity for
timely payment.

<PAGE>

================================================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR PAINEWEBBER. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THE PROSPECTUS RELATES. THE PROSPECTUS AND THIS STATEMENT OF
ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

------------------------

TABLE OF CONTENTS

================================================================================

GLOBAL SMALL CAP FUND INC.
COMMON STOCK

------------------------

STATEMENT OF ADDITIONAL
INFORMATION

------------------------

PAINEWEBBER INCORPORATED

------------------------

DECEMBER 1, 1997

================================================================================

<PAGE>
PART C - OTHER INFORMATION

Item 24. Financial Statements and Exhibits

1. Financial Statements:

Included in Part A of the Registration Statement:

a. Financial Highlights for each of the three fiscal
years ended July 31, 1997, and for the period October
15, 1993 (commencement of operations) to July 31,
1994.

Included in Part B of the Registration Statement
through incorporation by reference from the Annual Report to
the Shareholders, previously filed with the Securities and
Exchange Commission through EDGAR on September 30, 1997 (File
No. 33-64808) (Accession No. 0000889812-97-002090):

a. Portfolio of Investments as of July 31, 1997

b. Statement of Assets and Liabilities as of July 31,
1997

c. Statement of Operations for the fiscal year ended
July 31, 1997

d. Statement of Changes in Net Assets for each of the
two fiscal years in the period ended July 31, 1997

e. Notes to Financial Statements

f. Financial Highlights

g. Report of Ernst & Young LLP, Independent Auditors,
dated September 19, 1997

2. Exhibits:

a. Articles of Incorporation(1)
b. (i) Bylaws(2)
(ii) Amendment to Bylaws(2)
c. None
d. Inapplicable
e. Dividend Reinvestment Plan(3)
f. None
g. (i) Investment Advisory and Administration
Contract(4)
(ii) Form of Sub-Advisory Agreement(5)

- ----------
<TABLE>
<S> <C>

1 Incorporated by reference to exhibit 1 to the initial Registration Statement on Form N-2 filed June 22,
1993 (File No. 33-64808).

2 Incorporated by reference to exhibit b to Post-Effective Amendment No. 3 to the Registration Statement
on Form N-2 filed September 29, 1995 (File No. 33-64808).

3 Incorporated by reference to exhibit 5 to Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-2 filed September 30, 1993 (File No. 33-64808).

4 Incorporated by reference to exhibit g to Post-Effective Amendment No. 2 to the Registration Statement
on Form N-2 filed November 23, 1994 (File No. 33-64808).

5 Incorporated by reference to exhibit g to Post-Effective Amendment No. 3 to the Registration Statement
on Form N-2 filed September 29, 1995 (File No. 33-64808).

</TABLE>

II-1

<PAGE>

h. Underwriting Agreement(6)
i. None
j. Form of Custodian Agreement(7)
k. Transfer Agency Agreement(8)
l. Opinion and Consent of Counsel(9)
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent(10)
q. None
r. Financial Data Schedule (filed herewith)

Item 25. Marketing Arrangements

Inapplicable. See note accompanying Item 24.2.h.

Item 26. Other Expenses of Issuance and Distribution

Not applicable to current Post-Effective Amendment; for expenses
incurred in connection with this Registration Statement; see the Registrants's
Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2, SEC
File No. 33-64808, filed October 6, 1993.

Item 27. Persons Controlled by or Under Common Control

None.

Item 28. Number of Holders of Securities

<TABLE>
<CAPTION>
Title of Class Number of Record
- -------------- Holders as of
September 30, 1997
------------------
<S> <C>
Common Stock, par value $0.001 per share 89
</TABLE>

- ----------

6 The shares offered by the Prospectus will be offered in order to effect over-the-counter secondary
market transactions by PaineWebber in its capacity as a dealer and secondary market maker and not
pursuant to any agreement with the Fund. Shares were originally issued in a public offering pursuant to
an Underwriting Agreement, incorporated by reference to exhibit h.(a) to Post-Effective Amendment No. 2
to the Registration Statement on Form N-2 filed November 23, 1994 (File No. 33-64808), and a related

document, included as exhibit 8(b) to Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-2 filed September 30, 1993 (File No. 33-64808).

7 Incorporated by reference to exhibit j to Post-Effective Amendment No. 3 to the Registration Statement
on Form N-2 filed September 29, 1995 (File No. 33-64808).

8 Incorporated by reference to exhibit k to Post-Effective Amendment No. 2 to the Registration Statement
on Form N-2 filed November 23, 1994 (File No. 33-64808).

9 Incorporated by reference to exhibit 12 to Pre-Effective Agreement No. 3 to the Registration Statement
on Form N-2 filed October 6, 1993 (File No. 33-64808).

10 Incorporated by reference to exhibit 16 to Pre-Effective Amendment No. 2 to the Registration Statement
filed September 30, 1993 (File No. 33-64808).
</TABLE>

II-2

<PAGE>

Item 29. Indemnification

Incorporated by reference to Item 29 of Part C to Pre-Effective
Amendment No. 3 to the Registration Statement on Form N-2, filed October 6, 1993
(File No. 33-64808).

Item 30. Business and Other Connections of Investment Adviser

See "Management of the Fund" in the Prospectus.

Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is wholly owned by PaineWebber, which in turn is wholly owned by
Paine Webber Group Inc. Mitchell Hutchins is primarily engaged in the investment
advisory business. Information as to executive officers and directors of
Mitchell Hutchins is included in its Form ADV as filed with the SEC
(Registration number 801-13219) and incorporated by reference.

Item 31. Location of Accounts and Records

The accounts and records of the Registrant are maintained at the office
of the Registrant's custodian, State Street Bank and Trust Company, at One
Heritage Drive, North Quincy, Massachusetts 02171, except that the Registrant's
corporate records (its articles of incorporation, by-laws and minutes of the
meetings of its board of directors and shareholders) are maintained at the
offices of Mitchell Hutchins at 1285 Avenue of the Americas, New York, New York
10019.

Item 32. Management Services

None.

Item 33. Undertakings

The Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933;

(ii) To reflect in the prospectus any facts or
events after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent
a fundamental change in the information set
forth in the registration statement; and

(iii) To include any material information with

respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.

(2) That for the purpose of determining any liability under
the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497 under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(3) That for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.

(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.

(5) To send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of
a written or oral request, any Statement of Additional Information.

II-3

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 30th day of September, 1997.

GLOBAL SMALL CAP FUND INC.

By: /s/ Dianne E, O'Donnell
-------------------------------
Dianne E. O'Donnell
Vice President and Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment has been signed below by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Margo N. Alexander President and Director September 30, 1997
---------------------------------------------- (Chief Executive Officer)
Margo N. Alexander *

/s/ E. Garrett Bewkes, Jr. Director and Chairman September 30, 1997
---------------------------------------------- of the Board of Directors
E. Garrett Bewkes, Jr. *

/s/ Richard Q. Armstrong Director September 30, 1997
----------------------------------------------
Richard Q. Armstrong *

/s/ Richard Burt Director September 30, 1997
----------------------------------------------
Richard Burt *

/s/ Mary C. Farrell Director September 30, 1997
----------------------------------------------
Mary C. Farrell *

/s/ Meyer Feldberg Director September 30, 1997
----------------------------------------------
Meyer Feldberg *

/s/ George W. Gowen Director September 30, 1997
----------------------------------------------
George W. Gowen *

/s/ Frederic V. Malek Director September 30, 1997
----------------------------------------------
Frederic V. Malek *

/s/ Carl W. Schafer Director September 30, 1997
----------------------------------------------
Carl W. Schafer *

/s/ Paul H. Schubert Vice President and Treasurer (Chief September 30, 1997
---------------------------------------------- Financial and Accounting Officer)
Paul H. Schubert
</TABLE>

<PAGE>

SIGNATURES (Continued)

* Signature affixed by Robert A. Wittie pursuant to power of attorney
dated May 21, 1996 and incorporated by reference from Post-Effective
Amendment No. 25 to the Registration Statement of PaineWebber RMA
Tax-Free Fund, SEC File No. 2-78310, filed June 27, 1996.

<PAGE>

GLOBAL SMALL CAP FUND INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit Document Description
- ------- --------------------
<S> <C>

a. Articles of Incorporation [previously filed as Exhibit 1 to the initial Registration Statement on Form N-2,
filed June 22, 1993 (File No. 33-64808)].

b. (i) Bylaws [previously filed as Exhibit b to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-2, filed September 29, 1995 (File No. 33-64808)].

(ii) Amendment to the Bylaws [previously filed as Exhibit b to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-2, filed September 29, 1995 (File No. 33-64808)].

c. None

d. Inapplicable

e. Dividend Reinvestment Plan [previously filed as Exhibit 5 to Pre-Effective Amendment No. 2 to the
Registration Statement, filed September 30, 1993 (File No. 33-64808)].

f. None

g. (i) Investment Advisory and Administration Contract [previously filed as Exhibit g to Post-Effective
Amendment No. 2 to the Registration Statement on Form N-2, filed November 23, 1994 (File No.
33-64808)].

(ii) Form of Sub-Advisory Agreement [previously filed as Exhibit g to Post-Effective Amendment No. 3 to
the Registration Statement on Form N-2, filed September 29, 1995 (File No. 33-64808)].

h. (i) Underwriting Agreement [previously filed as Exhibit h.(a) to Post-Effective Agreement No. 2 to the
Registration Statement on Form N-2, filed November 23, 1994 (File No. 33-64808)].

(ii) Master Selected Dealer Agreement [previously filed as Exhibit 8(b) to Pre-Effective Amendment No. 2
to the Registration Statement, filed September 30, 1993 (File No. 33-64808)]

i. None

j. Form of Custodian Agreement [previously filed as Exhibit j to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-2, filed September 29, 1995 (File No. 33-64808)].

k. Transfer Agency Agreement [previously filed as Exhibit k to Post-Effective Agreement No. 2 to the
Registration Statement on Form N-2, filed November 23, 1994 (File No. 33-64808)].

l. Opinion and consent of counsel [previously filed as Exhibit 12 to Pre-Effective Agreement No. 3 to the
Registration Statement on Form N-2, filed October 6, 1993 (File No. 33-64808)].

m. None

n. Consent of Independent Auditors [filed herewith].

o. None

p. Letter of Investment Intent [previously filed as Exhibit 16 to Pre-Effective Amendment No. 2 to the
Registration Statement, filed September 30, 1993 (File No. 33-64808)].

q. None

r. Financial Data Schedule [filed herewith]
</TABLE>

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Propectus and "Auditors" in the Statement of Additional
Information and to the incorporation by reference of our report dated
September 19, 1997, in this Registration Statement (Form N-2 No. 33-64808)
of Global Small Cap Fund Inc.

ERNST & YOUNG LLP

New York, New York
September 26, 1997

<ARTICLE> 6
<CIK> 0000908158
<NAME> GLOBAL SMALL CAP FUND INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 48200
<INVESTMENTS-AT-VALUE> 66431
<RECEIVABLES> 1761
<ASSETS-OTHER> 30
<OTHER-ITEMS-ASSETS> 64
<TOTAL-ASSETS> 68286
<PAYABLE-FOR-SECURITIES> 1199
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2358
<TOTAL-LIABILITIES> 3557
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51415
<SHARES-COMMON-STOCK> 3802
<SHARES-COMMON-PRIOR> 3802
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (102)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (4807)
<ACCUM-APPREC-OR-DEPREC> 18223
<NET-ASSETS> 64729
<DIVIDEND-INCOME> 703
<INTEREST-INCOME> 78
<OTHER-INCOME> 0
<EXPENSES-NET> 861
<NET-INVESTMENT-INCOME> (80)
<REALIZED-GAINS-CURRENT> 3439
<APPREC-INCREASE-CURRENT> 13302
<NET-CHANGE-FROM-OPS> 16661
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 16661
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (99)
<OVERDIST-NET-GAINS-PRIOR> (8321)
<GROSS-ADVISORY-FEES> 560
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 861
<AVERAGE-NET-ASSETS> 56183

<PER-SHARE-NAV-BEGIN> 12.64
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 4.41
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.03
<EXPENSE-RATIO> 1.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>