GLOBAL SMALL
CAP FUND INC.
ANNUAL REPORT
July 31, 1995
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September 15, 1995
Dear Shareholder,
During the year ended July 31, 1995, crises that include the Mexican
government's decision to devalue its currency in December 1994, and the
unraveling of Barings plc, the British investment bank in February 1995, shook
the financial world and led to an investor flight to quality. The U.S. dollar
continued to depreciate against the yen and the Deutschemark, and there were
signs that the Federal Reserve Board's monetary tightening policy had slowed the
pace of the U.S. economic growth. On July 6, 1995, the Federal Reserve Board
decreased the benchmark Federal Funds rate, the rate banks charge each other for
overnight borrowing, by 0.25%. This decrease, the first in nearly three years,
signals that the Federal Reserve Board believes that U.S. inflationary pressures
have eased enough to accommodate an adjustment in monetary conditions.
PORTFOLIO REVIEW
The drop in the U.S. dollar and the decline of many emerging markets created a
renewed interest in domestic, large-cap equities during the first half of 1995.
Global Small Cap Fund Inc. (the "Fund") invests primarily in small cap companies
and was negatively affected by this trend. As a result, for the twelve months
ended July 31, 1995, the Fund had a total return of (6.97)% based on the Fund's
net asset value and (17.64)% based on the Fund's share price on the American
Stock Exchange. As of July 31, 1995, the Fund's net asset value was $11.61 per
share, while the closing market price on the American Stock Exchange was $9.25
per share.
Effective March 23, 1995, the board of directors of the Fund approved GE
Investment Management Inc. ("GEIM"), a subsidiary of GE Investments, as the
sub-adviser of the Fund. Ralph Layman, executive vice president and a senior
investment manager at GE Investments, is the portfolio manager of the Fund.
Since taking over portfolio management of the Fund, Mr. Layman has been
restructuring the Fund's portfolio to make it consistent with his investment
philosophy and style. The Fund's focus is to invest in stocks around the world
with market capitalizations under $1 billion, at the time of purchase, that are
reasonably priced and should be able to deliver consistent growth. Mr. Layman's
investment approach can be described as fundamental, bottom-up stock selection.
The stock selection screen is based on price-to-cash earnings (EPS +
depreciation/share) and 3-5 year growth projections. In evaluating companies,
Mr. Layman and his team look for a catalyst for every stock that might affect
future growth and is not yet reflected in the stock's price. This may include a
change in management, the introduction of a new product, or developing new
markets. The amount invested in any one stock depends on how easily the stock
can be traded--the liquidity or float.
Some examples of portfolio acquisitions since Mr. Layman assumed management of
the Fund include Astra International (3.6% of net assets as of July 31, 1995),
the second largest business group in Indonesia. Their largest division is
automotive and they have distribution rights for major manufacturers including
Toyota. They are benefitting from a low diffusion rate of automobiles in the
area and enjoy a 50% market share. Another example is Autoliv AB Free (2.9%), a
Swedish manufacturer of
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automotive safety systems. Autoliv AB Free is thriving on strong growth in
airbags and other safety devices, international expansion in Asia and the
Americas, and acquisitions funded by an exceptionally strong balance sheet. Some
of the existing companies in the portfolio still under research are companies
that should benefit from long-term trends--including out-sourcing, the
technology revolution and changing demographics.
GLOBAL INVESTMENT HIGHLIGHTS
We have become increasingly concerned about overheating in South East Asia, as
inflation rates in many countries approach 10% and GDP continues to soar. Wage
pressures generate considerable price pressure, with many countries facing a
shortage of skilled workers. Inflation might be exacerbated by growing trade
deficits and higher import prices. Countries such as Korea, Thailand and
Malaysia have been hurt by the stronger yen because many of their imports
consist of yen-based capital equipment. With high economic growth and higher
capital inflows (often in the form of foreign direct investment), managing the
liquidity boom will be a challenge. It is likely that interest rates will rise
in many of these countries.
The new French government, led by President Chirac and Prime Minister Juppe,
presented its Ffr 40 billion supplementary budget for 1995. The main elements of
the budget include Ffr 30 billion tax increases and Ffr 19 billion of
expenditure cuts. The tax increases will be borne by both wealth and corporate
income taxes. The new administration also provided incentives for job creation
by reducing social contribution charges to industry and providing additional tax
incentives for hiring the long-term unemployed. These stimulative measures were
necessary because President Chirac was elected on a job creation platform. The
markets initially reacted very positively, however a correction occurred in
August, when Finance Minister Madelin was forced to resign after targeting the
liberal social security system for true expenditure cuts.
The Mexican market was the star performer during the second quarter of 1995, up
27% in U.S. dollar terms. Optimism that the economy had survived the worst of
the liquidity crisis propelled investors to do some bottom fishing for value
stocks. Members of our portfolio team recently spent a week in Mexico seeing
executives and visiting companies and they returned more positive on the
long-term prospects for this market. What impressed us most is the way in which
companies, where possible, have quickly repositioned their products and
production for exports. Additionally, most companies have moved much more
rapidly than anticipated to reduce cost structures, which should benefit them in
their eventual recovery. Most managers said that April and May were terrible
months (e.g. retail sales were down 33% in April), but that things had not
deteriorated further in June. The banking system is still the primary concern,
but most felt that the loan restructuring program was working well so far. The
recession is far from over, but there are signs of a light at the end of the
tunnel. We believe that selectivity is the key to investment, as many companies
may not survive this downturn.
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2
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OUTLOOK
A slowdown in world economic growth has occurred, and has resulted in generally
lower interest rates and strong stock and bond markets. Thanks to the
stimulatory effect of interest rate easing, we expect a moderate pickup in
growth in the second half of 1995. Europe went into the last recession with a
two year lag versus the U.S., and then enjoyed a rapid export-led recovery.
After a lull in growth, we anticipate a much weaker, domestic demand-driven
phase of the recovery. Gradually, the U.S., Japanese and European cycles are
becoming more synchronized--perhaps in time for the next downturn. We are still
in the process of restructuring the portfolio. As always, we will continue to
focus on stocks that should be able to deliver consistent growth at a reasonable
price, regardless of the economic climate.
We value you as a shareholder and as a client, and thank you for your continued
support. We welcome any comments or questions you may have.
Sincerely,
/s/ FRANK P.L. MINARD /s/ RALPH R. LAYMAN
FRANK P.L. MINARD RALPH R. LAYMAN
Chairman, Portfolio Manager,
Mitchell Hutchins Asset Management Inc. Global Small Cap Fund Inc.
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3
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Global Small Cap Fund Inc.
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Portfolio of Investments
July 31, 1995
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COMMON STOCKS--85.80%
- -------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
- -------------- ----------- -------------- -----------
<C> <S> <C> <C> <C> <C>
ARGENTINA--3.35%
- --------------------------------------------------- GERMANY--2.32%
REAL ESTATE--0.16% ---------------------------------------------------
46,469 Cresud SA Comercial MISCELLANEOUS--2.32%
Bearer............... $ 70,633 17,560 SGL Carbon AG........ $ 1,023,885
----------- -----------
UTILITY--3.19% HONG KONG--7.82%
529,570 Comercial Del ---------------------------------------------------
Plata................ 1,408,656 INSURANCE--1.62%
----------- 1,008,000 National Mutual
Total Argentina Common Stocks........ 1,479,289 Asia................. 716,464
----------- -----------
AUSTRIA--5.58% PACKAGING & CONTAINERS--2.71%
- --------------------------------------------------- 2,848,000 M.C. Packaging (HK)
ELECTRONICS--1.91% Ltd 1,196,175
4,400 Austria Mikro Systeme -----------
International........ 844,131 REAL ESTATE--0.22%
----------- 370,000 Ryoden Development... 94,676
IRON & STEEL--2.78% -----------
16,730 Boehler Uddeholm RETAIL--3.27%
Bearer 1,227,207 739,700 Dickson Concept
----------- International,
MISCELLANEOUS--0.89% Ltd.................. 482,745
4,830 Nafta................ 392,546 1,100,000 Giordano
----------- International
Total Austria Common Stocks.......... 2,463,884 Ltd.................. 959,550
----------- -----------
AUSTRALIA--1.76% 1,442,295
- --------------------------------------------------- -----------
FOOD--1.76% Total Hong Kong Common Stocks........ 3,449,610
361,990 Burns Phillip & Co., -----------
Ltd. 775,623 HUNGARY--1.15%
----------- ---------------------------------------------------
DENMARK--2.73% FOOD PROCESSING--1.15%
- --------------------------------------------------- 9,346 Pick Szeged Ord
COMMERCIAL SERVICES--1.03% Bearer............... 506,271
15,600 ISS International SVS -----------
'B'.................. 454,700 INDONESIA--4.14%
----------- ---------------------------------------------------
TELECOMMUNICATIONS--1.70% AUTOMOTIVE--3.61%
13,410 Teledenmark 'B'...... 749,369 719,500 Astra
----------- International........ 1,594,237
Total Denmark Common Stocks.......... 1,204,069 -----------
----------- MINING & METALS--0.53%
FINLAND--3.08% 114,000 International Nickel
- --------------------------------------------------- Co................... 234,736
NEWSPAPER & PUBLISHING--0.92% -----------
20,000 AAmulehti Yhtymae Total Indonesia Common Stocks........ 1,828,973
Bearer............... 404,675 -----------
----------- ITALY--2.33%
TRANSPORTATION--MARINA--2.16% ---------------------------------------------------
50,600 Finnilines OY........ 951,558 MACHINERY--1.37%
----------- 200,000 Danieli & Co. Di Risp
Total Finland Common Stocks.......... 1,356,233 (Non Cv)............. 603,349
----------- -----------
FRANCE--7.63% MANUFACTURING--0.96%
- --------------------------------------------------- 88,200 Sasib................ 425,169
INDUSTRIAL HOLDINGS--1.19% -----------
22,962 Dynaction............ 527,807 Total Italy Common Stocks............ 1,028,518
----------- -----------
INFRASTRUCTURE--2.56% JAPAN--0.97%
16,880 Technip SA/Compagnie ---------------------------------------------------
Francaise............ 1,128,743 AUTO PARTS--0.48%
----------- 6,000 Royal Ltd............ 209,800
PHARMACEUTICALS--2.05% -----------
8,750 Boiron............... 905,078 PHARMACEUTICALS--0.49%
----------- 4,000 Towa Pharmaceutical
MINING & METALS--1.83% Co. Ltd. ........... 218,174
11,200 Eramet............... 807,439 -----------
----------- Total Japan Common Stocks............ 427,974
Total France Common Stocks........... 3,369,067 -----------
----------- MEXICO--3.07%
---------------------------------------------------
400,000 Industrias Penoles ...... 1,355,155
-----------
</TABLE>
4
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Global Small Cap Fund Inc.
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COMMON STOCKS--(continued)
- -------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
- -------------- ----------- -------------- -----------
<C> <S> <C> <C> <S> <C>
NETHERLANDS--2.68%
- --------------------------------------------------- THAILAND--1.19%
TRANSPORTATION-MARINA--2.68% ---------------------------------------------------
38,372 IHC Caland........... $ 1,181,352 ENGINEERING--0.59%
----------- 100,000 Christiani & Nielson
NORWAY--4.06% pcl $ 262,520
- --------------------------------------------------- -----------
OIL & GAS--4.06% NEWSPAPER & PUBLISHING--0.60%
14,700 Petroleum Geo 51,000 Matichon Newspapers
Service.............. 423,744 pcl 261,591
100,000 Transocean AS........ 1,368,021 -----------
----------- Total Thailand Common Stocks......... 524,111
Total Norway Common Stocks........... 1,791,765 -----------
----------- TURKEY--1.94%
PAKISTAN--0.00% ---------------------------------------------------
- --------------------------------------------------- NEWSPAPER & PUBLISHING--1.94%
BANKING--0.00% 34,331,000 Medya Holdings AS
700 Bank of Punjab....... 716 (New)................ 855,424
----------- -----------
PHILIPPINES--2.35% UNITED KINGDOM--6.43%
- --------------------------------------------------- ---------------------------------------------------
BREWERY--2.35% ADVERTISING--0.99%
274,100 San Miguel Corp. 225,854 Cordiant plc......... 436,707
Class B 1,037,366 -----------
----------- COMMERCIAL SERVICES--1.29%
POLAND--1.68% 173,500 Capita Group......... 571,141
- --------------------------------------------------- -----------
INFRASTRUCTURE--1.68% LEISURE--2.12%
296,000 Mostostal Export 152,000 Airtours plc......... 935,150
'B'.................. 743,436 -----------
----------- MEDICAL HOSPITAL, COMMERCIAL SERVICES--2.03%
RUSSIA--1.63% 310,749 Takare............... 893,839
- --------------------------------------------------- -----------
MISCELLANEOUS--1.63% Total United Kingdom Common Stocks... 2,836,837
100,000 Fleming Russia -----------
Securities Fund UNITED STATES--11.47%
Ltd. ................ 720,000 ---------------------------------------------------
----------- APPAREL-TEXTILES--0.78%
SINGAPORE--0.56% 10,000 Jones Apparel Group
- --------------------------------------------------- Inc. ................ 345,000
OIL & GAS--0.56% -----------
50,000 Far East COMPUTER SOFTWARE SERVICE--0.14%
Levingston........... 249,372 3,000 Seer Technologies
----------- Inc.................. 63,000
SOUTH AFRICA--0.91% -----------
- --------------------------------------------------- DRUGS, MEDICINE--0.26%
MINING--0.91% 10,796 Liposome Inc. ....... 116,057
57,898 Randfonstein Estates -----------
Goldmine............. 399,655 ELECTRONICS--1.12%
----------- 21,500 Advanced
SWEDEN--3.99% Semiconductor ENG... 319,920
- --------------------------------------------------- 20,455 RF Monolithics
AUTO PARTS--2.92% Inc. ................ 173,868
20,800 Autoliv AB Free...... 1,286,985 -----------
----------- 493,788
TRANSPORTATION--1.07% -----------
39,500 Linjebuss 'A'........ 474,841 FOOD--0.12%
----------- 4,222 Wholesome and Hearty
Total Sweden Common Stocks........... 1,761,826 Foods Inc.*.......... 52,775
----------- -----------
SWITZERLAND--0.98% HEALTH (NON DRUG)--1.60%
- --------------------------------------------------- 8,500 FHP International
TRANSPORTATION--0.98% Corp. 223,125
500 Danzas Holdings AG... 434,594 17,700 Sunrise Medical
----------- Inc.*................ 484,538
-----------
707,663
-----------
</TABLE>
5
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Global Small Cap Fund Inc.
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COMMON STOCKS--(continued)
- -------------------------------------------
<TABLE><CAPTION>
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
- -------------- ----------- -------------- -----------
<C> <S> <C> <C> <C> <C>
UNITED STATES (concluded) Total United States Common Stocks.... $ 5,066,814
- --------------------------------------------------- -----------
MACHINERY--0.16% Total Common Stocks
3,000 Opal Inc............. $ 72,750 (cost-$35,988,395) 37,871,819
----------- -----------
MISCELLANEOUS--1.24% ---------------------------------------------------
5,500 Inference Corp. Class PREFERRED STOCKS--2.88%
A.................... 81,125 ---------------------------------------------------
26,550 Komercni Bank AS BRAZIL--2.06%
GDR**................ 468,077 ---------------------------------------------------
----------- MACHINERY--2.06%
549,202 1,508,000 Brasmotor............ 306,389
----------- 330,000 Trafo Equip
PRODUCERS GOODS--5.51% Electricos........... 257,606
32,786 Coflexip S.A. Spoorit 640,000 Weg.................. 345,613
ADR.................. 811,454 -----------
65,000 Giddings & Lewis Total Brazil Preferred Stocks........ 909,608
Inc. ................ 1,080,625 -----------
10,000 Littlefuse Inc. ..... 332,500 RUSSIA--0.82%
10,000 Trimas Corporation... 205,000 ---------------------------------------------------
----------- MISCELLANEOUS--0.82%
2,429,579 50,000 Fleming Russia
----------- Securities Fund
RETAIL-APPAREL--0.54% Ltd. ................ 360,000
12,000 Ann Taylor Stores -----------
Corp. 237,000 Total Preferred Stocks (cost-
----------- $1,717,555) 1,269,608
-----------
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
LONG-TERM DEBT SECURITIES--1.26%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY INTEREST
AMOUNT DATES RATES
(000) *** -------- --------
- ------------
ITALY--0.36%
300,000 Danieli & Co. Di Risp............................. 01/01/00 7.250% 156,117
-----------
SWEDEN--0.90%
1,346 Kinnevik Industries Convertible Bond.............. 07/21/97 10.500 397,854
-----------
Total Long-Term Debt Securities (cost-$604,400)................. 553,971
-----------
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SHORT-TERM DEBT SECURITIES--10.93%
- ------------------------------------------------------------------------------------------------------
$4,850 U.S. Treasury Bills (cost-$4,825,768)............. 08/17/95 5.300
to to
09/07/95 5.405 4,825,768
-----------
- ------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--0.02%
- ------------------------------------------------------------------------------------------------------
10 Repurchase Agreement dated 07/31/95 with Brown
Brothers Harriman & Co., collateralized by $9,768
U.S. Treasury Notes, 7.250% due 08/31/96;
proceeds: $10,001 (cost-$10,000).................. 08/01/95 5.313 10,000
-----------
TOTAL INVESTMENTS (cost-$43,146,118)--100.89%................... 44,531,166
Liabilities in excess of other assets--(0.89)%.................. (393,781)
-----------
NET ASSETS--100.00%............................................. $44,137,385
-----------
-----------
</TABLE>
- ------------
* Non-income producing security
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These Securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
*** In local currency unless otherwise indicated.
GDR Global Depository Receipt
ADR American Depository Receipt
See accompanying notes to financial statements
6
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Global Small Cap Fund Inc.
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Statement of Assets and Liabilities
July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost-$43,146,118)...................................... $44,531,166
Cash.......................................................................... 4,258
Receivable for investments sold............................................... 104,877
Dividends and interest receivable............................................. 85,707
Deferred organizational expenses and other assets............................. 125,839
-----------
Total assets............................................................... 44,851,847
-----------
LIABILITIES
Payable for investments purchased............................................. 464,649
Payable to custodian.......................................................... 60,118
Payable to affiliates......................................................... 36,744
Accrued expenses and other liabilities........................................ 152,951
-----------
Total liabilities.......................................................... 714,462
-----------
NET ASSETS
Common stock, $0.001 par value; 3,801,667 shares
issued and outstanding (100,000,000 shares authorized)...................... 3,802
Additional paid-in-capital.................................................... 51,858,805
Accumulated net investment loss............................................... (445,622)
Accumulated net realized losses from investments.............................. (8,667,280)
Net unrealized appreciation of investments and other assets and liabilities
denominated in foreign currency............................................. 1,387,680
-----------
Net assets................................................................. $44,137,385
-----------
-----------
NET ASSET VALUE PER SHARE........................................................ $11.61
------
------
</TABLE>
See accompanying notes to financial statement
7
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Global Small Cap Fund Inc.
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Statement of Operations
For the Year Ended July 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $93,550)....................... $ 741,345
Interest...................................................................... 340,803
-----------
1,082,148
-----------
EXPENSES:
Investment advisory and administration........................................ 469,312
Custody and accounting........................................................ 177,847
Amortization of organizational expenses....................................... 43,464
Legal and audit............................................................... 40,421
Reports and notices to shareholders........................................... 33,492
Transfer agency............................................................... 9,763
Directors' fees and expenses.................................................. 6,500
Other expenses................................................................ 10,415
-----------
791,214
-----------
NET INVESTMENT INCOME............................................................ 290,934
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT TRANSACTIONS:
Net realized losses from:
Investment transactions.................................................... (8,649,451)
Foreign currency transactions.............................................. (1,840,999)
Net change in unrealized appreciation/depreciation of:
Investments................................................................ 5,422,005
Other assets, liabilities and forward contracts denominated in foreign
currencies....................................................................... 1,470,411
-----------
NET REALIZED AND UNREALIZED LOSSES FROM INVESTMENT TRANSACTIONS.................. (3,598,034)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $(3,307,100)
-----------
-----------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
Global Small Cap Fund Inc.
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Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
YEAR ENDED OCTOBER 15, 1993+
JULY 31, 1995 TO JULY 31, 1994
------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss)................................ $ 290,934 $ (204,103)
Net realized gains (losses) from:
Investment transactions.................................. (8,649,451) 3,221,365
Foreign currency transactions............................ (1,840,999) (743,003)
Net change in unrealized appreciation/depreciation of:
Investments.............................................. 5,422,005 (4,036,957)
Other asssets, liabilities and forward contracts
denominated in foreign currencies...................... 1,470,411 (1,467,779)
------------- -----------------
Net decrease in net assets resulting from operations........ (3,307,100) (3,230,477)
------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains from investment transactions............. (3,029,168) --
------------- -----------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from the sale of shares............................ -- 53,794,125
Offering costs charged to additional paid-in capital........ -- (190,000)
------------- -----------------
Net increase from capital share transactions................ -- 53,604,125
------------- -----------------
Net increase (decrease) in net assets....................... (6,336,268) 50,373,648
NET ASSETS:
Beginning of period......................................... 50,473,653 100,005
------------- -----------------
End of period............................................... $44,137,385 $50,473,653
------------- -----------------
------------- -----------------
</TABLE>
- ------------
+ Commencement of operations.
See accompanying notes to financial statements
9
<PAGE>
Global Small Cap Fund Inc.
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Notes to Financial Statements
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Global Small Cap Fund Inc. (the "Fund") was incorporated in Maryland on June
22, 1993 as a closed-end, diversified management investment company. Prior to
commencing operations on October 15, 1993, the Fund had no activities other than
organizational matters and the sale to Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins"), which is a wholly owned subsidiary of PaineWebber
Incorporated ("PaineWebber"), of 6,667 shares of common stock for a total of
$100,005. Organizational costs of $200,000 have been deferred and are being
amortized using the straight-line method over a period not to exceed 60 months
from the date the Fund commenced operations.
Valuation of Investments--Securities which are listed on U.S. and foreign
stock exchanges are valued at the last sale price on the day the securities are
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
valued on the exchange designated by Mitchell Hutchins as the primary market.
Securities traded in the over-the-counter ("OTC") market and listed on the
NASDAQ system are valued at the last trade price on the NASDAQ stock market
prior to the time of valuation; other OTC securities are valued at the last bid
price available in the OTC market prior to the time of valuation. The amortized
cost method of valuation is used to value short-term debt instruments with sixty
days or less remaining to maturity. Securities and assets for which market
quotations are not readily available (including restricted securities subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Fund's Board of Directors.
Foreign currency exchange rates are generally determined prior to the close
of the American Stock Exchange ("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 the AMEX, which would not be
reflected in the computation of the Fund's net asset value. If events materially
affecting the value of such securities or currency exchange rates occurred
during such time period, the securities will be valued at their fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses on sales of investments
and foreign exchange transactions are calculated using the identified cost
method. Interest income is recorded on an accrual basis and dividend income is
recorded on the ex-dividend date, (except in the case of certain foreign
dividends, which are recorded as soon after the ex-dividend date as the Fund
becomes aware of such dividend).
10
<PAGE>
Global Small Cap Fund Inc.
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Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Foreign Currency Translation--The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(1) market value of investment securities and other assets and
liabilities stated in foreign currencies are translated at the
exchange rates prevailing at the end of the period; and
(2) purchases and sales of investment securities, income and expenses are
translated at the rates of exchange prevailing on the respective
dates of such transactions.
Although the net assets and the market values of the Fund are presented at
the foreign exchange rates at the close of the period, the Fund does not
generally isolate the effect of fluctuations in foreign exchange rates from the
effect of the changes in market prices of securities. However, the Fund does
isolate the effect of fluctuations in foreign exchange rates when determining
the gain or loss upon the sale or maturity of foreign currency-denominated debt
obligations pursuant to federal income tax regulations.
Forward Foreign Currency Contracts--The Fund may enter into forward foreign
currency exchange contracts ("forward contracts") in connection with planned
purchases or sales of securities or to hedge the U.S. dollar value of portfolio
securities denominated in a particular currency.
The Fund has no specific limitation on the percentage of assets which may be
committed to such contracts. The Fund may enter into forward contracts or
maintain a net exposure to forward contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the position being hedged by such contracts or (2) the
Fund maintains cash, U.S. government securities or liquid, high-grade debt
securities in a segregated account in an amount not less than the value of its
total assets committed to the consummation of the forward contracts and not
covered as provided in (1) above, as marked-to-market daily.
Risks may arise upon entering forward contracts from the potential inability
of counterparties to meet the terms of their forward contracts and from
unanticipated movements in the value of foreign currencies relative to the U.S.
dollar.
Fluctuations in the value of open forward contracts are recorded for book
purposes as an unrealized gain or loss by the Fund. Realized gains and losses
include net gains and losses recognized by the Fund on contracts which have
matured or the Fund has terminated by entering into offsetting commitments.
Repurchase Agreements--The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings. The Fund occasionally
participates in joint repurchase agreement transactions with other funds managed
by Mitchell Hutchins.
11
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Reverse Repurchase Agreements--The Fund may enter into reverse repurchase
agreements with banks and broker-dealers up to an aggregate value of not more
than 10% of its total assets. As of July 31, 1995, the Fund had no reverse
repurchase agreements outstanding.
Federal Tax Status--The Fund intends to distribute all of its taxable income
and to comply with the other requirements of the Internal Revenue Code
applicable to regulated investment companies. Accordingly, no provision for
federal income taxes is required. In addition, by distributing during each
calendar year, substantially all of its net investment income, capital gains and
certain other amounts, if any, the Fund intends not to be subject to a federal
excise tax.
In accordance with U.S. Treasury regulations, the Fund has elected to defer
$4,170,059 of net realized capital losses and $264,873 of net realized currency
losses arising after October 31, 1994, such losses are treated for tax purposes
as arising on August 1, 1995.
At July 31, 1995, the Fund had a net capital loss carryforward of
$2,432,202. The loss carryforward is available as a reduction, to the extent
provided in the regulations, of future net realized capital gains, and will
expire July 31, 2003.
Dividends and Distributions--Dividends and distributions to shareholders are
recorded on the ex-dividend date. Net capital gains, if any, will be distributed
at least annually but the Fund may make more frequent distributions of such
gains, if necessary, to avoid income or excise taxes. Dividends from net
investment income and distributions from net realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. As of July 31, 1995, the effect of
such differences totalled $1,841,523. Dividends and distributions which exceed
net investment income and net realized capital gains for financial reporting
purposes, but not for tax purposes, are reported as dividends in excess of net
investment income or distributions in excess of net realized capital gains. To
the extent they exceed net investment income and net realized capital gains for
tax purposes, they are reported as distributions of additional paid-in-capital.
CONCENTRATION OF RISK
Investing in securities of foreign issuers may involve certain
considerations and risks not typically associated with investments in the United
States. These risks include revaluation of currencies, adverse fluctuations in
foreign currency values and possible adverse political, social and economic
developments, including those particular to a specific industry, country or
region, which could cause the securities and their markets to be less liquid and
prices more volatile than those of comparable U.S. companies . These risks are
greater with respect to securities of issuers located in emerging market
countries in which each Fund is authorized to invest.
12
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
The ability of the issuers of debt securities held by the Fund to meet their
obligations may be affected by economic and political developments in a specific
industry, country or region.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has an Investment Advisory and Administration Contract ("Advisory
Contract") with Mitchell Hutchins. In accordance with the Advisory Contract, the
Fund pays Mitchell Hutchins an investment advisory and administration fee, which
is accrued weekly and paid monthly, at an annual rate of 1.00% of its average
weekly net assets. At July 31, 1995, the Fund owed Mitchell Hutchins $36,744 for
investment advisory and administration fees.
Mitchell Hutchins has entered into a separate Sub-Advisory Agreement
("Sub-Advisory Agreement") with GE Investment Management Incorporated ("GEIM")
dated July 10, 1995. In accordance with the Sub-Advisory Agreement, Mitchell
Hutchins (not the Fund) pays GEIM a fee at an annual rate of 0.50% of the Fund's
average weekly net assets.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at July 31,
1995 was $45,193,309.
At July 31, 1995, the components of net unrealized depreciation of
investments, based on cost for federal income tax purposes, were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over
cost)........................................................ $3,748,059
Gross depreciation (investments having an excess of cost over
value)....................................................... (4,410,202)
----------
Net unrealized depreciation of investments..................... $ (662,143)
----------
----------
</TABLE>
For the year ended July 31, 1995, aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $94,110,406 and $79,185,987,
respectively.
CAPITAL STOCK
There are 100,000,000 shares of $0.001 par value capital stock authorized.
Of the 3,801,667 shares outstanding at July 31, 1995, Mitchell Hutchins owned
6,667 shares.
13
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
Quarterly Results of Operations (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS NET INCREASE
(LOSSES) ON (DECREASE) IN
INVESTMENTS AND NET ASSETS
NET INVESTMENT FOREIGN CURRENCY RESULTING FROM
INCOME (LOSS) TRANSACTIONS OPERATIONS
----------------- ------------------- -------------------
Total Per Total Per Total Per
QUARTER ENDED (000) Share (000) Share (000) Share
- ----------------------------------------- ----- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
July 31, 1995............................ $ 204 $ 0.05 $ 2,544 $ 0.67 $ 2,748 $ 0.72
April 30, 1995........................... 69 0.02 (2,480) (0.65) (2,411) (0.63)
January 31, 1995......................... (17) 0.00 (7,141) (1.88) (7,158) (1.88)
October 31, 1994......................... 35 0.01 3,479 0.91 3,514 0.92
----- ------ ------- ------ ------- ------
$ 291 $ 0.08 $(3,598) $(0.95) $(3,307) $(0.87)
----- ------ ------- ------ ------- ------
----- ------ ------- ------ ------- ------
July 31, 1994............................ $ 63 $ 0.02 $ 731 $ 0.19 $ 794 $ 0.21
April 30, 1994........................... (110) (0.03) (13,108) (3.45) (13,218) (3.48)
January 31, 1994......................... (167) (0.04) 9,301 2.45 9,134 2.41
October 31, 1993*........................ 10 0.00 50 0.01 60 0.01
----- ------ ------- ------ ------- ------
$(204) $(0.05) $(3,026) $(0.80) $(3,230) $(0.85)
----- ------ ------- ------ ------- ------
----- ------ ------- ------ ------- ------
</TABLE>
- ---------
* For the period October 15, 1993 (commencement of operations) to October 31,
1993.
14
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding throughout each period
is presented below:
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
YEAR ENDED OCTOBER 15, 1993+
JULY 31, 1995 TO JULY 31, 1994
---------------- ------------------
<S> <C> <C>
Net asset value, beginning of period...................... $ 13.28 $ 14.18
------ ------
Income from investment operations:
Net investment income (loss)........................... 0.08 (0.05)
Net realized and unrealized losses from investments and
foreign currency transactions........................ (0.95) (0.80)
------ ------
Total loss from investment operations..................... (0.87) (0.85)
------ ------
Distributions to shareholders from net realized gains from
investment transactions.................................. (0.80) --
------ ------
Offering costs charged to additional paid-in capital...... -- (0.05)
------ ------
Net asset value, end of period............................ $ 11.61 $ 13.28
------ ------
------ ------
Market value, end of period............................... $ 9.25 $ 12.13
------ ------
------ ------
Total investment return (1)............................... (17.64)% (14.46)%
------ ------
------ ------
Ratios/Supplemental data:
Net assets, end of period (000's)...................... $ 44,137 $ 50,474
Ratio of expenses to average net assets................ 1.69% 1.79%*
Ratio of net investment income (loss) to average net
assets............................................... 0.62% (0.46)%*
Portfolio turnover rate................................ 187% 71%
</TABLE>
- ---------
* Annualized
+ Commencement of operations.
(1) Total investment return is calculated assuming a purchase of one share at
market value on the first day of each period reported, reinvestment of all
dividends and capital gain distributions, if any, in accordance with the
Dividend Reinvestment Plan, and a sale at market value on the last day of
each period reported. Total investment returns for periods of less than one
year have not been annualized. Total investment return does not reflect
sales charges or brokerage commissions.
15
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
- --------------------------------------------------------------------------------
To Board of Directors and Stockholders
Global Small Cap Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Global Small Cap Fund Inc., including the portfolio of investments, as of July
31, 1995, and the related statement of operations for the year then ended, and
the statement of changes in net assets, and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned at July
31, 1995 by correspondence with custodians and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Global Small Cap Fund Inc. at July 31, 1995, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for each of the indicated periods in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
September 21, 1995
16
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
General Information (unaudited)
- --------------------------------------------------------------------------------
THE FUND
Global Small Cap Fund Inc. (the "Fund") is a diversified, closed-end
management investment company whose shares trade on the American Stock Exchange
("AMEX"). The Fund's investment objective is long-term capital appreciation. The
Fund's investment adviser and administrator is Mitchell Hutchins Asset
Management Inc., a wholly owned subsidiary of PaineWebber Incorporated, which
has over $44.8 billion in assets under management. The Fund's Sub-adviser is GE
Investment Management Incorporated, a wholly owned subsidiary of General
Electric Company, which, together with GE Investment Corporation, also a wholly
owned subsidiary of General Electric Company, manages over $50 billion in
assets.
SHAREHOLDER INFORMATION
The Fund's AMEX trading symbol is "GSG". Weekly comparative net asset value
and market price information about the Fund is published each Monday in the Wall
Street Journal and New York Times and each Saturday in Barron's, as well as
numerous other newspapers.
A special meeting of shareholders of Global Small Cap Fund Inc. ("Fund") was
held on July 10 , 1995. At the meeting Richard R. Burt was elected as a director
to serve until the annual meeting of shareholders in 1995, or until his
successor is elected and qualified.
The votes were as follows:
SHARES VOTED FOR SHARES WITHHOLD AUTHORITY
---------------- -------------------------
Richard R. Burt 2,989,318 694,347
In addition the following agreement was approved for the Fund:
A sub-advisory agreement between Mitchell Hutchins and GEIM with respect to
the Fund.
The votes were as follows:
SHARES VOTED FOR SHARES VOTED AGAINST SHARES WITHOLD AUTHORITY
---------------- ------------------------- -------------------------
2,319,058 33,205 694,347
Broker non-votes and abstentions are included within the "Shares Withold
Authority" totals.
17
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
General Information (concluded)
- --------------------------------------------------------------------------------
DISTRIBUTION POLICY
The Fund intends to pay dividends from its net investment income and net
short-term capital gain, if any, at least annually. The Fund anticipates
distributing 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 intends to distribute 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 gains.
The Fund has established a Dividend Reinvestment Plan under which
stockholders will have all dividends and other distributions on their shares of
Common Stock automatically reinvested in additional shares of Common Stock
purchased in the open market, unless such stockholders elect to receive cash.
Stockholders who intend to hold their shares through any other broker or nominee
should contact such broker or nominee to determine whether, or how, they may
participate in the Dividend Reinvestment Plan. The Fund will not issue any new
shares of Common Stock in connection with its Dividend Reinvestment Plan.
18
<PAGE>
Global Small Cap Fund Inc.
- --------------------------------------------------------------------------------
Tax Information
- --------------------------------------------------------------------------------
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (July 31,
1995) as to federal tax status of distributions received by shareholders during
such fiscal year. Accordingly, we are advising you that all of the distributions
paid by the Fund during the period were derived from short-term capital gains
and are taxable as ordinary income. Additionally, none of these distributions
qualify for the dividends received deduction available to corporate
shareholders.
Dividends received by tax-exempt recipients (e.g., IRA's and Keoghs) need
not be reported as taxable income. Some retirement trusts (e.g., corporate,
Keogh and 403(b)(7) plans) may need this information for their annual reporting.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1995. The second
notification (if necessary), which will reflect the amount to be used by
calendar year taxpayers on their federal income tax returns is made in
conjunction with Form 1099 DIV and will be mailed in January 1996. Shareholders
are advised to consult their own tax advisers with respect to the tax
consequences of their investment in the Fund.
19
<PAGE>
---------------------------------------
BOARD OF DIRECTORS
E. Garrett Bewkes, Jr., Chairman
Richard R. Burt
John R. Torell III
William D. White
---------------------------------------
OFFICERS
Margo N. Alexander
President
Victoria E. Schonfeld
Vice President
Dianne E. O'Donnell
Vice President and Secretary
Julian F. Sluyters
Vice President and Treasurer
---------------------------------------
INVESTMENT ADVISER AND
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
---------------------------------------
INVESTMENT SUB-ADVISER
GE Investment Management Incorporated
3003 Summer Street
Stamford, Connecticut 06904
]
---------------------------------------
Notice is hereby given in accordance
with Section 23(c) of the Investment
Company Act of 1940 that from time to
time the Fund may purchase at market
prices shares of its common stock in
the open market.
This report is sent to the shareholders
of the Fund for their information. It
is not a prospectus, circular or
representation intended for use in the
purchase or sale of shares of the Fund
or of any securities mentioned in the
report.
(C) 1995 PaineWebber Incorporated
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