<PAGE>
ANNUAL REPORT--SEPTEMBER 16, 1996
-------------------------------------------------------------
DEAR SHAREHOLDER,
We are pleased to present you with the Annual Report for PaineWebber
Global Small Cap Fund Inc. (the 'Fund') for the year ended July 31, 1996.
GENERAL MARKET OVERVIEW
Nearly all equity markets continued their upward trend during the first
seven months of 1996, despite a volatile July. This performance was led by many
European countries, as evidenced by year-to-date increases as of July 31, 1996
in the Morgan Stanley Capital International (MSCI) Index for Ireland of 12.8%;
Sweden, 10.0%; Spain, 8.7%; and France, 8.0%; as well as the U.S., 6.1% (all
data used with permission). Additionally, many of the emerging markets showed
significant strength during 1996, providing a sharp contrast to their weakness
in early 1995. Conversely, Japan's U.S. dollar return was weak, returning (3.4)%
through July.
More recently, market volatility increased as market sensitivity to
interest rates increased and the market's anticipation of future economic growth
around the world continued. Corrections in almost all the world equity markets
were witnessed in the month of July, including decreases in the U.S. of 4.38%;
Italy, 7.41%; and Japan, 4.48%, per the MSCI Index.
PORTFOLIO REVIEW
The Fund realized the fruits of its 1995 restructuring efforts in 1996 as
it achieved a total year-to-date return through July 31, 1996 of 11.6% based on
the Fund's net asset value and 17.0% based on the Fund's share price on the
American Stock Exchange. The Fund continues to be heavily weighted in
continental Europe (48.4% of net assets as of July 31, 1996), Asia (25.8%) and
in select emerging markets (14%). Stock selection was an important driver in
achieving the performance of the Fund.
1
<PAGE>
-------------------------------------------------------------
PORTFOLIO REVIEW
Some examples of portfolio stocks with significant year-to-date increases
in market value include:
JULY YTD RETURN % OF PORTFOLIO
--------------- --------------
Transocean................... 50% 3.3%
SGL Carbon................... 44% 2.4%
IHC Caland................... 49% 3.0%
Airtours..................... 45% 2.0%
OM Gruppen................... 69% 1.5%
Of course the Fund's portfolio is actively managed and its composition may
vary over time.
INVESTMENT VIEW-OUTLOOK
GE Investment Management ('GEIM'), subadviser of the Fund, utilizes an
investment approach that focuses on fundamental, bottom-up stock selection,
choosing companies which are attractive based on their price-to-cash earnings
ratio compared to their projected future growth rate. In line with this
investment philosophy, GEIM's global team is finding many interesting
opportunities around the world:
EUROPE looks attractive as the global team continues to find companies
which are significantly undervalued relative to their long-term growth rates. In
addition, it's believed the environment is rapidly changing in Europe as
privatizations with entrepreneurial managements, companies specializing in
growing niche areas and restructuring take hold.
U.S. generally looks more expensive relative to opportunities in other
parts of the world. As the market continues to rise, stock selection has become
even more important.
JAPAN still looks relatively expensive. Continued concerns over the
banking sector problems were renewed as Daiwa Bank was expelled from operating
in the U.S. and Sumitomo Bank suffered a huge copper trading loss estimated at
over $2 billion.
2
<PAGE>
-------------------------------------------------------------
PORTFOLIO REVIEW
ASIA, excluding Japan, continues to look attractive as Asia's economies
remain relatively strong with high levels of growth.
HONG KONG--As the transition of Hong Kong from Britain to China unfolds over
the next 12 months, the global team will be carefully monitoring the situation
and reporting on its developments.
It's anticipated that the markets will be very volatile as we approach June
1997.
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support
and welcome any comments or questions you may have.
Sincerely,
/s/ Margo Alexander /s/ Ralph R. Layman
MARGO N. ALEXANDER RALPH LAYMAN
President Portfolio Manager
Mitchell Hutchins Asset Management Global Small Cap Fund Inc.
Inc.
3
<PAGE>
GLOBAL SMALL CAP FUND INC.
PORTFOLIO OF INVESTMENTS JULY 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------- -----------
<S> <C>
COMMON STOCKS - 95.06%
AUSTRALIA - 1.25%
Food - 0.59%
175,000 Burns Phillip & Company, Limited............................ $ 285,598
-----------
Services - 0.66%
511,842 AAPC Limited................................................ 316,709
-----------
Total Australia Common Stocks.......................................... 602,307
-----------
AUSTRIA - 1.88%
Iron & Steel - 1.88%
12,052 Boehler Uddeholm Bearer..................................... 903,275
-----------
CROATIA - 1.67%
Consumer Goods - 1.67%
20,423 Pliva DD**.................................................. 801,603
-----------
FINLAND - 9.86%
Banks - 1.50%
26,550 Komercni Bank AS GDR**...................................... 719,505
-----------
Capital Equipment - 3.14%
58,000 Konecranes International.................................... 1,512,234
-----------
Consumer Durables - 0.53%
3,684 Raison Tehtaat.............................................. 254,499
-----------
Manufacturing - 1.27%
38,888 Valmet Corporation.......................................... 610,956
-----------
Newspaper & Publishing - 1.07%
20,000 AAmulehti Yhtymae Bearer.................................... 512,546
-----------
Transportation/Marina - 2.35%
56,600 Finnilines OY............................................... 1,128,872
-----------
Total Finland Common Stocks............................................ 4,738,612
-----------
FRANCE - 2.15%
Infrastructure - 0.98%
5,300 Technip SA/ Compagnie Francaise............................. 472,087
-----------
Producers' Goods - 1.17%
30,800 Coflexip S.A. Spoorit
ADR....................................................... 562,100
-----------
Total France Common Stocks............................................. 1,034,187
-----------
</TABLE>
4
<PAGE>
GLOBAL SMALL CAP FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------- -----------
COMMON STOCK - (CONTINUED)
<S> <C>
GERMANY - 4.05%
Capital Equipment - 0.83%
15,000 Turbon International AG..................................... $ 398,383
-----------
Chemicals - 2.47%
10,800 SGL Carbon AG............................................... 1,189,893
-----------
Producers' Goods - 0.75%
4,600 Adidas AG................................................... 359,326
-----------
Total Germany Common Stocks............................................ 1,947,602
-----------
HONG KONG - 9.90%
Capital Equipment - 0.20%
1,100,000 Harbour Ring International.................................. 95,302
-----------
Consumer Durables - 1.47%
400,000 Vtech Holdings.............................................. 708,624
-----------
Diversified Holding Company - 1.01%
1,034,000 Four Seas Mercantile Holdings............................... 484,690
-----------
Electronics - 0.92%
200,000 Johnson Electric Holdings................................... 439,657
-----------
Insurance - 0.65%
392,000 National Mutual Asia Limited................................ 314,277
-----------
Packaging & Containers - 1.93%
2,412,000 M.C. Packaging (HK) Limited................................. 927,896
-----------
Producers' Goods - 0.88%
1,490,000 Yue Yuen Industries......................................... 423,881
-----------
Retail - 2.84%
325,300 Dickson Concept International Limited....................... 389,100
1,100,000 Giordano International Limited.............................. 974,358
-----------
1,363,458
-----------
Total Hong Kong Common Stocks.......................................... 4,757,785
-----------
HUNGARY - 0.78%
Food Processing - 0.78%
9,346 Pick Szeged Ord Bearer...................................... 376,741
-----------
INDIA - 1.90%
Energy, Reserves & Production - 1.90%
50,000 BSES........................................................ 912,500
-----------
</TABLE>
5
<PAGE>
GLOBAL SMALL CAP FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------- -----------
COMMON STOCK - (CONTINUED)
<S> <C>
INDONESIA - 3.50%
Automotive - 2.02%
659,500 Astra International......................................... $ 757,240
226,666 Steady Safe................................................. 212,063
-----------
969,303
-----------
Banks - 0.72%
390,000 Panin Bank.................................................. 348,288
-----------
Building Materials - 0.58%
280,000 Mulia Industrindo........................................... 279,821
-----------
Tire & Rubber - 0.18%
175,000 Gadjah Tunggal.............................................. 85,584
-----------
Total Indonesia Common Stocks.......................................... 1,682,996
-----------
IRELAND - 1.42%
Transportation/Marina - 1.42%
76,769 Irish Continental........................................... 682,998
-----------
ITALY - 7.37%
Auto Parts - 1.18%
53,300 Brembo Spa*................................................. 568,051
-----------
Capital Equipment - 3.85%
40,000 Carraro Spa................................................. 171,048
15,607 Industria Macchine Automatiche.............................. 105,447
155,000 Gildemeister Italiana....................................... 540,446
100,000 Riva Finanziaria............................................ 417,752
10,000 Saes Getters Spa ADR........................................ 150,000
22,311 Safilo...................................................... 466,757
-----------
1,851,450
-----------
Consumer Durables - 2.34%
17,145 Industrie Natuzzi Spa*...................................... 775,811
80,700 Pagnossin Spa*.............................................. 347,744
-----------
1,123,555
-----------
Total Italy Common Stocks.............................................. 3,543,056
-----------
JAPAN - 2.53%
Auto Parts - 0.76%
12,100 Royal Limited............................................... 364,967
-----------
Materials - 0.53%
7,200 Nihon Jumbo Company......................................... 255,613
-----------
Retail (All Other) - 1.01%
10,400 Circle K Japan Company...................................... 485,148
-----------
</TABLE>
6
<PAGE>
GLOBAL SMALL CAP FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------- -----------
COMMON STOCK - (CONTINUED)
<S> <C>
JAPAN - (CONCLUDED)
Services - 0.23%
7,700 Kurogeya Company............................................ $ 109,634
-----------
Total Japan Common Stocks.............................................. 1,215,362
-----------
KOREA - 1.17%
Brewery - 0.64%
9,840 Cho Sun Brewery............................................. 307,462
-----------
Telecommunications - 0.53%
290 Korea Mobile Telecom Corporation............................ 253,291
-----------
Total Korea Common Stocks.............................................. 560,753
-----------
NETHERLANDS - 4.05%
Capital Equipment - 0.27%
5,757 Toolex Alpha NV............................................. 128,093
-----------
Food Processing - 0.62%
2,821 Nutricia Verenigde Bedrijven................................ 300,847
-----------
Transportation/Marina - 3.16%
31,000 IHC Caland NV............................................... 1,519,792
-----------
Total Netherlands Common Stocks........................................ 1,948,732
-----------
NORWAY - 4.12%
Equipment - 0.35%
20,000 Sensonor A/S................................................ 166,444
-----------
Oil & Gas - 3.77%
10,000 Petroleum Geo-Service*...................................... 273,220
59,463 Transocean AS............................................... 1,540,613
-----------
1,813,833
-----------
Total Norway Common Stocks............................................. 1,980,277
-----------
PERU - 0.31%
Services - 0.31%
6,795 Telefonic Del Peru SA....................................... 148,641
-----------
PHILIPPINES - 1.98%
Brewery - 1.77%
301,510 San Miguel Corporation Class B.............................. 851,431
-----------
Consumer Durables - 0.14%
200,000 Marsman & Company........................................... 68,689
-----------
</TABLE>
7
<PAGE>
GLOBAL SMALL CAP FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------- -----------
COMMON STOCK - (CONTINUED)
<S> <C>
PHILIPPINES - (CONCLUDED)
Telecommunications - 0.07%
23,600 Pilipino Telephone Corporation.............................. $ 31,070
-----------
Total Philippines Common Stocks........................................ 951,190
-----------
SINGAPORE - 2.31%
Consumer Durables - 0.36%
76,000 Want Want Holdings
ORD....................................................... 175,560
-----------
Financial Services - 0.96%
140,000 Hong Leong Finance.......................................... 461,680
-----------
Oil & Gas - 0.99%
100,000 Far East Levingston......................................... 474,135
-----------
Total Singapore Common Stocks.......................................... 1,111,375
-----------
SWEDEN - 10.75%
Auto Parts - 2.85%
48,204 Autoliv Ab 'B' Free......................................... 1,370,509
-----------
Capital Equipment - 0.41%
12,500 Assa Abbloy................................................. 196,600
-----------
Consumer Durables - 1.39%
46,916 Garphyttan.................................................. 666,945
-----------
Financial Services - 2.83%
20,000 Kinnevik Investments........................................ 574,678
32,300 OM Gruppen AB............................................... 784,004
-----------
1,358,682
-----------
Medical Supplies - 1.82%
51,300 Getinge Industries.......................................... 876,671
-----------
Services - 0.57%
26,655 Netcom Systems AB........................................... 272,097
-----------
Transportation - 0.88%
39,500 Linjebuss 'A'............................................... 424,127
-----------
Total Sweden Common Stocks............................................. 5,165,631
-----------
TAIWAN - 0.25%
Semiconductor - 0.25%
17,200 Advanced Semiconductor Engineering, GDR..................... 119,540
-----------
</TABLE>
8
<PAGE>
GLOBAL SMALL CAP FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------- -----------
COMMON STOCK - (CONTINUED)
<S> <C>
THAILAND - 1.19%
Financial Services - 0.40%
201,000 Siam City Bank plc.......................................... $ 193,086
-----------
Services - 0.79%
75,000 Siam Makro.................................................. 380,288
-----------
Total Thailand Common Stocks........................................... 573,374
-----------
UNITED KINGDOM - 7.61%
Services - 6.31%
652,617 Cordiant plc................................................ 1,106,475
173,500 Capita Group plc............................................ 906,766
127,000 Airtours plc................................................ 1,019,319
-----------
3,032,560
-----------
Medical, Hospital, Commercial Services - 1.30%
310,749 Takare plc.................................................. 623,528
-----------
Total United Kingdom Common Stocks..................................... 3,656,088
-----------
UNITED STATES - 13.06%
Apparel/Textiles - 1.54%
5,000 Jones Apparel Group Incorporated*........................... 257,500
10,000 Nine West Group, Incorporated*.............................. 483,750
-----------
741,250
-----------
Banks - 0.73%
6,600 Bank of Boston Corporation.................................. 349,800
-----------
Computer Hardware - 0.72%
20,000 Zebra Technologies Corporation*............................. 347,500
-----------
Drugs & Medicine - 0.08%
3,296 Liposome Incorporated*...................................... 39,758
-----------
Energy Reserves & Production - 0.25%
4400 Basic Pete International Limited............................ 122,100
-----------
Health (Non-Drug) - 0.14%
2,000 United Dental Care Incorporation............................ 68,750
-----------
Information & Computer Services - 0.59%
6,400 Catalina Marketing Corporation*............................. 281,600
-----------
Leisure, Luxury - 1.03%
25,000 Cannondale Corporation...................................... 493,750
-----------
Manufacturing - High Technology - 1.01%
10,000 EG&G........................................................ 181,250
20,000 Sensormatic Electronics Corporation......................... 305,000
-----------
486,250
-----------
</TABLE>
9
<PAGE>
GLOBAL SMALL CAP FUND INC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------- -----------
COMMON STOCK - (CONCLUDED)
<S> <C>
UNITED STATES - (CONCLUDED)
Manufacturing - General - 0.43%
10,000 Trimas Corporation.......................................... $ 207,500
-----------
Medical Products - 1.08%
15,000 Arrow International Incorporated............................ 315,000
13,200 Sunrise Medical Incorporation*.............................. 202,950
-----------
517,950
-----------
Medical Providers - 0.46%
8,500 FHP International Corporation*.............................. 222,063
-----------
Other Insurance - 2.03%
17,000 CMAC Investment Corporation................................. 975,375
-----------
Producers' Goods - 0.73%
10,000 Littlelfuse Incorporated*................................... 352,500
-----------
Retail (All Other) - 1.17%
27,350 Price Costco Incorporated**................................. 560,675
-----------
Specialty Retail - 1.07%
10,000 Barnes & Noble Incorporated*................................ 301,250
15,000 General Nutrition Companies Incorporated 213,750
-----------
515,000
-----------
Total United States Common Stocks...................................... 6,281,821
-----------
Total Common Stocks (cost - $40,876,826)............................... 45,696,446
-----------
PREFERRED STOCKS - 1.12%
BRAZIL - 1.12%
Home Appliances - 1.12%
1,508,000 Brasmotor
(cost - $428,914)......................................... 536,549
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATE RATE
- --------- -------- --------
<S> <C> <C> <C>
REPURCHASE AGREEMENT - 3.04%
$1,460 Repurchase Agreement dated 07/31/96 with State
Street Bank & Trust Company, collateralized by
$1,491,195 U.S Treasury Bonds, 7.250% due
08/15/22; proceeds: $1,460,219 (cost -
$1,460,000)....................................... 08/01/96 5.400% 1,460,000
-----------
Total Investments (cost - $42,765,740) - 99.22%.............. 47,692,995
Other assets in excess of liabilities - 0.78%................ 374,805
-----------
Net Assets--100.00%.......................................... $48,067,800
-----------
-----------
</TABLE>
- ------------
<TABLE>
<S> <C>
* 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.
ADR American Depositary Receipt
GDR Global Depositary Receipt
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1996
<TABLE>
<S> <C>
Assets
Investments, at value (cost - $42,765,740)..................... $47,692,995
Cash denominated in foreign currencies (cost - $629,850)....... 631,210
Cash........................................................... 105,062
Receivable for investments sold................................ 26,366
Dividends and interest receivable.............................. 85,939
Deferred organizational expenses and other assets.............. 89,891
------------
Total assets................................................... 48,631,463
------------
Liabilities
Payable for investments purchased.............................. 340,642
Payable to affiliates.......................................... 42,110
Accrued expenses and other liabilities......................... 180,911
------------
Total liabilities.............................................. 563,663
------------
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..................................... 51,563,257
Accumulated net investment loss................................ (99,419)
Accumulated net realized losses from investment transactions... (8,320,575)
Net unrealized appreciation of investments and other assets and
liabilities denominated
in foreign currencies......................................... 4,920,735
------------
Net assets..................................................... $48,067,800
------------
------------
Net asset value per share...................................... $12.64
------------
------------
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign withholding taxes of $81,277)........................................... $ 700,506
Interest (net of foreign withholding taxes of $707)............................................... 57,519
----------
758,025
----------
Expenses:
Investment advisory and administration............................................................ 456,664
Custody and accounting............................................................................ 152,302
Legal and audit................................................................................... 54,144
Reports and notices to shareholders............................................................... 47,565
Amortization of organizational expenses........................................................... 43,818
Transfer agency fees and expenses................................................................. 22,929
Directors' fees and expenses...................................................................... 6,500
Other expenses.................................................................................... 17,706
----------
801,628
----------
Net investment loss............................................................................... (43,603)
----------
Realized and unrealized gains (losses) from investment transactions:
Net realized gains (losses) from:
Investment transactions...................................................................... 523,875
Foreign currency transactions................................................................ (82,912)
Net change in unrealized appreciation/depreciation of:
Investments.................................................................................. 3,542,207
Other assets and liabilities denominated in foreign currencies............................... (9,152)
----------
Net realized and unrealized gains from investment transactions.................................... 3,974,018
----------
Net increase in net assets resulting from operations.............................................. $3,930,415
----------
----------
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY
31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
From operations:
Net investment income (loss)....................... $ (43,603) $ 290,934
Net realized gains (losses) from:
Investment transactions....................... 523,875 (8,649,451)
Foreign currency transactions................. (82,912) (1,840,999)
Net change in unrealized appreciation/depreciation
of:
Investments................................... 3,542,207 5,422,005
Other assets and liabilities denominated in
foreign currencies........................... (9,152) 1,470,411
------------ ------------
Net increase (decrease) in net assets resulting
from operations................................... 3,930,415 (3,307,100)
------------ ------------
Distributions to shareholders from:
Net realized gains from investment transactions.... -- (3,029,168)
------------ ------------
Net increase (decrease) in net assets.............. 3,930,415 (6,336,268)
Net assets:
Beginning of period................................ 44,137,385 50,473,653
------------ ------------
End of period...................................... $ 48,067,800 $ 44,137,385
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Global Small Cap Fund Inc. (the 'Fund') was incorporated in
Maryland on June 22, 1993 and is registered with the Securities
and Exchange Commission under the Investment Company Act of
1940, as amended, 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'), a wholly owned subsidiary of PaineWebber
Incorporated ('PaineWebber'), of 6,667 shares of common stock
for a total of $100,005. Organizational costs have been deferred
and are being amortized using the straight-line method over the
period of benefit, not to exceed 60 months from the date the
Fund commenced operations.
The preparation of financial statements in accordance with
generally accepted accounting principles requires Fund
management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following
is a summary of significant accounting policies:
Valuation of Investments--Securities that 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 generally
valued on the exchange designated by Mitchell Hutchins, or GE
Investment Management Incorporated ('GEIM'), the sub-adviser to
the Fund, as the primary market. Securities traded in the
over-the-counter ('OTC') market and listed on The Nasdaq Stock
Market, Inc. ('Nasdaq') are valued at the last available sale
price on Nasdaq prior to the time of valuation; other OTC
securities are valued at the last bid price available prior to
valuation. The amortized cost method, which approximates market
value, generally is used to value debt obligations with sixty
days or less remaining to maturity unless the Fund's board of
directors determines that this does not represent fair value.
Securities, including limited partnership interests, 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.
All investments quoted in foreign currencies are valued in U.S.
dollars on the basis of the foreign currency exchange rates
prevailing at the time such valuation is determined by the
Fund's custodian, unless the board of directors determines that
this does not represent fair value. Foreign currency exchange
rates are generally determined prior to the close of trading on
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 investments or currency exchange
rates occur 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 from investment and foreign exchange transactions are
calculated on the identified cost basis. Dividend income and
other
14
<PAGE>
distributions are recorded on the ex-dividend date ('ex-date')
(except for certain dividends from foreign securities that are
recorded as soon after the ex-date as the Fund becomes aware of
such dividends). Interest income is recorded on an accrual
basis.
Foreign Currency Translation--The books and records of the Fund
are maintained in U.S. dollars as follows: (1) the foreign
currency 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, sales, income and expenses are translated at the
rate of exchange prevailing on the respective dates of such
transactions. The resulting exchange gains and losses are
included in the Statement of Operations.
The Fund does not generally isolate the effect of fluctuations
in foreign exchange rates from the effects of the fluctuations
in market price of investment securities. However, the Fund does
isolate the effect of fluctuations in foreign exchange rates
when determining the realized gain or loss upon the sale or
maturity of foreign currency denominated debt obligations
pursuant to federal income tax regulations; such amount is
categorized as foreign exchange gain or loss for both financial
reporting and income tax reporting purposes.
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.
Dividends and Distributions--Dividends and distributions to
shareholders are recorded on the ex-date. The amount of
dividends and distributions 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. For the year ended July 31, 1996, the
reclassification arising from permanent book/tax differences
resulted in a reduction to accumulated net investment loss of
$389,806, an increase to accumulated net realized losses from
investment transactions of $94,258, and a decrease to additional
paid-in-capital of $295,548. Dividends and distributions that
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 paid-in-capital.
15
<PAGE>
CONCENTRATION OF RISK
Investing in securities of foreign issuers and currency
transactions 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 and U.S. government securities. These risks are
greater with respect to securities of issuers located in
emerging market countries in which this Fund is authorized to
invest.
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, and may be dependent on a relatively small
managment group. 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.
The ability of the issuers of debt securities held by the Fund
to meet their obligations may be affected by economic and
political developments particular to a specific industry,
country or region.
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has an Investment Advisory and Administration Contract
('Advisory Contract') with Mitchell Hutchins, under which
Mitchell Hutchins serves as investment adviser and
administrator of the Fund. In accordance with the Advisory
Contract, the Fund pays Mitchell Hutchins an investment
advisory and administration fee, which is computed weekly and
payable monthly, at an annual rate of 1.00% of the Fund's
average weekly net assets.
Mitchell Hutchins has a separate Sub-Advisory Agreement
('Sub-Advisory Agreement') with GEIM. 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, 1996 was substantially the same as the cost of
securities for financial statement purposes.
At July 31, 1996, the components of the net unrealized
appreciation of investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having
an excess of value over cost)..... $ 8,407,946
Gross depreciation (investments having
an excess of cost over value)..... (3,480,691)
------------
Net unrealized appreciation of
investments....................... $ 4,927,255
------------
------------
</TABLE>
16
<PAGE>
For the year ended July 31, 1996, aggregate purchases and sales
of portfolio securities, excluding short-term securities, were
$30,660,204 and $28,091,840, respectively.
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 $1,191,736 of net realized capital losses and
$66,873 of net realized currency losses arising after October
31, 1995. Such losses are treated for tax purposes as arising on
August 1, 1996.
At July 31, 1996, the Fund had a net capital loss carryforward
of $7,119,784 which expires as follows: $2,432,202 in 2003 and
$4,687,582 in 2004.
CAPITAL STOCK
At July 31, 1996, Mitchell Hutchins owned 6,667 shares of the
Fund.
17
<PAGE>
GLOBAL SMALL CAP FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 15,
1993+
FOR THE YEARS ENDED JULY 31, TO
---------------------------------- JULY 31,
1996 1995 1994
------------------ -------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period...................... $ 11.61 $ 13.28 $ 14.18
---------- -------------- ----------------
Net investment income (loss).............................. (0.01) 0.08 (0.05)
Net realized and unrealized gains (losses) from investment
transactions............................................ 1.04 (0.95) (0.80)
---------- -------------- ----------------
Net income (loss) from investment operations.............. 1.03 (0.87) (0.85)
---------- -------------- ----------------
Distributions from net realized gains..................... -- (0.80) --
---------- -------------- ----------------
Offering costs charged to additional paid-in capital...... -- -- (0.05)
---------- -------------- ----------------
Net asset value, end of period............................ $ 12.64 $ 11.61 $ 13.28
---------- -------------- ----------------
---------- -------------- ----------------
Market value, end of period............................... $ 10.38 $ 9.25 $ 12.13
---------- -------------- ----------------
---------- -------------- ----------------
Total investment return (1)............................... 12.22% (17.64)% (14.46)%
---------- -------------- ----------------
---------- -------------- ----------------
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $ 48,068 $ 44,137 $ 50,474
Expenses to average net assets............................ 1.76% 1.69% 1.79%*
Net investment income (loss) to average net assets........ (0.10)% 0.62% (0.46)%*
Portfolio turnover........................................ 64% 187% 71%
</TABLE>
- ------------------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a purchase of common stock at
market value on the first day of each period reported, reinvestment of all
dividends and 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 return does not reflect sales charges or
brokerage commissions. Total investment returns for periods of less than one
year have not been annualized.
18
<PAGE>
GLOBAL SMALL CAP FUND INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Global Small Cap Fund Inc.:
We have audited the accompanying statement of assets and
liabilities of Global Small Cap Fund Inc. (the 'Fund'),
including the portfolio of investments, as of July 31,
1996, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights
for each of the periods indicated therein. These financial
statements and the 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, 1996 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.
as of July 31, 1996, the results of its operations for the year
then ended, and the changes in its net assets for each of the
two years in the period then ended, 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 11, 1996
19
<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, 1996) as to federal tax status of
distributions received by shareholders during such fiscal year.
Accordingly, we are advising you that no distributions were paid
by the Fund during the period.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1996. 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 1997. Shareholders are advised to
consult their own tax advisers with respect to the tax
consequences of their investment in the Fund.
20
<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 $43.4 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 General Electric Investment
Corporation, also a wholly owned subsidiary of General Electric
Company, manages over $55.1 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, each Sunday in
the New York Times and each Saturday in Barron's, as well as
numerous other newspapers.
A special meeting of shareholders was held on April 11, 1996, at
which the following proposals were approved for the Fund:
PROPOSAL 1
To vote for or against the election of Directors:
<TABLE>
<CAPTION>
SHARES VOTED SHARES
FOR WITHHOLD AUTHORITY
------------ ------------------
<S> <C> <C>
Margo N. Alexander........................................ 1,871,930 98,924
Richard Q. Armstrong...................................... 1,871,850 99,004
E. Garrett Bewkes, Jr..................................... 1,870,717 100,137
Richard R. Burt........................................... 1,871,630 99,224
Mary C. Farrell........................................... 1,870,897 99,957
Meyer Feldberg............................................ 1,871,950 98,904
George W. Gowen........................................... 1,870,997 99,857
Frederic V. Malek......................................... 1,869,377 101,477
Carl W. Schafer........................................... 1,871,950 98,904
John R. Torell III........................................ 1,872,450 98,404
</TABLE>
21
<PAGE>
GLOBAL SMALL CAP FUND INC.
PROPOSAL 2
To vote for or against the following changes to the Fund's
fundamental investment restrictions and policies:
<TABLE>
<CAPTION>
SHARES
SHARES VOTED VOTED SHARES
FOR AGAINST ABSTAIN
------------ ------- -------
<S> <C> <C> <C>
Modification of Fundamental Restriction on Portfolio
Diversification for Diversified Funds....................... 1,404,550 34,385 81,918
Modification of Fundamental Restriction on Concentration....... 1,404,254 34,983 81,616
Modification of Fundamental Restriction on Senior Securities
and Borrowing . . .......................................... 1,359,688 79,910 81,255
Modification of Fundamental Restriction on Making Loans........ 1,338,386 84,216 98,251
Modification of Fundamental Restriction on Underwriting
Securities.................................................. 1,348,277 90,155 82,421
Modification of Fundamental Restriction on Real Estate
Investments................................................. 1,356,803 80,497 83,553
Modification of Fundamental Restriction on Investing in
Commodities................................................. 1,331,138 94,864 94,851
Elimination of Fundamental Restriction on Margin
Transactions................................................ 1,349,837 88,510 82,506
Elimination of Fundamental Restriction on Short Sales.......... 1,347,965 91,458 81,430
Elimination of Fundamental Restriction on Investments in Oil,
Gas and Mineral Leases and Programs......................... 1,345,433 89,611 85,809
</TABLE>
(Broker non-votes and abstentions are included within the
'Shares Withhold Authority' and 'Shares Abstain' totals.)
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.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1996. 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 1997. Shareholders are advised to
consult their own tax advisers with respect to the tax
consequences of their investment in the Fund.
22
<PAGE>
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<PAGE>
BOARD OF DIRECTORS
E. Garrett Bewkes, Jr., Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
John R. Torell III
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.
PaineWebber [LOGO]
1996 PaineWebber Incorporated
Member SIPC
PaineWebber [LOGO]
- --------------------------------------------------------------------------------
GLOBAL SMALL
CAP FUND INC.
ANNUAL REPORT
JULY 31, 1996
