<PAGE>
Global Small Cap Fund Inc.
GLOBAL SMALL
CAP FUND INC.
Top Five Countries
(as a % of net assets as of
July 31, 1997)
United States 15.89%
Sweden 9.34%
Finland 8.87%
United Kingdom 7.71%
Italy 7.12%
September 15, 1997
Dear Shareholder,
We are pleased to present you with the annual report for Global Small Cap
Fund Inc. (the "Fund") for the year ended July 31, 1997.
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Equity markets around the world, with the exception of Asia,
performed extremely well over the year and the year-to-date period ended
July 31, 1997. For the year-to-date period, performance leaders, as
measured by the Morgan Stanley Capital International (MSCI) World Index,
were Switzerland, up 33%; the U.S., up 30%; Finland, up 30%; the
Netherlands, up 30%; and Germany, up 28%. The Latin America markets were
also strong performers, led by Brazil, up 59%; Mexico, up 50%; and
Venezuela, up 50%. Conversely, the Asian markets were hit very hard as a
result of macroeconomic problems and the threat of falling property prices,
the adverse effects of which incurred damage to Asia's financial systems
and currencies. Most severely affected were the Thai market, which fell
30.4%, and the Philippines market, which fell 23.1%.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
Performance
[GRAPHIC OMITTED]
Global Small Cap Fund Inc. (Symbol:GSG) achieved a fiscal year return
through July 31, 1997 of 34.73% based on the Fund's net asset value and
39.69% based on the Fund's share price on the American Stock Exchange. Over
the same period, the Fund (based on net asset value) outperformed the
33.16% return of its benchmark index, the Morgan Stanley Capital
International World Index.
Portfolio Highlights
In Europe (56.75% of net assets as of July 31, 1997), corporate restructuring
that focused on shareholder value, corporate clarity and globalization
significantly helped Fund performance. In fact, Rofin Sinar (2.24% of net assets
as of July 31, 1997), one of the Fund's best performing holdings,
was spun out from Seimans as a part of its corporate restructuring process.
Within the U.S., low inflation--primarily due to global competition--low
interest rates and moderate growth helped drive companies like CMAC (2.48%
of net assets as of July 31, 1997), a mortgage insurer, to strong
performance.
Japan's market (3.44% of net assets as of July 31, 1997) did
experience some upward movement toward the end of the period. However,
pressure from a bank bailout, as well as stretched government finances,
made it difficult for Japan to make significant progress towards its needed
economic recovery. The market's underweighted position, therefore,
benefited the Fund over the period. However, when selecting stocks in which
to invest, GE Investment Management Incorporated, subadviser of the Fund,
utilizes an
1
<PAGE>
Annual Report
Global Small Cap Fund Inc.
FUND PROFILE
Goal:
Long-term capital
appreciation
Portfolio Manager/Subadviser:
Ralph Layman,
GE Investment Management Inc.
Total Net Assets:
$64.7 million as of
July 31, 1997
Dividend Payments:
Annually
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. This
discipline made it possible to identify stocks within Japan's market that
performed extremely well. One notable example is Circle K (1.13% of net
assets as of July 31, 1997). Owner and operator of a chain of small stores
similar to the United States' 7-Eleven, Circle K generated a return of
63.5% over the period.
Overall, Asian markets (excluding Japan, 12.38% of net assets as of July
31, 1997), underperformed other world markets due to a combination of a
slowdown in earnings growth and relatively high valuations. Here, too,
however, the Fund's investment discipline made it possible to identify
companies that performed well.
Finally, in Latin America, where continued economic growth, lower inflation
expectations and anticipated privatizations helped propel markets up over
the last six months, the Fund maintained a weighting of 2.29% of net assets
as of July 31, 1997. One of the most successful holdings in this market was
Disco (1.02%), a supermarket chain, which has benefited from consolidations
and acquisitions. The subadviser continues to view Disco favorably, as it's
believed the recent upgrade of the company's distribution center will
better enable the company to service its network.
Other examples of portfolio stocks with significant increases in market
value over the six month period ended July 31, 1997 included:
Company Country % of Portfolio
------- ------- (as of 7/31/97)
---------------
Airtours United Kingdom 2.23%
Jarvis United Kingdom 1.85%
Konecranes International Finland 2.97%
Of course, the Fund's portfolio is actively managed and its composition may
vary over time.
The Importance Of Choosing A Benchmark
Historically, there has not been a good industry benchmark available for
the small cap market worldwide. Because of this deficiency, the subadviser
has found it necessary to measure Fund performance against the MSCI World
Index, which invests predominantly in large cap companies. As a result of
this, the Fund's current benchmark is not always an effective measure of
the Fund's performance.
The subadviser is now in the process of evaluating the Salomon Brothers
Extended Market Index, which focuses on small cap performance, to determine
whether it would be a more representative benchmark for the Fund. The
subadviser is hopeful that this new index will prove to be a more
appropriate benchmark against which to measure the Fund's performance in
the future.
2
<PAGE>
OUTLOOK
- --------------------------------------------------------------------------------
With the exception of a few markets, equities around the world are in positive
territory for the year. Europe remains one of the most attractive regions in the
world, as the subadviser believes corporate restructuring will continue to focus
on shareholder value, corporate clarity and globalization. At a macro level,
European Monetary Union looks likely to happen, not as much from the economic
reality as much as the strength of political wills.
In the U.S., the subadviser believes low inflation, low interest rates and
moderate growth should continue to be the keys for the market's move higher.
However, relative valuations are high in the U.S.; as such, stock selection will
be important in this market.
Japan still looks expensive, especially relative to its growth prospects. There
is a lack of strong political leadership and an overhang of on-going serious
scandals from ministries and companies. Faced with continued pressure from the
bank bailout and the precarious state of government finances, the subadviser
expects that economic progress for Japan will continue to be slow. Asia,
excluding Japan, continues to look relatively attractive despite the market's
recent volatility. Selectivity of markets in the region and companies within the
markets is key.
Lastly, Latin America's economic growth and lower inflation expectations should
continue to improve. These conditions, along with anticipated privatizations,
should support these markets.
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 N. Alexander /s/ Ralph Layman
MARGO N. ALEXANDER RALPH LAYMAN
President Portfolio Manager
Mitchell Hutchins Asset Global Small Cap Fund Inc.
Management Inc.
This letter is intended to assist shareholders in understanding how the
Fund performed during the fiscal year ended July 31, 1997, and reflects our
views at the time we are writing this report. Of course, these views may
change in response to changing circumstances. We encourage you to consult
your investment executive regarding your personal investment program.
3
<PAGE>
Global Small Cap Fund Inc.
Portfolio of Investments July 31, 1997
<TABLE>
<CAPTION>
Number of Number of
Shares Value Shares Value
- ------ ----- ------ -----
COMMON STOCK--96.17%
<S> <C> <C> <C>
ARGENTINA--1.02% FINLAND--(concluded)
Retail--Food Chains--1.02% Machinery--Diversified--0.96%
13,500 Disco SA ADR ..................... $ 658,125 38,888 Valmet Corporation .................... $ 623,096
---------- ----------
Transportation--2.44%
AUSTRALIA--4.33% 51,600 Finnlines OY (1) ...................... 1,581,296
----------
Beverages--0.75% Total Finland Common Stock ......................... 5,744,223
177,545 BRL Hardy ........................ 486,921 ----------
----------
Capital Equipment-Miscellaneous--0.64% FRANCE--1.88%
15,000 Memtec Limited ADR ............... 412,500
---------- Auto Parts--0.39%
Computer Software & Services--1.67% 4,500 Bertrand Faure Ex Ebf ................. 252,395
600,000 Ci Technologies Group Limited .... 1,082,103 ----------
---------- Electronics--0.53%
Energy--0.76% 1,450 Le Carbone Lorraine ................... 343,672
131,155 Novus Petroleum .................. 487,054 ----------
---------- Energy--0.51%
Foods--0.51% 9,801 Coflexip S.A. Spoorit ADR ............. 333,234
178,645 Burns Philp & Company, Limited ... 332,838 ----------
---------- Engineering & Construction--0.45%
Total Australia Common Stock .................. 2,801,416 2,300 Technip SA/Campagnie Francaise ........ 289,800
---------- ----------
Total France Common Stock .......................... 1,219,101
AUSTRIA--1.51% ----------
GERMANY--5.83%
Steel--1.51%
12,052 Boehler Uddeholm Bearer .......... 978,389 Auto Parts--0.85%
---------- 35,000 Kolbenschmidt ......................... 551,121
----------
CROATIA--2.04% Capital Equipment--Miscellaneous--2.24%
80,000 Rofin-Sinar Technologies Incorporated* 1,450,000
Pharmaceutical--2.04% ----------
75,565 Pliva DD ** GDR .................. 1,322,388 Machinery--Diversified--0.67%
---------- 7,092 Boewe Systec .......................... 254,152
6,000 Pfeiffer Vacuum Technology ADR ........ 180,000
DENMARK--1.47% ----------
434,152
Entertainment--1.47% ----------
13,000 Martin Gruppen ................... 949,534 Office Equipment & Supplies--0.69%
---------- 15,000 Turbon International .................. 443,883
----------
EGYPT--0.30% Steel--1.38%
6,740 SGL Carbon ............................ 894,788
Banks--0.30% ----------
12,700 Misr International Bank Sae** GDR 193,675 Total Germany Common Stock ......................... 3,773,944
---------- ----------
FINLAND--8.87% GREECE--1.15%
Capital Equipment--Miscellaneous--2.97% Transportation--1.15%
48,000 Konecranes International ......... 1,920,559 74,375 Attica Enterprises .................... 746,052
---------- ----------
Computer Software & Services--0.97%
7,200 TT Tieto OY ...................... 625,928 HONG KONG--5.87%
----------
Consumer Goods--1.53% Electronics--1.49%
13,678 Hackman .......................... 457,724 480,000 Vtech Holdings ........................ 960,930
4,884 Raison Tehtaat ................... 535,620 ----------
---------- Food--0.78%
993,344 809,000 Four Seasons Mercantile Holdings ...... 504,156
---------- ----------
</TABLE>
4
<PAGE>
Global Small Cap Fund Inc.
<TABLE>
<CAPTION>
Number of Number of
Shares Value Shares Value
- ------ ----- ------ -----
COMMON STOCK--(continued)
<S> <C> <C> <C>
HONG KONG--(concluded) ISRAEL--(concluded)
Hardware & Tools--0.94% Retail--Specialty--0.63%
200,000 Johnson Electric Holdings ....... $ 610,914 26,493 Blue Square Israel Ltd* ADR ..... $ 410,641
---------- ----------
Retail--Specialty--2.66% Total Israel Common Stock ..................... 2,021,526
1,100,000 Giordano International Limited .. 692,606 ----------
920,000 Sa Sa International Holdings* ... 332,709
298,000 Yue Yuen Industries ............. 696,648 ITALY--7.12%
----------
1,721,963 Airlines--1.26%
---------- 100,000 Aeroporti Di Roma* .............. 812,103
Total Hong Kong Common Stock .................. 3,797,963 ----------
---------- Home Furniture--2.13%
50,000 Industrie Natuzzi* ADR .......... 1,378,125
INDONESIA--3.48% ----------
Machinery--Diversified--2.87%
Auto--2.07% 110,000 Carraro Spa ..................... 532,682
350,000 Astra International ............. 1,338,432 134,000 Gildemeister Italiana ........... 388,969
---------- 150,000 Idra Presse* .................... 352,338
Banks--0.33% 200,000 Riva Finanziaria ................ 585,003
350,000 Bank PAN Indonesia .............. 214,149 ----------
---------- 1,858,992
Materials--Building--0.54% ----------
800,000 Mulia Industrindo ............... 351,817 Miscellaneous--0.86%
---------- 22,311 Safilo .......................... 558,840
Transportation--0.54% ----------
340,167 Steady Safe ..................... 347,972 Total Italy Common Stock ...................... 4,608,060
---------- ----------
Total Indonesia Common Stock .................. 2,252,370
---------- JAPAN--3.44%
IRELAND--2.79% Capital Equipment--Miscellaneous--0.75%
25,000 Canon Chemicals Incorporated .... 487,959
Computer Software & Services--0.81% ----------
26,000 Iona Technologies* ADR .......... 521,625 Finance--0.45%
---------- 12,000 Shinki Co Ltd. .................. 294,043
Transportation--1.98% ----------
77,359 Irish Continental Group ......... 861,892 Food--0.46%
15,000 Ryanair Holdings* ADR ........... 423,750 10,010 Hokuto Corp ..................... 296,029
---------- ----------
1,285,642 Photography--0.19%
---------- 7,200 Nihon Jumbo Company ............. 119,848
Total Ireland Common Stock .................... 1,807,267 ----------
---------- Retail--Specialty--1.13%
12,480 Circle K Japan Company Ltd. ..... 731,823
ISRAEL--3.12% ----------
Semiconductor--0.46%
Computer Software & Services--2.49% 13,000 Mimasu Semiconductor Industry
33,000 Formula Systems Ltd.* ........... 691,260 Company Ltd. .................... 294,381
25,000 Memco Software Ltd.* ............ 490,625 ----------
13,000 Tecnomatix Technologies Limited* 429,000
---------- Total Japan Common Stock ...................... 2,224,083
1,610,885 ----------
----------
</TABLE>
5
<PAGE>
Global Small Cap Fund Inc.
<TABLE>
<CAPTION>
Number of Number of
Shares Value Shares Value
- ------ ----- ------ -----
COMMON STOCK--(continued)
<S> <C> <C> <C>
KOREA--0.95% SPAIN--1.39%
Beverages--0.36% Insurance--0.39%
9,840 Cho Sun Brewery Company Ltd. .... $ 231,074 5,000 Catalana Occidente .............. $ 253,319
---------- ----------
Telecommunications--0.59% Machinery--Diversified--0.74%
515 Korea Mobile Telecom Corporation 382,778 11,443 Miquel Y Costas Miquel .......... 477,481
---------- ----------
Total Korea Common Stock ...................... 613,852 Retail--Specialty--0.26%
---------- 5,000 Adolfo Dominguez* ............... 172,309
----------
MEXICO--1.27% Total Spain Common Stock ...................... 903,109
----------
Auto Parts--0.37%
30,700 SanLuis Corporacion ............. 237,997 SWEDEN--9.34%
----------
Pharmaceutical--0.90% Auto Parts--2.30%
25,000 Grupo Casa Autrey ADR ........... 581,250 30,000 Autoliv ......................... 1,052,618
---------- 36,500 Haldex .......................... 432,232
Total Mexico Common Stock ..................... 819,247 ----------
---------- 1,484,850
----------
NETHERLANDS--3.72% Capital Equipment--Miscellaneous--1.38%
40,826 Assa Abloy ...................... 895,296
Energy--2.58% ----------
31,000 IHC Caland ...................... 1,670,139 Computer Software & Services--1.05%
---------- 35,000 Prosolvia ....................... 679,816
Miscellaneous--1.14% ----------
48,000 DOCdata ......................... 740,848 Finance--1.49%
---------- 32,300 OM Gruppen ...................... 967,369
Total Netherlands Common Stock ................ 2,410,987 ----------
---------- Hotels--1.04%
40,000 Scandic Hotels .................. 666,658
NEW ZEALAND--0.40% ----------
Machinery--Diversified--0.51%
Transportation/Railroad--0.40% 20,000 Getinge Industries .............. 332,076
15,000 Tranz Rail Holdings Limited ADR . 258,750 ----------
---------- Multi-Industry Conglomerate--0.95%
20,000 Kinnevik Investments ............ 612,774
NORWAY--0.83% ----------
Telecommunications--0.62%
Energy--0.83% 26,655 Netcom Systems* ................. 404,162
10,000 Petroleum Geo-Services* ......... 535,249 ----------
---------- Total Sweden Common Stock ..................... 6,043,001
----------
SINGAPORE--2.04%
UNITED KINGDOM--7.71%
Communication Equipment--0.78%
150,000 Datacraft Asia (1) .............. 507,000 Computer Software & Services--1.04%
---------- 20,000 Eidos ........................... 216,598
Energy--0.51% 328,565 Geo Interactive Media Group* .... 458,271
100,000 Keppel Fels Ltd. ................ 333,084 ----------
---------- 674,869
Food--0.75% ----------
135,600 Want Want Holdings .............. 482,736 Employment--1.41%
---------- 150,000 Capita Group .................... 615,337
Total Singapore Common Stock .................. 1,322,820 350,000 Select Appointments Holdings .... 296,921
---------- ----------
912,258
SOUTH AFRICA--0.65% ----------
Retail--Specialty--0.65%
378,969 Metro Cash & Carry .............. 419,068
----------
</TABLE>
6
<PAGE>
Global Small Cap Fund Inc.
<TABLE>
<CAPTION>
Number of Number of
Shares Value Shares Value
- ------ ----- ------ -----
COMMON STOCK--(concluded)
<S> <C> <C> <C>
UNITED KINGDOM--(concluded) UNITED STATES--(concluded)
Engineering & Construction--1.85% Retail--Apparel--1.73%
325,000 Jarvis ...................... $1,197,241 10,000 Jones Apparel Group
---------- Incorporated* ............... $ 519,375
Leisure--2.23% 15,000 Nine West Group,
75,000 Airtours .................... 1,444,196 Incorporated* ............... 600,937
---------- ----------
Marketing & Advertising--1.18% 1,120,312
350,000 Cordiant .................... 760,967 ----------
---------- Retail--Specialty--2.37%
Total United Kingdom Common Stock ............. 4,989,531 10,000 Barnes & Noble Incorporated* 500,000
---------- 27,350 Price Costco, Incorporated* . 1,035,881
----------
UNITED STATES--13.65% 1,535,881
----------
Computer Software & Services--0.21% Telecommunications--0.15%
5,000 Aris Corporation* ........... 135,000 5,000 Corsair Communications
---------- Incorporated ................ 99,063
Computer Systems--0.96% ----------
20,000 Zebra Technologies Total United States Common Stock .............. 8,837,950
Corporation* ................ 623,750 ----------
---------- Total Common Stock (cost--$44,176,790) ........ 62,251,680
Consumer Goods--2.14% ----------
17,700 Cannondale Corporation* (1) . 314,175
12,500 Harman International ........ INVESTMENTS OF CASH COLLATERAL
Industries Incorporated ..... 496,875 FOR SECURITIES LOANED--3.28%
---------- 2,119,958 Liquid Assets Portfolio .... 2,119,958
20,000 Littelfuse Incorporated* .... 570,000 42 Prime Portfolio ............ 42
---------- ----------
1,381,050 Total Investments of Cash Collateral for
---------- Securities Loaned (cost--$2,120,000) .......... 2,120,000
Employment--0.53% ----------
7,500 Interim Services Incorporated* 341,719
---------- Number of
Engineering & Construction--0.61% Warrants
14,000 Jacobs Engineering Group ---------
Incorporated ................ 392,000
---------- WARRANTS--0.04%
Entertainment--0.43%
25,000 Metromedia International HONG KONG--0.04%
Group Incorporated* ......... 281,250
---------- Consumer Goods--0.04%
Finance--2.48% 206,800 Four Seasons Mercantile
34,000 CMAC Investment Corporation . 1,604,375 Holdings (cost $11,948) .... 26,977
---------- ----------
Machinery--Diversified--0.97%
60,000 ITEQ Incorporated* .......... 630,000 Number of
---------- Rights
Marketing & Advertising--0.42% ------
6,400 Catalina Marketing
Corporation* ................ 272,800 STOCK RIGHTS--1.10%
----------
Pharmaceuticals--0.65% HUNGARY--1.10%
8,500 Watson Pharmaceuticals,
Incorporated.* ............. 420,750 Food Processing--1.10%
---------- 9,346 Pick Szeged (cost--$571,165) 712,148
----------
</TABLE>
7
<PAGE>
Global Small Cap Fund Inc.
<TABLE>
<CAPTION>
Principal
Amount
(000) Maturity Date Interest Rates Value
----- ------------- -------------- -----
<S> <C> <C> <C>
REPURCHASE AGREEMENT--2.04%
$1,320 Repurchase Agreement dated
07/31/97 with State Street
Bank & Trust Company,
collateralized by $1,348,158
U.S. Treasury Notes, 5.875%
due 08/15/98; proceeds:
$1,320,205 (cost--$1,320,000).... 08/01/97 5.600% $ 1,320,000
-----------
<CAPTION>
<S> <C>
Total Investments (cost--$48,199,903)--102.63% .................................. 66,430,805
Liabilities in excess of other assets--(2.63)% .................................. (1,701,774)
-----------
Net Assets--100.00% ............................................................. $64,729,031
===========
</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.
ADR American Depositary Receipt
GDR Global Depositary Receipt
(1) Security, or a portion thereof, was on loan at July 31, 1997.
See accompanying notes to financial statements
8
<PAGE>
Global Small Cap Fund Inc.
Statement of Assets and Liabilities July 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (cost--$48,199,903) ....................... $66,430,805
Cash denominated in foreign currencies (cost--$65,425) .......... 63,332
Cash ............................................................ 279
Receivable for investments sold ................................. 1,679,926
Dividends and interest receivable ............................... 81,326
Deferred organizational expenses and other assets ............... 30,438
------------
Total assets .................................................... 68,286,106
------------
Liabilities
Collateral for securities loaned ................................ 2,120,000
Payable for investments purchased ............................... 1,198,993
Payable to affiliates ........................................... 55,128
Accrued expenses and other liabilities .......................... 182,954
------------
Total liabilities ............................................... 3,557,075
------------
Net Assets
Capital Stock--$0.001 par value; 100,000,000 shares authorized;
3,801,667 shares issued and outstanding ......................... 51,415,510
Accumulated net investment loss ................................. (102,359)
Accumulated net realized loss from investment transactions ...... (4,807,387)
Net unrealized appreciation of investments and other assets
and liabilities denominated in foreign currencies ............... 18,223,267
------------
Net assets ...................................................... $ 64,729,031
------------
Net asset value per share ....................................... $ 17.03
=======
See accompanying notes to financial statements
9
<PAGE>
Global Small Cap Fund Inc.
Statement of Operations
For the Year
Ended
July 31, 1997
-------------
Investment income:
Dividends (net of foreign withholding taxes of $81,416) ......... $ 702,771
Interest ........................................................ 77,884
----------
780,655
----------
Expenses:
Investment advisory and administration .......................... 559,511
Custody and accounting .......................................... 85,345
Legal and audit ................................................. 55,190
Reports and notices to shareholders ............................. 59,006
Amortization of organizational expenses ......................... 43,818
Transfer agency fees and expenses ............................... 27,953
Directors' fees and expenses .................................... 11,300
Other expenses .................................................. 18,602
-----------
860,725
-----------
Net investment loss ............................................. (80,070)
-----------
Realized and unrealized gains (losses) from investment
transactions:
Net realized gains (losses) from:
Investment transactions ....................................... 3,538,337
Foreign currency transactions ................................. (99,568)
Net change in unrealized appreciation/depreciation of:
Investments ................................................... 13,303,647
Other assets and liabilities denominated in foreign
currencies .................................................. (1,115)
-----------
Net realized and unrealized gains from investment transactions.... 16,741,301
-----------
Net increase in net assets resulting from operations ............. $16,661,231
===========
See accompanying notes to financial statements
10
<PAGE>
Global Small Cap Fund Inc.
Statement of Changes in Net Assets
</TABLE>
<TABLE>
<CAPTION>
For the Years
Ended July 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
From operations:
Net investment loss ......................................... $ (80,070) $ (43,603)
Net realized gains (losses) from:
Investment transactions ..................................... 3,538,337 523,875
Foreign currency transactions ............................... (99,568) (82,912)
Net change in unrealized appreciation/depreciation of:
Investments ................................................. 13,303,647 3,542,207
Other assets and liabilities denominated in foreign
currencies ................................................ (1,115) (9,152)
------------ ------------
Net increase in net assets resulting from operations ........ 16,661,231 3,930,415
Net assets:
Beginning of period .......................................... 48,067,800 44,137,385
------------ ------------
End of period ................................................ $ 64,729,031 $ 48,067,800
============ ============
</TABLE>
See accompanying notes to financial statements
11
<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. 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 subadviser 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. 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.
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.
12
<PAGE>
Notes To Financial Statements
Investment Transactions and Investment Income--Investment transactions are
recorded on the trade date. Realized gains and losses from investments and
foreign exchange transactions are calculated on the identified cost basis.
Dividend income and other 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. Discounts are accreted and
premiums are amortized as adjustments to interest income and the identified cost
of investments.
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. Net
realized foreign currency gain/loss is treated as ordinary income for income tax
purposes.
Dividends and Distributions--Dividends and distributions to shareholders
are recorded on the ex-date. The amount of dividends and distributions is
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.
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 management 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.
13
<PAGE>
Notes To Financial Statements
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.
Securities Lending
The Fund may lend up to 33 1/3% of its total assets to qualified
institutions. The loans are secured at all times by cash or U.S. government
securities in an amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends, determined on a daily basis and
adjusted accordingly. The Fund will regain record ownership of loaned securities
to exercise certain beneficial rights, however, the Fund may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower fail financially. The Fund receives compensation, which is included
in interest income, for lending its securities from interest earned on the cash
or U.S. government securities held as collateral, net of fee rebates paid to the
borrowers plus reasonable administrative and custody fees. The Fund's lending
agent is PaineWebber, which received $3,032 in compensation from the Fund for
the year ended July 31, 1997.
As of July 31, 1997, the Fund's custodian held cash and cash equivalents
having an aggregate value of $2,120,000 as collateral for portfolio securities
loaned having a market value of $1,997,925.
Investments in Securities
For federal income tax purposes, the cost of securities owned at July 31,
1997 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1997, 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) .......... $ 19,663,099
Gross depreciation (investments having an excess of cost over value) .......... (1,432,197)
------------
Net unrealized appreciation of investments .................................... $ 18,230,902
============
For the year ended July 31, 1997, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $27,691,069 and
$27,775,245, respectively.
Notes to Financial Statements
14
<PAGE>
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
$94,963 of net realized currency losses arising after October 31, 1996. Such
losses are treated for tax purposes as arising on August 1, 1997.
At July 31, 1997, the Fund had a net capital loss carryforward of
$4,798,332 which expires as follows: $110,750 in 2003 and $4,687,582 in 2004.
To reflect reclassification arising from permanent book/tax differences
there was a reduction to accumulated net investment loss of $77,130, a decrease
to accumulated net realized losses from investment transactions of $74,419 and a
decrease to additional paid-in capital of $151,549.
Capital Stock
At July 31, 1997, Mitchell Hutchins owned 6,667 shares of the Fund.
15
<PAGE>
Global Small Cap Fund Inc.
Financial Highlights
Selected data for a share of capital stock outstanding throughout each
period is presented below:
</TABLE>
<TABLE>
<CAPTION>
For the Period
For the Years Ended July 31, October 15, 1993+
----------------------------------- to
1997 1996 1995 July 31, 1994
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............................ $ 12.64 $ 11.61 $ 13.28 $ 14.18
--------- ------- ------- -------
Net investment income (loss) .................................... (0.02) (0.01) 0.08 (0.05)
Net realized and unrealized gains (losses) from investments ..... 4.41 1.04 (0.95) (0.80)
--------- ------- ------- -------
Total increase (decrease) from investment operations ............ 4.39 1.03 (0.87) (0.85)
Distributions from net realized gains from investments .......... -- -- (0.80) --
--------- ------- ------- -------
Offering costs charged to additional paid-in capital ............ -- -- -- (0.05)
--------- ------- ------- -------
Net asset value, end of period .................................. $ 17.03 $ 12.64 $ 11.61 $ 13.28
========= ======= ======= =======
Market value, end of period ..................................... $ 14.50 $ 10.38 $ 9.25 $ 12.13
========= ======= ======= =======
Total investment return (1) ..................................... 39.69 % 12.22 % (17.64)% (14.46)%
========= ======= ======= =======
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $ 64,729 $48,068 $44,137 $50,474
Expenses to average net assets .................................. 1.53 % 1.76 % 1.69 % 1.79 %*
Net investment income (loss) to average net assets .............. (0.14)% (0.10)% 0.62 % (0.46)%*
Portfolio turnover .............................................. 50 % 64 % 187 % 71 %
Average commission rate paid (2) ................................ $ 0.0204 -- -- --
</TABLE>
- ----------
+ Commencement of operations
* Annualized
(1) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported. Dividends and distributions,
if any, are assumed for purposes of this calculation to be reinvested at
prices obtained under the Fund's dividend reinvestment plan. Total
investment return does not reflect brokerage commissions. Total investment
return for period of less than one year has not been annualized.
(2) Effective for fiscal years beginning on or after September 1, 1995, the Fund
is required to disclose the average commission rate paid per share of common
stock investments purchased or sold.
16
<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, 1997, 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 and financial highlights. Our procedures included confirmation of
investments owned at July 31, 1997, by correspondence with the custodians. 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, 1997, 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 19, 1997
17
<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,
1997) 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 1997. 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 1998. Shareholders
are advised to consult their own tax advisers with respect to the tax
consequences of their investment in the Fund.
18
<PAGE>
Global Small Cap Fund Inc.
General Information
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 $46 billion in assets under management at August 31, 1997. The Fund's
subadviser 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 $64 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.
Distribution Policy
The Fund intends to pay dividends from its net investment income and net
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.
19
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22
<PAGE>
Board of Directors
E. Garrett Bewkes, Jr. Meyer Feldberg
Chairman George W. Gowen
Margo N. Alexander Frederic V. Malek
Richard Q. Armstrong Carl W. Schafer
Richard R. Burt
Mary C. Farrell
Officers
Margo N. Alexander Dianne E. O'Donnell
President Vice President and Secretary
Victoria E. Schonfeld Paul H. Schubert
Vice President 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 shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the Fund for their information.
It is not a prospectus, circular or representation intended for the use in the
purchase or sale of shares of the Fund or of any securities mentioned in this
report.
<PAGE>
Annual Report
Global Small
Cap Fund Inc.
July 31, 1997
PaineWebber
(C)1997 PaineWebber Incorporated
Member SIPC
