<PAGE>
GLOBAL SMALL CAP FUND INC. ANNUAL REPORT
September 15, 1998
Dear Shareholder,
We are pleased to present you with the annual report for the Global Small Cap
Fund Inc. (the "Fund") for the fiscal year ended July 31, 1998.
GENERAL MARKET OVERVIEW
Equity markets around the world generally performed well over the year ended
July 31, 1998, with the exceptions of Asia, Latin America and Canada. As
measured by the Morgan Stanley Capital International World Index, the
strongest performers for the fiscal year were Italy, up 69%, Spain, up 67%,
Finland, which gained 66%, Portugal, up 54% and France, which gained 41%.
Continuing economic and currency problems hit Asian and Latin American markets
hard. In U.S. dollar terms, the worst performers for the year were Malaysia,
which lost 75%, Hong Kong, which was down 55% and Singapore, which lost 47%.
Note: Since July 31, 1998 (the Fund's fiscal year-end), world financial
markets have experienced significant volatility. The market and Fund
performance cited in this report do not take into account this volatility nor
its impact on the Fund; the next semiannual report, which will cover the six
months ending January 31, 1999, will address this period.
PORTFOLIO REVIEW
PERFORMANCE
For the fiscal year ended July 31, 1998, the Fund (Symbol: GSG) gained 11.69%
based on changes in its net asset value and 8.19% based on changes in its
share price on the American Stock Exchange. Over the same period the Fund
outperformed a primary benchmark, the Salomon Brothers Extended Market Index,
which returned 3.41% in U.S. dollar terms.
Unless otherwise noted all portofolio weightings represent percentages of net
assets as of July 31, 1998. All holdings are subject to change.
GLOBAL SMALL CAP FUND INC.
FUND PROFILE
Goal:
Long-term capital
appreciation
Portfolio
Manager/Subadviser:
Ralph Layman,
GE Investment
Management Inc.
Total Net Assets:
$72.3 million as of
July 31, 1998
Dividend Payments:
Annually if any
GLOBAL SMALL
CAP FUND INC.
Top ten holdings
as of July 31, 1998(1)
Finnlines OY 3.5%
Esat Telecom Group PLC 3.0%
Vtech Holdings 3.0%
Tieto Corp. 2.7%
CMAC Investment Corp. 2.6%
Jarvis 2.6%
Scandic Hotels AB 2.5%
IHC Caland N.V. 2.3%
Montupet 2.1%
Assa Abloy AB 2.0%
<PAGE>
ANNUAL REPORT
PORTFOLIO HIGHLIGHTS
Strong performance across Europe (58.0% of net assets on July 31, 1998)
significantly helped Fund performance. European companies benefited from
corporate restructuring that focused on responsiveness to shareholders and
clear communication of corporate information, as well as globalization. A good
example in the United Kingdom is the construction and facilities management
firm Jarvis (2.6%), which during the past year benefited from its
restructuring efforts and refocused management team.
Other strong performers for the Fund included Finnlines OY (3.5%), a Finnish
shipping company, Tieto Corp. (2.7%), a Finnish business services company and
Scandic Hotels AB of Sweden (2.5%).
Stocks in the United States also turned in strong performances over the year,
supported by low interest rates, moderate growth and low inflation -- partly
due to the Asian crisis. CMAC Investment Corp. (2.6%), a mortgage insurer,
contributed to the Fund's performance for the fiscal year.
Japan is still struggling; its fundamentals continue to deteriorate, interest
rates have fallen to record lows and the yen is still losing value. The Fund's
near-zero weighting in Japan (0.4%) helped protect it from that country's
woes.
The Asian and Pacific Rim markets other than Japan (11.2%) plummeted over the
year and represented the only region in which the Fund sustained losses.
However, good stock picks in these markets partly offset the regional effects.
An example is Vtech Holdings (3.0%), a Hong Kong based producer of low-cost
consumer products, including a cordless phone that had a 50% share of the
world market. For the Fund's fiscal year, Vtech returned 140.95% in U.S.
dollar terms.
Unless otherwise noted, all portfolio weightings represent percentages of
net assets as of July 31, 1998. All holdings are subject to change.
GLOBAL SMALL
CAP FUND INC.
Top ten countries
as of July 31, 1998(1)
United States 17.8%
Sweden 12.0%
Finland 9.2%
United Kingdom 7.0%
Canada 5.4%
Hong Kong 4.9%
Switzerland 4.9%
Ireland 4.7%
Israel 4.3%
Italy 4.0%
Top five sectors
as of July 31, 1998(1)
Capital Equipment 34.2%
Services 27.8%
Consumer Goods 19.2%
Finance 9.4%
Energy 4.1%
2
<PAGE>
OUTLOOK
The United States market has held up well amidst earnings downgrades and
rising uncertainty about the impact of the Asian crisis on U.S. companies. It
is not surprising that during times of crisis the U.S. would benefit from a
"flight to quality." We believe low interest rates and low inflation could
support lower growth in the U.S., but still find more attractive opportunities
in Europe. We believe Europe will continue to be one of the most attractive
regions in the world as it approaches monetary union.
We remain cautious about Japan's long-term prospects. The economy needs
radical restructuring both on the corporate and government sides for
sustainable recovery. We are closely watching Japan's recovery efforts, such
as the banking reform plan and companies' share buybacks. We think Japan holds
the key to economic recovery in Asia and Latin America. Stock selection in
these markets has never been more important.
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.
For a quarterly Fund Profile on Global Small Cap Fund Inc. or a fund in the
PaineWebber Family of Funds, please contact your investment executive.
Sincerely,
/s/ Margo Alexander /s/ Ralph Layman
- ----------------------- --------------------------
MARGO ALEXANDER RALPH LAYMAN
President Portfolio Manager
Mitchell Hutchins Asset Global Small Cap Fund Inc.
Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended July 31, 1998, and reflects the views
of the subadviser at the time of 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, 1998
<PAGE>
Number of
Shares Value
- ------------- -----------
COMMON STOCKS--99.06%
Argentina--0.65%
Retail--Food Chains--0.65%
13,500 Disco SA ADR*................... $467,437
--------
Australia--0.95%
Entertainment--0.43%
215,000 Hoyts Cinemas Group.............. 310,934
--------
Oil--0.52%
287,986 Novus Petroleum.................. 372,739
--------
Total Australia Common Stocks................ 683,673
--------
Austria--0.94%
Steel--0.94%
12,052 Boehler Uddeholm Bearer.......... 683,117
--------
Canada--5.43%
Home Furniture--0.94%
20,573 Dorel Industries Inc.*........... 678,777
--------
Household Products--0.89%
27,571 Intertape Polymer Group Inc...... 647,806
--------
Telecommunications--3.60%
65,174 Bell Canada International Inc.*.. 1,405,315
56,000 CGI Groupe Inc.* ................ 1,195,314
---------
2,600,629
---------
Total Canada Common Stocks................... 3,927,212
---------
Chile--0.26%
Beverages--0.26%
6,000 Vina Concha Y Toro SA ADR*....... 187,500
---------
Denmark--2.20%
Computer Software & Services--1.02%
35,000 Olicom*(1)....................... 739,375
---------
Electronics--0.90%
19,964 Memory Card Technology........... 650,831
---------
Entertainment--0.28%
7,715 Martin Gruppen................... 204,850
---------
Total Denmark Common Stocks.................. 1,595,056
---------
Finland--9.24%
Computer Software & Services--2.70%
52,800 Tieto Corp....................... 1,952,807
---------
Finland--(concluded)
Electrical Equipment--1.17%
14,956 Konecranes International.........$ 843,550
---------
Food--1.11%
48,840 Raisio Group PLC................. 803,824
---------
Household Products--0.77%
13,678 Hackman.......................... 556,469
---------
Transportation--3.49%
41,548 Finnlines OY.....................2,520,109
---------
Total Finland Common Stocks..................6,676,759
---------
France--3.49%
Automobiles--2.13%
30,900 Montupet.........................1,538,396
---------
Electronics--0.69%
7,250 Le Carbone Lorraine.............. 499,497
---------
Oil Equipment & Services--0.67%
9,801 Coflexip S.A. Spoorit ADR*....... 485,149
---------
Total France Common Stocks...................2,523,042
---------
Germany--1.36%
Consumer Goods--0.42%
5,000 Vossloh AG*...................... 303,559
---------
Food--0.94%
7,917 Hornbach Holdings AG*............ 683,152
---------
Total Germany Common Stocks.................. 986,711
---------
Hong Kong--4.91%
Computer Systems--0.10%
274,560 Founder Hong Kong Ltd. (1)....... 75,297
---------
Electronics--3.00%
480,000 Vtech Holdings*..................2,168,162
---------
Food--0.38%
809,000 Four Seasons Mercantile
Holdings......................... 274,069
---------
Hardware & Tools--1.43%
240,000 Johnson Electric Holdings........1,031,425
---------
Total Hong Kong Common Stocks................3,548,953
---------
Hungary--0.78%
Food Processing--0.78%
9,346 Pick Szeged RT................... 566,870
---------
4
<PAGE>
GLOBAL SMALL CAP FUND INC.
Number of
Shares Value
- -------------- ----------------
COMMON STOCKS--(continued)
India--1.90%
Banks--0.67%
7,540 HDFC Ltd.........................$ 484,341
---------
Computer Software & Services--1.23%
58,700 Pentafour Software*.............. 887,053
---------
Total India Common Stocks....................1,371,394
---------
Ireland--4.72%
Airlines--0.81%
15,000 Ryanair Holdings ADR*............ 585,000
---------
Telecommunications--3.02%
53,313 Esat Telecom Group PLC*..........2,185,833
---------
Transportation--0.89%
42,044 Irish Continental Group PLC...... 647,228
---------
Total Ireland Common Stocks..................3,418,061
---------
Israel--4.28%
Computer Software & Services--3.63%
21,000 Formula Systems Ltd.*............ 727,305
328,565 Geo Interactive Media Group*..... 332,761
25,000 Memco Software Ltd.*............. 546,875
29,035 New Dimension Software Ltd.*..... 794,833
13,000 Tecnomatix Technologies Ltd.*.... 219,375
---------
2,621,149
---------
Electronics--0.65%
14,000 Orbotech Ltd.*................... 470,750
---------
Total Israel Common Stocks...................3,091,899
---------
Italy--4.01%
Banks--0.50%
15,417 Banco Popolare Di Bergamo........ 364,261
---------
Household Furniture & Appliances--1.03%
29,689 Industrie Natuzzi SPA ADR*....... 740,369
---------
Machinery (Diversified)--0.97%
200,000 Riva Finanziaria................. 700,276
---------
Miscellaneous--1.00%
111,555 STA Azionaria.................... 725,303
---------
Textiles--0.51%
120,000 Ittierre Holdings................ 368,926
---------
Total Italy Common Stocks....................2,899,135
---------
Japan--0.36%
Chemicals--0.36%
7,500 Fujimi Inc.......................$ 260,856
---------
Korea--2.16%
Electronic Components & Instrumentation--0.44%
5,600 Dae Duck Electronics Co.*........ 318,570
---------
Machinery (Diversified)--0.66%
53,000 Medison Co.*..................... 478,098
---------
Manufacturing--0.39%
9,000 Sindo Ricoh Co.*................. 279,033
---------
Textiles--0.67%
18,000 Younggone Corp.*................. 482,730
---------
Total Korea Common Stocks....................1,558,431
---------
Mexico--0.25%
Auto Parts--0.25%
45,000 San Luis Corporacion............. 180,707
---------
Netherlands--3.84%
Computer Software & Services--1.57%
48,000 DOCdata*.........................1,136,675
---------
Oil Equipment & Services--2.27%
31,574 IHC Caland N.V...................1,637,060
---------
Total Netherlands Common Stocks..............2,773,735
---------
Portugal--1.35%
Banks--1.35%
43,282 Espirito Santo Financial
Holdings SA (1)*................. 979,255
---------
Singapore--0.91%
Communication Equipment--0.91%
275,000 Datacraft Asia................... 657,250
---------
South Africa--0.38%
Retail--0.38%
386,450 Metro Cash & Carry............... 271,747
---------
5
<PAGE>
GLOBAL SMALL CAP FUND INC.
Number of
Shares Value
- --------------- ----------------
COMMON STOCKS--(continued)
Spain--2.26%
Banks--0.81%
19,578 Banco De Valencia*...............$ 587,521
---------
Food--0.76%
60,000 Telepizza*....................... 545,924
---------
Paper & Forest Products--0.69%
11,143 Miquel Y Costas Miguel........... 501,406
---------
Total Spain Common Stocks....................1,634,851
---------
Sweden--11.98%
Auto Parts--1.05%
43,800 Haldex AB........................ 760,312
---------
Capital Equipment--2.04%
34,055 Assa Abloy AB....................1,473,593
---------
Computer Systems--1.50%
120,000 Partnertech AB................... 649,065
35,000 Prosolvia AB*.................... 435,854
---------
1,084,919
Engineering & Construction--0.79%
37,528 Spectra Physics AB............... 571,188
Financial Services--1.27%
46,500 OM Gruppen AB.................... 918,314
---------
Hotels--2.45%
40,000 Scandic Hotels AB................1,773,607
---------
Machinery (Diversified)--1.21%
34,982 Custos AB........................ 875,661
---------
Telecommunications--1.67%
26,655 Netcom Systems AB................1,207,034
---------
Total Sweden Common Stocks...................8,664,628
---------
Switzerland--4.85%
Banks--1.09%
395 BK Sarasin & Cie................. 792,385
---------
Electrical Equipment--1.36%
9,250 Gretag Imaging Holdings*......... 986,750
---------
Food--1.61%
5,025 Barry Callebaut AG...............1,163,116
---------
Life Insurance--0.79%
484 Helvetia Patria Holdings......... 568,266
---------
Total Switzerland Common Stocks..............3,510,517
Thailand--0.33%
Food--0.33%
78,000 Pizza Public Co Ltd..............$ 238,971
---------
Turkey--0.48%
Beverages--0.48%
1,670,000 Efes Sinai Yatirim Holdings*..... 344,711
---------
United Kingdom--6.99%
Computer Software & Services--0.77%
35,014 Autonomy Corp.*.................. 137,867
44,500 JBA Holdings PLC................. 421,607
---------
559,474
---------
Employment--1.63%
70,000 Select Appointments Holdings.....1,175,467
---------
Engineering & Construction--2.61%
178,506 Jarvis...........................1,885,128
---------
Insurance--0.27%
19,009 United Assurance Group PLC*....... 197,486
---------
Leisure--1.71%
175,179 Airtours PLC.....................1,236,190
---------
Total United Kingdom Common Stocks...........5,053,745
---------
United States--17.80%
Computer Services--0.90%
20,000 Zebra Technologies Corp.......... 648,750
---------
Computer Software & Services--2.55%
5,000 Aris Corp.*...................... 135,000
50,000 Cognizant Technology Solutions*.. 800,000
5,000 Cotelligent Group Inc.*.......... 83,437
30,000 Medical Manager Corp*............ 828,750
---------
1,847,187
Consumer Goods--0.64%
20,000 Littelfuse Inc.*................. 465,000
---------
Electrical Equipment--2.45%
12,500 Harman International
Industries Inc................... 492,969
150,000 Lumen Technologies Inc.*.........1,275,000
---------
1,767,969
---------
Electronics--0.39%
17,500 DII Group Inc.*.................. 284,375
---------
6
<PAGE>
GLOBAL SMALL CAP FUND INC.
Number of
Shares Value
COMMON STOCKS--(concluded)
United States--(concluded)
Employment--0.54%
15,000 Interim Services Inc.*...........$ 390,000
---------
Engineering & Construction--0.57%
14,000 Jacobs Engineering Group Inc.*... 411,250
---------
Entertainment--0.27%
20,000 Adams Golf Inc.*................. 198,750
---------
Insurance--2.59%
34,000 CMAC Investment Corp.............1,876,375
---------
Machinery (Diversified)--1.38%
92,000 ITEQ Inc.*....................... 598,000
31,107 Sauer Inc........................ 396,614
---------
994,614
---------
Marketing & Advertising--0.44%
6,400 Catalina Marketing Corp.*........ 316,000
---------
Oil & Gas--0.34%
22,000 Swift Energy Co.*................ 247,500
---------
Oil Equipment & Services--0.30%
25,000 IRI International Corp.*......... 214,063
---------
Pharmaceutical--1.06%
17,000 Watson Pharmaceuticals Inc.*..... 767,125
---------
Retail--0.62%
23,000 Maxwell Shoe Inc.*............... 445,625
---------
Retail--Specialty--1.54%
20,000 Barnes & Noble Inc.*.............$ 760,000
35,000 Hines Horticulture Inc.*......... 350,000
---------
1,110,000
---------
Specialized Services--1.22%
30,000 International Telecomm Data
Systems Inc.*.................... 883,125
---------
Total United States Common Stocks...........12,867,708
----------
Total Common Stocks (cost--$52,953,093).....71,623,931
----------
Number of
Warrants
- -------------
WARRANTS--0.00%
Hong Kong--0.00%
Food--0.00%
206,800 Four Seasons Mercantile Holdings,
expiring on 09/30/98; exercise
price HKD 3.8 (cost--$11,948)... 2,936
---------
Total Investments
(cost--$52,965,041)--99.06%.................71,626,867
----------
Other assets in excess of
liabilities--0.94%........................... 676,265
---------
Net Assets--100.00%........................$72,303,132
-----------
- -------------------
ADR American Depositary Receipts
* Non-income producing security
(1) Security, or a portion thereof, was on loan at July 31, 1998.
See accompanying notes to financial statements
7
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at value (cost--$52,965,041)......................................................... $71,626,867
Investments of cash collateral received for securities loaned, at value (cost--$1,227,100)........ 1,227,100
Cash and cash denominated in foreign currencies (cost--$7,589).................................... 9,518
Receivable for investments sold................................................................... 817,230
Dividends and interest receivable................................................................. 120,162
Deferred organizational expenses and other assets................................................. 12,768
-----------
Total assets...................................................................................... 73,813,645
-----------
Liabilities:
Collateral for securities loaned.................................................................. 1,227,100
Payable for investments purchased................................................................. 73,910
Payable to affiliates............................................................................. 65,037
Accrued expenses and other liabilities............................................................ 144,466
-----------
Total liabilities................................................................................. 1,510,513
-----------
Net Assets:
Capital Stock--$0.001 par value; 100,000,000 shares authorized; 3,801,667 shares
issued and outstanding............................................................................ 51,089,515
Accumulated net investment loss.................................................................... (49,191)
Accumulated net realized gain from investment transactions......................................... 2,601,130
Net unrealized appreciation of investments and other assets and liabilities
denominated in foreign currencies.................................................................. 18,661,678
-----------
Net assets......................................................................................... $72,303,132
===========
Net asset value per share.......................................................................... $19.02
======
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended
July 31, 1998
-------------
<S> <C>
Investment income:
Dividends (net of foreign withholding taxes of $63,638)........................................... $ 638,161
Interest.......................................................................................... 83,236
---------
721,397
---------
Expenses:
Investment advisory and administration fees....................................................... 681,585
Custody and accounting............................................................................ 104,810
Legal and audit................................................................................... 61,540
Reports and notices to shareholders............................................................... 39,441
Amortization of organizational expenses........................................................... 23,955
Transfer agency fees and related expenses......................................................... 10,146
Directors' fees................................................................................... 11,900
Other expenses.................................................................................... 2,745
---------
936,122
---------
Net investment loss............................................................................... (214,725)
---------
Realized and unrealized gains (losses) from investment transactions:
Net realized gains (losses) from:.................................................................
Investment transactions......................................................................... 7,408,517
Foreign currency transactions................................................................... (58,102)
Net change in unrealized appreciation/depreciation of:
Investments..................................................................................... 430,924
Other assets and liabilities denominated in foreign currencies.................................. 7,487
---------
Net realized and unrealized gains from investment transactions.................................... 7,788,826
---------
Net increase in net assets resulting from operations.............................................. $7,574,101
---------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years
Ended July 31,
------------------------
1998 1997
------- ------
<S> <C> <C>
From operations:
Net investment loss................................................................ $ (214,725) $ (80,070)
Net realized gains (losses) from:
Investment transactions........................................................ 7,408,517 3,538,337
Foreign currency transactions.................................................. (58,102) (99,568)
Net change in unrealized appreciation/depreciation of:
Investments.................................................................... 430,924 13,303,647
Other assets and liabilities denominated in foreign currencies................. 7,487 (1,115)
------------ ------------
Net increase in net assets resulting from operations............................... 7,574,101 16,661,231
Net assets:
Beginning of year.................................................................. 64,729,031 48,067,800
------------ ------------
End of year........................................................................ $ 72,303,132 $ 64,729,031
============ ============
</TABLE>
See accompanying notes to financial statements
10
<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 Asset
Management Inc. ("Mitchell Hutchins"), the adviser and a wholly owned
subsidiary of PaineWebber Incorporated, 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 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.
11
<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.
12
<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 securities 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 $10,794 in
compensation from the Fund for the year ended July 31, 1998. At July 31, 1998,
the Fund owed PaineWebber $1,133 in security lending fees.
As of July 31, 1998, the Fund's custodian held cash and cash equivalents
having an aggregate value of $1,227,100 as collateral for portfolio securities
loaned having a market value of $1,131,549. The Fund invested the cash
collateral in the following:
Number of
Shares Value
- ------------ -----------
905,910 Liquid Assets Portfolio................ $ 905,910
314,833 TempFund Portfolio..................... 314,833
5,770 Prime Portfolio........................ 5,770
587 TempCash Portfolio..................... 587
-----------
$ 1,227,100
===========
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at July 31,
1998 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1998, the components of the net unrealized appreciation of
investments were as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross appreciation (investments having an excess of value over cost)............ $23,641,648
Gross depreciation (investments having an excess of cost over value)........... (4,979,822)
-----------
Net unrealized appreciation of investments...................................... $18,661,826
===========
</TABLE>
For the year ended July 31, 1998, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $44,361,493 and
$43,564,872, 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.
To reflect reclassification arising from permanent book/tax differences
there was a reduction to accumulated net investment loss of $267,893, an
increase to accumulated net realized gains from investment transactions of
$58,102 and a decrease to capital stock of $325,995.
CAPITAL STOCK
At July 31, 1998, Mitchell Hutchins owned 6,667 shares of the Fund.
14
<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
-----------------------------------
1998 1997 1996 1995 July 31, 1994
------ ------ ------ ------ ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $17.03 $12.64 $11.61 $13.28 $14.18
------ ------ ------ ------ ------
Net investment income (loss) (0.06) (0.02) (0.01) 0.08 (0.05)
Net realized and unrealized gains (losses) from investments
and foreign currency transactions 2.05 4.41 1.04 (0.95) (0.80)
------ ------ ------ ------ ------
Net increase (decrease) from investment operations 1.99 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 $19.02 $17.03 $12.64 $11.61 $13.28
====== ====== ====== ====== ======
Market value, end of period $15.69 $14.50 $10.38 $ 9.25 $12.13
====== ====== ====== ====== ======
Total investment return (1) 8.19% 39.69% 12.22% (17.64)% (14.46)%
====== ====== ====== ====== ======
Ratios/Supplemental Data:
Net assets, end of period (000's) $72,303 $64,729 $48,068 $44,137 $50,474
Expenses to average net assets 1.37% 1.53% 1.76% 1.69% 1.79%*
Net investment income (loss) to average net assets (0.31)% (0.14)% (0.10)% 0.62% (0.46)%*
Portfolio turnover 65% 50% 64% 187% 71%
Average commission rate paid (2) $0.0485 $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 a 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.
15
<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, 1998, 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 as of July 31, 1998, by correspondence with
the 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, 1998, 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/ Ernest & Young LLP
----------------------
New York, New York
September 14, 1998
16
<PAGE>
GLOBAL SMALL CAP FUND INC.
GENERAL INFORMATION (unaudited)
THE FUND
Global Small Cap Fund Inc. (the "Fund") is a diversified, closed-end
management investment company whose shares trade on the American Stock
Exchange ("AMEX"). The Fund's investment objective is long-term capital
appreciation. The Fund's investment adviser and administrator is Mitchell
Hutchins Asset Management Inc., a wholly owned asset management subsidiary of
PaineWebber Incorporated, which has over $51.6 billion in assets under
management at August 31, 1998. 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, managed over $69.9
billion in assets as of August 31, 1998.
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.
YEAR 2000 RISKS
Like other funds and financial and business organizations around the world,
the Fund could be adversely affected if the computer systems used by its
investment adviser, other service providers and entities with computer systems
that are linked to Fund records do not properly process and calculate
date-related information and data from and after January 1, 2000. Similarly,
the Fund could be adversely affected by investments in securities of issuers,
or by dependence on related trading systems, that encounter similar
date-related processing difficulties. This is commonly known as the "Year 2000
Issue."
Mitchell Hutchins is taking steps that it believes are reasonably designed
to address the Year 2000 Issue with respect to the computer systems that it
uses, and to obtain satisfactory assurances that each of the Fund's other
major service providers is taking comparable steps. However, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on
the Fund. The Fund is unable to predict what impact, if any, the Year 2000
Issue may have on the issuers of the securities in which it invests or on
related trading systems. An issuer's or trading systems ability to address the
Year 2000 Issue may be a function of the degree of technological
sophistication and the degree of due diligence being applied.
DISTRIBUTION POLICY
The Fund intends to pay dividends from its net investment income and net
capital gain, if any, at least annually. 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's Board of Directors has established a Dividend Reinvestment Plan
(the "Plan") under which all common stockholders whose shares are registered
in their own names, or in the name of PaineWebber or its nominee, will have
all dividends and other distributions on their shares automatically reinvested
in additional shares of common stock, unless such common stockholders elect to
receive cash. Common stockholders who elect to hold their shares in the name
of another broker or nominee should contact such broker or nominee to
determine whether, or how, they may participate in the Plan. The ability of
such stockholders to participate in the Plan may change if their shares are
transferred into the name of another broker or nominee.
17
<PAGE>
GLOBAL SMALL CAP FUND INC.
GENERAL INFORMATION (concluded) (unaudited)
A stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who
have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's transfer
agent and should include the stockholder's name and address as they appear on
that share certificate or in the transfer agent's records. An election to
terminate participation in the Plan, until such election is changed, will be
deemed an election by a stockholder to take all subsequent distributions in
cash. An election will be effective only for distributions declared and having
a record date at least ten days after the date on which the election is
received.
Additional shares of common stock acquired under the Plan will be purchased
in the open market, on the AMEX or otherwise, at prices that may be higher or
lower than the net asset value per share of the common stock at the time of
the purchase. The number of shares of common stock purchased with each
dividend will be equal to the result obtained by dividing the amount of the
dividend payable to a particular stockholder by the average price per share
(including applicable brokerage commissions) that the transfer agent was able
to obtain in the open market. The Fund will not issue any new shares of common
stock in connection with the Plan. There is no charge to participants for
reinvesting dividends or other distributions. The transfer agent's fees for
handling the reinvestment of distributions will be paid by the Fund. However,
each participant pays a pro rata share of brokerage commissions incurred with
respect to the transfer agent's open market purchases of common stock in
connection with the reinvestment of distributions. The automatic reinvestment
of dividends and other distributions in shares of common stock does not
relieve participants of any income tax that may be payable on such
distributions. Dividends from the Fund's investment company taxable income
(whether received in cash or reinvested in additional Fund shares) are taxable
to its stockholders as ordinary income to the extent of the Fund's earnings
and profits. Distributions of the Fund's net capital gain (whether received in
cash or reinvested in additional Fund shares), when designated as such, are
taxable to its stockholders as long-term capital gain, regardless of how long
they have held their Fund shares. A participant in the Plan will be treated as
having received a distribution in the amount of the cash used to purchase
shares of common stock on his behalf, including a pro rata portion of the
brokerage commissions incurred by the transfer agent.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent
to Plan participants at least 30 days before the record date for such
distribution. The Plan also may be amended or terminated by the transfer agent
by at least 30 days' written notice to all Plan participants. Additional
information regarding the Plan may be obtained from, and all correspondence
concerning the Plan should be directed to, the transfer agent at PNC Bank,
National Association, c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware
19899.
18
<PAGE>
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
PRINCIPAL 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.
PaineWebber
(Copyright) PaineWebber Incorporated
Member SIPC
JULY 31, 1998
