<PAGE>
GLOBAL SMALL CAP FUND INC. ANNUAL REPORT
September 15 1999
Dear Shareholder,
We are pleased to present you with the annual report for Global Small Cap Fund
Inc. (the "Fund") for the fiscal year ended July 31, 1999.
MARKET REVIEW
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Small capitalization equity markets around the world, with the exception of most
of Europe, performed positively over the fiscal year ended July 31, 1999.
Performance leaders, as measured by the Salomon Smith Barney Extended Market
Index (EMI), were Singapore, up 126%; Hong Kong, up 58%; New Zealand, up 51%;
and Japan, up 39%.
Nearly all of the European small markets performed poorly, many due to weakening
currencies and financial conditions. Most significantly affected were Portugal,
down 26%; Finland, down 20%; Belgium, down 20%; Austria, down 19%; and Ireland,
down 15%. The European markets were marginally negative in local currency terms.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS FOR PERIODS ENDED 7/31/99
Since
Inception
1 Yr 3 Yrs 5 Yrs 10/15/93
- --------------------------------------------------------------------------------
Net Asset Value Return/1 -4.78% 12.73% 7.73% 5.43%
Market Price Return/2 2.70% 15.69% 7.41% 3.52%
Salomon Smith Barney
Extended Market Index 8.37% 10.49% 9.86% 9.20%
- --------------------------------------------------------------------------------
1/ Assumes, for illustration only, that any dividends were reinvested at the net
asset value on the payable dates.
2/ Assumes any dividends were reinvested under the Dividend Reinvestment Plan.
PORTFOLIO HIGHLIGHTS
For the fiscal year, country allocation generally had a negative impact on
performance. Stock selection within countries lifted Fund performance, but not
enough to completely offset the losses from country allocation.
Strong performance across Asia and good stock selection within the region
significantly helped performance. Datacraft Asia (3.1%),* a Singapore-based
communication systems company, was one of the Fund's best performers during the
past year (+290%). Datacraft benefited from economic stability in Asia and
increased building of communication systems by multinationals within the region.
- --------------------------------------------------------------------------------
* Weightings represent percentages of net assets as of July 31, 1999, except
where noted otherwise. The Fund's portfolio is actively managed and its
composition will vary over time.
- --------------------------------------------------------------------------------
GLOBAL SMALL CAP FUND INC.
PROFILE: as of July 31,
1999
Investment Objective:
Long term capital
appreciation
Portfolio
Manager/Subadviser:
Ralph Layman,
GE Investment
Management Inc.
Commencement:
October 15, 1993
AMEX Symbol: GSG
Dividend Payments:
Annually, if any
Total Net Assets: $66.1
million
Per Share Net Asset
Value: $17.38
Per Share Market Price:
$15.25
- --------------------------------------------------------------------------------
1
<PAGE>
ANNUAL REPORT
Top 10 Countries* 7/31/99 1/31/99
- --------------------------------------------------------------------------------
United States 23.3% 21.4%
United Kingdom 7.9 5.5
Israel 7.5 6.1
Sweden 6.7 6.7
Netherlands 5.1 3.1
Italy 4.8 4.7
Ireland 4.4 5.9
Finland 4.1 9.0
Switzerland 4.1 5.4
Singapore 4.0 1.8
- --------------------------------------------------------------------------------
Total 71.9% 69.6%
The Fund's underweighting in Japan (1.0% vs. 9.0% for the Salomon Smith Barney
Extended Market Index) hurt performance since the Japanese market was one of the
best performing markets over the past year (+39%). A large part of this increase
(+26%) was due to the strength of the yen against the U.S. dollar. Foreign
buying supported the market as foreign investors looked for investment
opportunities outside the United States and Europe. An improving macroeconomic
environment and the prospect of additional restructuring encouraged these
investors. Positive stock performance partially offset the Fund's underweighting
in Japan.
Top 10 Holdings* 7/31/99 1/31/99
- --------------------------------------------------------------------------------
Datacraft Asia 3.1% 1.8%
DII Group Inc. 3.0 2.5
Perlos Corp. 2.7 --
Radian Group Inc. 2.7 --
Esat Telecom Group PLC 2.6 4.2
Cognizant Technology Solutions 2.0 3.2
Indra Sistemas S.A. 2.0 --
Scandic Hotels AB 2.0 2.0
Select Appointment Holdings 1.9 1.8
Tecnomatix Technologies Ltd. 1.8 1.5
- --------------------------------------------------------------------------------
* Weightings represent percentages of net assets as of July 31, 1999, except
where noted otherwise. The Fund's portfolio is actively managed and its
composition will vary over time.
2
<PAGE>
GLOBAL SMALL CAP FUND INC.
The Fund's significant overweighting in Europe (40.0% vs. 17.0% for the index)
hurt the Fund's performance over the fiscal year, after contributing strongly to
performance the prior year. Many of the companies in the portfolio suffered from
low liquidity and a lack of interest in the small capitalization sector of the
European market.
Top Five Sectors* 7/31/99 1/31/99
- --------------------------------------------------------------------------------
Services 44.3% Capital Equipment 29.4%
Capital Equipment 31.9 Services 27.0
Consumer Goods 13.1 Consumer Goods 19.8
Finance 7.7 Finance 13.4
Energy 1.1 Energy 3.1
- --------------------------------------------------------------------------------
Total 98.1% Total 92.7%
The Fund's underweighting in the United States (23.3% vs. 57.7% for the index)
caused it to lag the index as the U.S. small cap sector started to improve.
Again, positive stock selection within the U.S. enhanced performance but did not
completely offset the negative impact of the underweighting. One U.S. company
example is DII Group (3.0%), an electronic design and manufacturing company that
makes semiconductors and printed circuit boards.
In addition, Fund performance benefited from significant gains among stocks
within the portfolio including:
Company* Country Gain % Fund %
- --------------------------------------------------------------------------------
Dae Duck Electronics S. Korea 201.2 1.7
Medical Manager U.S. 22.7 1.8
Cognizant Technology Solutions U.S. 68.0 2.0
OUTLOOK
- --------------------------------------------------------------------------------
Valuation differences between the large and small cap stocks, which were at
historic extremes in the U.S., have begun to narrow slightly. We believe this
trend can continue in other parts of the world as well.
It appears that Asian economies have stabilized and are improving. However, we
remain cautious about Japan's recovery--whether it proves sustainable or not, it
will impact growth in Asia and the rest of the world.
* Weightings represent percentages of net assets as of July 31, 1999, except
where noted otherwise. The Fund's portfolio is actively managed and its
composition will vary over time.
3
<PAGE>
GLOBAL SMALL CAP FUND INC. ANNUAL REPORT
Worldwide growth prospects have improved, as Federal Reserve Chairman Alan
Greenspan noted in his comments on the second quarter. Stock markets should
perform well in the current environment of low interest rates, benign inflation,
stability in Asia and global growth. We continue to seek companies with
potential to benefit from and successfully compete within this environment.
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 quarterly information on Global
Small Cap Fund Inc. or a fund in the PaineWebber Family of Funds,/3 please
contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander /s/ Brian M. Storms
- --------------------------------------- ---------------------------------------
MARGO ALEXANDER BRIAN M. STORMS
Chairman and Chief Executive Officer President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc. Mitchell Hutchins Asset Management Inc.
/s/ Ralph Layman
- ---------------------------------------
RALPH LAYMAN
Portfolio Manager
Global Small Cap Fund Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the fiscal year ended July 31, 1999, and reflects the views
of the sub-adviser at the time of its writing. Of course, these views may
change in response to changing circumstances. We encourage you to consult
your financial advisor regarding your personal investment program.
3/ 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.
4
<PAGE>
GLOBAL SMALL CAP FUND INC.
PORTFOLIO OF INVESTMENTS JULY 31, 1999
Number of
Shares Value
------ -----
COMMON STOCKS--98.59%
Australia--3.71%
Computer Software & Services--1.06%
59,245 Computershare Ltd. .......................... $ 701,792
-----------
Engineering--1.62%
242,348 Pacific BBA Ltd. ............................ 1,067,637
-----------
Oil--0.51%
287,986 Novus Petroleum ............................. 332,679
-----------
Retail--Specialty--0.52%
118,215 Spotless Group .............................. 345,645
-----------
Total Australia Common Stocks ............................ 2,447,753
-----------
Belgium--0.56%
Telecommunications--0.56%
3,465 Telinfo S.A ................................. 366,979
-----------
Canada--2.90%
Household Products--1.16%
27,571 Intertape Polymer Group Inc. ................ 768,759
-----------
Pharmaceutical--1.55%
18,186 Biovail Corporation International (1)* ...... 1,021,826
-----------
Specialized Services--0.19%
7,075 Trojan Technologies Inc.* ................... 126,583
-----------
Total Canada Common Stocks ............................... 1,917,168
-----------
Chile--0.33%
Beverages--0.33%
6,000 Vina Concha Y Toro SA ADR* .................. 220,125
-----------
Finland--4.13%
Electronics--2.68%
124,906 Perlos Corp. ................................ 1,773,197
-----------
Gaming--0.93%
81,733 Rapala Normark Corp. ........................ 612,066
-----------
Household Products--0.02%
552 Hackman ..................................... 10,925
-----------
Telecommunications--0.50%
37,482 Teleste Corp. ............................... 330,810
-----------
Total Finland Common Stocks .............................. 2,726,998
-----------
France--2.47%
Automobiles--1.53%
30,900 Montupet .................................... 1,011,539
-----------
Number of
Shares Value
------ -----
France--(concluded)
Computer Software & Services--0.94%
5,541 Transiciel S.A .............................. $ 617,673
-----------
Total France Common Stocks ............................... 1,629,212
-----------
Germany--1.11%
Computer Software & Services--0.45%
20,267 Fortunecity.Com ............................. 301,375
-----------
Media--0.46%
8,520 Id Media .................................... 301,697
-----------
Telecommunications--0.20%
1,897 Adva AG ..................................... 132,926
-----------
Total Germany Common Stocks .............................. 735,998
-----------
Hong Kong--2.86%
Consumer Goods--0.84%
198,000 Li & Fung Ltd. .............................. 553,571
-----------
Food--0.46%
809,000 Four Seasons Mercantile Holdings ............ 302,270
-----------
Insurance--0.78%
688,000 Pacific Century ............................. 518,553
-----------
Retail--Apparel--0.78%
602,000 Giordano International Ltd. ................. 515,783
-----------
Total Hong Kong Common Stocks ............................ 1,890,177
----------
India--2.74%
Computer Software & Services--2.74%
26,200 Pentafour Software*+ ........................ 751,248
27,400 Satyam Computer ............................. 1,061,869
-----------
Total India Common Stocks ................................ 1,813,117
-----------
Ireland--4.36%
Airlines--1.18%
15,000 Ryanair Holdings ADR* ....................... 780,000
-----------
Telecommunications--2.63%
42,958 Esat Telecom Group PLC* ..................... 1,739,799
-----------
Transportation--0.55%
29,551 Irish Continental Group PLC ................. 363,557
-----------
Total Ireland Common Stocks .............................. 2,883,356
-----------
5
<PAGE>
GLOBAL SMALL CAP FUND INC.
Number of
Shares Value
------ -----
COMMON STOCKS--(continued)
Israel--7.53%
Computer Software & Services--4.50%
11,259 Check Point Software Tech Ltd. .............. $ 770,538
39,024 Fundtech Ltd. ............................... 985,356
63,891 Tecnomatix Technologies Ltd.* ............... 1,213,929
-----------
2,969,823
-----------
Electronics--1.72%
21,372 Orbotech Ltd.* .............................. 1,138,059
-----------
Telecommunications--1.31%
78,768 TTI Team Telecome ........................... 866,448
-----------
Total Israel Common Stocks ............................... 4,974,330
-----------
Italy--4.83%
Machinery (Diversified)--0.84%
199,425 Riva Finanziaria ............................ 554,697
-----------
Miscellaneous--1.13%
111,555 STA Azionaria ............................... 745,885
-----------
Motor Vehicle--0.83%
175,811 Ducati Motor Holdings ....................... 550,142
-----------
Publishing--2.03%
35,915 Class Editore ............................... 297,769
471,463 Poligrafici Editor S.P.A .................... 1,041,022
-----------
1,338,791
-----------
Total Italy Common Stocks ................................ 3,189,515
-----------
Japan--1.07%
Chemicals--0.60%
7,500 Fujimi Inc. ................................. 399,058
-----------
Computer Software & Services--0.47%
27,000 Catena Corp. (1) ............................ 308,518
-----------
Total Japan Common Stocks ................................ 707,576
-----------
Korea--3.60%
Electronic Components & Instrumentation--1.68%
85,827 Dae Duck Electronics Co.* ................... 1,112,506
-----------
Machinery (Diversified)--1.20%
57,929 Medison Co.* ................................ 789,394
-----------
Textiles--0.72%
180,000 Youngone Corp. .............................. 478,604
-----------
Total Korea Common Stocks ................................ 2,380,504
-----------
Number of
Shares Value
------ -----
Mexico--0.68%
Broadcasting--0.68%
100,000 TV Azteca SA de C V ......................... $ 450,000
-----------
Netherlands--5.11%
Computer Software & Services--2.12%
34,705 Devote N.V. ................................. 519,784
22,768 ICT Automatisering N.V. ..................... 557,780
19,290 Meta4 N.V. .................................. 323,992
-----------
1,401,556
-----------
Consumer Goods--0.91%
23,302 Airspray N.V. ............................... 600,776
-----------
Human Resources--1.53%
42,223 Unique International N.V. ................... 1,009,553
-----------
Multi-industry--0.55%
21,130 Aalberts Industrie .......................... 365,069
-----------
Total Netherlands Common Stocks .......................... 3,376,954
-----------
Norway--1.51%
Telecommunications--1.51%
30,477 Netcom Asa* ................................. 1,000,017
-----------
Singapore--4.04%
Communication Equipment--3.12%
433,000 Datacraft Asia .............................. 2,061,080
-----------
Electronic Equipment--0.92%
267,000 IDT Holdings Sing ........................... 606,090
Total Singapore Common Stocks ............................ 2,667,170
-----------
Spain--2.79%
Banks--0.77%
58,734 Banco De Valencia* .......................... 507,067
-----------
Telecommunications--2.02%
133,000 Indra Sistemas SA ........................... 1,334,619
Total Spain Common Stocks ................................ 1,841,686
-----------
Sweden--6.68%
Auto Parts--0.81%
43,800 Haldex AB ................................... 538,818
-----------
Computer Software & Services--3.88%
13,296 Framtidsfabriken AB ......................... 390,287
23,178 IBS AB ...................................... 450,280
104,713 Mandator AB ................................. 695,094
132,584 Sigma Ab .................................... 1,025,442
-----------
2,561,103
-----------
6
<PAGE>
GLOBAL SMALL CAP FUND INC.
Number of
Shares Value
------ -----
COMMON STOCKS--(continued)
Sweden--(concluded)
Hotels--1.99%
120,000 Scandic Hotels AB ........................... $ 1,315,437
-----------
Total Sweden Common Stocks ............................... 4,415,358
-----------
Switzerland--4.11%
Banks--1.21%
451 BK Sarasin & Cie ............................ 800,985
-----------
Electrical Equipment--1.52%
9,652 Gretag Imaging Holdings* .................... 1,002,654
-----------
Life Insurance--0.63%
484 Helvetia Patria Holdings .................... 418,444
-----------
Manufacturing--0.75%
17,000 Mettler Toledo International Inc.*........... 491,937
-----------
Total Switzerland Common Stocks........................... 2,714,020
-----------
Thailand--0.35%
Food--0.35%
78,000 Pizza Public Co. Ltd. ....................... 230,614
-----------
United Kingdom--7.85%
Computer Software & Services--2.59%
116,611 Autonomy Corp.* ............................. 845,430
398,557 Synstar ..................................... 864,270
-----------
1,709,700
-----------
Employment--1.88%
97,311 Select Appointments Holdings ................ 1,241,194
-----------
Manufacturing--0.46%
68,633 Weir Group .................................. 302,555
-----------
Publishing--0.66%
72,637 Dorling Kindersley .......................... 439,106
-----------
Retail--0.86%
354,265 Electron Boutique ........................... 568,416
-----------
Telecommunications--1.40%
185,810 Kingston Commerce Hull ...................... 924,507
-----------
Total United Kingdom Common Stocks ....................... 5,185,478
-----------
Number of
Shares Value
------ -----
United States--23.27%
Computer Software & Services--5.50%
35,000 Accrue Software Inc. ........................ $ 424,375
50,000 Cognizant Technology Solutions* ............. 1,343,750
5,400 Documentum Inc. (1)* ........................ 81,337
10,000 High Speed Access Corp. ..................... 346,875
18,750 Medical Manager Corp.* ...................... 1,190,625
33,919 Softworks Inc.* ............................. 246,973
-----------
3,633,935
-----------
Computer Services--1.42%
20,000 Zebra Technologies Corp. .................... 938,750
-----------
Drugs & Medicine--1.19%
28,000 Amerisource Health Corp.* ................... 784,000
-----------
Electronic Components & Instruments--0.77%
10,000 Globespan Semiconductor Inc. ................ 507,500
-----------
Electronics--2.99%
53,392 DII Group Inc.* ............................. 1,978,841
-----------
Employment--0.48%
15,000 Interim Services Inc.* ...................... 316,875
-----------
Engineering & Construction--0.73%
14,000 Jacobs Engineering Group Inc.* .............. 481,250
-----------
Financial--5.83%
54,200 Medallion Financial Corp. ................... 1,063,675
20,100 Profit Recovery Group International Inc.* ... 1,035,150
34,000 Radian Group Inc. ........................... 1,753,125
-----------
3,851,950
-----------
Marketing & Advertising--1.53%
10,578 Catalina Marketing Corp.* ................... 1,012,844
----------
Medical Products & Supplies--0.67%
20,143 Henry Schein Inc. ........................... 443,146
----------
7
<PAGE>
GLOBAL SMALL CAP INC.
Number of
Shares Value
------ -----
COMMON STOCKS--(continued)
United States--(concluded)
Retail-Specialty--1.13%
20,000 Barnes & Noble Inc.* ........................ $ 451,250
35,000 Hines Horticulture Inc.* .................... 293,125
-----------
744,375
-----------
Number of
Shares Value
------ -----
Specialized Services--1.03%
30,000 International Telecomm Data Systems Inc.* ... $ 281,250
13,322 Sunrise Assisted Living Inc. (1)* ........... 402,158
-----------
683,408
-----------
Total United States Common Stocks......................... 15,376,874
-----------
Total Investments (cost--$52,039,792)--98.59%............. $65,140,979
Other assets in excess of liabilities--1.41% ............. 934,413
-----------
Net Assets--100.00%....................................... $66,075,392
===========
- ----------
* Non-income producing security.
+ Illiquid security representing 1.14% of net assets.
(1) Security, or a portion thereof, was on loan at July 31, 1999.
ADR American Depository Receipt
See accompanying notes to financial statements
8
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1999
<TABLE>
<S> <C>
Assets
Investments, at value (cost--$52,039,792) .......................................................... $65,140,979
Investments of cash collateral for securities loaned, at value (cost--$1,720,750) .................. 1,720,750
Cash and cash denominated in foreign currencies (cost--$261,379) ................................... 271,543
Receivable for investments sold .................................................................... 2,086,242
Dividends and interest receivable .................................................................. 160,707
Other assets ....................................................................................... 1,080
-----------
Total assets ....................................................................................... 69,381,301
Liabilities
Collateral for securities loaned ................................................................... 1,720,750
Payable for investments purchased .................................................................. 1,321,695
Payable to affiliates .............................................................................. 55,981
Accrued expenses and other liabilities ............................................................. 207,483
-----------
Total liabilities .................................................................................. 3,305,909
Net Assets
Capital Stock--$0.001 par value; 100,000,000 shares authorized; 3,801,667 shares
issued and outstanding ........................................................................... 50,737,990
Accumulated net investment loss .................................................................... (90,525)
Accumulated net realized gain from investment transactions ......................................... 2,428,060
Net unrealized appreciation of investments and other assets and liabilities denominated in
foreign currencies ............................................................................... 12,999,867
-----------
Net assets ......................................................................................... $66,075,392
===========
Net asset value per share $17.38
======
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended
July 31, 1999
-------------
<S> <C>
Investment income:
Dividends (net of foreign withholding taxes of $64,034) ........................... $ 505,064
Interest .......................................................................... 76,169
-----------
581,233
-----------
Expenses:
Investment advisory and administration ............................................ 606,639
Custody and accounting ............................................................ 106,501
Legal and audit ................................................................... 60,006
Reports and notices to shareholders ............................................... 41,625
Transfer agency fees and expenses ................................................. 11,300
Directors' fees and expenses ...................................................... 10,500
Amortization of organizational expenses ........................................... 7,955
Other expenses .................................................................... 21,788
866,314
Less: Fee waiver from adviser ..................................................... (852)
-----------
Net expenses ...................................................................... 865,462
-----------
Net investment loss ............................................................... (284,229)
Realized and unrealized gains (losses) from investment transactions:
Net realized gains (losses) from:
Investment transactions ......................................................... 2,428,411
Foreign currency transactions ................................................... (108,630)
Net change in unrealized appreciation/depreciation of:
Investments ..................................................................... (5,560,639)
Other assets and liabilities denominated in foreign currencies .................. (101,172)
Net realized and unrealized losses from investment transactions ................... (3,342,030)
-----------
Net decrease in net assets resulting from operations .............................. $(3,626,259)
===========
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
GLOBAL SMALL CAP FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years
Ended July 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
From operations:
Net investment loss ....................................................... $ (284,229) $ (214,725)
Net realized gains from investment and foreign currency transactions ...... 2,319,781 7,350,415
Net change in unrealized appreciation/depreciation of investments,
other assets and liabilities denominated in foreign currencies .......... (5,661,811) 438,411
----------- -----------
Net increase (decrease) in net assets resulting from operations ........... (3,626,259) 7,574,101
Distributions to shareholders from:
Net realized gains from investment transactions ........................... (2,601,481) --
----------- -----------
Net increase (decrease) in net assets ..................................... (6,227,740) 7,574,101
Net assets:
Beginning of year ......................................................... 72,303,132 64,729,031
----------- -----------
End of year ............................................................... $66,075,392 $72,303,132
=========== ===========
</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
fully amortized on a straight-line basis over the period of 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--The Fund calculates its net asset value based on
the current market value for its portfolio securities. The Fund normally obtains
market values for its securities from independent pricing sources. Independent
pricing sources may use reported last sale prices, current market quotations or
valuations from computerized "matrix" systems that derive values based on
comparable securities. Securities traded in the over-the-counter ("OTC") market
and listed on The Nasdaq Stock Market, Inc. ("Nasdaq") normally are valued at
the last sale price on Nasdaq prior to valuation. Other OTC securities are
valued at the last bid price available prior to valuation. Securities which are
listed on U.S. and foreign stock exchanges normally are valued at the last sale
price on the day the securities are valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange designated as the
primary market by Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins"),
the adviser and a wholly-owned subsidiary of PaineWebber Incorporated, or by GE
Investment Management Incorporated ("GEIM"), the subadviser to the Fund. If a
market value is not available from an independent pricing source for a
particular security, that security is valued at fair value as determined in good
faith by or under the direction of the Fund's board of directors (the "board").
The amortized cost method of valuation, which approximates market value,
generally is used to value short-term debt instruments with sixty days or less
remaining to maturity, unless the board determines that this does not represent
fair value. All investments quoted in foreign currencies will be 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 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 will not be reflected
in the computation of the Fund's net asset value. If events materially affecting
the value of such securities or currency exchange rates occur during such
periods, the securities will be valued at their fair value as determined in good
faith by or under the direction of the Fund's board.
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. At July 31, 1999, the
Fund owed Mitchell Hutchins $55,481 in investment advisory and administration
fees. Mitchell Hutchins waived a portion of its investment advisory and
administration fees in connection with the Fund's investment of cash collateral
from security lending in the Mitchell Hutchins Private Money Market Fund LLC.
For the year ended July 31, 1999, Mitchell Hutchins waived $852.
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 331U3% of its total assets to qualified
institutions. The loans are secured at all times by cash, cash equivalents 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, cash equivalents or U.S. government securities held as
collateral, net of fee rebates paid to the borrowers plus reasonable
administrative and custody fees. For the year ended July 31, 1999, the Fund
earned $30,166 for lending its securities and PaineWebber earned $10,165 as the
Fund's lending agent. At July 31, 1999, the Fund owed PaineWebber $500 for
security lending fees.
As of July 31, 1999, the Fund's custodian held cash and cash equivalents
having an aggregate value of $1,720,750 as collateral for portfolio securities
loaned having a market value of $1,663,352. The Fund invested the cash
collateral in the following:
<TABLE>
<CAPTION>
Number of
Shares Value
----------- -----
<S> <C>
160,175 Janus Money Market Fund............................................. $ 160,175
144,661 Liquid Assets Money Portfolio....................................... 144,661
1,415,914 Mitchell Hutchins Private Money Market Fund LLC..................... 1,415,914
----------
Total investments of cash collateral for securities loaned (cost - $1,720,750).. $1,720,750
==========
</TABLE>
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at July 31,
1999 was substantially the same as the cost of securities for financial
statement purposes.
At July 31, 1999, 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).............. $15,851,885
Gross depreciation (investments having an excess of cost over value)............. (2,750,698)
-----------
Net unrealized appreciation of investments........................................ $13,101,187
===========
</TABLE>
For the year ended July 31, 1999, aggregate purchases and sales of portfolio
securities, excluding short-term securities, were $39,371,500 and $42,725,160,
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 reclassifications arising from permanent "book/tax" differences
for the year ended July 31, 1999, the Fund's net investment loss was reduced by
$242,895, accumulated net realized gains were increased by $108,630 and capital
stock was reduced by $351,525.
In accordance with U.S. Treasury regulations, the Fund has elected to defer
$90,525 of foreign currency losses arising after October 31, 1998. Such losses
are treated for tax purposes as arising on August 1, 1999.
CAPITAL STOCK
There are 100,000,000 shares of $ 0.001 par value common stock authorized. Of
the 3,801,667 shares outstanding at July 31, 1999, Mitchell Hutchins owned 7,026
shares.
15
<PAGE>
GLOBAL SMALL CAP FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each year is
presented below:
<TABLE>
<CAPTION>
For the Years Ended July 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year....................... $ 19.02 $ 17.03 $ 12.64 $ 11.61 $ 13.28
--------- -------- --------- ------- --------
Net investment income (loss)............................. (0.08) (0.06) (0.02) (0.01) 0.08
Net realized and unrealized gains (losses) from
investments and foreign currencies.................... (0.88) 2.05 4.41 1.04 (0.95)
--------- --------- --------- ------- --------
Total increase (decrease) from investment operations..... (0.96) 1.99 4.39 1.03 (0.87)
Distributions from net realized gains from investments... (0.68) -- -- -- (0.80)
--------- -------- --------- ------- --------
Net asset value, end of year............................. $ 17.38 $ 19.02 $ 17.03 $ 12.64 $ 11.61
========= ======== ========= ======= ========
Market value, end of year................................ $ 15.25 $ 15.69 $ 14.50 $ 10.38 $ 9.25
========= ======== ========= ======= ========
Total investment return (1).............................. 2.70% 8.19% 39.69% 12.22% (17.64)%
========= ======== ========= ======= ========
Ratios/Supplemental Data:
Net assets, end of year (000's).......................... $ 66,075 $ 72,303 $ 64,729 $48,068 $ 44,137
Expenses to average net assets,
net of waivers from adviser (2)....................... 1.43% 1.37% 1.53% 1.76% 1.69%
Net investment income (loss) to average net assets,
net of waivers from adviser (2)....................... (0.47)% (0.31)% (0.14)% (0.10)% 0.62%
Portfolio turnover rate.................................. 66% 65% 50% 64% 187%
</TABLE>
---------------
(1) Total investment return is calculated assuming a purchase of common
stock at the current market price on the first day of each year and a sale
at the current market price on the last day of each year 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.
(2) During the year ended July 31, 1999, Mitchell Hutchins waived a portion
of its advisory and administration fees. The ratios excluding the waiver
would be the same since the fee waiver represents less than 0.005%.
16
<PAGE>
GLOBAL SMALL CAP FUND INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Global Small Cap Fund Inc.:
We have audited the accompanying statement of assets and liabilities of Global
Small Cap Fund Inc. (the "Fund"), including the portfolio of investments, as of
July 31, 1999, 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, 1999, 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, 1999, the results of its operations for the
year then ended, 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 20, 1999
17
<PAGE>
GLOBAL SMALL CAP FUND INC.
TAX INFORMATION (unaudited)
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of each Fund's fiscal year end (July 31,
1999) as to federal tax status of distributions received by shareholders during
such fiscal year. Accordingly, we are advising you that the following
distributions in the amount of $0.6843 per share paid during the fiscal year by
the Funds were derived from long-term capital gains. The distributions paid did
not qualify for the dividend received deduction available to corporate
shareholders.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not
be reported as taxable income. Some retirement trusts (e.g., corporate, Keogh
and 403(b)(7) plans) may need this information for their annual information
reporting.
The Fund intends to make an election under Internal Revenue Code Section 853
to pass through foreign taxes paid to its shareholders. The total amount of
foreign taxes that may be passed through to the shareholders for the fiscal year
ended July 31, 1999 is $64,034. The foreign source income for information
reporting purposes is $64,034.
Shareholders should not use the above information to prepare their tax
returns. Since each Fund's fiscal year is not the calendar year, another
notification will be sent with respect to calendar year 1999. Such
notifications, which will reflect the amount to be used by calendar year
taxpayers on their federal income tax returns, will be made in conjunction with
Form 1099 DIV and will be mailed in January 2000. Shareholders are advised to
consult their own tax advisers with respect to the tax consequences of their
investment in each of the Funds.
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., an asset management subsidiary of PaineWebber Incorporated,
which has over $59 billion in assets under management at August 31, 1999. 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 registered investment adviser and a wholly owned
subsidiary of General Electric Company, manages over $82 billion in assets as of
August 31, 1999.
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 in numerous other newspapers.
18
<PAGE>
GLOBAL SMALL CAP FUND INC.
GENERAL INFORMATION (unaudited) (continued)
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, sub-adviser and 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."
The adviser/administrator 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.
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
19
<PAGE>
GLOBAL SMALL CAP FUND INC.
GENERAL INFORMATION (unaudited) (concluded)
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.
20
<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 Brian M. Storms
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>
PAINEWEBBER
(Copyright)1999 PaineWebber Incorporated
Member SIPC
GLOBAL SMALL
CAP FUND INC.
JULY 31, 1999
