Investment Company Act File No. 811-4981
Securities Act File No. 333-4358
As filed with the Securities and Exchange Commission on May 10, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No.
and/or
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 11
MORGAN GRENFELL SMALLCAP FUND, INC.
(Exact Name of Registrant as Specified in Charter)
885 Third Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
212-230-2600
MARK G. ARTHUS
Secretary
Morgan Grenfell SMALLCap Fund, Inc.
885 Third Avenue, New York, New York 10022
(Name and Address of Agent for Service)
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With Copies to:
ERNEST V. KLEIN, ESQ. THOMAS A HALE, ESQ.
Hale and Dorr Scadden, Arps, Slate, Meaghen & Flom
60 State Street 333 West Wacker Drive
Boston, Massachusetts 02109 Chicago, Illinois 60606
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Approximate date of proposed public offering:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis in reliance on rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- - ------------------------------------------------------------------------------
Amount Proposed Maximum Proposed Maximum Amount of
Title of Securities Being Offering Price Aggregate Registration
Being Registered Registered Per Share Offering Price Fee
- - ------------------------------------------------------------------------------
Common Stock,
par value 2,695,516 $11.19 $30,162,824.04 $10,400.97(1)
$.01 per share shares
- - ------------------------------------------------------------------------------
<PAGE>
(1) Estimated solely for the purposes of calculating the registration fee in
accordance with Rule 457(c) based on the average of the high and low prices
for the Company's Common Stock reported on the New York Stock Exchange
consolidated reporting system on May 8, 1996. A portion of the total
registration fee in the amount $1,000.43 was previously paid by the
Registrant at the time of the filing of its initial Registration Statement.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
MORGAN GRENFELL SMALLCAP FUND, INC.
FORM N-2
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Item Number, Form N-2 Caption in Prospectus
- - --------------------- ---------------------
Part A
1. Outside Front Cover...................... Outside Front Cover
2. Inside Front and Outside Back
Cover Page............................... Outside Front Cover Page
3. Fee Table and Synopsis................... Fund Expenses
4. Financial Highlights..................... Financial Highlights
5. Plan of Distribution..................... The Offer
6. Selling Shareholders..................... Not Applicable
7. Use of Proceeds.......................... The Offer; Use of Proceeds
8. General Description of the Registrant.... The Fund; Market and Net Asset
Value Information;
Investment Objectives and
Policies; Special Risk
Considerations
9. Management............................... Management
10. Capital Stock, Long-Term Debt and Other
Securities............................... Dividends and Distributions;
Dividend Reinvestment Plan;
Common Stock
11. Defaults and Arrears on Senior
Securities............................... Not Applicable
12. Legal Proceedings........................ Not Applicable
<PAGE>
Item Number, Form N-2 Caption in Prospectus
- - --------------------- ---------------------
13. Table of Contents of the Statement of
Additional Information................... Table of Contents of the
Statement of Additional
Information
Part B
14. Cover Page............................... Cover Page
15. Table of Contents........................ Table of Contents
16. General Information and History.......... The Fund (in Part A)
17. Investment Objectives and Policies....... Investment Objectives and
Policies; Investment
Restrictions
18. Management............................... Management
19. Control Persons and Principal Holders
of Securities............................ Management; Common Stock
(in Part A)
20. Investment Advisory and Other Services... Management of the Fund
(in Part A)
21. Brokerage Allocation and Other Practices. Portfolio Transactions
and Brokerage
22. Tax Status............................... Taxation
23. Financial Statements..................... Financial Statements
-2-
<PAGE>
SUBJECT TO COMPLETION DATED MAY 10, 1996
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY.
Morgan Grenfell SMALLCap Fund, Inc.
2,156,413 Shares of Common Stock
Issuable upon Exercise of
Rights to Subscribe for Such Shares
Morgan Grenfell SMALLCap Fund, Inc. (the "Fund") is issuing to its
shareholders of record as of the close of business on May 20, 1996 (the
"Record Date") non-transferable rights ("Rights") entitling the holders
thereof to subscribe for up to an aggregate of 2,156,413 shares of the
Fund's Common Stock (the "Shares"), at the rate of one Share of Common
Stock for every three Rights held (the "Offer"). Shareholders of record
will receive one Right for each whole share of Common Stock held on the
Record Date. Shareholders who fully exercise their Rights will be
entitled to subscribe for additional Shares of Common Stock pursuant to
the Over-Subscription Privilege described herein. The Fund may increase
the number of Shares of Common Stock subject to subscription by up to
25% of the Shares, or an additional 539,103 Shares of Common Stock, for
an aggregate total of 2,695,516 Shares. Fractional Shares will not be
issued upon the exercise of Rights. The Rights are non-transferable
and, therefore, may not be purchased or sold. The Rights will not be
admitted for trading on the New York Stock Exchange (the "NYSE") or any
other exchange. See "The Offer". THE SUBSCRIPTION PRICE PER SHARE (THE
"SUBSCRIPTION PRICE") WILL BE 95% OF THE LOWER OF (i) THE AVERAGE OF
THE LAST REPORTED SALE PRICES OF A SHARE OF THE FUND'S COMMON STOCK ON
THE NYSE ON THE DATE OF THE EXPIRATION OF THE OFFER (THE "PRICING
DATE") AND THE FOUR PRECEDING BUSINESS DAYS OR (ii) THE NET ASSET VALUE
PER SHARE AS OF THE CLOSE OF BUSINESS ON THE PRICING DATE.
The Fund first announced that the Fund was considering the Offer
after the close of trading on the NYSE on April 5, 1996. Shares of the
Fund's outstanding Common Stock trade on the NYSE under the symbol
"MGC". Shares issued upon the exercise of Rights and the
Over-Subscription Privilege will be listed for trading on the NYSE. The
net asset values per share of the Fund's Common Stock at the close of
business on April 5, 1996 (the last trading date on which the Fund
calculated its net asset value prior to the announcement) and on May
10, 1996 (the last trading date on which the Fund calculated its net
asset value prior to the date of this Prospectus) were $12.74 and
$_____, respectively, and the last reported sales price of a Share of
the Fund's Common Stock on the NYSE on those dates were $10.50 and
$_______, respectively.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE
14, 1996 UNLESS EXTENDED AS DESCRIBED HEREIN (THE "EXPIRATION DATE").
The Fund is a diversified, closed-end management investment
company whose primary investment objective is long-term capital
appreciation principally by investment in equity and equity-related
securities of U.S. companies. The Fund seeks current income as a
secondary investment objective. The Fund seeks to achieve its primary
investment objective by investing principally in common stocks of small
capitalization companies. For this purpose, small capitalization
companies are those ranked (at the time of investment) according to
market capitalization in the bottom 20% of all issuers listed or quoted
on a national securities exchange or market. Within this universe, the
Fund focuses on companies with market capitalizations of between $100
million and $1.6 billion. See "Investment Objectives and Policies". No
assurance can be given that the Fund's investment objectives will be
realized. While securities of small capitalization companies may offer
a greater capital appreciation potential than investments in large-cap
company securities, they may also present greater risks. See "Special
Risk Considerations".
<PAGE>
This Prospectus sets forth concisely the information about the
Fund that a prospective investor ought to know before investing.
Investors are advised to read this Prospectus and retain it for future
reference. A Statement of Additional Information, dated _________, 1996
(the "SAI"), containing additional information about the Fund, has been
filed with the Securities and Exchange Commission (the "Commission")
and is incorporated by reference in its entirety into this Prospectus.
A copy of the SAI, the table of contents of which appears on page 25 of
this Prospectus, may be obtained without charge by calling the Fund at
(800)__________.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
| Estimated | |
| Subscription | Estimated Sales | Estimated Proceeds
| Price(1) | Load(2) | to Fund(3)(4)
| | |
| | |
| | |
Per Share........ | $__________ | $__________ | $__________
| | |
| | |
Total Maximum (5). | $__________ | $__________ | $__________
| | |
(Footnotes on the following page)
----------------------------------
PaineWebber Incorporated
----------------------------------
The date of this Prospectus is _________, 1996.
<PAGE>
(continued from the previous page)
Upon the completion of the Offer, shareholders who do not fully
exercise their Rights will own a smaller proportional interest in the
Fund than they owned prior to the Offer. In addition, because the
Subscription Price per Share will be less than the then current net
asset value per share as of the Pricing Date, the Offer will result in
an immediate dilution of the net asset value per share for all
shareholders. Such dilution is not currently determinable because it is
not known how many Shares will be subscribed for, what the net asset
value or market price of the Common Stock will be on the Pricing Date
or what the Subscription Price will be, although the amount of such
dilution could be substantial. See "Special Risk Considerations".
Except as described herein, shareholders will have no right to rescind
their subscriptions after receipt of their payment for Shares by the
Subscription Agent.
The Fund's Investment Manager is Morgan Grenfell Capital
Management, Inc., a U.S.-registered investment adviser. The Investment
Manager is an indirect wholly-owned subsidiary of Morgan Grenfell Asset
Management Limited which is, in turn, a direct wholly-owned subsidiary
of Deutsche Morgan Grenfell Group PLC. Deutsche Morgan Grenfell Group
PLC is an indirect wholly-owned subsidiary of Deutsche Bank AG, a
commercial and investment banking group listed on stock exchanges
internationally. See "Management of the Fund". The address of the Fund
is 885 Third Avenue, New York, New York 10022, and its telephone number
is (212) 230-2600.
(Footnotes from the previous page)
(1) Estimated on the basis of 95% of the Fund's last sales price on
the NYSE on , 1996.
(2) In connection with the Offer, PaineWebber Incorporated (the
"Dealer Manager") and other broker-dealers soliciting the exercise
of Rights will receive solicitation fees equal to 2.50% of the
Subscription Price per Share for each Share issued pursuant to the
exercise of such Rights and the Over-Subscription Privilege. The
Fund has also agreed to pay the Dealer Manager a fee for financial
advisory and marketing services in connection with the Offer equal
to 1.25% of the aggregate Subscription Price for the Shares issued
pursuant to the exercise of such Rights and the Over-Subscription
Privilege and the Fund and the Investment Manager have agreed to
indemnify the Dealer Manager against certain liabilities under the
Securities Act of 1933, as amended.
(3) Before deduction of offering expenses incurred by the Fund,
estimated at $400,000, including up to an aggregate of $100,000 to
be paid to the Dealer Manager as partial reimbursement of its
expenses pursuant to the Offer.
(4) The funds received by check prior to the final due date of this
Offer will be deposited into a segregated interest-bearing account
(which interest will be paid to the Fund) pending proration and
distribution of Shares.
(5) Assumes all Rights are exercised at the Estimated Subscription
Price. Pursuant to the Over-Subscription Privilege, the Fund may
at the discretion of the Board of Directors increase the number of
Shares subject to subscription by up to 25% of the Shares offered
hereby. If the Fund increases the number of Shares subject to
subscription by 25%, the total maximum Estimated Subscription
Price (as hereinafter defined), Estimated Sales Load and Estimated
Proceeds to the Fund will be $__________, $_________ and
$__________, respectively.
<PAGE>
FUND EXPENSES
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price
per Share)(1)......................................... 3.75%
Annual Expenses (as a percentage of net assets
attributable to Common Stock)
Management Fees(2)................................. 1.00%
Other Expenses(3).................................. 0.44%
Total Annual Expenses................................... 1.44%
(1) The Dealer Manager and the other broker-dealers soliciting the
exercise of Rights will receive soliciting fees payable by the
Fund equal to 2.50% of the Subscription Price per Share for each
Share issued pursuant to the exercise of Rights and the
Over-Subscription Privilege. The Fund has also agreed to pay the
Dealer Manager a fee for financial advisory and marketing services
in connection with the Offer equal to 1.25% of the aggregate
Subscription Price per Share for each Share issued pursuant to the
exercise of Rights and the Over-Subscription Privilege and to
reimburse the Dealer Manager for out-of-pocket expenses up to an
aggregate of $100,000. These fees will be borne by the Fund and
indirectly by all of the Fund's shareholders, including those who
do not exercise their Rights.
(2) See "Management of the Fund -- Investment Manager; -- Management
Agreement" herein and "Expenses" and "Portfolio Transactions and
Brokerage" in the SAI for additional information.
(3) "Other Expenses" assume that (i) all of the Rights are exercised
and (ii) the Fund does not increase the number of shares subject
to subscription pursuant to the Over-Subscription Privilege. Other
expenses for the fiscal year ended December 31, 1995 were 0.51% as
a percentage of average net assets.
The foregoing fee table is intended to assist Fund investors in
understanding the various costs and expenses that an investor in the
Fund will bear directly or indirectly. "Other Expenses" have been
estimated for the current fiscal year.
Example
An investor would directly or indirectly pay the following expense
on a $1,000 investment in the Fund, assuming a 5% annual return
throughout the periods:
1 Year 3 Years 5 Years 10 Years
$52 $81 $113 $203
This Example assumes that all dividends and other distributions
are reinvested at net asset value and that the 1.44% listed under Total
Annual Expenses remains the same in the years shown. The Example also
reflects payment of the 3.75% Sales Load on the entire $1,000
investment. The above tables and the assumption in the Example of a 5%
annual return are required by the Securities and Exchange Commission
(the "Commission") regulations applicable to all investment companies;
the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Fund's Shares.
For a more complete description of certain of the Fund's costs and
expenses, see "Management of the Fund -- Investment Management; --
Management Agreement" herein and "Expenses" and "Portfolio Transactions
and Brokerage" in the SAI.
This Example should not be considered a representation of future
expenses, and the Fund's actual expenses may be greater or less than
those shown.
-2-
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a
share of the Fund's Common Stock outstanding throughout each period
presented. This information is derived from the financial and
accounting records of the Fund. The financial highlights for the eight
fiscal years ended December 31, 1995 and for the period ended December
31, 1987 have been audited by KPMG Peat Marwick LLP, independent
accountants, whose reports thereon were unqualified. The report of
independent accountants has been included in the SAI. This information
should be read in conjunction with the financial statements and notes
thereto included in the SAI.
<TABLE>
<CAPTION>
Years Ended December 31
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $10.21 $11.85 $ 11.97 $ 12.30 $ 8.70
Net investment income (expense) (0.00) (0.07) (0.08) (0.09) (0.10)
Net gain/(loss) on securities
(realized and unrealized) 4.23 (0.34) 1.10 0.58 4.67
Total from investment operations $ 4.23 $(0.41) $ 1.02 $ 0.49 $ 4.57
Less dividends and distributions:
Tax return of capital distribution (2.13) (1.23) (1.14) (0.82) (0.97)
Total dividends and distributions $(2.13) $(1.23) $ (1.14) $ (0.82) $ (0.97)
Net asset value, end of year $12.31 $10.21 $ 11.85 $ 11.97 $ 12.30
Market value per share, end of year $12.625(1) $ 8.875 $ 10.875 $ 12.250 $ 12.875
Total Investment Return(2):
Based on market value per share +42.3% -7.1% -1.9% +1.5% +58.0%
Based on net asset value per share +41.4% -3.5% +8.5% +4.0% +52.5%
Ratios to Average Net Assets:
Expenses 1.51% 1.52% 1.39% 1.44% 1.79%
Net investment income (expense) (0.03%) (0.59%) (0.74%) (0.83%) (0.85%)
Supplemental Data:
Net assets at end of year
(000 omitted) $74,402 $59,093 $67,321 $68,013 $64,461
Average net assets during year
(000 omitted) $72,202 $66,064 $69,048 $64,644 $58,900
Portfolio turnover 110% 105% 89% 89% 70%
Total debt outstanding at end
of year (000 omitted) -0- -0- -0- -0- $ 1,060
Asset coverage per $1000 of debt
(000 omitted) N/A N/A N/A N/A $ 60.8
</TABLE>
*Annualized.
(1) The Fund declared a $2.133 capital gain distribution payable to
shareholders of record on December 29, 1995. The dividend was paid on
January 26, 1996 and the Fund's shares traded with the dividend until
the ex-dividend date, January 29, 1996
-3-
<PAGE>
(2) Total investment return based on market value per share reflects
performance of the Fund during each period measured against the
actual market value per share. Total investment return based on net
asset value per share reflects the effect of changes in net asset
value resulting from the performance of the Fund during each period
measured against the Funds's net asset value. Both calculations
assume distributions, if any, were reinvested.
<TABLE>
<CAPTION>
May 6, 1987
(commencement
Years Ended December 31 operations)
1990 1989 1988 through 12/31/87
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $10.80 $ 8.87 $ 7.45 $ 9.27
Net investment income (expense) (0.11) (0.11) (0.11) (0.16)
Net gain/(loss) on securities
(realized and unrealized) (1.34) 2.29 1.53 (1.66)
Total from investment operations $(1.45) $ 2.18 $ 1.42 $(1.82)
Less dividends and distributions:
Tax return of capital distribution (0.65) (0.25) -- --
Total dividends and distributions $(0.65) $(0.25) $ 0.00 $ 0.00
Net asset value, end of year $ 8.70 $10.80 $ 8.87 $ 7.45
Market value per share, end of year $ 8.750 $ 9.625 $ 7.375 $ 6.000
Total Investment Return:
Based on market value per share -2.2% +34.2% +22.9% -40.0%
Based on net asset value per share -13.4% +24.6% +19.1% -19.7%
Ratios to Average Net Assets:
Expenses 2.01% 2.13% 2.56% 4.32%*
Net investment income (expense) (1.05%) (1.10%) (1.30%) (1.80%)*
Supplemental Data:
Net assets at end of year
(000 omitted) $45,581 $54,136 $44,462 $37,316
Average net assets during year
(000 omitted) $51,121 $50,522 $43,422 $44,062
Portfolio turnover 75% 80% 83% 98%*
Total debt outstanding at end
of year (000 omitted) $ 1,724 $ 2,324 $ 2,868 $ 3,360
Asset coverage per $1000 of debt
(000 omitted) $ 26.4 $ 23.3 $ 15.5 $ 11.1
</TABLE>
*Annualized.
-4-
<PAGE>
THE OFFER
Purpose of the Offer
The Board of Directors of the Fund has determined that it would be
in the best interests of the Fund and its shareholders to increase the
assets of the Fund available for investment, thereby enabling the Fund
to more fully take advantage of investment opportunities consistent
with the Funds's investment objectives. The Fund's Board of Directors
has voted unanimously to approve the terms of the Offer as set forth in
this prospectus.
In reaching its decision, the Board of Directors considered, among
other things, advice by the Investment Manager that new funds would
allow the Fund additional flexibility to capitalize on available
investment opportunities without the necessity of having to sell
existing portfolio securities that the Investment Manager believes
should be held. Although the Investment Manager currently expects
moderate growth in the U.S. economy, it believes attractive investment
opportunities exist in the market for small capitalization companies.
The Investment Manger believes that the growth prospects for small
capitalization companies are generally more dependent on individual
company developments (e.g. new products and services) than on the
performance of the overall economy. The Investment Manager also
believes that valuations of many small capitalization companies are
attractive relative to their forecasted earnings. Proceeds from the
offer will allow the Investment Manager to better take advantage of
such existing and future investment opportunities.
The Board of Directors also considered that the Offer would
provide shareholders with an opportunity to purchase additional shares
of the Fund below both its market price and net asset value. The Board
of Directors also took into account that a well-subscribed rights
offering may result in certain economies of scale which could in turn
marginally reduce the Funds's expense ratio in future years, and could
increase the liquidity of the Fund's shares of the NYSE. Finally, the
Board of Directors considered that, because the Subscription Price per
Share will be less than the net asset value per share on the Pricing
Date, the Offer will result in dilution of the net asset value per
share, but the Board believes that the factors in favor of the Offer
outweigh this dilution. See "Special Risk Considerations Dilution and
Effects of Non-Participation in the Offer."
The Fund's Investment Manager will benefit from the Offer because
the Investment Manager's fee is based on the weekly average net assets
of the Fund. It is not possible to state precisely the amount of
additional compensation the Investment Manager will receive as a result
of the Offer because it is not known how many Shares will be subscribed
for and because the proceeds of the Offer will be invested in
additional portfolio securities, which will fluctuate in value. See
"Management of the Fund".
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares
and on terms which may or may not be similar to the Offer. Any such
future rights offerings will be made in accordance with the
requirements of the Investment Company Act of 1940, as amended (the
"1940 Act").
Terms of the Offer
The Fund is issuing to holders of its common stock (the "Common
Stock") of record as of the close of business on May 20, 1996 (the
"Record Date"), non-transferable rights (the "Rights") to subscribe for
an aggregate of 2,156,413 Shares (2,695,516 Shares if the Fund
increases the number of shares available by up to 25% in connection
with the Over-Subscription Privilege). Each shareholder is being issued
one Right for each whole share of Common Stock owned on the Record
Date. The Rights entitle the holders thereof to subscribe for one Share
for every three Rights held (1 for 3). Fractional shares will not be
issued upon the exercise of Rights. Shareholders who receive or have
remaining fewer than three Rights will not be able to purchase a Share
upon the exercise of such Rights and will not be entitled to receive
any cash in lieu thereof, although such shareholders may subscribe for
Shares pursuant to the Over-Subscription Privilege. Rights may be
exercised at any time during the Subscription Period, which commences
on May 20, 1996 and ends at 5:00 p.m. New York City time, on June 14,
1996, unless extended by the Fund until 5:00 p.m., New York City time,
to a date not later than June 21, 1996 (such date, as it may be
extended, referred to herein as the "Expiration Date"). See "--
Expiration of the Offer". A shareholder's right to
-5-
<PAGE>
acquire during the Subscription Period at the Subscription Price one
additional Share for every three Rights held is hereinafter referred to
as the "Primary Subscription". The Rights are evidenced by subscription
certificates ("Subscription Certificates"), which will be mailed to
shareholders of record, except as discussed below under "Foreign
Restrictions".
Any shareholder who fully exercises all Rights issued to such
shareholder in the Primary Subscription will be entitled to subscribe
for additional Shares at the Subscription Price pursuant to the terms
of the Over-Subscription Privilege, as described below. Shares
available, if any, pursuant to the Over-Subscription Privilege are
subject to allotment and may be subject to increase, as is more fully
discussed below under "Over-Subscription Privilege". For purposes of
determining the maximum number of Shares a shareholder may acquire
pursuant to the Offer, shareholders whose Shares are held of record by
Cede & Co. Inc. ("Cede") or by any other depository or nominee will be
deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee on their behalf.
Over-Subscription Privilege
To the extent shareholders do not exercise all of the Rights
issued to them, any underlying Shares represented by such Rights will
be offered by means of the Over-Subscription Privilege to the
shareholders who have exercised all the Rights issued to them and who
wish to acquire more than the number of Shares to which they are
entitled. Only Shareholders who exercise all the Rights issued to them
may indicate, on the Subscription Certificate, which they submit with
respect to the exercise of the Rights issued to them, how many Shares
they desire to purchase pursuant to the Over-Subscription Privilege. If
sufficient Shares remain after completion of the Primary Subscription,
all over-subscription requests will be honored in full. If sufficient
Shares are not available to honor all over-subscription requests, the
Fund may, at the discretion of the Board of Directors, issue shares of
Common Stock up to an additional 25% of the Shares available pursuant
to the Offer, or 539,103 additional Shares of Common Stock in order to
cover such over-subscription requests. Regardless of whether the Fund
issues additional Shares pursuant to the Offer and to the extent Shares
are not available to honor all over-subscription requests, the
available Shares will be allocated among those who over-subscribe based
on the number of Shares owned by them in the Fund on the Record Date.
The allocation process may involve a series of allocations in order to
assure that the total number of Shares available for over-subscription
is distributed on a pro rata basis. The Fund will not offer to sell in
connection with the Offer any Shares that are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription
Privilege.
Subscription Price
The Subscription Price for the Shares to be issued pursuant to the
Offer will be 95% of the lower of (i) the average of the last reported
sale prices of a share of the Fund's Common Stock on the NYSE on the
date of the expiration of the Offer (the "Pricing Date") and the four
preceding business days and (ii) the net asset value per share as of
the close of business on the Pricing Date. For example, if the average
of the last reported sales price on the NYSE on the Pricing Date and
the four preceding business days of a share of the Fund's Common Stock
is $11.00, and the net asset value per share on the Pricing Date is
$10.00, the Subscription Price will be $9.50 (95% of $10.00). If,
however, the average of the last reported sales prices on the NYSE on
the Pricing Date and the four preceding business days is $11.00, and
the net asset value per share on the Pricing Date is $12.00, the
Subscription Price will be $10.45 (95% of $11.00).
The Fund first announced that the Fund was contemplating the Offer
after the close of trading on the NYSE on April 5, 1996 and announced
the terms of the Offer after the close of trading on May 8, 1996. The
net asset value per share of Common Stock at the close of business on
April 5, 1996 (the last trading date on which the Fund calculated its
net asset value per share prior to the announcement), May 3, 1996 (the
last trading date on which the Fund calculated its net asset value per
share prior to the commencement of the terms and on May 10, 1996 (the
last trading date on which the Fund calculated its net asset value
prior to the date of this Prospectus) was $12.74, $13.56 and $ ,
respectively, and the last reported sales price of a share of the
Fund's Common Stock on the NYSE on those dates was $10.50, $11.125 and
$ , respectively.
-6-
<PAGE>
Non-Transferability of Rights
The Rights are non-transferable and, therefore, may not be
purchased or sold. The Rights will not be listed for trading on the
NYSE or any other exchange. However, the additional Shares of Common
Stock to be issued upon the exercise of the Rights and the
Over-Subscription Privilege will be listed for trading on the NYSE,
subject to notice of official issuance.
Expiration of the Offer
The Offer will expire at 5:00 p.m., New York City time, on June
14, 1996, unless extended by the Fund until 5:00 p.m., New York City
time, to a date or dates not later than June 21, 1996. The Rights will
expire on the Expiration Date and thereafter may not be exercised.
Since the Expiration Date and the Pricing Date will be the same date,
shareholders who decide to acquire Shares in the Primary Subscription
or pursuant to the Over-Subscription Privilege will not know when they
make such decision the purchase price of such Shares. Any extension of
the Offer will be followed as promptly as practicable by announcement
thereof. Such announcement shall be issued no later than 9:00 a.m., New
York City time, on the next business day following the previously
scheduled Expiration Date. Without limiting the manner in which the
Fund may choose to make such announcement, the Fund will not, unless
otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such announcement other than by making a
release to the Dow Jones News Service or such other means of
announcement as the Fund deems appropriate.
Method of Exercise of Rights
Rights are evidenced by subscription certificates ("Subscription
Certificates") which will be mailed to shareholders or, if a
shareholder's shares of Common Stock are held by Cede or any other
depository or nominee on their behalf, to Cede or such depository or
nominee. Rights may be exercised by filling in completely and signing
the Subscription Certificate which accompanies this Prospectus and
mailing it in the envelope provided, or otherwise delivering the
completed and signed Subscription Certificate to the Subscription
Agent, together with payment in full for the Shares at the estimated
Subscription Price (the "Estimated Subscription Price") as described
below under "Payment for Shares". Rights may also be exercised by a
shareholder contacting his or her broker, banker or trust company,
which can arrange, on his or her behalf, to guarantee delivery of
payment (using a "Notice of Guaranteed Delivery") and of a properly
completed and executed Subscription Certificate. A fee may be charged
for this service. Since fractional Shares will not be issued, and
shareholders who receive or who have remaining, fewer than three Rights
will not be entitled to purchase a Share upon the exercise of such
Rights but will be able to request additional Shares pursuant to the
terms of the Offer applicable to the Over-Subscription Privilege.
Completed Subscription Certificates must be received by the
Subscription Agent prior to 5:00 p.m., New York City time, on the
Expiration Date (unless the guaranteed delivery procedures are complied
with as described below under "Payment for Shares") at the offices of
the Subscription Agent at the address set forth below.
Shareholders who Are Record Owners. Shareholders who are record
owners can choose between either option set forth under "Payment for
Shares" below. If time is of the essence, option (2), under "Payment
for Shares" below, will permit delivery of the Subscription Certificate
and payment after the Expiration Date.
Shareholders whose Shares Are Held By A Nominee. Shareholders
whose shares are held by a nominee, such as a broker or trustee, must
contact such nominee to exercise their Rights. In that case, the
nominee will complete the Subscription Certificate on behalf of the
investor and arrange for proper payment by one of the methods set forth
under "Payment for Shares" below.
Nominees. Nominees who hold shares of Common Stock for the account
of others must notify the beneficial owners of such shares as soon as
possible to ascertain such beneficial owners' intentions and to obtain
instructions with respect to the Rights. If the beneficial owner so
instructs, the nominee should complete the Subscription Certificate and
submit it to the Subscription Agent with the proper payment described
under "Payment for Shares" below.
-7-
<PAGE>
Foreign Restrictions
Record Date shareholders whose record addresses are outside the
United States (for these purposes the United States includes its
territories and possessions and the District of Columbia) will receive
written notice of the Offer; however Subscription Certificates will not
be mailed to such shareholders. The Rights to which those Subscription
Certificates relate will be held by the Subscription Agent for such
foreign Record Date shareholders' accounts until instructions are
received to exercise the Rights. If no such instructions are received
by the Expiration Date, such rights will expire.
Subscription Agent
The Subscription Agent is The Bank of New York, which will receive
for its administrative, processing, invoicing and other services as
subscription agent, a fee estimated to be approximately $35,000
including reimbursement for all out-of-pocket expenses related to the
Offer. Questions regarding the Subscription Certificates should be
directed to The Bank of New York, Tender & Exchange Department, P.O.
Box 11248, Church Street Station, New York, New York 10286-1248, (800)
507-9357 (toll free); shareholders may also consult their brokers or
nominees. Signed Subscription Certificates must be sent, together with
payment at the Estimated Subscription Price for all Shares subscribed
in the Primary Subscription and Over-Subscription Privilege by one of
the methods described below, prior to 5:00 p.m., New York City time, on
the Expiration Date. Alternatively, if using a Notice of Guaranteed
Delivery, the Notice of Guaranteed Delivery (see "Method of Exercise of
Rights" above) may also be sent by facsimile to (212) 815-6213, with
the originals to be sent promptly thereafter by one of the methods
described below. Facsimiles should be confirmed by telephone to (800)
507-9357.
(1) BY FIRST CLASS MAIL OR EXPRESS MAIL:
The Bank of New York
Attention: Tender & Exchange Department
P.O. Box 11248
Church Street Station
New York, New York 10286-1248
(2) BY HAND OR OVERNIGHT COURIER:
The Bank of New York
Attention: Tender & Exchange Department
101 Barclay Street
Receive and Deliver Window
New York, New York 10286
(3) BY FACSIMILE (TELECOPIER), with the original Subscription
Certificate to be sent by one of the methods described above:
(212) 815-6213
Confirm by telephone (800) 507-9357
Delivery to an address other than one of the addresses listed
above will not constitute valid delivery.
-8-
<PAGE>
Information Agent
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
Corporate
Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-8017
Toll Free: (800) 459-8562
or
Call Collect: (212) 896-1900
Shareholders may also contact their brokers or nominees for
information with respect to the Offer.
The Information Agent will receive a fee estimated to be
approximately $40,000 including reimbursement for all out-of-pocket
expenses related to the Offer.
Payment for Shares
Shareholders who acquire Shares in the Primary Subscription and
pursuant to the Over-Subscription Privilege may choose between the
following methods of payment:
(1) A shareholder can send the Subscription Certificate together
with payment for the Shares acquired in the Primary Subscription and
for additional Shares subscribed for pursuant to the Over-Subscription
Privilege to the Subscription Agent. Payment should be calculated on
the basis of the Estimated Subscription Price of $_____ per Share for
all Shares requested. To be accepted, such payment, together with the
executed Subscription Certificate, must be received by the Subscription
Agent at one of the Subscription Agent's offices at the addresses set
forth above prior to 5:00 p.m., New York City time, on the Expiration
Date. The Subscription Agent will deposit all checks and money orders
received by it prior to the final payment date into a segregated
interest-bearing account (which interest will be paid to the Fund)
pending proration and distribution of Shares. A PAYMENT PURSUANT TO
THIS METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY ORDER OR CHECK
DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO MORGAN
GRENFELL SMALLCAP FUND, INC. AND MUST ACCOMPANY A COMPLETED
SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE
ACCEPTED. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR AND, MAY AT THE DISCRETION OF THE FUND, NOT BE
ACCEPTED IF NOT CLEARED PRIOR TO THE EXPIRATION DATE, SHAREHOLDERS ARE
STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED
OR CASHIER'S CHECK OR MONEY ORDER.
(2) Alternatively, a subscription will be accepted by the
Subscription Agent if, prior to 5:00 p.m., New York City time, on the
Expiration Date, the Subscription Agent has received a Notice of
Guaranteed Delivery by facsimile (telecopy) or otherwise from a bank, a
trust company, or a NYSE member guaranteeing delivery of (i) payment of
the Estimated Subscription Price of $_____ per share for the Shares
subscribed for in the Primary Subscription and for any additional
Shares subscribed for pursuant to the Over-Subscription Privilege, and
(ii) a properly completed and executed Subscription Certificate. The
Subscription Agent will not honor a Notice of Guaranteed Delivery
unless a properly completed and executed Subscription Certificate
together with full payment is received by the Subscription Agent by the
close of business on the third business day after the Expiration Date
(June 19, 1996, unless the Offer is extended).
-9-
<PAGE>
Within eight business days following the Expiration Date (June 26,
1996), unless the Offer is extended (the "Confirmation Date"), a
confirmation will be sent by the Subscription Agent to each subscribing
shareholder (or, if the shareholder's shares of Common Stock are held
by Cede or any other depository or nominee, to Cede or such depository
or nominee), showing (i) the number of Shares acquired pursuant to the
Primary Subscription, (ii) the number of Shares, if any, acquired
pursuant to the Over-Subscription Privilege, (iii) the per Share and
total purchase price of the Shares, and (iv) any additional amount
payable by such shareholder to the Fund or any excess to be refunded by
the Fund to such shareholder, in each case based on the Subscription
Price as determined on the Pricing Date. If any shareholder exercises
his right to acquire Shares pursuant to the Over-Subscription
Privilege, any such excess payment which would otherwise be refunded to
the shareholder will be applied by the Fund toward payment for
additional Shares acquired pursuant to exercise of the
Over-Subscription Privilege. Any additional payment required from a
shareholder must be received by the Subscription Agent within ten
business days after the Confirmation Date (July 11, 1996, unless the
Offer is extended). Any excess payment to be refunded by the Fund to a
shareholder will be mailed by the Subscription Agent to such
shareholder as promptly as possible. All payments by a shareholder must
be in United States dollars by money order or check drawn on a bank
located in the United States of America and payable to MORGAN GRENFELL
SMALLCAP FUND, INC.
The Subscription Agent will deposit all checks received by it
prior to the final date into a segregated interest-bearing account
(which interest will accrue to the benefit of the Fund) pending
distribution of the Shares.
Whichever of the two methods described above is used, issuance and
delivery of certificates for the Shares purchased are subject to
collection of checks and actual payment pursuant to any Notice of
Guaranteed Delivery.
Shareholders will have no right to rescind their subscription
after receipt of their payment for Shares by the Subscription Agent,
except as provided below under "Notice of Net Asset Value Decline".
If a Shareholder who acquires Shares pursuant to the Primary
Subscription or Over-Subscription Privilege does not make payment of
any additional amounts due by the tenth Business Day after the
Confirmation Date, the Fund reserves the right to take any or all of
the following actions: (i) sell such subscribed and unpaid-for Shares
to other shareholders, (ii) apply any payment actually received by it
toward the purchase of the greatest whole number of Shares which could
be acquired by such holder upon exercise of the Primary Subscription or
Over-Subscription Privilege, or (iii) exercise any and all other rights
or remedies to which it may be entitled.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF
THE SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENT BE SENT BY REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE
ALLOWED TO ENSURE DELIVERY TO THE FUND AND CLEARANCE OF PAYMENT PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE
UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR AND, MAY AT THE DISCRETION OF THE FUND, NOT BE ACCEPTED IF NOT
CLEARED PRIOR TO THE EXPIRATION DATE, YOU ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Fund,
whose determinations will be final and binding. The Fund in its sole
discretion may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or
reject the purported exercise of any Right. Subscriptions will not be
deemed to have been received or accepted until all irregularities have
been waived or cured within such time as the Fund determines in its
sole discretion. The Fund will not be under any duty to give
notification of any defect or irregularity in connection with the
submission of Subscription Certificates or incur any liability for
failure to give such notification.
-10-
<PAGE>
Notice of Net Asset Value Decline
The Fund has, pursuant to the Commission's regulatory
requirements, undertaken to suspend the Offer until it amends this
prospectus if, subsequent to _________, 1996, the effective date of the
Fund's Registration Statement, the Fund's net asset value declines more
than 10% from its net asset value as of that date. Accordingly, the
Fund will notify shareholders of any such decline and thereby permit
them to cancel their exercise of Rights prior to the extended
expiration date as defined herein.
Delivery of Share Certificates
Stock certificates for all Shares acquired in the Primary
Subscription will be mailed promptly after the expiration of the Offer
and full payment for the subscribed Shares has been received and
cleared. Certificates representing Shares acquired pursuant to the
Over-Subscription Privilege will be mailed as soon as practicable after
full payment has been received and cleared and all allocations have
been effected. Participants in the Fund's Dividend Reinvestment Plan
(the "Plan") will have any Shares acquired in the Primary Subscription
and pursuant to the Over-Subscription Privilege credited to their
shareholder dividend reinvestment accounts in the Plan. Participants in
the Plan wishing to exercise Rights for the shares of Common Stock held
in their accounts in the Plan must exercise them in accordance with the
procedures set forth above. Stock certificates will be issued for
Shares credited to Plan accounts. Shareholders whose shares of Common
Stock are held of record by Cede or by any other depository or nominee
on their behalf or their broker-dealers' behalf will have any Shares
acquired in the Primary Subscription credited to the account of Cede or
such other depository or nominee. Shares acquired pursuant to the
Over-Subscription Privilege will be certificated and stock certificates
representing such Shares will be sent directly to Cede or such other
depository or nominee.
Federal Income Tax Consequences
The U.S. Federal income tax consequences to holders of Common
Stock with respect to the Offer will be as follows:
The distribution of Rights will not result in taxable income to a
shareholder nor will the Rights holder recognize gain or loss as a
result of the exercise of the Rights.
If the fair market value of the Rights as of the date of their
distribution equals or exceeds 15% of the fair market value of the
Common Stock with respect to which they are distributed, a U.S.
Shareholder's basis in such Common Stock must be allocated between such
Common Stock and the Rights in proportion to their respective fair
market values on the date of distribution. If the fair market value of
the Rights as of the date of their distribution is less than 15% of the
fair market value of the Common Stock with respect to which they are
distributed, however, a U.S. Shareholder's basis in such Common Stock
will remain unchanged and the basis in such Rights will be zero, unless
such U.S. Shareholder affirmatively and irrevocably elects (in a
statement attached to such shareholder's U.S. Federal income tax return
for the year in which the Rights are received) to allocate the basis in
the Common Stock between such Common Stock and the Rights in proportion
to their respective fair market values on the date of distribution.
If the Right is exercised by the holder of Common Stock, the basis
of the Common Stock received will equal the sum of the basis, if any,
allocated to the Right and the Subscription Price; and the holding
period of the Common Stock acquired upon such exercise will begin on
the date the Right is exercised.
If Rights issued to a U.S. shareholder expire without being sold
or exercised, no basis will be allocated to said Rights, and such
shareholder will not recognize any gain or loss for U.S. Federal income
tax purposes upon such expiration.
The foregoing is only a general summary of the applicable U.S.
Federal income tax law and does not include any state, local or foreign
tax consequences of the Offer. Such applicable U.S. Federal income tax
law is subject to change by legislative or administrative action.
Shareholders should consult their tax advisers concerning the tax
consequences of the Offer. See "Taxation" herein and in the SAI.
-11-
<PAGE>
Employee Plan Considerations
Shareholders that are employee benefit plans subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
(including corporate savings and 401(k) plans), Keough or H.R. 10 plans
of self-employed individuals and Individual Retirement Accounts
("IRAs") (collectively, "Plans") should be aware that additional
contributions of cash to the Plan (other than rollover contributions or
trustee-to-trustee transfers from other Plans) in order to exercise
Rights would be treated as Plan contributions and, when taken together
with contributions previously made, may subject a Plan, among other
things, to excise taxes for excess or nondeductible contributions. In
the case of Plans qualified under Section 401(a) of the Code,
additional cash contributions could cause the maximum contribution
limitations of Section 415 of the Code or other qualification rules to
be violated. Permitted contributions to IRAs are subject to annual
maximums (generally equal to the lesser of 100% of an individual's
earned income or $2,000, but up to $2,250 for an individual and his or
her non-earning spouse). The deductibility of such contributions may be
reduced or eliminated for particular shareholders, depending upon their
income levels and other factors. Other types of Plans are subject to
different contribution limitations and other restrictions concerning
which shareholders should consult their own tax advisers.
ERISA contains fiduciary responsibility requirements, and ERISA
and the Code contain prohibited transaction rules, that may impact the
exercise of Rights. Due to the complexity of these rules and the
penalties for noncompliance, Plans should consult with their counsel
regarding the consequences of their exercise of Rights under ERISA and
the Code.
Dilution
Upon the completion of the Offer, shareholders who do not exercise
their Rights fully will own a smaller proportional interest in the Fund
than would be the case if the Offer had not been made. In addition,
because the Subscription Price of each Share will be less than the net
asset value per share of the Fund's Common Stock as of the Pricing
Date, the Offer will result in a dilution of the net asset value per
share for all shareholders, which will disproportionately affect
shareholders who do not exercise their Rights in full. Although it is
not possible to state precisely the amount of such decrease in net
asset value because it is not known at the date of this Prospectus how
many Shares will be subscribed for, or what the Subscription Price will
be, such dilution may be substantial. For example, assuming all of the
Shares are sold at the Estimated Subscription Price and after deducting
all expenses related to the issuance of the Shares, the Fund's net
asset value per share on ______ would be reduced by approximately $____
or ____% (or, in the event that all of the Rights are exercised and the
Fund increases the number of Shares subject to subscription by 25%
pursuant to the Over-Subscription Privilege, by approximately $____ or
____%). See "Special Risk Considerations -- Dilution and Effect of
Non-Participation in the Offer".
Important Dates to Remember
Event Date
Record Date........................... May 20, 1996
Subscription Period................... May 20, 1996 - June 14, 1996*
Expiration Date and Pricing Date...... June 14, 1996*
Subscription Certificates and
Payment for Shares Due+........... June 14, 1996*
Notice of Guaranteed Delivery Due .... June 14, 1996*
Payment of Guarantees of Delivery Due. June 19, 1996*
Confirmation to Participants.......... June 26, 1996*
Final Payment for Shares.............. July 11, 1996*
* Unless the Offer is extended to a date not later than June 21, 1996.
+ A shareholder exercising Rights must deliver by the Expiration Date
either (i) the Subscription Certificate together with payment or (ii)
a Notice of Guaranteed Delivery.
-12-
<PAGE>
THE FUND
Morgan Grenfell SMALLCap Fund, Inc., incorporated in Maryland on
January 16, 1987, is a diversified, closed-end management investment
company registered under the 1940 Act. The Fund seeks, as a primary
investment objective, long-term capital appreciation principally by
investing in equity and equity-related securities of U.S. companies.
The Fund also seeks current income as a secondary investment objective.
See "Investment Objectives and Policies". No assurance can be given
that the Fund's investment objectives will be realized.
The Fund's Investment Manager is Morgan Grenfell Capital
Management, Inc., an indirect U.S. subsidiary of London based Deutsche
Morgan Grenfell Group PLC ("Deutsche Morgan Grenfell"). Duetsche Morgan
Grenfell is an indirect wholly-owned subsidiary of Deutsche Bank AG,
and is responsible for Deutsche Bank Group's institutional investment
management activities worldwide. The Investment Manager is registered
with the Commission under the Investment Advisers Act of 1940. Such
registration does not involve supervision or approval by the Commission
of investment advice rendered by the Investment Manager. See
"Management of the Fund".
The Fund completed an initial public offering of 5,000,000 shares
of its Common Stock in May 1987. The net proceeds to the Fund from such
offering were approximately $46,375,000. As of May , 1996, the net
assets of the Fund were $ and, since inception, the Fund had paid or
declared dividends and capital gains distributions aggregating $ . The
increase in the Fund's net assets since inception is attributable
primarily to appreciation in the value of its portfolio securities.
USE OF PROCEEDS
If all of the Rights are exercised in full and assuming a
Subscription Price of $_____ per share (95% of the last reported sale
price per share on the NYSE on _________, 1996), the net proceeds to
the Fund would be approximately $__________, after deducting expenses
payable by the Fund, including the fees and expenses of the Dealer
Manager and soliciting broker-dealers and other offering expenses
estimated to total $400,000. If the Fund increases the number of Shares
subject to subscription by up to 539,103 Shares, in order to satisfy
over-subscription requests, the additional net proceeds will be
approximately $__________. However, there can be no assurance that all
Rights will be exercised in full, and the Subscription Price will not
be determined until the close of business on the Expiration Date. The
Fund anticipates that the net proceeds of the Offer will be fully
invested in investments conforming to the Fund's investment objectives
and policies within six months from the Expiration Date. Pending such
investment, the proceeds will be invested in cash or cash equivalent
short-term obligations including, but not limited to, U.S. Government
obligations, certificates of deposit, commercial paper and short-term
notes.
MARKET AND NET ASSET VALUE INFORMATION
Shares of the Fund's Common Stock, $0.01 par value, are listed on
the NYSE under the symbol "MGC". The following table sets forth for the
Common Stock for the calendar quarters indicated: (i) the per share
high and low net asset values, (ii) the per share high and low market
prices on the NYSE, (iii) the premium (discount) to net asset value,
and (iv) the volume of trading on the NYSE.
<TABLE>
<CAPTION>
Premium/
(Discount)
to Net Asset Volume of
Net Asset Value Market Prices(1) Value Trading(1)
--------------- ----------------- ---------------- ----------
Common Stock High Low High Low High Low (in shares)
- - ------------ ---- --- ---- --- ---- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
First Quarter ......... $12.65 $11.49 $11.625 $ 9.875 (14.50)% (2.72)% 810,400
Second Quarter ........ 11.83 10.50 10.375 9.375 (15.45) (8.33) 594,600
Third Quarter ......... 11.78 10.54 10.000 9.125 (18.03) (12.38) 681,100
Fourth Quarter ........ 11.89 9.79 9.875 8.375 (18.43) (12.40) 824,600
-13-
<PAGE>
1995
First Quarter ......... 11.19 10.03 9.250 8.625 (18.95) (10.28) 820,400
Second Quarter ........ 12.33 10.96 10.625 9.125 (18.62) (12.47) 787,300
Third Quarter ......... 14.19 12.22 12.625 10.125 (18.70) (11.16) 1,050,000
Fourth Quarter ........ 14.45 13.32 12.625 11.250 (17.44) (11.41) 669,500
1996
First Quarter ......... 14.42 11.88 13.00 10.125 (16.87) (4.97) 1,067,000
Second Quarter
(through May 3, 1996)
</TABLE>
(1) As reported by the NYSE.
Since the Fund's inception in May 1987, the Fund's Common Stock
has generally traded at a discount to net asset value. Officers of the
Fund cannot determine the reason for the Fund's Common Stock trading at
a premium or discount to net asset value, nor can they predict whether
the Fund's Common Stock will trade in the future at a premium or
discount to net asset value and if so, the level of such premium or
discount. Shares of closed end investment companies frequently trade at
a discount from net asset value.
On _________, 1996, the net asset value per share of Common Stock
was $_____ and the last reported sales price was $_____, representing a
discount from net asset value per share of ___%.
-14-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund's primary investment objective is to seek long-term
capital appreciation by investing principally in equity and
equity-related securities of U.S. companies. The Fund seeks current
income as a secondary investment objective. There is no assurance that
the Fund will achieve its investment objectives. The Fund's primary
investment objective may not be changed without the approval of a
majority of the Fund's outstanding securities. As used in this
Prospectus, the term "majority of the Fund's outstanding voting
securities" means the lesser of either (i) 67% of the shares
represented at a shareholders meeting at which the holders of more than
50% of the outstanding shares are present in person or by proxy, or
(ii) more than 50% of the outstanding shares. Except as indicated under
"Investment Restrictions" in the SAI, the Fund does not consider its
other policies, including its secondary investment objective of current
income, to be fundamental, and such policies may be changed by the
Board of Directors without shareholder approval.
Investment Policies
The Fund's investments are made principally in publicly traded
securities of small capitalization companies in a variety of
industries. The Fund primarily invests in securities of U.S. issuers.
Equity and equity-related securities include common stocks, preferred
stocks and securities convertible into or exchangeable for such equity
securities. For purposes of the Fund's investment policies, small
capitalization companies are those ranked (at the time of investment)
according to market capitalization in the bottom 20% of all issuers
listed or quoted on a national securities exchange or market. Within
this universe, the Fund focuses on companies with market
capitalizations of between $100 million and $1.6 billion. At December
31, 1995, the median market capitalization of companies held in the
Fund was $684 million.
Investments in equity securities of small capitalized companies
generally involve both the opportunity for greater rewards and more
risk than an investment in common stocks of larger, better-known
companies. The Investment Manager believes that greater opportunities
for superior returns exist from investments in small capitalization
companies. These issuers are not as well-known to the general public,
may have less investor following, and, therefore, may provide
opportunities for investment gains due to the relative inefficiencies
in this sector of the marketplace.
The Fund seeks to invest in small capitalization companies the
earnings of which are expected by the Investment Manager to grow faster
than both inflation and the economy in general and where the Investment
Manager believes that such growth potential has not yet been fully
reflected in the market price. In seeking such investments, the
Investment Manager considers a variety of factors including quality of
management, a leading or dominant position in a major product line, a
sound financial position, and a relatively high rate of return on
invested capital so that future growth can be financed from internal
sources. The Fund may also invest in companies which offer the
possibility of accelerating earnings growth because of management
changes, new products or structural changes in the economy.
When, in the opinion of the Investment Manager, temporary
defensive positions are warranted by market or economic conditions, the
Fund may invest all or a portion of its assets in cash or cash
equivalent short-term obligations including, but not limited to, U.S.
Government obligations, certificates of deposit, commercial paper and
short-term notes.
The Fund may also engage in other investment practices, such as
borrowing, repurchase agreements, hedging instruments and lending of
its portfolio securities. See "Special Risk Considerations" herein and
"Investment Objectives and Policies" in the SAI.
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SPECIAL RISK CONSIDERATIONS
The following discusses certain matters that should be considered,
among others, in connection with the Offer.
Dilution and Effect of Non-Participation in the Offer
Because the Subscription Price will be less than the net asset
value per share of Common Stock on the Pricing Date (and the Fund will
incur expenses in connection with the Offer), the net asset value, on a
per share basis, of the Common Stock outstanding prior to the Offer
will be reduced as a result of the Offer and the number of Shares
outstanding after the Offer will increase by a greater percentage than
the increase in the size of the Fund's assets. It is not possible to
state precisely the amount of such decrease in net asset value per
share because it is not known at this time what the Subscription Price
will be, what the net asset value per share will be on the Expiration
Date or what proportion of the Shares will be subscribed for; however,
such decrease may be substantial. For example, assuming (i) all Rights
are exercised, (ii) the Fund's net asset value on the Expiration Date
is $_____ per share (the net asset value per share on _________, 1996),
and (iii) the Subscription Price is $_____ per share (95% of the last
reported sale price per share on the NYSE on _________, 1996), then the
Fund's net asset value per share would be reduced by approximately
$____ per share or ___%. Record Date shareholders will experience a
decrease in the net asset value per share held by them, irrespective of
whether they exercise all or any portion of their Rights. Moreover,
Record Date shareholders who do not fully exercise their Rights will,
at the completion of the Offer, own a smaller proportional interest in
the Fund than they owned prior to the Offer.
Small Capitalization Companies
The Fund invests principally in smaller, lesser-known companies
which the Investment Manager believes offer greater growth potential
than larger, more mature, better-known companies. Investing in the
securities of these companies, however, also involves greater risk and
the possibility of greater portfolio price volatility. Among the
reasons for the greater price volatility of these small companies and
less seasoned stocks are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks and
the greater sensitivity of small companies to changing economic
conditions in their geographic region. For example, securities of these
companies involve higher investment risk than that normally associated
with larger companies due to the greater business risks of small size
and limited product lines, markets, distribution channels and financial
and managerial resources.
Repurchase Agreements
The Fund may enter into repurchase agreements. In a repurchase
agreement, the Fund buys a security subject to the right and obligation
to sell it back to the other party at the same price plus accrued
interest. The counterparty furnishes collateral at least equal in value
or market price to its repurchase obligations. If the other party or
"seller" defaults, the Fund might suffer a loss to the extent that the
proceeds from the sale of the underlying securities and other
collateral held by the Fund in connection with the repurchase agreement
are less than the repurchase prices. In addition, in the event of
bankruptcy of the seller or failure of the seller to repurchase the
securities as agreed, the Fund could suffer losses, including loss of
interest or principal of the security and costs associates with delays
and enforcement of the repurchase agreement. The Fund enters into
repurchase agreements only with financial institutions deemed to
present minimal risk of bankruptcy during the term of the agreement
based on guidelines established and periodically reviewed by the Fund's
Board of Directors. Not more than 10% of the Fund's net assets will be
invested in repurchase agreements maturing in more than seven days.
Leverage and Borrowing
The Fund is authorized to borrow money in amounts of up to 15% of
the value of its total assets at the time of such borrowings.
Borrowings by the Fund create an opportunity for greater capital
appreciation with respect to the Fund's investment portfolio, but at
the same time such borrowing is speculative in that it will increase
the Fund's exposure to capital risk. In addition, borrowed funds are
subject to interest costs that may offset or exceed the return
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earned on the borrowed funds. The Fund has not had any outstanding
borrowing since the year ended December 31, 1991.
Certain Investment Strategies
The Fund has no current intention to enter into transactions in
options and futures and has not employed such instruments in the
portfolio management of the Fund since its inception. However, the Fund
retains the authority, without shareholder approval, to use options and
futures transactions to increase total return or to hedge against a
decline in the value of securities owned by it or an increase in the
price of securities which it plans to purchase. The use of options and
futures is a highly specialized activity which involves investment
risks and portfolio management skills that are different from those
associated with investments in equity securities. Use of these
instruments to seek to increase total return involves the risk of loss,
which may be substantial, if the Investment Manager is incorrect in its
expectation of change in securities prices. The successful use of
options and futures also depends upon the ability of the Investment
Manager to anticipate future price fluctuations and the degree of
correlation between the hedging instrument and securities prices. If
the Investment Manager is incorrect in its expectation of securities
prices or the correlation between these prices and the value of the
hedging instrument, the Fund's investment performance will be less
favorable than it would have been in the absence of the hedging
transaction. Entering into transactions in options and futures also
involves additional expenses for the Fund. See "Investment Objectives
and Policies" in the SAI for additional information concerning options
and futures strategies.
Lending of Portfolio Securities
Consistent with applicable regulatory requirements, the Fund, in
order to generate additional income in accordance with its secondary
investment objective, may lend its portfolio securities (principally to
broker-dealers, except the Investment Manger's affiliates, or
institutional investors) where such loans are callable at any time and
are continuously secured by collateral (cash or U.S. Government
Securities) at least equal to the current market value of the
securities loaned. The Investment Manager believes the risk of loss on
such transactions is slight because, if a borrower were to default for
any reason, the collateral should satisfy the obligation. The Fund
will, as a fundamental policy, limit such lending to not more than 30%
of the value of its total assets.
Portfolio Turnover
It is estimated that, under normal circumstances, the portfolio
turnover rate of the Fund will not exceed 150%. A high rate of
portfolio turnover (i.e., 100% or higher) will result in
correspondingly higher transaction costs to the Fund, increase the
likelihood of realizing net short-term capital gains (distributions
from which are taxable to shareholders as ordinary income) and, under
some circumstances, make it more difficult for the Fund to qualify as a
regulated investment company under the Code. See "Financial Highlights"
for the Fund's portfolio turnover since inception.
Unrealized Appreciation
As of April 30, 1996, there was approximately $19,930,298 or
approximately $3.08 per share of net unrealized appreciation in the
Fund's net assets of approximately $87,781,000; if realized and
distributed, or deemed distributed, such gains would, in general, be
taxable to shareholders, including holders at that time of Shares
acquired upon the exercise of Rights. See "Taxation".
Anti-takeover Provisions
The Fund has provisions in its Articles of Incorporation and
By-Laws that are intended to have the effect of limiting the ability of
other entities or persons to acquire control of the Fund, to cause it
to engage in certain transactions or to modify its structure. The Board
of Directors is divided into three classes. At the annual meeting of
shareholders each year, the term of one class will expire and directors
will be elected to serve in that class for terms of three years. This
provision could delay for up to two years the replacement of a majority
of the Board of Directors.
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These provisions could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of
the Fund in a tender offer or similar transaction. See "Common Stock -
Special Voting Provisions".
Discount to Net Asset Value
Since the Fund's commencement of investment operations in May
1987, the Fund's shares have generally traded in the market at a
discount from net asset value. Officers of the Fund cannot determine
the reason why the Fund's Common Stock has traded at a discount from
net asset value, nor can they predict whether the Fund's Common Stock
will in the future trade at a premium to or discount from net asset
value and if so, the level of such premium or discount. Shares of
closed-end investment companies frequently trade at a discount from net
asset value. The risk of the Common Stock trading at a discount is a
risk separate from a decline in the Fund's net asset value. See "Market
and Net Asset Value Information" herein and "Net Asset Value" in the
SAI.
MANAGEMENT OF THE FUND
Board of Directors
The management of the Fund, including general supervision of the
duties performed by the Investment Manager under the Investment
Management Agreement (as defined herein), is the responsibility of its
Board of Directors. For certain information regarding the Directors and
officers of the Fund, see "Management - Directors and Officers" in the
SAI.
One of the Directors of the Fund resides outside the United
States, and substantially all the assets of this Director are located
outside the United States. It may not be possible, therefore, for
investors to effect service of process within the United States upon
this Director or to enforce against him, in United States courts or
foreign courts, judgments obtained in United States courts predicated
upon the civil liability provisions of the federal securities laws of
the United States or the laws of the State of Maryland. In addition, it
is not certain that a foreign court would enforce, in original actions
or in actions to enforce judgments obtained in the United States,
liabilities against this Director predicated solely upon the Federal
securities laws.
Investment Manager
Morgan Grenfell Capital Management, Inc., 885 Third Avenue, New
York, New York, acts as Investment Manager to the Fund. The Investment
Manager is registered as an investment adviser with the Commission and
provides a full range of investment advisory services to institutional
clients. The Investment Manager is an indirect wholly-owned subsidiary
of Morgan Grenfell Asset Management, Ltd. ("MGAM"), which is a
wholly-owned subsidiary of Deutsche Morgan Grenfell Group PLC. Deutsche
Morgan Grenfell Group PLC is an indirect wholly-owned subsidiary of
Deutsche Bank AG, a commercial and investment banking group. As of
December 31, 1995, the Investment Manager managed approximately $8
billion in assets.
Subject to the supervision of the Fund's Board of Directors, the
Investment Manager manages the Fund's investments in accordance with
the Fund's investment objectives, policies and restrictions and makes
investment decisions on behalf of the Fund, including the selection of,
and placing of orders with, brokers and dealers to execute portfolio
transactions on behalf of the Fund. The Fund pays the Investment
Manager a fee at the annual rate of 1.00% of the Fund's average weekly
net assets and payable at the end of each calendar month. For the
fiscal years ended December 31, 1995, 1994 and 1993, the fees under the
management agreement (the "Management Agreement") with the Fund
amounted to $743,088, $1,004,524 and $957,761, respectively. The fees
payable by the Fund are higher than those paid by most other U.S.
investment companies due to the greater efforts and extra research that
are required to manage investments in small capitalization companies
but are similar to other funds with similar investment objectives.
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Morgan Grenfell Incorporated, Cyrus J. Lawrence Incorporated or
any other brokerage affiliate (the "Brokerage Affiliate") may act as a
broker for the Fund. In order for the Brokerage Affiliate to effect any
portfolio transactions for the Fund, the commissions, fees or other
remuneration received by the Brokerage Affiliate must be reasonable and
fair compared to the commissions, fees or other remuneration paid to
other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a
comparable period of time. The Fund will not deal with a Brokerage
Affiliate in any portfolio transaction in which the Brokerage Affiliate
acts as principal. However, Brokerage Affiliates may serve as the
Fund's broker in transactions conducted on an exchange or
over-the-counter transactions conducted on an agency basis.
Portfolio Manager
The Fund is managed by a team of three experienced portfolio
managers, Robert Kern, Audrey M.T. Jones and David A. Baratta, and a
dedicated trader, Michael Murphy, who develops execution strategies.
Mr. Kern and Ms. Jones have served as members of the Fund's portfolio
management team since the Fund's inception. Mr. Baratta joined the team
in September 1994. Mr. Kern has been in the investment advisory
business since 1965 (with the Investment Manager since 1986) and has
managed investments in small capitalization companies since 1970. Ms.
Jones has been employed by the Investment Manager as a portfolio
manager since 1986. Prior to joining the Investment Manager in 1993,
Mr. Baratta worked as a portfolio manager for AIG Global Investors and
Shearson Lehman Asset Management. Mr. Murphy is a senior equity trader
with the Investment Manager. Prior to joining the Investment Manager in
1987, Mr. Murphy was a partner at Alex Brown, where he specialized in
small cap equity trading. Effective May 10, 1996, Gerald M. Frey, who
previously served as a portfolio manager of the Fund, no longer serves
in that capacity.
Management Agreement
The Management Agreement sets forth the services to be provided by
and the fees to be paid to each party, as described above. The
Investment Manager shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
matters to which the Management Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence in
the performance of its duties or by reason of reckless disregard of its
duties and obligations under the Management Agreement.
The services of the Investment Manager to the Fund are not deemed
to be exclusive, and the Investment Manager or any affiliate thereof
may provide similar services to other investment companies and other
clients or engage in other activities.
The Fund pays all of its own expenses, other than those expressly
assumed by the Investment Manager or an affiliate. The expenses payable
by the Fund include, without limitation, organization and offering
expenses; fees and expenses incurred in connection with membership in
investment company organizations; custodian and transfer agent fees;
legal, auditing and accounting expenses; costs of preparing, printing
and distributing its proxy statements, shareholder reports and notices;
the costs and or fees incident to director and shareholder meetings;
Federal and state registration fees; stock exchange listing fees and
expenses; taxes or governmental fees; non-affiliated directors' fees;
interest on its borrowings; brokerage commissions; the cost of
preparing share certificates and the cost of issue, sale and repurchase
of its shares; payment for portfolio pricing services; and any
extraordinary expenses of a non-recurring nature. The Fund will also be
required to repay borrowings by it.
The Management Agreement remains in effect provided that such
continuance is specifically approved at least annually by the Board of
Directors or by vote of a majority of the Fund's outstanding voting
securities and, in either case, by a majority of the Directors who are
not parties to the Management Agreement or interested persons of any
such party. The Management Agreement terminates automatically if it is
assigned and may be terminated without penalty by vote of a majority of
the Fund's outstanding voting securities or by either party on not more
than 60 days' nor less than 30 days' written notice.
The Management Agreement provides that the Fund may use the name
"Morgan Grenfell" only so long as the Management Agreement or any
extension, renewal or amendment thereof remains in effect. If the
Management Agreement is no longer in effect, the Fund is obligated (to
the extent it lawfully can) to cease using such name or any
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other name indicating that it is advised by or otherwise connected with
the Investment Manager. In addition, the Investment Manager may grant
the non-exclusive right to use the name "Morgan Grenfell" to any other
entity, including any other investment company of which the Investment
Manager or any of its affiliates is the investment manager.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
History of Dividend Payments
The following table shows dividends per share paid by the Fund to
its shareholders since its inception:
Payable Date Source Amount
February 1, 1990.............. Capital Gains $0.250
December 31, 1990............. Capital Gains 0.6500
January 31, 1992.............. Capital Gains 0.9700
December 31, 1992............. Cash 0.8205
January 24, 1994.............. Capital Gains 1.137
January 20, 1995.............. Capital Gains 1.227
January 26, 1996.............. Capital Gains 2.133
The Fund distributes to shareholders, at least annually, all or
substantially all of its net investment income and net realized capital
gains. Pursuant to the Dividend Reinvestment Plan (the "Plan"), all
distributions to participants in the Plan will be automatically
reinvested by The Bank of New York (the "Bank"), as Plan Agent, in Fund
shares pursuant to the Plan. Shareholders will be deemed to participate
in the Plan unless (i) they elect to receive all distributions from net
investment income in cash, or (ii) they elect not to receive all
capital gain distributions in the form of a stock dividend and they
further make no election to receive such distributions in cash. Each
registered shareholder will receive from the Plan Agent an
authorization card to be signed and returned if the shareholder elects
to receive distributions from net investment income in cash or elects
not to receive capital gain distributions in the form of a stock
dividend. Shareholders who do not participate in the Plan will receive
all distributions in cash paid by check in U.S. dollars mailed directly
to the shareholder by the Bank, as dividend paying agent. In the case
of any distribution to participants in the Plan, the Board of Directors
may elect to pay such distribution in shares of the Fund's Common
Stock. For the fiscal year ended December 31, 1995, the Fund paid
distributions from long-term capital gains of $0.9953 per share and
dividends taxable as ordinary income equal to $1.1377 per share out of
ordinary income. In connection with such dividend, 426,804 shares of
Common Stock were issued by the Fund in accordance with the Plan.
The Plan Agent serves as agent for the shareholders in
administering the Plan. If the directors of the Fund declare a
dividend, participants in the Plan will receive stock in the Fund
valued, as described below, depending upon the market price or net
asset value determined at the time of purchase (generally the payable
date of the dividend). Whenever market price equals or exceeds net
asset value at the time shares are valued for the purpose of
determining the number of shares equivalent to the cash dividend or
distribution, participants will be issued shares of the Fund at a price
equal to the greater of net asset value or 95% of the then current
market price of the Fund's shares. If net asset value determined as at
the time of purchase exceeds the market price of Fund shares at such
time, or if the Fund should declare a dividend or other distribution
payable only in cash (i.e., if the Board of Directors should preclude
reinvestment at net asset value), the Plan Agent will, as agent for the
participants, buy Fund shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. If, before the Plan Agent
has completed its purchases, the market price exceeds the net asset
value of a Fund share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares,
resulting in the acquisition of fewer shares than if the dividend or
distribution had been paid in shares issued by the Fund.
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The Plan Agent maintains all shareholder accounts in the Plan and
furnishes written confirmations of all transactions in the account,
including information needed by shareholders for personal and tax
records. Shares in the account of each Plan participant are held by the
Plan Agent in non-certificated form in the name of the participant, and
each shareholder's proxy will include those shares purchased pursuant
to the Plan.
In the case of shareholders, such as banks, brokers or nominees,
that hold shares for others who are the beneficial owners, the Plan
Agent administers the Plan on the basis of the number of shares
certified from time to time by the shareholder as representing the
total amount registered in the shareholder's name and held for the
account of beneficial owners who are to participate in the Plan.
There is no charge to participants for reinvesting dividends or
capital gains distributions. The Plan Agent's fees for the handling of
reinvestment of dividends and distributions will be paid by the Fund.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not
relieve participants of any U.S. income tax that may be payable on such
dividends or distributions.
The Fund reserves the right to amend or to terminate the Plan.
There is no direct service charge to participants in the Plan; however,
the Fund reserves the right to amend the Plan to include a service
charge payable by the participants. All correspondence concerning the
Plan should be directed to the Plan Agent at The Bank of New York,
Dividend Reinvestment Department, P.O. 1958, Newark, New Jersey
07101-9774.
COMMON STOCK
The authorized capital stock of the Fund consists of 150,000,000
shares of Common Stock, US $0.01 par value, of which 6,469,239 were
outstanding as of May 10, 1996. The Shares when issued, will be fully
paid and nonassessable. All shares of Common Stock are equal as to
dividends, assets and voting privileges and have no conversion,
preemptive or exchange rights. In the event of liquidation, each share
of Common Stock is entitled to its proportion of the Fund's assets
after payment of debts and expenses. Shareholders are entitled to one
vote per share. All voting rights for directors are non-cumulative,
which means that the holders of more than 50% of the shares of common
stock can elect 100% of the directors if they choose to do so, and, in
such event, the holders of the remaining shares of common stock will
not be able to elect any directors. The Fund's outstanding Common Stock
is, and the Shares offered hereby will be, listed on the NYSE. The
symbol of the Fund's Common Stock on the NYSE is MGC.
The Fund has no present intention of offering additional shares
beyond this Offering, except that additional shares may be issued under
the Dividend Reinvestment Plan. See "Dividends and Distributions;
Dividend Reinvestment Plan". Other offerings of its Common Stock, if
made, will require approval of the Fund's Board of Directors. Any
additional offering will be subject to the requirements of the 1940 Act
that shares may not be sold at a price below the then current net asset
value (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing shareholders or with the
consent of a majority of the Fund's outstanding shares.
Special Voting Provisions
The Fund has provisions in its Articles of Incorporation and
By-Laws that are intended to have the effect of limiting the ability of
other entities or persons to acquire control of the Fund, to cause it
to engage in certain transactions or to modify its structure. The Board
of Directors is divided into three classes. At the annual meeting of
shareholders each year, the term of one class will expire and directors
will be elected to serve in that class for terms of three years. This
provision could delay for up to two years the replacement of a majority
of the Board of Directors.
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The affirmative vote of the holders of three-quarters of the
shares of the Fund is required to authorize any of the following
transactions:
(i) a merger or consolidation of the Fund with or into any other
corporation;
(ii) the issuance of any securities of the Fund to any person or
entity for cash;
(iii) the sale, lease or exchange of all or any substantial part of
the Fund's assets to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
(iv) the sale, lease or exchange to the Fund in exchange for
securities of the Fund of any assets of any entity or person (except
assets having an aggregate fair market value of less than $1,000,000);
if such corporation, person or entity is directly, or indirectly
through affiliates, the beneficial owner of 5% or more of the
outstanding shares of the Fund. However, such three-quarter vote will
not be required with respect to the foregoing transactions where the
Board of Directors in accordance with the Fund's Articles of
Incorporation approves the transaction. Reference is made to the
Articles of Incorporation and By-Laws of the Fund, on file with the
Commission, for the full text of these provisions. See "Further
Information."
The Fund's Articles of Incorporation also authorizes a class of
capital stock consisting of 20,000,000 shares of Series Preferred
Stock, $.01 par value, which would have such voting powers,
designations, preferences, and relative, participating, optional,
conversion or other special rights, and such qualifications,
limitations or restrictions, as the Board of Directors may designate
for each series thereof issued by vote of the Board of Directors from
time to time. The authorization of preferred stock enhances the Fund's
flexibility in connection with possible future actions. The authorized
but unissued shares of Preferred Stock could be used to make more
difficult a change in control of the Fund. Under certain circumstances,
such shares could be used to create voting impediments or to deter
persons seeking to effect a takeover or otherwise gain control of the
Fund. Such shares could be sold in public or private transactions to
purchasers who might side with the Board of Directors in opposing a
takeover bid which the Board of Directors determines not to be in the
best interests of the Fund and its stockholders. In addition, the Board
of Directors could authorize holders of a series of Preferred Stock to
vote, either separately as a class or with the holders of common stock,
on any merger, sale or exchange of assets by the Fund or any other
extraordinary corporate transaction. On the other hand, the issuance of
a series of Preferred Stock could increase the likelihood of such an
extraordinary transaction if the holders of such shares deemed it to be
desirable. The issuance of a series of Preferred Stock may adversely
affect the ability of the holders of shares of common stock to control
the Fund and may have an adverse effect on the marketability of the
Fund's shares.
These provisions could have the effect of depriving shareholders
of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. The Board
of Directors has determined that the foregoing voting requirements,
which are generally greater than the minimum requirements under
Maryland law and the 1940 Act, are in the best interests of
shareholders generally.
TAXATION
Federal Taxation of the Fund and its Distributions
The Fund has qualified and elected to be treated, and intends to
continue to qualify and be treated, as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code"). The
Fund intends to distribute all or substantially all its investment
company taxable income (all taxable income and realized capital gains
other than the excess of net long-term capital gain over net short-term
capital loss, reduced by deductible expenses) and net capital gain (the
excess of net long-term capital gain over net short-term capital loss)
each year, thereby avoiding the imposition on the Fund of Federal
income and excise taxes on such distributed income and gain. Such
distributions from investment company taxable income and net capital
gain will be taxable as ordinary income and long-term capital gains,
respectively, to shareholders of the Fund who are subject to tax.
Shareholders that are not
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subject to tax on their income generally will not be required to pay
tax on amounts distributed to them. Notwithstanding the above, the Fund
may decide to retain all or part of any net capital gain for
reinvestment. After the end of each taxable year, the Fund will notify
shareholders of the Federal income tax status of any distributions, or
deemed distributions, made by the Fund during such year. For a
discussion of certain income tax consequences to shareholders of the
Fund, see "Taxation" in the SAI.
Federal Income Tax Consequences Relating to the Offer
The following discussion describes certain United States Federal
income tax consequences of the Offer generally applicable to citizens
or residents of the United States and U.S. trusts, estates,
corporations and any other person who would be subject to U.S. Federal
income tax upon the sale or exchange of Common Stock acquired upon the
exercise of Rights ("U.S. Shareholders"). This summary is intended to
be descriptive only and does not purport to be a complete analysis or
listing of all potential tax effects relevant to the ownership of
Rights or Common Stock. Additionally, this summary does not
specifically address the U.S. Federal income tax consequences that
might be relevant to holders of Rights or Common Stock entitled to
special treatment under the U.S. Federal income tax laws, such as
individual retirement accounts and other tax deferred accounts,
financial institutions, life insurance companies and tax-exempt
organizations, and does not discuss the effect of state, local and
other tax laws. Further, this summary is based on interpretations of
existing law as of the date of this Prospectus as contained in the
Code, applicable current and proposed Treasury Regulations, judicial
decisions and published administrative positions of the Internal
Revenue Service, all of which are subject to change either
prospectively or retroactively.
U.S. Shareholders who receive Rights pursuant to the Offer will not
recognize taxable income for U.S. Federal income tax purposes upon
their receipt of the Rights.
If the fair market value of the Rights as of the date of their
distribution equals or exceeds 15% of the fair market value of the
Common Stock with respect to which they are distributed, a U.S.
Shareholder's basis in such Common Stock must be allocated between such
Common Stock and the Rights in proportion to their respective fair
market values on the date of distribution. If the fair market value of
the Rights as of the date of their distribution is less than 15% of the
fair market value of the Common Stock with respect to which they are
distributed, however, a U.S. Shareholder's basis in such Common Stock
will remain unchanged and the basis in such Rights will be zero, unless
such U.S. Shareholder affirmatively and irrevocably elects (in a
statement attached to his or its U.S. Federal income tax return for the
year in which the Rights are received) to allocate the basis in the
Common Stock between such Common Stock and the Rights in proportion to
their respective fair market values on the date of distribution.
A U.S. Shareholder who exercises Rights will not recognize any
gain or loss for U.S. Federal income tax purposes upon the exercise.
The basis of the newly acquired Common Stock will then be equal to the
sum of the Subscription Price paid for the Common Stock and the basis,
if any, allocated to the Rights in the manner described in the
immediately preceding paragraph.
If Rights issued to a U.S. Shareholder expire without being sold
or exercised, no basis will be allocated to such Rights, and such
Shareholder will not recognize any gain or loss for U.S. Federal income
tax purposes upon such expiration.
Upon a U.S. Shareholder's sale or exchange of Common Stock
acquired upon the exercise of Rights, such Shareholder will recognize
gain or loss measured by the difference between the proceeds of the
sale or exchange and the basis of such Common Stock. If the U.S.
Shareholder holds Common Stock as a capital asset, any gain or loss
realized upon its sale or exchange will generally be treated as a
long-term or short-term capital gain or loss, depending on the length
of the U.S. Shareholder's holding period for such Common Stock.
However, any loss recognized upon the sale or exchange of shares of
Common Stock with a tax holding period of 6 months or less may be
treated as a long-term capital loss to the extent of any distribution
of net capital gain with respect to such shares, and losses on certain
sales or exchanges may be disallowed under wash sale rules. The holding
period for Common Stock acquired upon the exercise of Rights will begin
on the date of exercise of the Rights.
A U.S. Shareholder may be subject to backup withholding at the rate
of 31% with respect to gross proceeds from the sale or exchange of
Common Stock unless such U.S. Shareholder (a) is a corporation or comes
within certain
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<PAGE>
other exempt categories and, when required, demonstrates and/or
certifies this fact, or (b) provides a correct taxpayer identification
number, along with certain required certifications, and otherwise
complies with applicable requirements of the backup withholding rules.
U.S. Shareholders who choose to transfer their Common Stock and who do
not provide the appropriate withholding agent with their correct
taxpayer identification number in the manner required may be subject to
penalties imposed by the Internal Revenue Service. Any amount withheld
under these rules is not an additional tax; it will be creditable
against the U.S. Shareholder's U.S. Federal income tax liability.
This summary is not intended to be, nor should it be, construed as
legal or tax advice to any current holder of Common Stock. Further,
because the U.S. Federal income tax consequences of the Offer may vary
depending upon the particular circumstances of each shareholder of the
Fund and other facts, and because this summary is not exhaustive of all
possible U.S. Federal income tax considerations (such as situations
involving taxpayers who are dealers in securities or whose functional
currency is not the U.S. dollar), the Fund's shareholders are urged to
consult their own tax advisors to determine the U.S. Federal income tax
consequences to them of the Offer and their ownership of Rights and
Common Stock. In addition, such shareholders are urged to consult their
own tax advisors in determining the U.S. state and local tax
consequences to them of the Offer and such ownership. See "Taxation" in
the SAI.
DISTRIBUTION ARRANGEMENTS
PaineWebber Incorporated, 1285 Avenue of the Americas, New York,
New York, will act as the Dealer Manager for the Offer. Under the terms
and subject to the conditions contained in the Dealer Manager Agreement
dated the date hereof, the Dealer Manager will provide financial
advisory and marketing services, in connection with the Offer and will
solicit the exercise of Rights and the Over-Subscription Privilege by
Record Date shareholders. The Offer is not contingent upon any number
of Rights being exercised. The Fund has agreed to pay the Dealer
Manager a fee for financial advisory and marketing services equal to
1.25% of the aggregate Subscription Price for Shares issued pursuant to
the exercise of such Rights or the Over-Subscription Privilege and to
pay broker-dealers, including the Dealer Manager, fees for its
solicitation efforts (the "Solicitation Fees") of 2.50% of the
Subscription Price for each Share issued pursuant to the exercise of
such Rights or the Over-Subscription Privilege solicited by such
broker-dealers. Solicitation Fees will be paid to the broker-dealer
designated on the applicable portion of the Subscription Certificates
or, in the absence of such designation, to the Dealer Manager.
In addition, the Fund has agreed to reimburse the Dealer Manager
up to an aggregate of $100,000 for their reasonable expenses incurred
in connection with the Offer. The Fund and the Investment Manager have
agreed to indemnify the Dealer Manager or contribute to losses arising
out of certain liabilities including liabilities under the Securities
Act. The Dealer Manager Agreement also provides that the Dealer Manager
will not be subject to any liability to the Fund in rendering the
services contemplated by the Agreement except for any act of bad faith,
willful misconduct, or gross negligence of the Dealer Manager or
reckless disregard by the Dealer Manager of its obligations and duties
under the Agreement.
The Fund has agreed not to offer or sell, or enter into any
agreement to sell, any equity or equity related securities of the Fund
or securities convertible into such securities for a period of 180 days
after the date of the Dealer Manager Agreement without the prior
consent of PaineWebber Incorporated, as Dealer Manager, except for the
Shares and Common Stock issued in reinvestment of dividends or
distributions.
CUSTODIAN, DIVIDEND PAYING AGENT,
TRANSFER AGENT AND REGISTRAR
The Bank of New York, P.O. 11002, Church Street Station, New York,
New York 10277, will act as the Fund's custodian, dividend paying
agent, transfer agent and registrar.
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<PAGE>
EXPERTS
The financial statements at December 31, 1995, and the financial
highlights included in this Prospectus have been so included in
reliance on the report of KPMG Peat Marwick LLP, New York, New York,
independent accountants, given on the authority of said firm as experts
in auditing and accounting.
LEGAL MATTERS
The validity of the Shares will be passed on for the Fund by Piper
and Marbury L.L.P., Baltimore, Maryland. Certain legal matters will be
passed on for the Fund by Hale and Dorr, Boston, Massachusetts and for
the Dealer Manager by Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
FURTHER INFORMATION
Further information concerning these securities and the Fund may
be found in the Registration Statement, of which this Prospectus and
the SAI incorporated by reference herein constitute a part, on file
with the Commission. Financial statements of the Fund for fiscal years
ended December 31, 1994 and December 31, 1995 are included in the
Fund's annual reports to shareholders for such years, copies of which
are on file with and may be inspected at the Commission as indicated
below.
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the 1940 Act, and in accordance therewith files reports and other
information with the Commission. Such reports and other information can
be inspected and copied at the public reference facilities maintained
by the Commission at 450 Fifth Street, Washington, D.C. 20549 and the
Commission's regional offices at 7 World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, Washington, D.C. 20549
at prescribed rates. Such reports and other information concerning the
Fund may also be inspected at the offices of the NYSE.
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<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
Investment Objectives and Policies................... 2
Investment Restrictions.............................. 9
Management........................................... 11
Expenses............................................. 15
Portfolio Transactions and Brokerage................. 16
Net Asset Value...................................... 19
Taxation............................................. 19
Financial Statements................................. F-1
Report of Independent Accountants....................
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<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained
in this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Fund, the Investment Manager or the Dealer Manager. Neither the
delivery of this Prospectus nor any sale made hereunder shall, MORGAN
GRENFELL SMALLCAP FUND, INC. under any circumstances, create any
implication that there has been no change in the affairs of the Fund since
the date hereof or that the information contained herein is correct as of
any time subsequent to its date. However, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus
will be amended or supplemented accordingly. This 2,156,413 Shares of
Prospectus does not constitute an offer to sell or a solicitation of Common
Stock Issuable upon an offer to buy any securities other than the Shares
offered by Exercise of Rights the Prospectus, nor does it constitute an
offer to sell or an offer to Subscribe to buy the Shares by anyone in any
jurisdiction in which such for such Shares of offer or solicitation is not
authorized or in which the person Common Stock making such an offer or
solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation.
MORGAN GRENFELL SMALLCAP FUND, INC.
2,156,413 Shares of
Common Stock Issuable upon
Exercise of Rights
to Subscribe
for such Shares of
Common Stock
--------------
PROSPECTUS
--------------
<PAGE>
TABLE OF CONTENTS
Page
Fund Expenses.............. 2
Financial Highlights....... 3
The Offer.................. 5
The Fund................... 13
Use of Proceeds............ 13
Market and Net Asset
Value Information........ 13
Investment Objectives
and Policies............. 15
Special Risk Considerations. 16 PAINEWEBBER INCORPORATED
Management of the Fund..... 18
Dividends and Distributions;
Dividend Reinvestment Plan. 20
Common Stock............... 21
Taxation................... 22
Distribution Arrangements.. 24
Custodian, Dividend Paying
Agent, Transfer Agent and
Registrar................ 24
Experts.................... 25
Legal Matters.............. 25 __________, 1996
Further Information........ 25
Table of Contents of Statement
of Additional Information.. 26
<PAGE>
SUBJECT TO COMPLETION DATED MAY 10, 1996
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL
INFORMATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY.
MORGAN GRENFELL SMALLCAP FUND, INC.
---------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") is not a
prospectus and should be read in conjunction with the Prospectus, dated
, 1996 (the "Prospectus"). This SAI does not include all
information that a prospective investor should consider before
purchasing shares of the Fund and investors should obtain and read the
Prospectus prior to purchasing shares. A copy of the Prospectus may be
obtained without charge by calling the Fund's Information Agent,
Corporate Investor Communications, Inc. at (800) 459-8562. This SAI
incorporates by reference the entire Prospectus. Defined terms used
herein shall have the same meaning as provided in the Prospectus. The
date of this SAI is , 1996.
---------------
TABLE OF CONTENTS
Page
Investment Objectives and Policies................. 2
Investment Restrictions............................ 10
Management......................................... 12
Expenses........................................... 14
Portfolio Transactions and Brokerage............... 15
Net Asset Value.................................... 18
Taxation........................................... 18
Financial Statements............................... F-1
Report of Independent Accountants..................
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek long-term
capital appreciation by investing principally in equity and
equity-related securities of U.S. companies. The Fund seeks current
income as a secondary investment objective. There is no assurance that
the Fund will achieve its investment objectives. See "Investment
Objectives and Policies" in the Prospectus.
The following describes certain investment strategies in which the
Investment Manager may engage, on behalf of the Fund, each of which may
involve certain special risks.
Options
Written Options. The Fund may write (sell) covered put and call
options on equity and fixed income securities and enter into related
closing transactions. The Fund may receive fees (referred to as
"premiums") for granting the rights evidenced by the options. However,
in return for the premium for a written call option, the Fund assumes
certain risks. For example, in the case of a written call option, the
Fund forfeits the right to any appreciation in the underlying security
in excess of the exercise price while the option is outstanding. A put
option gives to its purchaser the right to compel the Fund to purchase
an underlying security from the option holder at the specified price at
any time during the option period. In contrast, a call option written
by the Fund gives to its purchaser the right to compel the Fund to sell
an underlying security to the option holder at a specified price at any
time during the option period. Upon the exercise of a put option
written by the Fund, the Fund may suffer a loss equal to the difference
between the price at which the Fund is required to purchase the
underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. All options
written by the Fund are covered. In the case of a call option, this
means that the Fund will own the securities subject to the option or an
offsetting call option as long as the written option is outstanding, or
will have the absolute and immediate right to acquire other securities
that are the same as those subject to the written option. In the case
of a put option, this means that the Fund will deposit cash or high
grade liquid debt obligations in a segregated account with the
custodian with a value at least equal to the exercise price of the put
option.
Purchased Options. The Fund may also purchase put and call
options on securities. A put option entitles the Fund to sell,
and a call option entitles the Fund to buy, a specified security
at a specified price during the term of the option. The advantage
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<PAGE>
to the purchaser of a call option is that it may hedge against an
increase in the price of portfolio securities it ultimately wishes to
buy. The advantage to the purchaser of a put option is that it may
hedge against a decrease in the price of portfolio securities it
ultimately wishes to sell.
The Fund may enter into closing transactions in order to offset an
open option position prior to exercise or expiration by selling an
option it has purchased or by entering into an offsetting option. If
the Fund cannot effect closing transactions, it may have to retain a
security in its portfolio it would otherwise sell, or deliver a
security it would otherwise retain.
The Fund may purchase and sell options traded on U.S. exchanges
and, to the extent permitted by law, options traded over-the-counter
("OTC"). The Fund will treat over-the-counter options and their cover
as illiquid. There can be no assurance that a liquid secondary market
will exist for any particular option. Over-the-counter options also
involve the risk that a counterparty will fail to meet its obligation
under the option.
Stock Index Options
The Fund may purchase and write exchange-listed put and call
options on stock indices to hedge against risks of market-wide price
movements. A stock index measures the movement of a certain group of
stocks by assigning relative values to the common stocks included in
the index. Examples of well-known stock indices are the Standard &
Poor's Index of 500 Common Stocks and the Wilshire 5000 Index. Options
on stock indices are similar to options on securities. However, because
options on stock indices do not involve the delivery of an underlying
security, the option represents the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise
price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the exercise date.
When the Fund writes an option on a stock index, it will cover the
option by depositing cash or high grade liquid debt obligations or a
combination of both in an amount equal to the market value of the
option, in a segregated account, which will be marked to market daily,
with the Fund's custodian, and will maintain the account while the
option is open. Alternatively, and only in the case of a written call
option on a stock index, the Fund may cover the written option by
owning an offsetting call option.
-3-
<PAGE>
There are several risks associated with transactions in options on
securities or securities indices. For example, there are significant
differences between the securities markets and the corresponding
options markets that could result in imperfect correlations, causing a
given option transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded OTC or
on a U.S. securities exchange may be absent for reasons which include
the following: there may be insufficient trading interest in certain
options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on
an exchange; the facilities of an exchange or the Options Clearing
Corporation ("OCC") may not at all times be adequate to handle current
trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in
which event the secondary market on that exchange (or in that class or
series of options) would cease to exist, although outstanding options
that had been issued by the OCC as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
Futures Contracts and Options on Futures Contracts
When deemed advisable by the Investment Manager, the Fund may
enter into futures contracts and purchase and write options on futures
contracts to seek to increase total return or to hedge against changes
in interest rates or securities prices. The Fund may purchase and sell
financial futures contracts, including stock index futures, and
purchase and write related options. The Fund may engage in futures and
related options transactions for hedging and non-hedging purposes as
defined in regulations of the Commodity Futures Trading Commission. The
Fund will not enter into futures contracts or options thereon for
non-hedging purposes, if immediately thereafter, the aggregate initial
margin and premiums required to establish non-hedging positions in
futures contracts and options on futures will exceed 5% of the net
asset value of the Fund's portfolio, after taking into account
unrealized profits and losses on any such positions and excluding the
amount by which such options were in-the-money at the time of purchase.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts
and options obligating the Fund to purchase securities, require the
Fund to segregate cash or high grade liquid debt obligations with a
value equal to the amount of the Fund's obligations.
-4-
<PAGE>
Futures Contracts. A futures contract may generally be described
as an agreement between two parties to buy and sell a particular
financial instrument for an agreed price during a designated month (or
to deliver the final cash settlement price, in the case of a contract
relating to an index or otherwise not calling for physical delivery at
the end of trading in the contract). Futures contracts obligate the
long or short holder to take or make delivery of a specified quantity
of a commodity or financial instrument, such as a security or the cash
value of a securities index, during a specified future period at a
specified price.
When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its current
portfolio securities through the sale of futures contracts. When
interest rates are falling or securities prices are rising, the Fund,
through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it
effects anticipated purchases.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions
which may result in a profit or a loss. While futures contracts on
securities will usually be liquidated in this manner, the Fund may
instead make, or take, delivery of the underlying securities whenever
it appears economically advantageous to do so. A clearing corporation
associated with the exchange on which futures on securities are traded
guarantees that, if still open, the sale or purchase will be performed
on the settlement date.
Hedging Strategies. Hedging, by use of futures contracts, seeks to
establish with more certainty the effective price and rate of return on
portfolio securities and securities that the Fund proposes to acquire.
The Fund may, for example, take a "short" position in the futures
market by selling futures contracts in order to hedge against an
anticipated rise in interest rates or a decline in market prices that
would adversely affect the value of the Fund's portfolio securities.
Such futures contracts may include contracts for the future delivery of
securities held by the Fund or securities with characteristics similar
to those of the Fund's portfolio securities. If, in the opinion of the
Investment Manager, there is a sufficient degree of correlation between
price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of
its hedging strategy. Although under some circumstances prices of
securities in the Fund's portfolio may be more or less volatile than
prices
-5-
<PAGE>
of such futures contracts, the Investment Manager will attempt to
estimate the extent of this volatility difference based on historical
patterns and compensate for any such differential by having the Fund
enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes
affecting the Fund's securities portfolio. When hedging of this
character is successful, any depreciation in the value of portfolio
securities will be substantially offset by appreciation in the value of
the futures position. On the other hand, any unanticipated appreciation
in the value of the Fund's portfolio securities would be substantially
offset by a decline in the value of the futures position
On other occasions, the Fund may take a "long" position by
purchasing futures contracts. This would be done, for example, when the
Fund anticipates the subsequent purchase of particular securities when
it has the necessary cash, but expects the prices then available in the
applicable market to be less favorable than prices that are currently
available.
Options on Futures Contracts. The acquisition of put and call
options on futures contracts will give the Fund the right (but not the
obligation) for a specified price to sell or to purchase, respectively,
the underlying futures contract at any time during the option period.
As the purchaser of an option on a futures contract, the Fund obtains
the benefit of the futures position if prices move in a favorable
direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of the Fund's
assets. By writing a call option, the Fund becomes obligated, in
exchange for the premium, to sell a futures contract (if the option is
exercised), which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates
a premium which may partially offset an increase in the price of
securities that the Fund intends to purchase. However, the Fund becomes
obligated to purchase a futures contract (if the option is exercised)
which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The Fund
will incur transaction costs in connection with the writing of options
on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting option on
the same series. There is no guarantee that such
-6-
<PAGE>
closing transactions can be effected. The Fund's ability to establish
and close out positions on such options will be subject to the
development and maintenance of a liquid market.
The Fund may use options on futures contracts solely for bona fide
hedging or other non-hedging purposes as described below.
Other Considerations. The Fund will engage in futures and related
options transactions only for bona fide hedging or non-hedging purposes
as permitted by Commodities Futures Trading Commission ("CFTC")
regulations which permit principals of an investment company registered
under the 1940 Act to engage in such transactions without registering
as commodity pool operators. The Fund will determine that the price
fluctuations in the futures contracts and options on futures used by it
for hedging purposes are substantially related to price fluctuations in
securities or instruments held by the Fund or securities or instruments
which it expects to purchase. Except as stated below, the Fund's
futures transactions will be entered into for traditional hedging
purposes -- i.e., futures contracts will be sold to protect against a
decline in the price of securities that the Fund owns or futures
contracts will be purchased to protect the Fund against an increase in
the price of securities that the Fund intends to purchase. As evidence
of this hedging intent, the Fund expects that, on 75% or more of the
occasions on which it takes a long futures or option position
(involving the purchase of futures contracts), the Fund will have
purchased, or will be in the process of purchasing, equivalent amounts
of related securities in the cash market at the time when the futures
or option position is closed out. However, in particular cases, when it
is economically advantageous for the Fund to do so, a long futures
position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with
a different test under which the aggregate initial margin and premiums
required to establish non-hedging positions in futures contracts and
options on futures will not exceed 5% of the net asset value of the
Fund's portfolio, after taking into account unrealized profits and
losses on any such positions and excluding the amount by which such
options were in-the-money at the time of purchase.
Limitations and Risks Associated With Transactions In Options,
Futures Contracts and Options on Futures Contracts
The Fund's options and futures transactions involve (1) liquidity
risk that contractual positions cannot be easily
-7-
<PAGE>
closed out in the event of market changes or generally in the absence
of a liquid secondary market, (2) correlation risk that changes in the
value of hedging positions may not match the securities market
fluctuations intended to be hedged, and (3) market risk that an
incorrect prediction of securities prices by the Investment Manager may
cause the Fund to perform worse than if such positions had not been
taken. The ability to terminate over-the-counter options is more
limited than with exchange traded options and may involve the risk that
the counterparty to the option will not fulfill its obligations.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on
opening or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to
particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation may not
at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or
a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange, if any,
that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance
with their terms.
In accordance with a position taken by the Commission, the Fund
will limit its investments in illiquid securities to 10% of the Fund's
net assets. The Fund will treat over-the-counter options and the assets
used to cover such options as illiquid securities subject to this
limitation, except that, with respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount
of the illiquid securities may be calculated with reference to the
formula price.
Options and futures transactions are highly specialized activities
which involve investment techniques and risks that are different from
those associated with ordinary portfolio transactions. Gains and losses
on investments in options and futures depend on the Investment
Manager's ability to predict the direction of stock prices and other
economic factors. The loss that may be incurred by the Fund in entering
into futures contracts and written options thereon is potentially
unlimited. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render
-8-
<PAGE>
certain facilities of an options clearing entity or other entity
performing the regulatory and liquidity functions of an options
clearing entity inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely
execution of customers' orders. Most futures exchanges limit the amount
of fluctuation permitted in a futures contract's prices during a single
trading day. Once the limit has been reached no further trades may be
made that day at a price beyond the limit. The price limit will not
limit potential losses, and may in fact prevent the prompt liquidation
of futures positions, ultimately resulting in further losses.
Except as set forth above under "Futures Contracts and Options on
Futures Contracts", there is no limit on the percentage of the Fund's
assets that may be at risk with respect to futures contracts and
related options. The Fund may not invest more than 25% of its total
assets in purchased protective put options nor more than 5% of its
total assets in purchased options other than protective put options.
The Fund's transactions in options, futures contracts and options on
futures contracts may be limited by the requirements for qualification
of the Fund as a regulated investment company for tax purposes. See
"TAXATION," below. Options, futures contracts and options on futures
contracts are derivative instruments.
Foreign Securities
Investments in foreign securities may offer potential benefits not
available from investments solely in U.S. dollar-denominated domestic
issuers. Such benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of the Investment Manager, to offer
better opportunity for long-term growth of capital and income than
investments in U.S. securities, the opportunity to invest in foreign
countries with economic policies or business cycles different from
those of the United States and the opportunity to reduce fluctuations
in portfolio value by taking advantage of foreign stock markets that do
not necessarily move in a manner parallel to U.S. markets.
Investing in foreign securities involves certain special
considerations which are not typically associated with investing in
U.S. dollar-denominated securities of U.S. issuers. Investments in
foreign securities may involve currencies of foreign countries.
Currency exchange rates may fluctuate significantly over short periods
of time. Since foreign issuers are generally not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies, there
may be less publicly available information about a foreign company than
-9-
<PAGE>
about a U.S. company. Volume and liquidity in most foreign securities
markets are less than in the United States and securities of many
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Fund endeavors to achieve the most favorable
net results on its portfolio transactions. There is generally less
government supervision and regulation of foreign securities exchanges,
brokers, dealers and listed and unlisted companies than in the United
States. Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions.
Convertible Securities
Convertible securities may include corporate notes or preferred
stock but are ordinarily long-term debt obligations of the issuer
convertible at a stated exchange rate into common stock of the issuer.
As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely,
to increase as interest rates decline. Convertible securities generally
offer lower interest or dividend yields than non-convertible securities
of similar quality. However, when the market price of the common stock
underlying a convertible security exceeds the conversion price, the
price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common
stock declines, the convertible security tends to trade increasingly on
a yield basis, and thus may not decline in price to the same extent as
the underlying common stock. Convertible securities rank senior to
common stocks in an issuer's capital structure and are consequently of
higher quality and entail less risk than the issuer's common stock.
However, the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above
its value as a fixed income security. In evaluating a convertible
security, the Investment Manager will give primary emphasis to the
attractiveness of the underlying common stock.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies which
cannot be changed without the approval of the holders of a majority of
its shares (as defined under "Investment Objectives and Policies" in
the Prospectus). The Fund may not:
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(1) Borrow money on a secured or unsecured basis for any purpose
of the Fund in an aggregate amount exceeding 15% of the value of the
Fund's total assets at the time of any such borrowing (exclusive of all
obligations on amounts held as collateral for securities loaned to
other persons to the extent that such obligations are secured by assets
of at least equivalent value).
(2) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted by paragraph (1) above. The deposit in escrow of
securities in connection with the writing of put and call options,
collateralized loans of securities and collateral arrangements with
respect to margin for futures contracts are not deemed to be pledges or
hypothecations for this purpose.
(3) Act as an underwriter of securities of other issuers, except
to the extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter for purposes of
the Securities Act of 1933.
(4) Purchase or sell real estate or any interest therein, except
that the Fund may invest in securities issued or guaranteed by
corporate or governmental entities secured by real estate or interests
therein, such as mortgage pass-throughs and collateralized mortgage
obligations, or issued by companies that invest in real estate or
interests therein.
(5) Make loans to other persons except for loans of portfolio
securities (up to 30% of total assets) as described under "Investment
Objectives and Policies -- Lending of Portfolio Securities" in the
Prospectus and except through the use of repurchase agreements, the
purchase of commercial paper or the purchase of all or a portion of an
issue of debt securities in accordance with its investment objectives,
policies and restrictions, and provided that not more than 10% of the
Fund's assets will be invested in repurchase agreements maturing in
more than seven days.
(6) Invest in commodities or in commodity contracts, except that
it may enter into futures contracts on financial instruments and
options on such futures contracts subject to regulations of the
Commodity Futures Trading Commission.
(7) Purchase securities on margin, or make short sales of
securities, except for the use of short-term credit necessary for the
clearance of purchases and sales of portfolio securities, but it may
make margin deposits in connection with transactions in options,
futures and options on futures.
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(8) Purchase the securities of issuers conducting their principal
business activity in the same industry (other than securities issued or
guaranteed by the United States, its agencies and instrumentalities)
if, immediately after such purchase, the value of its investments in
such industry would comprise 25% or more of the value of its total
assets taken at market value at the time of each investment.
(9) Purchase securities of any one issuer, if
(a) more than 5% of the Fund's total assets taken at market
value would at the time of purchase be invested in the securities
of such issuer, except that such restriction does not apply to
securities issued or guaranteed by the United States Government or
its agencies or instrumentalities or corporations sponsored
thereby, and except that up to 25% of the Fund's total assets may
be invested without regard to this limitation; or
(b) such purchase would at the time result in more than 10%
of the outstanding voting securities of such issuer being held by
the Fund, except that up to 25% of the Fund's total assets may be
invested without regard to this limitation.
(10) Invest in securities of another registered investment
company, except in connection with a merger, consolidation, acquisition
or reorganization.
(11) Purchase any security, including any repurchase agreement
maturing in more than seven days, which is subject to legal or
contractual delays in or restrictions on resale, or which is not
readily marketable, if more than 10% of the net assets of the Fund,
taken at market value, would be invested in such securities.
(12) Invest for the purpose of exercising control over or
management of any company.
(13) Issue senior securities except pursuant to Section 18 of the
Investment Company Act of 1940, and, except that the Fund may borrow
money subject to investment restriction 1.
If a percentage restriction on investment or utilization of assets
as set forth above is adhered to at the time an investment is made, a
later change in percentage resulting from a change in the market values
of the Fund's assets will not be considered a violation of the
restriction (except for restriction 1).
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MANAGEMENT
Directors and Officers
The names and addresses of the directors and officers of the Fund
are set forth below, together with their positions and their principal
occupations during the past five years and, in the case of the
directors, their positions with certain other organizations and
companies.
Name, Age Positions With Principal Occupations
and Address the Fund During Past 5 Years
Michael Bullock* Chairman and Director Director, Chairman and
20 Finsbury Circus Chief Investment Officer,
London, EC2M 1NB Morgan Grenfell
England Investment Services,
Age 44 Ltd.; Managing Director,
Morgan Grenfell Asset
Management Ltd.;
Director, Morgan Grenfell
Capital Management Inc.
Robert E. Kern, Jr.* President and Director Executive Vice President
885 Third Avenue and Director, Morgan
New York, NY 10022 Grenfell Capital
Age 60 Management, Inc.
(September, 1986 to
present)
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Name, Age Positions With Principal Occupations
and Address the Fund During Past 5 Years
Robert E. Greeley Director Chairman, Page Mill Asset
Page Mill Asset Management (June 1985 to
Management Present); Manager
433 California Street Corporate Investments,
Suite 900 Hewlett-Packard Company
San Francisco, CA (March, 1979 to June
94104 1991); Director, Pacific
Age 64 Horizon Funds, Time
Horizon Funds
Joseph J. Incandela Director Partner/Managing
Thomas H. Lee Company Director, Thomas H. Lee
75 State Street Co.
Boston, MA 02109
Age 49
Richard D. Wood Director Consultant (October, 1994
27 Hidden Valley to present); Chairman and
Monrovia, CA 91016 President, Optical
Age 56 Radiation Corporation
(1969 to October 1994)
Audrey M.T. Jones* Vice President Senior Director, Morgan
885 Third Avenue Grenfell Capital
New York, NY 10022 Management Inc.
Age 49
Mark G. Arthus* Secretary and Director of
885 Third Avenue Treasurer Administration and
New York, NY 10022 Compliance, Morgan
Age 39 Grenfell Capital
Management, Inc. (July
1992 to present); Vice
President, Compliance,
Citibank, N.A. (August
1985 to July 1992)
* Indicates a person who is an "interested person" of the Fund,
as defined in the 1940 Act.
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As of April 30, 1996, the Directors and officers of the Fund
beneficially owned 51,985 shares (0.80%) of Common Stock of the Fund.
The following table sets forth the aggregate compensation paid by
the Fund to the Directors for the fiscal year ended December 31, 1995.
Compensation Table
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits As Annual From Fund
Compensation Part of Fund Benefits Complex Paid
Name and Position From Fund Expenses Retirement to Director*
Michael Bullock $0 $0 $0 $0
Robert E. Kern, Jr. $0 $0 $0 $0
Robert E. Greeley $10,000 $0 $0 $10,000
Joseph J. Incandela $10,000 $0 $0 $10,000
Richard D. Wood $10,000 $0 $0 $10,000
* None of the Directors receives any compensation from any other investment
company managed by or affiliated with the Investment Manager.
Executive Compensation
No current or former employees, officers or directors received
remuneration in excess of $60,000 in the last fiscal year for service
in all their respective capacities.
EXPENSES
The Fund's annual operating expenses are higher than those of most
other investment companies of comparable size because the management
fees and other operating expenses reflect the costs associated with an
investment company investing in small capitalization companies. For the
fiscal years ended December 31, 1995, 1994 and 1993, the Fund's
expenses amounted to $1,086,817, $1,004,524 and $957,761, respectively.
Expenses of the Offer will be charged to capital. The Fund's
annual expense ratio was 1.51%, 1.52% and 1.39% of the Fund's net
assets for the fiscal years ended December 31, 1995, 1994 and 1993,
respectively.
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<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision of the Board of Directors, the
Investment Manager makes decisions with respect to and places orders
for all purchases and sales of portfolio securities for the Fund. In
executing portfolio transactions, the Investment Manager seeks to
obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or
dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. Commission rates, being a
component of price, are considered together with such factors.
Commissions on transactions on U.S. securities exchanges are subject to
negotiation. Where transactions are effected in the over-the-counter
market or third market, the Fund deals with the primary market makers
unless a more favorable result is obtainable elsewhere. Fixed income
securities purchased or sold on behalf of the Fund normally will be
traded in the over-the-counter market on a net basis (i.e. without a
commission) through dealers acting for their own account and not as
brokers or otherwise through transactions directly with the issuer of
the instrument. Some fixed income securities are purchased and sold on
an exchange or in over-the-counter transactions conducted on an agency
basis involving a commission.
Pursuant to the Investment Management Agreement, the Investment
Manager agrees to select broker-dealers in accordance with guidelines
established by the Fund's Board of Directors from time to time and in
accordance with Section 28(e) of the Securities Exchange Act of 1934,
as amended. In assessing the terms available for any transaction, the
Investment Manager shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the
broker-dealer, and the reasonableness of the commission, if any, both
for the specific transaction and on a continuing basis. In addition,
the Investment Management Agreement authorizes the Investment Manager,
subject to the periodic review of the Fund's Board of Directors, to
cause the Fund to pay a broker-dealer which furnishes brokerage and
research services a higher commission than that which might be charged
by another broker-dealer for effecting the same transaction, provided
that the Investment Manager determines in good faith that such
commission is reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer, viewed in terms of
either the particular transaction or the overall responsibilities of
the Investment Manager to the Fund. Such brokerage and research
services may consist of pricing information, reports and statistics on
specific companies or industries, general summaries of groups of bonds
and their comparative earnings and yields, or broad overviews of the
securities markets and the economy.
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<PAGE>
Supplemental research information utilized by the Investment
Manager is in addition to, and not in lieu of, services required to be
performed by the Investment Manager and does not reduce the advisory
fees payable to the Investment Manager. The Directors will periodically
review the commissions paid by the Fund to consider whether the
commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Fund. It is
possible that certain of the supplemental research or other services
received will primarily benefit one or more other investment companies
or other accounts of the Investment Manager for which investment
discretion is exercised. Conversely, a Fund may be the primary
beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment
company. During the fiscal period ended December 31, 1995, the
Investment Manager did not, pursuant to any agreement or understanding
with a broker or otherwise through an internal allocation procedure,
direct any Fund's brokerage transactions to a broker because of
research services provided by such broker.
Investment decisions for each Fund and for other investment
accounts managed by the Investment Manager are made independently of
each other in the light of differing conditions. However, the same
investment decision may be made for two or more of such accounts.
Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some
cases this practice could have a detrimental effect on the price or
value of the security as far as a Fund is concerned, in other cases it
is believed to be beneficial to a Fund. To the extent permitted by law,
the Investment Manager may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions.
Pursuant to procedures determined by the Directors and subject to
the general policies of the Fund and Section 17(e) of the 1940 Act, the
Investment Manager may place securities transactions with brokers with
whom it is affiliated ("Affiliated Brokers").
Section 17(e) of the 1940 Act limits to "the usual and customary
broker's commission" the amount which can be paid by the Fund to an
Affiliated Broker acting as broker in connection with transactions
effected on a securities exchange. The Board, including a majority of
the Directors who are not "interested persons" of the Fund or the
Investment Manager, has adopted procedures designed to comply with the
requirements of Section 17(e) of the 1940 Act and Rule 17e-1
promulgated thereunder to ensure that the broker's commission is
"reasonable and fair
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<PAGE>
compared to the commission, fee or other remuneration received by other
brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time...."
A transaction would not be placed with an Affiliated Broker if a
Fund would have to pay a commission rate less favorable than their
contemporaneous charges for comparable transactions for their other
most favored, but unaffiliated, customers except for accounts for which
they act as a clearing broker, and any of their customers determined,
by a majority of the Directors who are not "interested persons" of the
Fund or the Investment Manager, not to be comparable to the Fund. With
regard to comparable customers, in isolated situations, subject to the
approval of a majority of the Directors who are not "interested
persons" of the Fund or the Investment Manager, exceptions may be made.
Since the Investment Manager, as investment adviser to the Fund, has
the obligation to provide management, which includes elements of
research and related skills, such research and related skills will not
be used by them as a basis for negotiating commissions at a rate higher
than that determined in accordance with the above criteria. The Fund
will not engage in principal transactions with Affiliated Brokers. When
appropriate, however, orders for the account of the Fund placed by
Affiliated Brokers are combined with orders of their respective
clients, in order to obtain a more favorable commission rate. When the
same security is purchased for two or more funds or customers on the
same day, each fund or customer pays the average price and commissions
paid are allocated in direct proportion to the number of shares
purchased.
Affiliated Brokers furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained
by them or any associated person of them in connection with effecting
transactions for the account of the Fund, and the Board reviews and
approves all the Fund's portfolio transactions on a quarterly basis and
the compensation received by Affiliated Brokers in connection
therewith. During the fiscal years ended December 31, 1993, 1994 and
1995, the Fund paid no brokerage commissions to Affiliated Brokers.
Affiliated Brokers do not knowingly participate in commissions
paid by the Fund to other brokers or dealers and do not seek or
knowingly receive any reciprocal business as the result of the payment
of such commissions. In the event that an Affiliated Broker learns at
any time that it has knowingly received reciprocal business, it will so
inform the Board.
For the fiscal years ended December 31, 1995, 1994 and 1993, the
Fund paid brokerage commissions in the amount of $739,100, $628,300 and
$706,900, respectively.
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<PAGE>
NET ASSET VALUE
The net asset value of a share of the Fund is determined as of the
close of the last business day of the NYSE in each week by dividing the
value of the Fund's assets (including dividends accrued but not
collected), less its liabilities (including accrued expenses but
excluding capital and surplus), by the number of shares of the Fund
outstanding. The net asset value will be made available for
publication.
Portfolio securities (including options) listed on an exchange and
over-the-counter securities (including options) quoted on the NASDAQ
system are valued on the basis of the last sale on the date as of which
the valuation is made, or, lacking any sales, at the current bid
prices. Over-the-counter securities not quoted on the NASDAQ system are
valued on the basis of the mean between the current bid and asked
prices on that exchange on which they are traded. Securities for which
reliable quotations are not readily available are valued at fair value,
as determined in good faith and pursuant to procedures established by
the Directors. Short-term investments with remaining maturities of 60
days or less are valued at amortized cost, unless the Board of
Directors determines that this does not represent fair value.
The outstanding shares of Common Stock are, and the Shares will
be, listed on the NYSE. The Fund's Common Stock has traded primarily at
a discount to net asset value since May 1987. Shares of closed-end
investment companies frequently trade at a discount from net asset
value. The officers of the Fund cannot predict whether the Fund's
Common Stock will trade in the future at a premium or a discount to net
asset value, and if so, the level of such premium or discount.
TAXATION
The following is a summary of the principal U.S. federal income,
and certain state and local, tax considerations regarding the purchase,
ownership and disposition of shares of the Fund. The summary does not
address special tax rules applicable to certain classes of investors,
such as tax-exempt entities, insurance companies and financial
institutions. Each prospective shareholder is urged to consult his own
tax adviser with respect to the specific federal, state, local and
foreign tax consequences of investing in the Fund. The summary is based
on the laws in effect on the date of this SAI, which are subject to
change.
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General
The Fund has elected to be treated, has qualified and intends to
continue to qualify for each taxable year, as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code").
Qualification of the Fund as a regulated investment company under
the Code requires, among other things, that (a) the Fund derive at
least 90% of its annual gross income from dividends, interest, payments
with respect to securities loans and gains from the sale or other
disposition of stocks or securities, or other income (including but not
limited to gains from options or futures contracts) derived with
respect to its business of investing in such stock or securities (the
"90% gross income test"); (b) the Fund derive less than 30% of its
annual gross income from the sale or other disposition of stock,
securities, options or futures contracts, any of which was held for
less than three months (the "short-short test"); and (c) the Fund
diversify its holdings so that, at the close of each quarter of its
taxable year, (i) at least 50% of the market value of the Fund's total
(gross) assets is comprised of cash, cash items, United States ("U.S.")
Government securities, securities of other regulated investment
companies and other securities limited in respect of any one issuer to
an amount not greater in value than 5% of the value of the Fund's total
(gross) assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of
its total (gross) assets is invested in the securities of any one
issuer (other than U.S. Government securities and securities of other
regulated investment companies) or two or more issuers controlled by
the Fund and engaged in the same, similar or related trades or
business.
If the Fund complies with such provisions, then in any taxable
year for which the Fund distributes, in accordance with the Code's
timing requirements, at least 90% of its "investment company taxable
income" (which includes, among other things, dividends, interest,
accrued original issue discount and recognized market discount income,
income from securities lending, and any net short-term capital gain in
excess of net long-term capital loss and is reduced by deductible
expenses) and at least 90% of the excess of its gross tax-exempt
interest income, if any, over certain disallowed deductions, the Fund
(but not its shareholders) will be relieved of federal income tax on
any income of the Fund, including long-term capital gains, distributed
to shareholders in accordance with the Code's requirements. However, if
the Fund retains any investment company taxable income or "net capital
gain" (the excess of net long-term capital gain over net short-term
capital loss), it will be subject to a tax at regular corporate rates
on the amount retained.
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<PAGE>
If the Fund retains any net capital gain, the Fund may designate
the retained amount as undistributed capital gains in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term
capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Fund against their U.S.
federal income tax liabilities, if any, and to claim refunds to the
extent the credit exceeds such liabilities. For U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Fund
will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's
gross income. The Fund intends to distribute at least annually to its
shareholders all or substantially all of its investment company taxable
income and to distribute annually, or retain and designate as described
in this paragraph, its net capital gain. If for any taxable year the
Fund fails to distribute at least 90% of its investment company taxable
income or otherwise does not qualify as a regulated investment company,
it will be taxed on all of its investment company taxable income and
net capital gain at corporate rates, and its distributions to
shareholders will be taxable as ordinary dividends to the extent of its
current and accumulated earnings and profits.
In order to avoid a 4% federal excise tax, the Fund must
distribute (or be deemed to have distributed) by December 31 of each
calender year at least 98% of its taxable ordinary income for such
year, at least 98% of the excess of its capital gains over its capital
losses (generally computed on the basis of the one-year period ending
on October 31 of such year), and all taxable ordinary income and the
excess of capital gains over capital losses for the previous year that
were not distributed for such year and on which the Fund did not pay
federal income tax. For federal income tax purposes, dividends declared
by the Fund in October, November or December to shareholders of record
on a specified date in such a month and paid during January of the
following year are treated as if they were paid by the Fund and
received by such shareholders on December 31 of the year declared.
For federal income tax purposes, the Fund is permitted to carry
forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss.
Gains and losses on the sale, lapse, or other termination of
options and futures contracts entered into by the Fund will generally
be treated as capital gain and losses. Certain of the futures contracts
and options held by the Fund will be required to
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be "marked-to-market" for federal income tax purposes, that is, treated
as having been sold at their fair market value on the last day of the
Fund's taxable year. These provisions may require the Fund to recognize
gains without a concurrent receipt of cash. Any gain or loss recognized
on actual or deemed sales of futures contracts or options that are
subject to the mark to market rules will be treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. As a
result of certain hedging transactions entered into by the Fund, the
Fund may be required to defer the recognition of losses on futures
contracts and options or underlying securities to the extent of any
unrecognized gains on related positions held by the Fund and the
characterization of gains or losses as long-term or short-term may be
changed. The tax provisions described above applicable to options and
futures contracts may affect the amount, timing and character of the
Fund's distributions to shareholders. The short-short test described
above may limit the Fund's ability to use options and futures
transactions. Certain tax elections may be available to the Fund to
mitigate some of the unfavorable consequences described in this
paragraph.
The Fund's investments, if any, in securities bearing original
issue discount or, if the Fund elects to include market discount in
income currently, market discount, will generally cause it to realize
income prior to the receipt of cash payments with respect to these
securities. The mark to market rules applicable to certain options and
futures contracts, as described above, may also require that net gains
be recognized without a concurrent receipt of cash. In order to obtain
cash to distribute this income or gains, maintain its qualification as
a regulated investment company, and avoid federal income or excise
taxes, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold.
Taxable U.S. Shareholders - Distributions
For U.S. federal income tax purposes, distributions by the Fund,
whether reinvested in additional shares or paid in cash, generally will
be taxable to shareholders who are subject to tax.
Distributions from the Fund's investment company taxable income
will be taxable as ordinary income. Distributions to corporate
shareholders designated as derived from the Fund's dividend income that
would be eligible for the dividends received deduction if the Fund were
not a regulated investment company will be eligible, subject to certain
holding period and debt-financing restrictions, for the 70% dividends
received deduction for corporations. The entire dividend, including the
deducted amount,
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is considered in determining the excess, if any, of a corporate
shareholder's adjusted current earnings over its alternative minimum
taxable income, which may increase its liability for the federal
alternative minimum tax, and the dividend may, if it is treated as an
"extraordinary dividend" under the Code, reduce such shareholder's tax
basis in its shares of the Fund. Capital gain dividends (i.e.,
dividends from net capital gain) if properly designated as such in a
written notice to shareholders mailed not later than 60 days after the
Fund's taxable year closes, will be taxed to shareholders as long-term
capital gain regardless of how long shares have been held by
shareholders, but are not eligible for the dividends received
deduction. Distributions, if any, that are in excess of the Fund's
current and accumulated earnings and profits, as computed for federal
income tax purposes, will first reduce a shareholder's tax basis in his
or her shares and, after such basis is reduced to zero, will constitute
capital gains to a shareholder who holds his or her shares as capital
assets.
All distributions, whether received in shares or in cash, as well
as sales and exchanges of Fund shares, must be reported by each
shareholder who is required to file a U.S. federal income tax return.
With respect to distributions paid in cash or, for shareholders
participating in the Dividend Reinvestment Plan (the "Plan"),
reinvested in shares purchased in the open market, the amount of the
distribution for tax purposes is the amount of cash distributed or
allocated to the shareholder. In the case of shares purchased on the
open market, a participating shareholder's tax basis in each share
received is its cost. With respect to distributions issued in shares of
the Fund, the amount of the distribution for tax purposes is the fair
market value of the issued shares on the payment date, and the
difference between such fair market value and the amount of cash the
shareholder would otherwise have received may be treated as a return of
capital. In the case of shares issued by the Fund, the shareholder's
tax basis in each share received is its fair market value on the
payment date, adjusted by any amount treated as a return of capital to
the shareholder.
Distributions by the Fund result in a reduction in the net asset
value of the Fund's shares and may also reduce their market value.
Should a distribution reduce the net asset value or market value below
a shareholder's cost basis, such distribution (to the extent paid from
the Fund's current or accumulated earnings and profits) would
nevertheless be taxable to the shareholder as ordinary income or
capital gain as described above even though, from an investment
standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to
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consider the tax implications of buying shares just prior to a
distribution. Since the market price of shares purchased at that time
may include the amount of any forthcoming distribution, investors
purchasing shares just prior to a distribution will in effect receive a
return of a portion of their investment in the form of a distribution
which nevertheless will be taxable to them.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to
accounts maintained as qualified retirement plans. Shareholders should
consult their tax advisers for more information.
Taxable U.S. Shareholders - Sale of Shares
When a shareholder's shares are sold, exchanged or otherwise
disposed of, the shareholder will generally recognize gain or loss
equal to the difference between the shareholder's adjusted tax basis in
the shares and the cash, or fair market value of any property,
received. Assuming the shareholder holds the shares as a capital asset
at the time of such sale or other disposition, such gain or loss should
be capital in character, and long-term if the shareholder has a tax
holding period for the shares of more than one year, otherwise (except
as described in the next sentence) short-term. However, any loss
realized on the sale, exchange or other disposition of Fund shares with
a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividend
received with respect to such shares. Additionally, any loss realized
on a sale or other disposition of shares of the Fund may be disallowed
under "wash sale" rules to the extent the shares disposed of are
replaced with other shares of the Fund within a period of 61 days
beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to a dividend reinvestment under the Plan
in shares of the Fund. If disallowed, the loss will be reflected in an
adjustment to the basis of the shares acquired.
Backup Withholding
The Fund will be required to report to the Internal Revenue
Service all distributions, as well as gross proceeds from the sale or
exchange of Fund shares with respect to which the Fund is a payor (such
as pursuant to a tender offer), except in the case of certain exempt
recipients, i.e., corporations and certain other investors to which
distributions are exempt from the information reporting provisions of
the Code. Under the backup
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withholding provisions of Code Section 3406 and applicable Treasury
regulations, all such reportable distributions and proceeds may be
subject to backup withholding of federal income tax at the rate of 31%
in the case of nonexempt shareholders who fail to furnish the Fund with
their correct taxpayer identification number and with certain required
certifications or if the Internal Revenue Service or a broker notifies
the Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding as a result of
failure to report interest or dividend income. The Fund may refuse to
accept any subscription that does not contain any required taxpayer
identification number or certification that the number provided is
correct. If the backup withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in
shares, will be reduced by the amounts required to be withheld. Any
amounts withheld may be credited against a shareholder's U.S. federal
income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
Non-U.S. Shareholders
The foregoing discussion relates solely to U.S. federal
income tax law as it applies to "U.S. persons" (i.e., U.S.
citizens or residents and U.S. domestic corporations,
partnerships, trust or estates) subject to tax under such law.
Dividends of investment company taxable income distributed by the
Fund to a shareholder who is not a U.S. person will be subject to
U.S. withholding tax at the rate of 30% (or a lower rate provided
by an applicable tax treaty) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in
which case the dividends will be subject to tax on a net income
basis at the graduated rates applicable to U.S. individuals or
domestic corporations. Distributions of net capital gain,
including amounts retained by the Fund which are designated as
undistributed capital gains, to a non-U.S. shareholder will not be
subject to U.S. income or withholding tax unless the distributions
are effectively connected with the shareholder's trade or business
in the U.S. or, in the case of a shareholder who is a nonresident
alien individual, the shareholder is present in the U.S. for 183
days or more during the taxable year and certain other conditions
are met.
Any gain realized by a shareholder who is not a U.S. person upon a
sale or other disposition of shares of the Fund will not be subject to
U.S. federal income or withholding tax unless the gain is effectively
connected with the shareholder's trade or business in the U.S., or in
the case of a shareholder who is a nonresident
-24-
<PAGE>
alien individual, the shareholder is present in the U.S. for 183
days or more during the taxable year and certain other conditions
are met. Non-U.S. persons who fail to furnish the Fund with an
IRS Form W-8 or acceptable substitute Form W-8 may be subject to
backup withholding at the rate of 31% on capital gain dividends
and the proceeds of certain sales of their shares with respect to
which the Fund is a payor (such as pursuant to a tender offer).
Investors who are not U.S. persons should consult their tax
advisers about the U.S. and non-U.S. tax consequences of ownership
of shares of, and receipt of distributions from, the Fund.
State and Local Taxes
The Fund may be subject to state or local taxes in jurisdictions
in which the Fund may be deemed to be doing business. In addition, in
those states or localities which have income tax laws, the treatment of
the Fund and its shareholders under such laws may differ from their
treatment under federal income tax laws, and investment in the Fund may
have tax consequences for shareholders different from those of a direct
investment in the Fund's portfolio securities. Shareholders should
consult their own tax advisers concerning these matters.
-25-
<PAGE>
SCHEUDLE OF INVESTMENTS
-----------------------
December 31, 1995
-----------------
<TABLE>
<CAPTION>
COMMON STOCKS: 89.3%
----------------------------------
MARKET
TECHNOLOGY: 21.2% BUSINESS FOCUS SHARES VALUE
---------------------------------- ---------------------------- ------- -------------
<S> <C> <C> <C>
* MEMC Electronic Materials Inc. Silicon Wafer Manufacturer 66,600 $ 2,172,825
* Dionex Corp. Analytical Instruments 31,000 1,759,250
Adobe Systems Inc. Applications Software 25,000 1,550,000
* Micrel Inc. Analog Semiconductors 75,000 1,462,500
* Computervision Corp. Computer-Aided Design
Systems 94,700 1,456,013
* Platinum Technology System Software Products 71,600 1,315,650
* Ceridian Corp. Human Resource Services 30,000 1,237,500
Linear Technology Corp. Advanced Linear Circuits 28,000 1,099,000
* Xilinx Inc. Field Programmable Gate
Arrays 35,000 1,067,500
* Synopsys Inc. CAE Software 25,200 957,600
* Progress Software Corp. Database Software 23,000 862,500
* Geoworks System & Application
Software 40,800 775,200
* Mercury Interactive Corp. Computer Software 40,700 742,775
* FTP Software Inc. Internetworking Software 24,000 696,000
* Discreet Logic Inc. Computer Software 25,500 637,500
* Rational Software Corp. Computer Software 21,400 478,825
* Integrated Process Equip. Inc. Semiconductor Equipment 17,000 399,500
-------------
$ 18,670,138
CONSUMER: 15.0%
----------------------------------
* Staples Inc. Office Products
Superstores 55,050 $ 1,341,844
* Department 56 Inc. Specialty Giftware 34,000 1,304,750
* Garden Ridge Corp. Specialty Home Accessories 29,000 1,123,750
* Nine West Group Inc. Women's Footwear Retailer 26,800 1,005,000
* Blyth Industries Inc. Candles and Accessories 30,200 890,900
Family Dollar Stores Discount Stores 63,650 875,187
Lancaster Colony Corp. Consumer Products 19,400 722,650
* Damark International Inc. General Merchandise 91,450 685,875
* Mohawk Industries Inc. Carpet Manufacturer 43,800 684,375
Leggett & Platt Inc. Furniture Components 25,500 618,375
* Stations Casinos Inc. Multi-Jurisdictional
Gaming 40,000 585,000
* Micro Warehouse Inc. Computer Direct Marketer 13,400 579,550
* West Marine Inc. Boating Supplies Retailer 18,500 578,125
* Daka International Inc. Restaurants 19,700 541,750
* Sonic Corp. Drive-In Restaurants 27,000 513,000
* PetsMart Inc. Pet Supplies Superstores 15,650 485,150
* Micros Systems Inc. Electronic Information
Systems 9,300 458,025
* Global Direct Mail Corp. Computer/Office Prod.
Marketer 8,000 220,000
-------------
$ 13,213,306
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
MARKET
ENERGY: 11.7% BUSINESS FOCUS SHARES VALUE
---------------------------------- ------------------------------- ------ -----------
<S> <C> <C> <C>
Tidewater Inc. Marine Support Vessels 70,000 $ 2,205,000
Devon Energy Corp. Oil & Gas Producer 58,500 1,491,750
* BJ Services Co. Stimulation & Pumping Services 45,000 1,305,000
* Triton Energy Corp. Oil & Gas Producer 18,000 1,032,750
* United Meridian Corp. Oil & Gas Producer 46,500 807,937
Camco International Inc. Oil Field Services & Equipment 28,500 798,000
Diamond Shamrock Inc. Refiner and Marketer 30,500 789,188
* Benton Oil & Gas Co. Oil & Gas Producer 52,000 780,000
Parker & Parsley Pete Co. Oil & Gas Producer 25,000 550,000
* Coda Energy Inc. Oil & Gas Producer 68,000 505,750
-----------
$10,265,375
CREDIT SENSITIVE: 11.2%
----------------------------------
* Dime Bancorp Inc. New York Savings Bank 138,500 $ 1,610,063
Baybanks Inc. Massachusetts Bank 15,000 1,473,750
* Glendale Fed Bank Fed Svgs California Savings & Loan 59,750 1,045,625
Lennar Corp. Residential & Commer. Builders 40,000 1,005,000
* Credit Acceptance Corp. Auto Financing 48,300 1,002,225
Long Island Bancorp Inc. New York Savings Bank 29,000 764,875
Peoples Heritage Finanacial Group Maine Savings Bank 27,000 614,250
Amresco Inc. Real Estate Financial Services 47,500 605,625
Paine Webber Group Inc. Financial Broker 29,250 585,000
* Triangle Pacific Corp. Flooring & Kitchen Cabinets 31,000 530,875
* First Bell Bancorp Inc. Pennsylvania Savings Bank 30,000 401,250
* HFNC Financial Corp. North Carolina Savings & Loan 14,000 183,750
-----------
$ 9,822,288
HEALTH CARE: 10.7%
---------------------------------
* Phycor Inc. Physician Practice Management Co. 66,675 $ 3,371,255
* Community Health Systems Inc. Hospital Management Company 38,600 1,375,125
* Henry Schein Inc. Healthcare Products Distributor 23,500 693,250
* American Oncology Inc. Physician Practice Management Co. 14,000 680,750
* Gensia Pharmaceuticals Inc. Pharmaceuticals 102,500 538,125
* Perseptive Biosystems Inc. Analytical Instruments 62,500 531,250
* ImmuLogic Pharmaceutical Corp. Pharmaceuticals 25,000 481,250
* Uromed Corp. Urological Devices 35,500 457,063
* Agouron Pharmaceuticals Inc. Pharmaceuticals 13,500 442,125
* Gilead Sciences Inc. Pharmaceuticals 13,500 432,000
* IDX Systems Corp. Health Care Information Systems 10,800 375,300
* Sun Healthcare Group Inc. Health Care Services 2,000 27,000
-----------
$ 9,404,493
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
MARKET
SERVICE COMPANIES: 10.6% BUSINESS FOCUS SHARES VALUE
- - ------------------------------- ---------------------------- ------ -----------
<S> <C> <C> <C>
Delta & Pine Land Co. Largest Cotton Seed Company 68,133 $ 2,503,887
* Paging Network Inc. Paging Services 96,500 2,352,188
New England Business Service Business Forms 80,100 1,742,175
* Daisytek International Corp. Non-Paper Office Supplies 30,500 937,875
* Vanguard Cellular Systems Cellular Telephone Service 35,800 724,950
* BISYS Group Inc. Information Processing
System 16,000 492,000
National Data Corp. Information Processing
System 12,500 309,375
* Corestaff Inc. Temporary/Contract
Personnel 8,000 292,000
-----------
$ 9,354,450
PROCESS INDUSTRIES: 5.2%
- - ------------------------------
Riverwood International Paperboard Packaging
Corp. Systems 50,000 $ 956,250
Rayonier Inc. Forest Products & Specialty
Pulp 27,500 917,812
P.H. Glatfelter Co. Paper Manufacturer 50,000 856,250
Potlatch Corp. Forest Products 19,000 760,000
Bowater Inc. Newsprint and Paper
Producer 20,000 710,000
Rock-Tenn Co. Paperboard Recycling 21,000 341,250
-----------
$ 4,541,562
TRANSPORTATION: 2.1%
- - ------------------------------
TNT Freightways Corp. Regional Trucker 53,900 $ 1,084,737
Atlantic Southeast Airlines Air Carrier 19,800 425,700
* American Freightways Corp. Regional Trucker 28,000 290,500
* Western Pacific Airlines
Inc. Airline 3,000 50,250
-----------
$ 1,851,187
CAPITAL GOODS: 1.6%
- - ------------------------------
Furon Co. Engineered Components 72,700 $ 1,454,000
-----------
$ 1,454,000
TOTAL COMMON STOCKS (cost $58,904,597) $78,576,799
COMMERCIAL PAPER: 10.7%
- - ------------------------------
Associates Corp. 5.754% due
1/2/96 $ 9,366,000
- - ------------------------------ -----------
TOTAL: 100% (cost 68,270,597) $87,942,799
===========
</TABLE>
* Non-income producing security.
See accompanying notes to financial statements
F-3
<PAGE>
- - -------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1995
- - -------------------------------------------------------------------------------
Assets:
Investments in securities at market value,
cost $68,270,597 (Note 1) $87,942,799
Receivables
Dividends and interest 24,812
-----------
Total assets $87,967,611
Liabilities:
Dividend payable $12,888,514
Payable for investment securities purchased 358,513
Accrued expenses 241,009
Due to custodian 77,881
-----------
Total liabilities $13,565,917
Net assets $74,401,694
===========
Net assets:
Common stock, $0.01 par value; 6,042,435 shares
issued; 150,000,000 shares authorized $ 60,424
Capital in excess of par value 53,503,539
Net unrealized appreciation of investments 19,672,203
Undistributed net capital gains 1,165,528
-----------
Net assets $74,401,694
===========
Net asset value per share as of the close of
business on December 31, 1995 $ 12.31
===========
See accompanying notes to financial statements
F-4
<PAGE>
- - -------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1995
- - -------------------------------------------------------------------------------
Investment income:
Interest $ 643,504
Cash dividends 407,245
Miscellaneous income 14,736
-----------
$ 1,065,485
Expenses:
Investment advisory fees (Note 2) $ 743,088
Custodian and transfer agent fees 99,956
Professional fees 69,934
Shareholder communications 61,999
Directors' fees 52,002
Insurance 31,912
Registration and listing fees 20,947
Miscellaneous 6,979
-----------
$ 1,086,817
Net investment expense $ (21,332)
Realized and unrealized gain/(loss) on investments:
Proceeds from sales $79,312,314
Less-cost of securities sold 65,323,084
-----------
Net realized gain on investments $13,989,230
Unrealized appreciation:
Beginning of year $ 8,092,049
End of year 19,672,203
-----------
Net increase in unrealized appreciation on
investments $11,580,154
-----------
Net realized and unrealized gain on investments $25,569,384
-----------
Net increase in net assets resulting
from operations $25,548,052
===========
See accompanying notes to financial statements
F-5
<PAGE>
- - -------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1995 and 1994
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets resulting from
operations:
Net investment expense $ (21,332) $ (389,775)
Net realized gain on investments 13,989,230 7,888,625
Net change in unrealized appreciation 11,580,154 (9,866,262)
------------ ------------
Net increase in net assets resulting from operations $ 25,548,052 $ (2,367,412)
Distributions from net realized gains (12,888,514) (7,096,506)
Share transactions 2,648,895 1,235,783
------------ ------------
Increase/(Decrease) in net assets $ 15,308,433 $ (8,228,135)
Net assets:
Beginning of year 59,093,261 67,321,396
------------ ------------
End of year $ 4,401,694 $ 59,093,261
============ ============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
1. Significant Accounting Policies
Morgan Grenfell SMALLCap Fund, Inc. (the "Fund") was organized as a
Maryland corporation on January 16, 1987 and is registered under the
Investment Company Act of 1940, as amended, as a closed-end, diversified
management investment company. The Fund commenced operations on May 6, 1987.
The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
Portfolio valuation: Securities listed on an exchange and over-the-counter
securities quoted on the NASDAQ system are valued on the basis of the last
sale price on the last business day of the year. Over-the-counter securities
not quoted on the NASDAQ system are valued on the basis of the average bid
and asked prices on that date. Commercial paper is carried at cost, which
approximates market.
Securities transactions and investment income: Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Realized gains and losses from securities transactions are recorded on the
basis of identified cost.
Federal income taxes: It is the policy of the Fund to qualify as a
regulated investment company by complying with provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of income and securities
profits (after application of net capital loss carryovers) sufficient to
relieve it from all, or substantially all, Federal income taxes.
2. Investment Advisory Fee and Other Transactions with Affiliates
The Fund pays advisory fees for investment and advisory services to Morgan
Grenfell Capital Management Inc. ("MGCM"), a wholly-owned subsidiary of
Morgan Grenfell PLC. Under the terms of the investment advisory agreement,
the management fee is calculated at an annual rate of one percent of the
Fund's average daily net assets.
Certain individuals who are officers or directors, or both, of the Fund
are also officers or directors, or both, of MGCM.
F-7
<PAGE>
3. Capital Share Transactions
On April 29, 1987, the Fund issued 10,782 shares to MGCM for $100,003.
Subsequent to a public offering, the Fund issued 5,000,000 additional shares
on May 6, 1987 for net proceeds of $46,375,000 after deducting underwriting
discounts of $3,625,000. Arrangements were made to borrow from MGCM an amount
equal to the underwriting discount so that at the conclusion of the offering,
the Fund had available for investment an amount equal to the gross proceeds
of the offering. Initial registration fees amounting to $57,407 were charged
against paid in capital at the time of issuance of these shares.
During 1995, 1994, 1992 and 1990 the Fund issued 256,925, 103,447, 441,639
and 229,642 shares, respectively, under the dividend reinvestment plan.
4. Investment Transactions
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold during the year ended December 31, 1995, excluding short-term
investments, were $69,533,278 and $79,312,314, respectively. At December 31,
1995, the cost of investments for Federal income tax purposes was
substantially the same as the cost for financial reporting purposes.
5. Dividend Reinvestment Plan
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
dividends from net investment income and/or all capital gain distributions
will be reinvested by The Bank of New York, as agent for shareholders in
administering the Plan (the "Plan Agent"), in additional shares of the Fund.
Registered shareholders are deemed to participate in the Plan unless they
elect to receive all dividends from net investment income and/or all capital
gains distributions in the form of cash. Each registered shareholder at the
time of purchase will receive from the Plan Agent an authorization card to be
signed and returned if the shareholder elects to receive distributions from
net investment income in cash or elects not to receive capital gain
distributions in the form of a stock dividend. Shareholders whose shares are
held in the name of a broker or nominee or shareholders transferring such an
account to a new broker should contact such broker or nominee to elect to
participate in the Plan or to receive their distributions in cash.
Participating shareholders will receive dividends from net investment
income and/or all capital gain distributions in additional shares issued by
the Fund if the shares are trading at a premium; i.e., the net asset value
("NAV") is less than the then-current market price. In such event, the number
of additional shares to be issued by the Fund will be determined by valuing
such shares at the higher of (i) their net asset value or (ii) 95% of the
market price. If shares of the Fund are trading at a discount; i.e., the NAV
exceeds the then-current market price, the Plan Agent will, as agent for the
participants, apply such dividends or distributions to purchase shares in the
open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts. In such case, the price of the shares to each
participating shareholder will be the average market price at which such
shares were purchased under the direction of the Plan Agent. There will be no
brokerage charges for shares directly issued by the Fund; however, brokerage
commissions incurred on open market purchases will be borne pro rata by each
participant. There is no direct service charge to participants in the Plan;
the fees of the Plan Agent will be borne by the Fund. However, the Fund
reserves the right to amend the Plan to include such a charge payable by the
participants or for other reasons.
F-8
<PAGE>
5. Dividend Reinvestment Plan - continued
Participants in the Plan may elect to withdraw from the Plan at any time
upon written notice to the Plan Agent and thereby elect to receive all
distributions from net investment income in cash and/or all capital gain
distributions either in the form of a stock dividend or in cash. The written
notice will not be effective with respect to distributions made within seven
days of its receipt by the Plan Agent. If notice is received after a record
date, a shareholder's request will be completed after the determination of
shares for that dividend has been credited to the shareholder's account.
Dividends and capital gain distributions are taxable whether paid in cash or
reinvested in additional shares, and the reinvestment of dividends and
capital gain distributions will not relieve participants of liability for any
U.S. income tax that may be payable (or required to be withheld) on such
dividends or distributions. Additional information about the Plan is
available by calling the Plan Agent's Shareholder Relations Department at
1-800-432-8224.
F-9
<PAGE>
SUPPLEMENTARY INFORMATION
Financial Highlights
Contained below is per-share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets, and
other supplemental data for the eight years ended December 31, 1995, and for
the period May 6, 1987 (commencement of operations) through December 31,
1987. This information has been derived from information provided in the
financial statements and market price data for the Fund's shares.
Years Ended December 31
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period $ 10.21 $ 11.85 $ 11.97
Net investment income
(expense) (0.00) (0.07) (0.08)
Net gain/(loss) on securities
(realized and unrealized) 4.23 (0.34) 1.10
----------- ----------- -----------
Total from investment operations $ 4.23 $ (0.41) $ 1.02
Less dividends and distributions:
Tax return
of capital distribution (2.13) (1.23) (1.14)
----------- ----------- -----------
Total dividends and distributions $ (2.13) $ (1.23) $ (1.14)
----------- ----------- -----------
Net asset value, end of year $ 12.31 $ 10.21 $ 11.85
=========== =========== ===========
Market value per share, $ 12.625(1) $ 8.875 $ 10.875
end of year
TOTAL INVESTMENT RETURN:
Based on market value per share +42.3% -7.1% -1.9%
Based on net asset value per
share +41.4% -3.5% +8.5%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.51% 1.52% 1.39%
Net investment income
(expense) (0.03%) (0.59%) (0.74%)
SUPPLEMENTAL DATA:
Net assets at end of year
(000 omitted) $ 74,402 $ 59,093 $ 67,321
Average net assets during year
(000 omitted) $ 72,202 $ 66,064 $ 69,048
Portfolio turnover 110% 105% 89%
Total debt outstanding at end
of year (000 omitted) -0- -0- -0-
Asset coverage per $1000 of debt
(000 omitted) N/A N/A N/A
*Annualized.
(1) The Fund declared a $2.133 capital gain distribution payable to
shareholders of record on December 29, 1995. The dividend was paid on January
26, 1996 and the Fund's shares traded with the dividend until the ex-dividend
date, January 29, 1996.
F-10
<PAGE>
Years Ended December 31 May 6, 1987
(commencement of
- - --------------------------------------------------------------- operations)
1992 1991 1990 1989 1988 through 12/31/87
- - ------- ------- ------- ------- ------- -------
$ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45 $ 9.27
(0.09) (0.10) (0.11) (0.11) (0.11) (0.16)
0.58 4.67 (1.34) 2.29 1.53 (1.66)
- - ------- ------- ------- ------- ------- -------
$ 0.49 $ 4.57 $ (1.45) $ 2.18 $ 1.42 $ (1.82)
(0.82) (0.97) (0.65) (0.25) -- --
- - ------- ------- ------- ------- ------- -------
$ (0.82) $ (0.97) $ (0.65) $ (0.25) $ 0.00 $ 0.00
- - ------- ------- ------- ------- ------- -------
$ 11.97 $ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45
======= ======= ======= ======= ======= =======
$12.250 $12.875 $ 8.750 $ 9.625 $ 7.375 $ 6.000
+1.5% +58.0% -2.2% +34.2% +22.9% -40.0%
+4.0% +52.5% -13.4% +24.6% +19.1% -19.7%
1.44% 1.79% 2.01% 2.13% 2.56% 4.32%*
(0.83%) (0.85%) (1.05%) (1.10%) (1.30%) (1.80%)*
$68,013 $64,461 $45,581 $54,136 $44,462 $37,316
$64,644 $58,900 $51,121 $50,522 $43,422 $44,062
89% 70% 75% 80% 83% 98%*
-0- $ 1,060 $ 1,724 $ 2,324 $ 2,868 $ 3,360
N/A $ 60.8 $ 26.4 $ 23.3 $ 15.5 $ 11.1
F-11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Morgan Grenfell SMALLCap Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Morgan Grenfell SMALLCap Fund, Inc.
as of December 31, 1995, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the years in
the two-year period ended December 31, 1995, and the financial highlights for
each of the years in the eight-year period ended December 31, 1995 and for
the period May 6, 1987 (commencement of operations) through December 31,
1987. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures include confirmation of
securities owned as of December 31, 1995, by correspondence with the
custodian 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
Morgan Grenfell SMALLCap Fund, Inc., as of December 31, 1995, the result of
its operations for the year then ended, changes in net assets for each of the
years in the two-year period ended December 31, 1995 and the financial
highlights for each of the years in the eight-year period ended December 31,
1995, and for the period May 6, 1987 (commencement of operations) through
December 31, 1987, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
January 31, 1996
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements: The following financial statements and schedules
of the Registrant included in the Statement of Additional Information are filed
with and made a part of this Registration Statement: Statement of Assets and
Liabilities, December 31, 1995; Statement of Operations for the fiscal year
ended December 31, 1995; Statement of Changes in Net Assets for the fiscal years
ended December 31, 1995 and 1994; Statement of Investments, December 31, 1995;
Notes to Financial Statements at December 31, 1995; Financial Highlights for the
eight fiscal years ended December 31, 1995 and for the period May 6, 1987 to
December 31, 1987; all other schedules are omitted because the information is
included elsewhere in the Prospectus or SAI or is not required.
(2) Exhibits
(a) - Amended and Restated Articles of
Incorporation*
(b) - Amended and Restated By-Laws*
(c) - Not applicable
(d)(1) - Form of Subscription Certificate**
(d)(2) - Form of Notice of Guaranteed Delivery**
(d)(3) - Form of Nominee Holder Over-Subscription
Exercise Form**
(e) - Not applicable
(f) - Not applicable
(g) - Investment Advisory Agreement*
(h) - Form of Dealer Manager Agreement**
(i) - Not applicable
(j)(1) - Custodian Agreement*
(j)(2) - Fund Accounting Agreement*
C-1
<PAGE>
(k)(1) - Registrar and Transfer Agency Agreement*
(k)(2) - Form of Subscription Agent Agreement**
(k)(3) - Form of Information Agent Agreement**
(l) - Opinion and Consent of Counsel**
(m) - Not applicable
(n) - Consent of Independent Auditors**
(o) - Not applicable
(p) - Form of Subscription Agreement for Initial
Capital*
(q) - Not applicable
(r) - Financial Data Schedule**
(s) - Powers of Attorney*
* Incorporated by reference to the Registrant's Initial Registration Statement
(333-4358; accession no. 0000950146-96-00517).
** Filed electronically herewith.
Item 25. Marketing Arrangements
See Exhibit 2(h) of this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
Printing Fees $100,000
Dealer Manager Expense
Reimbursement 100,000
Legal Fees 100,000
Registration Fees 30,000
Information Agent Fees 40,000
Subscripton Agent Fees 35,000
Miscellaneous 20,000
--------
$425,000
Item 27. Persons Controlled by or under Common Control with
Registrant
For a list of persons in a control relationship with the Registrant, see
the current investment adviser registrations on Form ADV for Morgan Grenfell
Capital Management, Inc. (File No. 801-27291) and Morgan Grenfell Investment
Services Limited (File No. 801-12880), which are hereby incorporated by
reference thereto.
Item 28. Number of Holders of Securities
As of March 31, 1996:
Title of Class Number of Record Holders
- - -------------- ------------------------
Common Stock, $.01 par value 635
C-2
<PAGE>
Item 29. Indemnification
Article X of Registrant's By-laws state as follows:
SECTION 10.01. Indemnification of Officers and Directors: Subject to and to
the fullest extent permitted by Section 2-418 of the Maryland General
Corporation Law, as from time to time amended (the "Statute"), every person who
is, or has been, a Director or officer of the Corporation shall be indemnified
by the Corporation to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in connection with any
claim, action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Director or officer and
against amounts paid or incurred by him in settlement thereof.
No such indemnification shall be provided to the Corporation hereunder to a
Director or officer:
(a) against any liability to the Corporation or its Stockholders by reason
of a final adjudication by the court or other body before which the proceeding
was brought that he engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office;
(b) unless he or she
(i) Acted in good faith;
(ii) Reasonably believed;
1. In the case of conduct in his or her official capacity with the
Corporation, that the conduct was in the best interests of the Corporation;
and
2. In all other cases, that the conduct was at least not opposed to
the best interests of the Corporation; and
(iii) In the case of any criminal proceeding, had no reasonable cause
to believe that the conduct was unlawful.
provided, however, that (x) if the proceeding was one by or in the right of
the Corporation, indemnification may be made by the Corporation only
against reasonable expenses and may not be made in respect of any
proceeding in which the Director or officer shall have been adjudged to be
liable to the Corporation and (y) a Director or officer may not be
C-3
<PAGE>
indemnified by the Corporation in respect of any proceeding charging
improper personal benefit to the Director or officer, whether or not
involving action in the Director's or officer's official capacity, in which
the Director or officer was adjudged to be liable on the basis that
personal benefit was improperly received.
(c) in the event of a settlement or other disposition not involving a
final adjudication resulting in a payment by a Director or officer, unless
there has been either a determination that such Director or officer did not
engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office by the court
or other body approving the settlement or other disposition or a reasonable
determination, based on a review of readily available facts (as opposed to
a full trial-type inquiry) that he did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Directors acting
on the matter (provided that a majority of the Disinterested Directors then
in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Corporation, shall be severable, shall not affect any
other rights to which any Director or officer may nor or hereafter be entitled,
shall continue as to a person who has ceased to be such director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which corporate personnel other than Directors and officers may be entitled by
contract or otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding of the character described in the last paragraph of this
Article shall be advanced by the Corporation prior to final disposition thereof
upon receipt of (i) an undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that he is not entitled to
indemnification under this Article and (ii) a written affirmation by the
recipient of his good faith belief that the standard of conduct necessary for
indemnification by the Corporation as authorized by the statute has been met,
provided that either:
C-4
<PAGE>
(a) such undertaking is secured by a surety bond or some other appropriate
security or the Corporation shall be insured against losses arising out of any
such advances; or
(b) a majority of the Disinterested Directors acting on the matter
(provided that a majority of the Disinterested Directors then in office act on
the matter) or any independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed to a
full trial- type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Article, a "Disinterested Director" is one (i) who is not
any "interested person" of the Corporation (as defined by the Investment Company
Act of 1940) (including anyone who has been exempted from being an "interested
person" by any rule, regulation or order of the Securities and Exchange
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding of the same or similar
grounds is then or has been pending.
As used in this Article, the words "claim", "action", "suit" or
"proceeding" shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened; and the words
"liability" and "expenses" shall include without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines penalties and other
liabilities.
SECTION 10.02. Indemnification of Employees and Agents: Employees and
agents who are not officers or Directors of the Corporation may be indemnified,
and reasonable expenses may be advanced to such employees or agents, in
accordance with the procedures set forth in this Article X to the extent
permissible under the Maryland General Corporation Law, the Securities Act of
1933, as amended, and the Investment Company Act of 1940 as those statutes are
now or hereafter in force, and to such further extent, consistent with the
foregoing, as may be provided by action of the Board of Directors or by
contract.
SECTION 10.03 Insurance of Officers, Directors, Employees and Agents: The
Corporation may purchase and maintain insurance on behalf of any person who is
or was a Director, officer, employee or agent of the Corporation, or while a
Director, officer, employee or agent of the Corporation is or was serving at the
request of the Corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan against any liability asserted against and incurred by such person
in any such capacity or arising out of such person's position.
C-5
<PAGE>
Item 30. Business and Other Connections of Investment Adviser
See "Management" in Part A to this Registration Statement on Form N-2.
Information as to the directors and officers of the Investment Manager is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-27291), and is incorporated herein by reference thereto.
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Name Address
---- -------
Morgan Grenfell Capital
Management, Inc........... 885 Third Avenue
New York, New York 10022
The Bank of New York........ 90 Washington Street
New York, New York 10015
Item 32. Management Services
Not applicable.
Item 33. Undertakings
(a) Registrant undertakes to suspend offering of the shares covered hereby
until it amends its Prospectus contained herein if (1) subsequent to the
effective date of this Registration Statement, its net asset value per share
declines more than ten percent from its net asset value per share as of the
effective date of this Registration Statement, or (2) its net asset value per
share increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
form of prospectus filed by the Registrant pursuant to 497(h) under the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
C-6
<PAGE>
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or in the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(c) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
(d) "Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue."
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 10th day of May 1996.
MORGAN GRENFELL SMALLCAP FUND, INC.
By: Robert E. Kern, Jr.*
---------------------------------
Robert E. Kern, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
)
)
Michael Bullock* )
- - ----------------------- )
Michael Bullock Chairman and )
Director )
(Principal Executive )
Officer) )
)
/s/Mark G. Arthus )
- - ----------------------- )
Mark G. Arthus Treasurer ) May 10, 1996
(Principal Financial )
and Accounting Officer) )
)
)
)
Robert E. Kern, Jr.* )
- - ----------------------- )
Robert E. Kern, Jr. President and )
Director )
)
)
<PAGE>
Signature Title Date
--------- ----- ----
)
)
Robert E. Greeley* )
- - ----------------------- )
Robert E. Greeley Director )
)
)
Joseph J. Icandela* )
- - ----------------------- )
Joseph J. Icandela Director )
)
)
Richard D. Wood* )
- - ----------------------- )
Richard D. Wood Director )
*By: /s/ Mark G. Arthus
-----------------------
Mark G. Arthus
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
(d)(1) - Form of Subscription Agreement
(d)(2) - Form of Notice of Guaranteed Delivery
(d)(3) - Form of Nominee Holder Over-Subscription Exercise Form
(h) - Form of Dealer Manager Agreement
(k)(2) - Form of Subscription Agent Agreement
(k)(3) - Form of Information Agent Agreement
(l) - Opinion and Consent of Counsel
(n) - Consent of Independent Auditors
(r) - Financial Data Schedule
FORM OF
MORGAN GRENFELL SMALLCAP FUND, INC.
RIGHTS OFFERING
SHAREHOLDER SUBSCRIPTION CERTIFICATE AND EXERCISE FORM
VOID IF NOT RECEIVED BY THE SUBSCRIPTION AGENT
BEFORE 5:00 P.M. NEW YORK CITY TIME ON JUNE 14, 1996,
UNLESS THE OFFER IS EXTENDED BY THE FUND
As the registered owner of this Subscription Certificate, you have been granted
Rights, based on the number of shares you owned on May 20, 1996 (the "Record
Date"), to subscribe for the number of Shares of the Fund's common stock shown
on the reverse of this Certificate. Under the Primary Subscription, you may
subscribe for one new Share for every three Rights held. The Subscription Price
per Share will be 95% of the lower of (i) the average of the last reported sale
prices of a share of the Fund's common stock on the New York Stock Exchange on
the expiration date of the Offer (the "Pricing Date") and the four preceding
business days and (ii) the net asset value per share of the Fund's common stock
as of the close of business on the Pricing Date. Pursuant to the
Over-Subscription Privilege, you may subscribe for any number of additional
Shares (to the extent available), provided you have exercised all the Rights
issued to you.
SAMPLE CALCULATION
(For Illustrative Purposes Only)
|-----------------------------------------------------------------------------|
| |
| * A shareholder who owns 150 shares on the Record Date would |
| be issued 150 Rights. |
| |
| * 150 Rights entitle the shareholder to subscribe for 50 new |
| Shares at the rate of one new Share for every three Rights held, |
| after fractional Shares have been excluded. Fractional Shares |
| will not be issued. |
| |
| * At the Estimated Subscription Price of $_____* per Share, |
| the payment amount due for the 50 new Shares would be $_____. |
| |
| 150 3 50 $ * $ |
| --------- / = --------- X --------- = --------- |
| (No. of Rights) (No. of Shares, (Estimated (Payment to be|
| excluding Subscription Remitted) |
| fractional Price per |
| shares) share) |
| |
| * $_____ is the Estimated Subscription Price only. The final |
| Subscription Price, which will be determined on June 14, 1996, |
| unless the Offer is extended by the Fund, could be higher or |
| lower than $_____, depending on movements in the net asset value |
| and market price of the shares. |
| |
|---------------------------------------------------------------------------- |
METHOD OF EXERCISE OF RIGHTS
To exercise your Rights, subscribe for Shares and calculate the payment for such
Shares, you must either (i) complete Sections 1 and 2 (and, if applicable,
Section 3) of the Exercise Form on the reverse of this Subscription Certificate,
and deliver the Subscription Certificate and payment for the Shares to the
Subscription Agent by one of the methods described below or (ii) deliver a
properly completed Notice of Guaranteed Delivery to the Subscription Agent by
one of the methods described below, in either case prior to 5:00 P.M., New York
City time, on the Expiration Date. See the prospectus for more details.
The Depositary for the Offer Is:
The Bank of New York
By Mail: Facsimile Transmission: By Hand or Overnight Courier:
(for Eligible Institutions Only)
(212) 815-6213
Tender & Exchange Tender & Exchange Department
Department 101 Barclay Street
P.O. Box 11248 Receive and Deliver Window
Church Street Station For Facsimile Confirmation New York, New York 10286
New York, New York Telephone:
10286-1248 (800) 507-9357
For information on this Offer call Corporate Investors Communications, Inc.,
toll free at (800) 459-8562.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY.
Confirmation notices will be sent to shareholders by June 24, 1996, unless the
Offer is extended (the "Confirmation Date").
RIGHTS TO PURCHASE SHARES ARE NON-TRANSFERABLE
Any questions regarding the Offer may be directed to the Information Agent,
Corporate Investor Communications, Inc., toll free at (800) 459-8562.
<PAGE>
TAX ID NUMBER ____________________
Subscription Certificate No. ____________________
Account No. ____________________
Rights Represented by this Certificate ____________________
Primary Subscription Shares Available ____________________
SECTION 1: DETAILS OF SUBSCRIPTION-PLEASE PRINT ALL
INFORMATION CLEARLY AND LEGIBLY
|------------------------------------------------------------------------------|
| IF YOU WISH TO SUBSCRIBE FOR ALL OF THE SHARES YOU ARE ENTITLED TO PURCHASE: |
| |
| A. I wish to subscribe for all of the |
| Shares I am entitled to purchase ____________ x $_____* = $___________ |
| under the Primary Subscription (Total number Payment |
| of new Shares Amount |
| entitled to |
| be purchased) |
| |
| |
| B. I wish to subscribe for additional |
| Shares, if available, pursuant |
| to the Over-Subscription Privilege.+____________ x $_____* = $___________|
| (Number of Payment |
| over-subscription Amount |
| Shares to be purchased) |
| |
| TOTAL AMOUNT ENCLOSED = $___________|
| |
| + You may only purchase additional Shares pursuant to the Over-Subscription|
| Privilege if you have fully exercised the Rights issued to |
| you under the Primary Subscription. |
| |
|------------------------------------------------------------------------------|
| IF YOU DO NOT WISH TO SUBSCRIBE FOR ALL OF |
| THE SHARES YOU ARE ENTITLED TO PURCHASE: |
| |
| C. I wish to subscribe only for the |
| following number of Shares under ____________ x $_____* = $___________|
| the Primary Subscription. (Number of Payment |
| New Shares Amount |
| to be purchased) |
| |
| TOTAL AMOUNT ENCLOSED = $___________|
| |
||-----------------------------------------------------------------------------|
| |
| * Estimated Subscription Price only; the final Subscription Price may |
| be higher or lower. |
| |
|------------------------------------------------------------------------------|
SECTION 2: CERTIFICATION
|------------------------------------------------------------------------------|
| |
| I acknowledge that I have received the Prospectus for this Offer, and |
| I hereby irrevocably subscribe for the number of new Shares indicated |
| above on the terms and conditions set forth in the Prospectus. I |
| understand and agree that I will be obligated to pay any additional |
| purchase price amounts for these new Shares to the Fund if the |
| Subscription Price, as determined on the Pricing Date, is in excess of |
| the $_____ Estimated Subscription Price. |
| |
| I hereby agree that if I fail to pay the full Subscription Price for |
| the Shares I have subscribed for, the Fund may exercise any of its |
| remedies, as noted in the Prospectus. |
| |
| ----------------------------- |
| Name and Signature of Shareholder(s) |
| ----------------------------- |
| Please provide your telephone number |
| ----------------------------- |
| |
| ----------------------------- |
|------------------------------------------------------------------------------|
| |
| If you wish to have your Shares and refund check (if any) delivered |
| to an address other than the address of record listed on the top of this |
| card, you must have your signature guaranteed by a member of the New |
| York Stock Exchange or by a bank or trust company with an office or |
| correspondent in the United States and provide the delivery address |
| below. Please check below if your address of record should be changed to |
| this address permanently: |
| _ |
| Delivery Address: Change my address of record |_| |
| to such delivery address |
| ------------------------ |
| ------------------------ |
| ------------------------ |
| |
|------------------------------------------------------------------------------|
SECTION 3: DESIGNATION OF BROKER/DEALER
|------------------------------------------------------------------------------|
| |
| The following broker/dealer is hereby designated as having been |
| instrumental in my exercise of Rights pursuant to this Offer: |
| |
| FIRM: ___________________________________________________________ |
| BROKER/DEALER NAME:______________________________________________ |
| BROKER/DEALER NUMBER:____________________________________________ |
| |
|------------------------------------------------------------------------------|
FORM OF
Broker Assigned Control #________
MORGAN GRENFELL SMALLCAP FUND, INC.
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company having an office or correspondent in the United States, guarantees
delivery to the Subscription Agent of (a) payment of the Estimated Subscription
Price of $____ per share for the total number of shares subscribed for under the
Primary Subscription and the Over-Subscription Privilege, as indicated herein,
together with confirmed exercise instructions by the close of business on
__________, 1996 and (b) payment of any additional invoiced amounts, as
described above, by the close of business on __________, 1996.
Payment amount based on
the Estimated Subscription
Price of $ per Share*:
----------------------
1. Primary Subscription:
Number of Primary
Number of Rights Subscription Shares
to be exercised: subscribed for:
______ Right/3 = ______ Shares x $_____ = $________
2. Over-Subscription
Privilege:
Number of Over-
Subscription
Shares subscribed for:
_______ Shares x $_____ = $___________
3. Total:
Total number of Shares Total payment
subscribed for: amount:
_______ Shares x $_____ = $___________
- - -----------
*Estimated Subscription Price only; the final Subscription Price may be higher
or lower.
How will you exercise the Rights on behalf of the beneficial owners?
(circle one)
A. Through DTC or another depository OR
B. By delivery of a Subscription Certificate directly to the
Subscription Agent.
<PAGE>
Indicate the Subscription Certificate Number for Each Applicable Shareholder:
- - -----------------------------------
- - -----------------------------------
- - -----------------------------------
- - -----------------------------------
- - ----------------------------------- -----------------------------------
Name of Firm Authorized Signature
- - ----------------------------------- -----------------------------------
DTC Participant Number Title
- - ----------------------------------- -----------------------------------
Address Name (Please Type or Print)
- - ----------------------------------- -----------------------------------
City State Zip Code Phone Number
- - ----------------------------------- -----------------------------------
Contact Name Date
<PAGE>
FORM OF
MORGAN GRENFELL SMALLCAP FUND, INC.
RIGHTS OFFERING
NOTICE OF GUARANTEED DELIVERY
TIME SENSITIVE -- UNLESS EXTENDED, THIS OFFER EXPIRES
ON June 14, 1996
As set forth in the prospectus under "THE OFFER -- Method of Exercise of
Rights" and "-- Payment for Shares," this form or one substantially equivalent
hereto may be used by a New York Stock Exchange member or a bank or trust
company with an office or correspondent in the United States as a means of
effecting a subscription on behalf of a shareholder pursuant to the rights
offering (the "Offer") of shares of the Fund's common stock. Such form must be
delivered by hand, sent by facsimile transmission, overnight courier or
first-class mail to the Subscription Agent prior to 5:00 P.M., New York City
time, on June 14, 1996, unless the Offer is extended by the Fund (the
"Expiration Date"). However, if sent by facsimile, the original executed form
must also be sent promptly thereafter by hand or mail delivery.
The Depositary for the Offer Is:
The Bank of New York
By Mail: Facsimile Transmission: By Hand or Overnight
(for Eligible Institutions Only) Courier:
Tender & Exchange Department Tender & Exchange Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
For Facsimile Confirmation Telephone:
(800) 507-9357
For information on this Offer call Corporate Investors Communication,
Inc., toll free at (800) 507-9357.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY.
This notice specifies the number of shares subscribed for under both the
Primary Subscription and Over-Subscription Privilege, and guarantees payment
for all subscribed shares and delivery of confirmed exercise instructions
electronically or by a form of the enclosed Beneficial Owner Certificate, no
later than the close of business on __________, 1996. Failure to deliver such
exercise instructions and payments will result in a shareholder's forfeiture of
the Rights. In the event the Subscription Price exceeds the Estimated
Subscription Price, an invoice for any additional amounts due will be sent by
__________, 1996 (the "Confirmation Date"). Payment for such additional amount,
if any, must be made by __________, 1996. In the event the Subscription Price is
less than the Estimated Subscription Price, the Subscription Agent will mail a
refund to exercising shareholders. If any shareholder exercises his or her right
to acquire Shares pursuant to the Over-Subscription Privilege, any such excess
payment which would otherwise be refunded to such shareholder will be applied by
the Fund toward payment for additional shares acquired pursuant to exercise of
the Over-Subscription Privilege.
FORM OF
Nominee Holder Over-Subscription Form
MORGAN GRENFELL SMALLCAP FUND, INC.
RIGHTS OFFERING
DTC PARTICIPANT OVER-SUBSCRIPTION FORM
NOMINEE HOLDER OVER-SUBSCRIPTION FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION
The Depositary for the Offer Is:
The Bank of New York
By Mail: Facsimile Transmission: By Hand or Overnight
(for Eligible Institutions Only) Courier:
Tender & Exchange Department Tender & Exchange Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
For Facsimile Confirmation Telephone:
(800) 507-9357
For information on this Offer call Corporate Investors Communication,
Inc., toll free at (800) 459-8562.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY.
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE
OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE
OVER-SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES
OF A COMMON DEPOSITORY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST
BE EFFECTED BY DELIVERY OF THE SUBSCRIPTION CERTIFICATE.
-------------
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE
FUND'S PROSPECTUS DATED __________, 1996 (THE "PROSPECTUS") AND ARE INCORPORATED
HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM
THE INFORMATION AGENT.
-------------
VOID, UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY
5:00 P.M., NEW YORK CITY TIME, ON June 14, 1996, UNLESS EXTENDED BY THE FUND
(THE "EXPIRATION DATE").
-------------
1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in [Name of Depository] (the "Depository") and that it has either
(i) exercised the Over-Subscription Privilege in respect of Rights and delivered
such exercised Rights to the Subscription Agent by means of transfer to the
Depository Account of the Fund or (ii) delivered to the Subscription Agent a
Notice of Guaranteed Delivery in respect of the exercise of the
Over-Subscription Privilege and will deliver the Rights called for in such
Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to
such Depository Account of the Fund.
2. The undersigned hereby exercised the Over-Subscription Privileges to
purchase, to the extent available Shares of common stock and certifies to the
Subscription Agent that such Over-Subscription Privilege is being exercised for
the account or accounts of persons (which may include the undersigned) on whose
behalf all Primary Subscription rights have been exercised.(*)
<PAGE>
3. The undersigned understands that payment of the Estimated Subscription
Price per share for each Share of common stock subscribed for pursuant to the
Over-Subscription Privilege must be received by the Subscription Agent at or
before 5:00 P.M. New York City time on the Expiration Date and represents that
such payment, in the aggregate amount of $ , either (check appropriate box):
__ has been or is being delivered to the Subscription Agent pursuant
|__| to the Notice of Guaranteed Delivery referred to
above, or
__ is being delivered to the Subscription Agent herewith, or
|__| has been delivered separately to the Subscription Agent;
__ and, in the case of funds not delivered pursuant to a Notice of
|__| Guaranteed Delivery, is or was delivered in the manner set forth below
(check appropriate box and complete information relating thereto):
__
|__| uncertified check
__
|__| certified check
__
|__| bank draft
- - ----------------------------------- -----------------------------------
Over-Subscription Confirmation Number Name of Nominee Holder
- - ----------------------------------- -----------------------------------
Depository Participant Number Address
-----------------------------------
Contact Name:____________________ City State Zip Code
Phone Number:____________________ By: ________________________________
Name:
Title:
Dated: __________________________, 1996
(*) PLEASE ATTACH A BENEFICIAL OWNER CERTIFICATION CONTAINING THE RECORD DATE
SHARE POSITION, THE NUMBER OF PRIMARY SHARES SUBSCRIBED FOR AND THE NUMBER
OF SHARES REQUESTED IN THE OVER-SUBSCRIPTION PRIVILEGE, BY EACH SUCH
OWNER.
MORGAN GRENFELL SMALLCAP FUND, INC.
________ Shares of Common Stock
Issuable Upon Exercise of ________ Non-Transferable
Rights to Subscribe for Such Shares of Common Stock
DEALER MANAGER AGREEMENT
New York, New York
May __, 1996
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Each of Morgan Grenfell SMALLCap Fund, Inc., a Maryland
corporation (the "Company") and Morgan Grenfell Capital Management, Inc., a
Delaware corporation (the "Investment Manager") confirms its agreement with
and appointment of PaineWebber Incorporated (the "Dealer Manager") to act
as dealer manager in connection with the issuance by the Company to the
holders of record at the close of business on _______ __, 1996, or such
other date as is established as the record date for such purpose (each a
"Holder" and, collectively, the "Holders"), of _______ non-transferable
rights entitling such Holders to subscribe for ___________ shares (each a
"Share" and, collectively, the "Shares") of common stock, par value $.01
per share (the "Common Stock"), of the Company (the "Offer"). Pursuant to
the terms of the Offer, the Company is issuing each Holder one
non-transferable right (each a "Right" and, collectively, the "Rights") for
each share of Common Stock held by such Holder on the record date set forth
in the Prospectus (the "Record Date"). Such Rights entitle Holders to
acquire during the subscription period set forth in the Prospectus (the
"Subscription Period"), at the price determined as set forth in such
Prospectus (the "Subscription Price"), one Share for each ______ Rights
exercised on the terms and conditions set forth in such Prospectus. No
fractional shares will be issued. Any Holder who fully exercises all Rights
initially issued to such Holder will be entitled to subscribe for, subject
to allotment, additional Shares (the "Over-Subscription Privilege").
Pursuant to the Over-Subscription Privilege, the Company may, at its
discretion, increase the number of Shares subject to subscription by up to
__%, or _______ Shares, for an aggregate total of _______ Shares.
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form N-2 (File Nos. 33-____
and 811-4981) and a related preliminary prospectus and preliminary
statement of additional information for the registration of the Shares
under the Securities Act of 1933, as amended (the "Securities Act"), the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
and the rules and regulations of the Commission under the Securities Act
and the Investment Company Act (the "Rules and Regulations"), and has filed
such amendments to such registration statement on Form N-2, if any, and
such amended preliminary prospectuses and preliminary statements of
additional information as may have been required to the date hereof. If the
registration statement has not become effective, a further amendment to
such registration statement, including forms of a final prospectus and
final statement of additional information necessary to permit such
registration statement to become effective will promptly be filed by the
Company with the Commission. If the registration statement has become
effective and any prospectus or statement of additional information
constituting a part thereof omits certain information at the time of
effectiveness pursuant to Rule 430A of the Rules and Regulations, a final
prospectus and final statement of additional information containing such
omitted information will promptly be filed by the Company with the
Commission in accordance with Rule 497(h) of the Rules and Regulations. The
term "Registration Statement" means the registration statement, as amended
(if applicable), at the time it becomes or became effective, including
financial statements and all exhibits and all documents, if any,
incorporated therein by reference, and any information deemed to be
included by Rule 430A. The term "Prospectus" means the final prospectus and
final statement of additional information in the forms filed with the
Commission pursuant to Rule 497(c), (h) or (j) of the Rules and
Regulations, as the case may be, as from time to time amended or
supplemented pursuant to the Securities Act. The Prospectus and letters to
beneficial owners of the shares of Common Stock of the Company, forms used
to exercise rights, any letters from the Company to securities dealers,
commercial banks and other nominees and any newspaper announcements, press
releases and other offering materials and information that the Company may
use, approve, prepare or authorize for use in connection with the Offer,
are collectively referred to hereinafter as the "Offering Materials".
1. Representations and Warranties.
(a) Each of the Company and the Investment Manager represents and
warrants to, and agrees with, the Dealer Manager as of the date hereof, as
of the date of the commencement of the Offer (such later date being
hereinafter referred to as the "Representation Date") and as of the
Expiration Date (as defined below) that:
(i) The Company meets the requirements for use of Form N-2 under
the Securities Act and the Investment Company Act and the Rules
and Regulations. At the time the Registration Statement becomes
effective, the Registration Statement will comply or complied in
all material respects with the requirements of the Securities
Act, the Investment Company Act and the Rules and Regulations and
will not or did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading. From the time the Registration Statement becomes
effective through the expiration date of the Offer set forth in
the Prospectus (the "Expiration Date"), the Prospectus and the
other Offering Materials will not contain an untrue statement of
a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements
in or omissions from the Registration Statement, Prospectus or
Offering Materials made in reliance upon and in conformity with
information furnished to the Company in writing by the Dealer
Manager expressly for use in the Registration Statement,
Prospectus or Offering Materials.
(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland, has full power and authority (corporate and
other) to conduct its business as described in the Registration
Statement and the Prospectus, currently maintains all material
governmental licenses, permits, consents, orders, approvals, and
other authorizations necessary to carry on its business as
contemplated in the Prospectus, and is duly qualified to do
business as a foreign corporation in each jurisdiction wherein it
owns or leases real property or in which the conduct of its
business requires such qualification, except where the failure to
be so qualified would not result in a material adverse effect
upon the business, properties, financial position or results of
operations of the Company. The Company has no subsidiaries.
(iii) The Company is registered with the Commission under the
Investment Company Act as a closed-end, diversified management
investment company, the Registration Statement will be effective
on the Representation Date and the Expiration Date, and no order
of suspension or revocation of such registration under the
Investment Company Act or the Securities Act has been issued or
proceedings therefor initiated or threatened by the Commission,
and the provisions of the Company's charter and by-laws comply as
to form in all material respects with the requirements of the
Investment Company Act.
(iv) KPMG Peat Marwick LLP, the accountants who certified the
financial statements of the Company set forth or incorporated by
reference in the Registration Statement and the Prospectus, are
independent public accountants as required by the Investment
Company Act and the Rules and Regulations.
(v) The financial statements of the Company set forth or
incorporated by reference in the Registration Statement and the
Prospectus present fairly in all material respects the financial
condition of the Company as of the dates or for the periods
indicated in conformity with generally accepted accounting
principles applied on a consistent basis; and the information set
forth in the Prospectus under the headings "Fund Expenses" and
"Financial Highlights" presents fairly in all material respects
the information stated therein.
(vi) The Company has an authorized capitalization as set forth in
the Prospectus; the outstanding shares of Common Stock have been
duly authorized and are validly issued, fully paid and
non-assessable and conform in all material respects to the
description thereof in the Prospectus under the heading "Common
Stock"; the Rights have been duly authorized by all requisite
action on the part of the Company for issuance pursuant to the
Offer; the Shares have been duly authorized by all requisite
action on the part of the Company for issuance and sale pursuant
to the terms of the Offer and, when issued and delivered by the
Company pursuant to the terms of the Offer against payment of the
consideration set forth in the Prospectus, will be validly
issued, fully paid and non-assessable; the Shares and the Rights
conform in all material respects to all statements relating
thereto contained in the Registration Statement, Prospectus and
other Offering Materials; and the issuance of each of the Rights
and the Shares is not subject to any preemptive rights.
(vii) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the
Registration Statement and the Prospectus, (A) the Company has
not incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, in each case other
than in the ordinary course of business, that are material to the
Company, (B) there has not been any material change in the
capital stock or long-term debt of the Company, or, except for
changes in the net asset value of the Company due to its normal
investment operations or to changes in market value, any material
adverse change in the condition (financial or other), business,
prospects, net assets or net investment income of the Company and
(C) there has been no dividend or distribution paid or declared
in respect of the Company's capital stock [other than _______].
(viii) Except as set forth in the Registration Statement and
Prospectus, there is no pending or, to the knowledge of the
Company and the Investment Manager, threatened action, suit or
proceeding affecting the Company or to which the Company is a
party before or by any court or governmental agency, authority or
body or any arbitrator, whether foreign or domestic, which the
Company or the Investment Manager reasonably expects to result in
any material adverse change in the condition (financial or
other), net assets or net investment income of the Company of a
character required to be disclosed in the Registration Statement
or the Prospectus.
(ix) There are no contracts or other documents of the Company
required to be described in the Registration Statement or the
Prospectus, or to be filed or incorporated by reference as
exhibits to the Registration Statement which are not described or
filed or incorporated by reference therein as permitted by the
Securities Act, the Investment Company Act or the Rules and
Regulations.
(x) Each of this agreement (the "Agreement"), the Subscription
Agency Agreement (the "Subscription Agency Agreement") dated as
of May __, 1996 between the Company and The Bank of New York (the
"Subscription Agent"), the Information Agent Agreement (the
"Information Agent Agreement") dated as of May __, 1996 between
the Company and Corporate Investors Communication (the
"Information Agent"), the Investment Advisory Agreement (the
"Investment Advisory Agreement") dated as of December 9, 1989
between the Company and the Investment Manager, the Fund
Accounting Agreement (the "Fund Accounting Agreement") dated as
of May 14, 1987 between the Company and The Bank of New York, the
Custodian Agreement (the "Custodian Agreement") dated as of May
14, 1987 between the Company and The Bank of New York, and the
Registrar and Transfer Agency Agreement (the "Transfer Agency
Agreement") dated as of May 14, 1987 between the Company and The
Bank of New York (collectively, all the foregoing are the
"Company Agreements") has been duly authorized, executed and
delivered by the Company; each of the Company Agreements complies
in all material respects with the provisions of the Investment
Company Act; and, assuming due authorization, execution and
delivery by the other parties thereto, each of the Company
Agreements constitutes a legal, valid, binding and enforceable
obligation of the Company, except as enforcement of the
indemnification provisions of this Agreement may be limited by
Federal or state securities laws or public policy and subject to
bankruptcy, insolvency, reorganization, moratorium and other laws
of general applicability relating to or affecting creditors'
rights, and to general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or
at law).
(xi) Neither the issuance of the Rights, nor the issuance and
sale of the Shares, nor the performance and consummation by the
Company of any other of the transactions contemplated in the
Company Agreements, nor the consummation of the transactions
contemplated in the Registration Statement will conflict with,
result in a breach or violation of, or constitute a default
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets of the
Company under the Articles of Incorporation or By-Laws of the
Company, or the terms and provisions of any agreement, indenture,
mortgage, lease or other instrument to which the Company is a
party or by which it may be bound or to which any of the property
or assets of the Company is subject, nor will such action result
in any violation of, or constitute a default under any provision
contained in, any order, law, rule or regulation applicable to
the Company of any court or governmental agency or body, whether
foreign or domestic, having jurisdiction over the Company or any
of its properties except, in each case, for such violations,
defaults, conflicts or breaches as do not have a material
adverse, either individually or in the aggregate, effect upon the
ability of the Company to perform its obligations under this
Agreement or any of the Company Agreements.
(xii) No consent, approval, authorization, notification or order
of, or filing with, any court or governmental agency or body is
required to be obtained by the Company for the consummation by
the Company of the transactions contemplated by the Company
Agreements or the Registration Statement, except such as have
been obtained, or if the registration statement filed with
respect to the Shares is not effective under the Securities Act
as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the
Investment Company Act, the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and state
securities laws.
(xiii) The Company owns or possesses all governmental licenses,
permits, consents, orders, approvals or other authorizations to
enable the Company to invest in securities as contemplated in the
Prospectus, except for such licenses, permits, consents, orders,
approvals or authorizations the failure of the Company to obtain
will not have a material adverse effect upon the Company.
(xiv) The outstanding Common Stock has been duly listed on the
New York Stock Exchange and prior to their issuance the Shares
will have been duly approved for listing, subject to official
notice of issuance, on the New York Stock Exchange.
(xv) The Company (A) has not taken, directly or indirectly, any
action designed to cause or to result in, or that has constituted
or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the issuance of the Rights or the sale or
resale of the Shares, (B) has not since the filing of the
Registration Statement sold, bid for or purchased, or paid anyone
any compensation for soliciting purchases of, shares of Common
Stock of the Company and (C) will not, until the later of the
expiration of the Rights or the completion of the distribution
(within the meaning of Rule 10b-6 under the Exchange Act) of the
Shares, sell, bid for or purchase, pay or agree to pay to any
person any compensation for soliciting another to purchase any
other securities of the Company (except for the solicitation of
the exercise of Rights and the Over-Subscription Privilege
pursuant to this Agreement); provided that any action in
connection with the Company's dividend reinvestment plan will not
be deemed to be within the terms of this Section 1(a)(xv).
(xvi) The Company has complied in all previous tax years, and
intends to direct the investment of the proceeds of the offering
described in the Registration Statement and the Prospectus in
such a manner as to continue to comply, with the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended
("Subchapter M of the Code"), and has qualified and intends to
continue to qualify as a regulated investment company under
Subchapter M of the Code.
(b) The Investment Manager represents and warrants to, and agrees
with, the Dealer Manager as of the date hereof, as of the Representation
Date and as of the Expiration Date that:
(i) The Investment Manager has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Delaware, has full power and authority (corporate
and other) to own its properties and conduct its business as
described in the Registration Statement and the Prospectus, and
is duly qualified to do business as a foreign corporation in each
jurisdiction wherein it owns or leases real property or in which
the conduct of its business requires such qualification, except
where the failure to be so qualified does not have a material
adverse effect upon the Investment Manager.
(ii) The Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and is not prohibited by the Advisers Act
or the Investment Company Act, or the rules and regulations under
such Acts, from acting as an investment adviser for the Company
as contemplated in the Prospectus and the Investment Advisory
Agreement.
(iii) Each of this Agreement and the Investment Advisory
Agreement is a party has been duly authorized, executed and
delivered by the Investment Manager and complies with all
applicable provisions of the Advisers Act, the Investment Company
Act and the rules and regulations under such Acts, and is,
assuming due authorization, execution and delivery by the other
parties thereto, a legal, valid, binding and enforceable
obligation of the Investment Manager, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium and other
laws of general applicability relating to or affecting creditors'
rights, and to general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or
at law).
(iv) Neither the performance by the Investment Manager of its
obligations under this Agreement or the Investment Advisory
Agreement nor the consummation of the transactions contemplated
therein or in the Registration Statement will conflict with,
result in a breach or violation of, or constitute a default
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets of the
Investment Manager under the Certificate of Incorporation or
By-Laws of the Investment Manager, or the terms and provisions of
any agreement, indenture, mortgage, lease or other instrument to
which the Investment Manager is a party or by which it may be
bound or to which any of the property or assets of the Investment
Manager is subject, nor will such action result in any violation
of, or constitute a default under any provision contained in, any
order, law, rule or regulation applicable to the Investment
Manager of any court or governmental agency or body, whether
foreign or domestic, having jurisdiction over the Investment
Manager or any of its properties except, in each case, for such
violations, defaults, conflicts or breaches as do not have a
material adverse effect, either individually or in the aggregate,
upon the ability of the Investment Manager to perform its
obligations under this Agreement or the Investment Advisory
Agreement.
(v) Except as set forth in the Registration Statement and
Prospectus, there is no pending or, to the best knowledge of the
Investment Manager, threatened action, suit or proceeding
affecting the Investment Manager or to which the Investment
Manager is a party before or by any court or governmental agency,
authority or body or any arbitrator, whether foreign or domestic,
which might result in any material adverse change in the
condition (financial or other), business prospects, net worth or
results of operations of the Investment Manager, or which the
Investment Manager reasonably expect to materially adversely
effect the Investment Manager's ability to perform its
obligations under the Agreement and the Investment Advisory
Agreement.
(vi) The Investment Manager owns or possesses any material
governmental licenses, permits, consents, orders, approvals or
other authorizations necessary to perform its obligations under
the Investment Advisory Agreement.
(vii) No consent, approval, authorization, notification or order
of, or any filing with, any court or governmental agency or body,
whether foreign or domestic, is required to be obtained by the
Investment Manager for the consummation by the Investment Manager
of the transactions contemplated by this Agreement or the
Investment Advisory Agreement.
(viii) The Investment Manager (a) has not taken, directly or
indirectly, any action designed to cause or to result in, or that
has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the issuance of the Rights
or the sale or resale of the Shares, (b) has not since the filing
of the Registration Statement sold, bid for or purchased, or paid
anyone any compensation for soliciting purchases of, shares of
Common Stock of the Company and (c) will not, until the later of
the expiration of the Rights or the completion of the
distribution (within the meaning of Rule 10b-6 under the Exchange
Act) of the Shares, sell, bid for or purchase, pay or agree to
pay any person any compensation for soliciting another to
purchase any other securities of the Company (except for the
solicitation of exercise of Rights and the Over-Subscription
Privilege pursuant to this Agreement); provided that any action
in connection with the Company's dividend reinvestment plan will
not be deemed to be within the terms of this Section 1(b)(viii).
(c) Any certificate required by this Agreement that is signed by
any officer of the Company or the Investment Manager and delivered to the
Dealer Manager or counsel for the Dealer Manager shall be deemed a
representation and warranty by the Company or the Investment Manager as the
case may be, to the Dealer Manager, as to the matters covered thereby.
2. Agreement to Act as Dealer Manager.
(a) On the basis of the representations and
warranties contained herein, and subject to the terms and
conditions of the Offer:
(i) The Company hereby appoints the Dealer Manager and other
soliciting dealers entering into a Soliciting Dealer Agreement,
in the form attached hereto as Exhibit A, with the Dealer Manager
(the "Soliciting Dealers"), to solicit, in accordance with the
Securities Act, the Investment Company Act and the Exchange Act,
the published rules and regulations of the Commission thereunder,
state securities and blue sky laws and (to the extent consistent
with such laws and regulations) and their customary practice, the
exercise of the Rights and the Over- Subscription Privilege,
subject to the terms and conditions of this Agreement, the
procedures described in the Registration Statement, the
Prospectus and, where applicable, the terms and conditions of
such Soliciting Dealer Agreement; and
(ii) The Company agrees to furnish, or cause to be furnished, to
the Dealer Manager, lists, or copies of those lists, showing the
names and addresses of, and number of shares of Common Stock held
by, Holders as of the Record Date, and the Dealer Manager agrees
to use such information only in connection with the Offer, and
not to furnish the information to any other person except for
securities brokers and dealers that have been requested by the
Dealer Manager to solicit exercises of Rights and the
Over-Subscription Privilege.
(b) The Dealer Manager agrees to provide to the Company, in
addition to the services described in paragraph (a) of this Section 2,
financial advisory and marketing services in connection with the Offer. No
advisory fee, other than the fees provided for in Section 3 of this
Agreement and the reimbursement of the Dealer Manager's out-of-pocket
expenses as described in Section 5 of this Agreement, will be payable by
the Company to the Dealer Manager in connection with the financial advisory
and marketing services provided by the Dealer Manager pursuant to this
Section 2(b).
(c) the Dealer Manager hereby makes, as to itself, the
representations, warranties and agreements set forth in the form of
Soliciting Dealer Agreement set forth as Exhibit A hereof.
(d) The Company and the Dealer Manager agree that the Dealer
Manager is an independent contractor with respect to the solicitation of
the exercise of Rights and the Over-Subscription Privilege and the
performance of financial advisory and marketing services for the Company
contemplated by this Agreement.
(e) In rendering the services contemplated by this Agreement, the
Dealer Manager will not be subject to any liability to the Company, the
Investment Manager or any of their affiliates, for any act or omission on
the part of any soliciting broker or dealer (except with respect to the
Dealer Manager acting in such capacity) or any other person, and the Dealer
Manager will not be liable for acts or omissions in performing its
obligations under this Agreement, except for any losses, claims, damages,
liabilities and expenses that are finally judicially determined to have
resulted from the bad faith, willful misconduct or gross negligence of the
Dealer Manager or by reason of the reckless disregard of the obligations
and duties of the Dealer Manager under this Agreement.
3. Dealer Manager and Solicitation Fees. In full payment for the
financial advisory and marketing services rendered and to be rendered
hereunder by the Dealer Manager, the Company agrees to pay the Dealer
Manager a fee (the "Dealer Manager Fee"), equal to ____% of the aggregate
Subscription Price for the Shares issued pursuant to the exercise of Rights
and the Over-Subscription Privilege. The Company also agrees to pay
Soliciting Dealers and the Dealer Manager, in full payment for their
soliciting efforts, fees (the "Solicitation Fees") (such Solicitation Fees
paid to the Dealer Manager are in addition to the Dealer Manager Fee) equal
to ____% of the Subscription Price per Share for each Share issued pursuant
to the exercise of Rights and the Over-Subscription Privilege. The Company
agrees to pay the Solicitation Fees to the broker-dealer designated on the
applicable portion of the form used by the Holder to exercise Rights and
the Over-Subscription Privilege, and if no broker-dealer is so designated
or a broker-dealer is otherwise not entitled to receive compensation
pursuant to the terms of the Soliciting Dealer Agreement, then to pay the
Dealer Manager the Solicitation Fee for each Share issued pursuant to such
exercise of Rights and the Over-Subscription Privilege. Payment to the
Dealer Manager by the Company will be in the form of a wire transfer of
same day funds to an account or accounts identified by the Dealer Manager.
Such payment will be made on each date on which the Company issues Shares
after the Expiration Date. Payment to a Soliciting Dealer will be made by
the Company directly to such Soliciting Dealer by check to an address
identified by such Soliciting Dealer. Such payments shall be made by the
tenth business day following the day on which final payment for the Shares
is due as set forth in the Prospectus.
4. Other Agreements.
(a) The Company covenants with the Dealer
Manager as follows:
(i) The Company will use its best efforts to cause the
Registration Statement to become effective under the Securities
Act, and will advise the Dealer Manager promptly as to the time
at which the Registration Statement and any amendments thereto
(including any post-effective amendment) becomes so effective.
(ii) The Company will notify the Dealer Manager immediately, and
confirm the notice in writing, (A) of the effectiveness of the
Registration Statement and any amendment thereto (including any
post-effective amendment), (B) of the receipt of any comments
from the Commission, (C) of any request by the Commission for any
amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, (D)
of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the initiation
of any proceedings for that purpose, (E) of the suspension of the
qualification of the Shares or the Rights for offering or sale in
any jurisdiction. The Company will make every reasonable effort
to prevent the issuance of any stop order described in subsection
(D) hereunder and, if any such stop order is issued, to obtain
the lifting thereof at the earliest possible moment.
(iii) The Company will give the Dealer Manager notice of its
intention to file any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus
which the Company proposes for use by the Dealer Manager in
connection with the Offer, which differs from the prospectus on
file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus is
required to be filed pursuant to Rule 497(c) or Rule 497(h) of
the Rules and Regulations), whether pursuant to the Investment
Company Act, the Securities Act, or otherwise, and will furnish
the Dealer Manager with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such
amendment or supplement to which the Dealer Manager or counsel
for the Dealer Manager shall reasonably object.
(iv) The Company will, without charge, deliver to the Dealer
Manager, as soon as practicable, the number of copies of the
Registration Statement as originally filed and of each amendment
thereto as it may reasonably request, in each case with the
exhibits filed therewith.
(v) The Company will, without charge, furnish to the Dealer
Manager, from time to time during the period when the Prospectus
is required to be delivered under the Securities Act, such number
of copies of the Prospectus (as amended or supplemented) as the
Dealer Manager may reasonably request for the purposes
contemplated by the Securities Act or the Rules and Regulations.
(vi) If any event shall occur as a result of which it is
necessary, in the reasonable opinion of counsel for the Dealer
Manager, to amend or supplement the Registration Statement or the
Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered
to a Holder, the Company will forthwith amend or supplement the
Prospectus by preparing and filing with the Commission (and
furnishing to the Dealer Manager a reasonable number of copies
of) an amendment or amendments of the Registration Statement or
an amendment or amendments of or a supplement or supplements to,
the Prospectus (in form and substance satisfactory to counsel for
the Dealer Manager), at the Company's expense, which will amend
or supplement the Registration Statement or the Prospectus so
that the Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements
therein, in the light of the circumstances existing at the time
the Prospectus is delivered to a Holder, not misleading.
(vii) The Company will endeavor, in cooperation with the Dealer
Manager and its counsel, to assist such counsel to qualify the
Rights and the Shares for offering and sale under the applicable
securities laws of such states and other jurisdictions of the
United States as the Dealer Manager may designate and maintain
such qualifications in effect for the duration of the Offer;
provided, however, that the Company will not be obligated to file
any general consent to service of process, or to qualify as a
foreign corporation or as a dealer in securities in any
jurisdiction in which it is not now so qualified. The Company
will file such statements and reports as may be required by the
laws of each jurisdiction in which the Rights and the Shares have
been qualified as above provided.
(viii) The Company will make generally available to its security
holders as soon as practicable, but no later than 60 days after
the close of the period covered thereby, an earnings statement
(in form complying with the provisions of Rule 158 of the Rules
and Regulations of the Securities Act) covering a twelve-month
period beginning not later than the first day of the Company's
fiscal quarter next following the "effective" date (as defined in
said Rule 158) of the Registration Statement.
(ix) For a period of 180 days from the date of this Agreement,
the Company will not, without the prior consent of the Dealer
Manager, offer or sell, or enter into any agreement to sell, any
equity or equity related securities of the Company or securities
convertible into such securities, other than the Rights and the
Shares and the Common Stock issued in reinvestment of dividends
or distributions.
(x) The Company will apply the net proceeds from the Offer as set
forth under "Use of Proceeds" in the Prospectus.
(xi) The Company will use its best efforts to cause the Shares to
be duly authorized for listing by the New York Stock Exchange
prior to the time the Shares are issued.
(xii) The Company will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter
M of the Code.
(xiii) The Company will advise or cause the Subscription Agent to
advise the Dealer Manager and each Soliciting Dealer from day to
day during the period of, and promptly after the termination of,
the Offer, as to the names and addresses of all Holders
exercising Rights, the total number of Rights exercised and the
number of Shares, including Shares requested pursuant to the
Over-Subscription Privilege, related thereto by each Holder
during the immediately preceding day, indicating the total number
of Rights verified to be in proper form for exercise, rejected
for exercise and being processed and, for the Dealer Manager and
each Soliciting Dealer, the number of Rights exercised and the
number of Shares, including Shares requested pursuant to the
Over-Subscription Privilege, related thereto on subscription
certificates indicating the Dealer Manager or such Soliciting
Dealer, as the case may be, as the broker-dealer with respect
thereto, and as to such other information as the Dealer Manager
may reasonably request; and will notify the Dealer Manager and
each Soliciting Dealer, not later than 5:00 P.M., New York City
time, on the first business day following the Expiration Date, of
the total number of Rights exercised and the number of Shares,
including Shares requested pursuant to the Over-Subscription
Privilege, related thereto, the total number of Rights verified
to be in proper form for exercise, rejected for exercise and
being processed and, for the Dealer Manager and each Soliciting
Dealer, the number of Rights exercised and the number of Shares,
including Shares requested pursuant to the Over-Subscription
Privilege, related thereto on subscription certificates
indicating the Dealer Manager or such Soliciting Dealer, as the
case may be, as the broker-dealer with respect thereto, and as to
such other information as the Dealer Manager may reasonably
request.
(b) The Company and the Investment Manager will not take,
directly or indirectly, any action designed to cause or to result in, or
that has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any security of the
Company to facilitate the issuance of the Rights or the sale or resale of
the Shares; provided that any action in connection with the Company's
dividend reinvestment plan will not be deemed to be within the meaning of
this Section 4(b).
5. Payment of Expenses.
(a) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including, but not limited to,
expenses relating to (i) the printing and filing of the Registration
Statement as originally filed and of each amendment thereto, (ii) the
preparation, issuance and delivery of the certificates for the Shares and
subscription certificates relating to the Rights, (iii) the fees and
disbursements of the Company's counsel and accountants, (iv) the
qualification of the Rights and the Shares under securities laws in
accordance with the provisions of Section 4(a)(vii) of this Agreement,
including filing fees and the preparation of the Blue Sky Survey by counsel
to the Dealer Manager, (v) the printing or other production and delivery to
the Dealer Manager of copies of the Registration Statement as originally
filed and of each amendment thereto and of the Prospectus and any
amendments or supplements thereto, (vi) the printing and other production
and delivery of copies of the Blue Sky Survey, (vii) the fees and expenses
incurred with respect to filing with the National Association of Securities
Dealers, Inc., (viii) the fees and expenses incurred in connection with the
listing of the Shares on the New York Stock Exchange, (ix) the printing or
other production, mailing and delivery expenses incurred in connection with
Offering Materials and (x) the fees and expenses incurred with respect to
the Information Agent.
(b) In addition to any fees that may be payable to the Dealer
Manager under this Agreement, the Company agrees to reimburse the Dealer
Manager upon request made from time to time for its reasonable expenses
incurred in connection with its activities under this Agreement, including
the reasonable fees and disbursements of its legal counsel (excluding Blue
Sky fees and expenses which are paid directly by the Company), in an amount
up to [$100,000].
(c) If this Agreement is terminated by the Dealer Manager in
accordance with the provisions of Section 6 or Section 9(a)(i), 9(a)(ii) or
9(a)(iii), the Company agrees to reimburse the Dealer Manager for all of
its reasonable out-of-pocket expenses incurred in connection with its
performance hereunder, including the reasonable fees and disbursements of
counsel for the Dealer Manager but shall not be liable to the Dealer
Manager or any Soliciting Dealer for any other fees or compensation
contemplated by Section 3 of this Agreement. In the event the transactions
contemplated hereunder are not consummated, the Company agrees to pay all
of the costs and expenses set forth in paragraphs (a) and (b) of this
Section 5 which the Company would have paid if such transactions had been
consummated.
6. Conditions of the Dealer Manager's Obligations. The
obligations of the Dealer Manager hereunder are subject to the accuracy of
the respective representations and warranties of the Company and the
Investment Manager contained herein, to the performance by the Company and
the Investment Manager of their respective obligations hereunder, and to
the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:30 P.M., New York City time, on the Representation Date, or at
such later time and date as may be approved by the Dealer Manager; the
Prospectus and any amendment or supplement thereto shall have been filed
with the Commission in the manner and within the time period required by
Rule 497(c), (e) or (h), as the case may be, under the Securities Act; no
stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of
the Company, the Investment Manager, Morgan Grenfell or the Dealer Manager,
shall be contemplated by the Commission; and the Company shall have
complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) On the Representation Date and the Expiration Date, the
Dealer Manager shall have received:
(1) The favorable opinions, dated the Representation Date and the
Expiration Date, of Hale and Dorr, counsel for the Company, in
form and substance satisfactory to counsel for the Dealer
Manager, to the effect that:
(i) The Company currently maintains all governmental
licenses, permits, consents, orders, approvals, and other
authorizations necessary to carry on its business as
contemplated in the Prospectus, except that counsel need
express no opinion as to securities or "blue sky" laws of
any state, and is duly qualified to do business as a foreign
corporation in each jurisdiction wherein it owns or leases
real property or in which the Company conducts material
business operations, the Company having informed such
counsel that the only such jurisdiction is (New York]. The
Company has no subsidiaries.
(ii) The Company is registered with the Commission under the
Investment Company Act as a closed-end, diversified
management investment company, and, to the knowledge of such
counsel, no order of suspension or revocation of such
registration has been issued or proceedings therefor
initiated or threatened by the Commission, and the
provisions of the Company's Articles of Incorporation and
By-Laws comply as to form in all material respects with the
requirements of the Investment Company Act.
(iii) The outstanding shares of Common Stock conform in all
material respects to the description thereof in the
Prospectus under the heading "Common Stock"; the Rights and
the Shares have been duly authorized and, when issued and
delivered by the Company pursuant to the terms of the Offer
against payment of the consideration set forth in the
Prospectus, will be validly issued, fully paid and
non-assessable; the Shares and the Rights conform in all
material respects to all statements relating thereto
contained in the Registration Statement, Prospectus and
other Offering Materials; and the issuance of each of the
Rights and the Shares is not subject to any preemptive
rights or other rights provided for by law or by the
Company's Articles of Incorporation.
(iv) Except as set forth in the Registration Statement and
Prospectus, to the best knowledge of such counsel, there is
no pending or threatened action, suit or proceeding
affecting the Company or to which the Company is a party
before or by any court or governmental agency, authority or
body or any arbitrator, whether foreign or domestic, which
might result in any material adverse change in the condition
(financial or other), business prospects, net assets or net
investment income of the Company, of a character required to
be disclosed in the Registration Statement or the
Prospectus.
(v) Such counsel does not know of any documents that are
required to be filed as exhibits to the Registration
Statement and are not so filed or of any documents required
to be summarized in the Prospectus and not so summarized.
(vi) Each of the Company Agreements has been duly
authorized, executed and delivered by the Company; each of
the Company Agreements complies with all applicable
provisions of the Investment Company Act; and, assuming due
authorization, execution and delivery by the other parties
thereto, each of the Company Agreements (other than this
Agreement) constitutes a legal, valid, binding and
enforceable obligation of the Company, subject to the
qualification that the enforceability of the Company's
obligations thereunder may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer
and other laws relating to or affecting the rights of
creditors generally.
(vii) Neither the issuance of the Rights, nor the issuance
and sale of the Shares, nor the performance by the Company
of its obligations under this Agreement or under any of the
Company Agreements will conflict with, result in a breach or
violation of, or constitute a default under, or result in
the creation or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company
under the terms of Articles of Incorporation or By-Laws of
the Company, or the terms and provisions of any agreement,
indenture, mortgage, lease or other instrument, or of any
order of any court or governmental body or agency, to which
the Company is a party or by which it may be bound or to
which any of the property or assets of the Company is
subject, which has, in each case, been specifically
identified to such counsel by the Company as an agreement,
indenture, mortgage, lease, order or other instrument that
is material to the business of the Company; nor will such
action result in any violation of or constitute a default
under any law, rule or regulation of any court or
governmental agency or body having jurisdiction over the
Company or any of its properties.
(viii) All consents, authorizations, approvals and filings
required to be made by the Company with any court or
governmental agency or body under the Federal laws of the
United States in connection with the transactions
contemplated hereby have been obtained or made.
(ix) The Common Stock has been duly listed on the New York
Stock Exchange and the Shares have been duly approved for
listing, subject to official notice of issuance, on the New
York Stock Exchange.
(x) The Registration Statement has become effective under
the Securities Act; any required filing of the Prospectus or
any supplement thereto pursuant to Rule 497(c), (e) or (h)
required to be made prior to the date of such opinion has
been made in the manner and within the time period required
by Rule 497(c), (e) or (h), as the case may be; to the best
knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued,
and no proceedings for that purpose have been instituted or
threatened; and the Registration Statement, the Prospectus
and each amendment thereof or supplement thereto (other than
the financial statements, the notes thereto and the
schedules and other financial and statistical data contained
therein, as to which such counsel need express no opinion)
appeared on their face to be appropriately responsive in all
material respects with the applicable requirements of the
Securities Act and the Investment Company Act and the Rules
and Regulations.
(xi) The statements in the Prospectus under the heading
"Taxation" fairly summarize the matters therein described.
In rendering such opinion, such counsel may rely as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company and public officials. Such counsel may state that their opinion is
limited to the Federal laws of the United States and that they are
expressing no opinion as to the effect of laws of any other jurisdiction,
except as specifically set forth in such opinion.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified,
and are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or
the Prospectus, in the course of their review and discussion of the
contents of the Registration Statement and Prospectus with certain officers
and employees of the Company and its independent accountants, no facts have
come to their attention which cause them to believe that the Registration
Statement, on the date it became effective, contained any untrue statement
of a material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements contained therein not
misleading or that the Prospectus, as of its date and on the Representation
Date or the Expiration Date, as the case may be, contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(2) The favorable opinion, dated the Representation Date and the
Expiration Date, of Hale and Dorr, counsel for the Investment
Manager, in form and substance satisfactory to counsel for the
Dealer Manager, to the effect that:
(i) The Investment Manager has been duly incorporated and is
existing as a corporation in good standing under the laws of
the State of Delaware, has the necessary power and authority
to conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to do
business as a foreign corporation in each jurisdiction
wherein it owns or leases real property or in which the
Investment Manager conducts material business operations,
the Investment Manager having informed such counsel that the
only such jurisdiction is [New York].
(ii) The Investment Manager is registered as an investment
adviser under the Advisers Act.
(iii) Each of this Agreement and the Investment Advisory
Agreement and any other Company Agreement to which the
Investment Manager is a party has been duly authorized,
executed and delivered by the Investment Manager and
complies with all applicable provisions of the Advisers Act,
the Investment Company Act and the rules and regulations
under such Acts, and is, assuming due authorization,
execution and delivery by the other parties thereto, the
Investment Advisory Agreement is a legal, valid, binding and
enforceable obligation of the Investment Manager, subject as
to enforcement to bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other laws relating to
or affecting the rights of creditors generally .
(iv) Neither the performance by the Investment Manager of
its obligations under this Agreement or the Investment
Advisory Agreement will conflict with, result in a breach or
violation of, or constitute a default under, or result in
the creation or imposition of any lien, charge or
encumbrance upon any properties or assets of the Investment
Manager under the terms of the Certificate of Incorporation
or By-Laws of the Investment Manager, or the terms and
provisions of any agreement, indenture, mortgage, lease or
other instrument, or of any order of any court or
governmental body or agency, to which the Investment Manager
is a party or by which it may be bound or to which any of
the property or assets of the Investment Manager is subject,
which has, in each case, been specifically identified to
such counsel by the Investment Manager as an agreement,
indenture, mortgage, lease, order or other instrument that
is material to the business of the Investment Manager; nor
will such action result in any violation or constitute a
default under any law, rule or regulation of any court or
governmental agency or body, whether foreign or domestic,
having jurisdiction over the Investment Manager or any of
its properties.
(v) Except as set forth in the Registration Statement and
Prospectus, to the best knowledge of counsel, there is no
pending or threatened action, suit or proceeding affecting
the Investment Manager or to which the Investment Manager is
a party before or by any court or governmental agency,
authority or body or any arbitrator, whether foreign or
domestic, which might result in any material adverse change
in the condition (financial or other), business prospects,
net worth or results of operations of the Investment
Manager, or which might materially and adversely affect the
properties or assets thereof of a character required to be
disclosed in the Registration Statement or Prospectus.
(vi) There are no consents, authorizations, approvals and
filings required to be made by the Investment Manager with
any court or governmental agency or body under the Federal
laws of the United States in connection with the
transactions contemplated hereby.
In rendering such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible
officers of the Investment Manager and public officials. Such counsel may
state that their opinion is limited to the Federal laws of the United
States and that they are expressing no opinion as to the effect of laws of
any other jurisdiction, except as specifically set forth in such opinion.
(3) The favorable opinions, dated the Representation Date and the
Expiration Date, of Piper & Marbury L.L.P., special counsel to
the Company, in form and substance satisfactory to counsel for
the Dealer Manager, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Maryland, has full power and authority
(corporate and other) to conduct its business as described
in the Registration Statement and Prospectus, and currently
maintains all governmental licenses, permits, consents,
orders, approvals, and other authorizations under the laws
of the State of Maryland necessary to carry on its business
as contemplated in the Prospectus, except that counsel
expresses no opinion as to the securities or "blue sky" laws
of the State of Maryland;
(ii) The Company's authorized capitalization is as set forth
in the Prospectus; the outstanding shares of Common Stock
have been duly authorized and are validly issued, fully paid
and non-assessable and conform in all material respects to
the description thereof in the Prospectus under the heading
"Common Stock"; the Rights have been duly authorized by all
requisite action on the part of Company for issuance
pursuant to the Offer; the Shares have been duly authorized
by all requisite action on the part of the Company for
issuance and sale pursuant to the terms of the Offer and,
when issued and delivered by the Company pursuant to the
terms of the Offer against payment of the consideration set
forth in the Prospectus, will be validly issued, fully paid
and non-assessable; the Shares and the Rights conform in all
material respects to all statements relating thereto
contained in the Registration Statement, the Prospectus and
the Offering Materials; and the issuance of each of the
Rights and the Shares is not subject to any preemptive
rights;
(iii) Except as set forth in the Prospectus, to the best
knowledge of such counsel, there is no pending or threatened
action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator in the State of
Maryland involving the Company of a character required to be
disclosed in the Registration Statement or the Prospectus;
(iv) Each of the Company Agreements has been duly
authorized, executed and delivered by the Company; no
consent, approval, authorization, notification or order of,
or any filing with, any court or governmental agency or body
is required under the laws of the State of Maryland for the
consummation by the Company of the transactions contemplated
by the Company Agreements, except (A) such as have been
obtained and (B) such as may be required under the
securities and "blue sky" of the State of Maryland in
connection with the transactions contemplated hereby; and
(v) Neither the issuance of the Rights, nor the issuance and
sale of the Shares by the Company, nor the performance and
consummation by the Company of any other of the transactions
contemplated in the Company Agreements or the Registration
Statement will conflict with, result in a breach or
violation of, or constitute a default under the charter or
by-laws of the Company or any court or governmental agency
or body of the State of Maryland.
In rendering such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
(c) The Dealer Manager shall have received from Skadden, Arps,
Slate, Meagher & Flom, counsel for the Dealer Manager, such opinion or
opinions, dated the Representation Date and the Expiration Date, with
respect to the Offer, the Registration Statement, the Prospectus and other
related matters as the Dealer Manager may reasonably require, and the
Company shall have furnished to such counsel such documents as they
reasonably request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Dealer Manager
certificates of the Company, signed by the Chairman of the Board, the
President or a Vice President of the Company, dated the Representation Date
and the Expiration Date, to the effect that the signers of such certificate
have read the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that, to the best of their knowledge:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as
of the Representation Date or the Expiration Date, as the case
may be, with the same effect as if made on the Representation
Date or the Expiration Date, as the case may be, and the Company
has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior
to the Representation Date or the Expiration Date, as the case
may be.
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or, to the Company's knowledge,
threatened.
(iii) Since the date of the most recent balance sheet included or
incorporated by reference in the Prospectus, there has been no
material adverse change in the condition (financial or other),
business prospects, net assets or net investment income of the
Company, other than in the ordinary course of business, except as
set forth in or contemplated in the Prospectus.
(e) The Investment Manager shall have furnished to the Dealer
Manager certificates, signed by the Chairman of the Board, the President, a
Vice President or other senior officer, dated the Representation Date and
the Expiration Date, to the effect that the signer of such certificate has
read the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and, to the best knowledge of such signer,
the representations and warranties of the Investment Manager in this
Agreement are true and correct in all material respects on and as of the
Representation Date or the Expiration Date, as the case may be, with the
same effect as if made on the Representation Date or the Expiration Date,
as the case may be.
(f) KPMG Peat Marwick LLP shall have furnished to the Dealer
Manager letters, dated the Representation Date and the Expiration Date, in
form and substance satisfactory to the Dealer Manager, and stating in
effect that:
(i) They are independent accountants with respect to the Company
within the meaning of the Securities Act and the applicable Rules
and Regulations.
(ii) In their opinion, the audited financial statements examined
by them and included or incorporated by reference in the
Registration Statement comply as to form in all material respects
with the applicable accounting requirements of the Securities Act
and the Investment Company Act and the respective Rules and
Regulations with respect to registration statements on Form N-2.
(iii) They have performed specified procedures, not constituting
an audit, including a reading of the latest available interim
financial information of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company
responsible for financial or accounting matters and such other
inquiries and procedures which shall be specified in such letter,
and on the basis of such inquiries and procedures nothing came to
their attention that caused them to believe that at the date of
the latest available financial information read by such
accountants, or at a subsequent specified date not more than five
business days prior to the Representation Date or the Expiration
Date, as the case may be, there was any change in the capital
stock, net assets or long term debt of the Company as compared
with amounts shown in the most recent statement of assets and
liabilities included or incorporated by reference in the
Registration Statement, except as the Registration Statement
discloses has occurred or may occur or as disclosed in their
letter.
(iv) In addition to the procedures referred to in clause (iii)
above, they have performed other specified procedures, not
constituting an audit, with respect to certain amounts,
percentages, numerical data and financial information appearing
in the Registration Statement, which have previously been
specified by the Dealer Manager and which shall be specified in
such letter, and have compared such items with, and have found
such items to be in agreement with, the accounting and financial
records of the Company.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not
have been (i) any change or decrease specified in the letter or letters
referred to in paragraph (d)-(f) of this Section 6, or (ii) any change, or
any development involving a prospective change, in or affecting the
business or properties of the Company, the effect of which, in any case
referred to in clause (i) or (ii) above, is, in the reasonable judgment of
the Dealer Manager, so material and adverse as to make it impractical or
inadvisable to proceed with the Offer as contemplated by the Registration
Statement and the Prospectus.
(h) Prior to the Representation Date, the Company shall have
furnished to the Dealer Manager such further information, certificates and
documents as the Dealer Manager may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects
satisfactory in substance to the Dealer Manager and its counsel, this
Agreement and all obligations of the Dealer Manager hereunder may be
canceled at, or at any time prior to, the Representation Date by the Dealer
Manager. Notice of such cancellation shall be given to the Company in
writing or by telephone or telegraph confirmed in writing.
7. Indemnification and Contribution.
(a) Each of the Company and the Investment Manager jointly and
severally, will indemnify and hold harmless the Dealer Manager, the
directors, officers, employees and agents of the Dealer Manager and each
person, if any, who controls the Dealer Manager within the meaning of
Section 15 of the Securities Act and Section 20 of the Exchange Act against
any and all losses, claims, damages and liabilities, joint or several
(including any investigation, legal and other expenses reasonably incurred
in connection with, and any amount paid in settlement of, any action, suit
or proceeding or any claim asserted), to which they, or any of them, may
become subject under the Securities Act, the Exchange Act, the Investment
Company Act, the Advisers Act or other statutory law or regulation, at
common law or otherwise, whether foreign or domestic, insofar as such
losses, claims, damages or liabilities arise out of or are based on any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement, the Prospectus or the Offering Materials,
and any amendment or supplement thereto, or the omission or alleged
omission to state in any or all such documents a material fact required to
be stated therein or necessary to make the statements in it not misleading
(in the case of the Prospectus, in light of the circumstances under which
such statements were made), provided that neither the Company nor the
Investment Manager will be liable to the extent that such loss, claim,
damage or liability arises from an untrue statement or omission or alleged
untrue statement or omission (1) made in reliance on and in conformity with
information furnished in writing to the Company by the Dealer Manager
expressly for use in the document, or (2) if a copy of the Prospectus was
not sent or given to such person at or before the written confirmation of
the sale to such person in any case where such delivery is required by the
Securities Act. This indemnity agreement will be in addition to any
liability that the Company or the Investment Manager might otherwise have.
(b) The Dealer Manager will indemnify and hold harmless the
Company and the Investment Manager each director and officer of the Company
who signs the Registration Statement and each person, if any, who controls
the Company or the Investment Manager within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, to the same extent as
the foregoing indemnity from the Company or the Investment Manager to the
Dealer Manager, but only insofar as losses, claims, damages or liabilities
arise out of or are based on any untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information furnished in writing to the Company by the Dealer Manager
expressly for use in preparation of the documents in which the statement or
omission is made or alleged to be made. This indemnity agreement will be in
addition to any liability that the Dealer Manager might otherwise have.
(c) Any party that proposes to assert the right to be indemnified
under this Section 7 will, promptly after receipt of notice of commencement
of any action against such party in respect of which a claim is to be made
against an indemnifying party or parties under this Section 7, notify each
such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission to notify such indemnifying
party will not, except to the extent set forth below, relieve it from
liability that it may have to any indemnified party. No indemnification
provided for in Section 7(a) or (b) hereof shall be available to any party
who shall fail to give notice as provided in this Section 7(c) if the party
to whom notice was not given was unaware of the proceeding to which such
notice would have related and was prejudiced by the failure to give such
notice, but the omission to notify such indemnifying party of such action
shall not relieve it from any liability that it may have to any indemnified
party for contribution or otherwise on account of the provisions in Section
7(a) or (b). If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in, and, to the extent
that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and, after notice from the
indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified
party in connection with the defense. The indemnified party will have the
right to employ its counsel in any such action, but the fees and expenses
of such counsel will be at the expense of such indemnified party unless (1)
the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded that there may be legal defenses available to it or other
indemnified parties that are different from or in addition to those
available to the indemnifying party (in which case the indemnifying party
will not have the right to direct the defense of such action on behalf of
the indemnified party) or (3) the indemnifying party has not in fact
employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of
which cases the reasonable fees and expenses of counsel will be at the
expense of the indemnifying party or parties. All such fees and expenses
will be reimbursed promptly as they are incurred. An indemnifying party
will not be liable for any settlement of any action or claim effected
without its written consent or, in connection with any proceeding or
related proceeding in the same jurisdiction, for the fees and expenses of
more than one separate counsel for all indemnified parties except to the
extent provided herein.
(d) In no case shall the indemnification provided in this Section
7 be available to protect any person against any liability to which any
such person would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its or his obligations
or duties hereunder, or by reason of its or his reckless disregard of its
or his obligations and duties hereunder.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7
is applicable in accordance with its terms but for any reason is held to be
unavailable from the Company, the Investment Manager or the Dealer Manager,
the Company, the Investment Manager and the Dealer Manager will contribute
to the total losses, claims, damages and liabilities (including any
investigation, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action or any claims
asserted, but after deducting any contribution received by the Company, the
Investment Manager or from persons other than the Dealer Manager, such as
persons who control the Company or the Investment Manager within the
meaning of the Securities Act or the Exchange Act, officers of the Company
who signed the Registration Statement and directors of the Company, who may
also be liable for contribution) to which the Company, the Investment
Manager or the Dealer Manager may be subject in such proportion as is
appropriate to reflect (i) the relative benefits received by the
indemnifying party or parties on the one hand and the indemnified party on
the other hand from the offering of the Shares or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law,
not only such relative benefits but also the relative fault of the
indemnifying party or parties on the one hand and the indemnified party on
the other hand in connection with the statements or omissions or alleged
statements or omissions that resulted in the losses, claims, damages or
liabilities, joint or several (including any investigation, legal or other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), for
which contribution is sought. The relative benefits received by the Company
and the Investment Manager (treated jointly for this purpose as one person)
on the one hand and the Dealer Manager on the other hand shall be deemed to
be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company bear to the total fees received
by the Dealer Manager. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Investment Manager or the Dealer Manager, the intent of the
parties and their relative knowledge, access to information and opportunity
to correct or prevent such statement or omission and any other equitable
considerations appropriate in the circumstances. Notwithstanding any other
provisions of this Section 7, (1) the Dealer Manager will not be
responsible for any amount in excess of the fees paid by the Company
pursuant to Section 3 hereof and (2) no person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) will be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section, any person
who controls a party to this Agreement within the meaning of the Securities
Act will have the same rights to contribution as that party, and each
officer of the Company who signed the Registration Statement and each
director of the Company will have the same rights to contribution as the
Company, subject in each case to clause (i) of the first sentence of this
Subsection 7(e). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action against such party in
respect of which a claim for contribution may be made under this Section 7,
notify such party or parties from whom contribution may be sought, but the
omission so to notify will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
otherwise than under this Section 7. No party will be liable for
contribution with respect to any action or claim settled without its
written consent.
(f) The Company and the Investment Manager agree to indemnify
each Soliciting Dealer and controlling persons to the same extent and
subject to the same conditions and to the same agreements, including with
respect to contribution, provided for in subsections (a), (b), (c), (d) and
(e) of this Section 7.
(g) The Company and the Investment Manager acknowledge that the
statements under the caption "Distribution Arrangements" in the Prospectus
constitute the only information furnished in writing to the Company by the
Dealer Manager expressly for use in such document, and the Dealer Manager
confirms that such statements are correct.
8. Representations, Warranties and Agreements to Survive
Delivery. The respective agreements, representations, warranties,
indemnities and other statements of the Company or its officers, of the
Investment Manager and of the Dealer Manager set forth in or made pursuant
to this Agreement shall survive the Expiration Date and will remain in full
force and effect, regardless of any investigation made by or on behalf of
the Dealer Manager or the Company or any of the officers, directors or
controlling persons referred to in Section 7 hereof, and will survive
delivery of and payment for the Shares pursuant to the Offer. The
provisions of Sections 5 and 7 hereof shall survive the termination or
cancellation of this Agreement.
9. Termination of Agreement. (a) This Agreement shall be subject
to termination in the absolute discretion of the Dealer Manager, by notice
given to the Company prior to the expiration of the Offer, if prior to such
time (i) financial, political, economic, currency, banking or social
conditions in the United States shall have undergone any material change
the effect of which on the financial markets makes it, in the Dealer
Manager's judgment, impracticable or inadvisable to proceed with the Offer,
(ii) there has occurred any outbreak or material escalation of hostilities
or other calamity or crisis the effect of which on the financial markets of
the United States is such as to make it, in the Dealer Manager's judgment,
impracticable or inadvisable to proceed with the Offer, (iii) trading in
the shares of Common Stock shall have been suspended by the Commission or
the New York Stock Exchange, (iv) trading in securities generally on the
New York Stock Exchange shall have been suspended or limited or (v) a
banking moratorium shall have been declared either by Federal or New York
State authorities.
(b) If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 5.
10. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Dealer Manager, will be
mailed, delivered or telegraphed and confirmed to PaineWebber Incorporated,
Attn: Todd A. Reit, 1285 Avenue of the Americas, New York, New York 10019;
or if sent to the Company or the Investment Manager will be mailed,
delivered or telegraphed and confirmed to them at: Morgan Grenfell SMALLCap
Fund, Inc., c/o Morgan Grenfell Capital Management, Inc., Attn:
____________, 885 Third Avenue, New York, New York 10022.
11. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and will
inure to the benefit of the officers and directors and controlling persons
referred to in Section 7 hereof, and no other person will have any right or
obligation hereunder.
12. Applicable Law. This Agreement will be
governed by and construed in accordance with the laws of
the State of New York without reference to choice of law
principles thereof.
13. Counterparts. This Agreement may be exe-
cuted in one or more counterparts, each of which shall be
deemed to be an original, but all of which together shall
constitute one and the same instrument.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the
Company, the Investment Manager and the Dealer Manager.
Very truly yours,
Morgan Grenfell SMALLCap Fund, Inc.
By:_________________________________
Name:
Title:
Morgan Grenfell Capital Management, Inc.
By:_________________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date
first above written.
PaineWebber Incorporated
By:__________________________________
Name:
Title:
<PAGE>
Exhibit A
Morgan Grenfell SMALLCap Fund Inc.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
__________ __, 1996.
To Securities Dealers and Brokers:
Morgan Grenfell SMALLCap Fund Inc. (the "Company") is issuing to
its shareholders of record ("Record Date Shareholders") as of the close of
business on __________ __, 1996 (the "Record Date") non-transferable rights
("Rights") to subscribe for an aggregate of up to _________ shares (the
"Shares") of common stock, par value $0.01 per share (the "Common Stock"),
of the Company upon the terms and subject to the conditions set forth in
the Company's Prospectus (the "Prospectus") dated __________ __, 1996 (the
"Offer"). Each such Record Date Shareholder is being issued one Right for
each full share of Common Stock owned on the Record Date. The Rights
entitle the Record Date Shareholder, during the Subscription Period (as
hereinafter defined) to acquire at the Subscription Price (as hereinafter
defined), one Share for each ______ Rights held in the primary
subscription. No fractional Shares will be issued. The Subscription Price
will be __% of the lower of (i) the average of the last reported sales
prices of a share of the Company's Common Stock on the New York Stock
Exchange on the date of the expiration of the Offer (the "Pricing Date")
and the four preceding business days and (ii) the net asset value per share
as of the Pricing Date. The Subscription Period will commence on __________
__, 1996 and end on the Expiration Date. (With respect to the Offer, the
term "Expiration Date" means 5:00 p.m., New York City time, on __________
__, 1996, unless and until the Company shall, in its sole discretion, have
extended the period for which the Offer is open, in which event the term
"Expiration Date" with respect to the Offer will mean the latest time and
date on which the Offer, as so extended by the Company, will expire.) Any
Record Date Shareholder who fully exercises all Rights issued to such
shareholders is entitled to subscribe for Shares which were not otherwise
subscribed for by others on primary subscription (the "Over- Subscription
Privilege"). Shares acquired pursuant to the Over-Subscription Privilege
are subject to allotment, as more fully discussed in the Prospectus.
For the duration of the Offer, the Company has agreed to pay
Solicitation Fees to any qualified broker or dealer executing a Soliciting
Dealer Agreement who solicits the exercise of Rights and the
Over-Subscription Privilege in connection with the Offer and who complies
with the procedures described below (a "Soliciting Dealer"). Upon timely
delivery to [The Bank of New York], the Company's Subscription Agent for
the Offer, of payment for Shares purchased pursuant to the exercise of
Rights and the Over-Subscription Privilege and of properly completed and
executed documentation as set forth in this Soliciting Dealer Agreement, a
Soliciting Dealer will be entitled to receive Solicitation Fees equal to
____% of the Subscription Price per Share so purchased; provided, however,
that no payment shall be due with respect to the issuance of any Shares
until payment therefor is actually received. A qualified broker or dealer
is a broker or dealer which is a member of a registered national securities
exchange in the United States or the National Association of Securities
Dealers, Inc. ("NASD") or any foreign broker or dealer not eligible for
membership who agrees to conform to the Rules of Fair Practice of the NASD,
including Sections 8, 24, 25 and 36 thereof, in making solicitations in the
United States to the same extent as if it were a member thereof.
The Company has agreed to pay the Solicitation Fees payable to
the undersigned Soliciting Dealer and to indemnify such Soliciting Dealer
on the terms set forth in the Dealer Manager Agreement, dated ________ __,
1996, among PaineWebber Incorporated as the Dealer Manager, the Company and
others (the "Dealer Manager Agreement"). Solicitation and other activities
by Soliciting Dealers may be undertaken only in accordance with the
applicable rules and regulations of the Securities and Exchange Commission
and only in those states and other jurisdictions where such solicitations
and other activities may lawfully be undertaken and in accordance with the
laws thereof. Compensation will not be paid for solicitations in any state
or other jurisdiction in which the opinion of counsel to the Company or
counsel to the Dealer Manager, such compensation may not lawfully be paid.
No Soliciting Dealer shall be paid Solicitation Fees with respect to Shares
purchased pursuant to an exercise of Rights and the Over-Subscription
Privilege for its own account or for the account of any affiliate of the
Soliciting Dealer, except that the Dealer Manager shall receive the
Solicitation Fees with respect to Shares purchased pursuant to an exercise
of Rights and the Over-Subscription Privilege for its own account provided
that such Shares are offered and sold by the Dealer Manager to its clients.
No Soliciting Dealer or any other person is authorized by the Company or
the Dealer Manager to give any information or make any representations in
connection with the Offer other than those contained in the Prospectus and
other authorized solicitation material furnished by the Company through the
Dealer Manager. No Soliciting Dealer is authorized to act as agent of the
Company or the Dealer Manager in any connection or transaction. In
addition, nothing herein contained shall constitute the Soliciting Dealers
partners with the Dealer Manager or with one another, or agents of the
Dealer Manager or of the Company, or create any association between such
parties, or shall render the Dealer Manager or the Company liable for the
obligations of any Soliciting Dealer. The Dealer Manager shall be under no
liability to make any payment to any Soliciting Dealer, and shall be
subject to no other liabilities to any Soliciting Dealer, and no
obligations of any sort shall be implied.
In order for a Soliciting Dealer to receive Solicitation Fees,
PaineWebber Incorporated must have received from such Soliciting Dealer no
later than 5:00 p.m., New York City time, on the Expiration Date, either
(i) a properly completed and duly executed Subscription Certificate with
respect to Shares purchased pursuant to the exercise of Rights and the
Over-Subscription Privilege and full payment for such Shares; or (ii) a
Notice of Guaranteed Delivery guaranteeing delivery to the Subscription
Agent by close of business on the third business day after the Expiration
Date, of (a) full payment with respect to Shares issued pursuant to the
exercise of Rights and the Over-Subscription Privilege and (b) a properly
completed and duly executed Subscription Certificate with respect such
Shares. Solicitation Fees will only be paid after receipt by the
Subscription Agent of a properly completed and duly executed Soliciting
Dealer Agreement (or a facsimile thereof). In the case of a Notice of
Guaranteed Delivery, Solicitation Fees will only be paid after delivery in
accordance with such Notice of Guaranteed Delivery has been effected.
Solicitation Fees will be paid by the Company to the Soliciting Dealer by
check to an address designated by the Soliciting Dealer below by the tenth
business day after final payment for the Shares is due as set forth in the
Prospectus.
All questions as to the form, validity and eligibility (including
time of receipt) of this Soliciting Dealer Agreement will be determined by
the Company, in its sole discretion, which determination shall be final and
binding. Unless waived, any irregularities in connection with a Soliciting
Dealer Agreement or delivery thereof must be cured within such time as the
Company shall determine. None of the Company, the Dealer Manager,
Subscription Agent, the Information Agent for the Offer (Shareholder
Communications Corporation) or any other person will be under any duty to
give notification of any defects or irregularities in any Soliciting Dealer
Agreement or incur any liability for failure to give such notification.
The acceptance of Solicitation Fees from the Company by the
undersigned Soliciting Dealer shall constitute a representation by such
Soliciting Dealer to the Company that: (i) it has received and reviewed the
Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise
of the Rights and the Over-Subscription Privilege, it has complied with the
applicable requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the applicable rules and regulations thereunder, any
applicable securities laws of any state or jurisdiction where such
solicitations may lawfully be made, and the applicable rules and
regulations of any self-regulatory organization or registered national
securities exchange; (iii) in soliciting purchases of Shares pursuant to
the exercise of the Rights and the Over-Subscription Privilege, it has not
published, circulated or used any soliciting materials other than the
Prospectus and any other authorized solicitation material furnished by the
Company through the Dealer Manager; (iv) it has not purported to act as
agent of the Company or the Dealer Manager in any connection or transaction
relating to the Offer; (v) the information contained in this Soliciting
Dealer Agreement is, to its best knowledge, true and complete; (vi) it is
not affiliated with the Company; (vii) it will not accept Solicitation Fees
paid by the Company pursuant to the terms hereof with respect to Shares
purchased by the Soliciting Dealer pursuant to an exercise of Rights and
the Over-Subscription Privilege for its own account; (viii) it will not
remit, directly or indirectly, any part of Solicitation Fees paid by the
Company pursuant to the terms hereof to any beneficial owner of Shares
purchased pursuant to the Offer; and (ix) it has agreed to the amount of
the Solicitation Fees and the terms and conditions set forth herein with
respect to receiving such Solicitation Fees. By returning a Soliciting
Dealer Agreement and accepting Solicitation Fees, a Soliciting Dealer will
be deemed to have agreed to indemnify the Company and the Dealer Manager
against losses, claims, damages and liabilities to which the Company may
become subject as a result of the breach of such Soliciting Dealer's
representations made herein and described above. In making the foregoing
representations, Soliciting Dealers are reminded of the possible
applicability of Rule 10b-6 under the Exchange Act if they have bought,
sold, dealt in or traded in any Shares for their own account since the
commencement of the Offer.
Solicitation Fees due to eligible Soliciting Dealers will be paid
promptly after consummation of the Offer. Upon expiration of the Offer, no
Solicitation Fees will be payable to Soliciting Dealers with respect to
Shares purchased thereafter.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Dealer Manager Agreement or, if not
defined therein, in the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws of
the State of New York without reference to the choice of law principles
thereof.
Please execute this Soliciting Dealer Agreement below accepting
the terms and conditions hereof and confirming that you are a member firm
of a registered national securities exchange or of the NASD or a foreign
broker or dealer not eligible for membership who has conformed to the Rules
of Fair Practice of the NASD, including Sections 8, 24, 25 and 36 thereof,
in making solicitations of the type being undertaken pursuant to the Offer
in the United States to the same extent as if you were a member thereof,
and certifying that you have solicited the purchase of the Shares pursuant
to exercise of the Rights and the Over-Subscription Privilege, all as
described above, in accordance with the terms and conditions set forth in
this Soliciting Dealer Agreement. Please forward two executed copies of
this Soliciting Dealer Agreement to Morgan Grenfell SMALLCAP Fund, Inc.,
c/o Morgan Grenfell Capital Management, Inc., 885 Third Avenue, New York,
New York 10022, Attention: ____________ (tel. number (212) _______; fax
number (212) ________). A signed copy of this Soliciting Dealer Agreement
will be promptly returned to the Soliciting Dealer at the address set forth
below.
Very truly yours,
PaineWebber Incorporated
By:
Name:
Title:
PLEASE COMPLETE THE INFORMATION BELOW:
ACCEPTED AND CONFIRMED BY SOLICITING DEALER
Contact at Firm: _______________________________________
Printed Firm Name Address
Authorized Signature Area Code and Telephone Number
Name and Title Fax Number
Dated:
Payment of the Solicitation Fee shall be mailed by check to the following
address:
Form of Subscription Agent Agreement
_____ , 1996
The Bank of New York
101 Barclay Street - 22W
New York, New York 10286
Attn: Susan A. McFarland
Dear Sirs:
Agent Agreement, dated as of _ _____ , 1996, between Morgan
Grenfell SMALLCap Fund, Inc. (the "Corporation") and The Bank of New
York, a New York Corporation (the "Agent").
Section 1. The Rights Offering. The Corporation is distributing to
the holders ("Stock Holders") of its outstanding Common Stock, $0.01
par value (the "Common Stock"), of record at the close of business on
May 20, 1996 (the "Record Date"), rights (the "Basic Subscription
Rights") to subscribe and purchase 2,156,413 shares of Common Stock
(2,695,516 if the Oversubscription Rights (as defined below) are
exercised) at the price of $ per share (the "Subscription Price") on
the basis of one Basic Subscription Right for each share of Common
Stock held of record on the Record Date. Three (3) Basic Subscription
Rights will be required to purchase one share of Common Stock. The
subscription offer will expire on June 14, 1996, unless extended by the
Corporation (the "Expiration Date"). The Subscription Warrants and
payment equal to the amount of the Subscription Price times the number
of shares of subscribed Common Stock ("Payment") must be received by
the Agent before 5:00 P.M., New York City time, on the Expiration Date.
The Corporation filed a Registration Statement relating to the
Basic Subscription Rights, its Oversubscription Rights (as defined in
the Final Prospectus referred to below), and the Common Stock to be
issued pursuant to the Basic Subscription Rights and the
Oversubscription Rights (collectively, the "Subscription Rights") with
the Securities and Exchange Commission under the Securities Act of 1993
(the "Act") on April 5, 1996. Said Registration Statement became
effective on May , 1996. A copy of the Final Prospectus as filed
pursuant to Rule under the Act (the "Final Prospectus") is attached as
Exhibit 1 hereto.
The Basic Subscription Rights are evidenced by fully-transferable
Subscription Warrants, a copy of the form of which is set forth hereto
as Exhibit 2.
Section 2. The Basic Subscription Rights. The Subscription
Warrants entitle the holders to subscribe, upon Payment, for Common
Stock at the rate of one share for each three Basic Subscription Rights
indicated on the Subscription Warrants. Reference is made to the final
Prospectus for a complete description of the Basic Subscription Rights.
<PAGE>
Section 3. Fractional Shares, Etc. No fractional shares of Common
Stock will be issued. Any fractional shares to which holders of
Subscription Rights would otherwise be entitled will be rounded down to
the next whole share.
Section 4. The Oversubscription Right. Any Stock Holder who
exercises all of its Basic Subscription Rights will have the right to
subscribe for additional shares of Common Stock, if any, that are not
purchased through the exercise of the Basic Subscription Rights (the
"Oversubscription Right"). There is no limitation on the number of
shares to which a Stock Holder may oversubscribe. If there are
insufficient shares of Common Stock to fill all oversubscriptions, the
shares of Common Stock that are available will be allocated among the
Stock Holders who have elected to oversubscribe pro rata based upon the
number of shares owned by each such Stock Holder on the Record Date.
The maximum number of shares of Common Stock so allocated to any Stock
Holder will be the number of shares for which such Stock Holder has
properly elected to oversubscribe. Purchasers of Basic Subscription
Rights who were not Stock Holders on the Record Date will not be
entitled to Oversubscription Right. If any shares of Common Stock
thereafter remain unsubscribed, they will be allocated on the same
basis until all unsubscribed shares of Common Stock are allocated. The
exercise of the Oversubscription Rights is irrevocable. Reference is
made to the Final Prospectus for a complete description of the
Oversubscription Right.
Section 5. Appointment of Agent.
(a) The Corporation hereby appoints you as Agent for the
subscription offer. In connection with your appointment as Agent, the
Corporation has also appointed you as Transfer Agent and as Registrar
of the Corporation for the Basic Subscription Rights and the Common
Stock to be issued pursuant to the Subscription Rights, to act as is
customary in such capacities.
(b) You understand that the Corporation will:
(i) Issue the Subscription Warrants in the names of the Stock
Holders on the Record Date and keep such records as are necessary
for the purpose of recording such issuance.
(ii) On , 1996, or in any event not later than
, 1996:
(A) mail by first-class mail to each holder of Common
Stock of record on the Record Date whose address of record is
within the continental United States or Canada and is not an
A.P.O. or F.P.O. address, (1) a Subscription Warrant evidencing
the Basic Subscription Rights to which such shareholder is
entitled under the subscription offer, (2) a copy of the Final
Prospectus and (3) a return envelope addressed to the Agent;
(B) mail by airmail to each holder of Common stock of
record on the Record Date whose address of record is outside the
continental United States and Canada, or is an A.P.O. or F.P.O.
address, a copy of the Final Prospectus.
<PAGE>
(iii) Withhold from mailing Subscription Warrants issued to
shareholders whose addresses of record are outside the continental
United States and Canada, or are A.P.O. addresses.
Section 6. Duties of the Agent. As Agent you are authorized and
directed to:
(a) Hold such Subscription Warrants for the account of
shareholders whose Subscription Warrants were withheld from mailing by
the Corporation pursuant to Section 5(b)(iii) above, whose addresses
are not known by the Agent or to whom, for any reason, proper delivery
of the Subscription Warrant cannot be effected, subject to such
shareholders making satisfactory arrangements with the Agent for the
exercise or other disposition of the Subscription Rights evidenced
thereby, and (i) follow the instruction of such shareholders if
received at or before 11:00 A.M., New York City time, on the second
business day prior to the Expiration Date or (ii) sell Subscription
Warrants on behalf of shareholders for whom no instructions are
received by 11:00 A.M., New York City time, on the second business day
prior to the Expiration Date.
(b) Mail by first class mail or deliver a copy of the Final
Prospectus (i) to each assignee or transferee of Subscription Warrants
upon the transfer thereof and (ii) with certificates for Common Stock
when such Common Stock is issued to persons other than the registered
holder of the Subscription Warrants.
(c) Effect transfers, divisions and combinations of Subscription
Warrants at the request of the holders thereof, in the manner and
subject to the terms and conditions set forth in the form of
Subscription Warrant in the Final Prospectus.
(d) Issue new Subscription Warrants under the circumstances, in
the manner and subject to the terms and conditions set forth in the
form of Subscription Warrant and in the Final Prospectus.
(e) Sell basic Subscription Rights for the account of the holders
thereof under the circumstances, in the manner and subject to the terms
and conditions set forth in the form of Subscription Warrant and in the
Final Prospectus. The Proceeds per Basic Subscription Right paid to the
seller thereof will be the same as the price received by the Agent for
the sale of such Basic Subscription Rights after deduction of any
brokerage commissions, taxes and other expenses. Net proceeds, if any,
of the sale of any Basic Subscription Rights shall be remitted to the
seller thereof.
(f) Accept subscriptions upon the exercise of Subscription Rights
in accordance with the terms of the Subscription Warrants and of the
Final Prospectus, up to 5:00 P.M., New York City time, on the
Expiration Date.
(g) Accept subscriptions received prior to 5:00 P.M., New York
City time, on the Expiration Date together with full payment for the
total number of shares of Common Stock subscribed for, together with a
letter or telegram from a bank or trust company or a member of a
national securities exchange in the United States, stating the name of
the subscriber, the number of Subscription Rights represented by the
Subscription Warrant and the number of shares of Common Stock
subscribed for, and guaranteeing that the Subscription Warrant will be
delivered within 48 hours to the Subscription Agent, subject to
withholding of the stock certificates representing the
<PAGE>
shares of Common Stock subscribed for pending receipt of the duly
executed Subscription Warrant.
(h) Accept subscriptions, without further authorization from the
Corporation, without procuring supporting legal papers or other proof
of authority to sign (including proof of appointment of a fiduciary or
other person acting in a representative capacity), and without
signatures of co-fiduciaries.
(i) where the Subscription Warrant is registered in the name
of a fiduciary, the subscription form is executed by such
fiduciary, and the shares of Common Stock are to be issued in the
name of the registered owner of the Subscription Warrant;
(ii) where the Subscription Warrant is in the name of a
corporation and the subscription form is executed by an officer
hereof, and the share of Common Stock is to be issued in the name
of such corporation; or
(iii) where the Subscription Warrant is registered in the name
of a decedent and the subscription is executed by a subscriber
purporting to act as the decedent's executor or administrator, the
share of Common Stock is to be registered in the name of the
subscriber as executor or administrator of the estate of the
deceased registered holder, and there is no evidence indicating
that the subscriber is not the duly authorized representative that
he purports to be.
(i) Accept subscriptions executed, as agent for the subscriber, by
a firm having membership on a national securities exchange, or by a
bank or trust company having an office or a correspondent in the .
(j) Refer to the Corporation, for specific instructions as to
acceptance or rejection, of subscriptions received after the Expiration
Date, subscriptions not authorized to be accepted pursuant to paragraph
(f), (g), (h) or (i) above, and subscriptions otherwise falling to
comply with the requirements to the Final Prospectus and terms of the
Subscription Warrants.
(k) Upon acceptance of subscriptions, the Agent shall:
(i) hold in trust for the Corporation, and transfer promptly
to the Corporation's demand deposit account with Account No. all funds
collected in payment of subscriptions;
(ii) advise the Corporation daily by telecopy and confirmed by
letter (Attn: ) as to the total number of shares of Common Stock
subscribed for and the amount of funds received and the total number of
Subscription Rights sold, with cumulative totals; and in addition
advise the of the Corporation (telephone number ), confirmed by
telecopy, of the amount of funds received (identified in accordance
with (i) above), deposited, available or transferred in accordance with
(i) above, with cumulative totals;
(iii) issue certificates as Transfer Agent and Registrar for
shares of Common Stock subscribed for, countersigned with the
respective signature of or of the
<PAGE>
Agent, each having authority to sign on its behalf as Registrar,
registered in the names specified by the subscribers, and mail or
deliver such certificates as instructed by the subscribers as soon as
practicable in accordance with the rules of NASD, after collection of
remittances for subscriptions; and
(iv) as promptly as possible but in any event on or before 3:30
P.M., New York City time, on the first full business day following the
Expiration Date, advise the Corporation in accordance with (ii) above
of the number of shares of Common Stock subscribed, the number of
subscription guarantees received, the number of shares of Common Stock
unsubscribed and the results of allocations required, if any, to
satisfy Oversubscription Rights.
(l) Allocate common Stock not required to satisfy the Basic
Subscription Rights to those shareholders how have appropriately
elected the Oversubscription Right. Only Stock Holders who exercise all
the Basic Subscription Rights granted to such Stock Holders by the
Corporation evidenced by a Subscription Warrant will have the privilege
to oversubscribe for additional shares of Common Stock. You shall
allocate Common Stock to satisfy oversubscriptions according to the
allocation procedure described earlier in this Agreement and in the
Final Prospectus. Further, in conducting such allocation procedures,
fractional amounts will be rounded down based on the highest fraction
and descending fractions until all shares of Common Stock are
allocated.
Section 7. Agent Compensation. The Corporation agrees that it will
pay to the Agent compensation for its services as such in accordance
with its Fee Schedule to act as Agent dated , 1996 and set forth hereto
as Exhibit . The Corporation further agrees that it will reimburse the
Agent for its necessary and reasonable expenses incurred in the
performance of its duties as such, including without limitation,
postage, stationary and supplies, and counsel fees.
Section 8. Confidential Information. The Agent acknowledges the
confidential and proprietary nature of the Corporation's shareholder
records and information related thereto which it may receive pursuant
to the exercise of its duties under this Agreement. The Agent agrees
that it shall maintain the confidentiality thereof and, except as
necessary to fulfill any duty under this Agreement, shall not disclose
the contents or nature thereof without the express prior written
authorization of a Corporation Vice President.
Section 9. Instructions. The Agent will be entitled to rely upon
any instructions or directions furnished to it in writing by any
officer of the Corporation, and will be entitled to treat as genuine,
and as the document is purports to be, any letter or other document
furnished to it by any officer of the Corporation.
Section 10. Indemnification. The Corporation further agrees that
the Corporation will indemnify, protect and hold harmless the Agent
from any and all liability, cost or expense resulting from any act,
omission, delay or refusal, made by it in reliance upon any signature,
endorsement, assignment, certificate, order, request, notice,
instructions or other instrument or document believed by it in good
faith to be valid, genuine and sufficient, and in accepting any
subscription or in effecting any transfer of Basic Subscription Rights
believed by it in good faith to have been duly authorized, in delaying
or refusing in good faith to accept any subscription or effect any
transfer of Basic
<PAGE>
Subscription Rights. The Agent shall, in issuing and registering Common
Stock as Transfer Agent and Registrar pursuant to duly exercised
Subscription Rights, be liable for and shall indemnify and hold the
Corporation harmless from any and all liability, cost or expense as a
result of or arising out of its own negligence or bad faith or that of
its agents, servants or employees. The Agent further agrees that, with
respect to its use on the Subscription Warrant of the facsimile
signature of _________________ it will indemnify, protect, and hold
harmless the Corporation from any and all liability, cost, or expense
for anything done or omitted to be done by the Agent with respect to
the use of such facsimile signature.
Section 11. Amendments. This Agreement may be amended,
supplemented or otherwise modified only by a written instrument
executed and delivered by each of the Corporation and the Agent.
Section 12. Governing Law. This Agreement will be governed by, and
construed and interpreted in accordance with, the laws of the State of
New York.
Section 13. Counterparts. This Agreement may be executed by the
parties hereto on separate counterparts, which counterparts take
together will be deemed to constitute one and the same instrument.
If the foregoing is acceptable to you, please indicate your
acceptance of your appointment as Agent upon the terms set forth above
by signing and return to us one copy of this Agreement.
Very truly yours,
Morgan Grenfell SMALLCap Fund, Inc.
By:______________________________
Name:____________________________
Title:___________________________
Accepted and agreed to as of
this day of
, 1996
The Bank of New York
By:_____________________
Name:___________________
Title:__________________
<PAGE>
Securities Processing Services
Stock Transfer
[logo]
THE
BANK OF
NEW
YORK
SUBSCRIPTION AGENT FEE SCHEDULE
FOR MORGAN GRENFELL SMALLCAP FUND, INC.
MARCH 8, 1996
ADMINISTRATION FEE $3,500.00
- - - Review Documents
- - - Assist Company and Counsel with initial set-up
TAPE CONVERSIONS $750.00
GENERATION OF RIGHTS CERTIFICATE (Per Account) $2.50
- - - Calculation of Rights
- - - Issuance of Rights Subscription Certificate
- - - Mailing of Rights Subscription Certificate
PROCESSING OF GOOD ORDER SUBSCRIPTIONS (Each) $10.00
- - - Review and Examination of Subscription Certificate and Check
- - - Proof and Control of Presentations
- - - Calculation of Security Entitlement
- - - Daily and Final Reporting
GENERATION OF ENTITLEMENT (Each) $1.30
- - - Issuance of Certificate Entitlement
SPECIAL HANDLING ITEMS $12.00
- - - Defective Presentations
- - - Application for Duplicate Rights Subscription Certificate
- - - Legal Presentation/Transfers
GUARANTEE ITEMS (Each) $12.00
(In addition to good order processing) $12.00
- - - Review and Examination of Notice of Guaranteed Delivery
Form and Check
- - - Proof and Control of Presentation
- - - Ensure Receipt of Subscription Certificate
<PAGE>
Securities Processing Services
Stock Transfer
[logo]
THE
BANK OF
NEW
YORK
ISSUANCE OF CHECK/SALE OF RIGHTS (Each) $2.50
LIST OF BENEFICIAL HOLDERS FOR OVERSUBSCRIPTION
PRIVILEGE (Each) $.50
- - - Data Entry of Beneficial Holders Showing Record Date Rights,
Primary Shares Subscribed and Additional Shares Subscribed
OVER-SUBSCRIPTION PRIVILEGES (Each) $4.00
- - - Proof and Control of Unexercised Rights
- - - Proof and Control of Over-Subscribed Requests and Checks
- - - Prorata Distribution of Over-Subscription Privilege Based on the
Number of Shares of Common Stock Held of Record on the Record Date
PRODUCTION OF REFUND CHECKS FOR SUBSCRIPTION PRICE DUE (Each) $1.00
- - - Refund of Over-Subscription Proceeds (if applicable)
EFFECTING SPLIT-UPS, TRANSFERS (Each) $4.00
PREPARING AND FILING OF TAX FORMS (Each) $1.00
GENERATION OF CONFIRMATION LETTERS (Each) $1.50
MINIMUM FEE $10,000.00
TERMS OF PROPOSAL
The fees presented herein are based on date currently available. If there are
any changes in the scope or complexity of the job requirements, the fees will be
reviewed and adjusted accordingly.
Miscellaneous Services
The charges for performing services not contemplated at the time of the
execution of the Agreement or not specifically covered elsewhere in the
schedule will be determined by mutual agreement in amounts commensurate with
the service.
Out-of-Pocket Expenses
Fees quoted do not include out-of-pocket expenses such as stationery, postage,
telephone, telex facsimile, wire transfers, programming and retention of
records which will be billed to the account. All mailing material must be
adaptable to mechanical equipment.
Corporate Investor Communications, Inc.
111 Commerce Road Carlstadt, NJ 07072-8017
Tel: (201) 896-1900 Fax: (201) 804-8017
April 12, 1996
Morgan Grenfell Smallcap Fund
885 Third Avenue, 32nd Floor
New York, New York 10022-4802
Attn: Mr. Richard P. Marotto
Re: Contract Agreement
Dear Mr. Marotto:
This agreement will confirm that Corporate Investor Communications,
Inc. has been retained to act as information agent in connection with
the upcoming rights offer to the shareholders of Morgan Grenfell
Smallcap Fund. As information agent, CIC will conduct a broker/nominee
inquiry as to ascertain the number of beneficial owners, provide for
the distribution of the offering document to the reorganization
departments of each institution and forward additional materials as
requested. CIC will respond to the volume of shareholder inquiries
regarding the terms of the offer and proper execution of the documents
and will monitor the response rate for the duration of the offer. CIC
can, if requested, pro-actively contact registered shareholders and
non-objecting beneficial owners (NOBOs) to help promote a high level of
participation.
Our fee to act as information agent based on a distribution of up to
6,500 sets of offering documents and the duration of the offer will be
$5,000.00 plus $3.00 for each registered and NOBO holder contacted if
requested. CIC will be reimbursed for all reasonable out-of-pocket
disbursements including postage, telephone and courier charges, data
transmissions and other expenses approved by your company. A retainer
of $5,000.00 for the information agent services, plus $1,500.00 towards
the out-of-pocket disbursements is required and will be credited to
your final service charges.
The company above hereby agrees to indemnify Corporate Investor
Communications, Inc.'s officers and employees against any and all
losses, claims and expenses incurred by CIC in conjunction with the
services provided except to the extent any such loss, claim or expense
is the result of the negligence of any CIC officer or employee.
Reimbursement will be made to indemnified persons at the time they are
incurred. The company shall not be responsible for any losses, claims
and expenses incurred by CIC which result from CIC's gross negligence
or willful misconduct.
Please forward an executed agreement to our office
and retain the other copy
MORGAN GRENFELL SMALLCAP FUND CORPORATE INVESTOR
COMMUNICATIONS, INC.
SIGNED: /s/Mark G. Arthus SIGNED: /s/Kevin P. Joel
NAME: Mark G. Arthus NAME: Kevin P. Joel
TITLE: Treasurer TITLE: Assistant Vice President
DATE: April 15, 1996 DATE: April 12, 1996
[Piper & Marbury L.L.P. letterhead]
May 10, 1996
Morgan Grenfell SMALLCap Fund, Inc,
885 Third Avenue
New York, New York 10023
Ladies and Gentlemen:
As special Maryland counsel to Morgan Grenfell SMALLCap Fund, Inc., a
Maryland corporation (the "Corporation"), in connection with a rights offering
pursuant to which holders of the outstanding shares of common stock, par value
$.01 per share (the "Common Stock"), will be issued non-transferable rights (the
"Rights") entitling the holders to purchase one new share of Common Stock for
each three Rights held and the registration under the Securities Act of 1933, as
amended, of 2,695,516 shares of Common Stock of the Corporation (including
539,103 shares to cover over-allotments, if any) (the "Shares") issuable upon
the exercise of the Rights, we have examined the charter and by-laws of the
Corporation, the Registration Statement (File Nos. 333-4358 and 811-4981) as
filed with the Securities and Exchange Commission on April 5, 1996, and all
amendments thereto (collectively the "Registration Statement") and the
resolutions of the Corporation's Board of Directors authorizing the issuance of
the Rights and the Shares issuable upon exercise of the Rights. We have
additionally examined a Certificate of Corporate Officer dated May 10, 1996,
including all exhibits attached thereto (the "Certificate"). In rendering our
opinion, we are relying on the Certificate and have made no independent
investigation or inquiries as to the matters set forth therein.
Based on our examination, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that the Shares to be
issued by the Corporation upon the exercise of the Rights have been duly
authorized, and when issued upon the terms set forth in the Registration
Statement, will be validly issued, fully paid and non-assessable.
<PAGE>
[Piper & Marbury letterhead--p.2]
Morgan Grenfell SMALLCap Fund, Inc.
May 10, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus.
Very truly yours,
/s/ Piper & Marbury L.L.P.
EXHIBIT (2)(n)
The Board of Directors
Morgan Grenfell SMALLCap Fund, Inc.
We consent to the use of our report incorporated herein by reference
and to the references to our Firm under the headings Financial Highlights
and Experts in the prospectus.
KPMG Peat Marwick LLP
/s/KPMG Peat Marwick LLP
New York, New York
May 9, 1996
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