<PAGE>
MORGAN GRENFELL
SMALLCAP FUND, INC.
Semi-Annual Report June 30, 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
Dear Shareholder,
Small cap stock returns were strong during the semi-annual period for the
six months ending June 30, 1999. The Fund outperformed its benchmark S&P 600
Index by 130 basis points (6.3% vs. 5.0%) based upon the Fund's NAV and 470
basis points based upon the Fund's market value (9.7% vs. 5.0%).
This gain was due in part to increased breadth in the market during the
second quarter of the year. In the three months ending June 30, 1999, small cap
stocks outperformed large cap stocks, with the S&P 600 rising 15.4% compared to
the S&P 500's gain of 7.0%. This marks the widest margin of small cap
outperformance since the third quarter of 1997. The Morgan Grenfell SMALLCap
Fund followed suit, posting a strong return of 12.8%.
Other reasons for the recent outperformance of small cap stocks include
greater confidence in the durability of the current economic expansion and
stable Asian and Latin American markets. These factors spurred increased
diversification and rotation toward cyclical and small cap stocks.
<TABLE>
<CAPTION>
AVERAGE TOTAL RETURN FOR THE PERIOD ENDED JUNE 30, 1999 (based upon the Fund's NAV)
Annualized Annualized Annualized Annualized
6 Months 1 Year 3 Year 5 Year 10 Year Inception
Return Return Return Return Return to Date
<S> <C> <C> <C> <C> <C> <C>
SMALLCap Fund 6.3% -1.1% 11.4% 18.3% 13.2% 11.4%
S&P 600 Index 5.0% -2.3% 12.4% 16.6% 12.4% 10.1%
Russell 2000 Index 9.3% 1.5% 11.2% 15.4% 12.4% 10.6%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALLCAP FUND S&P 600 INDEX RUSSELL 2000 INDEX
<S> <C> <C> <C>
5/6/87 1,000 1,000 1,000
957 891 923
12/89 1,198 1,015 1,073
1,038 774 864
12/91 1,575 1,150 1,262
1,635 1,392 1,494
12/93 1,776 1,653 1,777
1,719 1,574 1,744
12/95 2,459 2,046 2,241
2,959 2,482 2,610
12/97 3,397 3,117 3,194
3,488 3,076 3,112
6/30/99 3,707 3,231 3,401
</TABLE>
INITIAL INVESTMENT: $1,000
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
HISTORICAL RETURNS
<TABLE>
<CAPTION>
SMALLER COMPANIES
SMALLCAP -------------------- LARGER COMPANIES
FUND RUSSELL --------------------
PERIOD ENDED NAV S&P 600 2000 S&P 500 D.J.I.A
- --------------------------------------------------------------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
6/30/99 6.3% 5.0% 9.3% 12.4% 20.5%
1998 2.7% -1.3% -2.6% 28.6% 18.2%
1997 14.8% 25.6% 22.4% 33.4% 24.9%
1996 20.3% 21.3% 16.5% 23.0% 28.9%
1995 43.1% 30.0% 28.5% 37.6% 36.9%
1994 -3.2% -4.8% -1.8% 1.3% 5.0%
1993 8.6% 18.8% 18.9% 10.1% 17.0%
1992 3.8% 21.1% 18.4% 7.6% 7.4%
1991 51.8% 48.5% 46.0% 30.5% 24.3%
1990 -13.4% -23.7% -19.5% -3.1% -0.5%
1989 25.2% 13.9% 16.3% 31.7% 32.2%
1988 19.1% 19.5% 25.0% 16.6% 16.2%
Total Return from Inception (5/6/87) 270.63% 223.1% 240.1% 564.3% 573.4%
</TABLE>
PORTFOLIO STRUCTURE
THE FUND'S ECONOMIC SECTOR ALLOCATIONS CHANGED AS FOLLOWS DURING THE FIRST HALF
OF 1999.
<TABLE>
<CAPTION>
MARKET
NUMBER VALUE PERCENTAGE OF
OF COMPANIES (000,000) PORTFOLIO
----------------------------- ----------------------------- -----------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
ECONOMIC SECTOR 1999 1998 1999 1998 1999 1998 CHANGE
- ------------------------- ----------- --------------- ----------- --------------- ----------- --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Technology 20 19 30.3 27.8 25% 24% +1
Consumer 18 15 26.7 25.5 22% 22% 0
Healthcare 15 18 16.3 17.0 13% 15% -2
Credit Sensitive 9 11 16.2 19.0 13% 16% -3
Energy 5 4 11.0 4.6 9% 4% +5
Service Companies 4 4 6.1 6.9 5% 6% -1
Process Industries 6 6 5.6 4.9 5% 4% +1
Transportation 3 4 5.5 4.4 4% 4% 0
Capital Goods 1 1 0.1 0.2 0% 0% 0
----- ----- ----- ----- ----- ----- ------
Total Equities 81 82 117.8 110.3 96% 95% +1
----- -----
----- -----
Cash and Cash Equivalents 5.6 6.3 4% 5% -1
----- ----- ----- ----- ------
Total Fund 123.4 116.6 100% 100% --
----- ----- ----- ----- ------
----- ----- ----- ----- ------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
(JUNE 30, 1999)
<TABLE>
<CAPTION>
PERCENTAGE OF STOCK
COMPANY NET ASSETS SYMBOL BUSINESS FOCUS
- ------------------------------------------ ------------- ------ ------------------------------
<C> <S> <C> <C> <C>
1. Mercury Interactive Corp. 3.1% MERQ Automated Software Testing
Tools
2. US Freightways Corp. 3.1% USFC Regional Motor Carrier
High Bandwidth Silicon
3. Applied Micro Circuits Corp. 3.0% AMCC Solutions
Specialty Pharmaceuticals
4. Priority Healthcare Corp. 2.8% PHCC Distributor
Oil and Gas Exploration &
5. Devon Energy Corp. 2.8% DVN Production
6. BJ Services 2.6% BJS Petroleum Industry Services
Telecommunications Engineering
7. Dycom Industries Inc. 2.6% DY Services
Electronic Equipment
8. Scientific-Atlanta, Inc. 2.3% SFA Manufacturer
Communication & Information
9. COMSAT Corp. 2.2% CQ Services
10. Lennar Corp. 2.2% LEN Residential Home Builder
------
26.7%
------
------
</TABLE>
The Fund focuses primarily on companies with market capitalizations between $100
million and $2.2 billion at the time of initial investment. The weighted average
market capitalization of companies held in the Fund was $1.4 billion as of June
30, 1999.
ITEMS OF SHAREHOLDER INTEREST
Concurrent with the acquisition of Bankers Trust by Deutsche Bank, there have
been certain personnel changes. James Minnick has resigned from Morgan Grenfell
Inc. Joseph Incandela, currently an active board member, will replace Mr.
Minnick as president and chairman of the Fund board. David Baratta has resigned
from the firm and has been replaced by Mary Dugan, a portfolio manager covering
consumer products on behalf of Bankers Trust. She is now an officer of Morgan
Grenfell. The unanimous decision to appoint Audrey Jones to the Board was made
in April, given her integral involvement with the Fund since its inception. We
continue to believe that we have the right organizational infrastructure to
support the Fund and produce superior returns for our shareholders.
STRATEGY AND OUTLOOK
An improving global stock market environment and broad-based economic strength
across most US sectors will be instrumental in continuing to spur a migration of
institutional portfolios into smaller stocks and cyclical names. Inflation fears
appear overdone, especially since technological advancements and a competitive
labor pool worldwide should continue to keep labor inflation in check. In the
quarter ahead, sentiment will likely be dominated by corporate earnings reports
and US economic data releases that will be scrutinized in anticipation of the
Federal Reserve's August Federal Open Market Committee meeting.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
Signs of a significant economic slowdown or mounting inflationary pressures
would dampen sentiment, as would potential earnings shortfalls. However, given
across-the-board strength in consumer demand and confidence, along with tighter
labor markets, the relatively under-followed, small cap stock universe has a
higher potential for positive earnings surprises than their large cap
counterparts. This should spark renewed interest and provide added momentum to
small cap names. In coming months, Y2K compliance issues could take the
spotlight.
As individual investors assume growing responsibility for their own
retirement planning, mutual fund flows (especially into corporate-sponsored
plans) continue to be an important source of liquidity. As these individuals'
comfort level with equity investing increases, they are also likely to diversify
investments to include small cap stocks.
The small cap universe contains over 6,000 companies, representing well over
90% of all publicly-traded domestic companies, and is an excellent source for
identifying successful ventures at an early stage in their growth cycle. The US
economy, with its high level of entrepreneurial activity and venture capital
backing, should continue to provide many attractive investment opportunities as
early stage private companies shift to public ownership. Restructuring and
consolidation also create opportunities for small cap investors.
Our investment strategy is to continue to find companies with above-average
growth selling at reasonable valuations. Our team will continue to focus
primarily on individual stock selection with the goal of providing value-added
performance relative to the universe of US smaller companies. Earnings
disappointments continue to present the primary investment risk.
Our primary goal is to provide superior investment results for the Fund and
thus strong returns for our shareholders. Again, thank you for your continued
support as a shareholder of the Fund.
Sincerely,
/s/ Audrey M. T. Jones
Audrey M. T. Jones
Director
Morgan Grenfell SMALLCap Fund, Inc.
Executive Vice President
Morgan Grenfell Inc.
4
<PAGE>
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 97.2%
CAPITAL GOODS -- 0.1%
Brunswick Technologies* 30,300 $ 164,756
-------------
CONSUMER -- 22.0%
Bally Total Fitness Holding* 83,400 2,366,475
Championship Auto Racing Teams, Inc.* 48,600 1,454,963
Cheap Tickets, Inc.* 18,100 660,650
Corporate Executive Board Co.* 44,700 1,589,644
Daisytek International Corp.* 98,900 1,613,306
Damark International* 139,950 1,172,081
Furniture Brands International, Inc.* 75,900 2,115,713
Garden Ridge* 191,240 908,390
Insight Enterprises, Inc.* 58,912 1,458,072
Marketing Services Group, Inc.* 39,500 1,034,406
Micro Warehouse* 131,800 2,355,925
Mohawk Industries* 58,800 1,786,050
Papa John's International, Inc.* 47,100 2,104,781
Petsmart* 237,700 2,436,425
Pier 1 Imports, Inc. 12,100 136,125
PJ America, Inc.* 20,300 430,106
Tractor Supply Co.* 72,600 1,982,887
Zale Corp.* 27,300 1,092,000
-------------
26,697,999
-------------
CREDIT SENSITIVE -- 13.4%
Astoria Financial Corp. 31,655 1,390,842
Bank United Corp. 32,500 1,306,094
Dime Bancorp 117,300 2,360,663
D.R. Horton, Inc. 99,200 1,649,200
Golden State Bancorp, Inc.* 102,350 2,251,700
Insurance Management Solutions Group, Inc.* 15,600 132,600
Lennar Corp. 109,000 2,616,000
LNR Property Corp. 113,650 2,429,269
Paine Webber Group, Inc. 43,875 2,051,156
-------------
16,187,524
-------------
ENERGY -- 9.1%
BJ Services* 108,500 3,193,969
Devon Energy Corp. 94,400 3,374,800
Global Industries, Ltd.* 183,400 2,349,813
Input/Output, Inc.* 72,000 544,500
Marine Drilling Companies, Inc.* 111,200 1,522,050
-------------
10,985,132
-------------
HEALTHCARE -- 13.5%
Accredo Health, Inc.* 22,200 727,050
Alkermes, Inc.* 26,300 608,187
Beverly Enterprises, Inc.* 72,300 582,919
Bindley Western Industries, Inc. 101,200 2,333,925
Cell Genesys, Inc* 107,500 483,750
Collagen 31,000 426,250
Dendrite International, Inc.* 36,100 1,304,112
Enzon, Inc.* 60,700 1,255,731
IVAX Corp. 126,100 1,781,163
MedPartners, Inc.* 115,700 874,981
Nanogen* 80,600 554,125
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Priority Healthcare Corp., Cl A* 27,349 $ 943,540
Priority Healthcare Corp., Cl B* 71,450 2,465,025
Sonosite Inc.* 47,799 812,583
Sunrise Assisted Living, Inc.* 34,300 1,196,213
-------------
16,349,554
-------------
PROCESS INDUSTRIES -- 4.6%
Armco, Inc.* 102,700 680,387
Bowater 30,800 1,455,300
Carbo Ceramics 9,500 289,156
CompX International* 33,600 600,600
PH Glatfelter 92,900 1,358,663
Rayonier 24,700 1,230,369
-------------
5,614,475
-------------
SERVICE COMPANIES -- 4.9%
American Tower Corp. 65,800 1,579,200
COMSAT Corp. 82,700 2,687,750
Kroll-OGara Co.* 42,800 944,275
Price Communications Corp.* 51,700 775,500
-------------
5,986,725
-------------
TECHNOLOGY -- 25.0%
AdForce, Inc.* 23,400 549,900
Allegiance Telecom, Inc.* 8,300 455,462
Applied Micro Circuits Corp.* 44,700 3,676,575
BEA Systems, Inc.* 39,600 1,131,075
Cognex Corp.* 18,700 590,219
DII Group, Inc.* 27,500 1,026,094
Dycom Industries Inc.* 56,275 3,151,400
Infospace.com, Inc.* 27,300 1,283,100
Mercury Interactive Corp.* 106,200 3,756,825
Microchip Technology, Inc.* 38,900 1,842,887
Pairgain Technologies, Inc.* 57,600 662,400
Pegasus Systems, Inc.* 22,100 827,369
Pinnacle Systems* 59,800 2,010,775
Polycom, Inc.* 38,000 1,482,000
Rational Software, Corp.* 30,600 1,007,888
Scientific-Atlanta, Inc. 76,300 2,746,800
Symantec Corp.* 32,800 836,400
Terayon Communicatons Systems, Inc.* 12,700 709,612
Transwitch Corp.* 23,000 1,089,625
Whittman-Hart, Inc.* 45,300 1,438,275
-------------
30,274,681
-------------
TRANSPORTATION -- 4.6%
Atlantic Coast Airlines* 56,700 1,077,300
Tidewater, Inc. 23,700 722,850
US Freightways Corp. 80,700 3,737,419
-------------
5,537,569
-------------
TOTAL COMMON STOCKS
(Cost $85,773,077) 117,798,415
-------------
TOTAL INVESTMENTS -- 97.2%
(Cost $85,773,077) $ 117,798,415
-------------
OTHER ASSETS AND LIABILITIES, NET -- 2.8% 3,394,339
-------------
NET ASSETS - 100% $ 121,192,754
-------------
-------------
*Non-income producing security
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investment at Value (cost $85,773,077) $117,798,414
Cash 5,601,554
Receivable for Securities Sold 479,879
Dividend and Interest Receivable 18,518
------------
Total Assets $123,898,365
------------
LIABILITIES
Due to Advisor $ 96,951
Payable for Securities Purchased 2,484,625
Accrued Expenses and Other 124,035
------------
Total Liabilities $ 2,705,611
------------
Net Assets $121,192,754
------------
------------
SHARES OUTSTANDING AT JUNE 30, 1999 9,802,054
NET ASSET VALUE PER SHARE AT JUNE 30, 1999 $ 12.36
COMPOSITION OF NET ASSETS
Common Stock; (150,000,000 shares authorized
$0.01 par value) Based
on Outstanding Shares of Common Stock $ 98,021
Capital in Excess of Par Value 93,411,084
Accumulated Net Investment Loss (477,253)
Accumulated Net Realized Loss from Securities (3,864,435)
Net Unrealized Appreciation on Investments 32,025,337
------------
NET ASSETS, JUNE 30, 1999 $121,192,754
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
<PAGE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 169,026
Interest 101,394
----------
Total Investment Income 270,420
EXPENSES:
Investment Advisory Fees 553,688
Administration and Services Fees 33,221
Registration & Filing Fees 14,661
Custody Fee 19,040
Professional Fees 34,752
Printing Fees 37,636
Directors' Fees and Expenses 37,842
Miscellaneous Expenses 16,833
----------
Total Expenses 747,673
----------
NET INVESTMENT LOSS (477,253)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Loss from Investment Transactions (135,374)
Net Change in Unrealized Appreciation on
Investments 7,762,143
----------
Net Realized and Unrealized Gain on Investments 7,626,769
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $7,149,516
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- FOR THE PERIOD AND YEAR ENDED JUNE 30,
(UNAUDITED) AND DECEMBER 31,
<TABLE>
<CAPTION>
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net Investment Gain (Loss) $ (477,253) $ 133,999
Net Realized Gain (Loss) on
Investments (135,374) 1,071,118
Net Change in Unrealized Appreciation
on Investments 7,762,143 1,509,104
------------ ------------
Net Increase in Net Assets from
Operations 7,149,516 2,714,221
------------ ------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net Investment Income -- (133,999)
Net Realized Gain from Investment
Transactions -- (768,061)
Return of Capital -- (1,154,589)
------------ ------------
Total Distributions -- (2,056,649)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net Proceeds from Shares Reinvested -- 7,888,517
Reissuance of Treasury Shares -- 7,352,811
Cost of Treasury Shares Purchased -- (3,468,865)
------------ ------------
NET INCREASE IN NET ASSETS FROM CAPITAL
TRANSACTIONS -- 11,772,463
------------ ------------
Total Increase in Net Assets 7,149,516 12,430,035
NET ASSETS
Beginning of Period 114,043,238 101,613,203
------------ ------------
End of Period $121,192,754 $114,043,238
------------ ------------
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Shares Reinvested -- 713,358
Reissuance of Treasury Shares -- 647,700
Treasury Shares Purchased -- (333,200)
------------ ------------
Increase in Capital Shares from
Institutional Share Transactions -- 1,027,858
------------ ------------
------------ ------------
</TABLE>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
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 six month period ended June 30, 1999
(unaudited) and the five years ended December 31, 1998. This information has
been derived from information provided in the financial statements and market
price data for the Fund's shares.
<TABLE>
<CAPTION>
------------
PERIOD ENDED --------------------------------------------------
JUNE 30, YEARS ENDED DECEMBER 31,
1999 ------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 11.63 $ 11.58 $ 12.23 $ 12.31 $ 10.21 $ 11.85
Net investment income
(loss) (0.05) 0.01 (0.09) (0.06) (0.00) (0.07)
Net realized and
unrealized gains
(losses) 0.78 0.25 1.78 2.18 4.23 (0.34)
------------- ---------- ---------- ---------- --------- ---------
Total from investment
operations $ 0.73 $ 0.26 $ 1.69 $ 2.12 $ 4.23 $ (0.41)
Less distributions from:
Net investment income -- (0.01) -- -- -- --
Realized capital gains -- (0.08) (2.34) (1.60) (2.13) (1.23)
Return of capital -- (0.12) -- -- -- --
------------- ---------- ---------- ---------- --------- ---------
Total distributions $ -- $ (0.21) $ (2.34) $ (1.60) $ (2.13) $ (1.23)
------------- ---------- ---------- ---------- --------- ---------
Dilution due to rights
offering -- -- -- (0.60) -- --
------------- ---------- ---------- ---------- --------- ---------
Net asset value, end of
period $ 12.36 $ 11.63 $ 11.58 $ 12.23 $ 12.31 $ 10.21
------------- ---------- ---------- ---------- --------- ---------
------------- ---------- ---------- ---------- --------- ---------
Market value per share,
end of period $ 10.63 $ 9.69 $ 11.13 $ 10.50 $ 12.63 $ 8.88
TOTAL INVESTMENT RETURN:
Based on net asset value
per share 6.28% 2.66% +14.8% +20.3% +43.1% -3.2%
Based on market value per
share 9.68% -10.99% +28.5% +17.5% +42.3% -7.1%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.35%* 1.56% 1.42% 1.76% 1.51% 1.52%
Net investment income
(loss) (0.86%)* 0.12% (0.66)% (0.57)% (0.03)% (0.59)%
SUPPLEMENTAL DATA:
Net assets at end of year
(000 omitted) $121,193 $ 114,043 $ 101,613 $ 111,135 $ 74,402 $ 59,093
Average net assets during
year (000 omitted) $111,655 $ 110,974 $ 114,953 $ 99,372 $ 72,202 $ 66,064
Portfolio turnover 65% 116% 101% 162% 110% 105%
</TABLE>
* ANNUALIZED.
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- JUNE 30, 1999 (UNAUDITED)
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 ("GAAP").
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.
EXPENSES--Expenses that are directly related to the Fund are charged
directly to the Fund.
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. As of December 31, 1998, the Fund had available
realized capital losses to offset future net capital gains of $2,426,966 which
expire on December 31, 2006.
DISTRIBUTIONS--Distributions from net investment income and net realized
capital gains are determined in accordance with U.S. Federal income tax
regulations, which may differ from those amounts determined under GAAP. These
book/tax differences are either temporary or permanent in nature. To the extent
these differences are permanent they are charged or credited to paid in capital
in the period that the difference arises.
USE OF ESTIMATES--The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of increase and decrease in assets from operations during the reporting period.
Actual results could differ from those estimates.
2. ADMINISTRATION, INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH
AFFILIATES
By an agreement dated August 27, 1998, the Fund entered into an administration
agreement with Morgan Grenfell Inc. (the "Administrator"), pursuant to which the
Administrator will receive an annual fee of 0.06% based upon the aggregate
average daily net assets of the Fund. The Administrator generally assists in all
matters relating to the administration of the Fund, including the coordination
and monitoring of any third parties furnishing services to the Fund, preparation
and maintenance of financial accounting records, and the provision of necessary
office space, equipment and personnel to perform administrative and clerical
functions. The Administrator is also responsible for engaging an accounting
agent, custodian and transfer agent for the Fund's operations. Fees for services
rendered by the accounting agent and the transfer agent are paid by the
Administrator and not the Fund. As of June 30, 1999, the fees earned by the
Administrator were approximately $33,221.
Prior to October 13, 1998, SEI Financial Management Corporation served as
the Fund's administrator and received an annual fee based on the aggregate
average daily net assets of the Fund and Funds of the Morgan Grenfell Investment
Trust.
The Fund pays advisory fees for investment and advisory services to Morgan
Grenfell Inc. ("MG"). Under the terms of the investment advisory agreement, the
management fee is calculated at an annual rate of 1.00% 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 MG.
3. CAPITAL SHARE TRANSACTIONS
During 1998, 333,200 of the Fund's shares of outstanding common stock were
purchased in the open market by the Fund for re-issuance to shareholders
participating in the Dividend Reinvestment Plan. All
10
<PAGE>
- --------------------------------------------------------------------------------
such treasury shares, including those acquired in 1997, were reissued during
1998 in accordance with the Plan.
4. INVESTMENT TRANSACTIONS
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold for the year ended June 30, 1999, excluding short-term
investments, were $71,411,012 and $71,619,608, respectively.
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 NAV 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 or its designee 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 else-where, 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. During certain market conditions, it may be impracticable or impossible
to complete a market purchase program at prices below net asset value, and, in
such event, the Fund itself may in its discretion issue the required shares at
net asset value. 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.
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.
11
<PAGE>
SHAREHOLDER INFORMATION SERVICE
- --------------------------------------------------------------------------------
MORGAN GRENFELL INC. (THE ADVISOR TO THE MORGAN GRENFELL SMALLCAP FUND) IS A
SUBSIDIARY OF MORGAN GRENFELL ASSET MANAGEMENT LIMITED (MGAM), WHICH IN TURN IS
A SUBSIDIARY OF DEUTSCHE MORGAN GRENFELL GROUP PLC (DMG) AND IS RESPONSIBLE FOR
THE DEUTSCHE BANK GROUP'S INSTITUTIONAL INVESTMENT MANAGEMENT ACTIVITIES
WORLDWIDE. MORGAN GRENFELL WAS FOUNDED IN 1838 AND IS ONE OF THE UK'S LEADING
MERCHANT BANKS AND ASSET MANAGEMENT GROUPS. SINCE 1990, MORGAN GRENFELL HAS BEEN
A WHOLLY-OWNED SUBSIDIARY OF DEUTSCHE BANK, AG, ONE OF THE LARGEST FINANCIAL
INSTITUTIONS IN THE WORLD. CURRENTLY MGAM MANAGES IN EXCESS OF $170 BILLION FOR
A WIDE RANGE OF PENSION, CORPORATE, INSURANCE, LOCAL AUTHORITY, GOVERNMENT AND
PRIVATE CLIENTS WORLDWIDE.
Shares of the Morgan Grenfell SMALLCap Fund are traded on the New York Stock
Exchange under the symbol "MGC."
In accordance with Section 23(c) of the Investment Company Act of 1940, the
Fund hereby serves notice that it may from time to time repurchase shares of the
Fund in the open market at the option of the Board of Directors.
SHAREHOLDER INFORMATION SERVICE
Information regarding the Fund's net asset value is available by calling
1-800-550-6426. The Fund's net asset value is reported each week in THE WALL
STREET JOURNAL and BARRON'S. You may also visit our website at
www.morgan-grenfell.com.
THE BANK OF NEW YORK
1-800-524-4458
ADDRESS SHAREHOLDER INQUIRIES TO:
SHAREHOLDER RELATIONS DEPARTMENT - 11E
P.O. BOX 11258
CHURCH STREET STATION
NEW YORK, NY 10286
E-MAIL ADDRESS: [email protected]
THE BANK OF NEW YORK'S STOCK TRANSFER WEBSITE:
HTTP://STOCK.BANKOFNY.COM
SEND CERTIFICATES FOR TRANSFER AND ADDRESS CHANGES TO:
RECEIVE AND DELIVER DEPARTMENT - 11W
P.O. BOX 11002
CHURCH STREET STATION
NEW YORK, NY 10286
12
<PAGE>
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND, INC.
JAMES E. MINNICK
PRESIDENT AND CHAIRMAN
ROBERT E. GREELEY
DIRECTOR
President
Page Mill Asset Management Ltd.
JOSEPH J. INCANDELA
DIRECTOR
Private Equity Investor
RICHARD D. WOOD
DIRECTOR
Consultant
AUDREY M.T. JONES
DIRECTOR
Executive Vice President
Morgan Grenfell Inc.
JOHN P. CALLAGHEN
EXECUTIVE VICE PRESIDENT
Morgan Grenfell Inc.
JOAN A. BINSTOCK
TREASURER
Executive Vice President
Chief Operating Officer
Morgan Grenfell Inc.
TRACIE E. RICHTER
ASSISTANT TREASURER
Vice President
Morgan Grenfell Inc.
JAMES A. CAPEZZUTO
SECRETARY
Vice President - Legal Officer
Morgan Grenfell Inc.
WILLIAM M. O'DELL
ASSISTANT SECRETARY
Vice President
Morgan Grenfell Inc.
INDEPENDENT AUDITORS
KPMG LLP
757 Third Avenue
New York, NY 10017
TRANSFER AGENT
The Bank of New York
101 Barclay Street
New York, NY 10154
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
INVESTMENT ADVISOR
Morgan Grenfell Inc.
885 Third Avenue
32nd Floor
New York, NY 10022
ADMINISTRATOR
Morgan Grenfell Inc.
150 South Independence Square West
7th Floor
Philadelphia, PA 19106
MG-F-90-0699-01
