<PAGE>
MG
- --
AM
Morgan
Grenfell
SMALLCap
Fund,
Inc.
Semiannual Report
June 30, 1998
<PAGE>
Morgan Grenfell SMALLCap Fund, Incorporated
Semiannual Report--1998
Dear Shareholder:
The Morgan Grenfell SMALLCap Fund enjoyed a strong first half of the year
compared to its benchmark. The account's net asset value (NAV) grew 10.4%, which
exceeded the S&P 600 index's return of 6.0%. Despite this excellent performance,
the Fund's price discount to its NAV widened, causing stock price to decline
slightly, 1.1% in the year's first half.
A reason for the larger discount may be investor's enchantment with large
company shares. Indeed, the bull market of the last few years has been dominated
by large company stocks. In the last three years, the S&P 500 Index, a large cap
index, grew an average of almost 8 percentage points a year faster than the
small-company S&P 600 Index. We are very proud that the Fund's NAV, the measure
of our investment success, grew an average of 22.1% a year during this period,
placing it among the top performing small company growth funds.
Small companies continue to exhibit faster earnings growth in general than large
companies. Eventually, we expect that investors will be willing to pay for this
faster profit growth in the form of higher stock prices. When they do, we expect
to see price appreciation in the shares of Morgan Grenfell SMALLCap Fund as
well. While we await such an appreciation, we remain committed to our goal of
outperforming the small company indices.
<TABLE>
<CAPTION>
Smaller Companies Large Companies
MG SMALLCap ----------------------- ---------------
Fund S&P Russell S&P
Periods Net Asset Value Small Cap 600 2000 500
- ------- --------------- ------------- ------- --------
<S> <C> <C> <C> <C>
First Quarter 1998 12.61% 11.07% 10.06% 13.96%
Second Quarter 1998 -1.99% -4.46% -4.66% 3.30%
First Half 1998 10.36% 6.12% 4.93% 17.72%
Three years ended 6/30/98
(Annualized) 22.09% 22.36% 18.86% 30.24%
</TABLE>
PORTFOLIO STRUCTURE
The Fund's economic sector allocations changed as follows during the first half
of 1998:
<TABLE>
<CAPTION>
No. Companies Market Value($M) % Portfolio
----------------- -------------------- ------------------
Sector 12/31/97 6/30/98 12/31/97 6/30/98 12/31/97 6/30/98 Change
- -------------- -------- ------- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSUMER..................... 19 17 $ 23.7MM $ 29.7MM 20 24 +4
CREDIT SENSITIVE............. 10 14 21.1 25.2 17 20 +3
TECHNOLOGY................... 11 15 11.1 20.4 9 16 +7
HEALTH CARE.................. 14 15 18.5 18.8 15 15 0
SERVICE COMPANIES............ 9 8 10.8 9.2 9 7 -2
ENERGY....................... 6 6 10.3 8.1 8 6 -2
PROCESS INDUSTRIES........... 3 5 3.9 4.8 3 4 +1
TRANSPORTATION............... 4 5 4.9 6.6 4 5 +1
CAPITAL GOODS................ 1 1 0.1 0.3 1 - -1
-- -- ------ ----- --- --- ---
TOTAL EQUITIES............... 77 86 $104.4MM 123.1 86 97 +11
CASH AND CASH
EQUIVALENTS.................. 16.4 3.1 14 3 -11
------ ----- --- --- ---
TOTAL FUND................... 120.8MM 126.2 100% 100% 0
</TABLE>
<PAGE>
TEN LARGEST HOLDINGS
(June 30,1998)
<TABLE>
<CAPTION>
% Stock
Company Fund Symbol Business Focus
- -------------------------------- ---- ------ --------------------------------
<S> <C> <C> <C>
1. MERCURY INTERACTIVE......... 3.1 MERQ SOFTWARE TESTING SUITES
2. TRIANGLE PACIFIC CORP....... 3.0 TRIP HARDWOOD FLOORING MANUFACTURER
3. DIME BANCORP INC............ 2.8 DME NEW YORK SAVINGS BANK
4. MICRO WAREHOUSE INC......... 2.8 MWHS DIRECT MARKETER OF COMPUTERS
5. SYMANTEC CORP............... 2.6 SYMC COMPUTER SOFTWARE
6. LENNAR CORP................. 2.6 LEN RESIDENTIAL & COMMERCIAL BUILDER
7. TRIGON HEALTHCARE INC....... 2.5 TGH MANAGED HEALTHCARE PROVIDER
8. INTEGRATED HEALTH SERVICES.. 2.4 IHS SUBACUTE HEALTHCARE PROVIDER
9. JUST FOR FEET............... 2.4 FEET FOOTWEAR RETAILER
10. BALLY TOTAL FITNESS......... 2.3 BFT FITNESS CENTER OPERATOR
----
26.5
</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 $1,160 million on
6/30/98.
ITEMS OF SHAREHOLDER INTEREST
On April 24, 1998, the Annual Meeting of Shareholders (the "Meeting") was held
at the offices of Morgan Grenfell Capital Management (MGCM). At the meeting, two
proposals were voted on which had been outlined in the proxy statement. Under
Proposal I, Mr. Richard D. Wood was elected as director of the Fund to serve
until the 2001 meeting of shareholders with 7,290,840 shares (74.45% of
outstanding shares) voting in favor and 107,611 shares (1.10% of outstanding
shares) withheld. Under Proposal II, KPMG Peat Marwick, LLP, was ratified as
independent auditors of the Fund for the fiscal year ending December 31, 1998,
by a vote of 7,293,686 shares (74.47% of outstanding shares) in favor, 54,268
shares (0.55% of outstanding shares) against, and 50,497 shares (0.52% of
outstanding shares) abstaining.
Also on April 24, 1998, the Board of Directors of the Fund adopted certain
amendments to the Fund's Bylaws. The amendments require a shareholder to provide
written notice to the Secretary of the Fund of any proposal which the
shareholder wishes to raise at an annual meeting of shareholders which was not
included in the Fund's proxy materials at least 15 calendar days in advance of
the date of the annual meeting. The amendments also impose a 15 calendar day
advance written notice requirement on shareholders who wish to introduce at any
meeting of shareholders a nominee for election as a director. The notice
provisions were adopted to afford shareholders a fair opportunity to present
matters for consideration at annual meetings while ensuring that the Fund and
its directors will have a reasonable opportunity to thoughtfully consider the
matters proposed. Please contact the Secretary of the Fund for additional
information about the advance notice requirements if you are considering
presenting a proposal at an annual meeting.
In addition, in July 1998 Morgan Grenfell introduced its web site at www.morgan-
grenfell.com. This web site is designed to keep shareholders informed about the
fund's continuing performance and other items of interest.
2
<PAGE>
OUTLOOK
Our Small Cap Equity Team continues to believe that the small cap growth segment
of the equity universe is extremely attractive. Small cap growth stocks can be
purchased at discounts to their growth rates. Moreover, these stocks are trading
at similar valuations as large cap stocks but with higher expected earnings
growth rates.
The structure of the U.S. economy, with its high level of entrepreneurial
activity and venture capital backing, is expected to continue to provide small
cap investors with many attractive investment opportunities as early stage
private companies shift to public ownership. Restructuring and consolidation
trends create many opportunities for smaller company 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 U.S. smaller companies. Among individual
securities, 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/ James E. Minnick
- ------------------------
James E. Minnick
President
Morgan Grenfell SMALLCap Fund
3
<PAGE>
SCHEDULE OF INVESTMENTS
June 30, 1998
<TABLE>
<S> <C> <C> <C>
COMMON STOCKS: 98.4%
------------------------------------
CONSUMER: 23.7% BUSINESS FOCUS SHARES MARKET VALUE
------------------------------------ ------------------------------------------------- ------ ------------
Bally Total Fitness Commercial Operator of Fitness Centers 79,400 $ 2,858,400
*Cash America International Pawnshop Operator 5,200 79,300
Cost Plan Inc. Home Furnishings 58,800 1,749,300
Damark International A Direct Marketer of General Merchandise 119,250 1,013,625
Factory Card Outlet Corp. Party Supply Services 53,700 389,325
Finish Line Inc. Retail of Apparel/Shoes 87,900 2,472,187
Furniture Brands Int'l Inc. Residential Furniture Manufacturer 98,200 2,755,738
Garden Ridge Corp. Specialty Home Accessories 146,740 2,843,088
*Insight Enterprises Inc. Direct Marketer of Computers 58,950 2,358,000
Just For Feet Footwear Retailer 103,400 2,946,900
Marketing Services Group Direct Marketing Services 100,500 345,469
Micro Warehouse Inc. Direct Marketer of Computers 224,050 3,472,774
*Mohawk Industries Carpet Manufacturer 78,700 2,493,806
Petsmart Inc. Pet Supplies Retailer 160,700 1,607,000
Scansource Inc. Distributor of Point of Sale Products 23,100 444,675
Tractor Supply Co. Farming Supplies 10,100 251,238
*Westpoint Stevens Inc. Textile Products 48,000 1,584,000
-----------
$29,664,825
-----------
CREDIT SENSITIVE: 20.1%
------------------------------------
Bank Plus Corp. California Savings Bank 51,100 $ 625,975
*Bank United Corp. Texas Savings Bank 32,500 1,555,938
*DR Horton Inc. Residential/Commercial Builder 99,200 2,070,800
*Dime Bancorp Inc. New York Savings Bank 117,300 3,511,669
*Golden State Bancorp Inc. California Savings Bank 81,150 2,414,212
Golden State Litigation Warrants California Savings Bank-Litigation Tracking Warrants 52,550 279,172
*Idaho Power Co. Electric Utility 16,300 564,387
Independence Community Bank New York City Bank 78,400 1,332,800
*LG&E Energy Corp. Gas & Electric Utility 24,400 660,325
*LNR Property Corp. Real Estate Investment Management 109,000 2,793,125
*Lennar Corp. Residential & Commercial Builders 109,000 3,215,500
*Long Island Bancorp New York Savings Bank 9,700 589,275
*Paine Webber Group Inc. Brokerage Company 43,875 1,886,625
Triangle Pacific Corp. Hardwood Flooring 67,300 3,701,500
-----------
$25,201,303
TECHNOLOGY: 16.3%
------------------------------------
ATMI Inc. Semiconductor Materials & Equipment 35,700 $ 535,500
Avant! Corp. Computer Chip Design Software 57,400 1,420,650
Cognex Corp. Machine Vision Manufacturer 29,550 546,675
Dycom Industries Inc. Telecommunication Construction & Maintenance 72,350 2,441,813
Excite Inc. Internet Portal 5,800 542,300
Fore Systems Inc. Telecommunications Equipment 39,600 1,049,400
Harbinger Corp. Electronic Commerce Solution 66,450 1,607,259
Intest Corp. Semiconductor Equipment 38,500 231,000
LCC International Inc. Telecom Services 46,800 865,800
Mercury Interactive Software Testing Suites 87,000 3,882,375
</TABLE>
*Income Producing Security
4
<PAGE>
<TABLE>
TECHNOLOGY: continued BUSINESS FOCUS SHARES MARKET VALUE
------------------------------------- ------------------------------------------------ -------- ------------
<S> <C> <C> <C>
*Micrel Inc. Analog Power Integrated Circuits 10,200 $ 331,500
Pinnacle Systems Specialized Video Workstation & Software 59,000 1,910,125
Preview Travel Inc. Online Travel Service 25,400 873,125
Symantec Corp. Computer Software 125,650 3,282,606
Xylan Corp. Telecommunications Equipment 28,000 834,750
-----------
$20,354,878
HEALTH CARE: 15.0%
-------------------------------------
*ATL Ultrasound Inc. Medical Ultrasound Equipment 60,600 $ 2,764,875
CV Therapeutics Inc. Cardiovascular Drug Development 32,600 281,175
*Collagen Corp. Biomedical Devices 97,400 1,765,375
Dendrite International Drug Sales Management Systems 2,900 109,113
*Integrated Health Services Subacute Health Care Provider 80,400 3,015,000
*Lincare Holdings Inc. Respiratory Therapy 20,400 858,075
*Mentor Corp. Medical Devices 38,700 938,475
Nanogen Inc. Microelectronics and Molecular Biology 42,200 276,938
Pathogenesis Corp. Respiratory Drug Development 17,000 493,000
Quadramed Corp. Health Care Management Software 50,500 1,379,281
Sangstat Medical Corp. Transplant Drug Development 23,100 724,763
Henry Schein Inc. Health Care Products Distributor 45,900 2,117,137
Sonosight Inc. Ultrasonic Imaging Device Manufacturer 15,566 113,826
Steris Corp. Medical Sterilization Products 13,700 871,234
Trigon Healthcare Inc. Managed Health Care Provider 85,600 3,097,650
------------
$18,805,917
SERVICE COMPANIES: 7.4%
-------------------------------------
American Tower Systems Wireless Tower Services 52,800 $ 1,316,700
Checkpoint Systems Electronic Security Systems 66,500 939,313
Citadel Communications Corp. Radio Broadcasting Stations 7,000 112,000
*Comsat Corp. Satellite Communications Services 82,700 2,341,443
Consolidation Capital Conglomerate of Service Businesses 73,300 1,648,104
*Daisytek International Wholesale Distribution 14,400 366,300
Kroll-O'Gara Company Security Products & Services 29,700 634,838
Envoy Corp. Electronic Interchange Data Service 39,500 1,871,313
-----------
$ 9,230,011
ENERGY: 6.5%
-------------------------------------
*B.J. Services Company Stimulation and Pumping Services 58,000 1,685,625
*Camco International Inc. Oil Field Services & Equipment 12,800 996,800
*Devon Energy Corp. Oil & Gas Exploration and Production 50,600 1,767,838
*Lomak Petroleum Inc. Oil & Gas Exploration and Production 92,100 961,294
Marine Drilling Co. Inc. Offshore Drilling Contractor 71,200 1,139,200
Seagull Energy Corp. Oil & Gas Exploration and Production 91,700 1,518,781
-----------
$ 8,069,538
</TABLE>
*Income Producing Security
5
<PAGE>
<TABLE>
<CAPTION>
PROCESS INDUSTRIES: 3.8% BUSINESS FOCUS SHARES MARKET VALUE
------------------------------------ ------------------------------------------------- ------ ------------
<S> <C> <C> <C>
Bowater Inc. Newsprint and Paper Producer 30,800 $ 1,455,300
*Carbo Ceramics Propane Manufacturer 9,000 307,125
COMPX International Ergonomic Components Manufacturer 29,600 640,100
*P.H. Glatfelter Company Paper Manufacturer 78,000 1,233,375
*Rayonier Inc. Forest Products & Specialty Pulp 24,200 1,113,200
------------
$ 4,749,100
TRANSPORTATION: 5.3%
------------------------------------
*ASA Holdings Inc. Air Carrier 45,300 2,248,012
Dynamex Inc. Same-Day Delivery Services 20,050 243,106
Hvide Marine Inc. Offshore Transportation Services 55,100 747,294
*Skywest Inc. Regional Airline 27,000 756,000
*USFreightways Corp. Regional Motor Carrier 80,700 2,650,491
------------
$ 6,644,903
CAPITAL GOODS: 0.3%
------------------------------------
Brunswick Technologies Composites Manufacturer 25,600 $ 339,200
------------
TOTAL COMMON STOCKS: 98.4% $123,059,675
------------
CASH AND EQUIVALENTS: 2.5%
------------------------------------
The Northern Trust Company 3,138,000 $ 3,138,000
------------
TOTAL INVESTMENTS 100.9%
(Cost $95,588,229) $126,197,675
------------
Assets Less Liabilities--(0.9) (1,039,512)
------------
TOTAL NET ASSETS 100.00% $125,158,163
============
</TABLE>
*Income Producing Security
See accompanying Notes to Financial Statements
6
<PAGE>
Statement of Assets and Liabilities--June 30,1998
(Unaudited)
ASSETS:
Investments in securities at market value,
cost $95,588,229 (including cash equivalents of $3,138,000)... $126,197,675
Cash............................................................ 808
Receivables:
Investment securities sold.................................... 1,098,209
Accrued income................................................ 37,813
------------
Total Assets.................................................... $127,334,505
LIABILITIES:
Payable for investment securities purchased....................... $ 1,981,611
Accrued expenses.................................................. 194,731
------------
Total liabilities................................................. $ 2,176,342
------------
Net Assets........................................................ $125,158,163
============
Net Assets:
Common Stock, $0.01 par value; 9,793,568 shares outstanding;
150,000,000 shares authorized................................. 97,936
Capital in excess of par value.................................. 93,905,083
Net unrealized appreciation of investments...................... 30,609,446
Accumulated net investment income............................... 692,082
Undistributed net capital loss.................................. (146,384)
------------
Net assets applicable to 9,793,568 shares outstanding of
beneficial interest............................................. $125,158,163
============
Net asset value per share as of the close of business on
June 30, 1998................................................... $12.78
======
See accompanying Notes to Financial Statements
7
<PAGE>
Statement of Operations for the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<S> <C>
Investment income:
Interest....................................................... $ 162,339
Cash dividends................................................. 1,358,491
------------
Total Investment Income......................................... $ 1,520,830
Expenses:
Investment advisory fees....................................... $ 590,356
Administrative fees............................................ 86,813
Shareholder relations.......................................... 52,391
Regulatory fees................................................ 13,756
Legal fees..................................................... 23,892
Audit fees..................................................... 17,376
Directors' fees and expenses................................... 36,381
Miscellaneous.................................................. 543
Insurance...................................................... 7,240
------------
Total Expenses.................................................. $ 828,748
------------
Net investment income........................................... $ 692,082
Realized and unrealized gain on investments:
Proceeds from sales............................................ $776,141,922
Less cost of securities sold................................... 772,256,190
------------
Net realized gain on investments................................ $ 3,885,732
Unrealized appreciation:
Beginning of year.............................................. $ 22,754,090
End of year.................................................... 30,609,446
------------
Net increase in unrealized appreciation on investments.......... $ 7,855,356
Net realized and unrealized gain on investments................. $ 11,741,088
------------
Net increase in net assets resulting from operations............ $ 12,433,170
============
</TABLE>
Statement of Changes in Net Assets for the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<S> <C>
Increase in net assets resulting from operations:
Net investment income.......................................... $ 692,082
Net realized gain on investments............................... 3,885,732
Net change in unrealized appreciation.......................... 7,855,356
------------
Net increase in net assets resulting from operations.......... $ 12,433,170
Net proceeds from shares reinvested............................. 7,697,203
Reissuance of treasury shares................................... 3,414,587
------------
Net increase in net assets..................................... $ 23,544,960
Net assets:
Beginning of year............................................... 101,613,203
------------
End of period................................................... $125,158,163
============
</TABLE>
See accompanying Notes to Financial Statements
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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.
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.
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
The Fund has entered into an administration agreement with SEI Financial
Management Corporation (the "Administrator"), pursuant to which the
Administrator receives an annual fee based on the aggregate average daily net
assets of the Fund as follows: 0.10% up to $1 billion; 0.07% from $1 billion to
$1.5 billion; 0.05% from $1.5 billion to $2.5 billion; and 0.04% in excess of
$2.5 billion. The Fund pays the Administrator a minimum annual fee of $60,000
(after a one-year phase in period).
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 Fund pays advisory fees for investment and advisory services to Morgan
Grenfell Capital Management, Inc. ("MGCM"), a wholly-owned subsidiary of
Deutsche Morgan Grenfell. Under the terms of the investment advisory
9
<PAGE>
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.
3. Capital Share Transactions
The Fund has issued the following shares under the Dividend Reinvestment plan:
1990 1992 1994 1995 1996 1997 1998
229,642 441,639 103,447 256,925 372,578 764 704,872
4. Investment Transactions
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold during the six-month period ended June 30, 1998, excluding
short-term investments, were $62,800,169 and 56,348,512, 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 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. 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
10
<PAGE>
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.
6. Year 2000 Compliance
The management services provided to the Fund by the Adviser and services
performed by others, including the custodian and transfer agent, depend upon the
smooth operations of their computer systems. The Fund, like all other mutual
funds and organizations engaged in financial services, would be adversely
affected if the Adviser and other major service providers are not able to
properly calculate data from and after January 1, 2000. This is commonly
referred to as the "Year 2000 Issue". The Adviser has made compliance with the
Year 2000 Issue a high priority and is taking steps with their computer systems
that it believes are reasonably designed to address this issue. The Adviser is
also seeking assurances that comparable steps are being taken by the Fund's
other major service providers.
The Adviser does not currently anticipate that the Year 2000 Issue will have a
material impact on the ability to continue to fulfill their duty as the Fund's
investment adviser.
11
<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 six months ended June 30, 1998, ten years ended
December 31, 1997, 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.
<TABLE>
<CAPTION>
Six Months Years Ended December 31
Ended ---------------------------------------------
June 30, 1998 1997 1996 1995 1994
------------- -------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period....................... $ 11.58 $ 12.23 $ 12.31 $ 10.21 $11.85
Net investment income/(loss).... .07 (0.09) (0.06) (0.00) (0.07)
Net gain/(loss) on securities
(realized and unrealized)...... 1.13 1.78 2.18 4.23 (0.34)
-------- -------- --------- -------- ------
Total from investment
operations...................... $ 1.20 $ 1.69 $ 2.12 $ 4.23 $(0.41)
Less distributions:
Distributions from capital
gains.......................... -- (2.34) (1.60) (2.13) (1.23)
-------- -------- --------- -------- ------
Total distributions.............. $ -- $ (2.34) $ (1.60) $ (2.13) $(1.23)
-------- -------- --------- -------- ------
Dilution due to rights offering -- -- (0.60) -- --
-------- -------- --------- -------- ------
Net asset value, end of
period.......................... $ 12.78 $ 11.58 $ 12.23 $ 12.31 $10.21
======== ======== ========= ======== ======
Market value per share, end
of period....................... $ 11.00 $ 11.125 $ 10.50 $ 12.625 $8.875
======== ======== ========= ======== ======
TOTAL INVESTMENT RETURN:
Based on net asset value per
share........................... +10.36% +14.6% +20.8% +41.4% -3.5%
Based on market value per
share........................... -1.12% +28.5% +17.5% +42.3% -7.1%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................... 1.44%** 1.42% 1.76% 1.51% 1.52%
Net investment income (loss)..... 1.13%** (0.66%) (0.57%) (0.03%) (0.59%)
SUPPLEMENTAL DATA:
Net assets at end of period
(000 omitted).................. $125,158 $101,613 $111,135 $74,402 $59,093
Average net assets during
period (000 omitted)............ $119,096 $114,953 $ 99,372 $72,202 $66,064
Portfolio turnover............... 49% 101% 162% 110% 105%
Total debt outstanding at
end of period
(000 omitted)................... -0- -0- -0- -0- -0-
Asset coverage per $1000 of
debt (000 omitted).............. N/A N/A N/A N/A N/A
</TABLE>
* Annualized.
** For the six month period ended June 30, 1998. The ratios for that period have
been annualized.
12
<PAGE>
<TABLE>
<CAPTION>
May 6, 1987
(commencement of
Years Ended December 31 operations)
----------------------------------------------------------------- through
1993 1992 1991 1990 1989 1988 December 31, 1987
------- ------- -------- --------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period........................ $ 11.97 $ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45 $ 9.27
Net investment income/(loss)..... (0.08) (0.09) (0.10) (0.11) (0.11) (0.11) (0.16)
Net gain/(loss) on securities
(realized and unrealized)....... 1.10 0.58 4.67 (1.34) 2.29 1.53 (1.66)
------- ------- ------- ------- ------- ------- -------
Total from investment
operations....................... $ 1.02 $ 0.49 $ 4.57 $ (1.45) $ 2.18 $ 1.42 $ (1.82)
Less distributions:
Distributions from capital
gains........................... (1.14) (0.82) (0.97) (0.65) (0.25) -- --
------- ------- ------- ------- ------- ------- -------
Total distributions............... $ (1.14) $ (0.82) $ (0.97) $ (0.65) $ (0.25) $ 0.00 $ 0.00
------- ------- ------- ------- ------- ------- -------
Dilution due to rights offering -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period........................... $ 11.85 $ 11.97 $ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45
======= ======= ======= ======= ======= ======= =======
Market value per share, end
of period........................ $10.875 $12.250 $12.875 $ 8.750 $ 9.625 $ 7.375 $ 6.000
======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:
Based on net asset value per
share............................ +8.5% +4.0% +52.5% -13.4% +24.6% +19.1% -19.7%
Based on market value per
share............................ -1.9% +1.5% +58.0% -2.2% +34.2% +22.9% -40.0%
RATIOS TO AVERAGE NET ASSETS:
Expenses.......................... 1.39% 1.44% 1.79% 2.01% 2.13% 2.56% 4.32%*
Net investment income (loss)...... (0.74%) (0.83%) (0.85%) (1.05%) (1.10%) (1.30%) (1.80%)*
SUPPLEMENTAL DATA:
Net assets at end of period
(000 omitted)................... $67,321 $68,013 $64,461 $45,581 $54,136 $44,462 $37,316
Average net assets during
period (000 omitted)............. $69,048 $64,644 $58,900 $51,121 $50,522 $43,422 $44,062
Portfolio turnover................ 89% 89% 70% 75% 80% 83% 98%*
Total debt outstanding at
end of period
(000 omitted).................... -0- -0- $ 1,060 $ 1,724 $ 2,324 $ 2,868 $ 3,360
Asset coverage per $1000 of
debt (000 omitted)............... N/A N/A $ 60.8 $ 26.4 $ 23.3 $ 15.5 $ 11.1
</TABLE>
13
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
MORGAN GRENFELL
SMALLCap FUND, INC. DIRECTORS AND OFFICERS
- ---------------------------------------------------------------------------
Michael Bullock Joan A. Binstock
CHAIRMAN AND DIRECTOR TREASURER
Chief Investment Officer Chief Operating Officer
Morgan Grenfell Asset Morgan Grenfell Capital
Management, Ltd. Management, Inc.
James E. Minnick Tracie E. Richter
PRESIDENT AND DIRECTOR ASSISTANT TREASURER
President Vice President
Morgan Grenfell Capital Morgan Grenfell Capital
Management, Inc. Management, Inc.
Robert E. Greeley James A. Capezzuto
DIRECTOR SECRETARY
President, Vice President
Page Mill Asset Morgan Grenfell Capital
Management Ltd. Management, Inc.
Joseph J. Incandela INDEPENDENT AUDITORS
DIRECTOR --------------------
Partner/Managing Director KPMG Peat Marwick, LLP
Thomas H. Lee Co. 345 Park Avenue
New York, NY 10154
Richard D. Wood CUSTODIAN
DIRECTOR ---------
Consultant The Northern Trust Company
Fifty South LaSalle Street
Chicago, IL 60675
David A. Baratta TRANSFER AGENT
EXECUTIVE VICE PRESIDENT --------------
Morgan Grenfell Capital The Bank of New York
Management, Inc. 101 Barclay Street
New York, NY 10286
John Callaghan INVESTMENT ADVISOR
EXECUTIVE VICE PRESIDENT ------------------
Morgan Grenfell Capital Morgan Grenfell Capital
Management Inc. Management, Inc.
885 Third Avenue
Audrey M.T. Jones 32nd Floor
EXECUTIVE VICE PRESIDENT New York, NY 10022
Morgan Grenfell Capital
Management, Inc.
Morgan Grenfell Capital Management, 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 (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 $160
billion for a wide range of pension, corporate, insurance, local authority,
government and private clients from more than 40 countries 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
1-800-888-8060. The Fund's net asset value is reported each week in The Wall
Street Journal and Barron's.
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
