<PAGE>
MORGAN GRENFELL
SMALLCap Fund, Inc.
Annual Report December 31, 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
Dear Shareholder,
The Morgan Grenfell SMALLCap Fund significantly outperformed its benchmark
for the twelve months ended December 31, 1999. The Fund had a total return of
36.72% for the annual period, as compared to 12.41% for the S&P 600 Index. The
Fund also outperformed the Russell 2000 Index, which returned 21.26%, and the
Lipper Small Cap Core Funds Average, which returned 28.27%, for the same time
period.
MARKET REVIEW
For the first time in five years, the small cap equity market outperformed both
its large cap and mid cap brethren for the year ended December 31, 1999. The
dominant theme within the small cap sector during 1999 was "growth over value,"
as these different style stocks exhibited their widest divergence ever.
Led by technology and Internet-related stocks, small growth stocks, as
represented by the Russell 2000 Growth Index, gained 43.1% for the twelve months
ended December 31, 1999. On the other hand, the value component of the Russell
2000 Index fell approximately 1.5%. As with the broader equity market, more
stocks in the Russell 2000 Index actually declined in value in 1999 rather than
appreciated, rendering performance in the small cap U.S. stock market very
narrow indeed.
INVESTMENT STRATEGY
The Fund continues to focus 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 on December
31, 1999 was $1.5 billion.
The Fund's strong performance for 1999 was due primarily to effective sector
and individual stock allocation, despite high volatility within the U.S. equity
market in general and the small cap market in particular.
For example, the Fund's largest allocation was to the technology sector, the
small cap index's top performing sector. We focused our research on those
companies that we believed would benefit from e-commerce, the need for greater
bandwidth and connectivity, and other innovations that we anticipate will enjoy
strong demand in the future. Within this sector, strong performers included
Mercury Interactive and Pinnacle Systems.
Throughout most of the fiscal year, the portfolio was also overweight in
health care stocks. Winners for the Fund in this sector included Cell Genesys,
Inc. and ResMed, Inc.
The Fund also benefited from its holdings in certain energy companies,
particularly exploration and production companies that experienced drilling
successes in new oil and gas fields as well as oil service companies whose stock
increased in value with the recovery of oil prices during 1999. Also to the
benefit of the Fund, the portfolio was underweight in the poorly
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
performing consumer and credit sensitive sectors, the latter of which was
particularly impacted by fears of inflation, rising interest rates, and Y2K
concerns. As of December 31, 1999, the Fund held 89 securities in its portfolio.
MANAGER OUTLOOK
Our outlook for the equity markets in general is favorable, as the U.S. economy
continues to benefit from strong productivity-led growth in the midst of low
inflation. Fundamentals for corporate profits also remain solid across most
sectors. Thus, we believe that the year 2000 should bring higher stock prices
and broader, significantly improved market breadth, whereby non-technology
sectors with attractive valuations and strong corporate earnings should
participate more fully in market advances than in recent years.
The relative outperformance of small stocks in 1999 appears, in our view, to
be the beginning of an extended period of sustained outstanding performance,
especially given the improved global economic picture. Strong earnings growth,
rather than discounted valuations, should also be a key driver of smaller
companies.
Two additional factors could spark added momentum to the small cap rally. In
our opinion, 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.
In addition, the small cap universe contains over 6,300 companies,
representing well over 90% of all publicly traded domestic companies. Such a
universe provides an excellent source for corporate America and venture
capitalists to continue to recognize, as they did in record numbers during 1999,
value in these companies with solid fundamentals early in their growth cycle.
The U.S. 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.
Takeovers, restructuring and consolidation also create opportunities for small
cap investors.
Our market outlook is tempered by heightened expectations that the Federal
Reserve Board may raise interest rates in the new year in an effort to dampen
ongoing overzealous consumer spending. Any further Fed tightening of monetary
policy would come on the heels of three additional rate hikes in 1999, which
essentially brought rates back to levels seen prior to the global economic
crisis of 1998. Still, we believe that even with the possibility of further rate
hikes in 2000, the U.S. economy should be able to achieve a soft landing, at
worst. There may also be increased market volatility as presidential elections
near and campaign rhetoric begins to dominate the news. Earnings disappointments
continue to present the primary investment risk.
Given the recent and anticipated high volatility in the stock market, it is
important to keep in mind that we remain disciplined in our process. Our
investment strategy continues to:
- focus on small cap companies with above average growth prospects selling
at reasonable valuations with the potential to be the blue chips of the
future
2
<PAGE>
- --------------------------------------------------------------------------------
- focus on individual stock selection with the goal of providing value-added
performance relative to the universe of smaller U.S. companies
- use extensive and intensive fundamental research to identify companies
with innovation, leading or dominant position in their niche markets, a
high rate of return on invested capital, and the ability to finance a
major part of future growth from internal sources, and
- strictly adhere to our sell discipline to reduce exposure to stocks with
diminished appreciation potential.
As always, our primary objective is to provide high capital appreciation for
our shareholders. We thank you for your continued support of the Morgan Grenfell
SMALLCap Fund.
Sincerely,
/s/ Audrey M. T. Jones
Audrey M. T. Jones
President of the Morgan Grenfell SMALLCap Fund
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1999 (based upon the Fund's NAV)
- ---------------------------------------------------------------------------------------------------
Annualized Annualized Annualized Annualized
1 Year 3 Year 5 Year 10 Year Inception
Return Return Return Return to Date
<S> <C> <C> <C> <C> <C>
SMALLCap Fund* 36.7% 17.2% 22.6% 14.8% 13.1%
S&P 600 Index 11.7% 17.1% 13.0% 10.5% 10.5%
Russell 2000 Index 21.3% 13.1% 16.7% 13.4% 11.1%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $1,000 INVESTMENT IN MORGAN GRENFELL
SMALL CAP FUND, INC. VERSUS THE S&P 600 SMALL CAP INDEX AND THE RUSSELL 2000
INDEX.
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
12/99 4,768 3,506 3,775
</TABLE>
* COMMENCED OPERATIONS ON MAY 6, 1987.
NOTE: PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NOT PREDICATIVE
OF FUTURE PERFORMANCE. ACTUAL RETURN AND PRINCIPAL VALUE WILL FLUCTUATE,
AND SHARES WHEN SOLD MAY BE WORTH MORE OR LESS THAN THEIR COST.
4
<PAGE>
- --------------------------------------------------------------------------------
HISTORICAL RETURNS
<TABLE>
<CAPTION>
SMALLER COMPANIES
SMALLCAP -------------------- LARGER COMPANIES
FUND S&P RUSSELL -------------------
PERIOD NAV 600 2000 S&P 500 D.J.I.A
- -------------------------------------------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1999 36.7% 12.4% 21.3% 21.0% 27.2%
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) 376.8% 245.8% 277.4% 577.3% 583.5%
</TABLE>
PORTFOLIO STRUCTURE
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
NUMBER MARKET
OF VALUE PERCENTAGE OF
ECONOMIC SECTOR COMPANIES (000'S) PORTFOLIO
- ------------------------- ------------ ------------ --------------
1999 1998 1999 1998 1999 1998 CHANGE
----- ----- ----- ----- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Technology 21 19 46.0 27.8 29% 24% +5
Health Care 14 18 28.4 16.9 18% 15% +3
Consumer 20 15 26.2 25.5 17% 22% -5
Credit Sensitive 10 11 12.8 19.0 8% 16% -8
Energy 5 4 12.0 4.6 8% 4% +4
Service Companies 9 4 9.6 7.0 6% 6% 0
Transportation 4 4 7.6 4.4 5% 4% +1
Process Industries 6 6 6.4 4.9 4% 4% 0
Capital Goods 0 1 0.0 0.2 0% 0% 0
----- ----- ----- ----- ----- ----- -----------
Total Equities 89 82 149.0 110.3 95% 95% 0
===== =====
Cash and Cash Equivalents 8.1 6.3 5% 5% 0
----- ----- ----- ----- -----------
Total Fund 157.1 116.6 100% 100% 0%
===== ===== ===== ===== ===========
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
(DECEMBER 31, 1999)
<TABLE>
<CAPTION>
PERCENTAGE OF STOCK
COMPANY NET ASSETS SYMBOL BUSINESS FOCUS
- ------------------------------------------ ------------- ------ ------------------------------
<C> <S> <C> <C> <C>
1. Interworld Corp. 3.4% INTW Internet Software
2. BJ Services 2.9% BJS Petroleum Industry Services
3. Credence Systems Corp. 2.7% CMOS Electronic Measuring
Instrumentation
4. Pinnacle Systems, Inc. 2.6% PCLE Video Production Equipment
5. US Freightways Corp. 2.5% USFC Regional Motor Carrier
6. Enzon, Inc. 2.2% ENZN Gene Therapies for Life
Threatening
Diseases
7. Medical Manager Corp. 2.2% MMGR Healthcare Cost Containing
Services
8. DII Group, Inc. 2.1% DIIG Electronics Outsourcing
9. Transwitch Corp. 2.1% TXCC Digital High Speed
Semiconductor
Solutions
10. IVAX Corp. 2.1% IVX Pharmaceutical Developer &
Marketer
---------
24.8%
=========
</TABLE>
6
<PAGE>
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- DECEMBER 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------
DESCRIPTION SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 95.6%
CONSUMER -- 16.8%
American Eagle
Outfitters, Inc.* 37,200 $ 1,674,000
Ames Department
Stores, Inc.* 26,800 772,175
AnnTaylor Stores, Corp.* 41,700 1,436,044
Bally Total Fitness Holdings* 56,000 1,494,500
Championship Auto Racing
Teams, Inc.* 54,000 1,242,000
Corporate Executive Board
Co.* 44,700 2,497,612
Cumulus Media, Inc. * 52,900 2,684,675
Damark International Inc.* 26,250 413,438
Furniture Brands
International, Inc.* 75,900 1,669,800
GetThere.com, Inc.* 4,200 169,050
Marketing Services
Group, Inc.* 39,500 661,625
Martha Stewart Living
Omnimedia, Inc.* 10,500 252,000
Mohawk Industries Inc.* 58,800 1,550,850
Pacific Sunwear of
California, Inc.* 67,000 2,135,625
Quintus Corp.* 1,900 87,162
Radio Unica Corp.* 38,700 1,117,462
Spanish Broadcasting
System, Inc.* 62,800 2,527,700
Too, Inc.* 62,500 1,078,125
Zale Corp.* 43,000 2,080,125
99 Cents Only Stores* 16,000 612,000
------------
26,155,968
------------
CREDIT SENSITIVE -- 8.2%
Astoria Financial Corp. 31,655 963,499
Bank United Corp. 53,900 1,468,775
D.R. Horton, Inc. 101,300 1,399,206
Dime Bancorp 107,300 1,622,912
Dime Community Bancshares 11,200 207,200
Golden State Bancorp, Inc.* 102,350 1,765,537
Labranche & Co., Inc.* 51,000 650,250
Lennar Corp. 109,000 1,771,250
LNR Property Corp. 113,650 2,258,794
Sovereign Bancorp, Inc. 91,900 684,940
------------
12,792,363
------------
ENERGY -- 7.7%
BJ Services Co.* 107,200 4,482,300
Devon Energy Corp. 94,400 3,103,400
Global Industries, Ltd.* 183,400 1,581,825
Input/Output, Inc.* 72,000 364,500
Marine Drilling
Companies, Inc.* 111,200 2,495,050
------------
12,027,075
------------
HEALTH CARE -- 18.2%
Accredo Health, Inc.* 33,400 1,027,050
Alkermes, Inc.* 50,300 2,470,987
Cell Genesys, Inc.* 107,500 1,377,344
Dendrite
International, Inc.* 63,550 2,152,756
Enzon, Inc.* 80,300 3,483,012
IVAX Corp. 126,100 3,247,075
Invitrogen Corp.* 22,600 1,356,000
Medical Manager Corp.* 41,300 3,479,525
Nanogen, Inc.* 80,600 1,763,125
Priority Healthcare Corp., Cl
A* 27,349 791,412
Priority Healthcare Corp., Cl
B* 27,150 785,653
ResMed, Inc.* 56,300 2,350,525
Sonosite* 47,799 1,511,643
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------
DESCRIPTION SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
Trigon Healthcare, Inc.* 88,100 $ 2,598,950
------------
28,395,057
------------
PROCESS INDUSTRIES -- 4.1%
AK Steel Holding Corp. 72,323 1,365,097
Bowater Inc. 30,800 1,672,825
Carbo Ceramics 9,500 207,813
CompX International Inc.* 33,600 617,400
PH Glatfelter 92,900 1,352,856
Rayonier Inc. 24,700 1,193,319
------------
6,409,310
------------
SERVICE COMPANIES -- 6.2%
AGENCY.COM, Ltd.* 2,600 132,600
American Tower Corp. 65,800 2,011,013
Classic
Communications, Inc.* 4,100 149,906
eBenX, Inc.* 13,700 619,925
Insight Communications
Company, Inc.* 55,000 1,629,375
Pac-West Telecomm, Inc.* 35,200 932,800
Price Communications Corp.* 68,145 1,895,283
Triton PCS Holdings, Inc.* 11,300 514,150
Viatel, Inc.* 32,100 1,721,362
------------
9,606,414
------------
TECHNOLOGY -- 29.5%
Allied Riser Communications
Corp.* 101,600 2,101,850
Alpha Industries, Inc. 32,300 1,851,194
Art Technology Group, Inc.* 20,300 2,600,938
ATMI, Inc.* 69,500 2,297,844
Cognex Corp.* 62,500 2,437,500
Credence Systems Corp.* 48,900 4,229,850
DII Group, Inc.* 47,200 3,349,727
Interworld Corp.* 61,500 5,250,563
Kronos, Inc.* 9,400 564,000
National Information
Consortium, Inc.* 30,900 988,800
Pairgain Technologies, Inc.* 101,500 1,440,031
PC-Tel, Inc.* 14,800 777,000
Pegasus Systems, Inc.* 23,900 1,441,469
Pinnacle Systems Inc.* 100,500 4,089,094
Polycom, Inc.* 34,500 2,197,219
Sagent Technology, Inc.* 60,500 1,811,219
Symantec Corp.* 18,200 1,066,975
Symyx Technologies Inc.* 3,300 99,000
Titan Corp.* 61,000 2,874,625
TranSwitch Corp.* 45,900 3,330,619
Whittman-Hart, Inc.* 23,000 1,233,375
------------
46,032,892
------------
TRANSPORTATION -- 4.9%
Airborne Freight Corp. 54,300 1,194,600
Atlantic Coast Airlines
Holdings* 71,300 1,693,375
Tidewater Inc. 23,700 853,200
US Freightways Corp. 80,700 3,863,512
------------
7,604,687
------------
TOTAL INVESTMENTS -- 95.6%
(Cost $102,596,437) 149,023,766
------------
OTHER ASSETS IN EXCESS OF
LIABILITIES -- 4.4% 6,871,877
------------
NET ASSETS -- 100% $155,895,643
============
*Non-income producing security.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Investments at Value (cost $102,596,437) $149,023,766
Cash 8,056,918
Receivable for Securities Sold 1,911,433
Dividend and Interest Receivable 23,238
-----------
Total Assets 159,015,355
-----------
LIABILITIES
Due to Adviser 123,316
Due to Administrator 8,537
Payable for Securities Purchased 2,766,383
Accrued Expenses and Other 221,476
-----------
Total Liabilities 3,119,712
-----------
Net Assets $155,895,643
===========
SHARES OUTSTANDING AT DECEMBER 31, 1999 9,802,054
NET ASSET VALUE PER SHARE AT DECEMBER 31, 1999 $ 15.90
===========
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 Realized Gain from Securities 15,959,209
Net Unrealized Appreciation on Investments 46,427,329
-----------
NET ASSETS, DECEMBER 31, 1999 $155,895,643
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
<PAGE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 344,217
Interest 221,049
-----------
Total Investment Income 565,266
EXPENSES
Investment Advisory Fees 1,189,068
Professional Fees 109,156
Printing Fees 94,485
Miscellaneous Expenses 83,303
Administration Fees 71,347
Custody Fees 67,703
Directors' Fees and Expenses 58,106
Registration & Filing Fees 29,414
Transfer Agency Fees 20,846
-----------
Total Expenses 1,723,428
-----------
NET INVESTMENT LOSS (1,158,162)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain from Investment Transactions 20,846,432
Net Change in Unrealized Appreciation on
Investments 22,164,135
-----------
Net Realized and Unrealized Gain on Investments 43,010,567
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $41,852,405
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net Investment Income (Loss) $ (1,158,162) $ 133,999
Net Realized Gain on Investments 20,846,432 1,071,118
Net Change in Unrealized Appreciation
on Investments 22,164,135 1,509,104
------------ ------------
Net Increase in Net Assets from
Operations 41,852,405 2,714,221
------------ ------------
DISTRIBUTIONS 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 FOM CAPITAL
TRANSACTIONS -- 11,772,463
------------ ------------
Total Increase in Net Assets 41,852,405 12,430,035
NET ASSETS
Beginning of Period 114,043,238 101,613,203
------------ ------------
End of Period $155,895,643 $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>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
<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 five years ended December 31, 1999. This
information has been derived from information provided in the financial
statements and market price data for the Fund's shares.
<TABLE>
<CAPTION>
-------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------------ --------- --------- --------- --------
<S> <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
Net investment income
(loss) (0.12) 0.01 (0.09) (0.06) (0.00)
Net realized and
unrealized gains
(losses) 4.39 0.25 1.78 2.18 4.23
-------- -------- -------- -------- -------
Total from investment
operations $ 4.27 $ 0.26 $ 1.69 $ 2.12 $ 4.23
Less distributions from:
Net investment income -- (0.01) -- -- --
Realized capital gains -- (0.08) (2.34) (1.60) (2.13)
Return of capital -- (0.12) -- -- --
-------- -------- -------- -------- -------
Total distributions $ -- $ (0.21) $ (2.34) $ (1.60) $ (2.13)
-------- -------- -------- -------- -------
Dilution due to rights
offering -- -- -- (0.60) --
-------- -------- -------- -------- -------
Net asset value, end of
period $ 15.90 $ 11.63 $ 11.58 $ 12.23 $ 12.31
======== ======== ======== ======== =======
Market value per share,
end of period $ 14.19 $ 9.69 $ 11.13 $ 10.50 $ 12.63
TOTAL INVESTMENT RETURN:
Based on net asset value
per share +36.7% +2.66% +14.6% +20.8% +41.4%
Based on market value per
share +46.45% -10.99% +28.5% +17.5% +42.3%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.45% 1.56% 1.42% 1.76% 1.51%
Net investment income
(loss) (0.97)% 0.12% (0.66)% (0.57)% (0.03)%
SUPPLEMENTAL DATA:
Net assets at end of year
(000 omitted) $155,896 $114,043 $101,613 $111,135 $74,402
Average net assets during
year (000 omitted) $118,894 $110,974 $114,953 $ 99,372 $72,202
Portfolio turnover 114% 116% 101% 162% 110%
</TABLE>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- DECEMBER 31, 1999
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") for investment companies.
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. Over-the-counter securities not quoted on the NASDAQ system are valued on
the basis of the average bid and asked prices. 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 paid by 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.
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 Deutsche Asset Management, Inc., ("DAMI", the "Administrator",
formerly 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. For the year ended December 31, 1999, the fees
earned by the Administrator were approximately $71,347.
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 DAMI.
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 DAMI.
3. CAPITAL SHARE TRANSACTIONS
There were no capital share transactions for the year ended December 31, 1999.
12
<PAGE>
- --------------------------------------------------------------------------------
4. INVESTMENT TRANSACTIONS
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold for the year ended December 31, 1999, excluding short-term
investments, were $132,608,029 and $136,839,697, respectively.
For Federal income tax purposes, the cost of securities owned, the aggregate
gross unrealized appreciation and depreciation and the net unrealized
appreciation on investments at December 31, 1999 were $102,880,939, $50,201,082,
$4,058,255 and $46,142,827, 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.
13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
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, 1999, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period ended December 31, 1999, and the financial highlights for each
of the years in the five-year period ended December 31, 1999. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our reponsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, 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, 1999, the result of its
operations for the year then ended, changes in its net assets for each of the
years in the two-year period ended December 31, 1999 and the financial
highlights for each of the years in the five-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
New York, New York
February 4, 2000
14
<PAGE>
SHAREHOLDER INFORMATION SERVICE
- --------------------------------------------------------------------------------
DEUTSCHE ASSET MANAGEMENT, INC. (THE ADVISER TO THE MORGAN GRENFELL SMALLCAP
FUND) IS A INDIRECT WHOLLEY OWNED SUBSIDIARY OF DEUTSCHE BANK AG.
Shares of the Morgan Grenfell SMALLCap Fund, a closed end 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.
SHAREHOLDER INQUIRIES:
THE BANK OF NEW YORK
1-800-524-4458
SHAREHOLDER RELATIONS DEPARTMENT - 11E
P.O. BOX 11258
CHURCH STREET STATION
NEW YORK, NY 10286
E-MAIL ADDRESS: [email protected]
15
<PAGE>
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND, INC.
ROBERT E. GREELEY
DIRECTOR
President
Page Mill Asset Management Ltd.
JOSEPH J. INCANDELA
DIRECTOR AND CHAIRMAN
Private Equity Investor
AUDREY M.T. JONES
PRESIDENT AND DIRECTOR
Executive Vice President
Deutsche Asset Management, Inc.
RICHARD D. WOOD
DIRECTOR
Consultant
JOHN P. CALLAGHAN
EXECUTIVE VICE PRESIDENT
Deutsche Asset Management, Inc.
EDWARD J. VEILLEUX
VICE PRESIDENT
Managing Director
Deutsche Asset Management
AMY M. OLMERT
TREASURER AND CHIEF FINANCIAL OFFICER
Vice President
Deutsche Asset Management
JOSEPH PARASCONDOLA
ASSISTANT TREASURER
Assistant Vice President
Deutsche Asset Management
FRAN POLLACK-MATZ
SECRETARY
Vice President
Deutsche Asset Management
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 ADVISER
Deutsche Asset Management, Inc.
885 Third Avenue
32nd Floor
New York, NY 10022
MGSCAN(1299)
