<PAGE>
M u t u a l F u n d
S e m i - A n n u a l R e p o r t
June 30, 2000
Morgan Grenfell
SMALLCap Fund, Inc.
A Member of the
Deutsche Bank Group [/]
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Letter to Shareholders
Dear Shareholder:
Attached please find the June 30, 2000 semi-annual report for the Morgan
Grenfell SMALLCap Fund.
I am also pleased to announce two new initiatives. The Board of Directors
unanimously voted to change the name of the Fund from the Morgan Grenfell
SMALLCap Fund, Inc. to The SMALLCap Fund, Inc. to gain broader exposure for the
Fund. I anticipate that the name change will occur in the third quarter of this
year. Please note that the ticker symbol "MGC" will not change. In addition, the
Fund will launch its own web-site www.thesmallcapfundinc.com in the fourth
quarter of this year. This site will include news, updates, quarterly fact
sheets, annual, and semi-annual reports, as well as the daily NAV of the Fund.
I would like to thank you for being a shareholder of the Fund, and look forward
to sharing more exciting developments with you in the future. Please feel free
to contact the Fund as we welcome shareholder input and look forward to
responding to your questions or concerns.
Best regards,
Joseph J. Incandela
Chairman of the Fund
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
--------------------------------------------------------------------------------
Table of Contents
Letter to Shareholders............................. 3
Morgan Grenfell SMALLCap Fund, Inc.
Schedule of Investments.......................... 8
Statement of Assets and Liabilities.............. 10
Statement of Operations.......................... 11
Statements of Changes in Net Assets.............. 12
Financial Highlights............................. 13
Notes to Financial Statements.................... 14
Proxy Results.................................... 18
-----------------------------
The Fund is not insured by the FDIC and is not a deposit, obligation of or
guaranteed by Deutsche Bank. The Fund is subject to investment risks, including
possible loss of principal amount invested.
-----------------------------
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2
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
--------------------------------------------------------------------------------
Letter to Shareholders
Dear Fellow Shareholder:
The Morgan Grenfell SMALLCap Fund outperformed its benchmark for the six months
ended June 30, 2000. The Fund had a total return of 9.95% for the semi-annual
period (based on the Fund's NAV), as compared to 6.93% for the S&P Small Cap 600
Index. The Fund also outperformed the Russell 2000 Index, which returned 3.04%,
and the Lipper Small Cap Core Funds Average, which returned 9.20%, for the same
time period.
MARKET REVIEW
Continuing the trend from 1999, the small cap equity market, as measured by the
S&P 600 Index, outperformed its large cap brethren for the six months ended June
30, 2000. However, the dominant theme within the small cap sector was
"volatility and reversal," due primarily to wide swings in investor sentiment
since year end 1999.
The year started strongly, with technology and health care, especially
biotechnology, leading the performance charge. In March, the small cap market
pulled back, and both the technology and health care sectors ended the month
down. Still, for the first quarter overall, health care and technology were
among the top performing sectors along with communications services, mostly
driven by cellular/wireless, and energy, as a result of rising commodity prices.
The second quarter began with a continuation of the March sell-off. Fears of a
pick-up in inflation, a shift in investor sentiment regarding "New Economy" vs.
"Old Economy" stocks, and the near-certain prospect of higher interest rates
followed by a gradual slowdown in economic growth caused a decline in all
capitalization segments of the equity market. However, the small cap market
improved in the latter half of the second quarter, as optimism rose that the
Federal Reserve Board could engineer a "soft landing" for the U.S. economy.
Also, earnings growth estimates remained strong. In the small cap market, the
health care and energy sectors led second quarter performance. However, the
negative returns in technology and other sectors during these months hindered
overall market performance.
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 June 30,
2000 was $1.39 billion.
The Fund's strong performance for the first half of 2000 was due primarily to
effective sector allocation and individual stock selection, despite high
volatility within the U.S. equity market in general and the small cap market in
particular.
For example, the Fund maintained an overweight position in two of the best
performing sectors--health care and energy. Winners for the Fund in these
sectors included Caremark Rx Inc., Priority Healthcare Corp., Trigon Healthcare
Inc., BJ Services, Devon Energy Corp., and Global Industries. Performance was
also aided by an underweight position in the poorly performing consumer sector.
The Fund's overweight position in the technology sector had a mixed impact on
portfolio performance. Still, we maintained our position, focusing 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 Tech Data Corp. and Documentum, Inc. As of June 30, 2000, the Fund held
89 securities across nine sectors in its portfolio.
MANAGER OUTLOOK
Recent economic data suggests that U.S. economic growth may be sustained at a
more moderate pace with lessened investor anxiety regarding rising interest
rates and inflation. A moderation in energy prices could further reduce
inflationary pressures. Profit growth seems solid across most segments of the
market. Thus, our outlook for the U.S. equity markets in general is favorable.
We remain positive on the small cap market as well. Profit growth remains
positive and relative valuations in small cap stocks continue to be attractive.
Two additional factors could support the strong performance of the small cap
equity market. 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
--------------------------------------------------------------------------------
3
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
--------------------------------------------------------------------------------
Letter to Shareholders
stocks. In fact, small cap mutual fund inflows during the first half of 2000
were the best in three years.
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 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. Restructuring and consolidation also create opportunities for small
cap investors.
Our market outlook is tempered by several risks that exist for the rest of the
year. In particular, we are concerned about valuation risk, especially in NASDAQ
stocks. So far, the NASDAQ Composite remains extremely volatile and has
experienced daily movements of over 5% on twelve occasions during the first six
months of 2000. Also, margin and consumer debt remains at high levels. Third,
interest rates could increase further, which may lead to significant slowing of
the economy. There may also be increased market volatility as presidential
elections near and debates on federal budget policy, free trade issues, and the
long-term funding of Social Security begin to dominate the news. Overall,
earnings disappointments continue to present the primary investment risk.
Despite the recent and anticipated high volatility in the stock market, we
remain disciplined in our investment 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
. 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 maximize 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, Inc.
--------------------------------------------------------------------------------
4
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
--------------------------------------------------------------------------------
Performance Comparison
MORGAN GRENFELL SMALLCap FUND, INC.,
S&P SMALL CAP 600 INDEX AND RUSSELL 2000 INDEX
AVERAGE GROWTH OF A $1,000 INVESTMENT (SINCE MAY 6, 1987)
[GRAPH APPEARS BELOW]
May-87 1,000 1,000 1,000
Dec-88 957 891 923
Dec-89 1,198 1,015 1,073
Dec-90 1,038 774 864
Dec-91 1,575 1,150 1,262
Dec-92 1,635 1,392 1,494
Dec-93 1,776 1,653 1,777
Dec-94 1,719 1,574 1,744
Dec-95 2,459 2,046 2,241
Dec-96 2,959 2,482 2,610
Dec-97 3,397 3,117 3,194
Dec-98 3,488 3,076 3,112
Dec-99 4,768 3,458 3,774
June-00 5,243 3,698 3,889
Morgan Grenfell SMALLCap Fund, Inc. - $5,243
S&P Small Cap 600 Index - $3,749
Russell 2000 Index - $3,571
Average Annual Total Return for the Periods Ended June 30, 2000
(based upon the Fund's NAV)
1 Year 41.44% 3 Year 19.06% Since 5/6/87/1/ 13.42%
Benchmark returns are for the period beginning 4/30/87
--------------------------------------------------------------------------------
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so that shares, when sold, may be worth more
or less than their original cost. Performance figures assume the
reinvestment of dividend and capital gain distributions.
The S&P Small Cap 600 Index is an unmanaged index of 600 domestic stocks
chosen for market size, liquidity and industry group representation. It is a
widely accepted benchmark of small capitalization equity market performance.
The Russell 2000 Index is an unmanaged index which tracks the common stock
price movement of the 2000 smallest companies in the Russell 3000 Index,
which measures the performance of the 3000 largest U.S. companies based on
total market capitalization. Index returns do not reflect expenses, which
have been deducted from the Fund's return.
/1/ The Fund's inception date.
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5
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Historical Returns (Cumulative)
<TABLE>
<CAPTION>
Morgan Grenfell Smaller Companies
SMALLCap S&P Russell Larger Companies
Fund, Inc. Small Cap 2000 S&P 500
Period NAV 600 Index Index Index D.J.I.A.
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/1/00-6/30/00 10.0% 6.9% 3.0% -0.4% -8.5%
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) 424.2% 274.9% 257.1% 612.9% 559.1%
</TABLE>
-------------------------------------------------------------------------------
Portfolio Structure
<TABLE>
<CAPTION>
Number Market Value Percentage of
of Companies (in Millions) Portfolio
Economic Sector 2000* 1999 2000* 1999 2000* 1999 Change
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Technology 29 21 58.9 46.0 36% 29% +7
Health Care 15 14 37.8 28.4 22% 18% +4
Consumer 13 20 15.1 26.2 9% 17% -8
Credit Sensitive 10 10 15.3 12.8 9% 8% +1
Energy 6 5 14.6 12.0 9% 8% +1
Service Companies 8 9 10.5 9.6 6% 6% 0
Transportation 4 4 6.5 7.6 4% 5% -1
Process Industries 3 6 3.3 6.4 2% 4% -2
Capital Goods 1 0 0.7 -- 0% 0% 0
-- -- ----- ----- ---- ----
Total Equities 89 89 162.7 149.0 97% 95%
== == ----- ----- ---- ----
Cash and Cash Equivalents 6.0 8.1 3% 5%
----- ----- ---- ----
Total Fund 168.7 157.1 100% 100%
===== ===== ==== ====
</TABLE>
-------------------------------------------------------------------------------
*Represents 1/1/00-6/30/00.
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6
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Ten Largest Holdings As of June 30, 2000
<TABLE>
<CAPTION>
Percentage
of Net Stock
Company Assets Symbol Business Focus
------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1. Documentum Inc. 3.6% DCTM Intranet Software Developer
2. Trigon Healthcare Inc. 3.5% TGH Managed Healthcare Provider
3. Province Healthcare Co. 2.6% PRHC Non-Urban Hospital Network
4. Maxtor Corp. 2.4% MXTR Semiconductor Measurement &
Inspection System Supplier
5. Dendrite International Inc. 2.4% DRTE Pharmaceutical Salesforce Automation
6. Tech Data Corp. 2.2% TECD Computer Equipment Distributor
7. Cybex Computer Products Corp. 2.1% CBXC Neurological Medical Device Provider
8. ADTRAN Inc. 2.1% ADTN High Speed Digital Transmission Products
9. ResMed Inc. 2.0% RMD Medical Device Manufacturer
10. Pinnacle Systems Inc. 2.0% PCLE Video Production Equipment
-----
24.9%
=====
</TABLE>
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7
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Schedule of Investments June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
--------------------------------------------------------------
<C> <S> <C>
Common Stocks - 98.0%
Capital Goods - 0.4%
19,200 Oshkosh Truck Corp.................... $ 686,400
------------
Consumer - 9.1%
56,000 Bally Total Fitness Holding*.......... 1,421,000
38,500 BJ's Wholesale Club, Inc.*............ 1,270,500
49,550 Cheesecake Factory, Inc.*............. 1,362,625
9,200 Factory 2-U Stores, Inc.*............. 347,875
77,900 Furniture Brands
International, Inc.*................. 1,178,238
37,300 Hain Celestial Group, Inc.*........... 1,368,444
64,400 Mohawk Industries*.................... 1,400,700
26,100 Perfomance Food Group Co.*............ 835,200
53,400 Spanish Broadcasting
System, Inc.*........................ 1,098,037
26,500 Too, Inc.*............................ 674,094
51,100 Trex Co., Inc.*....................... 2,555,000
26,100 Zale Corp.*........................... 952,650
16,533 99 Cents Only Stores*................. 659,253
------------
15,123,616
------------
Credit Sensitive - 9.2%
31,655 Astoria Financial Corp................ 815,116
62,300 Bank United Corp...................... 2,192,181
37,400 Bottomline Technologies, Inc.*........ 1,278,613
101,300 D.R. Horton, Inc...................... 1,373,881
107,300 Dime Bancorp.......................... 1,689,975
102,350 Golden State Bancorp, Inc.*........... 1,842,300
51,000 Labranche & Co., Inc.*................ 733,125
109,000 Lennar Corp........................... 2,207,250
113,650 LNR Property Corp..................... 2,216,175
142,400 Sovereign Bancorp, Inc................ 1,001,243
------------
15,349,859
------------
Energy - 8.8%
51,100 BJ Services*.......................... 3,193,750
56,400 Devon Energy.......................... 3,168,975
145,300 Global Industries, Ltd.*.............. 2,742,537
72,000 Input/Output, Inc.*................... 607,500
97,100 Marine Drilling Companies, Inc.*...... 2,718,800
67,000 National - Oilwell, Inc.*............. 2,202,625
------------
14,634,187
------------
Health Care - 22.8%
53,400 Accredo Health, Inc.*................. 1,845,637
48,100 Alpharma, Inc......................... 2,994,225
397,500 Caremark Rx, Inc.*.................... 2,707,969
99,700 Cell Genesys, Inc.*................... 2,791,600
94,600 Coventry Health Care, Inc.*........... 1,260,838
119,250 Dendrite International, Inc.*......... 3,972,516
57,500 Enzon, Inc.*.......................... 2,443,750
21,700 Nanogen, Inc.*........................ 920,894
27,349 Priority Healthcare Corp., ClA*....... 2,032,373
18,350 Priority Healthcare Corp., ClB*....... 1,363,634
120,200 Province Healthcare Co.*.............. 4,342,225
124,400 ResMed, Inc.*......................... 3,327,700
40,599 SonoSite, Inc.*....................... 1,169,759
<CAPTION>
Shares Description Value
--------------------------------------------------------------
<C> <S> <C>
112,800 Trigon Healthcare, Inc.*.............. $ 5,816,250
187,800 XOMA Ltd.*............................ 804,009
------------
37,793,379
------------
Process Industries - 2.0%
30,800 Bowater Inc........................... 1,359,050
77,300 PH Glatfelter Co...................... 787,494
32,200 Rayonier Inc.......................... 1,155,175
------------
3,301,719
------------
Service Companies - 6.3%
50,200 Alamosa PCS Holdings, Inc.*........... 1,047,925
27,200 GT Group Telecom, Inc., Cl B*......... 430,100
55,000 Insight Communications
Company, Inc.*....................... 859,375
124,000 Pac-West Telecomm, Inc.*.............. 2,480,000
68,145 Price Communications Corp.*........... 1,605,667
37,700 SBA Communications Corp.*............. 1,958,044
93,300 US Unwired Inc.*...................... 1,212,900
30,100 Viatel, Inc.*......................... 859,731
------------
10,453,742
------------
Technology - 35.5%
44,300 Accrue Software, Inc.*................ 1,572,650
58,000 ADTRAN, Inc.*......................... 3,472,750
124,100 Allied Riser Communications
Corp.*............................... 1,752,912
29,500 Alpha Industries, Inc................. 1,299,844
53,000 ATMI, Inc.*........................... 2,464,500
50,900 Cognex Corp.*......................... 2,634,075
81,000 Computer Network
Technology Corp.*.................... 1,407,375
53,200 Credence Systems Corp.*............... 2,935,975
81,500 Cybex Computer Products
Corp.*............................... 3,504,500
67,400 Documentum, Inc.*..................... 6,023,875
98,700 InFocus Corp.*........................ 3,176,906
47,600 IntraNet Solutions, Inc.*............. 1,826,650
27,200 iPrint.com, Inc.*..................... 133,449
23,000 LTX Corp.*............................ 803,563
1,600 Marvell Technology Group
Ltd.*................................ 91,200
376,400 Maxtor Corp.*......................... 3,975,725
90,200 Mentor Graphics Corp.*................ 1,792,725
9,200 National Computer
Systems, Inc......................... 453,100
118,100 Netpliance, Inc.*..................... 1,077,662
30,000 PC-Tel, Inc.*......................... 1,140,000
35,850 Pegasus Solutions, Inc.*.............. 389,869
101,800 Philadelphia Suburban Corp............ 2,086,900
20,100 Photon Dynamics, Inc.*................ 1,501,219
147,300 Pinnacle Systems, Inc.*............... 3,311,952
8,000 Polycom, Inc.*........................ 752,750
81,600 SAGA SYSTEMS, Inc.*................... 1,014,900
82,200 Tech Data Corp.*...................... 3,580,838
61,000 Titan Corp.*.......................... 2,729,750
30,000 Zoran Corp.*.......................... 1,978,125
------------
58,885,739
------------
</TABLE>
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8
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Schedule of Investments June 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
--------------------------------------------------------------
<C> <S> <C>
Transportation - 3.9%
75,000 Airbone Freight Corp................. $ 1,420,312
71,300 Atlantic Coast Airlines*............. 2,263,775
23,700 Tidewater, Inc....................... 853,200
80,700 USFreightways Corp................... 1,982,194
------------
6,519,481
------------
Total Investments
(Cost $128,394,525)............ 98.0% 162,748,122
Other Assets in Excess
of Liabilities................. 2.0 3,290,334
------ ------------
Net Assets...................... 100.0% $166,038,456
====== ============
</TABLE>
--------------------------------------------------------------
*Non-income producing security
The accompanying notes are an integral part of the financial statements.
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9
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Statement of Assets and Liabilities (Unaudited)
<TABLE>
<CAPTION>
As of
June 30,
2000
----------------------------------------------------------------------------------
<S> <C>
Assets
Investment at Value (cost $128,394,525).......................... $162,748,122
Cash............................................................. 5,997,391
Receivable for Securities Sold................................... 12,455,401
Dividends and Interest Receivable................................ 13,591
------------
Total Assets...................................................... 181,214,505
------------
Liabilities
Payable for Securities Purchased................................. 14,975,616
Due to Advisor................................................... 125,655
Accrued Expenses and Other....................................... 66,794
Due to Administrator............................................. 7,984
------------
Total Liabilities................................................. 15,176,049
------------
Net Assets........................................................ $166,038,456
============
Composition of Net Assets
Common Stock; (150,000,000 shares authorized $0.01 par value).
Based on Outstanding Shares of Common Stock..................... $ 107,905
Capital in Excess of Par Value................................... 105,670,560
Accumulated Net Realized Gain from Investments................... 25,906,394
Net Unrealized Appreciation on Investments....................... 34,353,597
------------
Net Assets........................................................ $166,038,456
============
Shares Outstanding................................................ 10,790,522
============
Net Asset Value Per Share
(net assets divided by shares outstanding)....................... $ 15.39
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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10
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 2000
-------------------------------------------------------------------------------------
<S> <C>
Investment Income
Dividends........................................................... $ 201,171
Interest............................................................ 189,721
------------
Total Investment Income.............................................. 390,892
------------
Expenses
Investment Advisory Fee............................................. 809,303
Administration Fees................................................. 48,558
Directors' Fees..................................................... 37,798
Professional........................................................ 25,958
Custody Fee......................................................... 25,780
Legal Fee........................................................... 22,490
Printing Fees....................................................... 19,919
Transfer Agency Fee................................................. 9,020
Registration & Filing Fees.......................................... 3,656
Miscellaneous....................................................... 30,526
------------
Total Expenses....................................................... 1,033,008
------------
Expenses in Excess of Income......................................... (642,116)
------------
Realized and Unrealized Gain (Loss) on Investments:
Net Realized Gain from Investment Transactions...................... 26,860,711
Net Change in Unrealized Appreciation/Depreciation on Investments... (12,073,732)
------------
Net Realized and Unrealized Gain on Investments...................... 14,786,979
------------
Net Increase in Net Assets from Operations........................... $ 14,144,863
============
</TABLE>
See Notes to Financial Statements.
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11
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Statements of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Increase in Net Assets from Operations:
Expenses in Excess of Income.......................... $ (642,116) $ (1,158,162)
Net Realized Gain on Investments...................... 26,860,711 20,846,432
Net Change in Unrealized Appreciation/Depreciation
on Investments....................................... (12,073,732) 22,164,135
------------ ------------
Net Increase in Net Assets from Operations............. 14,144,863 41,852,405
Distributions to Shareholders
Net Realized Gain from Investment Transactions........ (16,271,410) --
------------ ------------
Total Distributions.................................... (16,271,410) --
------------ ------------
Capital Share Transactions:
Net Proceeds from Shares Reinvested................... 12,269,360 --
Reissuance of Treasury Shares......................... -- --
Cost of Treasury Shares Purchased..................... -- --
------------ ------------
Net Increase in Net Assets from Capital Transactions... 12,269,360 --
------------ ------------
Total Increase in Net Assets........................... 10,142,813 41,852,405
Net Assets
Beginning of Period.................................... 155,895,643 114,043,238
------------ ------------
End of Period.......................................... $166,038,456 $155,895,643
============ ============
</TABLE>
See Notes to Financial Statements.
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12
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Financial Highlights
<TABLE>
<CAPTION>
For the six months ended June 30, 2000 and the years ended December 31, (Unaudited)
For a Share Outstanding Throughout each Period
For the Six Months
Ended June 30, For the Year Ended
2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morgan Grenfell SMALLCap Fund, Inc.:
Per Share Operating Performance:
Net Asset Value, Beginning
of Period $15.90 $11.63 $11.58 $12.23 $12.31 $10.21
------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net Investment Income
(Expenses in Excess of Income) 0.01 (0.12) 0.01 (0.09) (0.06) --
Net Realized and Unrealized
Gain/(Loss) 1.14 4.39 0.25 1.78 2.18 4.23
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.15 4.27 0.26 1.69 2.12 4.23
------ ------ ------ ------ ------ ------
Distribution to Shareholders:
Net Investment Income -- -- (0.01) -- -- --
Realized Capital Gains (1.66) -- (0.08) (2.34) (1.60) (2.13)
Return of Capital -- -- (0.12) -- -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.66) -- (0.21) (2.34) (1.60) (2.13)
------ ------ ------ ------ ------ ------
Dilution Due to Rights Offering -- -- -- -- (0.60) --
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $15.39 $15.90 $11.63 $11.58 $12.23 $12.31
====== ====== ====== ====== ====== ======
Market Value, End of Period $15.45 $14.19 $ 9.69 $11.13 $10.50 $12.63
====== ====== ====== ====== ====== ======
Total Return Based on Net Asset Value
Per Share 41.44% 36.70% 2.66% 14.60% 20.80% 41.40%
Total Return Based on Market Value
Per Share 25.29% 46.45% (10.99)% 28.50% 17.50% 42.30%
Net Assets, End of Period (000) $166,038 $155,896 $114,043 $101,613 $111,135 $74,402
Ratio of Expenses to Average
Net Assets 1.28%/1/ 1.45% 1.56% 1.42% 1.76% 1.51%
Ratio of Net Investment Income/(Loss)
to Average Net Assets (0.79)%/1/ (0.97)% 0.12% (0.66)% (0.57)% (0.03)%
Portfolio Turnover Rate 72% 114% 116% 101% 162% 110%
</TABLE>
-------------------------------------------------------------------------------
/1/ Annualized
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13
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
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Notes to Financial Statements June 30, 2000 (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 began 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.
Valuation of Securities--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 value.
Securities transactions and investment income--Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the ex-dividend
date and interest income is recorded on the accrual basis. Realized gains and
losses from securities transactions are recorded on the basis of identified
cost.
Federal income taxes--It is the policy of the Fund to qualify as a regulated
investment company by complying with provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue Code, and
to make distributions of income and capital gains (after application of net
capital loss carryovers) sufficient to relieve it from 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
The Fund has entered into an administration agreement with Deutsche Asset
Management, Inc., ("DeAM", the "Administrator", formerly Morgan Grenfell
Inc.), pursuant to which the Administrator is paid 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 are
paid by the Administrator and not the Fund. For the six months ended June 30,
2000, the fees earned by the Administrator were approximately $48,558.
The fund has entered into an advisory agreement with DeAM. Under this agreement
the fund pays a fee calculated at an annual rate of 1.00% of the Fund's average
daily net assets.
Certain individuals who are officers or directors of the Fund are also officers
or directors of DeAM.
3. Capital Share Transactions
Transactions in capital shares for the six months ended June 30, 2000 and the
year ended December 31, 1999 were as follows.
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended
6/30/2000 12/31/1999
--------------------- ---------------
Shares Amount Shares Amount
------- ----------- ------ ------
<S> <C> <C> <C> <C>
Shares Sold............................ -- -- -- --
Reinvested............................. 988,468 $12,269,360 -- --
Shares Purchased....................... -- -- -- --
------- ----------- ------ ------
Net Increase in Capital
Shares................................ 988,468 $12,269,360 -- --
======= =========== ====== ======
</TABLE>
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14
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
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Notes to Financial Statements June 30, 2000 (Unaudited)
4. Purchases and Sales of Investment Securities
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold for the six months ended June 30, 2000, excluding short-term
investments, were $114,424,708 and $115,487,331, respectively.
For Federal income tax purposes, the cost of securities owned was $128,394,525.
The aggregate gross unrealized appreciation and depreciation and the net
unrealized appreciation on purchases and sales of investments at June 30, 2000
were $43,408,143, $9,054,546 and $34,353,597, respectively.
5. Fund Management
The Fund is managed by a team with an average of twenty-one years of experience.
The portfolio sector responsibilities are as follows:
John P. Callaghan Health Care and Technology Sectors
Doris R. Klug Consumer and Capital Goods Sectors
Audrey M.T. Jones Credit & Sensitive, Communication
Services, Process Industries and
Transportation Sectors
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15
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Dividend Reinvestment Plan
The Plan
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
distributions from net investment income and/or capital gains will be reinvested
in additional shares of the Fund by The Bank of New York, as agent for
shareholders in administering the Plan (the "Plan Agent"). Registered
shareholders are deemed to participate in the Plan unless they elect to be paid
in cash. When registered shareholders purchase shares of the Fund, they will
receive from the Plan Agent an authorization card to be signed and returned if
they wish to receive distributions in cash. 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 their broker or nominee to elect to participate
in the Plan or to receive their distributions in cash.
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
either in the form of a stock dividend or 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 reinvested shares for that distribution have
been credited to the shareholder's account.
If the Fund's shares are trading at a premium; (i.e. the net asset value ("NAV")
is less than the then-current market price), participating shareholders will
receive distributions in additional shares issued by the Fund. The number of
additional shares will be determined by dividing the amount of the shareholder's
distribution by the higher of (i) the Fund's NAV or (ii) 95% of the Fund's
market price. If the Fund is trading at a discount, as has generally been the
case, the Fund will issue shares to reinvesting shareholders at a price equal to
the average closing price of the Fund over the five trading days preceding the
payment date.
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. The Board
reserves the right to amend the Plan to provide for a charge to participants or
for any other reasons.
Distributions are taxable whether paid in cash or reinvested in additional
shares.
Prior to April 2000 the Fund's policy with regard to reinvestment of
distributions when the Fund was trading at a discount was to purchase the
necessary shares on the market and, if necessary, issue shares at net asset
value. In April 2000, the Fund's Board of Directors amended the Plan to its
current policy of issuing new shares. Shareholders of the Fund were notified of
this change by mail. The amendment eliminates the necessity of delaying the
crediting of shares to the accounts of reinvesting shareholders beyond the
payment date, a situation that may occur when a larger distribution is paid. It
also obviates the need of issuing shares at net asset value if shares cannot be
purchased in a timely fashion. The Board recognized that the issuance of new
shares at a price lower than net asset value will result in dilution of the net
asset value of the previously outstanding shares. Accordingly, to offset such
dilution, the Board intends to authorize the Fund to purchase shares equal to
the amount of shares issued under the Plan subsequent to the payable date.
-------------------------------------------------------------------------------
16
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Share Repurchase Program
On August 16, the Fund announced that its Board of Directors has authorized the
Fund to repurchase up to 1,000,000 shares of its Common Stock in open market
purchases to be effected over the New York Stock Exchange. The Board of
Directors and Fund Management expect the Fund to make such purchases from time
to time during 2000.
The Board has authorized this buy back program to offset the impact of share
dilution that occurred on June 21, 2000 when the Fund issued 988,468 new shares
to shareholders who elected to receive the Fund's capital gains distribution in
shares of the Fund. Because the new shares were issued at market price, the
repurchase of a similar number of shares on the open market should offset some
or all of the dilution. The buyback initiatives will also prepare the Fund for
its next distribution and may have the positive effect of temporarily reducing
the Fund's current discount.
Amendment to By-Laws
In April, the Board of Directors adopted several amendments to the Fund's By-
Laws to reflect recent changes in Maryland law. The advance notice provisions in
the By-Laws have been changed so that shareholders are now required to notify
the Fund in writing of any proposal which they intend to present at an annual
meeting of shareholders, including any nominations for director, between 90 and
120 days prior to the first anniversary of the mailing date of the notice from
the prior year's annual meeting of shareholders. The notification must be in the
form prescribed by the By-Laws. The advance notice provisions were amended to
provide the Fund and its directors with the opportunity to thoughtfully consider
and address the matters proposed before the Fund prepares and mails its proxy
statement to shareholders. Other amendments set forth the procedures which must
be followed in order for a shareholder to call a special meeting of
shareholders, increase the percentage of votes required to call a special
meeting and enhance the Board's ability to fill vacancies on the Board of
Directors. Please contact the Secretary of the Fund for additional information
about the advance notice requirements or the other amendments to the By-Laws.
-------------------------------------------------------------------------------
17
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Proxy Results (Unaudited)
At the annual shareholders meeting held on April 18, 2000, shareholders voted on
the following proposals. The description of each proposal and number of shares
voted are as follows:
1. To elect Audrey M.T. Jones as a Director of the Fund until 2003.
Shares Shares Voted
Voted Withheld
For Authority
------ ------------
2,546,300 1,503,080
2. To ratify the selection of KPMG LLP as the independent auditors of the Fund.
For Against Withheld
--------- --------- --------
3,103,183 2,429,370 206,806
The voting results presented have been certified by CT Corporation, which served
as the independent inspector of elections for the shareholders' meeting.
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18
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Deutsche Asset Management, Inc. (the Adviser to the Morgan Grenfell SMALLCap
Fund) is a indirect wholly 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
1-800-432-8224
Shareholder Relations Department - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
E-Mail Address: [email protected]
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19
<PAGE>
Morgan Grenfell SMALLCap Fund, Inc.
-------------------------------------------------------------------------------
Directors and Officers
Robert E. Greeley John P. Callaghan
DIRECTOR EXECUTIVE VICE PRESIDENT
President Deutsche Asset Management, Inc.
Page Mill Asset Management Ltd.
Edward J. Veilleux
Joseph J. Incandela VICE PRESIDENT
DIRECTOR AND CHAIRMAN Director
Private Equity Investor Deutsche Asset Management
Audrey M.T. Jones Amy M. Olmert
PRESIDENT AND DIRECTOR TREASURER AND CHIEF FINANCIAL OFFICER
Executive Vice President Director
Deutsche Asset Management, Inc. Deutsche Asset Management
Richard D. Wood Fran Pollack-Matz
DIRECTOR SECRETARY
Consultant Vice President
Deutsche Asset Management
INDEPENDENT AUDITORS CUSTODIAN
KPMG LLP Brown Brothers Harriman & Co.
757 Third Avenue 40 Water Street
New York, NY10017 Boston, MA 02109
TRANSFER AGENT INVESTMENT ADVISER
The Bank of New York Deutsche Asset Management, Inc.
101 Barclay Street 885 Third Avenue
New York, NY 10154 32nd Floor
New York, NY 10022
MGSCSA (06/00)
