Morgan Grenfell
SMALLCap FUND
1995 ANNUAL REPORT
<PAGE>
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 Morgan Grenfell Group PLC (Morgan
Grenfell)*, 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 $75 billion for a wide range of pension,
corporate, insurance, local authority, government and private clients from
more than 40 countries worldwide.
* In July 1995, it was announced that Deutsche Bank would be establishing an
investment bank in London under the auspices of Morgan Grenfell Group, PLC.
This investment bank will be named Deutsche Morgan Grenfell and will include
MGAM. At the same time, MGAM will take control of Deutsche Bank's
institutional investment management companies, DEGEF and Deutsche Bank Asset
Management.
2
<PAGE>
To Our Shareholders:
Overall, 1995 was a "great" year for the stock market. It was also an
excellent year for the Fund which gained +41.4% as measured by the change in
net asset value, ranking it among the top performing closed-end equity funds.
Some of the Fund's achievements during the year and comments relating to
the performance of our smaller capitalization equities team are highlighted
below.
(bullet) The Fund's +41.4% gain in net asset value significantly exceeded
the S&P SmallCap 600 benchmark, which was up +30.0%.
(bullet) Although large companies outperformed the small cap indices in
1995; e.g., the S&P 500 and Dow Jones Industrial Average gained
+37.4% and +36.7%, respectively, the Fund also outperformed these
popular stock market averages.
(bullet) The Fund provided investors with consistent "value added"
performance throughout the year; e.g., the Fund's quarterly
performance exceeded the S&P SmallCap 600 index in each of the
four quarters.
(bullet) The Fund's performance was achieved while maintaining broad
diversification within the smaller company universe.
(bullet) Our small cap investment team added value virtually across all
economic sectors.
(bullet) Each member of the team achieved "value added" performance
relative to their respective universe of investment opportunity.
A detailed discussion of the Fund's performance and portfolio structure is
contained in the "Review of 1995" section beginning on page four.
For the benefit of shareholders, and especially the Fund's new
shareholders, a description of the Fund's universe of investment opportunity
and how our smaller capitalization equities team is structured to find these
opportunities is presented below.
INVESTMENT UNIVERSE
-------------------
The Fund's investment universe is comprised of companies representing the
lowest 20% of the market capitalization of all equities. Within this
universe, the Fund focuses primarily on companies with market capitalizations
of between $100 million and $1.6 billion. At the end of 1995, this
capitalization range contained approximately 2,700 companies with a total
market value of $1.2 trillion.
1
<PAGE>
INVESTMENT TEAM
---------------
Morgan Grenfell Capital Management's Smaller Capitalization Equities
investment team is comprised of five experienced professionals. Four have
investment research/portfolio management responsibility and work with our
fifth member, a dedicated trader, to develop execution strategies. This
unique approach, which has been designed specifically for smaller company
investing, provides each member of the team with beginning-to-end involvement
in the investment process as well as bottom-line accountability.
Our investment team, along with their primary economic sector
responsibilities, is listed below.
<TABLE>
<CAPTION>
<S> <C>
SMALLER CAPITALIZATION
EQUITIES TEAM SECTOR RESPONSIBILITY
---------------------------- -----------------------------------------
Robert Kern (Manager) Technology/Capital Goods
David Baratta Consumer/Service
Gerald Frey Technology/Health Care
Audrey Jones Energy/Credit Sensitive/Transportation/
Process Industries/Service
Michael Murphy Trading
</TABLE>
Investment research specialization by economic sector provides the
advantage of an in-depth understanding of each economic sector and industries
within these sectors. This knowledge provides our team with the ability to
make high quality individual company investment decisions.
A traditional approach to fundamental investment research represents the
foundation of our investment product. Original investment research
encompasses not only the financial analysis of companies, but also entails
extensive travel by each member of the team to visit companies and discuss
business strategies with corporate managements.
A team approach, with investment expertise across all economic sectors,
provides the Fund with the ability to structure a broadly diversified
portfolio within the universe of smaller companies as well as the ability to
shift investment emphasis among sectors.
OUTLOOK
-------
The current slowdown in economic growth and its negative impact on
corporate profits represent a significant change in the investment
environment as we enter 1996. Thus, while a low level of inflation and
further declines in interest rates are expected to continue to be positives
for stock prices, investment success will be more dependent upon selecting
companies which meet or exceed earnings expectations.
Slower economic growth is also expected to cause investors to focus on the
superior growth prospects of many smaller companies. Importantly, the ability
of these companies to achieve rapid growth
2
<PAGE>
is more dependent on individual company developments; e.g., new products, and
less dependent on macro-economic trends.
Another positive factor in the current outlook for selected smaller
companies is the expectation that cash flows into aggressive growth mutual
funds will continue at a high level.
Overall, our team's goal is to provide the Fund's shareholders with "value
added" performance relative to the S&P SmallCap 600 index as well as the S&P
500 index, which represents a broad measure of the stock market. We expect to
achieve this goal by focusing primarily on individual stock selection.
Robert E. Kern, Jr.
President
Morgan Grenfell SMALLCap Fund
January, 1996
3
<PAGE>
A REVIEW OF 1995
----------------
The following review covers the Fund's 1995 results and an analysis of the
Fund's portfolio structure, including changes in economic sector weightings
during 1995.
PERFORMANCE
-----------
At the end of 1995, the Fund's net asset value was $12.31 per-share and
when adjusted for the $2.133 per-share distribution from capital gains, the
increase in net asset value for the year was +41.4%.
Performance of the Fund and comparisons with the popular stock market
averages are presented in the table below.
<TABLE>
<CAPTION>
Smaller
Companies Large Companies
MG SMALLCap --------------- -------------------
fund S&P S&P
Perod Net Asset Value SmallCap 600 500 D.J.I.A.
--------------- ---------------- --------------- ------ ---------
<S> <C> <C> <C> <C>
1995 +41.4% +30.0% +37.4% +36.7%
1994 -3.5 -4.8 +1.3 +4.9
1993 +8.5 +18.8 +10.1 +17.0
1992 +4.0 +21.0 +7.6 +7.4
1991 +52.5 +48.5 +30.5 +24.2
1990 -13.4 -23.7 -3.1 -0.4
1989 +24.6 +13.9 +31.6 +31.6
1988 +19.1 +19.5 +16.5 +15.9
Total Return
From Inception +143.4% +105.3% +180.3% +194.8%
(5/6/87-12/31/95)
</TABLE>
Performance of the Fund's net asset value exceeded the S&P SmallCap 600
index, which is representative of the smaller company universe. Although the
large company stock market indices outperformed smaller companies during
1995, the Fund also outperformed the S&P 500 and Dow Jones Industrial
Average.
The price of the Fund's shares at the end of 1995 was $12.625 per share.
This represented a discount of 12.6% when adjusted for the $2.133 per-share
capital gain distribution, to the Fund's net asset value and compares with a
discount of 13.1% at the beginning of the year.
4
<PAGE>
PORTFOLIO STRUCTURE
-------------------
The following table presents the portfolio structure of the Fund by
economic sector and changes in portfolio structure during 1995.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
NO. MARKET %
ECONOMIC SECTOR COMPANIES VALUE PORTFOLIO
- ------------------------- --------------- ------------------ --------------
1994 1995 1994 1995 1994 1995 Change
---- ---- ------- ------- ---- ---- ------
Technology 17 17 $17.5MM $18.7MM 27% 21% -6
Consumer 15 18 10.3 13.2 16 15 -1
Energy 10 10 7.2 10.3 11 12 +1
Credit Sensitive 3 12 1.4 9.8 2 11 +9
Health Care 12 12 7.3 9.4 11 11 +0
Service Companies 8 8 8.7 9.4 13 10 -3
Process Industries 8 6 5.6 4.5 9 5 -4
Transportation 4 4 3.9 1.9 6 2 -4
Capital Goods 1 1 0.9 1.4 1 2 +1
- ------------------------- ---- ---- ------- ------- ---- ---- -----
TOTAL EQUITIES 78 88 $62.8MM $78.6MM 96% 89% -7
Cash and Cash Equivalents 2.8 9.4 4 11 +7
- ------------------------- ------- ------- ---- ---- -----
TOTAL FUND $65.6MM $88.0MM 100% 100% --
</TABLE>
During 1995, the Fund's best performing sectors were: Health Care (+87%),
Technology (+85%), Credit Sensitive (+62%), and Service Companies (+61%).
Investment in these sectors represented approximately 50% of the Fund's total
assets.
The nine percentage portfolio weighting increase in the Credit Sensitive
sector provided a significant contribution to the Fund's performance; i.e., a
+62% gain. A combination of declining interest rates and a high level of
acquisitions benefited results.
Although the Fund's Consumer sector performed significantly better than
the consumer stocks contained in the S&P SmallCap 600 index, the environment
for many consumer companies remained very competitive during 1995.
Cash reserves were 11% of total assets on 12/31/95. A portion of this
total has been utilized to fund payment of the $2.133 per-share capital gains
distribution paid on January 26, 1996.
5
<PAGE>
TWENTY LARGEST HOLDINGS
-----------------------
December 31, 1995
-----------------
<TABLE>
<CAPTION>
COMPANY SYMBOL LISTED BUSINESS FOCUS
- ---------------------------------- ------- ------- ------------------------------------
<S> <C> <C> <C>
Phycor Inc. PHYC OTC Physician Practice Management Co.
Delta & Pine Land Co. DLP NYSE Largest Cotton Seed Company
Paging Network Inc. PAGE OTC Paging Services
Tidewater Inc. TDW NYSE Marine Support Vessels
MEMC Electronic Materials, Inc. WFR NYSE Silicon Wafer Manufacturer
New England Business Service NEB NYSE Business Forms
Dionex Corp. DNEX OTC Analytical Instruments
Dime Bancorp Inc. DME NYSE New York Savings Bank
Adobe Systems Inc. ADBE OTC Applications Software
Devon Energy Corp. DVN AMEX Oil & Gas Producer
Baybanks Inc. BBNK OTC Massachusetts Bank
Micrel Inc. MCRL OTC Analog Semiconductors
Furon Co. FCY NYSE Engineered Components
Computervision Corp. CVN NYSE Computer-Aided Design Systems
Community Health Systems Inc. CYH NYSE Hospital Management Company
Staples Inc. SPLS OTC Office Products Superstores
Platinum Technology PLAT OTC System Software Products
BJ Services Co. BJS NYSE Stimulation & Pumping Services
Department 56 Inc. DFS NYSE Specialty Giftware
Ceridian Corporation CEN NYSE Human Resource Services
</TABLE>
The top twenty holdings, which represent approximately 40% of the Fund's
total value, are comprised primarily of high quality emerging growth
companies. At the end of 1995, the average market capitalization of companies
held in the Fund was $1.039 billion.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTION
----------------------------------------
During 1995, the Fund declared a capital gains distribution of $2.133 per
share. This distribution was made on January 26, 1996, to shareholders of
record on December 29, 1995.
Entering 1996, the Fund has a net unrealized capital gain totaling
$19,672,203, or approximately $3.26 per share.
Net investment income represents dividends and interest income less
expenses. The Fund's investment objective is to seek capital appreciation; as
a result, focus will be on stocks with no significant yield. As in prior
years, the Fund had a net investment expense for 1995 and it is unlikely the
Fund will pay a dividend from net investment income.
6
<PAGE>
SCHEUDLE OF INVESTMENTS
-----------------------
December 31, 1995
-----------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
COMMON STOCKS: 89.3%
---------------------------------
MARKET
TECHNOLOGY: 21.2% BUSINESS FOCUS SHARES VALUE
--------------------------------- --------------------------------- ------- --------------
* MEMC Electronic Materials Inc. Silicon Wafer Manufacturer 66,600 $ 2,172,825
* Dionex Corp. Analytical Instruments 31,000 1,759,250
Adobe Systems Inc. Applications Software 25,000 1,550,000
* Micrel Inc. Analog Semiconductors 75,000 1,462,500
* Computervision Corp. Computer-Aided Design Systems 94,700 1,456,013
* Platinum Technology System Software Products 71,600 1,315,650
* Ceridian Corp. Human Resource Services 30,000 1,237,500
Linear Technology Corp. Advanced Linear Circuits 28,000 1,099,000
* Xilinx Inc. Field Programmable Gate Arrays 35,000 1,067,500
* Synopsys Inc. CAE Software 25,200 957,600
* Progress Software Corp. Database Software 23,000 862,500
* Geoworks System & Application Software 40,800 775,200
* Mercury Interactive Corp. Computer Software 40,700 742,775
* FTP Software Inc. Internetworking Software 24,000 696,000
* Discreet Logic Inc. Computer Software 25,500 637,500
* Rational Software Corp. Computer Software 21,400 478,825
* Integrated Process Equip. Inc. Semiconductor Equipment 17,000 399,500
------------
$18,670,138
CONSUMER: 15.0%
---------------------------------
* Staples Inc. Office Products Superstores 55,050 $ 1,341,844
* Department 56 Inc. Specialty Giftware 34,000 1,304,750
* Garden Ridge Corp. Specialty Home Accessories 29,000 1,123,750
* Nine West Group Inc. Women's Footwear Retailer 26,800 1,005,000
* Blyth Industries Inc. Candles and Accessories 30,200 890,900
Family Dollar Stores Discount Stores 63,650 875,187
Lancaster Colony Corp. Consumer Products 19,400 722,650
* Damark International Inc. General Merchandise 91,450 685,875
* Mohawk Industries Inc. Carpet Manufacturer 43,800 684,375
Leggett & Platt Inc. Furniture Components 25,500 618,375
* Stations Casinos Inc. Multi-Jurisdictional Gaming 40,000 585,000
* Micro Warehouse Inc. Computer Direct Marketer 13,400 579,550
* West Marine Inc. Boating Supplies Retailer 18,500 578,125
* Daka International Inc. Restaurants 19,700 541,750
* Sonic Corp. Drive-In Restaurants 27,000 513,000
* PetsMart Inc. Pet Supplies Superstores 15,650 485,150
* Micros Systems Inc. Electronic Information Systems 9,300 458,025
* Global Direct Mail Corp. Computer/Office Prod. Marketer 8,000 220,000
--------------
$13,213,306
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
MARKET
ENERGY: 11.7% BUSINESS FOCUS SHARES VALUE
--------------------------------- --------------------------------- ------- --------------
Tidewater Inc. Marine Support Vessels 70,000 $ 2,205,000
Devon Energy Corp. Oil & Gas Producer 58,500 1,491,750
* BJ Services Co. Stimulation & Pumping Services 45,000 1,305,000
* Triton Energy Corp. Oil & Gas Producer 18,000 1,032,750
* United Meridian Corp. Oil & Gas Producer 46,500 807,937
Camco International Inc. Oil Field Services & Equipment 28,500 798,000
Diamond Shamrock Inc. Refiner and Marketer 30,500 789,188
* Benton Oil & Gas Co. Oil & Gas Producer 52,000 780,000
Parker & Parsley Pete Co. Oil & Gas Producer 25,000 550,000
* Coda Energy Inc. Oil & Gas Producer 68,000 505,750
--------------
$10,265,375
CREDIT SENSITIVE: 11.2%
---------------------------------
* Dime Bancorp Inc. New York Savings Bank 138,500 $ 1,610,063
Baybanks Inc. Massachusetts Bank 15,000 1,473,750
* Glendale Fed Bank Fed Svgs California Savings & Loan 59,750 1,045,625
Lennar Corp. Residential & Commer. Builders 40,000 1,005,000
* Credit Acceptance Corp. Auto Financing 48,300 1,002,225
Long Island Bancorp Inc. New York Savings Bank 29,000 764,875
Peoples Heritage Finanacial Group Maine Savings Bank 27,000 614,250
Amresco Inc. Real Estate Financial Services 47,500 605,625
Paine Webber Group Inc. Financial Broker 29,250 585,000
* Triangle Pacific Corp. Flooring & Kitchen Cabinets 31,000 530,875
* First Bell Bancorp Inc. Pennsylvania Savings Bank 30,000 401,250
* HFNC Financial Corp. North Carolina Savings & Loan 14,000 183,750
--------------
$ 9,822,288
HEALTH CARE: 10.7%
---------------------------------
* Phycor Inc. Physician Practice Management Co. 66,675 $ 3,371,255
* Community Health Systems Inc. Hospital Management Company 38,600 1,375,125
* Henry Schein Inc. Healthcare Products Distributor 23,500 693,250
* American Oncology Inc. Physician Practice Management Co. 14,000 680,750
* Gensia Pharmaceuticals Inc. Pharmaceuticals 102,500 538,125
* Perseptive Biosystems Inc. Analytical Instruments 62,500 531,250
* ImmuLogic Pharmaceutical Corp. Pharmaceuticals 25,000 481,250
* Uromed Corp. Urological Devices 35,500 457,063
* Agouron Pharmaceuticals Inc. Pharmaceuticals 13,500 442,125
* Gilead Sciences Inc. Pharmaceuticals 13,500 432,000
* IDX Systems Corp. Health Care Information Systems 10,800 375,300
* Sun Healthcare Group Inc. Health Care Services 2,000 27,000
--------------
$ 9,404,493
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
MARKET
SERVICE COMPANIES: 10.6% BUSINESS FOCUS SHARES VALUE
----------------------------------- --------------------------------- ------- --------------
Delta & Pine Land Co. Largest Cotton Seed Company 68,133 $ 2,503,887
* Paging Network Inc. Paging Services 96,500 2,352,188
New England Business Service Business Forms 80,100 1,742,175
* Daisytek International Corp. Non-Paper Office Supplies 30,500 937,875
* Vanguard Cellular Systems Cellular Telephone Service 35,800 724,950
* BISYS Group Inc. Information Processing System 16,000 492,000
National Data Corp. Information Processing System 12,500 309,375
* Corestaff Inc. Temporary/Contract Personnel 8,000 292,000
--------------
$ 9,354,450
PROCESS INDUSTRIES: 5.2%
-----------------------------------
Riverwood International Corp. Paperboard Packaging Systems 50,000 $ 956,250
Rayonier Inc. Forest Products & Specialty Pulp 27,500 917,812
P.H. Glatfelter Co. Paper Manufacturer 50,000 856,250
Potlatch Corp. Forest Products 19,000 760,000
Bowater Inc. Newsprint and Paper Producer 20,000 710,000
Rock-Tenn Co. Paperboard Recycling 21,000 341,250
--------------
$ 4,541,562
TRANSPORTATION: 2.1%
-----------------------------------
TNT Freightways Corp. Regional Trucker 53,900 $ 1,084,737
Atlantic Southeast Airlines Air Carrier 19,800 425,700
* American Freightways Corp. Regional Trucker 28,000 290,500
* Western Pacific Airlines Inc. Airline 3,000 50,250
--------------
$ 1,851,187
CAPITAL GOODS: 1.6%
-----------------------------------
Furon Co. Engineered Components 72,700 $ 1,454,000
--------------
$ 1,454,000
TOTAL COMMON STOCKS (cost $58,904,597) $78,576,799
COMMERCIAL PAPER: 10.7%
-----------------------------------
Associates Corp. 5.754% due 1/2/96 $ 9,366,000
----------------------------------- -------------
TOTAL: 100% (cost 68,270,597) $87,942,799
=============
</TABLE>
* Non-income producing security.
See accompanying notes to financial statements
9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities at market value,
cost $68,270,597 (Note 1) $87,942,799
Receivables
Dividends and interest 24,812
-----------
Total assets $87,967,611
Liabilities:
Dividend payable $12,888,514
Payable for investment securities purchased 358,513
Accrued expenses 241,009
Due to custodian 77,881
-----------
Total liabilities $13,565,917
Net assets $74,401,694
===========
Net assets:
Common stock, $0.01 par value; 6,042,435 shares issued;
150,000,000 shares authorized $ 60,424
Capital in excess of par value 53,503,539
Net unrealized appreciation of investments 19,672,203
Undistributed net capital gains 1,165,528
-----------
Net assets $74,401,694
===========
Net asset value per share as of the close of business on
December 31, 1995 $ 12.31
===========
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Interest $ 643,504
Cash dividends 407,245
Miscellaneous income 14,736
-------------
$ 1,065,485
Expenses:
Investment advisory fees (Note 2) $ 743,088
Custodian and transfer agent fees 99,956
Professional fees 69,934
Shareholder communications 61,999
Directors' fees 52,002
Insurance 31,912
Registration and listing fees 20,947
Miscellaneous 6,979
-------------
$ 1,086,817
Net investment expense $ (21,332)
Realized and unrealized gain/(loss) on investments:
Proceeds from sales $ 79,312,314
Less-cost of securities sold 65,323,084
-------------
Net realized gain on investments $ 13,989,230
Unrealized appreciation:
Beginning of year $ 8,092,049
End of year 19,672,203
-------------
Net increase in unrealized appreciation on investments $ 11,580,154
-------------
Net realized and unrealized gain on investments $ 25,569,384
-------------
Net increase in net assets resulting
from operations $ 25,548,052
=============
</TABLE>
See accompanying notes to financial statements
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets resulting from operations:
Net investment expense $ (21,332) $ (389,775)
Net realized gain on investments 13,989,230 7,888,625
Net change in unrealized appreciation 11,580,154 (9,866,262)
---------- -----------
Net increase in net assets resulting from operations $ 25,548,052 $ (2,367,412)
Distributions from net realized gains (12,888,514) (7,096,506)
Share transactions 2,648,895 1,235,783
---------- -----------
Increase/(Decrease) in net assets $ 15,308,433 $(8,228,135)
Net assets:
Beginning of year 59,093,261 67,321,396
---------- -----------
End of year $ 74,401,694 $59,093,261
========== ===========
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1995 and 1994
--------------------------
1. Significant Accounting Policies
Morgan Grenfell SMALLCap Fund, Inc. (the "Fund") was organized as a
Maryland corporation on January 16, 1987 and is registered under the
Investment Company Act of 1940, as amended, as a closed-end, diversified
management investment company. The Fund commenced operations on May 6, 1987.
The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
Portfolio valuation: Securities listed on an exchange and over-the-counter
securities quoted on the NASDAQ system are valued on the basis of the last
sale price on the last business day of the year. Over-the-counter securities
not quoted on the NASDAQ system are valued on the basis of the average bid
and asked prices on that date. Commercial paper is carried at cost, which
approximates market.
Securities transactions and investment income: Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Realized gains and losses from securities transactions are recorded on the
basis of identified cost.
Federal income taxes: It is the policy of the Fund to qualify as a
regulated investment company by complying with provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of income and securities
profits (after application of net capital loss carryovers) sufficient to
relieve it from all, or substantially all, Federal income taxes.
2. Investment Advisory Fee and Other Transactions with Affiliates
The Fund pays advisory fees for investment and advisory services to Morgan
Grenfell Capital Management Inc. ("MGCM"), a wholly-owned subsidiary of
Morgan Grenfell PLC. Under the terms of the investment advisory agreement,
the management fee is calculated at an annual rate of one percent of the
Fund's average daily net assets.
Certain individuals who are officers or directors, or both, of the Fund
are also officers or directors, or both, of MGCM.
13
<PAGE>
3. Capital Share Transactions
On April 29, 1987, the Fund issued 10,782 shares to MGCM for $100,003.
Subsequent to a public offering, the Fund issued 5,000,000 additional shares
on May 6, 1987 for net proceeds of $46,375,000 after deducting underwriting
discounts of $3,625,000. Arrangements were made to borrow from MGCM an amount
equal to the underwriting discount so that at the conclusion of the offering,
the Fund had available for investment an amount equal to the gross proceeds
of the offering. Initial registration fees amounting to $57,407 were charged
against paid in capital at the time of issuance of these shares.
During 1995, 1994, 1992 and 1990 the Fund issued 256,925, 103,447, 441,639
and 229,642 shares, respectively, under the dividend reinvestment plan.
4. Investment Transactions
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold during the year ended December 31, 1995, excluding short-term
investments, were $69,533,278 and $79,312,314, respectively. At December 31,
1995, the cost of investments for Federal income tax purposes was
substantially the same as the cost for financial reporting purposes.
5. Dividend Reinvestment Plan
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
dividends from net investment income and/or all capital gain distributions
will be reinvested by The Bank of New York, as agent for shareholders in
administering the Plan (the "Plan Agent"), in additional shares of the Fund.
Registered shareholders are deemed to participate in the Plan unless they
elect to receive all dividends from net investment income and/or all capital
gains distributions in the form of cash. Each registered shareholder at the
time of purchase will receive from the Plan Agent an authorization card to be
signed and returned if the shareholder elects to receive distributions from
net investment income in cash or elects not to receive capital gain
distributions in the form of a stock dividend. Shareholders whose shares are
held in the name of a broker or nominee or shareholders transferring such an
account to a new broker should contact such broker or nominee to elect to
participate in the Plan or to receive their distributions in cash.
Participating shareholders will receive dividends from net investment
income and/or all capital gain distributions in additional shares issued by
the Fund if the shares are trading at a premium; i.e., the net asset value
("NAV") is less than the then-current market price. In such event, the number
of additional shares to be issued by the Fund will be determined by valuing
such shares at the higher of (i) their net asset value or (ii) 95% of the
market price. If shares of the Fund are trading at a discount; i.e., the NAV
exceeds the then-current market price, the Plan Agent will, as agent for the
participants, apply such dividends or distributions to purchase shares in the
open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts. In such case, the price of the shares to each
participating shareholder will be the average market price at which such
shares were purchased under the direction of the Plan Agent. There will be no
brokerage charges for shares directly issued by the Fund; however, brokerage
commissions incurred on open market purchases will be borne pro rata by each
participant. There is no direct service charge to participants in the Plan;
the fees of the Plan Agent will be borne by the Fund. However, the Fund
reserves the right to amend the Plan to include such a charge payable by the
participants or for other reasons.
14
<PAGE>
5. Dividend Reinvestment Plan - continued
Participants in the Plan may elect to withdraw from the Plan at any time
upon written notice to the Plan Agent and thereby elect to receive all
distributions from net investment income in cash and/or all capital gain
distributions either in the form of a stock dividend or in cash. The written
notice will not be effective with respect to distributions made within seven
days of its receipt by the Plan Agent. If notice is received after a record
date, a shareholder's request will be completed after the determination of
shares for that dividend has been credited to the shareholder's account.
Dividends and capital gain distributions are taxable whether paid in cash or
reinvested in additional shares, and the reinvestment of dividends and
capital gain distributions will not relieve participants of liability for any
U.S. income tax that may be payable (or required to be withheld) on such
dividends or distributions. Additional information about the Plan is
available by calling the Plan Agent's Shareholder Relations Department at
1-800-432-8224.
15
<PAGE>
SUPPLEMENTARY INFORMATION
-------------------------
Financial Highlights
Contained below is per-share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets, and other supplemental data for the eight years ended December 31,
1995, and for the period May 6, 1987 (commencement of operations) through
December 31, 1987. This information has been derived from information
provided in the financial statements and market price data for the Fund's
shares.
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------
1995 1994 1993
-------------- -------------- ---------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period $ 10.21 $ 11.85 $ 11.97
Net investment income
(expense) (0.00) (0.07) (0.08)
Net gain/(loss) on securities
(realized and unrealized) 4.23 (0.34) 1.10
------- ------- -------
Total from investment operations $ 4.23 $ (0.41) $ 1.02
Less dividends and distributions:
Tax return
of capital distribution (2.13) (1.23) (1.14)
------- ------- -------
Total dividends and distributions $ (2.13) $ (1.23) $ (1.14)
------- ------- -------
Net asset value, end of year $ 12.31 $ 10.21 $ 11.85
======= ======= =======
Market value per share,
end of year $12.625(1) $ 8.875 $10.875
TOTAL INVESTMENT RETURN:
Based on market value per share +42.3% -7.1% -1.9%
Based on net asset value per share +41.4% -3.5% +8.5%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.51% 1.52% 1.39%
Net investment income
(expense) (0.03%) (0.59%) (0.74%)
SUPPLEMENTAL DATA:
Net assets at end of year
(000 omitted) $74,402 $59,093 $67,321
Average net assets during year
(000 omitted) $72,202 $66,064 $69,048
Portfolio turnover 110% 105% 89%
Total debt outstanding at end
of year (000 omitted) -0- -0- -0-
Asset coverage per $1000 of debt
(000 omitted) N/A N/A N/A
</TABLE>
*Annualized.
(1) The Fund declared a $2.133 capital gain distribution payable to
shareholders of record on December 29, 1995. The dividend was paid on January
26, 1996 and the Fund's shares traded with the dividend until the ex-dividend
date, January 29, 1996.
16
<PAGE>
<TABLE>
<CAPTION>
May 6, 1987
Years Ended December 31 (commencement
- ----------------------------------------------------------------- operations)
1992 1991 1990 1989 1988 through 12/31/87
- ---------- ---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45 $ 9.27
(0.09) (0.10) (0.11) (0.11) (0.11) (0.16)
0.58 4.67 (1.34) 2.29 1.53 (1.66)
- ---------- -------- -------- -------- -------- ------------
$ 0.49 $ 4.57 $ (1.45) $ 2.18 $ 1.42 $ (1.82)
(0.82) (0.97) (0.65) (0.25) -- --
- ---------- -------- -------- -------- -------- ------------
$ (0.82) $ (0.97) $ (0.65) $ (0.25) $ 0.00 $ 0.00
- ---------- -------- -------- -------- -------- ------------
$ 11.97 $ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45
========== ======== ======== ======== ======== ============
$12.250 $ 12.875 $ 8.750 $ 9.625 $ 7.375 $ 6.000
+1.5% +58.0% -2.2% +34.2% +22.9% -40.0%
+4.0% +52.5% -13.4% +24.6% +19.1% -19.7%
1.44% 1.79% 2.01% 2.13% 2.56% 4.32%*
(0.83%) (0.85%) (1.05%) (1.10%) (1.30%) (1.80%)*
$68,013 $ 64,461 $ 45,581 $ 54,136 $ 44,462 $ 37,316
$64,644 $ 58,900 $ 51,121 $ 50,522 $ 43,422 $ 44,062
89% 70% 75% 80% 83% 98%*
-0- $ 1,060 $ 1,724 $ 2,324 $ 2,868 $ 3,360
N/A $ 60.8 $ 26.4 $ 23.3 $ 15.5 $ 11.1
</TABLE>
17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Shareholders
Morgan Grenfell SMALLCap Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Morgan Grenfell SMALLCap Fund, Inc.
as of December 31, 1995, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the years in
the two-year period ended December 31, 1995, and the financial highlights for
each of the years in the eight-year period ended December 31, 1995 and for
the period May 6, 1987 (commencement of operations) through December 31,
1987. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures include confirmation of
securities owned as of December 31, 1995, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Morgan Grenfell SMALLCap Fund, Inc., as of December 31, 1995, the result of
its operations for the year then ended, changes in net assets for each of the
years in the two-year period ended December 31, 1995 and the financial
highlights for each of the years in the eight-year period ended December 31,
1995, and for the period May 6, 1987 (commencement of operations) through
December 31, 1987, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
New York, New York
January 31, 1996
18
<PAGE>
MORGAN GRENFELL SMALLCap FUND -- DIRECTORS AND OFFICERS
-------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Michael Bullock Audrey M.T. Jones
CHAIRMAN AND DIRECTOR VICE PRESIDENT
Chief Investment Officer Senior Director
Morgan Grenfell Asset Management, Ltd. Morgan Grenfell Capital
Management, Inc.
Robert E. Kern, Jr. Gerald S. Frey
PRESIDENT AND DIRECTOR VICE PRESIDENT
Executive Vice President Senior Director
Morgan Grenfell Capital Morgan Grenfell Capital
Management, Inc. Management, Inc.
Robert E. Greeley Mark G. Arthus
DIRECTOR SECRETARY AND TREASURER
Partner Director of Administration and Compliance
Cypress Cove Fund L.P. Morgan Grenfell Capital
Management, Inc.
Joseph J. Incandela
DIRECTOR TRANSFER AGENT
Partner/Managing Director The Bank of New York
Thomas H. Lee Co. 101 Barclay Street
New York, NY 10286
Richard D. Wood
CORPORATE OFFICES
DIRECTOR Morgan Grenfell Capital Management, Inc.
Consultant 885 Third Avenue
32nd Floor
New York, NY 10022
</TABLE>
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.
19
<PAGE>
SHAREHOLDER INFORMATION SERVICE
-------------------------------
Information regarding the Fund's net asset value is available by calling
1-800-888-8060. Additional shareholder information can be obtained by calling
1-800-432-8224 through the Bank of New York's Shareholder Relations
Department. The Fund's net asset value is reported each week in The Wall
Street Journal and Barron's.
20
<PAGE>