<PAGE>
[MGAM LOGO]
MORGAN GRENFELL
SMALL CAP FUND, INC.
Annual Report December 31, 1998
[PICTURE OF GLOBE]
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
During the first half of the year, the SMALLCap Fund (the "Fund") posted strong
performance relative to its benchmark, with an NAV return of 10.4% versus a
return of 6.1% for the S&P 600 Small Cap Index. In the second half, the Fund
matched the benchmark with a return of -7.0%.
While the market environment was more difficult for small cap stocks during
the second half of the year, particularly at the outset of the fourth quarter,
equities in general and small stocks in particular rallied back strongly after
the Federal Reserve intervened three times to loosen credit to restore investor
confidence. The Fund appreciated nearly 50% from the lows set October 8th
through year-end. This return outpaced both the benchmark S&P 600 Small Cap
Index (+38%) and the large cap S&P 500 Index (+28%).
For the year ended December 31, 1998, the Fund outperformed the benchmark,
returning 2.7% verses -1.3% for the S&P 600 Small Cap Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (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* 2.7% 12.4% 14.5% 13.2% 10.8%
S&P 600 Small Cap Index -1.3% 14.6% 13.2% 13.2% 10.1%
Russell 2000 Index -2.6% 11.6% 11.9% 12.9% 10.2%
</TABLE>
COMPARISON OF CHANGE IN THE VALUE OF A $1,000 INVESTMENT IN MORGAN GRENFELL
SMALL CAP FUND, INC. VERSUS S&P 600 SMALL CAP INDEX AND THE RUSSELL 2000 INDEX.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MORGAN GRENFELL S&P 600 RUSSELL 2000
SMALLCAP FUND SMALL CAP INDEX INDEX
<S> <C> <C> <C>
5/6/87 $1,000 $1,000 $1,000
12/88 $1,191 $1,195 $1,249
12/89 $1,484 $1,361 $1,451
12/90 $1,285 $1,039 $1,168
12/91 $1,960 $1,542 $1,707
12/92 $2,038 $1,866 $2,021
12/93 $2,211 $2,217 $2,403
12/94 $2,134 $2,110 $2,360
12/95 $3,018 $2,744 $3,030
12/96 $3,645 $3,328 $3,530
12/97 $4,177 $4,180 $4,320
12/98 $4,289 $4,125 $4,210
</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.
<TABLE>
<CAPTION>
SMALLER COMPANIES
SMALLCAP ----------------------- LARGER COMPANIES
FUND S&P SMALLCAP RUSSELL --------------------
PERIOD NAV 600 2000 S&P 500 D.J.I.A
- ------------------------------------------------------------ ----------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1998 2.7% -1.3% -2.6% 28.7% 18.1%
1997 14.6% 25.6% 22.4% 33.4% 24.7%
1996 20.8% 21.3% 16.5% 23.0% 28.8%
1995 41.4% 30.0% 28.4% 37.4% 36.7%
1994 -3.5% -4.8% -1.8% 1.3% 4.9%
1993 8.5% 18.8% 18.9% 10.1% 17.0%
1992 4.0% 21.0% 18.4% 7.6% 7.4%
1991 52.5% 48.5% 46.1% 30.5% 24.2%
1990 -13.4% -23.7% -19.5% -3.1% -0.4%
1989 24.6% 13.9% 16.2% 31.6% 31.6%
1988 19.1% 19.5% 24.9% 16.5% 15.9%
Total Return from Inception 230.7% 207.6% 211.3% 491.1% 458.9%
</TABLE>
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
The outperformance of the growth-style SMALLCap Fund may indicate a shift in
market sentiment that had previously favored value-style small company funds. We
believe growth-style investing is consistent with an economic environment
exhibiting slowing corporate earnings, as investors are willing to pay more for
the stocks of those companies that can continue to deliver top- and bottom-line
growth in the later stages of economic expansions. Many of these companies tend
to be in the small cap growth universe where Morgan Grenfell finds its
investment opportunities.
The Fund's top-performing stocks over the year were concentrated in the
technology, consumer and health care sectors. Examples include medical equipment
manufacturer Resmed Inc. (+223%), pharmaceutical sales management software
provider Dendrite International Inc. (+158%) and software testing leaders
Rational Software Corp. (+133%) and Mercury Interactive Corp. (+75%). The Fund
also benefited from strong performance by Microwarehouse Inc. (+143%) and
Insight Enterprises Inc. (+108%), both of which sell personal computers and
related goods on the internet and through catalogs, as well as by Mohawk
Industries Inc. (+92%), a leader in the residential and commercial carpet
industry.
TWENTY LARGEST HOLDINGS
(DECEMBER 31, 1998)
<TABLE>
<CAPTION>
PERCENTAGE OF STOCK
COMPANY NET ASSETS SYMBOL BUSINESS FOCUS
- --------------------------------- ------------- ------ ------------------------------
<C> <S> <C> <C> <C>
1. Concord Communications, Inc. 2.8% CCRD Network Management Software
2. Dime Bancorp Inc. 2.7% DME New York Savings Bank
Telecommunications Engineering
3. Dycom Industries Inc. 2.7% DY Services
Catalog & Internet Computer
4. Micro Warehouse Inc. 2.7% MWHS Retailer
Automated Software Testing
5. Mercury Interactice Corp. 2.6% MERQ Tools
Communication & Information
6. Comsat Corp. 2.6% CQ Services
7. Lennar Corp. 2.4% LEN Homebuilder
8. Garden Ridge Corp. 2.2% GRDG Home Decor Retailer
Automated Software Testing
9. Rational Software Corp. 2.2% RATL Tools
10. Mohawk Industries Inc. 2.2% MHK Broadloom Carpet Manufacturer
Oil and Gas Exploration &
11. Devon Energy Corp. 2.1% DVN Production
Pediatrix Medical Group,
12. Inc. 2.1% PDX Physician Management Services
13. US Freightways Corp. 2.1% USFC Regional Motor Carrier
14. Biochem Pharma Inc. 2.0% BCHE Biomedical Products
15. Petsmart Inc. 2.0% PETM Petstore Retailer
16. D.R. Horton, Inc. 2.0% DHI Homebuilder
Commercial Real-Estate
17. LNR Property Corp. 2.0% LNR Developer
18. Just For Feet, Inc. 2.0% FEET Footwear Retailer
19. Bally Total Fitness Holding 2.0% BFT Fitness Center Operator
Wholesale Computer Products
20. Tech Data Corp. 2.0% TECD Distributor
------
45.4%
------
------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
At year-end the Fund was broadly diversified across the main sectors of the
US economy. There were 82 holdings in nine sectors. Four sectors had weightings
in excess of 10%, namely technology (24%), consumer (22%), credit sensitive
(16%) and health care (15%). The Fund's weighted average market cap was $1.3
billion as of December 31, 1998.
PORTFOLIO STRUCTURE
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF MARKET OF
COMPANIES VALUE PORTFOLIO
---------- ------------ ----------
ECONOMIC SECTOR 1998 1997 1998 1997 1998 1997 CHANGE
- ------------------------- ---- ---- ----- ----- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Technology 19 11 27.7 11.1 24% 9% +15
Consumer 15 19 25.5 23.7 22% 20% +2
Credit Sensitive 11 10 19.0 21.1 16% 17% +1
Health Care 18 14 17.0 18.5 15% 15% --
Service Companies 4 9 7.0 10.8 6% 9% -4
Process Industries 6 3 4.9 3.9 4% 3% +1
Energy 4 6 4.6 10.3 4% 8% -4
Transportation 4 4 4.4 4.9 4% 4% -1
Capital Goods 1 1 0.2 0.1 0% 1% -1
---- ---- ----- ----- ---- ---- ------
Total Equities 82 77 110.3 104.4 95% 86% +9
---- ----
---- ----
Cash and Cash Equivalents 6.3 16.4 5% 14% -9
----- ----- ---- ---- ------
Total Portfolio 116.6 120.8 100% 100% --
----- ----- ---- ---- ------
----- ----- ---- ---- ------
</TABLE>
STRATEGY AND OUTLOOK
Our Small Cap Equity team strongly believes that small caps are due for a
rebound. Large cap stocks have now outperformed small cap stocks for five
straight years. In fact, 1998 was the third worst year ever in terms of small
cap performance relative to large cap performance. The S&P 600 Small Cap Index
returned over 30% less than the S&P 500 Index. Only in 1929 and in 1937 did
small caps post such poor relative performance.
Such extreme performance discrepancies make small cap stocks very attractive
on a valuation basis, however, investors can purchase small cap stocks at
substantial discounts to their earnings growth rates. And even with higher
expected earnings growth rates, small cap stocks are still trading at lower
valuations than large cap stocks.
We believe that the structure of the US economy, with its high level of
entrepreneurial activity and venture capital backing, should continue to provide
investors with many attractive investment opportunities as early-stage private
companies shift to public ownership. Additionally, as individuals continue to
assume responsibility for their own retirement planning, mutual fund flows
should continue to be an important source of liquidity. As these individuals
become more comfortable with equity investing, they are likely to increase their
allocation to small cap stocks.
The small cap universe contains over 6,000 companies and provides an
excellent opportunity to find successful companies at an early stage in their
growth cycles. Our investment process emphasizes individual stock selection with
the goal of providing value-added performance relative to the universe of US
smaller companies.
3
<PAGE>
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 96.7%
CAPITAL GOODS -- 0.2%
Brunswick Technologies, Inc.* 30,900 $ 196,988
CONSUMER -- 22.4%
Bally Total Fitness Holding* 90,100 2,241,237
Daisytek International Corp.* 72,700 1,381,300
Damark International, Inc. - Cl A* 147,550 1,198,844
Factory Card Outlet Corp.* 23,900 32,862
Furniture Brands International, Inc.* 75,900 2,068,275
Garden Ridge Corp.* 283,040 2,565,050
Hollywood Entertainment Corp.* 6,100 166,225
Insight Enterprises, Inc.* 40,700 2,070,612
Just For Feet, Inc* 129,100 2,243,113
Marketing Services Group, Inc.* 112,600 394,100
Micro Warehouse, Inc.* 90,200 3,049,888
Mohawk Industries, Inc.* 58,800 2,473,275
Papa John's International, Inc.* 36,600 1,614,975
Petsmart, Inc.* 211,400 2,325,400
Tractor Supply Company* 71,000 1,704,000
-------------
25,529,156
-------------
CREDIT SENSITIVE -- 16.7%
Astoria Financial Corp. 31,655 1,448,216
Bank United Corp. 32,500 1,275,625
D. R. Horton, Inc. 99,200 2,281,600
Dime Bancorp, Inc. 117,300 3,101,119
Golden State Bancorp, Inc. 102,350 1,701,569
Golden State Bancorp-Litig Wt 52,550 239,759
Independence Community Bank Corp. 78,400 1,249,500
Lennar Corp. 109,000 2,752,250
LNR Property Corp. 113,650 2,265,897
Paine Webber Group, Inc. 43,875 1,694,672
Rochester Gas & Electric Corp. 33,200 1,037,500
-------------
19,047,707
-------------
ENERGY -- 4.0%
BJ Services Company* 74,900 1,170,312
Devon Energy Corp. 77,200 2,369,075
Marine Drillings Companies, Inc.* 92,700 712,631
Range Resources Corp. 104,200 358,188
-------------
4,610,206
-------------
HEALTH CARE -- 14.9%
Alpharma Inc.-C1 A 37,300 1,317,156
Bindley Western Industries, Inc. 40,700 2,004,475
Biochem Pharma, Inc.* 81,300 2,327,213
Cohesion Technologies, Inc.* 94,000 340,750
Collagen Aesthetics, Inc. 33,700 303,300
CV Therapeutics, Inc.* 62,900 298,775
Dendrite International, Inc.* 30,900 771,534
Henry Schein, Inc.* 14,400 644,400
Integrated Health Services 100,500 1,419,562
IVAX Corp. 45,000 559,688
Nanogen, Inc.* 78,500 314,000
Owens & Minor, Inc. 30,100 474,075
PathoGenesis Corp.* 12,500 725,000
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pediatrix Medical Group, Inc.* 39,400 $ 2,361,538
ResMed, Inc.* 17,300 784,988
Sepracor, Inc.* 10,800 945,675
Sonosite, Inc.* 30,866 320,235
Trigon Healthcare, Inc.* 27,600 1,029,825
-------------
16,942,189
-------------
PROCESS INDUSTRIES -- 4.3%
Bowater, Inc. 30,800 1,276,275
Carbo Ceramics, Inc. 9,500 166,250
CompX International, Inc.* 33,600 886,200
PH Glatfelter Company 92,900 1,149,637
Rayonier, Inc. 24,700 1,134,656
Republic Group, Inc. 15,000 300,938
-------------
4,913,956
-------------
SERVICE COMPANIES -- 6.1%
American Tower Corp. 65,800 1,945,213
Building One Services Corp.* 33,900 707,662
Comsat Corp. 82,700 2,977,200
Kroll-O Gara Company* 33,900 1,336,931
-------------
6,967,006
-------------
TECHNOLOGY -- 24.3%
ATMI, Inc.* 43,400 1,095,850
Concord Communications, Inc.* 57,000 3,234,750
Dycom Industries, Inc.* 53,450 3,053,331
Intest Corp.* 38,500 317,625
Legato Systems, Inc.* 29,100 1,918,781
Lycos, Inc.* 31,300 1,739,106
Maxtor Corp.* 141,700 1,983,800
Mercury Interactice Corp.* 47,400 2,998,050
Novellus Systems, Inc.* 21,300 1,054,350
Pinnacle Systems, Inc.* 33,600 1,201,200
Polycom, Inc.* 21,800 485,050
Preview Travel, Inc.* 13,900 256,281
Rational Software Corp.* 94,000 2,491,000
Scientific Atlanta, Inc. 34,100 777,906
Security Dynamics Technology, Inc.* 46,600 1,071,800
Segue Software, Inc.* 15,500 313,875
Sipex Corp.* 25,000 878,125
Tech Data Corp.* 55,500 2,233,875
Terayon Communication Systems, Inc.* 15,000 555,000
-------------
27,659,755
-------------
TRANSPORTATION -- 3.8%
ASA Holdings, Inc. 45,300 1,381,650
Dynamex, Inc.* 22,950 90,366
Hyide Marine, Inc.* 111,100 555,500
US Freightways Corp. 80,700 2,350,388
-------------
4,377,904
-------------
TOTAL COMMON STOCKS
(Cost $85,981,673) $ 110,244,867
-------------
OTHER ASSETS AND LIABILITIES, NET -- 3.3% 3,798,371
-------------
NET ASSETS - 100% $ 114,043,238
-------------
*Non-income producing security
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investment at Value (cost $85,981,673) $110,244,867
Cash 6,348,243
Receivable for Securities Sold 909,660
Dividend and Interest Receivable 33,458
------------
Total Assets $117,536,228
------------
LIABILITIES
Due to Advisor $ 91,612
Payable for Securities Purchased 3,277,620
Accrued Expenses and Other 123,758
------------
Total Liabilities $ 3,492,990
------------
Net Assets $114,043,238
------------
------------
SHARES OUTSTANDING AT DECEMBER 31, 1998 9,802,054
NET ASSET VALUE PER SHARE AT DECEMBER 31, 1998 $ 11.63
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 Losses from Securities (3,729,061)
Net Unrealized Appreciation on Investments 24,263,194
------------
Net Assets, December 31, 1998 $114,043,238
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
<PAGE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $1,585,105
Interest 285,594
----------
Total Investment Income 1,870,699
EXPENSES:
Investment Advisory Fees 1,113,166
Administration and Custody Fees 110,285
Registration & Filing Fees 29,744
Transfer Agency Fees 252,657
Professional Fees 97,787
Directors' Fees and Expenses 96,384
Miscellaneous Expenses 36,677
----------
Total Expenses 1,736,700
----------
NET INVESTMENT INCOME 133,999
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net Realized Gain from Investment Transactions 1,071,118
Net Change in Unrealized Appreciation on
Investments 1,509,104
----------
Net Realized and Unrealized Gain on Investments 2,580,222
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $2,714,221
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
------------ ------------
1998 1997
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net Investment Income (Loss) $ 133,999 $ (762,302)
Net Realized Gain on Investments 1,071,118 16,744,027
Net Change in Unrealized Appreciation
on Investments 1,509,104 (1,106,053)
------------ ------------
Net Increase in Net Assets from
Operations 2,714,221 14,875,672
------------ ------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net Investment Income (133,999) --
Net Realized Gain from Investment
Transactions (768,061) (20,525,524)
Return of Capital (1,154,589) --
------------ ------------
Total Distributions (2,056,649) (20,525,524)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net Proceeds from Shares Reinvested 7,888,517 11,029
Reissuance of Treasury Shares 7,352,811 --
Cost of Treasury Shares Purchased (3,468,865) (3,883,946)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM CAPITAL TRANSACTIONS 11,772,463 (3,872,917)
------------ ------------
Total Increase (Decrease) in Net
Assets 12,430,035 (9,522,769)
NET ASSETS
Beginning of Period 101,613,203 111,135,972
------------ ------------
End of Period $114,043,238 $101,613,203
------------ ------------
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Shares Reinvested 713,358 764
Reissuance of Treasury Shares 647,700 --
Treasury Shares Purchased (333,200) (314,500)
------------ ------------
Increase in Capital Shares from Share
Transactions 1,027,858 (313,736)
------------ ------------
------------ ------------
</TABLE>
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
<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 eleven years ended December 31, 1998, 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,
-----------------------------------------------
1998 1997 1996 1995
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 11.58 $ 12.23 $ 12.31 $ 10.21
Net investment income (loss) 0.01 (0.09) (0.06) (0.00)
Net realized and unrealized
gains (losses) 0.25 1.78 2.18 4.23
--------- ---------- ---------- ---------
Total from investment
operations $ 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 $ 11.63 $ 11.58 $ 12.23 $ 12.31
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Market value per share, end of
period $ 9.69 $ 11.13 $ 10.50 $ 12.63
TOTAL INVESTMENT RETURN:
Based on net asset value per
share 2.66% +14.6% +20.8% +41.4%
Based on market value per
share -10.99% +28.5% +17.5% +42.3%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.56% 1.42% 1.76% 1.51%
Net investment income (loss) 0.12% (0.66)% (0.57)% (0.03)%
SUPPLEMENTAL DATA:
Net assets at end of year (000
omitted) $ 114,043 $ 101,613 $ 111,135 $ 74,402
Average net assets during year
(000 omitted) $ 110,974 $ 114,953 $ 99,372 $ 72,202
Portfolio turnover 116% 101% 162% 110%
Total debt outstanding at end
of year (000 omitted) -- -- -- --
Asset coverage per $1000 of
debt (000 omitted) N/A N/A N/A N/A
</TABLE>
* ANNUALIZED.
AMOUNTS DESIGNATED AS "--" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0.
8
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------
MAY 6, 1987
------------------------------------------------------------------ (COMMENCEMENT
YEARS ENDED DECEMBER 31, OF OPERATIONS)
--------------------------------------------------------------------------------- THROUGH
1994 1993 1992 1991 1990 1989 1988 12/31/87
--------- --------- --------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 11.85 $ 11.97 $ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45 $ 9.27
Net investment income (loss) (0.07) (0.08) (0.09) (0.10) (0.11) (0.11) (0.11) (0.16)
Net realized and unrealized
gains (losses) (0.34) 1.10 0.58 4.67 (1.34) 2.29 1.53 (1.66)
--------- --------- --------- --------- --------- --------- --------- -------
Total from investment
operations $ (0.41) $ 1.02 $ 0.49 $ 4.57 $ (1.45) $ 2.18 $ 1.42 $ (1.82)
Less distributions from:
Net investment income -- -- -- -- -- -- -- --
Realized capital gains (1.23) (1.14) (0.82) (0.97) (0.65) (0.25) -- --
Return of capital -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- -------
Total distributions $ (1.23) $ (1.14) $ (0.82) $ (0.97) $ (0.65) $ (0.25) $ 0.00 $ 0.00
--------- --------- --------- --------- --------- --------- --------- -------
Dilution due to rights
offering -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- -------
Net asset value, end of period $ 10.21 $ 11.85 $ 11.97 $ 12.30 $ 8.70 $ 10.80 $ 8.87 $ 7.45
--------- --------- --------- --------- --------- --------- --------- -------
--------- --------- --------- --------- --------- --------- --------- -------
Market value per share, end of
period $ 8.88 $ 10.88 $ 12.25 $ 12.88 $ 8.75 $ 9.63 $ 7.38 $ 6.00
TOTAL INVESTMENT RETURN:
Based on net asset value per
share -3.5% +8.5% +4.0% +52.5% -13.4% +24.6% +19.1% -19.7%
Based on market value per
share -7.1% -1.9% +1.5% +58.0% -2.2% +34.2% +22.9% -40.0%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.52% 1.39% 1.44% 1.79% 2.01% 2.13% 2.56% 4.32%*
Net investment income (loss) (0.59)% (0.74)% (0.83)% (0.85)% (1.05)% (1.10)% (1.30)% (1.80)%*
SUPPLEMENTAL DATA:
Net assets at end of year (000
omitted) $ 59,093 $ 67,321 $ 68,013 $ 64,461 $ 45,581 $ 54,136 $ 44,462 $37,316
Average net assets during year
(000 omitted) $ 66,064 $ 69,048 $ 64,644 $ 58,900 $ 51,121 $ 50,522 $ 43,422 $44,062
Portfolio turnover 105% 89% 89% 70% 75% 80% 83% 98%*
Total debt outstanding at end
of year (000 omitted) -- -- -- $ 1,060 $ 1,724 $ 2,324 $ 2,868 $ 3,360
Asset coverage per $1000 of
debt (000 omitted) N/A N/A N/A $ 60.8 $ 26.4 $ 23.3 $ 15.5 $ 11.1
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND -- DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Morgan Grenfell SMALLCap Fund, Inc. ("the Fund") was organized as a Maryland
corporation on January 16, 1987 and is registered under the Investment Company
Act of 1940, as amended, as a closed-end, diversified management investment
company. The Fund commenced operations on May 6, 1987.
The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles ("GAAP").
PORTFOLIO VALUATION--Securities listed on an exchange and over-the-counter
securities quoted on the NASDAQ system are valued on the basis of the last sale
price on the last business day of the year. Over-the-counter securities not
quoted on the NASDAQ system are valued on the basis of the average bid and asked
prices on that date. Commercial paper is carried at cost, which approximates
market.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME--Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the ex-dividend
date and interest income is recorded on the accrual basis. Realized gains and
losses from securities transactions are recorded on the basis of identified
cost.
EXPENSES--Expenses that are directly related to the Fund are charged
directly to the Fund.
FEDERAL INCOME TAXES--It is the policy of the Fund to qualify as a regulated
investment company by complying with provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue Code, and
to make distributions of income and securities profits (after application of net
capital loss carryovers) sufficient to relieve it from all, or substantially
all, Federal income taxes. As of December 31, 1998, the Fund had available
realized capital losses to offset future net capital gains of $2,426,966 which
expire on December 31, 2006.
DISTRIBUTIONS--Distributions from net investment income and net realized
capital gains are determined in accordance with U.S. Federal income tax
regulations, which may differ from those amounts determined under GAAP. These
book/tax differences are either temporary or permanent in nature. To the extent
these differences are permanent they are charged or credited to paid in capital
in the period that the difference arises.
USE OF ESTIMATES--The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of increase and decrease in assets from operations during the reporting period.
Actual results could differ from those estimates.
2. ADMINISTRATION, INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH
AFFILIATES
By an agreement dated August 27, 1998, the Fund entered into an administration
agreement with Morgan Grenfell Inc. (the "Administrator"), pursuant to which the
Administrator will receive an annual fee of 0.06% based upon the aggregate
average daily net assets of the Fund. The Administrator generally assists in all
matters relating to the administration of the Fund, including the coordination
and monitoring of any third parties furnishing services to the Fund, preparation
and maintenance of financial accounting records, and the provision of necessary
office space, equipment and personnel to perform administrative and clerical
functions. The Administrator is also responsible for engaging an accounting
agent, custodian and transfer agent for the Fund's operations. Fees for services
rendered by the accounting agent and the transfer agent are paid by the
Administrator and not the Fund. The Administrator began serving as the Fund's
administrator effective October 13, 1998, however, fees payable to the
Administrator at the above rate became effective from November 1, 1998. As of
December 31, 1998, the fees earned by the Administrator were approximately
$13,181.
Prior to October 13, 1998, SEI Financial Management Corporation ("SEI")
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 "Trust") as follows: 0.10% up to $1 billion; 0.07% from $1
billion to $1.5 billion; 0.05% from $1.5 billion to $2.5 billion; and 0.04% in
excess of $2.5 billion. The Trust is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company consisting of
twenty-two investment portfolios. Services rendered by SEI to the Fund were
substantially the same as being rendered by the Administrator, however,
administration fees payable to SEI did not include fees payable to Fund's
transfer agent and SEI as accounting agent to the Fund. SEI received $37,849 in
fees from the Fund.
10
<PAGE>
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The Fund pays advisory fees for investment and advisory services to Morgan
Grenfell Inc. ("MG"). Under the terms of the investment advisory agreement, the
management fee is calculated at an annual rate of 1.00% of the Fund's average
daily net assets.
Certain individuals who are officers or directors, or both, of the Fund are
also officers or directors, or both, of MG.
3. CAPITAL SHARE TRANSACTIONS
During 1998, 333,200 of the Fund's shares of outstanding common stock were
purchased in the open market by the Fund for re-issuance to shareholders
participating in the Dividend Reinvestment Plan. All such treasury shares,
including those acquired in 1997, were reissued during 1998 in accordance with
the Plan.
4. INVESTMENT TRANSACTIONS
The aggregate cost of securities purchased and the aggregate proceeds of
securities sold for the year ended December 31, 1998, excluding short-term
investments, were $128,703,230 and $124,403,425, respectively.
5. DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all dividends
from net investment income and/or all capital gain distributions will be
reinvested by The Bank of New York, as agent for shareholders in administering
the Plan (the "Plan Agent"), in additional shares of the Fund. Registered
shareholders are deemed to participate in the Plan unless they elect to receive
all dividends from net investment income and/or all capital gains distributions
in the form of cash. Each registered shareholder at the time of purchase will
receive from the Plan Agent an authorization card to be signed and returned if
the shareholder elects to receive distributions from net investment income in
cash or elects not to receive capital gain distributions in the form of a stock
dividend. Shareholders whose shares are held in the name of a broker or nominee
or shareholders transferring such an account to a new broker should contact such
broker or nominee to elect to participate in the Plan or to receive their
distributions in cash.
Participating shareholders will receive dividends from net investment income
and/or all capital gain distributions in additional shares issued by the Fund if
the shares are trading at a premium; i.e., the net asset value ("NAV") is less
than the then-current market price. In such event, the number of additional
shares to be issued by the Fund will be determined by valuing such shares at the
higher of (i) their NAV or (ii) 95% of the market price. If shares of the Fund
are trading at a discount, i.e., the NAV exceeds the then-current market price,
the Plan Agent or its designee will, as agent for the participants, apply such
dividends or distributions to purchase shares in the open market, on the New
York Stock Exchange or else-where, for the participants' accounts. In such case,
the price of the shares to each participating shareholder will be the average
market price at which such shares were purchased under the direction of the Plan
Agent. During certain market conditions, it may be impracticable or impossible
to complete a market purchase program at prices below net asset value, and, in
such event, the Fund itself may in its discretion issue the required shares at
net asset value. There will be no brokerage charges for shares directly issued
by the Fund, however, brokerage commissions incurred on open market purchases
will be borne pro rata by each participant. There is no direct service charge to
participants in the Plan; the fees of the Plan Agent will be borne by the Fund.
However, the Fund reserves the right to amend the Plan to include such a charge
payable by the participants or for other reasons.
Participants in the Plan may elect to withdraw from the Plan at any time
upon written notice to the Plan Agent and thereby elect to receive all
distributions from net investment income in cash and/or all capital gain
distributions either in the form of a stock dividend or in cash. The written
notice will not be effective with respect to distributions made within seven
days of its receipt by the Plan Agent. If notice is received after a record
date, a shareholder's request will be completed after the determination of
shares for that dividend has been credited to the shareholder's account.
Dividends and capital gain distributions are taxable whether paid in cash or
reinvested in additional shares, and the reinvestment of dividends and capital
gain distributions will not relieve participants of liability for any U.S.
income tax that may be payable (or required to be withheld) on such dividends or
distributions. Additional information about the Plan is available by calling the
Plan Agent's Shareholder Relations Department at 1-800-432-8224.
11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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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, 1998, 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, 1998, and the financial highlights for each
of the years in the eleven-year period ended December 31, 1998 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 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, 1998, by correspondence with the custodian. 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, 1998, 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, 1998 and the financial
highlights for each of the years in the eleven-year period ended December 31,
1998, and for the period May 6, 1987 (commencement of operations) through
December 31, 1987, in conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
February 17, 1999
12
<PAGE>
SHAREHOLDER INFORMATION SERVICE
- --------------------------------------------------------------------------------
MORGAN GRENFELL INC. (THE ADVISOR TO THE MORGAN GRENFELL SMALLCAP FUND) IS A
SUBSIDIARY OF MORGAN GRENFELL ASSET MANAGEMENT LIMITED (MGAM), WHICH IN TURN IS
A SUBSIDIARY OF DEUTSCHE MORGAN GRENFELL GROUP PLC (DMG) AND IS RESPONSIBLE FOR
THE DEUTSCHE BANK GROUP'S INSTITUTIONAL INVESTMENT MANAGEMENT ACTIVITIES
WORLDWIDE. MORGAN GRENFELL WAS FOUNDED IN 1838 AND IS ONE OF THE UK'S LEADING
MERCHANT BANKS AND ASSET MANAGEMENT GROUPS. SINCE 1990, MORGAN GRENFELL HAS BEEN
A WHOLLY-OWNED SUBSIDIARY OF DEUTSCHE BANK, AG, ONE OF THE LARGEST FINANCIAL
INSTITUTIONS IN THE WORLD. CURRENTLY MGAM MANAGES IN EXCESS OF $165 BILLION FOR
A WIDE RANGE OF PENSION, CORPORATE, INSURANCE, LOCAL AUTHORITY, GOVERNMENT AND
PRIVATE CLIENTS WORLDWIDE.
Shares of the Morgan Grenfell SMALLCap Fund are traded on the New York Stock
Exchange under the symbol "MGC."
In accordance with Section 23(c) of the Investment Company Act of 1940, the
Fund hereby serves notice that it may from time to time repurchase shares of the
Fund in the open market at the option of the Board of Directors.
SHAREHOLDER INFORMATION SERVICE
Information regarding the Fund's net asset value is available by calling
1-800-550-6426. The Fund's net asset value is reported each week in THE WALL
STREET JOURNAL and BARRON'S. You may also visit our website at
www.morgan-grenfell.com.
THE BANK OF NEW YORK
1-800-524-4458
ADDRESS SHAREHOLDER INQUIRIES TO:
SHAREHOLDER RELATIONS DEPARTMENT - 11E
P.O. BOX 11258
CHURCH STREET STATION
NEW YORK, NY 10286
E-MAIL ADDRESS: [email protected]
THE BANK OF NEW YORK'S STOCK TRANSFER WEBSITE:
HTTP://STOCK.BANKOFNY.COM
SEND CERTIFICATES FOR TRANSFER AND ADDRESS CHANGES TO:
RECEIVE AND DELIVER DEPARTMENT - 11W
P.O. BOX 11002
CHURCH STREET STATION
NEW YORK, NY 10286
13
<PAGE>
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
MORGAN GRENFELL SMALLCAP FUND, INC.
JAMES E. MINNICK
PRESIDENT AND CHAIRMAN
President
Morgan Grenfell Inc.
PATRICK W.W. DISNEY
DIRECTOR
Chief Executive Officer
Morgan Grenfell Investment
Services Ltd.
ROBERT E. GREELEY
DIRECTOR
President
Page Mill Asset Management Ltd.
JOSEPH J. INCANDELA
DIRECTOR
Partner/Managing Director
Thomas H. Lee Co.
RICHARD D. WOOD
DIRECTOR
Consultant
DAVID A. BARATTA
EXECUTIVE VICE PRESIDENT
Morgan Grenfell Inc.
JOHN P. CALLAGHEN
EXECUTIVE VICE PRESIDENT
Morgan Grenfell Inc.
AUDREY M.T. JONES
EXECUTIVE VICE PRESIDENT
Morgan Grenfell Inc.
JOAN A. BINSTOCK
TREASURER
Executive Vice President
Chief Operating Officer
Morgan Grenfell Inc.
TRACIE E. RICHTER
ASSISTANT TREASURER
Vice President
Morgan Grenfell Inc.
JAMES A. CAPEZZUTO
SECRETARY
Vice President - Legal Officer
Morgan Grenfell Inc.
INDEPENDENT AUDITORS
KPMG LLP
757 Third Avenue
New York, NY 10017
TRANSFER AGENT
The Bank of New York
101 Barclay Street
New York, NY 10154
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
INVESTMENT ADVISOR
Morgan Grenfell Inc.
885 Third Avenue
32nd Floor
New York, NY 10022
ADMINISTRATOR
Morgan Grenfell Inc.
885 Third Avenue
32nd Floor
New York, NY 10022
MG-F-90-1298-01
