Deep Discount Advisors, Inc.
1 West Pack Square, Suite 777
Asheville, NC 28803
Ph: 828-255-4832 Fax: 828-255-4834
March 26, 2003
Dear Fellow shareholder of The SMALLCap Fund,
This letter is not a solicitation. Furthermore, unlike the stuff
you have been receiving from our Fund, it is not costing you any
money.
My clients and I, like you, bought our SMALLCap shares to make a
profit. Most of us don't care who runs the Fund, as long as we
get our money's worth. However, some things are more important
than money.
My reputation and my integrity are important to me. That is why
I am sending you this mailing, at my own personal expense.
(Incidentally, it ain't cheap!)
I have been the victim of a campaign of innuendo and half-truths
designed to get you to vote a certain way at our Fund's upcoming
annual meeting. This campaign has even extended to planting
misleading and factually incorrect snippets in the financial
press, without proper attribution or fact checking.
Anticipating the possibility that this might happen, I sent an
open letter to our Board of Directors setting the record
straight. I asked them to do their job, to quit misleading the
shareholders, and to tell the truth. I also asked them to let
those shareholders who are sick of this whole mess leave the
Fund, at full asset value. Alas, as you must know by now, it was
all to no avail.
I am not going to tell you how to vote, or how I am going to
vote. But I believe you should at least have all the facts. I
have therefore enclosed a copy of the letter I sent to the Board.
Be forewarned, it doesn't tell a pretty story.
Sincerely,
Ron Olin
A fellow SMALLCap Shareholder
___________________________________________________________________
Deep Discount Advisors, Inc.
1 West Pack Square, Suite 777
Asheville, NC 28803
Ph: 828-274-1863
March 14, 2003
The Board of Directors
The SMALLCap Fund, Inc.
One South Street
Baltimore, Maryland 21202
Ph: 212-336-4891
Re: An Open Letter to the Board of the SMALLCap Fund, Inc.
Dear Sirs and Madam:
As you are aware, my clients and I are long-term investors in The
SMALLCap Fund Inc. (The Fund), owning a substantial number of shares.
Up until this time, we have been passive investors, depending on the
skill and competence of the investment adviser (Deutsche Asset
Management) and the Board members to deliver value to us and the other
shareholders of this closed-end fund. Our sole goal has been to make
money on the Fund's shares, along with the other shareholders. We have
been strong supporters of the closed-end structure over the years,
believing that it gives the greatest flexibility to managers and
directors to enhance value to shareholders through superior portfolio
performance, judicious expense control, and innovative corporate
actions which exploit discounts for the benefit of long-term
shareholders.
However, over the last two years, it appears to us that the investment
adviser and a slim majority consisting of four of the seven board
members have become absorbed in an effort to defend against what they
perceive to be a threat to their positions. As a result, they appear
to have neglected their proper roles in serving the interests of all
shareholders. In addition to tolerating very poor Fund performance
against its small-cap benchmark, these individuals have taken a series
of actions to eliminate their accountability to shareholders and expose
the Fund to expensive and distracting class action law suits from
disenfranchised shareholders. Furthermore, all of this has been done
while attacking me and other shareholders in the name of "protecting"
the fund from a so-called raid on the management contract by one of its
own directors, Mr. Bradshaw. The purpose of this letter is to set the
record straight and to encourage the above mentioned individuals to
focus on their proper responsibilities and abandon efforts to entrench
themselves in their positions.
POOR PORTFOLIO PERFORMANCE - Based on information provided in the
Fund's most recent annual report, the portfolio performance has been
absolutely terrible. The Fund's selected benchmark is the S&P SmallCap
600 Index. In 2001 the Fund lost -9.3% while the benchmark "gained"
+6.5%. In 2002 the Fund lost -21.2% while the benchmark lost only
- -14.6%. This underperformance has cost the shareholders over
$30,000,000 over these two years. This is significant in a fund whose
assets have declined from $150,000,000 at the beginning of 2001 to
about $80,000,000 recently.
The portfolio manager, Ms. Jones, is an "Interested" Director by virtue
of her association with Deutsche Asset Management. She also manages a
small-cap, open-end fund with similar objectives for this same adviser.
Last year she joined the former Board Chairman, Mr. Incandela, in a
failed attempt to convince a majority of shareholders to give up the
closed-end structure and transfer all of the Fund assets to the open-
end fund which she manages. This other fund has suffered equally poor
performance and, because of its open-end structure and larger size,
would have provided for even less accountability to SMALLCap Fund
shareholders.
PACKING THE BOARD - Mr. Incandela is President of Overture Capital
Partners, a private equity firm. Last year he and another long-term
Director were opposed in their bid for re-election to the Board.
Immediately prior to last year's annual meeting, when it was apparent
that they were about to be removed from the Board by a vote of the
shareholders, this former Chairman convened a special Board meeting.
With the support of Ms. Jones, the board was expanded to seven members,
and two new directors, Mr. Kuftinec and Mr. Naylor, were appointed to
the Board without shareholder approval.
Mr. Kuftinec and Mr. Naylor are managing directors of Overture Capital
Partners, the firm of which the former Chairman is the President, and
have no previous experience whatsoever with closed-end funds. This all
resulted in giving four Directors control of the seven-member board.
These four Directors consist of the former Chairman's two business
associates, the Portfolio Manager, and Mr. Wood. Mr. Wood is a long-
time fellow Director of Mr. Incandela who is not up for election until
2004. He has since assumed Chairmanship of the Board.
The remaining three directors, all of whom were elected by shareholders
in the last two years, have had extensive experience as directors of
closed-end funds. It is also noteworthy that they have, in the past,
replaced managers who had significantly underperformed their
benchmarks. Whether they would have ultimately taken such actions in
this case or not, it is quite likely that they would have attempted to
address the Fund's poor performance. The shareholders who elected them
would have had every reason to expect that they would comprise a
majority of the Board, and would therefore have been in a position to
hold the adviser accountable for the Fund's portfolio performance. On
the contrary, packing the Board in the manner described above, with the
complicity of the interested Director, may have removed this
accountability.
Subsequently, the Board has passed a series of unusual by-laws, without
shareholder approval, which have had the effect of limiting the rights
of shareholders to elect future directors to the Board. If, as I
suspect, these by-laws were secured by a four-to-three vote of the
Directors, with the support of the Interested Director, it represents,
in my opinion, either an actual or apparent conflict of interest.
PROTECTING THE FUND FROM MR. BRADSHAW - The claimed justification for
these bizarre actions centers around "protecting" the Fund from a raid
on the management contract by one of the Fund's directors (Mr.
Bradshaw) and his management company (Cornerstone Advisors). I know
Mr. Bradshaw. Some years ago he used to work for me, and much has been
made of the fact that he is married to my wife's sister. His company
manages several closed-end funds in which my clients and I own large
positions.
Since Mr. Bradshaw formed his own management company, I have supported
him on some issues, which made sense to me, and opposed him on others,
which did not. In three funds, the former advisers asked to be
replaced. In one of those cases the contract went to an outside
manager that I recommended, and in the other two cases, Cornerstone
Advisors received the contracts after shareholder approval. In another
instance, I supported Board decisions to have Cornerstone Advisors
replace a manager that had significantly underperformed his large-cap,
US equity benchmark. Once, Bradshaw tried to merge two of the funds he
managed in order to consolidate their operation. I opposed, voted
against, and defeated this merger because it would have had negative tax
implications for long-term investors in one of the two funds.
In last year's proxy contest, Bradshaw campaigned in favor of, and
voted for, the SMALLCap merger proposal because he felt it would allow
exiting shareholders to get out of the fund at a favorable price.
I declined to vote in favor because I felt there were better ways to
provide Net Asset Value (NAV) to those who wished to leave without
damaging the long-term prospects for those investors who wished to
stay. (The current SMALLCap Board majority has both the authority and
means to provide NAV to those shareholders desiring to exit the Fund.
As they are aware, they can do this at any time through a tender offer
for all shares. I respectfully request them to do so immediately. It
is the least they can do for disenchanted shareholders, after all the
other things they have done to them recently.)
Nevertheless, the bottom line is that Mr. Bradshaw understands closed-
end funds and does a competent job managing three large-cap, US equity
funds that have (1) consistently met or exceeded their benchmark
performance, (2) waived management fees to reduce fund expenses, and
(3) adopted policies that have almost eliminated discounts in two funds
and created premiums in the third. (Premiums are far better than
getting Net Asset Value for shares.) However, it should be noted that
Bradshaw has no experience managing a small-cap portfolio and says he
has no desire to do so.
Let us set the record straight. Mr. Bradshaw is a Director of the
SMALLCap Fund because his election was recommended by the Fund, on the
Fund's 2001 proxy. The Fund 's former Chairman approached me in 2001
and suggested that I agree to vote my shares for both Mr. Wood (the
current Board Chairman) and Mr. Bradshaw. He approached me. I did not
approach him. It was his idea, not mine. He said he wished to avoid a
costly proxy fight with Mr. Bradshaw who, according to the Fund's
proxy, "has significant experience serving on the boards of directors
of several other closed-end funds" and "after considering Mr.
Bradshaw's nomination and qualifications, the Board has determined that
the Fund would also benefit from Mr. Bradshaw's service on the Board."
He clearly knew of Mr. Bradshaw's history with me and wanted my support
for the Fund's proxy.
Then came the terrible 2001 portfolio performance when the Fund
underperformed its benchmark by an almost unbelievable 15.8%! (+6.5%
for the Benchmark vs. -9.3% for the Fund). In early 2002, Mr. Bradshaw
nominated two candidates for director in order to provide "an
independent voice on important matters affecting the Fund" (from his
proxy). One year after I had been asked to support Mr. Wood and Mr.
Bradshaw in the Fund's 2001 proxy, I was unfairly attacked in the
Fund's 2002 proxy material because of my past association with Mr.
Bradshaw. Extensive, costly solicitation by the fund made the claim
that Mr. Bradshaw, with my complicity, was trying to steal the
management contract, even though he said he was not interested.
For the record, I understand that Mr. Bradshaw has stated he would not
accept the Fund's management contract under any conditions; a position
which I fully support. As the Board is well aware, my federal filing
last year clearly stated:
"The [Fund's] securities were acquired with the intent to gain a
diversified exposure to a portfolio of predominately small-cap
securities selected and managed by an investment advisor skilled in
that market sector. The reporting person [my firm] is a long term
investor that supports the continuation of the current investment
objective of the issuer to invest in small-cap securities..."
So that there is no confusion whatsoever, let me now state it even more
clearly. "I will not support, and would strongly oppose, now or in the
future, any effort to give the investment management contract of the
Fund to Mr. Bradshaw or his investment advisory company." Any
representation to the contrary in the Fund's proxy materials,
particularly without reference to my unequivocal position on this
matter, is materially misleading to the Fund's shareholders.
One can not help but suspect that this is all a "Red Herring" and that
the real fear is that the shareholders, through new Directors, will
demand accountability for poor Fund performance.
DISENFRANCHISING SHAREHOLDERS - Last year the shareholders sorted
through all the name-calling and voted. They threw out the former
Chairman by a large vote margin and elected Mr. Bradshaw's nominees.
Having recently elected three new directors of the five in office, the
shareholders might have assumed they would finally get accountability.
Instead, in one of the most blatant, cynical acts in disregard of
shareholder wishes that I have ever observed, the about-to-be-defeated
Chairman circumvented the will of the shareholders. With the support
of the aforementioned interested Director and Portfolio Manager, he
packed the Board with two of his business associates, perpetuating a
razor thin 4 to 3 majority.
As if this were not enough, this Board then passed a series of bizarre
by-laws, without shareholder approval, which limit the rights of
shareholders to elect any future directors to the Board. One such by-
law gives exclusive authority to the Board majority to screen future
opposing director candidates and refuse to allow the candidacy of
anyone they consider, in their judgment, to be inappropriate. A later,
second by-law requires that no Director can unseat an existing Director
unless he receives the vote of a majority of all shares outstanding.
Since it is rare that more than 65% of shares are even voted in a
contested election, this means that the opposition candidate would have
to secure at least 10 of every 13 votes cast to unseat an incumbent.
The incumbent would need to only receive a small fraction of the votes
actually cast to keep his position, and presumably would have the full
resources of the Fund in an expensive proxy contest in order to achieve
the necessary blocking votes.
In my opinion, these extreme, Draconian machinations expose the Fund
and Deutsche Asset Management to expensive, distracting, and time-
consuming class-action law suits by disenfranchised current and former
shareholders. For example, well-known closed-end activist Philip
Goldstein and New York attorney Gregory Keller have recently been
successful in their law suit against Lincoln National Convertible
Securities Fund, which took far less egregious actions against the
rights of their shareholders. To its credit, that fund turned over a
new leaf, declassified their Board of Directors, contacted and
solicited the advice of their largest shareholders, and offset some of
the large legal expenses by reducing the adviser's management fee. One
would only wish they had seen the light earlier. Perhaps that is the
lesson that should be heeded by the adviser and some of the current
Directors of the SMALLCap Fund.
IT'S NOT TOO LATE - We respectfully ask the current Board majority and
Deutsche Asset Management to step back from the path they are pursuing
and put the shareholders first. Quit picking fights with some
shareholders and misleading others. Offer an exit, at full asset
value, to everyone who wants to cash out, and give the Fund back to
those who wish to remain. Reverse the unilateral actions taken to
disenfranchise shareholders, which expose the Fund, its adviser, and
some of its Directors to costly legal challenges. Address the Fund's
portfolio performance problems and fix them. Accept accountability to
the shareholders and seek their advice. Even at this late date, it is
not too late to do the right thing.
Sincerely,
Ronald G. Olin
President, Deep Discount Advisors