Continued from prior page:
16
as a group and (ii) by any person who owns of record or beneficially 5% or more
of the Fund's stock. The Fund is not aware of any person who controls it as that
term is defined in the Investment Company Act of 1940 (the "Act").
# of Shares # of Outstanding
Name of Owner Owned Shares Owned
Officers and Directors
as a group (4 persons) 1,300,000 2.38%
Cede & Company P.O. Box 20 Bowling Green Station
New York, NY 10004 16,912,799 31.00%
(1) Includes shares owned by spouses, partnerships of which the officers and
directors are general partners, and retirement plans of the officers and
directors.
(2) Cede & Company is a clearing house which is listed as record owner of the
Fund's shares but is not a beneficial owner and does not exercise the power
to vote the shares indicated. It is a nominee, holding the shares in
"street name" for the actual beneficial owners, the identity of whom are
unknown to the Fund.
Item 20. INVESTMENT ADVISORY AND OTHER SERVICES Citadel Asset Management, Ltd.
("the Advisor" or "CAM") acted as the investment advisor to the Fund until July
2, 1992, pursuant to an agreement between CAM and the Fund (the "Advisory
Agreement"). By agreement between CAM and the Fund, the Advisory Agreement was
terminated on July 2, 1992. Since the termination of the Advisory Agreement, the
Fund has operated on a self-directed basis, without the counsel and advice of an
investment advisor. Operating on a self-directed basis, the Fund no longer
utilizes the services of an investment advisor. Instead, the Board of Directors
of the Fund, through the Fund's Advisory Committee and Investment Committee,
currently manages the investment operations of the Fund, and otherwise provides
the services heretofore performed by the Fund's Investment Advisor.
During the fiscal year ended September 30, 1998, the Fund paid no advisory fees.
The Fund's total net assets at September 30, 1998, were $1,116,635.
Redwood MicroCap Fund, Inc. (FKA Penny Stock Fund of North America, Inc.)
was also an advisory client of the Advisor. As of February 28, 1992, the
advisory agreement between Redwood MicroCap Fund, Inc and CAM was terminated.
See Part B, Items 27 and 30 for information concerning persons and affiliates of
the Advisor.
The Advisory Agreement with the Fund's investment Advisor, CAM, provided that,
subject to the control of the Board of Directors of the Fund, the investment
17
Advisor: (i) managed the investment operations of the Fund; (ii) provided the
Fund with such investment research advise and supervision as the Fund, from time
to time, considered necessary for the proper supervision of its portfolio
securities; (iii) furnished continuously an investment program and determined,
in its best judgement, from time to time, what securities should be purchased,
sold or exchanged, and what portion of the Fund's assets should be held
uninvested; (iv) made recommendations as to the manner in which voting rights,
right to consent to corporate action, and any other rights pertaining to the
Fund's portfolio securities should be exercised; (v) took, on behalf of the
Fund, all action it deemed necessary to implement the Fund's investment
policies, including, without limitation, placing orders to purchase or sell the
portfolio securities of the Fund's account with brokers or dealers it selected;
and (vi) prepared, maintained, and retained all books, accounts, records and
other documents required for the business of the Fund, except for such books,
accounts records and other documents that were to be prepared by the custodian,
transfer agent, or registrar of the Fund.
Under the terms of the Advisory Agreement, the Fund and the advisor each paid
their own expenses and costs of doing business (such as employee salaries,
office rental and telephone). Consequently, in addition to the Advisory Fee, the
Fund was responsible for payment of expenses, without limitation, relating to
attorneys, independent auditors, taxes and other government fees, costs incurred
under custodial agreement, expenses incurred in the registration and
qualification of the common stock for sale, expenses of printing and filing
reports of other documents with government agencies, brokerage and other
commissions or expenses relating to the execution of investment portfolio
transactions, insurance premiums and other ordinary and necessary business
expenses, such as postage.
For its services under the Advisory Agreement, the Advisor received a fee equal
to a stated annual percentage of the total net assets, assessed on the first
business day of each month, and payable up to 0.08333% of the net asset value of
the Fund as of its first business day each month, or up to 1% of the net asset
value of the Fund per year. The annual fee to the Advisor was calculated as
follows:
Net Total Assets Annual Advisory Fee
First $10,000,000 1%
Amounts over $10,000,000 0.75%
THIS ADVISORY FEE OF 1% PER ANNUM WAS HIGHER THAN THAT PAID BY
MOST OTHER INVESTMENT COMPANIES FOR SIMILAR SERVICES.
The Advisory Agreement, dated July 2, 1990, provided that it would continue for
two years from July 2, 1990, and would be renewed on an annual basis so long as
such renewal was approved annually by the Board or by a vote of a majority of
the outstanding voting shares at the Annual Meeting of the Fund. Any vote by the
18
Board relating to the Advisory Agreement must be approved by a majority of the
"Disinterested Directors," cast in person at a meeting called for that purpose.
The Board, the Shareholders of the Fund by a vote of the majority of the common
stock outstanding, or the Advisor could terminate the Advisory Agreement without
penalty upon sixty (60) days' written notice. The Advisory Agreement was
considered and unanimously renewed for an additional year by the Board of
Directors on July 1, 1991 and by the Shareholders at the Annual Meeting held on
July 2, 1991.
On July 2, 1992, the Board of Directors and CAM unanimously agreed to terminate
the Advisory Agreement without penalty. The decision to terminate the Advisory
Agreement was motivated by the Fund's exceedingly high expense ratio relative to
the Fund's small size and the corresponding determination of the Board of
Directors that it was in the best interest of the Company's shareholders to
reduce operating expenses wherever possible. Since the cessation of the services
of CAM as advisor, the Fund has operated on a self-directed basis without the
services of an Advisor, as permitted by the 1940 Act.
Item 21. BROKERAGE ALLOCATION AND OTHER PRACTICES
(1) The change in agency commissions during the most recent fiscal year, as
compared to the two prior fiscal years, is due to the increase of buying and
selling of portfolio securities by the Registrant. The change in principle
commission during the fiscal year ended 1996, as compared to the 1995 and 1994
fiscal year end, is due to a decrease in trading activity of the Fund.
(2) Broker Commissions:
(a) The brokerage commissions paid by the Fund during the three most
recent fiscal years ended September 30 are as follows:
1998 1997 1996
---- ---- ----
Principal Commissions** $ 15,421 $ 33,010 $ 76,494
Agency Commissions $ 2,236 $ 2,784 $ 11,805
Aggregate Commissions** $ 17,657 $ 35,794 $ 88,299
**Principal commissions are not disclosed on trade confirmations and are
therefore estimated.
(b) No brokerage commissions were paid by the Registrant during the
three years ended September 30, 1998 to any affiliated broker.
(3) Selection of Brokers: Not applicable.
(c) Use of research Services Performed by Brokers: None.
(4) Transactions Directed Through a Broker Because of Research Services:
None.
(5) Acquisition of Securities of Regular Brokers or Dealers: During the
last fiscal year the Registrant did not acquire any securities of its regular
broker or dealers or their parents. 19
Item 22. TAX STATUS
The Fund has not elected to be treated for Federal tax purposes as a "regulated
investment company" under Subchapter M of the Internal Revenue Code.
Consequently, investment income and realized capital gains are taxed to the Fund
at the tax rates applicable to corporations.Item 23. FINANCIAL STATEMENTS
The following financial statements were filed on November 25, 1998 with the
Securities and Exchange Commission as part of the Fund's 1998 Annual Report to
Shareholders pursuant to Section 30 (b) (2) of the Act and are incorporated by
reference:
(1) Statement of Investments in Unaffiliated Issuers as of September 30,
1998
(2) Statement of Investments in Affiliated Issuers as September 30, 1998
(3) Assets and Liabilities as of September 30, 1998
(4) Capital Stock and Accumulated Loss as of September 30, 1998
(5) Statement of Operations for the year ended September 30, 1998
(6) Statement of Changes in Net Assets for the years ended September 30,
1998 and 1997 (7) Notes to Financial Statements (8) Financial Highlights
(9) Report of Independent Auditors
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS(a) Financial Statements:
See Part B, Item 23. (b) Exhibits:
(1) Articles of Incorporation of the Fund are incorporated by
reference to the Form N-2 filed on September 24, 1983.
(2) Bylaws of the Fund, as amended, are incorporated by reference to
Amendment No. 2 of the Form N-2 filed on January 24, 1987.
(3) Voting Trust Agreement - None
(4) Specimen Stock Certificate is incorporated by reference to the Form N-2
filed on September 24, 1983.
(5) Instruments relating to long term debt - None
(6) Investment Advisor Agreement with Citadel Asset Management, Ltd. dated
July 2, 1990 (7) Underwriting or Distribution Contracts - None
(8) Bonus, Profit Sharing, Pension or Similar Plans - None
(9) Custodian Agreement is incorporated by reference to the Form N-2 filed
on September 24, 1983 (10) Independent Auditors consent
20(b) Exhibits (continued)
(10a) Transfer Agent Agreement is incorporated by reference to Amendment
No. 5 to the Form N-2 filed on January 28, 1989
(10b) Fidelity Bond, as endorsed is incorporated by reference to Amendment
No. 4 to the Form N-2 filed on January 21, 1989
(10c) Employment Agreement of Philip J. Halseide is incorporated by
reference to amendment No. 2 to the Form N-2 filed on January 28, 1986
(10d) Employment Agreement of Jack P. Phelan is incorporated by reference
to Amendment No. 2 to the Form N-2 filed on July 28, 1986
(10e) Office Space Lease Agreement with Wells Mortgage is incorporated by
reference to Amendment No. 5 to the Form N-2 filed on January 28, 1989
(14) Agreement Relating to Initial Capital of Fund - None
(15) Model Plans - NoneItem 25. MARKETING ARRANGEMENTS
Not applicable.
Item 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
Item 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Redwood MicroCap Fund, Inc. was under common control until February 1992 with
the Registrant by virtue of the fact that Philip J. Halseide was an officer of
both funds until that date. He was also a controlling person of Citadel Asset
Management, Ltd. which served as the Investment Advisor for the Fund until July
1992. Mr. Halseide owns 45% of the outstanding voting securities of the
Investment Advisor. Redwood MicroCap Fund, Inc and Citadel Asset Management,
Ltd. are Colorado corporations.
Citadel Asset Management, Ltd. ("the Advisor" or "CAM") acted as the investment
advisor to the Fund pursuant to an agreement between CAM and the Fund (the
"Advisory Agreement") until July 2, 1992. By agreement between CAM and the Fund,
the Advisory Agreement was terminated on July 2, 1992. Since the termination of
the Advisory Agreement, the Fund has operated on a self-directed basis, without
the counsel and advice of an investment advisor.
Item 28. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth the number of record holders by class of stock as
of September 30, 1998:
Title of Class Number of Record Holders
Common Stock 6279
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