This prospectus sets forth concisely the information about The Japan Fund,
Inc., an open-end management investment company, that a prospective
investor should know before investing. Please retain it for future reference.
If you require more detailed information, a Statement of Additional
Information dated May 1, 1995, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103, care of The Japan Fund Service
Center or calling 1-800-53-JAPAN. The Statement of Additional Information has
been incorporated by reference into this prospectus and has been filed with the
Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents
Expense information 2
Financial highlights 3
Shareholder benefits 4
Investment objective 4
Investment policies 4
Investment strategies 4
Why invest in the Fund? 5
Additional information about investment policies and strategies 6
Risk factors 7
Investment results 10
Distribution and performance information 14
Fund organization 14
Purchases and redemptions 16
Transaction information 19
Shareholder services 20
Tax-advantaged retirement plans 22
The Scudder Family of Funds 23
How to contact The Japan Fund Back cover
Directors and officers Back cover
Distributor: Scudder Investor Services, Inc.
THE JAPAN FUND, INC.
PROSPECTUS
MAY 1, 1995
* Offering opportunities for long-term capital appreciation by investing
primarily in the equity securities of Japanese companies.
* A pure no-load(tm) mutual fund with no commissions to buy, sell or exchange
shares.
Scudder, Stevens & Clark, Inc.
Investment Adviser
<PAGE>
Expense information
How to compare The Japan Fund, Inc.
This information is designed to help you understand the various costs and
expenses of investing in The Japan Fund, Inc. (the "Fund"). By reviewing this
table and those in other mutual funds' prospectuses, you can compare the Fund's
fees and expenses with those of other funds. With The Japan Fund, Inc., you pay
no commissions to purchase or redeem shares. As a result, all of your investment
goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares ("sales NONE
load")
Commissions to reinvest dividends NONE
Deferred sales load NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the year ended December 31,
1994.
Investment management fees 0.73%
12b-1 fees NONE
Other expenses 0.35%
------
Total Fund operating expenses 1.08%
======
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------- ------- ------- -------
$11 $34 $60 $132
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund. If you wish to receive
your redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Purchases and redemptions."
2
<PAGE>
Financial highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements. Prior to August 14, 1987, the Fund was operated as a closed-end,
diversified management investment company. Since August 14, 1987, the Fund has
operated as an open-end, diversified management investment company, commonly
known as a "mutual fund." Accordingly, except with respect to information for
the period January 1, 1985 to August 14, 1987, the data set forth below reflect
the investment performance of the Fund as a mutual fund rather than a closed-end
investment company.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31, 1994 and may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
The following information has been audited by Price Waterhouse LLP,
independent accountants, whose unqualified report thereon is included in the
Annual Report to Shareholders, which is included in the Fund's Statement of
Additional Information. The financial highlights should be read in conjunction
with the financial statements and notes thereto included in the Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1994(a) 1993(a) 1992 1991 1990 1989 1988 1987 1986(a) 1985(a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period. . . . $10.33 $8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28 $15.53 $12.60
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (loss) . . . . . (.05) (.05) (.05) (.03) .09 .04 .04 .16 .10 .08
Net realized and
unrealized gain
(loss) on
investments . . . . . . 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13 5.81 9.34 4.28
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Total from investment
operations . . . . . . . 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17 5.97 9.44 4.36
------ ----- ------ ----- ------ ----- ----- ----- ----- ------
Less distributions from:
Net investment
income . . . . . . . . . -- -- -- -- (.09) (.08) (.02) (.20) (.02) (.07)
In excess of net
investment income. . . . -- (.28) -- -- -- -- -- -- -- --
Net realized gains on
investment transactions. (.80) (.39) -- (.41) (1.10) (3.59) (3.88) (9.08) (4.67) (1.36)
In excess of net
realized gains . . . . . (.05) -- -- -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions . . . . (.85) (.67) -- (.41) (1.19) (3.67) (3.90) (9.28) (4.69) (1.43)
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period . . . . . . $10.50 $10.33 $8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28 $15.53
======= ====== ====== ====== ======= ====== ====== ====== ====== ======
TOTAL RETURN (%) . . . . . 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40 33.01 77.54 38.89
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions). . . . 586 471 409 335 313 401 404 394 584 360
Ratio of operating
expenses to average
net assets (%) . . . . . 1.08 1.25 1.42 1.26 1.05 1.02 1.01 .90 .70 .64
Ratio of net investment
income (loss) to
average net
assets (%) . . . . . . . (.40) (.47) (.31) (.15) .72 .34 .28 .41 .51 .63
Portfolio turnover
rate (%) . . . . . . . . 74.3 81.7 47.0 46.4 52.7 60.4 38.8 34.0 38.2 23.9
<FN>
(a) Per share amounts have been calculated using weighted average shares outstanding.
</FN>
</TABLE>
3
<PAGE>
Shareholder benefits
* broad and diversified investment portfolio
* active professional management by Scudder, Stevens & Clark, Inc.
* no sales charges or Rule 12b-1 distribution charges; a pure no-load(tm)
fund
* shares redeemable at net asset value at any time with no redemption
charge
* individual attention from a Japan Fund Service Specialist (8 a.m.-
8 p.m. eastern time, Monday-Friday) at the toll-free number
1-800-53-JAPAN
* optional participation in the Scudder Family of Funds, a group of pure
no-load(tm) mutual funds managed by Scudder, Stevens & Clark, Inc.
* $1,000 minimum initial investment
Investment objective
The investment objective of The Japan Fund, Inc. (the "Fund"), a
diversified mutual fund, is long-term capital appreciation, which it seeks
to achieve by investing primarily in equity securities (including American
Depositary Receipts) of Japanese companies. Equity securities are defined as
common and preferred stock, debt securities convertible into common stock
(sometimes referred to as "convertible debentures") and common stock purchase
warrants.
There can be no assurance that the Fund's objective will be met. The Fund's
objective is a fundamental investment policy and may not be changed without
shareholder approval.
Investment policies
Unless otherwise noted, the investment policies of the Fund are
non-fundamental and may be changed by the Fund's Board of Directors without
shareholder approval. Shareholders will, however, receive written notice of any
changes in these policies.
Under normal conditions, the Fund will invest at least 80% of its assets in
Japanese securities, that is, securities issued by entities that are organized
under the laws of Japan ("Japanese companies"), securities of affiliates of
Japanese companies, wherever organized or traded, and securities of issuers not
organized under the laws of Japan but deriving 50% or more of their revenues
from Japan. These securities may include debt securities (Japanese government
debt securities and debt securities of Japanese companies) when the Fund's
investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser") believes that
the potential for capital appreciation from investment in debt securities equals
or exceeds that available from investment in equity securities.
Investment strategies
The Fund currently intends to focus its investments in select Japanese
companies, whether large or small, that have an active market for their shares
and that show a potential for greater-than-average growth. These companies may
be situated in the post-industrial sectors of the economy, sensitive to consumer
demand, technology-driven, and globally competitive, including companies that
are sharing in the rapid growth of Japan's Asia-Pacific neighbors. The Fund
anticipates that most equity securities of Japanese companies in which it
invests, either directly or indirectly by means of American Depositary Receipts
or convertible debentures, will be listed on securities exchanges in Japan.
The Fund may also invest up to 30% of its net assets in equity securities
of Japanese companies which are traded in an over-the-counter market. These are
4
<PAGE>
generally securities of relatively small or little-known companies that the
Adviser believes have above-average earnings growth potential. When evaluating
an individual company for the purpose of stock selection, the Adviser takes into
consideration, among other factors, the size of the company; the depth and
quality of management; a company's product line, business strategy or
competitive position in its industry; marketing and technical strengths;
research and development efforts; financial strength, including degree of
leverage; cost structure; revenue and earnings growth potential; price-earnings
ratios and other stock valuation measures.
The Fund may invest up to 20% of its assets in cash or in short-term
government or other short-term prime obligations in order to have funds readily
available for general corporate purposes, including the payment of operating
expenses, dividends and redemptions, or the investment in securities through
exercise of rights or otherwise, or in repurchase agreements in order to earn
income for periods as short as overnight. Where the Adviser determines that
market or economic conditions so warrant, the Fund may, for temporary defensive
purposes, invest more than 20% of its assets in cash or such securities. For
instance, there may be periods when changes in market or other economic
conditions, or in political conditions, will make advisable a reduction in
equity positions and increased commitments in cash or corporate debt securities,
whether or not Japanese, or in the obligations of the Government of the United
States or of Japan or of other governments.
Why invest in the Fund?
The Japan Fund, Inc. is the oldest and largest U.S. mutual fund investing
primarily in Japan. With the second largest GNP in the world and its stock
exchanges comprising over 25% of the world's equity market, Japan represents a
significant part of global investment opportunities. Japan is not only the
producer of high-quality automobiles, computers, televisions, VCRs and stereos,
but is also home to some of the world's largest securities firms, utility
companies and banks. Japan's long-term record of growth is outstanding, and the
Fund believes that its economy and that of its neighbors in which some Japanese
companies participate offer further substantial growth opportunities in the long
term.
Over the past 30 years Japan has experienced significant economic
development. During the era of high economic growth in the 1960s and early 1970s
the expansion was based on the development of heavy industries such as steel and
shipbuilding. In the 1970s Japan moved into assembly industries which employ
high levels of technology and consume relatively low quantities of resources,
and since then Japan has become a major producer of electrical and electronic
products and automobiles.
While it would be highly unlikely that Japan's economy will continue to
grow at the same phenomenal rates seen in the 1960s, 1970s and 1980s, it should
continue to offer investors many attractive investment opportunities. Japan is
now in a major transition toward becoming a domestic-led economy, driven in
large part by one of the world's highest average per capita incomes, above-
average savings rates, and a rise in leisure spending. In addition to a growing
domestic market, the economy should also benefit from a continuing
high-technology focus, above-average capital spending, and established ties to
markets in the high-growth economies of Asia and the Pacific. As a result,
select Japanese securities continue to offer above-average growth potential for
investors willing to assume the risks associated with investing in Japan.
Investors undertaking direct foreign investments in Japan often encounter
complications and extra costs. They may find it difficult to make purchases and
5
<PAGE>
sales, to obtain current information, to hold securities in safekeeping and to
convert the value of their investments from yen into dollars. The Fund manages
these problems for the investor. With a single investment, the investor has a
diversified portfolio which is managed by experienced professionals. The Adviser
of the Fund has extensive experience dealing in the Japanese market and with
Japanese brokers and custodian banks. In addition, the Adviser has the benefit
of established information sources and believes the Fund affords an efficient
and cost-effective method of investing in Japan.
Additional information about investment policies and strategies
Investment restrictions
The Fund may not, without shareholder approval:
* borrow money except as a temporary measure for extraordinary or emergency
purposes or except in connection with reverse repurchase agreements
provided that the Fund maintains asset coverage of 300% for all borrowings;
or
* make loans to other persons, except (a) loans of portfolio securities, and
(b) to the extent the entry into repurchase agreements and the purchase of
debt securities in accordance with its investment objective and investment
policies may be deemed to be loans.
In addition, as a matter of nonfundamental policy, the Fund may not invest
more than 10% of its net assets in securities which are not readily marketable,
restricted securities and repurchase agreements maturing in more than seven
days. The Fund may not invest more than 5% of its net assets in restricted
securities.
Please refer to the Statement of Additional Information for a listing of
the Fund's other investment restrictions.
Debt securities
The debt securities in which the Fund may invest for cash management
purposes are short-term government or other short-term prime obligations (i.e.,
high-quality debt obligations maturing not more than one year from the date of
issuance). All other debt securities in which the Fund invests are rated no
lower than BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service,
Inc. ("Moody's") or, if unrated, are of equivalent quality as determined by the
Fund's adviser. The Fund intends to continue these practices with respect to
investment in debt securities in the future.
Repurchase agreements
As a means of earning income for periods as short as overnight, the Fund
may enter into repurchase agreements with selected banks and broker/dealers.
Under a repurchase agreement, the Fund acquires securities, subject to the
seller's agreement to repurchase them at a specified time and price.
Convertible securities
The Fund may invest in convertible securities which are securities that may
be converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. Convertible securities may offer higher
income than the common stocks into which they are convertible. The convertible
securities in which the Fund may invest include bonds, notes, debentures,
preferred stocks and other securities convertible into common stocks and may be
fixed-income or zero coupon debt securities. Prior to their conversion,
convertible securities may have characteristics similar to nonconvertible debt
securities.
Strategic Transactions and derivatives
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
6
<PAGE>
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Fund's portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect the Fund's unrealized gains in the value
of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of
fixed-income securities in the Fund's portfolio, or to establish a position in
the derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these strategic transactions may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes. Please refer to "Risk factors--Strategic
Transactions and derivatives" for more information.
Risk factors
Investors should consider the following factors inherent in investment in
Japan.
Trade issues
Because of the concentration of Japanese exports in highly visible products
such as automobiles, machine tools and semiconductors, and the large trade
surpluses ensuing therefrom, Japan is in a difficult phase in its relations with
its trading partners, particularly the United States, where the trade imbalance
is the greatest. Japan's trade surplus increased to $146 billion in
1994 from $141 billion in 1993.
Currency factors
Over a long period of years, the yen has generally appreciated in relation
to the dollar. The yen's appreciation has added to the returns of dollars
invested through the Fund in Japan. A decline in the value of the yen would have
the opposite effect, adversely affecting the value of the Fund in dollar terms.
7
<PAGE>
The Japanese Stock Market
Like other stock markets, the Japanese stock market can be volatile. For
example, the Japanese stock market, as measured by the Tokyo Stock Price Index
(TOPIX), increased by over 500% during the ten-year period ended December 31,
1989, reaching its high of 2884.80 on December 18, 1989, and it has declined by
over 45% since that time, falling to 1559.09 on December 30, 1994. This decline
has had an adverse effect on the availability of credit and on the value of the
substantial stock holdings of Japanese companies, in particular, Japanese banks,
insurance companies and other financial institutions. This in turn has
contributed to the recent weakness in Japan's economy. A continuation or
recurrence of a Japanese stock market decline could have an adverse impact
throughout Japan's economy.
Differences in accounting methods make it difficult to compare the earnings
of Japanese companies with those of companies in other countries, especially the
U.S. In general, however, reported net income in Japan is understated relative
to U.S. accounting standards and this is one reason why price-earnings ratios of
the stocks of Japanese companies have tended historically to be higher than
those for U.S. stocks. In addition, Japanese companies have tended historically
to have higher growth rates than U.S. companies and Japanese interest rates have
generally been lower than in the U.S., both of which factors tend to result in
lower discount rates and higher price-earnings ratios in Japan than in the U.S.
Investment in foreign securities
Investments in foreign securities involve special considerations due to
more limited information, higher brokerage costs, different accounting
standards, thinner trading markets as compared to domestic markets and the
likely impact of foreign taxes on the income from debt securities. They may also
entail certain other risks, such as the possibility of one or more of the
following: imposition of dividend or interest withholding or confiscatory taxes;
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; less government supervision
and regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Purchases of foreign
securities are usually made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar.
Further, it may be more difficult for the Fund's agents to keep currently
informed about corporate actions which may affect the prices of portfolio
securities. Communications between the United States and foreign countries may
be less reliable than within the United States, thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. The Fund's ability and decisions to purchase and sell
portfolio securities may be affected by laws or regulations relating to the
convertibility of currencies and repatriation of assets. The management of the
Fund seeks to mitigate the risks associated with these considerations through
diversification and professional management.
Other factors
The Fund is also susceptible to a relatively turbulent political
environment which affects issuers located in Japan and the surrounding Pacific
Basin region. For example, in 1992, a major power broker in the Liberal
Democratic Party ("LDP") was forced to step down for allegedly dealing with
gangsters. This resignation threw factional political alignments into disarray
and hastened the passage of power temporarily to a new generation of LDP
politicians. Public disapproval of official improprieties created a move toward
8
<PAGE>
reform of the political system. In 1993, a seven-party alliance that was formed
to endorse a non-LDP coalition government named two Prime Ministers by April
1994. In June 1994, a coalition of Social Democrats, the LDP and a small
representation by the New Harbinger Party named yet another Prime Minister to
succeed. Three substantial economic stimulus programs were put into place in
1993, and in 1994 a personal income tax cut of considerable magnitude and a
major political reform bill were announced. While the political situation
continues to be uncertain, electoral reforms and deregulation passed through
Parliament by the non-LDP coalition have attracted much public support and are
unlikely to be overturned.
The following are descriptions of some additional investment risks the Fund
may entail, depending upon the composition of its portfolio at any given time.
Investing in small company securities. The securities of small companies
are often traded over-the-counter and may not be traded in the volumes typical
on a national securities exchange. Consequently, in order to sell this type of
holding, the Fund may need to discount the securities from recent prices or
dispose of the securities over a long period of time. The prices of this type of
security may be more volatile than those of larger companies which are often
traded on a national securities exchange.
The investment risk associated with these companies is higher than that
normally associated with larger, older companies due to the greater business
risks of small size, including limited product lines, distribution channels and
financial and managerial resources. Further, there is typically less publicly
available information concerning smaller companies than for larger, more
established ones.
Debt securities. Securities rated BBB by S&P or Baa by Moody's are neither
highly protected nor poorly secured. These securities normally pay higher yields
but involve potentially greater price variability than higher-quality
securities. These securities are regarded as having adequate capacity to repay
principal and pay interest, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to do so. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics.
Repurchase agreements. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of securities under a
repurchase agreement before repurchase of the securities, the Fund may encounter
delay and incur costs including a decline in value of the securities before
being able to sell the securities.
Convertible securities. While convertible securities generally offer lower
yields than nonconvertible debt securities of similar quality, their price may
increase if the value of the underlying common stock increases. Conversely,
their price may decrease, but to a lesser extent, if the value of the underlying
common stock decreases. Convertible securities entail less credit risk than the
issuer's common stock.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the Fund
management's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
9
<PAGE>
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
Investment results
The Fund is designed for long-term investors who can accept international
stock-market risk. The value of the Fund's portfolio securities fluctuates with
market and economic conditions, causing Fund shares to fluctuate in value. In
addition, the Fund's investments are denominated in yen, the value of which
continually changes in relation to the dollar. This varying relationship will
also affect the value of the Fund's shares. Depending on when you sell your
shares, their value may be higher or lower than when you purchased them. In
return for accepting stock-market risk, you may earn a greater return on your
investment than from a money-market or income fund.
The first table on page 11 shows percent change in the Fund's net asset
value per share for the past ten years. The second table on page 11 presents the
total returns earned by an assumed investment of $10,000 in the Fund over the
one-, five- and ten-year periods ended December 31, 1994. The chart and related
table beginning on page 12 show the history of a $10,000 investment in the
Fund's shares made at the initial public offering price in 1962, assuming
reinvestment of capital gains and income distributions.
10
<PAGE>
Except with respect to information pertaining to the period August 14, 1987, to
December 31, 1994, the tables on this and the following pages present investment
results of the Fund when it operated as a closed-end investment company and are
included for informational purposes only. Investors should note that the
investment results of the Fund when operated as an open-end investment company
as described herein may vary from the results set forth below for the period
when the Fund operated as a closed-end investment company.
Annual capital changes
Net Asset Capital Gains Capital
December 31, Value/Share Dividends Distributions Change
1984 $ 12.60 _ _ _
1985 15.53 $0.07 $1.36 38.07%
1986 20.28 0.02 4.67 77.30
1987 16.97 0.20 9.08 31.86
1988 16.24 0.02 3.88 19.28
1989 14.27 0.08 3.59 11.09
1990 10.76 0.09 1.10 -17.81
1991 10.69 _ 0.41 3.11
1992 8.90 _ _ -16.74
1993 10.33 0.28 0.39 20.47
1994 10.50 _ 0.85 10.03
Growth of a $10,000 Investment
Years Ended Value of Initial Cumulative Average Annual
December 31, 1994 $10,000 Investment Total Return Total Return
One Year $11,003 10.03% 10.03%
Five Years 9,768 -2.32 -0.47
Ten Years 42,701 327.01 15.62
* "Capital Change" measures the return from capital, including reinvestment
of any capital gains distributions, and does not include the reinvestment
of income dividends.
* "Growth of a $10,000 Investment" assumes dividends and capital gains
distributions, if any, were reinvested.
* These results are not intended to indicate future investment
performance.
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THE JAPAN FUND, INC.
INVESTMENT PERFORMANCE
History of a $10,000 Investment in Stock Assuming
Reinvestment of Capital Gains and Income Distributions
Income Capital Gains Net Asset
Dividends Distributions Value of
Reinvested Reinvested Initial Investment
0 10000 10000
9240 0 9240
8016 376 8671
8033 377 9073
532 13465 11328
569 14979 12120
1099 15437 11633
4339 25690 16327
11406 57081 33912
9500 36430 19176
19769 56425 24168
35741 97493 39744
31357 77138 28032
33149 73741 22056
49813 104143 27048
65599 133458 31440
66110 130772 27720
109337 211121 38976
90296 169675 27192
122689 225249 30840
148419 270555 33024
153181 275642 28800
198646 355661 33360
195911 349335 30240
274986 485179 37272
504968 861411 48672
689290 1145732 40728
831796 1368049 38976
933110 1527089 34248
769292 1277244 25824
794208 1316999 25656
661221 1096472 21360
797519 1355675 24792
Key Assumptions
* The data have been adjusted to reflect a three-for-one stock split in April
1970.
* Investment income distributions prior to 1978 are assumed to have been
reinvested at the mean market price on the ex-dividend date. Investment
income distributions subsequent to 1977 and all capital gains distributions
are assumed to have been reinvested at the lower of the mean market price
or net asset value on the ex-dividend date of the respective distribution.
* No adjustments have been made for income taxes.
* The two capital stock rights offerings of the Fund, in July 1963 and May
1975, have been treated as capital gain distributions, the value of which
was determined by reference to the individual right's market value on the
date of issuance. It is assumed that all rights were sold in the open
market and the resultant proceeds were reinvested in the Fund at the mean
market price on the date of the right's issuance without giving effect to
transaction costs.
* Initial $10,000 investment was made at initial public offering price.
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Net Asset Income Total
End of Value Initial Capital Gains Dividends Net Asset
Year Investment Distribution Reinvested Asset
4/62* $ 10,000 $ 10,000
1962 9,240 $ 0 $ 0 9,240
1963 8,016 376 279 8,671
1964 8,033 377 663 9,073
1965 11,328 532 1,605 13,465
1966 12,120 569 2,290 14,979
1967 11,633 1,098 2,707 15,438
1968 16,327 4,339 5,023 25,689
1969 33,912 11,406 11,764 57,082
1970 19,176 9,500 7,754 36,430
1971 24,168 19,769 12,488 56,425
1972 39,744 35,741 22,008 97,493
1973 28,032 31,357 17,749 77,138
1974 22,056 33,149 18,536 73,741
1975 27,048 49,813 27,282 104,143
1976 31,440 65,599 36,419 133,458
1977 27,720 66,110 36,942 130,772
1978 38,976 109,337 62,808 211,121
1979 27,192 90,296 52,187 169,675
1980 30,840 122,689 71,720 225,249
1981 33,024 148,419 89,112 270,555
1982 28,800 153,181 93,661 275,642
1983 33,360 198,646 123,655 355,661
1984 30,240 195,911 123,184 349,335
1985 37,272 274,986 172,921 485,179
1986 48,672 504,968 307,771 861,411
1987** 40,728 689,290 415,714 1,145,732
1988 38,976 831,796 497,276 1,368,048
1989 34,248 933,110 559,731 1,527,089
1990 25,824 769,292 482,128 1,277,244
1991 25,656 794,208 497,135 1,316,999
1992 21,360 661,221 413,891 1,096,472
1993 24,792 797,519 533,365 1,355,676
1994 25,223 879,600 586,882 1,491,705
During the period from the Fund's initial public offering until August 14, 1987,
the market price of the Fund's stock was sometimes above net asset value and
sometimes below; accordingly, the data set forth above should not be construed
as an indication of the record of a shareholder's investment in the Fund based
on market prices. Nor should it be construed as a representation of the future
performance of the Fund's net asset value. In addition, the data set forth above
reflect the considerable enhancement of the Fund's assets in 1985, 1986 and 1987
resulting from the sharp appreciation in the value of the yen versus the U.S.
dollar.
* Inception of The Japan Fund, Inc.
** The Japan Fund, Inc. converted to an open-end investment company as of
August 14, 1987.
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Distribution and performance information
Dividends and capital gain distributions
The Fund intends to distribute any dividends from its net investment income
and net realized capital gains after utilization of capital loss carryforwards,
if any, in December to prevent application of a federal excise tax. An
additional distribution may be made within three months of the Fund's fiscal
year end, if necessary. Any dividends or capital gain distributions declared in
October, November or December with a record date in such a month and paid during
the following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared. According
to your preference, you may receive distributions in cash or have them
reinvested in additional shares of the Fund. If your investment is in the form
of a retirement plan, all dividends and capital gain distributions will be
reinvested in your account.
All dividends from net investment income are taxable to shareholders as
ordinary income. Differences between dividend distributions reported to
shareholders for tax purposes and actual distributions received by shareholders
as either cash or additional shares may reflect the Fund's payment of
withholding taxes imposed by Japan on dividends and interest under the tax
convention between the United States and Japan. Such payments to Japan are
considered distributions to shareholders for tax purposes. Subject to applicable
limitations, such amounts may be claimed as a foreign tax credit by shareholders
or may be deducted by shareholders in computing their federal taxable income.
For further information, please refer to the section "Taxes" in the Fund's
Statement of Additional Information. Long-term capital gain distributions, if
any, are taxable as long-term capital gain regardless of the length of time you
have owned your shares. Distributions of short-term capital gain are taxable as
ordinary income.
The Fund sends you detailed tax information about the amount and type of
its distributions each year.
Performance information
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. Total return is the change in value of
an investment in the Fund for a specified period. Average annual total return
refers to the average annual compound rate of return of an investment in the
Fund assuming the investment has been held for one year, five years and ten
years, as of a stated ending date. Cumulative total return represents the
cumulative change in value of an investment in the Fund for various periods. All
types of total return calculations assume that all dividends and capital gains
distributions during the period were reinvested in shares of the Fund. Capital
change measures return from capital, including reinvestment of any capital gain
distributions but not reinvestment of dividends. Performance will vary based
upon, among other things, changes in market conditions and expenses.
Fund organization
The Fund, which was incorporated under the laws of the State of Maryland in
1961, is an open-end, diversified management investment company registered under
the Investment Company Act of 1940 (the "1940 Act"). The Fund's activities are
supervised by its Board of Directors. At the time of any election, shareholders
have one vote for each share held. The Fund is not required to and has no
current intention to hold annual shareholder meetings, although special meetings
may be called for purposes such as electing or removing Directors, changing
14
<PAGE>
fundamental policies or approving an investment advisory contract. Shareholders
will be assisted in communicating with other shareholders in connection with
removing a Director as if Section 16(c) of the 1940 Act were applicable. From
the date of the Fund's initial public offering in 1962 until August 14, 1987,
the Fund operated as a closed-end, diversified management investment company.
Investment advise
In making investment decisions, the Fund retains Scudder, Stevens & Clark,
Inc. to provide management services and investment advice. The Adviser, one of
the nation's most experienced investment management firms, makes investment
decisions and manages the daily business affairs of the Fund in accordance with
the Fund's investment objective and policies and guidelines established by the
Fund's Board of Directors.
The address of Scudder, Stevens & Clark, Inc. is 345 Park Avenue, New York,
New York 10154.
The Nikko International Capital Management Co., Ltd. ("NICAM"), an
indirectly controlled affiliate of The Nikko Securities Co., Ltd., one of
Japan's leading securities companies, provides information and investment advice
to the Adviser for the benefit of the Fund.
NICAM is engaged in the investment counseling and management business and
provides economic research, business information and securities analysis to a
variety of Japanese and international clients, including investors interested in
Japanese and other Far Eastern securities, and companies interested in
international direct investments and joint ventures or in raising funds in
international capital markets. The address of NICAM is 17-9,
Nihonbashi-Hakozakicho, Chuo-ku, Tokyo 103, Japan.
The Adviser received investment advisory and management fees for services
rendered to the Fund which totalled 0.73% of the Fund's net assets during the
fiscal year ended December 31, 1994. The investment advisory and management fees
are graduated so that increases in the Fund's net assets may result in a lower
average fee rate and decreases in a Fund's net assets may result in a higher
average fee rate.
NICAM received fees from the Adviser for services rendered for the benefit
of the Fund which totalled 0.15% of the Fund's net assets during the fiscal year
ended December 31, 1994. This fee paid to NICAM was also graduated, and at a
special meeting on December 21, 1993, shareholders approved a new Research
Agreement between the Adviser and NICAM, and ratified their approval on July 22,
1994, which restructured the fee payable to NICAM to 0.10% of average daily net
assets, payable monthly during the fiscal year 1995. On December 31, 1995, the
research contract with NICAM will terminate.
The Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Transfer agent, dividend-paying and shareholder service agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts
02107-2291, a wholly-owned subsidiary of Scudder, Stevens & Clark, Inc., is the
transfer and dividend-paying agent.
The Japan Fund Service Center, Two International Place, Boston,
Massachusetts 02110-4103, is a special division of Scudder Service Corporation.
The Japan Fund Service Center is the shareholder service agent for the Fund and
also provides subaccounting and recordkeeping services for shareholder accounts
in certain retirement and employee benefit plans. For telephone numbers and
addresses, please refer to the section "How to contact The Japan Fund."
Distributor
Scudder Investor Services, Inc., a wholly-owned subsidiary of the
Adviser, is the Fund's principal underwriter. Scudder Investor Services,
Inc. confirms, as agent, all purchases of shares of the Fund.
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<PAGE>
Custodian and sub-custodian
Brown Brothers Harriman & Co. is the Fund's custodian, and Sumitomo
Trust & Banking Co. (Tokyo Office) is the Fund's sub-custodian.
Purchases and redemptions
Note: All addresses and telephone numbers can be found under "How to
contact The Japan Fund."
Opening an account ($1,000 minimum)
By check
Checks should be made payable to "The Japan Fund, Inc." in the amount of
$1,000 or more (retirement plan minimums are less--see appropriate plan
literature) and mailed with a completed and signed application to "The Japan
Fund Service Center."
By wire
Under most circumstances, it is possible to open an account by wire. Please
call 1-800-53-JAPAN for an account number and further information.
By exchange from a Scudder fund
You can open a new Japan Fund account at no cost by exchanging shares with
a value of $1,000 or more from another fund in the Scudder Family of Funds. Your
new Japan Fund account will have the same registration and address as your
existing account. Please call 1-800-53-JAPAN for information on the transfer of
special account features.
To exchange by mail or fax, send a letter to "The Scudder Funds" or fax to
1-800-821-6234. Include the name of the Scudder fund from which you are
exchanging, the account name(s) and address, the account number, the dollar
amount or number of shares to be exchanged into your Japan Fund account. Sign
your name(s) exactly as it appears on your account statement. Please also
provide your daytime phone number. The exchange requirements for corporations,
other organizations, trusts, fiduciaries, institutional investors and retirement
plans may differ from those of individual accounts. Please call 1-800-53-JAPAN
for more information.
Making additional investments
Note: Scudder retirement plans have similar or lower minimums for
additional investments.
By check ($100 minimum)
Send a check to "The Japan Fund, Inc." for $100 or more with the tear-off
stub from your Japan Fund account statement or with a letter of instruction
including the Fund name and your account number.
By wire ($100 minimum)
Follow the instructions described under "Opening an account--By wire."
By exchange from a Scudder fund ($100 minimum)
Follow the instructions described under "Opening an account--By
exchange from a Scudder fund."
You can also make exchanges among your Scudder Fund accounts on SAIL, the
Scudder Automated Information Line, if you have requested an authorization to do
so. Call 1-800-53-JAPAN for more details.
Automatic Investment Plan ($50 minimum)
You may arrange to make regular investments through automatic deductions
from your checking account. Please call 1-800-53-JAPAN for more information and
an application.
By telephone order ($2,500 minimum)
Existing shareholders may purchase shares at a certain day's price by
calling The Japan Fund Service Center before the close of the New York Stock
Exchange (the "Exchange") (normally 4 p.m. eastern time) on that day. Orders
must be for $2,500 or more and cannot be for an amount greater than four times
the value of your account at the time the order is placed. A confirmation with
complete purchase information is sent shortly after your order is received. You
16
<PAGE>
must include with your payment the order number given at the time the order is
placed. If payment by check or federal reserve wire is not received within seven
business days, the order will be cancelled and the shareholder will be
responsible for any loss to the Fund resulting from this cancellation. Telephone
orders are not available for shares held in Scudder IRA accounts and most other
Scudder Retirement Plans.
Non-certificated shares
Due to the desire of Fund management to afford ease of redemption,
ownership in the Fund is on a non-certificated basis. If you currently hold
certificates for shares of the Fund (either directly or through your broker) and
want to continue your investment in the Fund, you may do so either by continuing
to hold such certificates or, for your convenience, by surrendering them to the
Fund's transfer agent who will hold them for your account in non-certificated
form. Surrendering your certificates for Japan Fund shares to the Fund's
transfer agent may be convenient for you because in doing so (1) you will be
relieved of safekeeping of the certificates (the transfer agent will do it for
you), (2) you will have the option to avail yourself of the various shareholder
services offered by the Scudder Family of Funds (e.g., exchange from one fund
into another) and (3) you will receive regular reports of your share total,
including additional shares added to your account as a result of the
reinvestment of dividends and capital gains distributions.
Converting your certificated Fund shares into non-certificated form is not
a taxable event, nor does such conversion alter your tax cost of shares or your
ownership interest and rights in the Fund.
If you want additional information on surrendering your certificated shares
and establishing an open account, please write or call The Japan Fund Service
Center.
Selling fund shares (redemptions)
Shares are redeemable at the option of the shareholder at net asset value
next determined after receipt of a redemption request in good order.
IF YOU HOLD CERTIFICATES FOR JAPAN FUND SHARES, YOU MUST SURRENDER SUCH
CERTIFICATES TO THE FUND'S TRANSFER AGENT PRIOR TO REDEMPTION. Call or write The
Japan Fund Service Center for information on redemption of certificated shares.
If you hold Japan Fund shares in non-certificated form, you may redeem your
shares according to the following instructions.
By telephone
This is the quickest and easiest way to sell Japan Fund shares. You may
redeem any amount to your pre-designated bank account, and up to $50,000 to your
address of record. If you elected telephone redemption to your bank on your
application, you can call to request that federal funds be sent to your
authorized bank account. If you did not elect telephone redemption to your bank
on your application, call 1-800-53-JAPAN for more information.
Redemption proceeds will be wired to your bank unless otherwise requested.
If your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Japan Fund account on SAIL, the
Scudder Automated Information Line, if you have requested an authorization to do
so. Call 1-800-53-JAPAN for more details.
Telephone redemption is not available for shares held in Scudder IRA
accounts and most other Scudder retirement plan accounts.
In the event you are unable to reach the Fund by telephone, you should
write to the Fund following the instructions described below under "By mail or
fax."
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<PAGE>
By mail or fax
To redeem shares by mail or fax, send a letter to "The Japan Fund Service
Center" or fax to 1-800-821-6234 and include the account name(s) and address,
the account number, and the dollar amount or number of shares you wish to
redeem. Sign your name(s) exactly as it appears on your account statement.
Please also provide your daytime phone number.
Signature guarantees
For your protection and to prevent fraudulent redemptions, on written
redemption requests in excess of $50,000 we require an original signature and an
original signature guarantee for each person in whose name the account is
registered. (The Fund reserves the right, however, to require a signature
guarantee for all redemptions.) You can obtain a signature guarantee from most
banks, credit unions or savings associations, or from broker/dealers, municipal
securities broker/dealers, government securities broker/dealers, national
securities exchanges, registered securities associations, or clearing agencies
deemed eligible by the Securities and Exchange Commission. Signature guarantees
by notaries public are not acceptable. Redemption requirements for corporations,
other organizations, trusts, fiduciaries, agents, institutional investors and
retirement plans may be different from those for regular accounts. For more
information call 1-800-53-JAPAN.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and
the right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be wired
to a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine.
Automatic Withdrawal Plan
If the value of your account is $10,000 or more, you may arrange to receive
automatic periodic cash payments. Please call or write The Japan Fund Service
Center for more information and an application.
Redemption-in-kind
The Fund has filed an election pursuant to Rule 18f-1 under the 1940 Act
with the Securities and Exchange Commission pursuant to which the Fund would be
obligated, in the event its Board of Directors determines to make redemption
payments in portfolio securities, to satisfy redemption requests by any one
shareholder of record during any 90-day period solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
Accordingly, in the event the Fund's management makes such a determination,
the Fund may honor any request for redemption or repurchase order by making
payment in readily marketable securities chosen by the Fund and valued as they
are for purposes of computing the Fund's net asset value, subject to the Fund's
obligation to pay cash as described above. The tax consequences to a redeeming
shareholder are the same whether the shareholder receives cash or securities in
payment for his shares.
If redemption payment is made in portfolio securities, the redeeming
shareholder will incur brokerage commissions and Japanese sales taxes in
converting those securities into cash. In addition, the conversion of securities
into cash may expose the shareholder to stock-market risk and currency exchange
risk.
18
<PAGE>
If you receive portfolio securities upon redemption of your Fund shares,
you may request that such securities either (1) be delivered to you or your
designated agent or (2) be liquidated on your behalf and the proceeds of such
liquidation (net of any brokerage commissions and Japanese sales taxes) remitted
to you.
Please write or call The Japan Fund Service Center for further information.
Transaction information
Purchases by check
Checks are invested in full and fractional shares. If you purchase shares
with a check that does not clear, your purchase will be cancelled and you will
be subject to any losses or fees incurred in the transaction. Checks must be
drawn on or payable through a U.S. bank. If you purchase shares by check and
redeem them within seven business days of purchase, the Fund may hold redemption
proceeds until the purchase check has cleared which may take up to seven
business days or more. If you purchase shares by federal funds wire, you may
avoid this delay. Redemption requests by telephone, including exchanges, prior
to the expiration of the seven-day period will not be accepted.
Share price
Purchases and redemptions, including exchanges, are made at net asset
value. The Fund's custodian, Brown Brothers Harriman & Co., determines net asset
value per share as of the close of regular trading on the Exchange, normally 4
p.m. eastern time, on each day the Exchange is open for trading. Net asset value
per share is calculated by dividing the market value of total Fund assets, less
all liabilities, by the total number of shares outstanding.
Market value of Fund assets is determined using the last reported sale
price on the stock exchange on which the trading volume for Fund assets is
highest or, if such price is not available or is deemed out-of-date by the Board
of Directors, using the best information available to the Fund's custodian.
Where quotes on Fund assets are unavailable, such assets will be valued at their
fair value in good faith in accordance with procedures established by the Board
of Directors. In addition, money market investments with a remaining maturity of
less than 60 days will be valued by the amortized cost method.
The net asset value of the Fund is quoted daily in the financial pages of
leading newspapers under the heading "Japan Fund."
Processing time
All purchase and redemption requests received in good order by the Fund's
transfer agent in Boston by the close of regular trading on the Exchange are
executed at the net asset value per share calculated at the close of regular
trading that day.
Purchase and redemption requests received after the close of regular
trading on the Exchange will be executed the following business day.
If you wish to make a purchase of $500,000 or more, you should notify The
Japan Fund Service Center by calling 1-800-53-JAPAN.
The Fund will normally send your redemption proceeds within one business
day following the redemption request, but may take up to seven days (or longer
in the case of shares recently purchased by check).
Short-term trading
Purchases and sales should be made for long-term investment purposes only.
The Fund and Scudder Investor Services, Inc. each reserves the right to restrict
purchases of Fund shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in the Fund's
share price appears evident.
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<PAGE>
Tax information
It is the Fund's intent to comply with provisions of the Internal Revenue
Code applicable to regulated investment companies. Accordingly, the Fund intends
to distribute to shareholders substantially all of its taxable income less
earnings and profits (as defined for U.S. tax purposes) attributed to shares
redeemed. Under the United States-Japan tax treaty, Japan imposes a withholding
tax of 15% of dividends and 10% on interest.
A redemption of shares, including an exchange into a Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gain distributions and redemption and
exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. The Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
The Fund also reserves the right, following 30 days' notice to shareholders, to
redeem all shares in accounts without a certified Social Security or tax
identification number. A shareholder may avoid involuntary redemption by
providing the Fund with a tax identification number during the 30-day notice
period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000. Scudder
retirement plans have similar or lower minimum share balance requirements. The
Fund reserves the right, following 60 days' written notice to shareholders, to
redeem all shares in sub-minimum accounts, including accounts of new investors,
where a reduction in value has occurred due to a redemption or exchange out of
the account. Reductions in value that result solely from market activity will
not trigger an involuntary redemption. The Fund will mail the proceeds of the
redeemed account to the shareholder. The shareholder may restore the share
balance to $1,000 or more during the 60-day notice period and must maintain it
at no lower than that minimum to avoid involuntary redemption.
Shareholders of record prior to August 14, 1987, will not be subject to the
$1,000 minimum share balance requirement.
Shareholder services
Fund statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund
reports, such as the Fund's Annual Report, may be mailed to your household (same
surname, same address). Please contact The Japan Fund Service Center at
1-800-53-JAPAN if you wish to receive additional shareholder reports.
Shareholder inquiries
Knowledgeable Japan Fund Service Specialists are committed to providing you
with ongoing, responsive service. They will answer questions about the Fund's
objective and investment characteristics.
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<PAGE>
Investment flexibility
If you join the Scudder Family of Funds, you can exchange your Japan Fund
shares for shares of any of the Scudder funds and likewise exchange shares of
any of the Scudder funds for shares of The Japan Fund, Inc. any time at net
asset value by telephone or letter, free of charge. The money market, income,
growth, tax-free, and growth and income funds in the Scudder Family of Funds
have different investment objectives to meet varying goals. Maintaining accounts
in more than one fund in the Scudder Family of Funds enables you to design an
investment program for your particular needs. Telephone redemption and telephone
exchange are subject to termination and their terms are subject to change at any
time by the Fund or the transfer agent.
Experienced professional management
Your investment in the Fund is actively managed under the guidelines
established by the Fund's Board of Directors. Professional management is an
important advantage for investors who do not have the time or expertise to
invest directly in individual securities.
A team approach to investing
The Japan Fund, Inc. is managed by a team of Scudder investment
professionals, who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders and other investment specialists who
work in Scudder's offices across the United States and abroad. Scudder believes
its team approach benefits Fund investors by bringing together many disciplines
and leveraging Scudder's extensive resources.
Lead Portfolio Manager Seung Kwak has had responsibility for the Fund's
investment strategy and daily operations since 1994 and has been a member of the
portfolio management team since 1989. Mr. Kwak has directed our Tokyo-based
research effort since he joined Scudder in 1988. Elizabeth J. Allan, Portfolio
Manager, helps set the Fund's general investment strategies, and was responsible
for the Fund's investment strategy and daily operations from 1991 to 1994. Ms.
Allan has contributed her expertise to the management of the portfolio since she
joined Scudder in 1987 and has numerous years of Pacific Basin research and
investing experience. Eileen O. Gerspach, Portfolio Manager, helps set the
Fund's general investment strategies. Ms. Gerspach, who joined the team in May
1995, has worked in the investment industry since 1984 and has eight years of
experience as a portfolio manager.
SAIL(tm)-- Scudder Automated Information Line
For touchtone access to account information, prices and yields, or to
perform transactions in your existing Scudder fund accounts, shareholders can
call Scudder's Automated Information Line (SAIL) at 1-800-343-2890. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact The Japan Fund"
for the address.
Low minimum investment
The minimum initial investment for the Fund and for any of the Scudder
funds is $1,000. Scudder retirement plans have similar or lower minimum initial
investment requirements. You may add $100 or more to your account at any time.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in
additional Fund shares. Please call 1-800-53-JAPAN to request this feature.
21
<PAGE>
Tax-advantaged retirement plans
The Japan Fund, Inc. may be a good choice to help you meet your retirement
goals. Scudder Investor Services, Inc., underwriter of The Japan Fund, Inc.,
offers a variety of tax-advantaged retirement plans for individuals, businesses
and non-profit organizations. These flexible plans are designed for use with the
Scudder funds (except Scudder tax-free funds, which are inappropriate for such
plans) as pure no-load(tm) investment options to meet a broad range of
investment objectives. Using Scudder's retirement plans can help shareholders
save on current taxes while building their retirement savings.
* Scudder No-Fee IRAs. Tax-deferred retirement plans for anyone with earned
income. The maximum annual contribution is $2,000 per person. Many people
can deduct all or part of their contributions from their taxable income,
and all investment earnings accrue on a tax deferred basis. The Scudder
No-Fee IRA charges no annual custodial fee.
* 401(k) Plans. 401(k) plans allow employers and employees to make
tax-deductible retirement contributions. Scudder offers a full service
program that includes recordkeeping, prototype plan, employee
communications, and trustee services, as well as investment options.
* Profit Sharing and Money Purchase Pension Plans. These plans allow
corporations, partnerships and people who are self-employed to make annual,
tax-deductible contributions of up to $30,000 for each person covered by
the plans. Plans may be adopted individually, or paired to maximize
contributions. These are sometimes known as Keogh plans.
* 403(b) Plans. Retirement Plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.
* SEP-IRAs. Easily administered retirement plans for small businesses and
self-employed individuals. The maximum annual contribution to SEP-IRA
accounts is adjusted each year for inflation.
* Scudder Horizon Plan. A no-load variable annuity that lets you build
assets by deferring taxes on your investment earnings. You can start
with $2,500 or more.
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian
of these plans and is paid an annual fee for some of the above retirement plans.
For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please
call 1-800-225-2470.
For information about 401(k)s or 403(b)s, please call 1-800-323-6105. To
effect transactions in existing IRA, SEP-IRA, Profit Sharing or Pension Plan
accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life
Insurance Company (in New York State, Intramerica Life Insurance Company
[S1802]). The contract is offered by Scudder Insurance Agency, Inc.
(in New York State, Nevada and Montana, Scudder Insurance Agency of New
York, Inc.). CNL, Inc. is the Principal Underwriter. Scudder Horizon Plan
is not available in all states.
22
<PAGE>
The Scudder Family of Funds
As a Japan Fund shareholder, you can receive information on the Scudder
Family of Funds if you wish to do so. This service is available wholly at the
option of the Japan Fund shareholder. The Scudder Family of Funds offers many
conveniences and services: free telephone exchanges and redemptions at any time
at net asset value, Scudder Funds Centers across the U.S., maintained by Scudder
Investor Services, Inc., for those shareholders who like to conduct business in
person and the Scudder Funds newsletter which reports periodically on the stock
and bond markets, and new Scudder investment products.
If you are interested, please contact a specialist at The Japan Fund
Service Center by calling 1-800-53-JAPAN.
23
<PAGE>
How to contact The Japan Fund
For investment information or questions about your account:
The Japan Fund Service Center
Two International Place
Boston, MA 02110-4103
1-800-53-JAPAN
(8 a.m.- 8 p.m. eastern time)
Before you phone, please be sure to have your account and Social Security
numbers in hand. Use the above address or phone number to ask about The Japan
Fund's investment characteristics or objective, operating procedures, to request
additional or interim account statements, or to get forms for privileges,
options, or services.
For making a transaction in an account:
The Japan Fund Service Center
P.O. Box 2291
Boston, MA 02107-2291
1-800-53-JAPAN
(8 a.m.- 8 p.m. eastern time)
Use this phone number for telephone exchange or redemption. Before you
phone, please be sure to have your account and Social Security numbers in hand.
Use this address for checks, redemptions, exchange or transfer requests, or
account maintenance instructions such as a change in address, reinvestment
option, bank account or Social Security number.
For account updates and price information:
If you would like an account update or current price information for The
Japan Fund, please call our 24-hour tape recording:
1-800-343-2890 #81 (SAIL Code)
For investment information on any of the funds in the Scudder Family of Funds:
If you have questions about the investment characteristics or objectives of
any of the funds in the Scudder Family of Funds, please call or write:
Scudder Investor Relations
Two International Place
Boston, MA 02110-4103
1-800-225-2470
(8 a.m.- 8 p.m. eastern time)
Directors and officers
Robert G. Stone, Jr., Chairman of the Board and Director
Douglas Loudon, President
William L. Givens, Director
William H. Gleysteen, Jr., Director
Nobuo Ishizaka, Director
John F. Loughran, Director
William V. Rapp, Director
Henry Rosovsky, Director
O. Robert Theurkauf, Director
Shoji Umemura, Director
Hiroshi Yamanaka, Director
Elizabeth J. Allan, Vice President
William E. Holzer, Vice President
Thomas W. Joseph, Vice President
Seung K. Kwak, Vice President
Edward J. O'Connell, Vice President
Miyuki Wakatsuki, Vice President
Gina Provenzano, Vice President and Treasurer
Kathryn L. Quirk, Vice President and Secretary
Thomas F. McDonough, Assistant Secretary
Pamela A. McGrath, Assistant Treasurer
Honorary Directors
Tristan E. Beplat
Allan Comrie
Jonathan Mason
James W. Morley
<PAGE>
THE JAPAN FUND, INC.
A Pure No-Load(TM) (No Sales Charges) Mutual
Fund Which Seeks Long-Term Capital
Appreciation By Investing Primarily in
Equity Securities of Japanese
Companies
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of The Japan Fund, Inc. dated May 1,
1995, as amended from time to time, a copy of which may be obtained without
charge by writing to Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 care of The Japan Fund Service Center.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.......................................................................1
Investment Objective and Policies............................................................................1
Investment Restrictions.....................................................................................11
Other Investment Policies...................................................................................11
JAPAN AND THE JAPANESE ECONOMY.......................................................................................13
Economic Trends.............................................................................................14
Industrial Production.......................................................................................15
Energy......................................................................................................16
Labor.......................................................................................................17
Prices......................................................................................................17
Foreign Trade...............................................................................................18
SECURITIES MARKETS IN JAPAN..........................................................................................20
PURCHASES AND EXCHANGES..............................................................................................23
Additional Information About Opening An Account.............................................................23
Additional Information About Making Subsequent Investments..................................................23
Checks......................................................................................................24
Wire Transfer of Federal Funds..............................................................................24
Share Price.................................................................................................24
Share Certificates..........................................................................................24
Other Information...........................................................................................24
Exchanges...................................................................................................25
REDEMPTIONS..........................................................................................................26
Redemption by Telephone.....................................................................................26
Redemption by Mail or Fax...................................................................................26
Redemption-in-Kind..........................................................................................27
Other Information...........................................................................................27
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................28
The Pure No-Load(TM) Concept................................................................................28
Distribution Plans..........................................................................................29
Diversification.............................................................................................29
Scudder Funds Centers.......................................................................................29
Reports to Shareholders.....................................................................................30
THE SCUDDER FAMILY OF FUNDS..........................................................................................30
SPECIAL PLAN ACCOUNTS................................................................................................33
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for
Corporations and Self-Employed Individuals.............................................................33
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals..............................................................................33
Scudder IRA: Individual Retirement Account.................................................................34
Scudder 403(b) Plan.........................................................................................35
Automatic Withdrawal Plan...................................................................................35
Group or Salary Deduction Plan..............................................................................35
Automatic Investment Plan...................................................................................35
Uniform Transfers/Gifts to Minors Act.......................................................................36
Scudder Trust Company.......................................................................................36
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................36
i
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued)
Page
<S> <C>
PERFORMANCE AND OTHER INFORMATION....................................................................................36
Average Annual Total Return.................................................................................36
Cumulative Total Return.....................................................................................37
Total Return................................................................................................37
Capital Change..............................................................................................37
Comparison of Fund Performance..............................................................................38
FUND ORGANIZATION....................................................................................................42
INVESTMENT ADVISORY ARRANGEMENTS.....................................................................................42
Personal Investments by Employees of the Adviser............................................................45
DIRECTORS AND OFFICERS...............................................................................................45
REMUNERATION.........................................................................................................47
DISTRIBUTOR..........................................................................................................48
TAXES................................................................................................................49
United States Federal Income Taxation.......................................................................49
Japanese Taxation...........................................................................................53
BROKERAGE AND PORTFOLIO TURNOVER.....................................................................................53
NET ASSET VALUE......................................................................................................54
ADDITIONAL INFORMATION...............................................................................................55
Experts.....................................................................................................55
Public Official Documents...................................................................................55
Other Information...........................................................................................55
FINANCIAL STATEMENTS.................................................................................................55
</TABLE>
ii
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
(See "Investment Objective and Policies" in the Fund's prospectus.)
Investment Objective and Policies
The Japan Fund, Inc. (the "Fund"), is a pure no-load(TM), diversified,
open-end management investment company which continually offers and redeems its
shares. It is a company of the type commonly known as a mutual fund.
The Fund's investment objective is long-term capital appreciation,
which it seeks to achieve by investing primarily in equity securities (including
American Depositary Receipts) of Japanese companies, as described below.
The Fund deems its investment objective a matter of fundamental policy
and elects to treat it as such pursuant to Sections 8(b)(3) and 13(a)(3) of the
Investment Company Act of 1940 (the "1940 Act").
Under normal conditions, the Fund will invest at least 80% of its
assets in Japanese securities, that is, securities issued by entities that are
organized under the laws of Japan ("Japanese companies"), securities of
affiliates of Japanese companies, wherever organized or traded, and securities
of issuers not organized under the laws of Japan but deriving 50% or more of
their revenues from Japan. In so doing, the Fund's investment in Japanese
securities will be primarily in common stocks of Japanese companies. However,
the Fund may also invest in other equity securities issued by Japanese entities,
such as warrants and convertible debentures, and in debt securities (Japanese
government debt securities and debt securities of Japanese companies) when the
Fund's investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"),
believes that the potential for capital appreciation from investment in debt
securities equals or exceeds that available from investment in equity
securities.
The Fund may invest up to 20% of its assets in cash or in short-term
government or other short-term prime obligations in order to have funds readily
available for general corporate purposes, including the payment of operating
expenses, dividends and redemptions, or the investment in securities through
exercise of rights or otherwise, or in repurchase agreements in order to earn
income for periods as short as overnight. Where the Fund's management determines
that market or economic conditions so warrant, the Fund may, for temporary
defensive purposes, invest more than 20% of its assets in cash or such
securities. For instance, there may be periods when changes in market or other
economic conditions, or in political conditions, will make advisable a reduction
in equity positions and increased commitments in cash or corporate debt
securities, whether or not Japanese, or in the obligations of the Government of
the United States or of Japan or of other governments.
The Fund purchases and holds securities which the Adviser believes to
have potential for long-term capital appreciation; investment income is a
secondary consideration in the selection of portfolio securities. It is not the
policy of the Fund to trade in securities or to realize gain solely for the
purpose of making a distribution to its shareholders.
It is not the policy of the Fund to make investments which involve
promotion or business management or which would subject the Fund to unlimited
liability or for the purpose of exercising control over management.
The Fund may also invest up to 30% of its net assets in equity
securities of Japanese companies which are traded in an over-the-counter market.
These are generally securities of relatively small or little-known companies
that the Fund's investment adviser believes have above-average earnings growth
potential. Securities that are traded over-the-counter may not be traded in the
volumes typical on a national securities exchange. Consequently, in order to
sell this type of holding, the Fund may need to discount the securities from
recent prices or dispose of the securities over a long period of time. The
prices of this type of security may be more volatile than those of larger
companies which are often traded on a national securities exchange.
The Fund may make contracts, incur liabilities and borrow money, and
issue bonds, notes and obligations, as permitted by the laws of Maryland, by the
1940 Act and by the Fund's Articles of Incorporation.
It is the Fund's policy not to underwrite the sale of, or participate
in any underwriting or selling group in connection with the public distribution
of, any securities; provided, however, that this policy shall not be construed
<PAGE>
to prevent or limit in any manner the Fund's right to purchase securities for
its investment portfolio, whether or not such purchase might be deemed to make
the Fund an underwriter or a participant in any such underwriting or selling
group.
It is the policy of the Fund not to engage in the purchase and sale of
real estate, other than real estate deemed by the Board of Directors to be
necessary and convenient for the operation of the Fund's affairs; provided,
however, that this policy shall not be construed to prevent or limit in any
manner the Fund's right to purchase, acquire and invest in securities of real
estate companies or other companies owning or investing in real estate.
It is the Fund's policy not to make loans, other than by way of making
investments in corporate debt securities or government obligations or commercial
paper as described above.
Specialized Investment Techniques
Foreign Currencies. Because investments in foreign securities usually
will involve currencies of foreign countries, and because the Fund may hold
foreign currencies and forward contracts, futures contracts and options on
futures contracts on foreign currencies, the value of the assets of the Fund as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the Fund
may incur costs in connection with conversions between various currencies.
Although the Fund values its assets daily in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through entering into
forward or futures contracts to purchase or sell foreign currencies.
Depositary Receipts. The Fund may invest indirectly in securities of
emerging country issuers through sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), International Depositary
Receipts ("IDRs") and other types of Depositary Receipts (which, together with
ADRs, GDRs and IDRs are hereinafter referred to as "Depositary Receipts").
Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. In addition, the
issuers of the stock of unsponsored Depositary Receipts are not obligated to
disclose material information in the United States and, therefore, there may not
be a correlation between such information and the market value of the Depositary
Receipts. ADRs are Depositary Receipts typically issued by a United States bank
or trust company which evidence ownership of underlying securities issued by a
foreign corporation. GDRs, IDRs and other types of Depositary Receipts are
typically issued by foreign banks or trust companies, although they also may be
issued by United States banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally, Depositary Receipts in registered form are designed for use in the
United States securities markets and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. For purposes
of the Fund's investment policies, the Fund's investments in ADRs, GDRs and
other types of Depositary Receipts will be deemed to be investments in the
underlying securities. Depositary Receipts other than those denominated in U.S.
dollars will be subject to foreign currency exchange rate risk. Certain
Depositary Receipts may not be listed on an exchange and therefore may be
illiquid securities.
Debt Securities. When the Adviser believes that it is appropriate to do
so in order to achieve the Fund's objective of long-term capital growth, the
Fund may invest up to 20% of its total assets in debt securities of both foreign
and domestic issuers. Portfolio debt investments will be selected for their
capital appreciation potential on the basis of, among other things, yield,
credit quality, and the fundamental outlooks for currency and interest rate
trends, taking into account the ability to hedge a degree of currency or local
bond price risk. The Fund may purchase bonds, rated Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by Standard & Poor's
("S&P") or, if unrated, judged to be of equivalent quality as determined by the
Adviser. Should the rating of a portfolio security be downgraded, the Adviser
will determine whether it is in the best interest of the Fund to retain or
dispose of such security. See the Appendix to this Statement of Additional
Information for a more complete description of the ratings assigned by ratings
organizations and their respective characteristics.
2
<PAGE>
Convertible Securities. The Fund may invest in convertible securities
which are bonds, notes, debentures, preferred stocks, and other securities which
are convertible into common stocks. Investments in convertible securities can
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions, or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stocks changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis and so may not experience
market value declines to the same extent as the underlying common stock. When
the market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock, although typically not as much as the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes (LYONs). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System and any foreign bank or any domestic or
foreign broker-dealer which is recognized as a reporting government securities
dealer if the creditworthiness of the bank or broker-dealer has been determined
by the Fund's management to be at least equal to that of issuers of commercial
paper rated within the two highest grades assigned by Moody's or S&P or at least
as high as that of other obligations the Fund may purchase.
A repurchase agreement, which provides a means for the Fund to earn
income on funds for periods as short as overnight, is an arrangement under which
the purchaser (i.e., the Fund) acquires a U.S. Government security ("Government
Obligation") and the seller agrees, at the time of sale, to repurchase the
Government Obligation at a specified time and price. The repurchase price may be
higher than the purchase price, the difference being income to the Fund, or the
purchase price and repurchase prices may be the same with interest owed to the
Fund at a stated rate together with the repurchase price on repurchase. In
either case, the income to the Fund is unrelated to the Government Obligation
subject to the repurchase agreement.
3
<PAGE>
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Government Obligation subject to the
repurchase agreement. It is not clear whether a court would consider the
Government Obligation purchased by the Fund subject to a repurchase agreement as
being owned by the Fund or as being collateral for a loan by the Fund to the
seller. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Government Obligation before repurchase of the
Government Obligation under a repurchase agreement, the Fund may encounter delay
and incur costs before being able to sell the security. Delays may involve loss
of interest or decline in price of the Government Obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the Government Obligation, the Fund may be required to
return the Government Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Fund's management seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Government Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the Government Obligation subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund
will direct the seller of the Government Obligation to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement will equal or exceed the repurchase price.
A repurchase agreement with foreign banks may be available with respect
to government securities of the particular foreign jurisdiction, and such
repurchase agreements involve risks similar to repurchase agreements with U.S.
entities.
Investments in Other Investment Companies. The Fund may invest in securities of
closed-end investment companies. To the extent that the Fund does so invest, it
will, by virtue of its investment therein, pay a pro rata portion of any
investment advisory fees payable to the advisers of such closed-end investment
companies. An investment by the Fund in any such closed-end investment company
would thereby result in Fund shareholders indirectly paying an advisory fee in
addition to that payable to the Fund's adviser.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of the fixed-income securities in the Fund's portfolio, or
to enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
4
<PAGE>
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
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The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, determined to be of equivalent credit quality by the Adviser. The
staff of the SEC currently takes the position that OTC options purchased by the
Fund, and portfolio securities "covering" the amount of the Fund's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 10% of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income.
The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
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The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Fund, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
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forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
contract would not exceed the value of the Fund's securities denominated in
correlated currencies. For example, if the Adviser considers that the Austrian
schilling is correlated to the German deutschemark (the "D-mark"), the Fund
holds securities denominated in schillings and the Adviser believes that the
value of schillings will decline against the U.S. dollar, the Adviser may enter
into a contract to sell D-marks and buy dollars. Currency hedging involves some
of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
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transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
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grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid high grade securities at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high grade assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate liquid high grade assets equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAXES.")
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Investment Restrictions
The Fund may not, without the approval of holders of a majority of its
outstanding voting securities (as defined by the 1940 Act):
(a) Purchase or sell physical commodities or contracts relating to
physical commodities;
(b) With respect to 75% of its total assets taken at market value,
purchase more than 10% of the outstanding voting securities of
any one issuer, or invest more than 5% of the value of its
total assets in the securities of any one issuer, except
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and except securities of other
investment companies;
(c) Borrow money except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements provided that the Fund maintains asset
coverage of 300% for all borrowings;
(d) Act as an underwriter of securities issued by others, except
to the extent that it may be deemed an underwriter in
connection with the disposition of portfolio securities of the
Fund;
(e) Make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent the entry into repurchase
agreements and the purchase of debt securities in accordance
with its investment objective and investment policies may be
deemed to be loans;
(f) Purchase or sell real estate (except that the Fund may invest
in (i) securities of companies which deal in real estate or
mortgages, and (ii) securities secured by real estate or
interests therein, and that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of
the Fund's ownership of securities).
In addition, the Fund's Articles of Incorporation, which can be amended
only with the approval of holders of a majority of its outstanding stock, do not
authorize the issuance of senior securities or debt securities other than
securities to evidence borrowings as permitted by investment restriction (c)
above.
It is also the Fund's policy not to concentrate its investments in
particular industries and not in any event to invest more than 25% of its total
assets in any one industry. An exception to this policy in the case of rights
offerings of Japanese corporations permits the Fund to purchase the securities
of any issuer pursuant to the exercise of rights distributed to the Fund by the
issuer, even though after such purchase more than 25% of the total assets of the
Fund would be invested in securities of issuers in the same industry, with the
limitation that no such purchase may be made if as a result the Fund would no
longer be a diversified investment company as defined by the 1940 Act.
Other Investment Policies
In addition, the Board of Directors of the Fund has voluntarily adopted
certain policies and restrictions which are observed in the conduct of the
Fund's affairs and which may be changed by the Board of Directors without the
approval of shareholders. Pursuant to these policies and restrictions, which
represent the intentions of the Board based upon current circumstances, the Fund
will not:
(a) Purchase any securities of the Government of Japan or any
instrumentality thereof, if as a result, the aggregate amount
of such securities held by the Fund would be more than 25% of
the total assets of the Fund;
(b) Purchase the securities of any issuer which has been in
continuous operation for less than three years (including the
operations of predecessor companies) if as a result of such
purchase more than 5% of the Fund's total assets would be
invested in the securities of all such issuers;
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(c) Purchase the securities of other investment companies except
through open market purchases involving no more than a
customary broker's commission or in connection with a merger
or consolidation;
(d) Purchase or retain the securities of any issuer if certain
persons, who are affiliated with the Fund or an investment
adviser (as defined by the Investment Company Act of 1940)
thereof and individually own beneficially more than 1/2% of
the outstanding securities of any class of such issuer, own
beneficially in the aggregate more than 5% of such securities;
(e) Purchase securities on margin (except such short-term credits
as may be necessary for clearance of transactions and the
maintenance of margin with respect to futures contracts), make
short sales (unless by virtue of its ownership of other
securities, it has the right to obtain securities sold and, if
the right is conditional, the sale is made upon the same
conditions) or participate on a joint or joint and several
basis in any trading account in any securities;
(f) Mortgage or pledge any of its assets;
(g) Purchase or sell interest in oil, gas, or other mineral
exploration or development programs, or leases (although it
may invest in securities of issuers which own or invest in
such interests);
(h) Invest more than 5% of the Fund's net assets in warrants or
more than 2% of its net assets in warrants that are not listed
on the New York or American Stock Exchanges or on an exchange
with comparable listing requirements (for this purpose,
warrants attached to securities will be deemed to have no
value);
(i) Purchase securities of other open-end investment companies or
invest more than 5% of its total assets (taken at market
value) in the securities of closed-end investment companies,
provided that no purchases of the securities of closed-end
investment companies shall be made except by purchase in the
open market where no commission or profit to a sponsor or
broker/dealer results other than the customary broker's
commission (except when such purchase, although not made in
the open market, is part of a plan of merger or
consolidation);
(j) Purchase restricted securities (for these purposes restricted
security means a security with a legal or contractual
restriction on resale in the principal market in which the
security is traded), including repurchase agreements maturing
in more than seven days and securities which are not readily
marketable, if as a result more than 10% of the value of the
Fund's net assets (valued at current market value) would be
invested in such securities;
(k) Purchase securities if, as a result thereof, more than 5% of
the value of the Fund's net assets would be invested in
restricted securities (for these purposes restricted security
means a security with a legal or contractual restriction on
resale in the principal market in which the security is
traded);
(l) Buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of its net assets; or sell put
options on securities, if, as a result, the aggregate value of
the obligations underlying such put options would exceed 50%
of the Fund's net assets;
(m) Enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the fair
market value of the Fund's total assets; provided that in the
case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in computing
the 5% limit;
(n) Purchase unmarketable interests in real estate;
(o) Invest more than 5% of its net assets in repurchase
agreements;
12
<PAGE>
(p) Invest more than 30% of its net assets in equity securities
which are traded in an over-the-counter market; or
(q) Borrow money except from banks as a temporary measure for
extraordinary or emergency purposes. The Fund will not
purchase securities while outstanding borrowings exceed 5% of
the Fund's total assets. Under the Investment Company Act of
1940, asset coverage of 300% of any borrowings must be
maintained.
As a matter of non-fundamental policy, the Fund may invest in
securities of issuers having their principal place of business in developing or
newly industrializing countries, but has no present intention to invest more
than 5% of its net assets in such securities.
The 1940 Act imposes certain additional restrictions affecting the
Fund's investments.
For purposes of determining whether a percentage restriction on
investment or utilization of assets as set forth above under "Investment
Objective and Policies," "Investment Restrictions" or "Other Investment
Policies" has been adhered to at the time an investment is made, a later change
in percentage resulting from changes in the value or the total cost of the
Fund's assets will not be considered a violation of such restriction.
JAPAN AND THE JAPANESE ECONOMY*
Because of distance, as well as differences in language, history, and
culture, Japan remains relatively unfamiliar to many investors. The archipelago
of Japan stretches for 1300 miles in the western Pacific Ocean and comprises an
area of approximately 146,000 square miles. The four main islands, Hokkaido,
Honshu, Kyushu and Shikoku, cover the same approximate range of latitude and the
same general range of climate as the east coast of the United States north of
Florida. The archipelago has in the past experienced earthquakes and tidal waves
of varying degrees of severity, and the risks of such phenomena, and damage
resulting therefrom, continue to exist.
Japan has a total population of approximately 125 million. Life
expectancy is one of the highest in the world. Literacy in Japan approaches
100%. Nearly 90% of Japanese students graduate from high school. Approximately
37% go on to college or university. Approximately 45% of the total population of
Japan is concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya,
cities with some of the world's highest population densities.
Over the post war period Japan has experienced significant economic
development. Today Japan is the second largest industrial nation in the world in
terms of GDP, with the United States being the largest. During the era of high
economic growth in the 1960s and early 1970s the expansion was based on the
development of heavy industries such as steel and shipbuilding. In the 1970s,
Japan moved into assembly industries that employ high levels of technology and
consume relatively low quantities of resources, and since then has become a
major producer of automobiles and electrical and electronic products. More
recently Japanese manufacturers have moved capacity abroad to lower labor cost
areas while focusing on high technology goods and improving services in the home
market. The recent deregulation in retailing, together with rising demand for
services, has created new business opportunities in consumer products, such as
travel, leisure pursuits, fashions, computer software, mobile communications,
fast food restaurants and specialized retailing.
Since the early 1980s Japan has generally experienced very low levels
of inflation. This achievement has been made possible by gains in productivity
that exceeded wage increases on balance and, at times, a strong yen that has
reduced the cost of imported raw materials.
Japan's economy is a market economy in which industry and commerce are
predominantly privately owned and operated. However, the Government is involved
in establishing and meeting objectives for developing the economy and improving
the standard of living of the Japanese people. In order to achieve its economic
objectives, the Government has generally relied on providing the prerequisite
- -------------------------
* Where figures in tables under this caption have been rounded off, the
totals may not necessarily agree with the sum of figures.
13
<PAGE>
business environment and administrative guidance. The agencies of the Government
primarily concerned with economic policy and its implementation are the Economic
Planning Agency, The Ministry of Finance (MOF) and the Ministry of International
Trade and Industry (MITI). The Bank of Japan, Japan's central bank, also acts in
this field.
After a period of political turmoil immediately after World War II, the
Liberal Democratic Party (LDP) came to power and continued to rule until the
summer of 1993. The party represented producers--business and agriculture-- not
consumers. Voting representation, heavily skewed in favor of rural areas, as
well as hefty corporate "contributions" to politicians perpetuated this
arrangement. As Japan matured, however, policy deviated further and further from
the interests of most urban salary earners, who had come to comprise the bulk of
the population. More and more "contributions" were needed to keep the LDP in
power, until finally a spate of bribery and payback scandals brought the party
down. Prime Minister Morihiro Hosokawa came to the fore in the summer of 1993 on
a platform of political reform, deregulation, and decentralization. His
government, however, was a coalition of seven parties with diverse interests and
whose experience in the seat of power was limited. While the formerly
unassailable power of the bureaucrats at MITI and MOF has begun to crack, these
powerful interest groups have succeeded in blocking many of the government's
proposed reforms. Mr. Hosokawa abruptly resigned on April 8, 1994. After
considerable bargaining among various members of the coalition, Foreign Minister
Tsutomu Hata, a former member of the LDP and a founder of the present coalition
was named Prime Minister by the Parliament on April 25, 1994 only to be
succeeded in late June by Tomiichi Murayama who became prime minister in a
coalition government of Social Democrats and the LDP with a small representation
by the New Harbinger party. While the political situation continues to be
uncertain, the electoral reforms and the deregulation Mr. Hosokawa succeeded in
getting through Parliament have attracted much public support and are unlikely
to be overturned.
Economic Trends
During the ten and five-year periods ended December 1994, Japan's gross
domestic product in constant prices increased at an average annual compound
growth rate of 3.3% and 2.1%, respectively. In May 1989, the Bank of Japan began
to tighten monetary policy in response to the rapid growth of the economy that
reached 6.2% in 1988 and to the asset inflation evidenced in the rapidly rising
stock market and real estate prices. The discount rate was raised, in stages,
from 2.5% to 5.5% by July 1991. The economy began to decelerate slowly. Growth
in 1989 was 4.7%, in 1990, 4.8% and in 1991, 4.3%. The deceleration in growth
gained momentum in early 1992 and three successive quarters of falling GDP were
registered resulting in the worst recession of the post-war period. The economy
grew by only 1.1% in 1992, declined by 0.2% in 1993 and increased by a mere 0.6%
in 1994. Several fiscal stimulus packages have failed to initiate a robust
recovery. Early in 1995, the economy received a further shock with the
devastating earthquake in the Kobe area. But even more serious in its impact on
the economy has been the dramatic rise of the yen. By mid April 1995 the yen had
risen 22% relative to the dollar since the beginning of the year imparting a
deflationary bias to the economy and threatening the fragile recovery. So far
the government's and the Bank of Japan's responses to the rising yen have had
little impact.
14
<PAGE>
The following table sets forth the relative increase in Japan's gross
domestic product as discussed on page 14 for calendar years 1989-1994.
<TABLE>
<CAPTION>
GROSS DOMESTIC PRODUCT (trillions of yen)
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
GDP At Current Prices 396.2 425.5 451.3 463.1 465.0 469.2
Consumption 264.8 282.4 296.3 308.0 315.6 323.8
Private 228.5 243.6 255.1 264.8 270.9 277.7
Public 36.3 38.8 41.2 43.3 44.7 46.1
Fixed Investment 122.8 136.8 143.4 142.2 138.8 134.1
Private 96.9 108.6 113.1 107.0 98.3 92.1
Public 25.9 28.1 30.3 35.2 40.5 42.0
Change in Inventories 3.1 2.3 3.3 1.6 0.7 1.3
Net Exports of Goods and Services 5.6 3.0 8.3 11.2 10.9 10.0
Exports of Goods and Services 42.4 45.9 46.8 47.4 44.2 44.4
Imports of Goods & Services 36.8 42.9 38.5 36.2 33.3 34.4
GDP at Constant (1985) Prices 380.7 399.0 416.0 420.6 419.8 422.1
GDP Deflator (1985=100) 104.1 106.4 108.5 110.1 111.0 111.2
Percentage Increase of GDP
At Current Prices 6.7% 7.2% 6.3% 2.6% 0.6% 0.7%
At Constant Prices 4.7% 4.8% 4.3% 1.1% -0.2% 0.6%
Deflator 1.9% 2.2% 2.0% 1.5% 0.8% 0.1%
Percentage of GDP at
Current Prices
Consumption 66.8% 66.5% 65.7% 66.5% 67.9% 69.0%
Gross Investment 31.8 32.8 32.5 31.1 30.0 28.9
Exports of Goods & Services 10.7 10.8 10.4 10.2 9.3 9.5
Imports of Goods & Services -9.3 -10.1 -8.5 -7.8 -7.2 -7.3
---- ----- ---- ---- ---- ----
Total GDP 100.0% 100.0% 100.0% 100.0% 100.0% 100.1%
Source: Economic Planning Agency, Quarterly Report on National Accounts (March 1995).
</TABLE>
Industrial Production
The following table sets forth indices of industrial production of
Japan and other selected industrial countries for the six years ending with
calendar year 1994 (with 1990 as 100):
15
<PAGE>
INDICES OF INDUSTRIAL PRODUCTION
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Japan 96.1 100.0 101.8 95.6 91.2 91.8
United States 99.0 100.0 98.1 99.6 101.7 107.9
Germany 94.8 100.0 103.2 101.3 94.5 97.5
United Kingdom 100.3 100.0 96.1 95.9 97.9 103.0
France 98.2 100.0 99.9 98.9 95.1 NA
Italy 100.6 100.0 97.8 97.2 94.4 NA
Canada 103.4 100.0 95.6 95.9 101.8 NA
Source: IMF, International Financial Statistics (April 1995).
</TABLE>
The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1988 through 1993:
<TABLE>
<CAPTION>
GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS
1988 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C>
Agriculture, Forestry and Fisheries 2.7% 2.7% 2.6% 2.3% 2.3% 2.2%
Mining 0.3 0.3 0.3 0.3 0.3 0.2
Construction 8.8 8.8 8.9 8.8 8.7 8.8
Manufacturing 29.7 30.6 31.4 32.1 31.1 30.4
Electricity, Gas and Water 3.1 3.1 3.2 3.3 3.3 3.4
Wholesale and Retail Trade 13.7 13.6 13.8 13.8 14.0 14.1
Finance and Insurance 6.3 6.7 6.2 5.9 5.8 5.4
Real Estate Transportation, 10.2 10.2 10.0 9.8 9.9 10.1
Communication and Other
Public Utilities 6.4 6.5 6.4 6.4 6.2 6.4
Services 13.7 13.9 14.3 14.1 14.2 14.0
Government Services 7.4 7.1 6.8 6.5 6.5 6.6
Private Non-Profit Institutions 1.9 1.9 1.9 1.8 1.8 1.9
Import Duty 0.6 0.7 0.6 0.8 0.9 0.8
Imputed Interest (5.0) (5.8) (5.9) (5.7) (5.8) (5.3)
Statistical Discrepancy 0.1 (0.2) (0.6) 0.1 0.7 0.9
--- ----- ----- --- --- ---
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
* Gross domestic product measures the value of final goods and services
produced by a country's domestic economy. It is equal to gross national
product, minus the income that residents receive from abroad for factor
services rendered abroad, plus similar payments made to non-residents
who contribute to the domestic income.
Source: Economic Planning Agency, Annual Report on National Accounts (1995).
</TABLE>
Energy
Japan has historically depended on oil for most of its energy
requirements. Virtually all of its oil is imported, the majority from the Middle
East. Oil price changes used to have a major impact on the domestic economy, but
now their influence is relatively diminished.
Japan has worked to reduce its dependence on oil by encouraging energy
conservation and use of alternative fuels. In addition to conservation efforts,
a restructuring of industry, with emphasis shifting from basic industries to
16
<PAGE>
processing and assembly type industries, has also contributed to the reduction
of oil consumption. Despite Japan's sustained economic growth, crude oil imports
have not increased materially since 1979.
Labor
In 1994 approximately 65 million persons, or approximately 52% of the
Japanese population, were employed, of which approximately 6% were employed in
agriculture, forestry and fisheries, 34% in mining, construction and
manufacturing and 38% in trade, finance, transportation and communication, and
22% in other service-related industries (including the government). Since 1980
an increasing proportion of the paid workforce is female and an increasing
number of people have been employed in service industries.
Except for 1992 and 1993, productivity gains over the recent five-year
period have exceeded or been close to the rise in wages with the result that
unit labor costs have declined or risen only slightly. In 1992 and 1993,
however, there were sharp declines in productivity that were due in part to
Japan's labor policies, which tend to result in a decline of productivity when
production falls since labor is not let go as rapidly as in other industrialized
countries. As a result, unit labor costs rose in 1992 and 1993 with the rise in
1992 being very pronounced. With an increase in productivity in 1994 that
exceeded the rise in wages, unit labor costs declined 0.8%.
MANUFACTURING
Wages Productivity Unit Labor Costs
(annual percentage change)
1989 5.8 5.9 -0.1
1990 5.3 4.0 1.2
1991 3.4 2.5 0.9
1992 1.2 -5.4 7.0
1993 0.1 -1.4 1.5
1994 2.0 2.8 -0.8
Source: Ministry of Labor, Monthly Labor Statistics (Mar. 1995); Productivity
Research Institute, Quarterly Journal of Productivity Statistics (Wages
are for manufacturers who employ 30 or more persons.)
Prices
In 1994 the wholesale price index fell by 2.1% and the consumer price
index rose by 0.7%. The virtual absence of inflation was due in part to the
decline in economic activity or in part to the deflationary impact of a strong
yen.
The tables below set forth the wholesale and consumer price indices for
Japan and other selected industrial countries for which comparable statistics
are available:
<TABLE>
<CAPTION>
COMPARATIVE WHOLESALE PRICE INDICES
(1990 = 100)
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
Japan 98.0 100.0 100.2 98.7 95.0 93.0
United States 96.6 100.0 100.2 100.8 102.3 103.6
Germany 98.3 100.0 102.4 103.8 103.7 NA
United Kingdom 94.1 100.0 105.4 108.7 113.0 115.8
France 101.3 100.0 98.7 97.1 94.4 NA
Italy 93.1 100.0 105.2 107.4 NA NA
Canada 99.7 100.0 99.0 99.5 102.7 108.5
Source: IMF, Int'l Financial statistics (March, 1995)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE CONSUMER PRICE INDICES
(1990 = 100)
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
Japan 97.0 100.0 103.3 105.1 106.4 107.1
United States 94.9 100.0 104.2 107.4 110.6 113.4
Germany 97.4 100.0 103.5 107.6 112.0 115.4
United Kingdom 91.3 100.0 103.2 109.8 111.5 114.3
France 96.7 100.0 103.2 105.7 107.9 109.7
Italy 93.9 100.0 106.3 111.8 116.8 NA
Canada 95.5 100.0 105.6 107.2 109.2 109.4
Source: IMF, Int'l Financial Statistics (March, 1995)
</TABLE>
Balance of Payments
During the 1980s, Japan recorded increased trade surpluses and became
the world's major creditor nation. In 1994, Japan registered a surplus of $129
billion in its current account. This surplus was predominantly due to a record
surplus of $146 billion in its trade account.
In 1994, Japan registered an outflow of $82 billion in its long-term
capital account.
Foreign Trade
Overseas trade is important to Japan's economy even though offshore
production has eroded its importance. Japan has few natural resources and must
export to pay for its imports of these basic requirements. During the year ended
December 31, 1994, exports and imports represented approximately 8.6% and 5.5%,
respectively, of Japan's current gross domestic product. Roughly three quarters
of Japan's exports are machinery and equipment including motor vehicles, machine
tools and electronic equipment. Japan's principal imports consist of raw
materials, foodstuff and fuels, such as oil and coal.
Japan's principal export markets are the United States, Canada, the
United Kingdom, Germany, Australia, Korea, Taiwan, Hong Kong and the People's
Republic of China. The principal sources of its imports are the United States,
South East Asia and the Middle East.
The following table shows (i) indices in yen terms of the value, volume
and unit value (a measure of average prices) of Japanese exports and imports and
(ii) the Japanese terms of trade (the ratio of export to import prices), which
is an indicator of a country's comparative advantage in trade. The recent
improvement in the terms of trade has been the result of a higher yen and
generally declining world commodity prices. While a higher yen might have been
expected to raise the unit value or price of exports, Japanese exporters kept
their export prices low in order to maintain market share.
<TABLE>
<CAPTION>
FOREIGN TRADE OF JAPAN
(1990 = 100)
Value Index Volume Index Unit Value Index
-------------- --------------------- ------------------- Terms
Exports Imports Exports Imports Exports Imports of Trade
<C> <C> <C> <C> <C> <C> <C> <C>
1988 81.9 70.9 91.1 87.7 89.9 80.9 111.1
1989 91.2 85.6 95.0 94.6 96.1 90.5 106.2
1990 100.0 100.0 100.0 100.0 100.0 100.0 100.0
1991 102.0 94.2 102.5 104.0 99.7 90.6 110.0
1992 103.8 87.2 104.0 103.6 99.7 84.2 118.4
1993 97.0 79.2 102.3 107.9 94.8 73.5 129.0
1994 97.7 83.0 104.0 122.4 93.9 67.8 138.5
</TABLE>
Source: Ministry of Finance, The Summary Report on Trade of Japan (Dec. 1994)
18
<PAGE>
Because of the concentration of Japanese exports in highly visible
products such as automobiles, machine tools and semiconductors and the large
trade surpluses ensuing therefrom, Japan has entered a difficult phase in its
relations with its trading partners, particularly the United States, where the
trade imbalance is the greatest. The recent weakness in the Japanese economy has
held back import growth at the same time that manufacturers find foreign markets
attractive relative to poor domestic demand. Trade sanctions may continue to
impact Japan adversely in both the short- and long-term.
The following table sets forth the composition of Japan's exports and
imports by major commodity groups:
<TABLE>
<CAPTION>
COMPOSITION OF JAPAN'S EXPORTS AND IMPORTS
<S> <C> <C> <C> <C> <C> <C>
Japan's Exports 1989 1990 1991 1992 1993 1994
Textile Products 2.5% 2.5% 2.5% 2.5% 2.3% 2.1%
Metals & Metal Products 7.8 6.8 6.7 6.3 6.4 6.1
Machinery & Equipment:
Ships 1.6 1.9 2.1 2.3 2.8 2.9
Motor Vehicles 17.6 17.8 17.4 17.8 16.2 14.4
TV & Radio Receivers 1.4 1.6 1.7 1.6 1.4 1.2
Motorcycles 0.7 0.8 0.9 1.1 1.2 1.0
Scientific, medical &
optical instruments 4.1 4.0 4.1 4.0 3.9 4.0
Other 49.3 48.9 49.0 48.8 50.5 52.5
Total 74.7 75.0 75.2 75.6 76.0 76.0
Chemicals 5.4 5.5 5.6 5.6 5.6 6.0
Foods & Beverages 0.6 0.6 0.6 0.6 0.6 0.5
Other Exports 9.0 9.6 9.4 9.4 9.6 9.3
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
Japan's Imports 1989 1990 1991 1992 1993 1994
Foods & Beverages 14.7% 13.5% 14.6% 16.0% 16.4% 17.0%
Textile Materials 1.6 1.1 1.0 0.9 0.6 0.7
Chemicals 7.6 6.9 7.4 7.4 7.5 7.4
Mineral Fuels:
Petroleum 10.2 13.2 12.7 12.9 11.6 10.1
Coal 2.8 2.6 2.7 2.6 2.5 2.1
Other 7.4 8.1 7.7 7.1 6.2 5.2
Total 20.4 23.9 23.1 22.6 20.3 17.4
Metal Ores & Scrap 4.4 3.9 3.7 3.3 2.4 2.7
Machinery & Equipment 15.4 17.4 18.1 18.4 19.4 21.7
Other Imports 35.9 33.3 32.1 31.4 32.9 38.1
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
Source: Ministry of Finance, The Summary Report - Trade of Japan (Dec. 1994).
</TABLE>
19
<PAGE>
The following table indicates the geographic distribution of Japan's
trade in recent years.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF JAPAN'S EXPORTS AND IMPORTS
<S> <C> <C> <C> <C> <C> <C>
Japan's Exports 1989 1990 1991 1992 1993 1994
Developed Areas
U.S.A 33.9% 31.5% 29.1% 28.2% 29.2% 29.7%
EC 17.4 18.7 18.8 18.4 15.6 14.5
Australia 2.8 2.4 2.1 2.1 2.1 2.2
Canada 2.5 2.4 2.3 2.1 1.7 1.5
Others 4.2 4.3 3.9 3.6 3.4 3.0
--- --- --- --- --- ---
Total 60.8 59.3 56.2 54.4 52.0 50.9
Developing Areas
S.E. Asia 26.7% 28.8% 30.6% 30.7% 32.5% 35.0%
Middle East 3.1 3.4 3.9 4.5 3.7 2.8
Latin America 3.4 3.6 4.1 4.6 4.7 4.7
Africa 1.0 1.2 1.1 1.2 1.2 1.0
Others 0.4 0.3 0.3 0.3 0.3 0.2
--- --- --- --- --- ---
Subtotal 34.6 37.3 40.0 41.3 42.4 43.7
Former Soviet Union 1.1% 0.9% 0.7% 0.3% 0.4% 0.3%
China 3.1 2.1 2.7 3.5 4.8 4.7
Others 0.4 0.4 0.4 0.5 0.5 0.4
--- --- --- --- --- ---
Subtotal 4.6 3.4 3.8 4.3 5.7 5.4
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
Japan's Imports 1989 1990 1991 1992 1993 1994
Developed Areas
U.S.A. 22.9 22.4% 22.5% 22.4% 23.0% 22.8%
EC 13.3 15.0 13.4 13.4 12.5 12.9
Australia 5.5 5.3 5.5 5.3 5.1 5.0
Canada 4.1 3.6 3.3 3.3 3.4 3.2
Others 5.1 4.7 4.7 4.5 4.2 4.4
--- --- --- --- --- ---
Total 50.9 51.0 49.4 48.9 48.2 48.3
Developing Areas
S.E. Asia 25.1% 23.3% 24.8% 24.7% 25.2% 24.7%
Middle East 10.9 13.2 12.4 12.5 11.3 10.2
Latin America 4.2 4.2 4.2 3.7 3.5 2.2
Africa 1.0 0.8 0.8 0.7 0.8 0.6
Others 0.5 0.3 0.3 0.4 0.4 1.9
--- --- --- --- --- ---
Subtotal 41.7 41.8 42.5 42.0 41.2 39.6
Former Soviet Union 1.4% 1.4% 1.4% 1.0% 1.2% 1.3%
China 5.3 5.1 6.0 7.3 8.5 10.0
Others 0.7 0.7 0.7 0.8 0.8 0.9
--- --- --- --- --- ---
Subtotal 7.4 7.2 8.1 9.1 10.5 12.2
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
Source: Ministry of Finance, The Summary Report--Trade of Japan (December 1994).
</TABLE>
SECURITIES MARKETS IN JAPAN
There are eight stock exchanges in Japan. Of these, the Tokyo Stock
Exchange, the Osaka Stock Exchange and the Nagoya Stock Exchange are the
largest. The three main markets have two sections of stocks; generally,
20
<PAGE>
companies with smaller capitalization are listed on the second section. In
addition, The Japan Over-The-Counter Trading Co. acts as the intermediary
between securities companies wishing to trade shares on the over-the-counter
(OTC) market. The primary role of the OTC market is to facilitate the raising of
funds from the investing public by unlisted, small and medium-sized companies.
Equity securities of Japanese companies which are traded in an over-the-counter
market are generally securities of relatively small or little-known companies.
There are two widely followed price indices. The Nikkei Stock Average
(NSA) is an arithmetic average of 225 selected stocks computed by a private
corporation. In addition, the Tokyo Stock Exchange publishes the TOPIX, formerly
the TSE Index, which is an index of all first section stocks. The second section
has its own index. Nihon Keizai Shimbun, Inc., the publisher of a leading
Japanese economic newspaper, publishes the OTC Index.
The following table shows the high, low and close of the Nikkei Stock
Average, TOPIX and the Nikkei OTC Index for the years 1986 through 1993.
<TABLE>
<CAPTION>
Calendar NSA* TSE/TOPIX* OTC**
Year High Low Close High Low Close High Low Close
---- ---- --- ----- ---- --- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 18936.24 12881.50 18701.30 1583.35 1025.85 1556.37 1163.18 811.69 1056.43
1987 26646.43 18544.05 21564.00 2258.56 1557.46 1725.83 1270.27 1046.26 1107.03
1988 30159.00 21217.04 30159.00 2357.03 1690.44 2357.03 1402.61 1099.52 1313.11
1989 38915.87 30183.79 38915.87 2884.80 2364.33 2881.37 2597.52 1315.40 2597.52
1990 38712.88 20221.86 23848.71 2867.70 1523.43 1733.83 4149.20 2154.20 2175.48
1991 27146.91 21456.76 22983.77 2028.85 1638.06 1714.68 3333.78 1918.06 1946.14
1992 23801.18 14309.41 16924.95 1763.43 1102.50 1307.66 2022.41 1099.32 1227.93
1993 21148.11 16078.71 17417.24 1698.67 1250.06 1439.31 1728.13 1200.84 1447.60
1994 21552.81 17369.74 19723.06 1712.73 1445.97 1559.09 2002.73 1445.47 1776.25
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1994); Monthly
Statistics Report (Dec. 1986, 1987, 1988, 1989, 1990, 1991, 1993,
1994).
**Annual Statistics of OTC Stocks (1994), issued by Japan
Securities Dealers Association.
</TABLE>
In the five years ending December 1989, the Tokyo Stock Price Index
(TOPIX) more than tripled, rising from 913.37 to 2881.37. The Index then
declined 39.8% in 1990, 1.1% in 1991 and 23.7% in 1992, reaching, at that point,
1307.66. In 1993 the Index rose 10.1% to 1439.31 and in 1994, 8.3% to 1559.09.
Beginning in 1991, a number of trading improprieties, including allegations that
some of the major brokerage firms engaged in unauthorized reimbursements to
large corporate customers for stock market losses, have been reported in the
press. The decline in stock prices has raised the cost of capital for industry
and has reduced the value of stock holdings by banks and corporations. These
effects have, in turn, contributed to the recent weakness in Japan's economy and
could continue to have an adverse impact in the future.
The following table presents certain statistics with respect to the
trading of equity securities on the Tokyo Stock Exchange (first and second
sections combined) and the OTC market for the past six years.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
TSE OTC TSE OTC TSE OTC TSE OTC TSE OTC TSE OTC
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Market
Capitalization 611,151.9 12,231 379,231 11,824 377,924.4 12,880 289,483 7,943 324,357 11,228 368,784 14,558
(in
billions
of yen)
Daily
Average 893,974 2,125 500,400 4,331 380,512 4,206 268,857 1,767 353,394 4,374 342,164 8,994
Trading
Volume
(000
shares)
Number 1,597 263 1,627 342 1,641 430 1,651 436 1,667 477 1,689 581
of
Listed
Companies
Source: Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1995).
</TABLE>
Compared to the United States, the common stocks of many Japanese
companies trade at a higher price-earnings ratio. Historically, investments in
the OTC market have been more volatile than the TSE.
21
<PAGE>
In recent years, the proportion of trading by institutional investors
had tended to increase at the expense of individuals. In the last three years of
stock price declines, however, the share of trading represented by financial
institutions and business corporations has fallen while the share of trading by
foreigners has risen substantially as can be seen in the following table:
<TABLE>
<CAPTION>
Financial Business
Institutions Corporations Individuals Foreigners Other
<S> <C> <C> <C> <C> <C>
1988 36.5 16.8 32.3 10.1 4.3%
1989 39.2 14.6 30.3 11.3 4.6
1990 37.4 12.3 31.2 14.1 5.0
1991 34.6 9.8 31.0 19.8 4.8
1992 31.9 7.4 28.2 27.4 5.1
1993 34.6 7.4 28.0 25.2 4.8
1994 34.2 6.3 23.3 12.2 4.0
Source: Tokyo Stock Exchange, Annual Securities Statistics (1994).
</TABLE>
The following table shows the price/earning ratios and rates of return
for TOPIX for each of the past seven years. Because of differences in accounting
methods used in Japan and the United States, the price/earning ratios are not
directly comparable. The Japanese price/earnings ratio declined sharply in 1990,
1991 and 1992 as a result of the decline in stock prices. It rose in 1993 due in
part to a recovery in stock prices but also to a decline in earnings. In 1994,
the return on the TOPIX registered 9%.
AVERAGE PRICE/EARNINGS RATIOS AND RATES OF RETURN
Average
Price/Earnings Ratio Rate of Return
1988 58.4 37.0
1989 70.6 22.7
1990 39.8 -39.3
1991 37.8 -0.5
1992 36.7 -22.9
1993 64.9 10.9
1994 79.5 9.0
* Rates of return in yen calculated on basis of closing prices and average
dividends for each year.
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1991, 1992, 1993,
1994); Monthly Statistics Report (Dec. 1988, 1989, 1990, 1991, 1992,
1993, 1994).
Following is a statistical comparison between the Tokyo Stock Exchange
(both sections) and the New York Stock Exchange for the six years ending 1994:
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
TSE NYSE TSE NYSE TSE NYSE TSE NYSE TSE NYSE TSE NYSE
--- ---- --- ---- --- ---- --- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Companies 1597 1720 1627 1769 1641 1885 1651 2063 1667 2362 1689 2570
Aggregate Market Value
in Billions of Dollars* 4260 3030 2822 2820 3028 3321 2331 4035 2898 4545 3590 4448
as Percentage of GDP 148 58 96 51 90 58 64 67 69 72 78 66
Turnover Ratio (%) 73 52 38 47 28 41 20 40 26 50 25 51
* Calculated on the basis of the yen conversion rate published by the IMF.
Sources: Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1995); IMF, International Financial Statistics; Monthly
Statistics Report (Feb. 1995).
</TABLE>
22
<PAGE>
As of December 31, 1994, the market value of all listed Japanese equity
securities, as compiled by the Tokyo Stock Exchange, was $3624.5 billion. The
following table, compiled by Morgan Stanley Capital International, sets forth
the size of the Japanese equity market in comparison with that of other major
equity markets for the years ending December 31, 1990, 1991, 1992, 1993 and
1994.
<TABLE>
<CAPTION>
EQUITY STOCK MARKETS OF THE WORLD
(dollars in billions)
December 1990 December 1991 December 1992 December 1993 December 1994
$ % $ % $ % $ % $ %
- - - - - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States 2,183.5 33.32 3,702.4 37.57 4,022.8 43.16 4467.0 38.4 4626.3 36.6
Japan 2,805.5 33.22 2,996.0 30.43 2,331.5 25.02 2885.4 24.8 3624.5 28.7
United Kingdom 882.4 10.45 953.7 9.68 914.9 9.82 1189.9 10.2 1145.0 9.1
Canada 222.4 2.63 232.2 2.36 219.7 2.36 296.6 2.5 288.0 2.3
Federal Republic of 341.7 4.05 369.1 3.75 325.7 3.49 442.6 3.8 476.9 3.8
Germany
Australia 105.9 1.25 137.0 1.39 133.2 1.43 196.2 1.7 212.4 1.7
Switzerland 162.8 1.93 199.0 2.02 195.2 2.09 243.8 2.1 284.0 2.2
France 296.5 3.51 346.9 3.52 333.0 3.57 453.4 3.9 444.3 3.5
Netherlands 114.3 1.35 129.4 1.31 129.8 1.39 171.2 1.5 224.4 1.8
Hong Kong 83.5 0.99 119.0 1.21 161.9 1.74 383.2 3.3 241.2 1.9
Other 615.8 7.29 671.0 6.81 878.1 9.42 908.6 7.8 1072.8 8.5
----- ---- ----- ---- ----- ---- ----- --- ------ ---
Total $8,444.3 100.00% $9,855.7 100.00% $9,320.1 100.00% $11,637.9 100.00% $12,639.8 100.00%
-------- ------- -------- ------- -------- ------- --------- ------- --------- -------
Source: Morgan Stanley Capital International (Quarterly 1991:1, 1992:1, 1993:1, 1994:1, 1995:1).
</TABLE>
PURCHASES AND EXCHANGES
(See "Purchases and Redemptions" and "Transaction Information"
in the Fund's prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $1,000 through
Scudder Investor Services, Inc. by letter, fax, or telephone.
The minimum initial purchase amount is less than $1,000 under certain
special plan accounts.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $2,500 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone by established shareholders (except by Scudder Individual Retirement
Account (IRA), Scudder profit sharing, Scudder 401(k) and Scudder 403(b)
planholders), members of the NASD and banks. Orders placed in this manner may be
directed to The Japan Fund Service Center or to any Scudder Funds Center office.
A two-part invoice of the purchase will be mailed out promptly following receipt
of a request to buy. Payment should be attached to a copy of the invoice for
proper identification. Federal regulations require that payment be received
within seven (7) business days. If payment is not received within that time, the
shares may be canceled. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Fund shall have the authority, as agent of the
shareholder, to redeem shares in the account to reimburse the Fund or the
principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
the Fund.
23
<PAGE>
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in United States funds and must be drawn on, or
payable through, a United States bank.
If shares are purchased by a check which proves to be uncollectible,
the Fund reserves the right to cancel the purchase immediately and the purchaser
will be responsible for any loss incurred by the Fund or the principal
underwriter by reason of such cancellation. If the purchaser is a shareholder,
the Fund shall have the authority, as agent of the shareholder, to redeem shares
in the account to reimburse the Fund or the principal underwriter for the loss
incurred. Investors whose orders have been canceled may be prohibited from or
restricted in placing future orders in The Japan Fund, Inc. or any of the other
funds in the Scudder Family of Funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading (normally 4 p.m. eastern time) on the New York Stock Exchange (the
"Exchange") on a selected day, your bank must forward federal funds by wire
transfer and provide the required account information so as to be available to
the Fund prior to such close.
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently Scudder Investor Services, Inc., pays a fee for
receipt by the custodian of "wired funds," but the right to charge investors for
this service is reserved.
Boston banks are closed on certain holidays that the Exchange may be
open. These holidays are Martin Luther King, Jr. Day (the 3rd Monday in
January), Columbus Day (the 2nd Monday in October) and Veterans' Day (November
11). Investors are not able to purchase shares by wiring federal funds on such
holidays because State Street Bank is not open to receive such funds on behalf
of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the Application in good order. Purchases made by
check are executed on the next business day after the check is received in
Boston by the Fund's transfer agent. Net asset value normally will be computed
as of the close of regular trading on the Exchange on each day during which the
Exchange is open for trading. Orders received after the close of regular trading
on the Exchange will receive the next day's net asset value. If the order has
been placed by a member of the NASD, other than Scudder Investor Services, Inc.,
it is the responsibility of the broker, and not the Fund, to place the order by
the close of the Exchange.
Share Certificates
Due to the desire of Fund management to afford ease of redemption,
ownership in the Fund is on a non-certified basis. Share certificates now in a
shareholder's possession may be sent to the Fund's transfer agent for
cancellation and credit to such shareholder's account on a non-certificated
basis.
Other Information
If transactions are arranged and settlement is made through a member of
the NASD, other than Scudder Investor Services, Inc., that member may, at its
discretion, charge a fee for that service.
The Board of Directors and Scudder Investor Services, Inc., the Fund's
principal underwriter, each has the right to limit the amount of purchases by,
and to refuse to sell to, any person. The Board of Directors and Scudder
Investor Services, Inc. each may suspend or terminate the offering of shares of
a Fund at any time.
The Tax Identification Number section of the Fund's application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information,
except those from exempt organizations, may be returned to the investor.
24
<PAGE>
The Fund may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
Exchanges
The procedure for exchanging shares from The Japan Fund, Inc. into
shares of another Scudder fund, when the new account is established with the
same registration, telephone option, dividend option and address as the present
account, is set forth under "Purchases and Redemptions -- Opening An Account" in
the Fund's prospectus. If an exchange involves establishing a new account, at
least $1000 must be exchanged. If the exchange is made into an existing account,
at least $100 must be exchanged. If the account receiving the exchange proceeds
is to be different in any respect, the exchange request must be in writing and
must contain a signature guarantee as described under "Purchases and Redemption
- -- Selling Fund Shares -- Signature guarantees" in the Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day will ordinarily be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading will be executed on the following business day. Notwithstanding
the foregoing, if a shareholder requests to exchange his or her Japan Fund
shares for shares in another fund in the Scudder Family of Funds, and in
connection therewith receives Fund portfolio securities in payment for those
Fund shares (see "REDEMPTIONS" below), there will be a delay in repurchasing
shares in such other fund owing to the time required to liquidate such
securities on the shareholder's behalf and to remit the proceeds of such
liquidation to the Fund's transfer agent. Accordingly, an exchange order in
those instances (1) may not be executed for up to seven business days after the
exchange request is received in good order and (2) will be executed at the net
asset value next determined after the transfer agent's receipt of such
liquidation proceeds.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from the Fund or another
Scudder Fund to an existing account in the Fund or another Scudder Fund through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the phone or in writing. Automatic
Exchanges will continue until the shareholder requests by phone or in writing to
have the feature removed, or until the originating account is depleted. The
Trust and the Transfer Agent each reserves the right to suspend or terminate the
privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
An exchange into another fund in the Scudder Family of Funds is a redemption of
shares, and therefore may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such an exchange may be subject to backup
withholding. (see "Taxes.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Funds
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The funds in the Scudder Family of Funds into which investors may make
an exchange are listed under "THE SCUDDER FAMILY OF FUNDS" herein. Before making
an exchange, shareholders should obtain a prospectus of the Scudder fund into
which the exchange is being contemplated from Scudder Investor Services, Inc.
25
<PAGE>
REDEMPTIONS
(See "Purchases and Redemptions" and "Transaction Information"
in the Fund's prospectus.)
Redemption by Telephone
Shareholders currently receive the right automatically, without having
to elect it, to redeem by telephone up to $50,000 to their address of record. In
order to request redemptions by telephone, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account to which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit-Sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. A signature and a signature guarantee
are required for each person in whose name the account is
registered.
Telephone redemption is not available with respect to shares
represented by share certificates.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted for seven (7) business days following their purchase.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed as explained in the
Fund's prospectus.
In order to ensure proper authorization before redeeming shares, the
transfer agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax required in
some states when settling estates.
26
<PAGE>
It is suggested that shareholders holding certificated shares or shares
registered in other than individual names contact the Fund's transfer agent
prior to redemptions to ensure that all necessary documents accompany the
request. When shares are held in the name of a corporation, trust, fiduciary or
partnership, the transfer agent requires, in addition to the stock power,
certified evidence of authority to sign. These procedures are for the protection
of shareholders and should be followed to ensure prompt payment. Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption will be sent within seven (7) days after receipt of a request
for redemption that complies with the above requirements. Delays of more than
seven (7) days of payment for shares tendered for repurchase or redemption may
result but only until the purchase check has cleared.
The requirements for the IRA redemptions are different from those for
regular accounts. For more information call 1-800-53-JAPAN.
Redemption-in-Kind
In the event the Fund's management determines that substantial
distributions of cash would have an adverse effect on the Fund's remaining
shareholders, the Fund reserves the right to honor any request for redemption or
repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Fund and valued as they are for purposes of computing
the Fund's net asset value. The Fund has elected, however, to be governed by
Rule 18f-1 under the Investment Company Act of 1940 as a result of which the
Fund is obligated to redeem shares, with respect to any one shareholder during
any 90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of the period. The tax consequences to
a redeeming shareholder are the same whether the shareholder receives cash or
securities in payment for his shares.
If redemption payment is made in portfolio securities, the redeeming
shareholder will incur brokerage commissions and Japanese sales taxes in
converting those securities into cash. In addition, the conversion of securities
into cash may expose the shareholder to stock-market risk and currency exchange
risk.
If a shareholder receives portfolio securities upon redemption of his
Fund shares, he may request that such securities either (1) be delivered to him
or his designated agent or (2) be liquidated on his behalf and the proceeds of
such liquidation (net of any brokerage commissions and Japanese sales taxes)
remitted to him.
Other Information
All redemption requests must be directed to the Fund's transfer agent.
Redemption requests that are delivered to the Fund rather than to the Fund's
transfer agent will be forwarded to the transfer agent, and processed at the
next calculated NAV after receipt by the transfer agent.
The value of shares redeemed or repurchased may be more or less than
the shareholder's cost depending on the net asset value at the time of
redemption or repurchase. The Fund does not impose a redemption or repurchase
charge. Redemption of shares, including an exchange into another fund in the
Scudder Family of Funds, may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
If transactions at any time reduce a shareholder's account balance to
below $1000 in value, the Fund will notify the shareholder that, unless the
account balance is brought up to at least $1000, the Fund will redeem all shares
in the Fund and close the account by making payment to the shareholder. The
shareholder has sixty days to bring the account balance up to $1000 before any
action will be taken by the Fund. Shareholders of record prior to August 14,
1987, are not subject to the $1000 minimum share balance requirement. (This
policy applies to accounts of new shareholders but does not apply to certain
Special Plan Accounts).
27
<PAGE>
FEATURES AND SERVICES OFFERED BY THE FUND
(See "Shareholder benefits" in the Fund's prospectus.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its funds from the
vast majority of mutual funds available today. The primary distinction is
between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Rules of Fair Practice, a mutual fund
can call itself a "no-load" fund only if the 12b-1 fee and/or service fee does
not exceed 0.25% of a fund's average annual net assets.
Because Scudder funds do not pay any asset-based sales charges or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
YEARS Scudder 8.50% Load Fund Load Fund with 0.75% No-Load Fund with
Pure No-Load(TM)Fund 12b-1 Fee 0.25% 12b-1 Fee
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
15 41,772 38,222 37,698 40,371
20 67,275 61,557 58,672 64,282
</TABLE>
Investors are encouraged to review the fee tables on page 2 of the
Fund's prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
28
<PAGE>
Distribution Plans
Investors have complete freedom of choice as to whether to receive cash
or to reinvest any dividends from net investment income, or distributions from
realized capital gains in additional shares of the Fund. A change of
instructions for the method of payment may be given to the transfer agent at
least five days prior to a dividend record date.
Please call 1-800-53-JAPAN for more information.
Reinvestment is usually made on the day following the record date.
Investors may leave standing instructions with the Fund's transfer agent
designating their option for either reinvestment or cash distribution of any
income dividends or capital gains distributions. If no election is made,
dividends and distributions will be invested in additional shares of the Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the DistributionsDirect
Program. Shareholders who elect to participate in the DistributionsDirect
Program, and whose predesignated checking account of record is with a member
bank of the Automated Clearing House Network (ACH) can have income and capital
gain distributions automatically deposited to their personal bank account
usually within three business days after the Fund pays its distribution. A
DistributionsDirect request form can be obtained by calling 1-800-53-JAPAN.
Confirmation statements will be mailed to shareholders as notification that
distributions have been deposited.
Diversification
A shareholder's investment represents an interest in a large,
diversified portfolio of carefully selected securities. Diversification may
protect you against the possible risks associated with concentrating in fewer
securities or in a specific market sector.
Scudder Funds Centers
Investors may visit any of the Centers, listed below, maintained by
Scudder Investor Services, Inc. The Centers are designed to provide individuals
with services during any business day. Investors may pick up literature or find
assistance with opening an account, adding funds or special options to existing
accounts, making exchanges within the Scudder Family of Funds, redeeming shares
or opening retirement plans. Checks should not be mailed to the Centers. (See
"PURCHASES AND EXCHANGES--Share Price".)
<TABLE>
<C> <C> <C>
Boca Raton Scottsdale San Francisco
4400 North Federal Highway #130 4141 North Scottsdale Road 180 Montgomery Street
Boca Raton, Florida 33431 Suite 105 San Francisco, CA 94104
407-395-0040 Scottsdale, AZ 85251 415-788-3212
602-423-1100
Boston San Diego
166 Federal Street Los Angeles Sorrento Court
Boston, Massachusetts 02110 333 South Hope Street, 37th Fl. 9450 Scranton Avenue
800-225-2470 Los Angeles, California 90071 Suite 101
213-628-1144 San Diego, CA 92121
Chicago 619-658-8093
The Rookery Building New York
209 South LaSalle Street 345 Park Avenue, 26th Floor
Chicago, IL 60604 New York, New York 10154
312-629-1929 212-326-6200
Cincinnati Portland
600 Vine Street One S.W. Columbia Street
Suite 2000 Suite 930
Cincinnati, Ohio 45202-2430 Portland, Oregon 97258
513-621-4200 503-224-3999
</TABLE>
29
<PAGE>
Reports to Shareholders
The Fund issues to its shareholders unaudited semiannual financial
statements and annual financial statements audited by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets and supplementary information. The Fund
presently intends to distribute to shareholders informal quarterly reports
during the intervening quarters, containing a statement of the investments of
the Fund. The distribution will be accompanied by a brief indication of the
source of the distribution.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Fund's prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
INCOME
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate- and
long-term bonds.
Scudder Short Term Global Income Fund seeks to provide high current
income from a portfolio of high-grade money market instruments and
short-term bonds denominated in foreign currencies and the U.S. dollar.
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<PAGE>
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may
not be possible.
Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in investment-grade
municipal securities.
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
long-term municipal securities with an emphasis on high quality.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
Scudder New York Tax Free Fund seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.
Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
31
<PAGE>
Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.
GROWTH AND INCOME
Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.
Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.
GROWTH
Scudder Capital Growth Fund seeks to maximize long-term growth of
capital through a broad and flexible investment program emphasizing
common stocks.
Scudder Development Fund seeks to achieve long-term growth of capital
primarily through investments in marketable securities, principally
common stocks, of relatively small or little-known companies which in
the opinion of management have promise of expanding their size and
profitability or of gaining increased market recognition for their
securities, or both.
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S. and
foreign issuers. Income is an incidental consideration.
Scudder Global Small Company Fund seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S.
growth companies.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
- -------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
The Japan Fund, Inc. seeks capital appreciation through investment in
Japanese securities, primarily in common stocks of Japanese companies.
The net asset values of The Japan Fund, Inc. can be found daily in the
"Mutual Funds" section of The Wall Street Journal and other leading newspapers
throughout the country under "Japan." Most of the other Scudder Funds can be
found under "Scudder Funds." Investors will notice the net asset value and
offering price are the same, reflecting the fact that no sales commission or
"load" is charged on the sale of shares of the Scudder Funds. The latest
seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Japan Fund, Inc. and the Scudder Family of Funds offer many
conveniences and services, including: active professional investment management;
broad and diversified investment portfolios; pure no-load funds with no sales
charges or Rule 12b-1 distribution fees; individual attention from a Japan Fund
Service Specialist or Scudder Service Representative; free telephone exchanges
into Scudder money market, tax free, income, and growth funds; shares redeemable
at net asset value at any time.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By Automatic
Investment Plan" and "Exchanges and redemptions--By Automatic Withdrawal
Plan" in the Fund's prospectus.)
Detailed information on any Japan Fund or Scudder investment plan,
including the applicable charges, minimum investment requirements and
disclosures made pursuant to Internal Revenue Service (the "IRS") requirements,
may be obtained by contacting Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470.
It is advisable for an investor considering the funding of the investment plans
described below to consult with an attorney or other investment or tax adviser
with respect to the suitability requirements and tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
33
<PAGE>
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2000 to an IRA prior to the year such individual attains
age 70 1/2. In addition, certain individuals who are active participants in
qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,250 for married couples if one spouse has earned income of no
more than $250). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
Starting
Age of Annual Rate of Return
Contributions 5% 10% 15%
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
<TABLE>
<CAPTION>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
Starting
Age of Annual Rate of Return
Contributions 5% 10% 15%
<S> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
34
<PAGE>
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000
or more of shares of the Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Payments are mailed at the
end of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be reinvested in additional shares. Shares are then liquidated as
necessary to provide for withdrawal payments. Since the withdrawals are in
amounts selected by the investor and have no relationship to yield or income,
payments received cannot be considered as yield or income on the investment and
the resulting liquidations may deplete or possibly extinguish the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Fund's prospectus. Any such requests must
be received by the Fund's transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Corporation or its agent on written notice, and
will be terminated when all shares of the Fund under the Plan have been
liquidated or upon receipt by the Corporation of notice of death of the
shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-53-JAPAN.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for directors or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Corporation and its agents reserve the right to establish a
maintenance charge in the future depending on the services required by the
investor.
The Corporation reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when the shares are priced low the investor will
purchase more shares than when the share price is higher. Over a period of time
this investment approach may allow the investor to reduce the average price of
the shares purchased. However, this investment approach does not assure a profit
35
<PAGE>
or protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP).
In this case, the minimum initial investment is $500.
The Corporation reserves the right, after notice has been given to the
shareholder and custodian, to terminate a shareholder's account in the event
that regular investments to the account cease before the $1,000 minimum is
reached.
Scudder Trust Company
Annual service fees are paid by the Fund to Scudder Trust Company, an
affiliate of the Adviser, for certain retirement plan accounts and are included
in the fees paid to the Transfer Agent.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and Performance Information--Dividends and Capital
Gains Distributions" in the Fund's prospectus.)
The Fund intends to follow the practice of distributing substantially
all of net investment company taxable income as well as the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
The Fund intends to distribute any dividends from its net investment
income and net realized capital gains after utilization of capital loss
carryforwards, if any, in December to prevent application of a federal excise
tax. An additional distribution may be made within three months of the Fund's
fiscal year end, if necessary. Any dividends or capital gains distributions
declared in October, November or December with a record date in such a month and
paid during the following January will be treated by shareholders for federal
income tax purposes as if received on December 31 of the calendar year declared.
If a shareholder has elected to reinvest any dividends and/or other
distributions, such distributions will be made in additional shares of the Fund
and confirmations will be mailed to each shareholder. If a shareholder has
chosen to receive cash, a check will be sent.
PERFORMANCE AND OTHER INFORMATION
(See "Distribution and performance
information--Performance information" in
the Fund's prospectus.)
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return is the average annual compound rate of return for,
where applicable, the periods of one year, five years, and ten years, all ended
on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compound rates of return of a hypothetical investment over
such periods, that would compare the initial amount to the ending redeemable
value of such investment according to the following formula and (average annual
total return is then expressed as a percentage):
36
<PAGE>
T = (ERV/P)^(1/n) - 1
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 payment made
at the beginning of the applicable period.
Average Annual Total Return for periods ended 12/31/94
One Year Five Years Ten Years
-------- ---------- ---------
10.03% -0.47% 15.62%
Cumulative Total Return is the compound rate of return on a hypothetical initial
investment of $1000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions were reinvested in Fund shares.
Cumulative total return is calculated by finding the compound rates of return of
hypothetical investment over such period, according to the following formula
(cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000 investment
made at the beginning of the applicable period.
Cumulative Total Return for periods ended 12/31/94
One Year Five Years Ten Years
-------- ---------- ---------
10.03% -2.32% 327.01%
Total Return is the rate of return on an investment for a specified period of
time calculated in the same manner as cumulative total return.
Capital Change measures the return from invested capital including reinvested
capital gains distributions. Capital change does not include the reinvestment of
income dividends.
The investment results of the Fund will tend to fluctuate over time, so
that current distributions, total returns and capital change should not be
considered representations of what an investment may earn in any future period.
Actual distributions will tend to reflect changes in market yields, and will
also depend upon the level of the Fund's expenses, realized investment gains and
losses, and the results of the Fund's investment policies. Thus, at any point in
time, current distributions or total returns may be either higher or lower than
past results, and there is no assurance that any historical performance record
will continue.
37
<PAGE>
Quotations of the Fund's performance are based on historical earnings
and are not intended to indicate future performance of the Fund. An investor's
shares when redeemed may be worth more or less than their original cost.
Performance of the Fund will vary based on changes in market conditions and the
level of the Fund's expenses.
Comparison of non-standard performance data of various investments is
valid only if such performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of the Fund with performance quoted with respect to other investment companies
or types of investments.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
Because some or all of the Fund's investments are denominated in a
foreign currency, the strength or weakness of the U.S. dollar as against this
currency may account for part of the Fund's investment performance. Historical
information on the value of the dollar versus this foreign currency may be used
from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against this currency. In addition, marketing materials may cite country
and economic statistics and historical stock market performance for any of the
countries in which the Fund invests, including, but not limited to, the
following: population growth, gross domestic product, inflation rate, average
stock market price-earnings ratios and the total value of stock markets. Sources
for such statistics may include official publications of various foreign
governments and exchanges.
From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations. In addition, the Fund's performance may also be
compared to the performance of broad groups of comparable mutual funds. Indices
with which the Fund's performance may be compared include, but are not limited
to, the following:
The Europe/Australia/Far East (EAFE) Index
Morgan Stanley Capital International World Index
J.P. Morgan Global Traded Bond Index
Salomon Brothers World Government Bond Index
NASDAQ Composite Index
Wilshire 5000 Stock Index
The following graph illustrates the historical risks and returns of
selected indices which track the performance of various combinations of United
States and international securities for the ten year period ended December 31,
1994; results for other periods may vary. The graph uses ten year annualized
international returns represented by the Morgan Stanley Capital International
38
<PAGE>
Europe, Australia and Far East (EAFE) Index and ten year annualized United
States returns represented by the S&P 500 Index. Risk is measured by the
standard deviation in overall portfolio performance within each index.
Performance of an index is historical, and does not represent the performance of
the Fund, and is not a guarantee of future results.
LINE CHART - EFFICIENT FRONTIER
MSCI EAFE vs. S&P 500 (12/31/84-12/31/94)
CHART DATA:
Total Standard
Return Deviation
------ ---------
17.95 18.46 100% Int'l MSCI EAFE
17.14 18.05 10 US/90 Int'l
16.41 17.64 20/80
15.8 17.23 30 U.S./70 Int'l
15.3 16.82 40/60
14.93 16.41 50 U.S./50Int'l
14.7 16 60/40
14.62 15.59 70 U.S./30 Int'l
14.69 15.18 80/20
14.91 14.77 90 U.S./10 Int'l
15.27 14.36 100% U.S. S&P 500
MSCI EAFE vs. S&P 500 (12/31/84 - 12/31/94)
18.46 17.95
18.05 17.14
17.64 16.41
17.23 15.8
16.82 15.3
16.41 14.93
16 14.7
15.59 14.62
15.18 14.69
14.77 14.91
14.36 15.27
Source: Lipper Analytical Services, Inc. (Data as of 12/31/94)
From time to time, in marketing and other Fund literature, Directors
and officers of the Fund, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Adviser has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
39
<PAGE>
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about this Fund. Sources for Fund performance information and articles
about the Fund may include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
40
<PAGE>
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national business weekly that periodically reports
mutual fund performance data.
41
<PAGE>
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
FUND ORGANIZATION
(See "Fund organization" in the Fund's prospectus.)
The Fund was incorporated under the laws of the State of Maryland in
1961.
The authorized capital stock of the Fund consists of 600,000,000 shares
of a par value of $.33 1/3 each--all of one class and all having equal rights as
to voting, redemption, dividends and liquidation. All shares issued and
outstanding are fully paid and non-assessable, transferable, and redeemable at
net asset value at the option of the shareholder. Shares have no preemptive or
conversion rights.
The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and, in such
event, the holders of the remaining less than 50% of the shares voting for the
election of directors will not be able to elect any person or persons to the
Board of Directors.
To the knowledge of the Fund, no person is a control person of the Fund
within the meaning ascribed to such term under the Securities Act of 1933, as
amended.
As of April 1, 1995, all Directors and officers of the Fund as a group
owned beneficially (as that term is defined in Section 13(d) of the Securities
Exchange Act of 1934) less than 1% of the Fund.
As of April 1, 1995, 4,610,633 shares in the aggregate, 8.6% of the
outstanding shares of the Fund, were held in the name of Charles Schwab & Co.,
101 Montgomery Street, San Francisco, CA 94104 who may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the best of the Fund's knowledge, as of April 1, 1995, no person
owned beneficially more than 5% of the Fund's outstanding shares except as
stated above.
INVESTMENT ADVISORY ARRANGEMENTS
(See "Fund organization" in the Fund's prospectus.)
At a special meeting held on December 21, 1993, shareholders of the
Fund approved an Investment Management Agreement with Scudder, Stevens & Clark,
Inc., succeeding Asia Management as the Fund's investment adviser. The
shareholders also approved a Research Agreement between Scudder, Stevens &
Clark, Inc. and The Nikko International Capital Management Co., Ltd. ("NICAM").
These two agreements have the effect of reducing the total advisory fees paid by
the Fund. The shareholders' approval of these agreements was ratified at a
special meeting held on July 22, 1994.
Scudder, Stevens & Clark, Inc. is one of the most experienced
investment management firms in the United States. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
42
<PAGE>
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953, the Adviser introduced the Scudder
International Fund, the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Development Fund, Scudder Equity Trust, Scudder Fund, Inc., Scudder Funds Trust,
Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment
Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia
Fund, Inc., Scudder New Europe Fund, Inc., Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, Scudder World Income Opportunities Fund,
Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The First Iberian Fund,
Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The Latin America Dollar
Income Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $11 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
The Investment Management Agreement between the Fund and the Adviser
dated and effective January 1, 1994, (the "Agreement"), was last approved by the
Directors on January 26, 1995 and will continue in effect until February 28,
1996 and from year to year thereafter only if its continuance is approved
annually by the vote of a majority of those Directors who are not parties to
such Agreement or interested persons of the Adviser or the Fund, cast in person
at a meeting called for the purpose of voting on such approval, and either by a
vote of the Fund's Directors or of a majority of the outstanding voting
securities of the Fund. The Agreement may be terminated at any time without
payment of penalty by either party on sixty days' written notice, and
automatically terminates in the event of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objectives, policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of the Fund's
assets shall be held uninvested, subject to the Fund's Articles, By-Laws, the
43
<PAGE>
1940 Act, the Internal Revenue Code of 1986 and to the Fund's investment
objective, policies and restrictions, and subject, further, to such policies and
instructions as the Board of Directors of the Fund may from time to time
establish.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Directors and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, custodian, accountants and others); preparing and making filings with
the Commission and other regulatory agencies; assisting in the preparation and
filing of the Fund's federal, state and local tax returns; preparing and filing
the Fund's federal excise tax returns; assisting with investor and public
relations matters; monitoring the valuation of securities and the calculation of
net asset value; monitoring the registration of shares of the Fund under
applicable federal and state securities laws; maintaining the Fund's books and
records to the extent not otherwise maintained by a third party; assisting in
establishing accounting policies of the Fund; assisting in the resolution of
accounting and legal issues; establishing and monitoring the Fund's operating
budget; processing the payment of the Fund's bills; assisting the Fund in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting the Fund in the conduct of its business, subject to the
direction and control of the Directors.
The Adviser pays the compensation and expenses of all Directors,
officers and executive employees (except expenses incurred attending Board and
committee meetings outside New York, New York or Boston, Massachusetts) of the
Fund affiliated with the Adviser and makes available, without expense to the
Fund, the services of such Directors, officers and employees of the Adviser as
may duly be elected officers of the Fund, subject to their individual consent to
serve and to any limitations imposed by law, and provides the Fund's office
space and facilities.
For its services under the Agreement, the Adviser receives a monthly
fee, payable in dollars, equal on an annual basis to 0.85 of 1% of the first
$100 million of average daily net assets, 0.75 of 1% on assets in excess of $100
million up to and including $300 million, 0.70 of 1% on assets in excess of $300
million up to and including $600 million, and 0.65 of 1% of assets in excess of
$600 million. For purposes of computing the monthly fee, the average daily net
assets of the Fund is determined as of the close of business on each business
day of each month throughout the year. For the years ended December 31, 1993 and
1992, the Fund paid Asia Management aggregate fees pursuant to its then
effective investment advisory and management agreement of $4,147,194 and
$2,928,192, respectively, of which $1,087,289 and $778,321, respectively, were
paid to NICAM. For the year ended December 31, 1994, the Fund paid the Adviser
$4,773,356, of which $975,256 was paid to NICAM.
Under the Agreement the Fund is responsible for all of its other
expenses including: organizational costs, fees and expenses incurred in
connection with membership in investment company organizations; brokers'
commissions; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the Transfer Agent; the cost of preparing share
certificates or any other expenses of issue, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of Directors, officers
and employees of the Fund who are not affiliated with the Adviser; the cost of
printing and distributing reports and notices to stockholders; and the fees and
disbursements of custodians. The Fund may arrange to have third parties assume
all or part of the expenses of sale, underwriting and distribution of shares of
the Fund. The Fund is also responsible for its expenses of shareholders'
meetings, the cost of responding to shareholders' inquiries, and its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Directors of the Fund with
respect thereto. The custodian agreement provides that the custodian shall
compute the net asset value.
The Agreement expressly provides that the Adviser shall not be required
to pay a pricing agent of any Fund for portfolio pricing services, if any.
Pursuant to certain state laws, the Adviser is required to reimburse
the Fund for annual expenses to the extent required by the lowest expense
limitations imposed by the states in which the Fund is at the time offering its
shares for sale, although no payments are required to be made by the Adviser
pursuant to this reimbursement provision in excess of the annual fee paid by the
Fund to the Adviser. The Adviser has been advised that the lowest such
limitation is presently 2 1/2% of average daily net assets up to $30,000,000, 2%
of the next $70,000,000 of such net assets and 1 1/2% of such net assets in
excess of that amount. Certain expenses such as brokerage commissions, taxes,
44
<PAGE>
extraordinary expenses and interest are excluded from such limitations. If
reimbursement is required, it will be made as promptly as practicable after the
end of the Fund's fiscal year. However, no fee payment will be made to the
Adviser during any fiscal year which will cause year-to-date expenses to exceed
the cumulative pro-rata expense limitation at the time of such payment.
Pursuant to the Research Agreement between the Adviser and The Nikko
International Capital Management Co., Ltd. ("NICAM") dated and effective January
1, 1994, NICAM provides the Adviser with information, investment
recommendations, advice and assistance for use by the Adviser in advising the
Fund. (Prior to May 1, 1987, these services were provided to Asia Management by
The Nikko Research Center, Ltd.) NICAM is free, under the terms of the Research
Agreement, to render similar services to others, including other investment
companies. For its services under the Research Agreement, NICAM receives from
Scudder, Stevens & Clark, Inc. an annual fee of 0.15 of 1% up to $700 million of
average daily net assets, 0.14 of 1% of assets in excess of $700 million,
payable monthly during fiscal year 1994 and 0.10 of 1% of average daily net
assets, payable monthly during fiscal year 1995. On December 31, 1995, the
research contract with NICAM will terminate. For purposes of computing the
monthly fee, the value of the average daily net assets of the Fund is determined
as of the close of business on the last business day of each month. The Fund's
expenses are paid out of gross investment income. Shareholders pay no direct
charges or fees for investment services.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
Name and Address Position with Fund Principal Occupation***
- ------------------- ---------------------- -------------------------
<S> <C> <C>
Robert G. Stone, Jr. Chairman of the Board and Chairman of the Board
Kirby Corporation Director and Director,
405 Lexington Ave - 39th Fl. Kirby Corporation
New York, NY 10174 (marine transportation,
diesel repair and property
and casualty insurance in
Puerto Rico)
Douglas M. Loudon# President Managing Director,
Scudder, Stevens & Clark, Inc.
William L. Givens Director President,
Twain Associates, Inc. Twain Associates
21 Custom House Street
Suite 470
Boston, MA 02110
William H. Gleysteen, Jr. Director President,
The Japan Society The Japan Society, Inc.
333 East 47th Street
New York, NY 10017
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with Fund Principal Occupation***
- ------------------- ---------------------- -------------------------
<S> <C> <C>
Nobuo Ishizaka Director Non-executive Director of Atlas
Copco, Kaigain Bussan K.K., and HFI
Food, Inc.
John F. Loughran Director Senior Adviser for Asia Pacific
711 Silvergate Avenue to J.P. Morgan & Co., Inc.
Point Loma
San Diego, CA 92106
William V. Rapp Director Managing Director,
Rue Associates Rue Associates
85 River Road
Scarborough, NY 10510
Henry Rosovsky* Director Professor,
Harvard University Harvard University
Littauer 218
Cambridge, MA 02138
O. Robert Theurkauf*# Director Advisory Managing Director, Scudder,
Stevens & Clark, Inc.
Shoji Umemura* Director Chairman,
The Nikko Securities Co., Ltd. The Nikko Securities Co., Ltd.
3-1-1, Marunouchi, Chiyoda-ku
Tokyo, Japan
Hiroshi Yamanaka Director Adviser to the Board,
Meiji Mutual Life The Meiji Mutual Life
Insurance Company Insurance Company
2-1-1, Marunouchi, Chiyoda-ku
Tokyo, Japan
Tristan E. Beplat Honorary Director Director, Daiwa Bank
One Haslet Avenue & Trust Co., Yasuda Fire
Princeton, NJ 08540 and Marine Insurance Company of
America
Allan Comrie Honorary Director Director,
40 Sheridan Drive Petroleum & Resources Corp., The
New Canaan, CT 06840 Adams Express Co.
Jonathan Mason Honorary Director Retired First Vice President
39 Tuckahoe Lane Prudential-Bache Securities, Inc.
Southampton, NY 11968
James W. Morley Honorary Director Professor of Political Science
145 Piermont Road Emeritus
Closter, NJ 07624 Columbia University
Elizabeth J. Allan# Vice President Principal,
Scudder, Stevens & Clark, Inc.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with Fund Principal Occupation***
- ------------------- ---------------------- -------------------------
<S> <C> <C>
William E. Holzer# Vice President Managing Director,
Scudder, Stevens & Clark, Inc.
Thomas W. Joseph**+ Vice President Principal,
Scudder, Stevens & Clark, Inc.
Seung K. Kwak# Vice President Managing Director,
Scudder, Stevens & Clark, Inc.
Edward J. O'Connell# Vice President Principal,
Scudder, Stevens & Clark, Inc.
Miyuki Wakatsuki Vice President General Manager,
17-9, Nihonbashi-Hakozakicho Japan Fund Office,
Chuo-Ku Nikko International Capital
Tokyo 103, Japan Management Co., Ltd.
Gina Provenzano# Vice President and Treasurer Associate,
Scudder, Stevens & Clark, Inc.
Kathryn L. Quirk# Vice President and Secretary Managing Director,
Scudder, Stevens & Clark, Inc.
Thomas F. McDonough+ Assistant Secretary Principal,
Scudder, Stevens & Clark, Inc.
Pamela A. McGrath+ Assistant Treasurer Principal,
Scudder, Stevens & Clark, Inc.
* An "interested person" of the Fund as defined by the Investment Company Act of
1940, as amended.
** Mr. Joseph is a vice president, director, treasurer and assistant clerk of Scudder
Investor Services, Inc., the Fund's principal underwriter.
*** Unless otherwise stated, all the directors and officers of the Fund
have been associated with their respective companies for more than five
years, but not necessarily in the same capacity.
# Address = 345 Park Avenue, New York, New York 10154-0010.
+ Address = Two International Place, Boston, Massachusetts 02110-4103
</TABLE>
The Executive Committee of the Fund's Board of Directors, which
currently consists of Messrs. Stone, Loughran, Theurkauf and Rosovsky, has and
may exercise any or all of the powers of the Board of Directors in the
management of the business and affairs of the Fund when the Board is not in
session, except as provided by law and except the power to increase or decrease,
or fill vacancies on, the Board.
REMUNERATION
Several of the officers and Directors of the Fund may be officers of
Scudder, Stevens & Clark, Inc. or of The Nikko Securities Co., Ltd. The Fund
pays direct remuneration only to those officers of the Fund who are not
affiliated with Scudder or their affiliates. Currently, the Chairman of the
Board is the only officer who is not so affiliated. Each of the Directors who is
not affiliated with Scudder, Stevens & Clark, Inc. or The Nikko Securities Co.,
Ltd. will be paid by the Fund. Each of these unaffiliated Directors receives an
annual Director's fee of $6,000 and fees of $1,000 for attending each meeting of
the Board and $750 for attending each committee meeting, or meeting held for the
purpose of considering arrangements between the Fund and Scudder, Stevens &
Clark, Inc., or any of its other affiliates. Each unaffiliated Director also
receives $750 per committee meeting attended. The Chairman of the Board
currently receives additional compensation of $10,000 annually. As of July 30,
47
<PAGE>
1992, Honorary Directors of the Fund received $1,000 for each Board meeting
attended. For the year ended December 31, 1994, such fees totalled $143,619.
The following Compensation Table, provides in tabular form, the following data.
Column (1) All directors who receive compensation from the Fund.
Column (2) Aggregate compensation received by a director from all series of the
Fund.
Columns (3) and (4) Pension or retirement benefits accrued or proposed to
be paid by the Fund.
Column (5) Total compensation received by a director from
the Fund plus compensation received from all funds managed by Scudder for which
a director serves. The total number of funds from which a director receives such
compensation is also provided in column (5).
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1994
=====================================================================================================================
(1) (2) (3) (4) (5)
Pension or Total Compensation
Retirement Estimated From The Japan
Benefits Accrued Annual Benefits Fund, Inc. and
Name of Person, Aggregate Compensation from As Part of Fund Upon Retirement Fund Complex Paid
Position The Japan Fund, Inc. Expenses to Director
=====================================================================================================================
<S> <C> <C> <C> <C>
Robert G. Stone, Jr., $ 22,000 $ 6,289 $ 6,000 $ 146,727
Director (15 Funds)
William Givens, $ 12,750 $ 3,665 $ 6,000 $ 22,415
Director (1 Fund)
William H. Gleysteen, Jr., $ 16,500 $ 3,804 $ 3,000 $ 117,017
Director (12 Funds)
John F. Loughran, $ 16,500 $ 3,500 $ 6,000 $ 26,000
Director (1 Fund)
William V. Rapp, $ 17,250 $ 1,822 $ 6,000 $ 25,072
Director (1 Fund)
Henry Rosovsky, $ 14,750 $ 2,273 $ 6,000 $ 23,023
Director (1 Fund)
Hiroshi Yamanaka, $ 9,000 $ 7,726 $ 6,000 $ 22,726
Director (1 Fund)
Tristan E. Beplat, $ 2,000 N/A N/A $ 2,000
Honorary Director (1 Fund)
Allan Comrie, $ 5,196 $ 5,376 $ 5,184 $ 15,756
Honorary Director (1 Fund)
Jonathan Mason, $ 6,000 $ 7,388 $ 6,000 $ 19,388
Honorary Director (1 Fund)
James W. Morley, $ 8,596 $ 6,624 $ 6,000 $ 21,220
Honorary Director (1 Fund)
</TABLE>
DISTRIBUTOR
Under the terms of the Underwriting Agreement dated and effective
August 14, 1987, between the Fund and Scudder Investor Services, Inc. (the
"Distributor"), a Massachusetts corporation, which is a wholly-owned subsidiary
of Scudder, Stevens & Clark, Inc., the Fund is responsible for: the payment of
48
<PAGE>
all fees and expenses in connection with the preparation and filing with the
Securities and Exchange Commission of its registration statement and prospectus
and any amendments and supplements thereto; the registration and qualification
of shares for sale in the various states, including registering the Fund as a
broker or dealer; the fees and expenses of preparing, printing and mailing
prospectuses (see below for expenses relating to prospectuses paid by the
Distributor), notices, proxy statements, reports or other communications
(including newsletters) to shareholders of the Fund; the cost of printing and
mailing confirmations of purchases of shares and the prospectuses accompanying
such confirmations; any issue taxes or any initial transfer taxes; a portion of
shareholder toll-free telephone charges and expenses of service representatives,
the cost of wiring funds for share purchases and redemptions (unless paid by the
shareholder who initiates the transaction); the cost of printing and postage of
business reply envelopes; and a portion of the cost of computer terminals used
by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of the Fund's shares.
Scudder Investor Services, Inc. also acts as distributor for Scudder
California Tax Free Fund, Scudder California Tax Free Money Fund, Scudder
Capital Growth Fund, Scudder Cash Investment Trust, Scudder Development Fund,
Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA
Fund, Scudder Institutional Fund, Inc., Scudder International Fund, Inc.,
Scudder Investment Trust, Scudder Municipal Trust, Scudder Massachusetts Tax
Free Fund, Scudder New York Tax Free Money Fund, Scudder Ohio Tax Free Fund,
Scudder Pennsylvania Tax Free Fund, Scudder Portfolio Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Target Fund, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, AARP Growth Trust, AARP Income Trust,
AARP Tax Free Income Trust and AARP Cash Investment Funds. Scudder, Stevens &
Clark, Inc., pays the expenses of the operations of Scudder Investor Services,
Inc., with which it is affiliated.
NOTE: Although the Fund does not currently have a 12b-1 Plan and shareholder
approval would be required in order to adopt one, the underwriting agreement
provides that the Fund will also pay those fees and expenses permitted to be
paid or assumed by the Fund pursuant to a 12b-1 Plan, if any, adopted by the
Fund, notwithstanding any other provision to the contrary in the underwriting
agreement, and the Fund or a third party will pay those fees and expenses not
specifically allocated to the Distributor in the underwriting agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of the Fund.
TAXES
(See "Distribution and performance information--Dividends and Capital Gains
Distributions" and "Transaction Information -- Tax Information,
Tax Identification Number" in the Fund's prospectus.)
United States Federal Income Taxation
The following is a general discussion of certain U.S. federal income
tax consequences relating to the status of the Fund and to the tax treatment of
distributions by the Fund to shareholders. This discussion is based on the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
Revenue Rulings and judicial decisions as of the date hereof, all of which may
be changed either retroactively or prospectively. This discussion does not
address all aspects of U.S. federal income taxation that may be relevant to
shareholders in light of their particular circumstances or to shareholders
subject to special treatment under U.S. federal income tax laws (e.g., certain
financial institutions, insurance companies, dealers in stock or securities,
tax-exempt organizations, persons who have entered into hedging transactions
with respect to shares of the Fund, persons who borrow in order to acquire
shares, and certain foreign taxpayers).
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Prospective shareholders should consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
The Fund and its Investments. The Fund intends to qualify for and elect the
special tax treatment applicable to "regulated investment companies" under
Sections 851-855 of the Code.
To so qualify, the Fund must, among other things: (a) derive at least
90% of its gross income in each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
(b) derive less than 30% of its gross income in each taxable year from the sale
or other disposition of (i) stock or securities held for less than three months,
(ii) options, futures or forward contracts (other than options, futures or
forward contracts on foreign currencies) held for less than three months, and
(iii) foreign currencies (or options, futures or forward contracts on foreign
currencies) held for less than three months but only if such currencies
(options, futures or forward contracts) are not directly related to the Fund's
principal business of investing in stock or securities (or options or futures
with respect to stock or securities); and (c) diversify its holdings so that, at
the end of each quarter of the Fund's taxable year, (i) at least 50% of the
value of the Fund's total assets is represented by cash and cash items,
securities of other regulated investment companies, United States Government
securities and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the value of the Fund's
total assets and not greater than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of the Fund's total assets
is invested in the securities of any one issuer (other than United States
Government securities or securities of other regulated investment companies) or
in any issuers of the same industry that are controlled by the Fund. The Fund
anticipates that, in general, its foreign currency gains will be directly
related to its principal business of investing in stock and securities.
Qualification and election as a "regulated investment company" involve
no supervision of investment policy or management by any government agency. As a
regulated investment company, the Fund generally will not be subject to U.S.
federal income tax on its net investment income and net long-term and short-term
capital gains, if any, that it distributes to its shareholders, provided that at
least 90% of its "investment company taxable income" (determined without regard
to the deduction for dividends paid) is distributed or deemed distributed. The
Fund will generally be subject to tax at regular U.S. federal corporate income
tax rates on any income or gains which are not treated as distributed and, under
certain circumstances, in respect of investments in passive foreign investment
companies as described below. Furthermore, the Fund will also be subject to a
U.S. federal corporate income tax with respect to distributed amounts in any
year that it fails to qualify as a regulated investment company or fails to meet
the applicable distribution requirement. Although all or a portion of the Fund's
taxable income (including any net capital gains) for a calendar year may be
distributed in January of the following year, such a distribution may be treated
for U.S. federal income tax purposes as having been received by shareholders
during the calendar year. In addition, the Fund intends to make sufficient
distributions in a timely manner in order to ensure that it will not be subject
to the 4% U.S. federal excise tax on certain undistributed income of regulated
investment companies.
The Fund generally intends to distribute all of its net investment
income, net short-term capital gains and net long-term capital gains (which
consist of net long-term capital gains in excess of net short-term capital
losses) in a timely manner. If any net capital gains are retained by the Fund
for reinvestment, requiring Federal income taxes to be paid thereon by the Fund,
the Fund will elect to treat such capital gains as having been distributed to
shareholders. As a result, each shareholder will report such capital gains as
long-term capital gains, will be able to claim his share of U.S. federal income
taxes paid by the Fund on such gains as a credit or refund against his own U.S.
federal income tax liability and will be entitled to increase the adjusted tax
basis of his Fund shares by the difference between his pro rata share of such
gains and the related credit or refund.
The Fund may invest in shares of certain foreign corporations which may
be classified under the Code as passive foreign investment companies ("PFICs").
If the Fund receives a so-called "excess distribution" with respect to PFIC
stock, the Fund itself may be subject to a tax on a portion of the excess
distribution. Certain distributions from a PFIC as well as gains from the sale
of the PFIC shares are treated as "excess distributions." In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the Fund held the PFIC shares. The Fund will be
subject to tax on the portion, if any, of an excess distribution that is
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Excess
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distributions allocated to the current taxable year are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
Proposed regulations have been issued which may allow the Fund to make
an election to mark to market its shares of these foreign investment companies
in lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Fund would report as ordinary
income the amount by which the fair market value of the foreign company's stock
exceeds the Fund's adjusted basis in these shares. No mark to market losses may
be recognized. The effect of the election would be to treat excess distributions
and gain on dispositions as ordinary income which is not subject to a fund level
tax when distributed to shareholders as a dividend. Alternatively, the Fund may
elect to include as income and gain its share of the ordinary earnings and net
capital gain of certain foreign investment companies in lieu of being taxed in
the manner described above.
Exchange control regulations may restrict repatriations of investment
income and capital or the proceeds of securities sales by foreign investors such
as the Fund and may limit the Fund's ability to make sufficient distributions to
satisfy the 90% and excise tax distribution requirements.
The Fund's transactions in foreign currencies, forward contracts,
options, and futures contracts (including options and futures contracts on
foreign currencies) will be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund or defer Fund losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require the Fund to
"mark-to-market" certain types of the positions in its portfolio (i.e., treat
them as if they were sold), and (b) may cause the Fund to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. The Fund intends to monitor these transactions and to make the
appropriate tax elections and will make the appropriate entries in its books and
records when it acquires any foreign currency, forward contract, option, futures
contract, or hedged investment and will generally attempt to mitigate any
adverse effects of these rules in order to minimize or eliminate its tax
liabilities and to prevent disqualification of the Fund as a regulated
investment company.
Distributions. Distributions to shareholders of the Fund's net investment income
and distributions of net short-term capital gains will be taxable as ordinary
income to shareholders. Generally, dividends paid by the Fund will not qualify
for the dividends-received deduction available to corporations, because the
Fund's income generally will not consist of dividends paid by U.S. corporations.
Distributions of the Fund's net capital gains (designated as capital gain
dividends by the Fund) will be taxable to shareholders as long-term capital
gains, regardless of the length of time the shares have been held by a
shareholder and are not eligible for the dividends-received deduction.
Distributions in excess of the Fund's current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of
capital, to the extent of a shareholder's adjusted basis in his shares of the
Fund, and as a capital gain thereafter (if the shareholder held his shares of
the Fund as capital assets).
Shareholders electing to receive distributions in the form of
additional shares will be treated for U.S. federal income tax purposes as
receiving a distribution in an amount equal to the fair market value, determined
as of the distribution date, of the shares received and will have a cost basis
in each share received equal to the fair market value of a share of the Fund on
the distribution date.
All distributions of net investment income and net capital gains,
whether received in shares or in cash, must be reported by each shareholder on
his U.S. federal income tax return. A distribution will be treated as paid
during a calendar year if it is declared by the Fund in October, November or
December of the year to holders of record in such a month and paid by January 31
of the following year. Such distributions will be taxable to shareholders as if
received on December 31 of such prior year, rather than in the year in which the
distributions are actually received.
Sale or Redemption of Shares. A shareholder may recognize a taxable gain or loss
if the shareholder sells or redeems his shares (which includes exchanging his
shares for shares of another Scudder Fund). A shareholder will generally be
subject to taxation based on the difference between his adjusted tax basis in
the shares sold or redeemed and the value of the cash or other property received
by him in payment therefor.
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A shareholder who receives securities upon redeeming his shares will
have a tax basis in such securities equal to their fair market value on the
redemption date. A shareholder who subsequently sells any securities received
pursuant to a redemption will recognize taxable gain or loss to the extent that
the proceeds from such sale are greater or less than his tax basis in such
securities.
Any gain or loss arising from the sale or redemption of shares will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will generally be long-term capital gain or loss if the
shares are held for more than one year and short-term capital gain or loss if
the shares are held for one year or less. Any loss realized on a sale or
redemption will be disallowed to the extent the shares disposed of are replaced
with substantially identical shares within a period beginning 30 days before and
ending 30 days after the disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
arising from the sale or redemption of shares held for six months or less will
be treated for U.S. federal tax purposes as a long-term capital loss to the
extent of any amount of capital gain dividends received by the shareholder with
respect to such share.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. Although the price of shares purchased at the time
includes the amount of the forthcoming distribution, the distribution will
nevertheless be taxable to them.
Foreign Taxes. As set forth below under "Japanese Taxation," it is expected that
certain income of the Fund will be subject to Japanese withholding taxes. If the
Fund is liable for foreign income taxes, including such Japanese withholding
taxes, the Fund expects to meet the requirements of the Code for
"passing-through" to its shareholders the foreign taxes paid, but there can be
no assurance that the Fund will be able to do so. Under the Code, if more than
50% of the value of the Fund's total assets at the close of the taxable year
consists of stock or securities of foreign corporations, the Fund will be
eligible, and may file an election with the Internal Revenue Service to
"pass-through" to the Fund's shareholders the amount of foreign income taxes
paid by the Fund. Pursuant to this election a shareholder will: (a) include in
gross income (in addition to taxable dividends actually received) the
shareholder's pro rata share of the foreign income taxes paid by the Fund; (b)
treat the shareholder's pro rata share of such foreign income taxes as having
been paid by the shareholder; and (c) subject to certain limitations, be
entitled either to deduct the shareholder's pro rata share of such foreign
income taxes in computing the shareholder's taxable income or to use it as a
foreign tax credit against U.S. income taxes. No deduction for foreign taxes may
be claimed by a shareholder who does not itemize deductions. A shareholder's
election to deduct rather than credit such foreign taxes may increase the
shareholder's alternative minimum tax liability, if applicable. Shortly after
any year for which it makes such an election, the Fund will report to its
shareholders, in writing, the amount per share of such foreign tax that must be
included in each shareholder's gross income and the amount which will be
available for deduction or credit.
Generally, a credit for foreign income taxes is subject to the
limitation that it may not exceed the shareholder's U.S. tax (before the credit)
attributable to the shareholder's total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by the Fund from its
foreign source income will be treated as foreign source income. The Fund's gains
and losses from the sale of securities, and currency gains and losses, will
generally be treated as derived from U.S. sources. The limitation on the foreign
tax credit is applied separately to foreign source "passive income," such as the
portion of dividends received from the Fund which qualifies as foreign source
income. Because of these limitations, a shareholder may be unable to claim a
credit for the full amount of the shareholder's proportionate share of the
foreign income taxes paid by the Fund.
If the Fund does not make the election, any foreign taxes paid or
accrued will represent an expense to the Fund which will reduce its net
investment income. Absent this election, shareholders will not be able to claim
either a credit or deduction for their pro rata portion of such taxes paid by
the Fund, nor will shareholders be required to treat as part of the amounts
distributed to them their pro rata portion of such taxes paid.
Backup Withholding. The Fund will be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to shareholders who
fail to provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
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other shareholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against a shareholder's U.S. federal income tax liability.
Foreign Shareholders. A "Foreign Shareholder" is a person or entity that, for
U.S. federal income tax purposes, is a nonresident alien individual, a foreign
corporation, a foreign partnership, or a nonresident fiduciary of a foreign
estate or trust. If a distribution of the Fund's net investment income and net
short-term capital gains to a Foreign Shareholder is not effectively connected
with a U.S. trade or business carried on by the investor, such distribution will
be subject to withholding tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Foreign Shareholders may be subject to an increased U.S. federal income
tax on their income resulting from the Fund's election (described above) to
"pass-through" amounts of foreign taxes paid by the Fund, but may not be able to
claim a credit or deduction with respect to the withholding tax for the foreign
taxes treated as having been paid by them.
A Foreign Shareholder generally will not be subject to U.S. federal
income tax with respect to gain on the sale or redemption of shares of the Fund,
distributions from the Fund of net long-term capital gains, or amounts retained
by the Fund which are designated as undistributed capital gains unless the gain
is effectively connected with a trade or business of such shareholder in the
United States. In the case of a Foreign Shareholder who is a nonresident alien
individual, however, gain arising from the sale or redemption of shares of the
Fund, distributions of net long-term capital gains and amounts retained by the
Fund which are designated as undistributed capital gains ordinarily will be
subject to U.S. income tax at a rate of 30% if such individual is physically
present in the U.S. for 183 days or more during the taxable year and, in the
case of gain arising from the sale or redemption of Fund shares, either the gain
is attributable to an office or other fixed place of business maintained by the
shareholder in the United States or the shareholder has a "tax home" in the
United States.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of investment in the Fund.
Notices. Shareholders will be notified annually by the Fund as to the U.S.
federal income tax status of the dividends, distributions, and deemed
distributions made by the Fund to its shareholder. Furthermore, shareholders
will also receive, if appropriate, various written notices after the close of
the Fund's taxable year regarding the U.S. federal income tax status of certain
dividends, distributions and deemed distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year.
Japanese Taxation
The operations of the Fund as described herein do not, in the opinion
of Nagashima & Ohno, Japanese counsel for the Fund, involve the creation in
Japan of a "permanent establishment" of the Fund by reason only of dealing in
Japanese securities (whether or not such dealings are effected through
securities firms or banks licensed in Japan) provided such dealings are
conducted by the Fund from outside of Japan pursuant to the tax convention
between the United States and Japan (the "Convention") as currently in force.
Pursuant to the Convention, a Japanese withholding tax at the maximum rate of
15% is, with certain exceptions, imposed upon dividends paid by a Japanese
corporation to the Fund. Pursuant to the present terms of the Convention,
interest received by the Fund from sources within Japan is subject to a Japanese
withholding tax at a maximum rate of 10%. In the opinion of Nagashima & Ohno,
pursuant to the Convention, capital gains of the Fund arising from its
investments as described herein are not taxable in Japan.
Generally, the Fund will be subject to the Japan securities transaction
tax on its sale of certain securities in Japan. The current rates of such tax
range from 0.03% to 0.30% depending upon the particular type of securities
involved. Transactions involving equity securities are currently taxed at the
highest rate.
BROKERAGE AND PORTFOLIO TURNOVER
Total brokerage commissions paid by the Fund amounted to $2,623,142 for
1994, $2,278,248 for 1993 and $1,325,290 for 1992. Of such amounts, commissions
were paid by the Fund for brokerage services rendered by The Nikko Securities
Co., Ltd. ("Nikko Securities") in respect of portfolio transactions by the Fund
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in the amounts of $60,488 for 1994, $19,432 for 1993 and $0 for 1992. Such
amounts represented 2.3%, 0.85% and 0% of the total brokerage commissions paid
by the Fund in such years, respectively. The advisory fee paid to NICAM was not
reduced because of such brokerage commissions. During the years ended December
31, 1994, 1993 and 1992, there were $0, $0 and $11,665, respectively, in
commissions paid or accrued by the Fund to J.P. Morgan Securities Asia, Ltd.
Such amounts represented 0%, 0% and 0.88% of the total brokerage commissions
paid by the Fund in such years, respectively. The rate of total portfolio
turnover of the Fund for the years 1994, 1993, and 1992 was 74.3%, 81.7% and
47.0%, respectively.
The Fund always seeks to place portfolio transactions with those
brokers which, in the opinion of the management of the Fund, provide the best
execution of Fund orders. The Fund considers the obtaining of the most favorable
price for Fund orders a major factor in best execution. Subject to this practice
of seeking the best execution, the Fund, in allocating brokerage, may consider
research information provided by brokers to the Fund or to the Adviser for use
in advising the Fund. Orders for portfolio transactions of the Fund may be
placed through Scudder Investor Services, Inc., which in turn places orders on
behalf of the Fund with other brokers and dealers. Scudder Investor Services,
Inc. receives no commissions, fees or other remuneration from the Fund for this
service.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close
of regular trading on the New York Stock Exchange (the "Exchange") on each day
the Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value per
share is determined by dividing the value of the total assets of the Fund, less
all liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any sales, the security is valued
at the high or "inside" bid quotation. The value of an equity security not
quoted on the NASDAQ System, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
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portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial statements of the Fund included in the Annual Report to
shareholders dated December 31, 1994, attached to this Statement of Additional
Information, have been examined by Price Waterhouse, independent accountants, in
reliance upon the accompanying report of said firm, which report is given upon
their authority as experts in accounting and auditing.
Public Official Documents
The documents referred to after the tabular and textual information
appearing herein under the caption "JAPAN AND THE JAPANESE ECONOMY" and
"SECURITIES MARKETS IN JAPAN" as being the source of the statistical or other
information contained in such tables or text are in all cases public official
documents of Japan, its agencies, The Bank of Japan or the Japanese Stock
Exchange, with the exception of the public official documents of the United
Nations and of the International Monetary Fund.
Other Information
Many of the investment changes in the Fund will be made at prices
different from those market prices prevailing at the time they may be reflected
in a regular report to shareholders of the Fund. These transactions will reflect
investment decisions made by the Fund's investment adviser in light of the
objectives and policies of the Fund, and such factors as its other portfolio
holdings and tax considerations and should not be construed as recommendations
for similar action by other investors.
The CUSIP number of The Japan Fund, Inc. is 471070-10-2.
The Fund employs Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109, as Custodian and Sumitomo Trust and Banking Co.
(Tokyo Office) as Sub-Custodian.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02205-2291, a wholly-owned subsidiary of the Adviser, is
the transfer, dividend-paying and shareholder service agent for the Fund. For
the year ended December 31, 1994, the Fund was charged by Scudder Service
Corporation $870,278, of which $70,123 was payable at December 31, 1994.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Fund has
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended, and reference is hereby made to the Registration Statement for
further information with respect to the Fund and the securities offered hereby.
This Registration Statement is available for inspection by the public at the
Securities and Exchange Commission in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of The Japan Fund, Inc., are attached hereto
on pages 9 through 23, inclusive, in the Annual Report to the shareholders of
the Fund dated December 31, 1994, and are deemed to be a part of this Statement
of Additional Information.
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THE JAPAN FUND, INC.
Annual Report
December 31, 1994
A pure no-load(tm) mutual fund
This information must be preceded or accompanied by a current
prospectus.
Portfolio changes should not be considered recommendations for
action by individual investors.
<PAGE>
THE JAPAN FUND, INC.
Contents
Portfolio Management Discussion 3
Reviews the period's investing strategies, financial
markets, and economic conditions
Performance Update 4
Portfolio Summary 5
Investment Portfolio 9
Itemized list of your Fund's portfolio holdings
Financial Statements 13
Financial Highlights 16
Notes to Financial Statements 17
Report of Independent Accountants 23
Tax Information 24
Officers and Directors 26
How to Contact The Japan Fund Back cover
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PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
As you are all aware, after the close of The Japan Fund's fiscal year,
a major earthquake hit the Kobe area. The economic and investment market
implications of this tragic event are significant, and we are enclosing a
special letter to discuss the ramifications.
In a difficult year for the financial markets, positive investment
returns were especially welcome. We are pleased to report that The Japan
Fund provided a 10.03% total return for the 12 months ended December 31,
1994. The Fund's performance reflected an increase in share price from
$10.33 a year ago to $10.50 on December 31, 1994, and reinvested
distributions of $0.85 per share. By comparison, the Tokyo Stock Price
Index (TOPIX), your Fund's benchmark, posted a dollar-based total return of
21.96%, roughly half of which were gains resulting from appreciation of the
Japanese yen.
Several factors hampered the Fund's performance relative to the
TOPIX--key among them was a comparatively small exposure to cyclical
industries, which led the Japanese market rally in 1994. The Fund also
maintained a heavy weighting relative to the TOPIX in consumer growth- and
service-oriented companies, both of which underperformed significantly in
1994 after rewarding the Fund with three years of healthy performance. In
addition, the Fund's reduced exposure to the yen inhibited returns during
the year. Concerned that the yen had become overvalued relative to the U.S.
dollar, we converted approximately 40% of the Fund's yen exposure back to
U.S. dollars, primarily through forward currency contracts. Designed to
help protect gains when the yen declines, our hedging strategy limited the
Fund's participation in the currency's appreciation last year.
1994--An Eventful Year
A number of noteworthy developments marked the environment for
Japanese investments during the past year.
First, the Japanese stock market rebounded sharply during the year's
first half, driven by purchases from non-Japanese investors who believed
economic recovery was on its way. The best-performing market segments
included economically sensitive industries such as machinery, paper, steel,
shipping, rubber, transportation, textiles, and chemicals.
3
<PAGE>
The Japan Fund, Inc.
Performance Update as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
The Japan Fund, Inc.
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $11,003 10.03% 10.03%
5 Year $ 9,768 -2.32% -0.47%
10 Year $42,701 327.01% 15.62%
TOPIX
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $12,196 21.96% 21.96%
5 Year $ 8,109 -18.91% -4.10%
10 Year $46,085 360.85% 16.50%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended December 31
The Japan Fund, Inc.
Year Amount
- ----------------------
84 10000
85 13889
86 24659
87 32798
88 39162
89 43714
90 36562
91 37700
92 31387
93 38807
94 42701
TOPIX
Year Amount
- ----------------------
84 10000
85 14501
86 27212
87 39954
88 53217
89 56831
90 36440
91 39500
92 30450
93 37785
94 46085
The Tokyo Stock Exchange Stock Price Index (TOPIX) is an
unmanaged capitalization weighted measure (adjusted in U.S.
dollars) of all shares listed on the first section of the
Tokyo Stock Exchange. Index returns assume dividends reinvested
net of withholding tax and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -------------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended December 31
- ----------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-------------------------------------------------------------------------------
Net Asset Value... $15.53 $20.28 $16.97 $16.24 $14.27 $10.76 $10.69 $ 8.90 $10.33 $10.50
Income Dividends.. $ .07 $ .02 $ .20 $ .02 $ .08 $ .09 $ -- $ -- $ .28 $ --
Capital Gains
Distributions..... $ 1.36 $ 4.67 $ 9.08 $ 3.88 $ 3.59 $ 1.10 $ .41 $ -- $ .39 $ .85
Fund Total
Return (%)........ 38.89 77.54 33.01 19.40 11.63 -16.36 3.11 -16.74 23.64 10.03
Index Total
Return (%)........ 45.00 87.65 46.82 33.19 6.79 -35.88 8.39 -22.92 24.07 21.96
</TABLE>
All performance is historical, assumes reinvestment of all dividends and capital
gains, and is not indicative of future results. Investment return and principal
value will fluctuate, so an investor's shares, when redeemed, may be worth more
or less than when purchased.
4
<PAGE>
Portfolio Summary as of December 31, 1994
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Common Stocks 97%
Cash Equivalents 3%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Sectors (Excludes 3% Cash Equivalents)
- --------------------------------------------------------------------------
Manufacturing 29%
Consumer Discretionary 18%
Financial 12%
Durables 10%
Metals & Minerals 9%
Service Industries 5%
Technology 5%
Consumer Staples 4%
Construction 2%
Other 6%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
Ten Largest Equity Holdings
- --------------------------------------------------------------------------
1. Nichiei Co., Ltd.
Finance company for small and medium-sized firms
2. Canon Inc.
Leading producer of visual image and information equipment
3. Kyocera Corp.
Leading ceramic package manufacturer
4. Sumitomo Metal Industries, Ltd.
Leading integrated crude steel producer
5. Shohkoh Fund & Co., Ltd.
Finance company for small and medium-sized firms
6. SMC Corp.
Leading maker of pneumatic equipment
7. Hitachi Metals, Ltd.
Major producer of high-quality specialty steels
8. Nissen Co., Ltd.
Mail order women's apparel distributor
9. Keyence Corp.
Specialized manufacturer of sensors
10. Japan Associated Finance Co.
Venture capital company
For more complete details about the Fund's Investment Portfolio, see page 9.
A monthly investment portfolio summary is available upon request.
5
<PAGE>
After peaking in June, however, the Japanese market drifted lower as
foreign buying eased. At the same time, rising bond yields and skepticism about
the strength of the fledgling economic recovery kept domestic investors on the
sidelines.
Second, as mentioned earlier, the yen appreciated significantly
throughout the year, from 111 yen to the U.S. dollar last January to a
record high of 96 in early November. The yen finished the year at 99 to the
dollar. The historically large inflow of foreign investments into Japanese
equities early in the year, combined with a continued avoidance of foreign
currency investments by Japanese institutions and Japan's large trade
surplus, appear to have supported the most recent round of yen
appreciation.
Third, long-term interest rates in Japan rose from 3% last January to
4.7% in October (as measured by 10-year Japanese government bond yields).
Japan's strongly deflationary environment ordinarily would be favorable for
bonds. But investors sold Japanese bonds in response to global bond market
weakness and increasing evidence of an economic recovery in Japan.
Strategic Portfolio Changes
During 1994, Japan's best performing stocks shifted from those with
defensive or secular growth characteristics to cyclicals offering favorable
prospects for turnaround and recovery. To take advantage of this change, we
took several major steps to reallocate the portfolio.
As cyclical stocks rallied almost across the board, we strategically
increased the Fund's economically-sensitive holdings. To determine
selections, we sought companies that are competitive on a global scale. We
expect structural changes in distribution networks, the weakening of
traditional business relationships, and the yen's strength to create an
unfavorable environment for companies operating solely in the domestic
market. Additionally, we favored companies that have demonstrated
management initiative through restructuring and the reduction of fixed
costs, such as personnel and depreciation. Finally, in keeping with our
fundamental investment approach, we carefully selected stocks whose prices
were compelling given the underlying companies' estimated earnings over the
next three to four years.
Putting our strategy to work, the Fund established a major position in
the steel industry, with stocks such as Nisshin Steel, Sumitomo Metal,
Hitachi Metal, and Kawasaki Steel. These companies are all undergoing
aggressive restructuring and are global leaders in their respective
6
<PAGE>
businesses -- Nisshin in stainless steel, Sumitomo in stainless and seamless
pipes, and Hitachi in high-grade specialty steel.
The Fund also increased its investments in the machinery sector,
another area that benefited strongly from global economic activity in 1994.
Recent investments include NSK, a global leader in ball bearings and
autoparts; Komori, one of the world's leading offset printing machinery
manufacturers; and Hitachi Construction Machinery, a global leader in
hydraulic excavators.
To enable the portfolio to take advantage of strength in Japanese
over-the-counter (OTC) stocks, the Fund's upper limit for owning
small-company stocks was increased in September from 20% of the portfolio
to 30%. In dollar terms, Japanese OTC stocks surged 37.49% in 1994, far
outstripping the TOPIX. Several of these stocks were among the Fund's
largest holdings, including JAFCO, a pioneer and leader among Japanese
venture capital companies, Shohkoh Fund, a provider of short-term
noncollateralized loans to small- and medium-sized companies, and THK, the
world's leading manufacturer of linear motion mechanical components.
As interest rates rose in 1994 on the expectation of economic
recovery, interest-rate-sensitive and other defensive stocks lost ground.
Affected industries included electric power and gas, metal products,
financials, construction, food, insurance, and pharmaceuticals. Stocks in
the retail and service industries, which were instrumental in supporting
the Fund's performance during the last four years, didn't fare much better.
We stuck with select holdings in these groups based on their attractive
longer-term business prospects. But we pared back significantly in areas we
believed were losing fundamental attractiveness -- housing, insurance, and
pharmaceuticals, for instance.
Currently, opportunities are developing in Japan's CATV (cable
television) industry, an industry still in its infancy. Recent deregulation
is expected to induce consolidation, expand services, and accelerate market
penetration. Our holdings of Itochu and Sumitomo Corporations, the two
largest players in the Japanese CATV industry, reflect our belief that the
valuation of the CATV enterprises and their growth potential remain
under-appreciated by the Japanese marketplace. Other opportunities are
developing in the area of industrial garbage processing. Fund holdings of
7
<PAGE>
dump truck makers such as ShinMaywa and Kyokuto Kaihatsu are benefiting not
only from a recovery in dump truck sales, but a longer-term growth trend in
garbage-processing equipment.
Outlook
As always, we continue to emphasize a bottom-up stock selection
process based on extensive field research of individual companies. At the
same time, we also maintain a broad top-down perspective, which centers
around independent fundamental analysis.
In this regard, we believe many of the building blocks are in place
for The Japan Fund to benefit from important developments in the Japanese
economy: greater competition from imports, deregulation in many industries
such as finance and telecommunications, and the growth of new industries
such as non-bank finance and multimedia. Further, evidence increasingly
suggests a modest economic recovery and growth in corporate earnings, while
inflation remains contained, setting a favorable backdrop for Japanese
equity investments in 1995. While the yen's future direction remains a
critical variable for the recovery, we continue to believe that the yen
will likely weaken as Japan's trade surplus contracts and investment
capital again begins flowing out of the country. Our strategy of hedging
against the risk of yen depreciation therefore remains in place.
Thank you for your continued investment in The Japan Fund.
Sincerely,
/s/Douglas M. Loudon /s/Robert G. Stone, Jr.
Douglas M. Loudon Robert G. Stone, Jr.
President Chairman
The Japan Fund:
A Team Approach to Investing
The Japan Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management
process. Team members work together to develop investment strategies and
select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists
who work in our offices across the United States and abroad. We believe our
team approach benefits Fund investors by bringing together many disciplines
and leveraging Scudder's extensive resources.
Lead Portfolio Manager Seung Kwak assumed responsibility for the
Fund's investment strategy and daily operation in 1994 and has been a
member of the portfolio management team since 1989. Mr. Kwak has directed
our Tokyo-based research effort since he joined Scudder in 1988. Elizabeth
J. Allan, Portfolio Manager, helps set the Fund's general investment
strategy. Ms. Allan has contributed her expertise to the management of the
Fund since she joined Scudder in 1987 and has numerous years of Pacific
Basin research and investing experience.
8
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO as of December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1% COMMERCIAL PAPER
-------------------------------------------------------------------
11,446,000 American Express Credit Corp., 1/3/95 . 11,442,293
8,323,000 CIT Group Holdings Inc., 1/3/95 . . . . 8,320,203
-----------
TOTAL COMMERCIAL PAPER (Cost $19,762,496) 19,762,496
-----------
96.9% COMMON STOCKS
-------------------------------------------------------------------
Shares
-------------------------------------------------------------------
CONSUMER DISCRETIONARY 17.8%
Department &
Chain Stores 1.8% 37,000 Fast Retailing Co., Ltd. . . . . . . . 4,047,165
142,000 Ito-Yokado Co., Ltd. . . . . . . . . . 7,595,183
-----------
11,642,348
-----------
Home Furnishings 0.6% 92,000 Nitori Co., Ltd. . . . . . . . . . . . 3,785,248
-----------
Recreational Products 1.4% 129,000 Sankyo Co., Ltd. . . . . . . . . . . . 8,673,357
-----------
Restaurants 4.0% 400,000 Aiya Co., Ltd. . . . . . . . . . . . . 7,425,991
68,600 Genki Sushi Co., Ltd . . . . . . . . . . 1,996,387
230,000 Skylark Co., Ltd . . . . . . . . . . . . 4,385,349
413,000 Ten Allied Co., Ltd . . . . . . . . . . 11,604,616
-----------
25,412,343
-----------
Specialty Retail 10.0% 49,000 Bunkyodo Co., Ltd. . . . . . . . . . . 2,016,056
238,600 Cox Co., Ltd . . . . . . . . . . . . . . 4,726,482
143,750 Hasegawa Co., Ltd . . . . . . . . . . . 2,510,035
208,000 Kato Denki Co., Ltd . . . . . . . . . . 5,635,725
143,700 Ministop Co., Ltd . . . . . . . . . . . 4,225,198
558,000 Nissen Co., Ltd . . . . . . . . . . . . 17,246,764
281,200 Royal Ltd . . . . . . . . . . . . . . . 11,005,319
104,000 Shimamura Co., Ltd . . . . . . . . . . . 5,218,264
116,900 Simree Co., Ltd . . . . . . . . . . . . 1,560,231
93,000 Tsutsumi Jewelry Co., Ltd . . . . . . . 8,492,725
-----------
62,636,799
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
THE JAPAN FUND, INC.
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER STAPLES 4.3%
Consumer Electronic &
Photographic Products 3.5% 340,000 Pioneer Electronics Corp. . . . . . . . . . 8,188,660
243,400 Sony Corp. (ADR) . . . . . . . . . . . . . 13,660,825
----------
21,849,485
----------
Food & Beverage 0.8% 273,000 Rock Field Co., Ltd. . . . . . . . . . . . 5,369,594
----------
COMMUNICATIONS 2.1%
Telephone/Communications 1,505 DDI Corp. . . . . . . . . . . . . . . . . . 12,988,460
----------
FINANCIAL 11.6%
Other Financial Companies 105,000 Japan Associated Finance Co. . . . . . . . 16,332,163
501,876 Nichiei Co., Ltd. . . . . . . . . . . . . . 32,232,879
59,800 Sanyo Shinpan Finance Co., Ltd. . . . . . . 5,766,964
89,900 Shohkoh Fund & Co., Ltd. . . . . . . . . . 18,584,446
----------
72,916,452
----------
MEDIA 2.1%
Broadcasting & Entertainment 250,000 Horipro Inc. . . . . . . . . . . . . . . . . 6,171,601
120,277 Sony Music Entertainment (Japan) Inc. . . . 6,759,169
----------
12,930,770
----------
SERVICE INDUSTRIES 5.2%
Miscellaneous Commercial
Services 1,463,000 Itochu Corp. . . . . . . . . . . . . . . . 10,423,783
95,000 Secom Co., Ltd. . . . . . . . . . . . . . . 5,910,687
26,000 Softbank Corp. . . . . . . . . . . . . . . 5,740,090
1,072,000 Sumitomo Corp. . . . . . . . . . . . . . . 10,972,805
----------
33,047,365
----------
DURABLES 9.6%
Aerospace 0.4% 234,000 JAMCO Corp. . . . . . . . . . . . . . . . . 2,489,112
----------
Automobiles 7.8% 654,000 Bridgestone Corp. . . . . . . . . . . . . . 10,238,234
428,000 Kyokuto Kaihatsu Kogyo Co., Ltd. . . . . . . 12,111,992
262,000 Ogura Clutch Co., Ltd. . . . . . . . . . . 3,891,219
966,000 ShinMaywa Industries, Ltd. . . . . . . . . 9,887,807
1,074,000 Suzuki Motor Corp. . . . . . . . . . . . . 12,609,935
----------
48,739,187
----------
Construction/Agricultural
Equipment 1.3% 636,000 Hitachi Construction Machinery Co., Ltd. . . 8,360,863
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications
Equipment 0.1% 31,000 Japan Radio Co., Ltd. . . . . . . . . . 460,411
-----------
MANUFACTURING 28.5%
Chemicals 2.4% 1,437,000 Nippon Shokubai Corp., Ltd. . . . . . . 13,987,858
82,000 Showa Highpolymer Co., Ltd. . . . . . . 822,880
----------
14,810,738
----------
Diversified Manufacturing 1.3% 571,000 Sumitomo Electric Industries, Ltd. . . 8,136,678
----------
Electrical Products 6.9% 1,296,000 Hitachi Ltd. . . . . . . . . . . . . . 12,862,459
152,000 Mabuchi Motor Co., Ltd . . . . . . . . . 11,440,040
639,000 Matsushita Electrical Industrial
Co., Ltd . . . . . . . . . . . . . . . 10,516,407
1,169,000 Toshiba Corp . . . . . . . . . . . . . . 8,481,555
----------
43,300,461
----------
Hand Tools 0.0% 9,000 Asahi Diamond Industrial Co., Ltd. . . 151,722
----------
Industrial Specialty 0.4% 83,000 Oiles Corp. . . . . . . . . . . . . . . 2,332,163
----------
Machinery/Components/
Controls 13.7% 51,000 Amano Corp. . . . . . . . . . . . . . . 757,451
147,500 Keyence Corp . . . . . . . . . . . . . . 16,726,041
343,000 Komori Corp . . . . . . . . . . . . . . 9,190,266
1,181,000 NGK Spark Plug Co., Ltd . . . . . . . . 15,525,439
1,345,000 NSK Ltd . . . . . . . . . . . . . . . . 10,662,820
318,900 SMC Corp . . . . . . . . . . . . . . . . 18,145,138
613,000 THK Co., Ltd . . . . . . . . . . . . . . 15,501,857
----------
86,509,012
----------
Office Equipment/Supplies 3.8% 1,414,000 Canon Inc. . . . . . . . . . . . . . . 23,980,532
----------
TECHNOLOGY 4.6%
Computer Software 0.3% 35,000 PCA Corp. . . . . . . . . . . . . . . . 2,142,499
Electronic Components/ ----------
Distributors 3.3% 279,000 Kyocera Corp. . . . . . . . . . . . . . 20,690,517
Electronic Data ----------
Processing 1.0% 622,000 Fujitsu Ltd. . . . . . . . . . . . . . 6,304,265
ENERGY 0.1% ----------
Engineering 36,000 JGC Corp. . . . . . . . . . . . . . . . 614,150
METALS AND MINERALS 9.2% ----------
Steel & Metals 1,419,000 Hitachi Metals, Ltd . . . . . . . . . . 17,372,604
1,588,000 Kawasaki Steel Corp . . . . . . . . . . 6,645,218
2,978,000 Nisshin Steel Co., Ltd . . . . . . . . . 15,002,067
5,743,000 Sumitomo Metal Industries, Ltd . . . . . 18,615,043
----------
57,634,932
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
THE JAPAN FUND, INC.
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSTRUCTION 1.8%
Building Materials 0.1% 24,000 Toyo Exterior Co., Ltd. . . . . . . . . . . . 652,684
-----------
Homebuilding 1.7% 88,000 Eyeful Home Technology Inc. . . . . . . . . . 2,693,427
228,000 Hosoda Corp. . . . . . . . . . . . . . . . . 3,363,372
295,000 Sumitomo Forestry Co., Ltd. . . . . . . . . . 4,736,578
-----------
10,793,377
-----------
TOTAL COMMON STOCKS (Cost $568,054,352) . . . 609,355,524
-----------
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $587,816,848)(a) . . . . . . . . . . 629,118,020
===========
<FN>
(a) The cost for federal income tax purposes was $608,072,384. At December 31, 1994, net unrealized
appreciation for all securities based on tax cost was $21,045,636. This consisted of aggregate
gross unrealized appreciation for all securities in which there was an excess of market value
over tax cost of $49,830,443 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over market value of $28,784,807.
At December 31, 1994, the outstanding written option was as follows (Note A):
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(JPY) Expiration Strike Market
Call Option (000's) Date Price Value ($)
----------- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Japanese Yen
(Premium received $1,861,822) . . . . 4,177,500 2/24/95 JPY103.55 2,088,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $587,816,848)
(Note A) . . . . . . . . . . . . . . . . . . . . . . . . $629,118,020
Foreign currency holdings, at market (identified
cost $2,023,999)(Note A) . . . . . . . . . . . . . . . . 2,005,360
Forward foreign currency exchange contracts to buy,
at market (contract cost $1,695,564) (Notes A and E) . . 1,697,904
Receivable on forward foreign currency exchange
contracts to sell (Notes A and E) . . . . . . . . . . . 157,230,491
Receivable on investments sold . . . . . . . . . . . . . . 7,302,616
Receivable on fund shares sold . . . . . . . . . . . . . . 1,655,024
Dividends and interest receivables . . . . . . . . . . . . 225,286
Other assets . . . . . . . . . . . . . . . . . . . . . . . 5,551
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . $799,240,252
LIABILITIES
Payable for fund shares redeemed . . . . . . . . . . . . . $ 16,198,586
Payable for investments purchased . . . . . . . . . . . . . 4,084,082
Due to custodian bank . . . . . . . . . . . . . . . . . . . 4,975,758
Accrued management fee (Note C) . . . . . . . . . . . . . . 366,607
Other accrued expenses (Note C) . . . . . . . . . . . . . . 507,846
Written option, at market (premium received
$1,861,822) (Note A) . . . . . . . . . . . . . . . . . . 2,088,750
Payable on closed forward foreign currency
exchange contracts (Note A) . . . . . . . . . . . . . . 17,748,535
Payable for forward foreign currency exchange
contracts to buy (Notes A and E) . . . . . . . . . . . . 1,695,564
Payable for forward foreign currency exchange
contracts to sell, at market (contract
cost $157,230,491) (Notes A and E) . . . . . . . . . . . 165,867,271
-------------
Total liabilities . . . . . . . . . . . . . . . . . . 213,532,999
------------
Net assets, at market value . . . . . . . . . . . . . . . . $585,707,253
============
NET ASSETS
Net assets consist of:
Accumulated distributions in excess of net
investment income . . . . . . . . . . . . . . . . . . $(11,758,799)
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . 41,301,172
Options . . . . . . . . . . . . . . . . . . . . . . . (226,928)
Foreign currency related transactions . . . . . . . . (8,668,944)
Accumulated net realized gain . . . . . . . . . . . . . 5,671,452
Capital stock . . . . . . . . . . . . . . . . . . . . . 18,593,152
Additional paid-in capital . . . . . . . . . . . . . . . 540,796,148
------------
Net assets, at market value . . . . . . . . . . . . . . . . $585,707,253
============
NET ASSET VALUE, offering and redemption price per
share ($585,707,253 -:-55,779,456 outstanding
shares of capital stock, $.333 par value,
600,000,000 shares authorized) . . . . . . . . . . . . . $10.50
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
THE JAPAN FUND, INC.
- -----------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of withholding taxes of $540,648) . . . . $ 3,134,824
Interest (net of withholding taxes of $2,765) . . . . . . 1,326,307
-----------
4,461,131
Expenses:
Management fee (Note C) . . . . . . . . . . . . . . . . . $ 4,773,356
Shareholder and Transfer Agent services (Note C) . . . . 1,072,511
Officers and directors fees and expenses (Notes C & D) . 198,619
Custodian fees . . . . . . . . . . . . . . . . . . . . . 470,400
Printing . . . . . . . . . . . . . . . . . . . . . . . . 264,135
Auditing and accounting services . . . . . . . . . . . . 106,150
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . 38,446
Federal registration . . . . . . . . . . . . . . . . . . 14,762
State registration . . . . . . . . . . . . . . . . . . . 95,787
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 26,761 7,060,927
--------------------------
Net investment loss . . . . . . . . . . . . . . . . . . . (2,599,796)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . 58,018,296
Options . . . . . . . . . . . . . . . . . . . . . . . 1,759,997
Foreign currency related transactions . . . . . . . . (17,752,808) 42,025,485
----------
Net unrealized appreciation (depreciation) during
the period on:
Investments . . . . . . . . . . . . . . . . . . . . . 11,153,602
Options . . . . . . . . . . . . . . . . . . . . . . . (226,928)
Foreign currency related transactions . . . . . . . . (8,662,240) 2,264,434
--------------------------
Net gain on investment transactions . . . . . . . . . . . 44,289,919
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $41,690,123
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
INCREASE (DECREASE) IN NET ASSETS 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment loss . . . . . . . . . . . . . . $ (2,599,796) $ (2,446,967)
Net realized gain from investment transactions. 42,025,485 51,954,231
Net unrealized appreciation on investment
transactions during the period . . . . . . . 2,264,434 46,281,578
------------ ------------
Net increase in net assets resulting from
operations . . . . . . . . . . . . . . . . . 41,690,123 95,788,842
------------ ------------
Distributions to shareholders:
In excess of net investment income ($.28 per
share for December 31, 1993) . . . . . . . . -- (12,112,180)
------------ ------------
From net realized gains ($.80 and $.39 per
share, respectively) . . . . . . . . . . . (42,020,462) (16,848,042)
------------ ------------
In excess of net realized gains ($.05 per
share for December 31, 1994) . . . . . . . . (2,360,903) --
------------ ------------
Fund share transactions:
Proceeds from shares sold . . . . . . . . . . . 521,023,226 292,059,002
Net asset value of shares issued to
shareholders in reinvestment of
distributions . . . . . . . . . . . . . . . 37,569,251 23,722,426
Cost of shares redeemed . . . . . . . . . . . . (441,092,468) (320,398,596)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions . . . . . . . . . . 117,500,009 (4,617,168)
------------ ------------
INCREASE IN NET ASSETS . . . . . . . . . . . . 114,808,767 62,211,452
Net assets at beginning of period . . . . . . . 470,898,486 408,687,034
------------ ------------
NET ASSETS AT END OF PERIOD (including
accumulated distributions in excess of net
investment income of $(11,758,799) and
$(10,656,633), respectively) . . . . . . . . $585,707,253 470,898,486
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period . . . 45,596,062 45,899,642
------------ ------------
Shares sold . . . . . . . . . . . . . . . . . . 44,011,661 25,773,439
Shares issued to shareholders in reinvestment
of distributions . . . . . . . . . . . . . . 3,602,037 2,307,731
Shares redeemed . . . . . . . . . . . . . . . . (37,430,304) (28,384,750)
------------ ------------
Net increase (decrease) in Fund shares. . . . . 10,183,394 (303,580)
------------ ------------
Shares outstanding at end of period . . . . . . 55,779,456 45,596,062
============ ============
</TABLE>
15
<PAGE>
<TABLE>
THE JAPAN FUND, INC.
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1994(a) 1993(a) 1992 1991 1990 1989 1988 1987 1986(a) 1985(a)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period. . . . $10.33 $8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28 $15.53 $12.60
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (loss) . . . . . (.05) (.05) (.05) (.03) .09 .04 .04 .16 .10 .08
Net realized and
unrealized gain
(loss) on
investments . . . . . . 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13 5.81 9.34 4.28
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Total from investment
operations . . . . . . . 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17 5.97 9.44 4.36
------ ----- ------ ----- ------ ----- ----- ----- ----- ------
Less distributions from:
Net investment
income . . . . . . . . . -- -- -- -- (.09) (.08) (.02) (.20) (.02) (.07)
In excess of net
investment income. . . . -- (.28) -- -- -- -- -- -- -- --
Net realized gains on
investment transactions. (.80) (.39) -- (.41) (1.10) (3.59) (3.88) (9.08) (4.67) (1.36)
In excess of net
realized gains . . . . . (.05) -- -- -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions . . . . (.85) (.67) -- (.41) (1.19) (3.67) (3.90) (9.28) (4.69) (1.43)
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period . . . . . . $10.50 $10.33 $8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28 $15.53
======= ====== ====== ====== ======= ====== ====== ====== ====== ======
TOTAL RETURN (%) . . . . . 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40 33.01 77.54 38.89
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions). . . . 586 471 409 335 313 401 404 394 584 360
Ratio of operating
expenses to average
net assets (%) . . . . . 1.08 1.25 1.42 1.26 1.05 1.02 1.01 .90 .70 .64
Ratio of net investment
income (loss) to
average net
assets (%) . . . . . . . (.40) (.47) (.31) (.15) .72 .34 .28 .41 .51 .63
Portfolio turnover
rate (%) . . . . . . . . 74.3 81.7 47.0 46.4 52.7 60.4 38.8 34.0 38.2 23.9
<FN>
(a) Per share amounts have been calculated using weighted average shares outstanding.
</TABLE>
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
The Japan Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The policies described below are followed consistently by the Fund in
the preparation of its financial statements in conformity with generally
accepted accounting principles.
SECURITY VALUATION. Portfolio securities which are traded on an exchange are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities traded in the over-the-counter market are valued at the most
recent sale price on such market. If no sale occurred in the over-the-counter
market, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation shall be used.
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Directors.
OPTIONS. When the Fund writes (sells) an option, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as an
asset and as an equivalent liability. The amount of the liability is
subsequently marked-to-market to reflect the current market value of the option
written. The current market value of an option is the last price on the
principal exchange on which such option is traded or, in the absence of a sale,
the mean between the last bid and offering prices. When a written option
expires on its stipulated expiration date or a Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of a
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying
17
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
security or currency and the liability related to such option is extinguished.
When a written call option is exercised, the Fund realizes a gain or loss from
the sale of the underlying security or currency and the proceeds from such sale
are increased by the premium received. When a written put option is exercised,
the amount of the premium originally received reduces the cost of the security
or currency which the Fund purchases upon exercise of the option.
The premium paid by the Fund for the purchase of an option is included in the
Fund's Statement of Assets and Liabilities as an investment and subsequently
marked-to-market to reflect the current market value of the option. If an
option which the Fund has purchased expires on the stipulated expiration date,
the Fund realizes a loss in the amount of the cost of the option. If the Fund
enters into a closing sale transaction, it realizes a gain or loss, depending
on whether the proceeds from the sale are greater or less than the cost of the
option.
If the Fund exercises a purchased put option, it realizes a gain or loss from
the sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. If the Fund exercises a purchased
call option, the cost of the security will be increased by the premium
originally paid.
FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:
(i) market value of investment securities, other assets and
liabilities at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and
interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes
in market prices of the investments. Such fluctuations are included with the
net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. In connection with portfolio
purchases and sales of securities denominated in a foreign currency, the Fund
may enter into forward foreign currency exchange contracts ("contracts").
Additionally, the Fund may enter into contracts to hedge certain other foreign
currency denominated assets. Contracts are recorded at market value. During the
period, to hedge a portion of the Fund's Japanese yen exposure, the Fund
entered into yen forward exchange contracts. Certain risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts. Realized and unrealized gains and losses
arising from such transactions are included in net realized and unrealized gain
(loss) from foreign currency related transactions. Purchases and sales of
forward foreign currency contracts having the same settlement date and broker
are offset and any realized gain (loss) is recognized on the date of offset,
otherwise gain (loss) is recognized on the settlement date.
FEDERAL INCOME TAXES. No provision for United States income taxes has been made
since it is the Fund's policy to comply with provisions of the Internal Revenue
Code applicable to regulated investment companies. Accordingly, the Fund
distributes to shareholders substantially all of its taxable income less
earnings and profits (as defined for U.S. tax purposes) attributed to shares
redeemed. Under the United States-Japan tax treaty, Japan imposes a withholding
tax of 15% of the dividends and 10% on interest. There is currently no Japanese
tax on capital gains.
DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income are
made annually. During any particular year net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders annually. An additional distribution may be made to the extent
necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles.
These differences primarily relate to investments in forward contracts and
passive foreign investment companies. As a result, net
19
<PAGE>
THE JAPAN FUND, INC.
- ------------------------------------------------------------------------------
investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund. The Fund uses the identified cost method for
determining realized gain or loss on investments for both financial and federal
income tax reporting purposes.
OTHER. Investment security transactions are accounted for on a trade-date
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Acquisition
discount and original issue discount are accreted for both tax and financial
reporting purposes.
B. PURCHASES AND SALES OF SECURITIES
- ------------------------------------------------------------------------------
For the year ended December 31, 1994, purchases and sales of investment
securities (excluding short-term investments) aggregated $552,205,784 and
$471,312,014, respectively.
Transactions in written options for the year ended December 31, 1994 are
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS ON CURRENCIES
-----------------------------------------
PREMIUMS
JAPANESE YEN RECEIVED ($)
-----------------------------------------
<S> <C> <C>
Beginning of Period . . -- --
Written . . . . . . . . Y12,885,650,000 $3,197,800
Closed . . . . . . . . (1,000,000,000) (445,678)
Expired . . . . . . . . (7,708,150,000) (890,300)
--------------- ----------
End of Period . . . . . Y 4,177,500,000 $1,861,822
=============== ==========
</TABLE>
C. RELATED PARTIES
- -----------------------------------------------------------------------------
Under the Investment Management Agreement (the " Management Agreement") with
Scudder, Stevens & Clark, Inc. (the "Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objective, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides
certain administrative services in accordance with the Management Agreement.
The Fund agrees to pay the Adviser a fee equal to annual rate of 0.85% of
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the first $100,000,000 of the Fund's average daily net assets, 0.75% of the next
$200,000,000 of such assets, 0.70% of the next $300,000,000 of such assets and
0.65% of such net assets in excess of $600,000,000 computed and accrued daily
and paid monthly. For the year ended December 31, 1994, the fee pursuant to the
Management Agreement amounted to $4,773,356, which was equivalent to an annual
effective rate of .73% of the Fund's average daily net assets. The Management
Agreement also provides that if the Fund's expenses, exclusive of taxes,
interest and extraordinary expenses, exceed specified limits, such excess, up to
the amount of the management fee, will be paid by the Adviser.
Under the Research Agreement, (the "Research Agreement") between the Adviser
and The Nikko International Capital Management Co., Ltd. ("NICAM"), an
affiliate of The Nikko Securities Co., Ltd., NICAM provides information,
investment recommendations, advice and assistance for use by the Adviser in
advising the Fund. The Adviser agrees to pay NICAM a fee equal to an annual
rate of 0.15% of the first $700,000,000 of the Fund's average daily net assets
and 0.14% of such net assets in excess of $700,000,000 computed and accrued
daily and paid monthly. For the year ended December 31, 1994 the fee pursuant
to the Research Agreement amounted to $975,256.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend paying and shareholder service agent for the Fund.
For the year ended December 31, 1994, the amount charged to the Fund by SSC
aggregated $870,278, of which $70,123 is unpaid at December 31, 1994.
The Fund pays each of its Officers and Directors not affiliated with the
Advisor an annual fee plus specified amounts for attended board and committee
meetings. For the year ended December 31, 1994, the Officers and Directors fees
aggregated $143,619.
During the year ended December 31, 1994, there were $60,488 in commissions paid
or accrued by the Fund to The Nikko Securities Co., Ltd.
D. DIRECTORS' RETIREMENT BENEFITS
- ---------------------------------
Under a retirement program, which became effective January 1, 1992, independent
members of the Board of Directors who meet certain criteria become eligible to
participate in a defined benefit retirement program. Under this program monthly
payments will be made for a period of 120 months by the Fund based on the
21
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
individual's final year basic Directors fees and length of service. For the year
ended December 31, 1994, Directors' retirement benefits amounted to $55,000. At
December 31, 1994, the Fund has accrued $137,703 for such benefits.
<TABLE>
<CAPTION>
E. COMMITMENTS
- --------------
As of December 31, 1994 the Fund had entered into the following forward foreign
currency exchange contracts resulting in net unrealized depreciation of
$8,634,440.
NET UNREALIZED
APPRECIATION
SETTLEMENT (DEPRECIATION)
CONTRACTS TO DELIVER IN EXCHANGE FOR DATE (U.S.$)
- ----------------------- -------------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
USD 519,711 JPY 52,042,882 1/4/95 2,546
USD 320,031 JPY 31,881,482 1/5/95 (96)
USD 855,822 JPY 85,271,783 1/6/95 (110)
JPY 9,321,743 USD 92,987 1/4/95 (558)
JPY 2,008,294 USD 20,005 1/5/95 (149)
JPY 463,997,831 USD 4,651,919 1/5/95 (4,355)
JPY 245,791,474 USD 2,465,580 1/6/95 (968)
JPY 7,936,500,000 USD 75,000,000 1/25/96 (8,970,620)
JPY 6,914,737,500 USD 75,000,000 7/5/96 339,870
----------
(8,634,440)
==========
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF THE JAPAN FUND, INC.:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Japan Fund, Inc. (the "Fund")
at December 31, 1994, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1994 by correspondence with the custodian and
brokers and the application of alternative procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 1, 1995
23
<PAGE>
THE JAPAN FUND, INC.
TAX INFORMATION
- -----------------------------------------------------------------------------
For its fiscal year ended December 31, 1994, the total amount of income
received by the Fund from sources within foreign countries and possessions of
the United States was $.01 per share (representing a total of $543,413). The
total amount of taxes paid by the Fund to such countries was $.01 per share
(representing a total of $543,413).
The Fund paid distributions of $.85 per share from net long-term capital gains
during its fiscal year ended December 31, 1994. Pursuant to Section 852 of the
Internal Revenue Code, the Fund designates $57,023,588 as capital gains
dividends for its fiscal year ended December 31, 1994.
24
(The next page is blank in the printed report)
<PAGE>
OFFICERS AND DIRECTORS
Robert G. Stone, Jr.
Chairman of the Board and Director
Chairman of the Board, Kirby Corporation
Douglas M. Loudon
President
Managing Director, Scudder, Stevens & Clark, Inc.
Elizabeth J. Allan
Vice President
Principal, Scudder, Stevens & Clark, Inc.; Vice President, Scudder New
Asia Fund, Inc.
William E. Holzer
Vice President
Managing Director, Scudder, Stevens & Clark, Inc.; President, Scudder
Global Fund; Vice President, Scudder International Fund, Inc.
Thomas W. Joseph
Vice President
Principal, Scudder, Stevens & Clark, Inc.; Vice President, Treasurer &
Director, Scudder Investor Services, Inc.; President, Scudder
Insurance Agency, Inc.
Seung Kwak
Vice President
Managing Director, Scudder, Stevens & Clark, Inc.
Edward J. O'Connell
Vice President
Principal, Scudder, Stevens & Clark, Inc.
Miyuki Wakatsuki
Vice President
Manager, Nikko International Capital Management Co., Ltd.
Gina Provenzano
Vice President and Treasurer
Vice President, Scudder, Stevens & Clark, Inc.
Kathryn L. Quirk
Vice President and Secretary
Managing Director, Scudder, Stevens & Clark, Inc.
Thomas F. McDonough
Assistant Secretary
Principal, Scudder, Stevens & Clark, Inc.
Pamela A. McGrath
Assistant Treasurer
Principal, Scudder, Stevens & Clark, Inc.
William L. Givens
Director
President, Twain Associates
William H. Gleysteen, Jr.
Director
President, The Japan Society, Inc.
John F. Loughran
Director
Senior Adviser for Asia Pacific to J.P. Morgan & Co., Inc.
William V. Rapp
Director
Senior Research Fellow Columbia University; Visiting Lecturer,
University of Victoria; Managing Director, Rue Associates
Henry Rosovsky
Director
Professor, Harvard University; Director, Corning Inc., Paine Webber
Group
O. Robert Theurkauf
Director
Advisory Managing Director, Scudder, Stevens & Clark, Inc.
26
<PAGE>
Shoji Umemura
Director
Chairman, The Nikko Securities Co., Ltd.; Vice Chairman, Japan
Securities Dealers Association; Director, The Securities Analysts
Association of Japan; Adviser, Japan Association of Corporate
Executives; Executive Director, Federation of Economic Organizations,
Japan Federation of Employers Association; Governor, Board of
Governors, Tokyo Stock Exchange; Governor, Board of Governors,
Association of Tokyo Stock Exchange Regular Members; Adviser, Tokyo
Chamber of Commerce and Industry; Vice President, Japan-Korea Economic
Association; Member, Board of Trustees, Waseda University; Chairman,
Congregation, Waseda University
Hiroshi Yamanaka
Director
Adviser to the Board, The Meiji Mutual Life Insurance Company;
Lifetime Executive Director, Japan Committee for Economic Development;
Vice Chairman, The Security Analysts Association of Japan; Doctor of
Commerce, Chuo University; Auditor, Bank of Tokyo, Ltd.; Director,
Kirin Brewery Co., Ltd., Nikon Corp.; Governor, Board of Governors,
Tokyo Stock Exchange
HONORARY DIRECTORS
Tristan E. Beplat
Director, Daiwa Bank Trust Co., Yasuda Fire & Marine Insurance Co. of
America, Pacific Forum, Farfield Maxwell, Ltd; Member, Advisory
Council, East Asian Studies, Princeton University; Honorary Director,
Japan Society, U.S.-Asia Institute, Radix Ventures, Inc.
Allan Comrie
Former Director, The Japan Fund, Inc.
Jonathan Mason
Former Chairman of the Board and Director, The Japan Fund, Inc.
James W. Morley
Professor of Political Science Emeritus, Columbia University
27
<PAGE>
You can call toll free (1-800-343-2890) anytime day or night and get access
to automated information regarding transactions in your account as well as
The Japan Fund's share price. By using your touch-tone telephone and
providing the necessary information (including your account number), you
can receive daily updates from this computerized system.
We remind all shareholders that the Fund offers a free dividend
reinvestment program. You can obtain additional information about this
feature and arrange to have all dividends and capital gain distributions
reinvested in additional Fund shares by calling The Japan Fund Service
Center at 1-800-53-JAPAN (1-800-535-2726). The Fund typically distributes
capital gains twice a year (December and March).
HOW TO CONTACT US:
1-800-53-JAPAN
1-800-535-2726
(Outside the U.S. call 617-439-4640)
The Japan Fund
Shareholder Service Center
Two International Place
Boston, MA 02110
Scudder, Stevens & Clark, Inc.
Investment Manager
