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, 1996, 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 21
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, 1996
o Offering opportunities for long-term capital appreciation by investing
primarily in the equity securities of Japanese companies.
o 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 load") NONE
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, 1995.
Investment management fees 0.75%
12b-1 fees NONE
Other expenses 0.46%
-----
Total Fund operating expenses 1.21%
=====
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
------ ------- ------- --------
$12 $38 $66 $147
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, 1986 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, 1995 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,
------------------------------------------------------------------------------------------------
1995 1994(a) 1993(a) 1992 1991 1990 1989 1988 1987 1986(a)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.50 $10.33 $ 8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28 $15.53
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (loss) ........ (.01) (.05) (.05) (.05) (.03) .09 .04 .04 .16 .10
Net realized and
unrealized gain (loss)
on investments ....... (.94) 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13 5.81 9.34
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............ (.95) 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17 5.97 9.44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ............... -- -- -- -- -- (.09) (.08) (.02) (.20) (.02)
In excess of net
investment income .... -- -- (.28) -- -- -- -- -- -- --
From net realized
gains on investment
transactions ......... -- (.80) (.39) -- (.41) (1.10) (3.59) (3.88) (9.08) (4.67)
In excess of net
realized gains ....... (.11) (.05) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ... (.11) (.85) (.67) -- (.41) (1.19) (3.67) (3.90) (9.28) (4.69)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period ......... $ 9.44 $10.50 $10.33 $ 8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ........ (9.07) 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40 33.01 77.54
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) .... 549 586 471 409 335 313 401 404 394 584
Ratio of operating
expenses to average
daily net assets (%) ... 1.21 1.08 1.25 1.42 1.26 1.05 1.02 1.01 .90 .70
Ratio of net investment
income to average
daily net assets (%) ... (.24) (.40) (.47) (.31) (.15) .72 .34 .28 .41 .51
Portfolio turnover rate (%) 69.9 74.3 81.7 47.0 46.4 52.7 60.4 38.8 34.0 38.2
<FN>
(a) Per share amounts have been calculated using weighted average shares
outstanding.
</FN>
</TABLE>
3
<PAGE>
Shareholder benefits
o broad and diversified investment portfolio
o active professional management by Scudder, Stevens & Clark, Inc.
o no sales charges or Rule 12b-1 distribution charges; a pure no-load(TM)
fund
o shares redeemable at net asset value at any time with no redemption charge
o 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
o optional participation in the Scudder Family of Funds, a group of pure
no-load(TM) mutual funds managed by Scudder, Stevens & Clark, Inc.
o $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
4
<PAGE>
Japanese companies which are traded in an over-the-counter market. These are
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
5
<PAGE>
Why invest in the Fund? (cont'd)
costs. They may find it difficult to make purchases and 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:
o 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
o 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 10% of its total 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
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 declined to $107 billion in 1995 from
$121 billion in 1994.
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>
Risk factors (cont'd)
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 fluctuated
in a downward trend since then and on December 29, 1995 was over 45% below the
peak. 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 Fund is also
susceptible to a relatively turbulent political environment which affects
issuers located in Japan and the surrounding Pacific Basin region. The
management of the Fund seeks to mitigate the risks associated with these
considerations through diversification and professional management.
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
8
<PAGE>
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
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
9
<PAGE>
Risk factors (cont'd)
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.
Illiquid investments. The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.
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, 1995. 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, 1995, 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.
<TABLE>
<CAPTION>
ANNUAL CAPITAL CHANGES
----------------------
Net Asset Capital Gains
December 31, Value/Share Dividends Distributions Capital Change
------------ ----------- --------- ------------- --------------
<S> <C> <C> <C> <C>
1985 $15.53
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
1995 9.44 -- 0.11 -9.07
GROWTH OF A $10,000 INVESTMENT
------------------------------
Years Ended Value of Initial Cumulative Average Annual
December 31, 1995 $10,000 Investment Total Return Total Return
----------------- ------------------ ------------ ------------
One Year $ 9,093 -9.07% -9.07%
Five Years 10,620 6.20 1.21
Ten Years 27,958 179.58 10.83
</TABLE>
o "Capital Change" measures the return from capital, including reinvestment of
any capital gains distributions, and does not include the reinvestment of
income dividends.
o "Growth of a $10,000 Investment" assumes dividends and capital gains
distributions, if any, were reinvested.
o These results are not intended to indicate future investment performance.
11
<PAGE>
Investment results (cont'd)
(MOUNTAIN CHART TITLE)
THE JAPAN FUND, INC.
INVESTMENT PERFORMANCE
History of a $10,000 Investment in Stock Assuming
Reinvestment of Capital Gains and Income Distributions
(MOUNTAIN CHART GRAPHIC OMITTED--DATA ON FOLLOWING PAGE)
Key Assumptions
o The data have been adjusted to reflect a three-for-one stock split in April
1970.
o 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.
o No adjustments have been made for income taxes.
o 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.
o Initial $10,000 investment was made at initial public offering price.
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<TABLE>
<CAPTION>
Capital Gains
Net Asset Value Distribution Income Dividends Total
End of Year Initial Investment Reinvested Reinvested Net Asset Value
----------- ------------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
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
1995 22,655 799,859 533,958 1,356,472
</TABLE>
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 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
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may be called for purposes such as electing or removing Directors, changing
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 adviser
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, provided information and investment advice to the Adviser
for the benefit of the Fund under the terms of a Research Agreement which
expired on December 31, 1995.
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 0.75% of the Fund's average daily net assets
during the fiscal year ended December 31, 1995. 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 average daily 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 paid to NICAM to 0.10% of average
daily net assets, paid monthly during the fiscal year 1995. On December 31,
1995, the research contract with NICAM expired.
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 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 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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Fund organization (cont'd)
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 must
include with your payment the order number given at the time the order is
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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.
By "AutoBuy"
If you elected "AutoBuy" for your account, you can call toll-free to purchase
shares. The money will be automatically transferred from your predesignated bank
checking account. Your bank must be a member of the Automated Clearing House for
you to use this service. If you did not elect "AutoBuy," call 1-800-53-JAPAN for
more information.
To purchase additional shares, call 1-800-53-JAPAN. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.
If you purchase shares by "AutoBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
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.
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Purchases and redemptions (cont'd)
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."
By "AutoSell"
If you elected "AutoSell" for your account, you can call toll-free to redeem
shares. The money will be automatically transferred to your predesignated bank
checking account. Your bank must be a member of the Automated Clearing House for
you to use this service. If you did not elect "AutoSell," call 1-800-53-JAPAN
for more information.
To redeem shares, call 1-800-53-JAPAN. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "AutoSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
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
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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.
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,
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Transaction information (cont'd)
you may avoid this delay. Redemption requests by telephone 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 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.
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
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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.
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
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Shareholder services (cont'd)
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.
SAIL(TM)--Scudder Automated Information Line
For personalized account information, including fund prices, yields and
account balances, to perform transactions in existing Scudder fund accounts, or
to obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. 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.
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. These retirement plans allow a maximum annual
contribution of $2,000 per person for anyone with earned income. 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.
22
<PAGE>
* 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
for some 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 [S
1802]). 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.
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
Henry Rosovsky, 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
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
Robert G. Stone, Jr.
<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, 1996
- --------------------------------------------------------------------------------
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,
1996, 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
Specialized Investment Techniques............................................................................2
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
Balance of Payments.........................................................................................18
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
Additional Information About Making Subsequent Investments by AutoBuy.......................................24
Checks......................................................................................................24
Wire Transfer of Federal Funds..............................................................................24
Share Price.................................................................................................25
Share Certificates..........................................................................................25
Other Information...........................................................................................25
Exchanges...................................................................................................25
REDEMPTIONS..........................................................................................................26
Redemption by Telephone.....................................................................................26
Redemption by AutoSell......................................................................................27
Redemption by Mail or Fax...................................................................................27
Redemption-in-Kind..........................................................................................28
Other Information...........................................................................................28
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................28
The Pure No-Load(TM) Concept................................................................................28
Dividends and Capital Gains Distributions Options...........................................................29
Diversification.............................................................................................30
Scudder Funds Centers.......................................................................................30
Reports to Shareholders.....................................................................................30
THE SCUDDER FAMILY OF FUNDS..........................................................................................31
SPECIAL PLAN ACCOUNTS................................................................................................34
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
Self-Employed Individuals..............................................................................34
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........34
Scudder IRA: Individual Retirement Account.................................................................34
Scudder 403(b) Plan.........................................................................................35
Automatic Withdrawal Plan...................................................................................35
Group or Salary Deduction Plan..............................................................................36
Automatic Investment Plan...................................................................................36
Uniform Transfers/Gifts to Minors Act.......................................................................36
i
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS (continued) Page
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................37
PERFORMANCE AND OTHER INFORMATION....................................................................................37
FUND ORGANIZATION....................................................................................................43
INVESTMENT ADVISORY ARRANGEMENTS.....................................................................................44
Personal Investments by Employees of the Adviser............................................................46
DIRECTORS AND OFFICERS...............................................................................................46
REMUNERATION.........................................................................................................49
DISTRIBUTOR..........................................................................................................50
TAXES................................................................................................................51
United States Federal Income Taxation.......................................................................51
Japanese Taxation...........................................................................................54
BROKERAGE AND PORTFOLIO TURNOVER.....................................................................................55
NET ASSET VALUE......................................................................................................55
ADDITIONAL INFORMATION...............................................................................................56
Experts.....................................................................................................56
Public Official Documents...................................................................................56
Other Information...........................................................................................56
FINANCIAL STATEMENTS.................................................................................................57
</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 to
<PAGE>
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
transactions ("component" transactions), instead of a single Strategic
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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
grade assets with its custodian to the extent Fund obligations are not otherwise
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"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 10% of the
value of the Fund's total 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
business environment and administrative guidance. The agencies of the Government
primarily concerned with economic policy and its implementation are the Economic
____________________________
* Where figures in tables under this caption have been rounded off, the
totals may not necessarily agree with the sum of figures.
13
<PAGE>
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.
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. Growth of 1.1% in 1992 was followed by an increase of only 0.1% in
1993, 0.5% in 1994 and 0.9% in 1995. 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 was the sharp rise of the yen in early
1995. The yen reached 81 yen to the dollar in mid-April, a rise of 24% from the
beginning of the year, imparting a deflationary bias to the economy and
threatening the fragile recovery. Subsequent action by the government and the
Bank of Japan resulted in a decline of the yen. By April of 1996, the yen had
depreciated by 24% from its high in 1995. Further Government stimulus and easy
money policies together with the depreciation of the yen have resulted in
increasing activity during 1995. By the fourth quarter of 1995, the annual rate
of increase in real GDP was 3.6% over the previous quarter.
14
<PAGE>
The following table sets forth the composition of Japan's gross domestic
product in yen and in percentage terms. In addition, the gross domestic product
in constant yen and the gross domestic deflator are shown.
<TABLE>
<CAPTION>
Gross Domestic Product
(In trillions of yen)
<S> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995
GDP at Current Prices 430.0 459.0 471.8 475.4 479.1 480.7
Consumption 288.1 303.2 315.6 323.5 331.6 335.9
Private 249.3 261.9 272.3 278.7 285.8 289.0
Public 38.8 41.4 43.3 44.8 45.8 46.8
Fixed Investment 136.5 144.0 143.5 140.4 137.4 136.7
Private 108.3 113.5 108.2 99.7 96.0 95.1
Public 28.2 30.5 35.3 40.7 41.4 41.6
Change in Inventories 2.4 3.5 1.5 0.6 0.0 0.9
Net Exports of Goods and Services 3.0 8.3 11.2 10.9 10.0 7.2
Exports of Goods and Services 45.9 46.8 47.4 44.2 44.4 45.4
Imports of Goods and Services -42.9 -38.5 -36.2 -33.3 -34.4 -38.2
GDP at Constant (1990) Prices 430.0 447.0 451.8 452.3 454.5 458.4
GDP Deflator (1990=100) 100.0 102.7 104.4 105.1 105.4 104.9
Percentage Increase of GDP
At Current Prices 7.5% 6.7% 2.8% 0.8% 0.8% 0.3%
At Constant Prices 5.1% 4.0% 1.1% 0.1% 0.5% 0.9%
Deflator 2.2% 2.7% 1.7% 0.6% 0.3% -0.5%
Percentage Distribution of GDP
Consumption 67.0% 66.1% 66.9% 68.0% 69.2% 69.9%
Fixed Investment 31.7% 31.4% 30.4% 29.5% 28.7% 28.4%
Change in Inventories 0.6% 0.8% 0.3% 0.1% 0.0% 0.2%
Exports of Goods and Services 10.7% 10.2% 10.0% 9.3% 9.3% 9.4%
Imports of Goods and Services -10.0% -8.4% -7.7% -7.0% -7.2% -7.9%
------ ----- ----- ----- ----- -----
Total GDP 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Source: Economic Planning Agency, Quarterly Report on National Accounts (March
1996).
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
1990=100
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Japan 101.8 95.6 91.2 91.8 94.9
United States 98.1 99.6 101.7 107.9 111.8
Germany 103.2 101.3 94.5 97.5 96.9
United Kingdom 96.3 96.2 98.1 103.1 105.4
France 99.9 98.9 95.2 99.2 103.7
Italy 99.1 97.8 95.7 102.2 107.7
Canada 95.6 95.9 101.8 104.0 112.7
Source: IMF, International Financial Statistics (April 1996).
The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1989 through 1994:
<TABLE>
<CAPTION>
GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS
<S> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994
Agriculture, Forestry and Fisheries 2.6% 2.5% 2.4% 2.3% 2.1% 2.1%
Mining 0.2 0.3 0.2 0.2 0.2 0.2
Construction 9.8 10.1 10.2 10.3 10.8 10.8
Manufacturing 28.2 28.2 28.1 27.1 25.5 24.5
Electricity, Gas and Water 2.8 2.6 2.6 2.7 2.7 2.8
Wholesale and Retail Trade 13.4 13.6 13.7 13.1 12.9 12.7
Finance and Insurance 6.4 5.9 5.5 5.2 4.7 5.2
Real Estate Transportation, 10.9 10.9 10.9 11.5 12.2 12.7
Communication and Other
Public Utilities 6.9 6.6 6.5 6.4 6.4 6.4
Services 14.4 14.8 15.1 16.0 16.7 16.8
Government Services 7.7 7.6 7.5 7.6 7.7 7.9
Private Non-Profit Institutions 2.0 2.0 2.0 2.0 2.1 2.2
Import Duty 0.6 0.6 0.6 0.6 0.6 0.6
Imputed Interest (5.6) (5.8) (5.5) (5.3) (4.8) (4.9)
Statistical Discrepancy (0.2) (0.0) 0.1 0.1 0.1 0.1
----- ----- --- --- --- ---
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
</TABLE>
* Gross domestic product measures the value of original 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 economy.
Source: Economic Planning Agency, Annual Report on National Accounts (1996).
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.
16
<PAGE>
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
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 1995 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 work force 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 increases in productivity in 1994 and in 1995
that exceeded the rise in wages, unit labor costs declined 0.9% in 1994 and 1.4%
in 1995.
MANUFACTURING
Wages Productivity Unit Labor Costs
(annual percentage change)
1990 5.3 4.0 1.2
1991 3.4 2.5 0.9
1992 1.2 -5.4 6.9
1993 0.1 -1.4 1.6
1994 2.0 2.9 -0.9
1995 3.2 4.7 -1.4
Source: Ministry of Labor, Monthly Labor Statistics (Mar. 1996); Productivity
Research Institute, Quarterly Journal of Productivity Statistics (Wages
are for manufacturers who employ 30 or more persons.)
Prices
In 1995 the wholesale price index fell by 0.1% and the consumer price index
was virtually unchanged. The virtual absence of inflation was due in part to the
decline in economic activity and in part to the deflationary impact of a strong
yen.
17
<PAGE>
The tables below set forth the wholesale and consumer price indices for
Japan and other selected industrial countries for which comparable statistics
are available:
COMPARATIVE WHOLESALE PRICE INDICES
(1990 = 100)
1991 1992 1993 1994 1995
Japan 100.2 98.7 95.0 93.0 92.2
United States 100.2 100.8 102.3 103.6 107.3
Germany 102.4 103.8 103.7 104.4 106.2
United Kingdom 105.4 108.7 113.0 115.8 120.6
France* 98.7 97.1 94.4 95.4 101.1
Italy 105.2 107.4 112.9 117.2 129.3
Canada 99.0 99.5 102.7 108.5 117.3
* Intermediate Industrial Goods
Source: IMF, Int'l Financial statistics (April 1996)
OECD, Main Economic Indicators (February 1996)
COMPARATIVE CONSUMER PRICE INDICES
(1990 = 100)
1991 1992 1993 1994 1995
Japan 103.3 105.1 106.4 107.1 107.0
United States 104.2 107.4 110.6 113.4 116.6
Germany 103.5 107.6 112.0 115.4 117.4
United Kingdom 103.2 109.8 111.5 114.3 118.2
France 103.2 105.7 107.9 109.7 111.6
Italy 106.3 111.7 116.8 121.4 127.9
Canada 105.6 107.2 109.2 109.4 111.8
Source: IMF, Int'l Financial Statistics (April 1996)
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 $110
billion in its current account. This surplus was predominantly due to a surplus
of $135 billion in its trade account.
In 1995, Japan registered an outflow of $84 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, 1995, exports and imports represented approximately 8.6% and 6.0%,
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.
18
<PAGE>
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>
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
1995 100.2 93.2 108.0 137.7 92.8 67.7 137.1
</TABLE>
Source: Ministry of Finance, The Summary Report on Trade of Japan (Dec. 1995)
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 1990 1991 1992 1993 1994 1995
Textile Products 2.5% 2.5% 2.5% 2.3% 2.1% 2.0%
Metals & Metal Products 6.8 6.7 6.3 6.4 6.1 6.5
Machinery & Equipment:
Ships 1.9 2.1 2.3 2.8 2.9 2.4
Motor Vehicles 17.8 17.4 17.8 16.2 14.4 12.0
TV & Radio Receivers 1.6 1.7 1.6 1.4 1.2 1.0
Motorcycles 0.8 0.9 1.1 1.2 1.0 0.9
Scientific, medical &
optical instruments 4.0 4.1 4.0 3.9 4.0 4.2
Other 48.9 49.0 48.8 50.5 52.5 54.2
Total 75.0 75.2 75.6 76.0 76.0 74.7
Chemicals 5.5 5.6 5.6 5.6 6.0 6.8
Foods & Beverages 0.6 0.6 0.6 0.6 0.5 0.5
Other Exports 9.6 9.4 9.4 9.6 9.3 9.5
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
Japan's Imports 1990 1991 1992 1993 1994 1995
Foods & Beverages 13.5% 14.6% 16.0% 16.4% 17.0% 15.2%
Textile Materials 1.1 1.0 0.9 0.6 0.7 0.5
Chemicals 6.9 7.4 7.4 7.5 7.4 7.3
Mineral Fuels:
Petroleum 13.2 12.7 12.9 11.6 10.1 8.9
Coal 2.6 2.7 2.6 2.5 2.1 2.0
Other 8.1 7.7 7.1 6.2 5.2 5.0
Total 23.9 23.1 22.6 20.3 17.4 15.9
Metal Ores & Scrap 3.9 3.7 3.3 2.4 2.7 2.3
Machinery & Equipment 17.4 18.1 18.4 19.4 21.7 26.3
Other Imports 33.3 32.1 31.4 32.9 38.1 33.5
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
</TABLE>
Source: Ministry of Finance, The Summary Report - Trade of Japan (Dec. 1995).
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 1990 1991 1992 1993 1994 1995
Developed Areas
U.S.A. 31.5% 29.1% 28.2% 29.2% 29.7% 27.3%
EC 18.7 18.8 18.4 15.7 14.5 15.9
Australia 2.4 2.1 2.1 2.1 2.2 1.8
Canada 2.4 2.3 2.1 1.7 1.5 1.3
Others 4.3 3.9 3.6 3.0 2.8 1.7
--- --- --- --- --- ---
Total 59.3 56.2 54.4 51.7 50.7 48.0
Developing Areas
S.E. Asia 28.8% 30.6% 30.7% 32.5% 35.0% 38.3%
Middle East 3.4 3.9 4.5 3.7 2.8 2.3
Latin America 3.6 4.1 4.6 4.7 4.7 4.4
Africa 1.2 1.1 1.2 1.2 1.0 0.9
Others 0.3 0.3 0.3 0.4 0.4 0.5
--- --- --- --- --- ---
Subtotal 37.3 40.0 41.3 42.5 43.9 46.4
Former Soviet Union 0.9% 0.7% 0.3% 0.4% 0.3% 0.3%
China 2.1 2.7 3.5 4.8 4.7 5.0
Others 0.4 0.4 0.5 0.5 0.4 0.3
--- --- --- --- --- ---
Subtotal 3.4 3.8 4.3 5.7 5.4 5.6
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
Japan's Imports 1990 1991 1992 1993 1994 1995
Developed Areas
U.S.A. 22.4% 22.5% 22.4% 23.0% 22.8% 22.4%
EC 15.0 13.4 13.4 12.5 12.9 14.5
Australia 5.3 5.5 5.3 5.1 5.0 4.3
Canada 3.6 3.3 3.3 3.4 3.2 3.2
Others 4.7 4.7 4.5 4.1 4.3 3.2
--- --- --- --- --- ---
Total 51.0 49.4 48.9 48.1 48.2 47.6
Developing Areas
S.E. Asia 23.3% 24.8% 24.7% 25.2% 24.7% 25.3%
Middle East 13.2 12.4 12.5 11.3 10.2 9.4
Latin America 4.2 4.2 3.7 3.5 3.5 3.5
Africa 0.8 0.8 0.7 0.8 0.6 0.6
Others 0.3 0.3 0.4 1.1 1.2 1.7
--- --- --- --- --- ---
Subtotal 41.8 42.5 42.0 41.9 40.2 40.0
Former Soviet Union 1.4% 1.4% 1.0% 1.2% 1.3% 1.4%
China 5.1 6.0 7.3 8.5 10.0 10.7
Others 0.7 0.7 0.8 0.8 0.9 0.3
--- --- --- --- --- ---
Subtotal 7.2 8.1 9.1 10.5 12.2 12.4
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------
</TABLE>
Source: Ministry of Finance, The Summary Report--Trade of Japan (December
1995).
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> <C>
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
1995 20011.96 14485.41 19868.15 1587.87 1193.16 1577.70 1852.13 1194.77 1488.40
</TABLE>
Sources: *Tokyo Stock Exchange, Annual Securities Statistics (1994); Monthly
Statistics Report (Dec. 1987, 1988, 1989, 1990, 1991, 1993, 1994, 1995).
**Annual Statistics of OTC Stocks (1995), issued by Japan
Securities Dealers Association.
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, in 1994, 8.3% to 1559.09 and in 1995, 12%
to 1577.70. 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>
1990 1991 1992 1993 1994 1995
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 379,231 11,824 377,924.4 12,880 289,483 7,943 324,357 11,228 358,592 14,558 365,716 14,535
(in billions
of yen)
Daily
Average 500,400 4,331 380,512 4,206 268,857 1,767 353,394 4,374 342,163 8,994 369,613 9,763
Trading
Volume
(000 shares)
Number of 1,627 342 1,641 430 1,651 436 1,667 477 1,689 564 1,714 678
Listed
Companies
Source: Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1996).
</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> <C>
1989 38.6% 15.4% 31.8% 11.3% 3.2%
1990 37.4 13.2 31.2 14.1 4.1
1991 34.6 10.7 31.0 19.8 3.9
1992 31.9 8.5 28.2 27.4 4.0
1993 34.6 8.7 28.0 25.2 3.1
1994 34.2 7.3 23.3 32.2 3.0
1995 30.3 7.3 25.8 33.7 2.9
</TABLE>
Source: Tokyo Stock Exchange, Annual Securities Statistics (1995).
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 1995,
the return on the TOPIX registered 2.0%.
AVERAGE PRICE/EARNINGS RATIOS AND RATES OF RETURN
Average
Price/Earnings Ratio Rate of Return
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
1995 86.5 2.0
* 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, 1995); Monthly Statistics Report (Dec. 1989, 1990, 1991, 1992, 1993,
1994, 1995).
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 1995
TSE NYSE 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> <C> <C>
Number of Companies 1597 1720 1627 1769 1641 1885 1651 2063 1667 2362 1689 2570 1714 2675
Aggregate Market
Value in Billions of
Dollars* 4260 3030 2822 2820 3028 3321 2331 4035 2898 4545 3590 4448 3557 6000
as Percentage of GDP 153 58 88 51 82 58 61 67 68 72 75 66 76 83
Turnover Ratio (%) 73 52 38 47 28 41 20 40 26 50 25 51 27 59
</TABLE>
* Calculated on the basis of the yen conversion rate published by the
IMF.
Sources: Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1996);
Monthly Statistics Report (Feb. 1995).
22
<PAGE>
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, 1991, 1992, 1993, 1994
and 1995.
<TABLE>
<CAPTION>
EQUITY STOCK MARKETS OF THE WORLD
(dollars in billions)
December 1991 December 1992 December 1993 December 1994 December 1995
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States 3,702.4 37.57 4,022.8 43.16 4467.0 38.4 4626.3 36.6 6338.0 41.9
Japan 2,996.0 30.43 2,331.5 25.02 2885.4 24.8 3624.5 28.7 3582.7 23.7
United Kingdom 953.7 9.68 914.9 9.82 1189.9 10.2 1145.0 9.1 1354.3 9.0
Canada 232.2 2.36 219.7 2.36 296.6 2.5 288.0 2.3 333.4 2.2
Federal 369.1 3.75 325.7 3.49 442.6 3.8 476.9 3.8 579.5 3.8
Republic of
Germany
Australia 137.0 1.39 133.2 1.43 196.2 1.7 212.4 1.7 245.4 1.6
Switzerland 199.0 2.02 195.2 2.09 243.8 2.1 284.0 2.2 401.6 2.7
France 346.9 3.52 333.0 3.57 453.4 3.9 444.3 3.5 504.5 3.3
Netherlands 129.4 1.31 129.8 1.39 171.2 1.5 224.4 1.8 304.3 2.0
Hong Kong 119.0 1.21 161.9 1.74 383.2 3.3 241.2 1.9 274.4 1.8
Other 671.0 6.81 878.1 9.42 908.6 7.8 1072.8 8.5 1197.2 7.9
----- ---- ----- ---- ----- --- ------ --- ------ ---
Total $9,855.7 100.00% $9,320.1 100.00% $11,637.9 100.00% $12,639.8 100.00% $15,115.3 100.00%
-------- ------- -------- ------- --------- ------- --------- ------- --------- -------
</TABLE>
Source: Morgan Stanley Capital International (Quarterly 1992:1, 1993:1,
1994:1, 1995:1, 1996:1).
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>
Additional Information About Making Subsequent Investments by AutoBuy
Shareholders, whose predesignated bank account of record is a member of the
Automated Clearing House Network (ACH) and who have elected to participate in
the AutoBuy program, may purchase shares of the Fund by telephone. Through this
service shareholders may purchase up to $250,000 but not less than $250. To
purchase shares by AutoBuy, shareholders should call before 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. AutoBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
AutoBuy and redeem them within seven days of the purchase, the Fund may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you will be subject to any losses or fees incurred in the
transaction. AutoBuy transactions are not available for IRA accounts and most
other retirement plan accounts.
In order to request purchases by AutoBuy, shareholders must have completed
and returned to the Transfer Agent the application, including the designation of
a bank account from which the purchase payment will be debited. New investors
wishing to establish AutoBuy may so indicate on the application. Existing
shareholders who wish to add AutoBuy to their account may do so by completing an
AutoBuy Enrollment Form. After sending in an enrollment form shareholders should
allow for 15 days for this service to be available.
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.
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 Fund 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. (the "Distributor") 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.
24
<PAGE>
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 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 the Distributor that member may, at its discretion, charge a
fee for that service. The Board of Directors and the Distributor, 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.
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 at
current net asset value through Scudder's Automatic Exchange Program. Exchanges
must be for a minimum of $50. Shareholders may add this free feature over the
25
<PAGE>
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 the Distributor.
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,
26
<PAGE>
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 AutoSell
Shareholders, whose predesignated bank account of record is a member of the
Automated Clearing House Network (ACH) and who have elected to participate in
the AutoSell program may sell shares of the Fund by telephone. To sell shares by
AutoSell, shareholders should call before 4 p.m. eastern time. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, shares will be redeemed at the net asset value per share calculated at
the close of trading on the day of your call. AutoSell requests received after
the close of regular trading on the Exchange will begin their processing and be
redeemed at the net asset value calculated the following business day. AutoSell
transactions are not available for Scudder IRA accounts and most other
retirement plan accounts.
In order to request redemptions by AutoSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish AutoSell may so indicate on the application.
Existing shareholders who wish to add AutoSell to their account may do so by
completing an AutoSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
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 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.
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.
27
<PAGE>
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).
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
28
<PAGE>
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>
- ------------------------------------------------------------------------------------------------------------------
Scudder No-Load Fund with
YEARS Pure No-Load(TM)Fund 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1 Fee
12b-1 Fee
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <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.
Dividends and Capital Gains Distributions Options
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.
29
<PAGE>
Investors may also have dividends and distributions automatically deposited
in 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 the
Distributor. 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>
<CAPTION>
<S> <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
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>
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.
30
<PAGE>
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 Global Bond Fund seeks to provide total return with an emphasis on
current income by investing primarily in high-grade bonds denominated in
foreign currencies and the U.S. dollar. As a secondary objective, the Fund
will seek capital appreciation.
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 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.
31
<PAGE>
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.
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.
__________________________________
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
32
<PAGE>
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 Discovery 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 Small Company Value Fund invests for long-term growth of capital by
seeking out undervalued stocks of small U.S. companies.
Scudder Value Fund seeks long-term growth of capital through investment in
undervalued equity securities.
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
33
<PAGE>
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.
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
34
<PAGE>
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 following table 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 Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- ----------------------------------------------------------------------------------------------------------
<S> <C> <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 Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- ----------------------------------------------------------------------------------------------------------
<S> <C> <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>
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
35
<PAGE>
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
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.
36
<PAGE>
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):
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 12/31/95
One Year Five Years Ten Years
-------- ---------- ---------
-9.07% 1.21% 10.83%
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):
37
<PAGE>
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 12/31/95
One Year Five Years Ten Years
-------- ---------- ---------
-9.07% 6.20% 179.58%
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.
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
38
<PAGE>
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 Morgan Stanley Capital International (MSCI)
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 26 year period ended December 31,
1995; results for other periods may vary. The graph uses 26 year annualized
international returns represented by the Morgan Stanley Capital International
Europe, Australia and Far East (EAFE) Index and 26 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.
39
<PAGE>
XY SCATTER CHART OMITTED. CHART TITLE:
------------------------------------------------------
EFFICIENT FRONTIER
S&P 500 vs. MSCI EAFE Index (12/31/69-12/31/95)
------------------------------------------------------
XY SCATTER CHART DATA:
Total Return Standard Deviation
------------ ------------------
13.15 17.18 100% Int'l MSCI EAFE
13.16 16.24 10 US/90 Int'l
13.14 15.43 20/80
13.09 14.76 30 U.S./70 Int'l
13.01 14.26 40/60
12.9 13.94 50 U.S./50Int'l
12.76 13.82 60/40
12.59 13.9 70 U.S./30 Int'l
12.39 14.17 80/20
12.15 14.64 90 U.S./10 Int'l
11.89 15.27 100% U.S. S&P 500
Data Source: Ibbotson Associates. (Data as of 12/31/95)
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 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
40
<PAGE>
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.
Scudder's Theme: Build Create Provide Marketing and fund literature may refer to
Scudder's theme: "Build Create Provide." This theme intends to encapsulate the
composition of a sound investment philosophy, one through which Scudder can help
provide investors appropriate avenues for pursuing dreams. Individuals recognize
the need to build investment plans that are suitable and directed at achieving
one's financial goals. The desired result from planning and a long-term
commitment to it is the ability to build wealth over time. While there are no
guarantees in the pursuit of wealth through investing, Scudder believes that a
sound investment plan can enhance one's ability to achieve financial goals that
are clearly defined and appropriately approached. Wealth, while a relative term,
may be defined as the freedom to provide for those interests which you hold most
important -- your family, future, and/or your community.
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.
41
<PAGE>
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.
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.
42
<PAGE>
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.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
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 March 31, 1996, 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 March 31, 1996, 6,736,856 shares in the aggregate, 12.58% 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 March 31, 1996, no person owned
beneficially more than 5% of the Fund's outstanding shares except as stated
above.
43
<PAGE>
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"), the Research
Agreement expired on December 31, 1995. 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 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 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
Securities Trust, 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 $12 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.
44
<PAGE>
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 October 26, 1995 and will continue in effect until October 31, 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
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 year ended December 31, 1993, the
Fund paid Asia Management aggregate fees pursuant to its then effective
investment advisory and management agreement of $4,147,194, of which $1,087,289
was paid to NICAM. For the years ended December 31, 1995 and 1994, the Fund paid
the Adviser $3,840,792 and $4,773,356, respectively, of which $512,970 and
$975,256, respectively, 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
45
<PAGE>
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,
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, paid monthly during fiscal year 1995. On December 31, 1995, the research
contract with NICAM expired. For purposes of computing the monthly fee, the
value of the average daily net assets of the Fund was 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, Age and Address Position with Fund Principal Occupation***
- --------------------- ------------------ -----------------------
<S> <C> <C>
Henry Rosovsky (68)* Chairman of the Board and Professor,
Harvard University Director Harvard University
Littauer 218
Cambridge, MA 02138
Douglas M. Loudon (51)# President Managing Director,
Scudder, Stevens & Clark, Inc.
46
<PAGE>
William L. Givens (66) Director President,
Twain Associates, Inc. Twain Associates
21 Custom House Street
Suite 470
Boston, MA 02110
William H. Gleysteen, Jr. (70) Director Consultant
The Japan Society
333 East 47th Street
New York, NY 10017
Nobuo Ishizaka (62) Director Non-executive Director of Atlas
Kaigai Bussan Co., Ltd. Copco, Kaigain Bussan K.K., and HFI
2-5, 2-chome, Roppongi Food, Inc.
Minato-Ku, Tokyo 106, Japan
John F. Loughran (64) Director Senior Adviser for Asia Pacific
711 Silvergate Avenue to J.P. Morgan & Co., Inc.
Point Loma
San Diego, CA 92106
William V. Rapp (57) Director Managing Director,
Rue Associates Rue Associates
85 River Road
Scarborough, NY 10510
O. Robert Theurkauf (69)*# Director Advisory Managing Director, Scudder,
Stevens & Clark, Inc.
Shoji Umemura (76)* Director Chairman,
The Nikko Securities Co., Ltd. The Nikko Securities Co., Ltd.
3-1-1, Marunouchi, Chiyoda-ku
Tokyo, Japan
Hiroshi Yamanaka (83) 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 (83) Honorary Director Director, Daiwa Bank
One Haslet Avenue & Trust Co., Yasuda Fire
Princeton, NJ 08540 and Marine Insurance Company of
America
Allan Comrie (76) Honorary Director Director,
40 Sheridan Drive Petroleum & Resources Corp., The
New Canaan, CT 06840 Adams Express Co.
Jonathan Mason (80) Honorary Director Retired First Vice President
39 Tuckahoe Lane Prudential-Bache Securities, Inc.
Southampton, NY 11968
47
<PAGE>
James W. Morley (74) Honorary Director Professor of Political Science
145 Piermont Road Emeritus
Closter, NJ 07624 Columbia University
Robert G. Stone, Jr. (73) Honorary Director Chairman of the Board
Kirby Corporation 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)
Elizabeth J. Allan (42)# Vice President Principal,
Scudder, Stevens & Clark, Inc.
William E. Holzer (46)# Vice President Managing Director,
Scudder, Stevens & Clark, Inc.
Thomas W. Joseph (56)**+ Vice President Principal,
Scudder, Stevens & Clark, Inc.
Seung K. Kwak (34)# Vice President Managing Director,
Scudder, Stevens & Clark, Inc.
Edward J. O'Connell (50)# Vice President Principal,
Scudder, Stevens & Clark, Inc.
Miyuki Wakatsuki (59) Vice President General Manager,
17-9, Nihonbashi-Hakozakicho Japan Fund Office,
Chuo-Ku Nikko International Capital
Tokyo 103, Japan Management Co., Ltd.
Gina Provenzano (54)# Vice President and Treasurer Associate,
Scudder, Stevens & Clark, Inc.
Kathryn L. Quirk (43)# Vice President and Secretary Managing Director,
Scudder, Stevens & Clark, Inc.
Pamela A. McGrath (42)+ Assistant Treasurer Managing Director,
Scudder, Stevens & Clark, Inc.
Thomas F. McDonough (48)+ Assistant Secretary Principal,
Scudder, Stevens & Clark, Inc.
<FN>
* 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
</FN>
</TABLE>
48
<PAGE>
The Executive Committee of the Fund's Board of Directors, which currently
consists of Messrs. 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,
1992, Honorary Directors of the Fund received $1,000 for each Board meeting
attended. For the year ended December 31, 1995, such fees totaled $145,087.
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). Generally, compensation received by
a Director for serving on the board of a closed-end fund is greater than the
compensation received by a Director for serving on the board of an open-end
fund.
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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
- --------------------------------------------------------------------------------------------------------------------
Henry Rosovsky, $21,707 $2,519 $6,000 $30,226
Director (1 Fund)
William Givens, $16,500 $3,815 $6,000 $26,315
Director (1 Fund)
William H. Gleysteen, Jr., $15,750 $4,133 $3,000 $140,650
Director (12 Funds)
John F. Loughran, $20,250 $3,619 $6,000 $29,869
Director (1 Fund)
William V. Rapp, $15,750 $1,766 $6,000 $23,516
Director (1 Fund)
Hiroshi Yamanaka, $6,000 $8,024 $6,000 $20,024
Director (1 Fund)
Tristan E. Beplat, $4,000 N/A N/A $4,000
Honorary Director (1 Fund)
49
<PAGE>
Allan Comrie, $5,196 $5,394 $5,196 $15,786
Honorary Director (1 Fund)
Jonathan Mason, $6,000 $7,408 $6,000 $19,408
Honorary Director (1 Fund)
James W. Morley, $8,000 $6,669 $6,000 $20,669
Honorary Director (1 Fund)
Robert G. Stone, Jr., $16,163 $6,788 $6,000 $150,302
Honorary Director (15 Funds)
</TABLE>
DISTRIBUTOR
Under the terms of the Underwriting Agreement dated and effective August
14, 1987, between the Fund and the Distributor, a Massachusetts corporation,
which is a subsidiary of Scudder, Stevens & Clark, Inc., the Fund is responsible
for: the payment of 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 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 Securities 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.
50
<PAGE>
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).
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.
51
<PAGE>
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 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).
52
<PAGE>
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.
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
53
<PAGE>
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
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
54
<PAGE>
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 $2,438,600 for
1995, $2,623,142 for 1994 and $2,278,248 for 1993. 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
in the amounts of $186,917 for 1995, $60,488 for 1994 and $19,432 for 1993. Such
amounts represented 7.6%, 2.3% and 0.85% 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, 1995, 1994 and 1993, there were no commissions paid or accrued by the Fund
to J.P. Morgan Securities Asia, Ltd. The rate of total portfolio turnover of the
Fund for the years 1995, 1994 and 1993 was 69.9%, 74.3% and 81.7%, 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.
55
<PAGE>
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
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, 1995, 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 Davis Polk and Wardwell as the Fund's counsel.
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.
56
<PAGE>
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291, Boston,
Massachusetts 02205-2291, a subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for the Fund. For the year ended
December 31, 1995, the Fund was charged by Scudder Service Corporation $779,092,
of which $61,459 was unpaid at December 31, 1995.
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 25, inclusive, in the Annual Report to the shareholders of the
Fund dated December 31, 1995, and are deemed to be a part of this Statement of
Additional Information.
57
<PAGE>
THE JAPAN FUND, INC.
Annual Report
December 31, 1995
A pure no-load(TM) mutual fund
Scudder, Stevens & Clark, Inc.
Investment Manager
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
83-6-26
MIS69A
<PAGE>
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 14
Financial Highlights 17
Notes to Financial Statements 18
Report of Independent Accountants 25
Tax Information 26
Officers and Directors 26
How to Contact The Japan Fund Back cover
2
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The past year continued to test the stamina of investors in Japanese
stocks, yet rewarded their patience. After declining for months, stocks finally
reversed course midway through The Japan Fund's fiscal year ended December 31,
1995.
The Fund's total return (as measured in U.S. dollars) for the 12-month
fiscal period was -9.07%, reflecting the reinvestment of an $0.11 per share
capital gain distribution and a drop in the Fund's share price to $9.44 on
December 31, 1995 from $10.50 a year ago. These results conceal the
progressively better investment conditions that prevailed in the final six
months of the Fund's fiscal year: From June 30 through the end of 1995, the Fund
generated an 11.85% total return.
The unmanaged Tokyo Stock Price Index (TOPIX)--by and large comprising the
stocks of large companies--declined 1.29% for the fiscal year in dollar terms.
Reflecting the divergent performance of large and small stocks in 1995, the
unmanaged Tokyo Stock Exchange Second Section Index and the unmanaged OTC Index,
which are indices of smaller stocks, produced weaker -5.89% and -18.95%
dollar-based returns, respectively. As an actively managed portfolio, the Fund
enjoys the flexibility to invest in companies of varying sizes, providing they
meet our strict criteria for investment. Small-company stocks occupied an
appreciable portion of the portfolio throughout the year, as did stocks in
industries sensitive to changes in the economy. Despite the challenging
investment conditions, we maintained these holdings because we believe that they
are fundamentally attractive and should do well as the Japanese economy
recovers.
Market Conditions Recover in Latter Half of 1995
The market environment in Japan was struck by a succession of unfortunate
events in the early months of 1995. Among them were the tragic earthquake in the
city of Kobe--one of Japan's key economic ports--and the downfall of a venerable
British institution--Barings Bank--due to trading losses in Asia. Meanwhile, the
yen's continued strength earlier in the year depressed economic activity. The
currency surged from 100 yen to the U.S. dollar at the start of the year to a
peak of 79.75 yen to the dollar in April. The strong yen not only hindered
corporate profits, but also darkened consumer and market sentiment. Not
surprisingly, Japanese stocks reflected these woes, with stock prices bottoming
in June.
3
<PAGE>
THE JAPAN FUND, INC.
PERFORMANCE UPDATE as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
THE JAPAN FUND, INC.
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $ 9,093 -9.07% -9.07%
5 Year $10,620 6.20% 1.21%
10 Year $27,958 179.58% 10.83%
TOPIX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $ 9,871 -1.29% -1.29%
5 Year $12,483 24.83% 4.53%
10 Year $31,370 213.70% 12.10%
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
- ----------------------
85 $10,000
86 $17,754
87 $23,615
88 $28,197
89 $31,475
90 $26,325
91 $27,145
92 $22,599
93 $27,942
94 $30,745
95 $27,958
TOPIX
Year Amount
- ----------------------
85 $10,000
86 $18,766
87 $27,553
88 $36,699
89 $39,191
90 $25,130
91 $27,240
92 $20,999
93 $26,057
94 $31,781
95 $31,370
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 witholding 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>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
--------------------------------------------------------------------------------
NET ASSET VALUE... $20.28 $16.97 $16.24 $14.27 $10.76 $10.69 $ 8.90 $10.33 $10.50 $ 9.44
INCOME DIVIDENDS.. $ .02 $ .20 $ .02 $ .08 $ .09 $ -- $ -- $ .28 $ -- $ --
CAPITAL GAINS
DISTRIBUTIONS..... $ 4.67 $ 9.08 $ 3.88 $ 3.59 $ 1.10 $ .41 $ -- $ .39 $ .85 $ .11
FUND TOTAL
RETURN (%)........ 77.54 33.01 19.40 11.63 -16.36 3.11 -16.74 23.64 10.03 -9.07
INDEX TOTAL
RETURN (%)........ 87.65 46.82 33.19 6.79 -35.88 8.39 -22.92 24.07 21.96 -1.29
</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, 1995
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Equity Securities 92%
Cash Equivalents 6%
Other 2%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
SECTORS (Excludes 6% Cash Equivalents)
- --------------------------------------------------------------------------
Manufacturing 34%
Financial 14%
Metals & Minerals 12%
Consumer Discretionary 10%
Durables 8%
Service Industries 7%
Consumer Staples 4%
Technology 3%
Construction 3%
Other 5%
----
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. SMC CORP.
Leading maker of pneumatic equipment
3. JAPAN ASSOCIATED FINANCE CO.
Venture capital company
4. NIPPON ELECTRIC GLASS CO., LTD.
Leading manufacturer of cathode-ray tube glass
5. CANON INC.
Leading producer of visual image and information equipment
6. BRIDGESTONE CORP.
Leading automobile tire manufacturer
7. KAWASAKI STEEL CORP.
Major integrated steelmaker
8. SUMITOMO METAL INDUSTRIES, LTD.
Leading integrated crude steel producer
9. MATSUSHITA ELECTRICAL INDUSTRIAL CO,. LTD.
Consumer electronic products manufacturer
10. HITACHI METALS, LTD.
Major producer of high-quality specialty steels
- -----------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 9.
A monthly Investment Portfolio Summary and quarterly Portfolio Holdings
are available upon request.
5
<PAGE>
By contrast, the second half of the year saw a confluence of positive
developments. In July, the yen began to weaken, acting as a catalyst for the
economic recovery currently unfolding in Japan. By late September, the yen had
fallen to 104 yen to the dollar. Japanese authorities also did their share in
helping to restore investor confidence. The Bank of Japan cut the discount rate
to 0.5%, the lowest level ever, and lower than the prevailing average dividend
yield of equities. The central bank also began purchasing government bonds to
encourage the growth of money supply. And the government's subsequent
announcement of a massive 14.2 trillion yen fiscal package is expected to help
breathe life back into the economy.
Prospects for Japanese corporations have taken a positive turn as the
government's relaxation of taxes on stock dividends paved the way for
corporations to buy back their outstanding shares. Further, companies have
started to revise their earnings forecasts upward as economic prospects
improved.
Keeping An Eye On Value While Pursuing Growth
As always, shaping the Fund's portfolio strategy centers around a
comprehensive research process. While we routinely evaluate structural and
cyclical changes underway in Japan, ultimately, it is intensive stock-by-stock
analysis that defines our investment approach. Leading companies with top or
growing market share, above-average earnings growth, and healthy balance sheets
are typical of the Fund's current investments.
During the past year, this stock-driven approach resulted in a portfolio
whose profile looked distinctly different from that of major market benchmarks.
Falling stock prices had created opportunities to take advantage of values in
the marketplace--that is, investments in large and small companies whose stocks
were priced below what our research indicates is their intrinsic worth.
This dual focus on growth and value reinforced our conviction in certain
holdings. Among these were carefully selected small growth companies showing
signs of becoming tomorrow's blue chips--Nichiei, SMC, and THK, for example. The
performance of these stocks--along with small stocks as a group--fell short of
that of larger-company stocks during the first half of 1995, when the outlook
for economic recovery remained clouded. But believing these holdings stood to
serve the Fund well over the longer term, we retained them in the portfolio. As
it turned out, this decision contributed to Fund performance as the year drew
on.
6
<PAGE>
We also continued to hold other investments that we felt would emerge
unscathed from the tough conditions--global technology companies, for instance,
such as Canon, Fujitsu, and Matsushita Electrical Industrial. Companies that
were restructuring themselves to be well positioned once economic recovery took
hold also numbered among core holdings. Examples include select steel and
trading companies that have reworked their businesses to become more
competitively fit. These restructured investments performed well as the economy
began to reawaken--and they likely will enhance Fund performance further as
economic and market conditions continue to improve.
By contrast, we found that several holdings no longer merited a place in
the Fund. We pared back some retail and restaurant holdings, a process begun
over a year ago. While many of these stocks had performed well for the Fund in
earlier years, their future prospects had dimmed under adverse conditions.
Deflation and the increasingly competitive market climate hurt companies such as
Ten Allied, Skylark, Nissen, and Ministop.
From the sale of these stocks, we directed proceeds to a number of new
investments. We favored cash-rich companies from varying industries,
particularly those generating steady cash flow, such as Takeda Chemical, East
Japan Railway, and Banyu Pharmaceutical. Several construction-related companies
also held promise, given expectations for recovery in private construction
orders during the coming year. Among these new additions were Takasago Thermal
Engineering, Sekisui Chemical, Matsushita Electric Works, and Kansai Sekiwa Real
Estate.
Meanwhile, shaping the Fund's currency strategy proved to be a
balancing act between guarding against yen weakening and benefiting from yen
strengthening. Hence, we designed a currency strategy emphasizing the use of
options to enable the portfolio to benefit from a rising yen while also
defending the Fund against major weakness. On balance, these strategies
contributed a net gain of approximately 0.68% to the Fund's 1995 performance.
7
<PAGE>
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. Eileen O. Gerspach, Portfolio Manager, also helps set the Fund's
general investment strategy. Ms. Gerspach, who joined the team in May 1995, has
worked in the investment industry since 1984 and has nine years of experience as
a portfolio manager.
Outlook
Recent improvements in the economic landscape have set the stage for an
improved market environment in the year ahead. There are many positive signs.
The government is acting to resolve problems surrounding the insolvency issues
besetting major banks, and corporate profits are improving. Renewed domestic
demand should help absorb some of the excess inventory that has accumulated, and
fuel a recovery in industrial production. Further, deflationary pressures may be
abating, demonstrated by the reversal of the yen midway through 1995. Seasonal
factors could prompt the yen to strengthen temporarily in the spring. Still, the
currency may fall further, as long as the Japanese trade surplus--a fundamental
force behind a strong yen--continues to fall sharply.
Other heartening signs include the prospect that domestic assets may flow
back to Japanese stocks. Japanese households and institutions are holding
historically large proportions of cash compared to their holdings of equities.
Under the currently low interest rate environment, investors may shift money to
stocks as the market rally revives investor confidence.
In the last two years, we have completed much of the groundwork to
reposition The Japan Fund to take advantage of renewal and recovery in Japan. As
the Japanese economy continues to emerge from a historically long economic
downturn, we believe that many of these investments should distinguish
themselves on the basis of the strengths found in the best Japanese companies:
Vision, resourcefulness, adaptability, competitiveness, and growth.
Thank you for your continued interest in The Japan Fund.
Sincerely,
/s/Douglas M. Loudon /s/Henry Rosovsky
Douglas M. Loudon Henry Rosovsky
President Chairman
8
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO as of December 31, 1995
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2.4% REPURCHASE AGREEMENTS
-----------------------------------------------------------------------------
13,744,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette dated 12/29/95 at 5.85%
to be repurchased on 1/2/95 at $13,752,934
collateralized by a $12,947,000 U.S. Treasury
Note, 7.875%, 4/15/98 (Cost $13,744,000) ........... 13,744,000
----------
-----------------------------------------------------------------------------
3.4% COMMERCIAL PAPER
-----------------------------------------------------------------------------
6,000,000 Kimberly-Clark Corp., 5.59%, 1/31/96 ................ 5,972,081
14,000,000 New Center Asset Trust, 5.71%, 1/17/96 .............. 13,964,440
----------
TOTAL COMMERCIAL PAPER (Cost $19,936,521) 19,936,521
----------
-----------------------------------------------------------------------------
1.0% CONVERTIBLE BONDS
-----------------------------------------------------------------------------
MANUFACTURING
Industrial
Specialty JPY 544,000,000 Nippon Electric Glass Co., Ltd., 2%, 3/29/02
(Cost $6,024,854) .................................. 6,074,845
----------
-----------------------------------------------------------------------------
91.1% COMMON STOCKS
-----------------------------------------------------------------------------
Shares
CONSUMER
DISCRETIONARY 9.5%
Department &
Chain Stores 2.0% 110,000 Fast Retailing Co., Ltd. ............................ 5,465,375
100,000 Ito-Yokado Co., Ltd. ................................ 6,159,806
----------
11,625,181
----------
Home Furnishings 0.4% 96,000 Nitori Co., Ltd. (b) ................................ 2,696,368
----------
Recreational
Products 2.6% 224,000 Bandai Co., Ltd. .................................... 9,176,949
145,000 Square Co., Ltd. .................................... 5,940,436
----------
15,117,385
----------
Restaurants 0.4% 92,460 Genki Sushi Co., Ltd. ............................... 2,238,741
----------
Specialty Retail 4.1% 36,700 Bunkyodo Co., Ltd. .................................. 835,303
146,000 Kato Denki Co., Ltd. ................................ 3,789,637
353,640 Royal Ltd. .......................................... 11,816,542
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
THE JAPAN FUND, INC.
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
91,400 Shimamura Co., Ltd. ................................. 3,532,068
73,900 Tsutsumi Jewelry Co., Ltd. .......................... 3,700,368
----------
23,673,918
----------
CONSUMER STAPLES 3.8%
Consumer
Electronic &
Photographic
Products 1.1% 332,000 Pioneer Electronics Corp. ............................ 6,077,288
----------
Food & Beverage 2.7% 232,000 Ariake Japan Co., Ltd. ............................... 7,976,755
135,000 Jusco Co., Ltd. ...................................... 3,517,191
273,000 Rock Field Co., Ltd. (b) ............................. 4,256,949
----------
15,750,895
----------
HEALTH 2.1%
Pharmaceuticals 629,000 Banyu Pharmaceutical Co., Ltd ........................ 7,736,852
257,000 Takeda Chemical Industries, Ltd. ..................... 4,231,477
----------
11,968,329
----------
COMMUNICATIONS 0.2%
Telephone/
Communications 124 DDI Corp. ............................................ 960,775
----------
FINANCIAL 12.6%
Other Financial
Companies 12.3% 188,000 Japan Associated Finance Co. ......................... 19,846,973
501,876 Nichiei Co., Ltd. .................................... 37,428,041
116,000 Sanyo Shinpan Finance Co., Ltd. ...................... 9,549,637
26,100 Shohkoh Fund & Co., Ltd. ............................. 4,904,019
----------
71,728,670
----------
Real Estate 0.3% 93,000 Kansai Sekiwa Real Estate, Ltd. ...................... 1,666,344
----------
MEDIA 1.2%
Broadcasting &
Entertainment 285,000 Horipro Inc. ......................................... 3,809,201
63,277 Sony Music Entertainment (Japan) Inc. ................ 3,309,402
----------
7,118,603
----------
SERVICE INDUSTRIES 6.6%
Miscellaneous
Commercial Services 17,600 Aucnet Inc. .......................................... 852,300
1,303,000 Itochu Corp. ......................................... 8,770,799
139,000 Secom Co., Ltd. ...................................... 9,666,053
877,000 Sumitomo Corp. ....................................... 8,918,644
</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> <C>
576,000 Takasago Thermal Engineering Co., Inc. ............... 10,320,581
----------
38,528,377
----------
DURABLES 7.0%
Automobiles 1,089,000 Bridgestone Corp. .................................... 17,297,433
76,000 FCC Co., Ltd. ........................................ 2,679,322
571,100 Kyokuto Kaihatsu Kogyo Co., Ltd. ..................... 11,615,593
1,137,000 ShinMaywa Industries, Ltd. ........................... 9,382,315
----------
40,974,663
----------
MANUFACTURING 30.5%
Chemicals 1.3% 55,000 Nippon Shokubai Corp., Ltd. .......................... 538,015
476,000 Sekisui Chemical Co., Ltd. ........................... 7,007,458
----------
7,545,473
----------
Diversified
Manufacturing 0.4% 211,000 Sumitomo Electric Industries, Ltd. ................... 2,534,044
----------
Electrical
Products 4.8% 927,000 Hitachi Ltd. ......................................... 9,337,337
16,000 Mabuchi Motor Co., Ltd. .............................. 994,867
942,000 Matsushita Electrical Industrial Co., Ltd. ........... 15,327,458
301,000 Toshiba Corp. ........................................ 2,358,441
----------
28,018,103
----------
Hand Tools 0.4% 162,430 Asahi Diamond Industrial Co., Ltd. ................... 2,281,099
---------
Industrial
Specialty 3.1% 114,000 Mirai Industry Co., Ltd. ............................. 2,716,126
658,000 NHK Spring Co., Ltd. ................................. 3,313,898
621,000 Nippon Electric Glass Co., Ltd. ...................... 11,788,475
----------
17,818,499
----------
Machinery/
Components/
Controls 14.0% 112,500 Keyence Corp. ........................................ 12,966,102
474,000 Komori Corp. ......................................... 11,936,077
957,000 Mitsubishi Heavy Industries, Ltd. .................... 7,628,194
843,000 NGK Spark Plug Co., Ltd. ............................. 10,614,044
303,000 NSK Ltd. ............................................. 2,200,969
295,700 SMC Corp. ............................................ 21,393,501
514,600 THK Co., Ltd. ........................................ 14,653,017
----------
81,391,904
----------
Office Equipment/
Supplies 6.5% 970,000 Canon Inc. ........................................... 17,568,039
989,000 Ricoh Co., Ltd. ...................................... 10,823,923
113,900 Riso Kagaku Corp. .................................... 9,608,416
----------
38,000,378
----------
</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>
TECHNOLOGY 2.4%
Electronic
Components/
Distributors 1.5% 116,000 Kyocera Corp. ........................................ 8,617,143
-----------
Electronic Data
Processing 0.9% 472,000 Fujitsu Ltd. ......................................... 5,257,143
-----------
METALS & MINERALS 11.5%
Precious Metals 1.9% 1,255,000 Sumitomo Metal Mining Co., Ltd. ...................... 11,279,806
-----------
Steel & Metals 9.6% 1,207,000 Hitachi Metals, Ltd. ................................. 15,080,194
4,456,000 Kawasaki Steel Corp. ................................. 15,536,659
2,360,000 Nisshin Steel Co., Ltd. .............................. 9,531,429
5,094,000 Sumitomo Metal Industries, Ltd.* ..................... 15,442,344
-----------
55,590,626
-----------
CONSTRUCTION 2.4%
Building Materials 1.4% 758,000 Matsushita Electric Works, Inc.. ..................... 8,002,131
-----------
Homebuilding 0.3% 21,000 Eyeful Home Technology Inc. .......................... 262,373
215,000 Hosoda Corp. ......................................... 1,645,036
-----------
1,907,409
-----------
Miscellaneous 0.7% 205,000 Maeda Road Construction Co., Ltd. .................... 3,792,252
-----------
TRANSPORTATION 1.3%
Railroads 1,564 East Japan Railway Co. ............................... 7,604,143
-----------
TOTAL COMMON STOCKS (Cost $516,946,612) ............... 529,765,690
-----------
-----------------------------------------------------------------------------
2.1% PURCHASED OPTIONS
-----------------------------------------------------------------------------
Principal
Amount
-----------------------------------------------------------------------------
JPY 11,000,000,000 Put on Japanese Yen, strike price
JPY 101.9, expiration date 10/17/96 ........ 4,202,000
JPY 11,000,000,000 Put on Japanese Yen, strike price
JPY 102.59, expiration date 12/18/96 ....... 4,136,000
JPY 11,000,000,000 Put on Japanese Yen, strike price
JPY 102.68, expiration date 1/16/97 ....... 3,685,000
-----------
TOTAL PURCHASED OPTIONS (Cost $6,446,016) ............. 12,023,000
-----------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $563,098,003) (a) ............................... 581,544,056
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Non-income producing security
(a) The cost for federal income tax purposes was $581,168,570. At December 31,
1995, net unrealized appreciation for all securities based on tax cost was
$375,486. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of
$30,669,096 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $30,293,610.
(b) Securities valued in good faith by the Valuation Committee of the Board of
Directors. The cost of these securities at December 31, 1995 aggregated
$8,732,109. See Note A of the Notes to Financial Statements.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
THE JAPAN FUND, INC.
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------
December 31, 1995
- ---------------------------------------------------------------------------------------------
<CAPTION>
ASSETS
<S> <C> <C>
Investments, at market (identified cost $563,098,003)
(Note A) .................................................. $ 581,544,056
Cash ........................................................ 887
Foreign currency holdings, at market (identified
cost $2,117,635)(Note A) .................................. 2,110,090
Receivable on fund shares sold .............................. 730,116
Dividends and interest receivables .......................... 140,307
Receivable on investments sold .............................. 122,999
Other assets ................................................ 5,551
-------------
Total assets .............................................. $ 584,654,006
LIABILITIES
Payable for investments purchased .............. $ 5,436,795
Payable for fund shares redeemed ............... 3,081,429
Accrued management fee (Note C) ................ 336,671
Other accrued expenses (Note C) ................ 601,920
Payable on closed forward currency
exchange contracts (Note A) ................. 26,393,018
-----------
Total liabilities ...................................... 35,849,833
-------------
Net assets, at market value ................................. $ 548,804,173
=============
NET ASSETS
Net assets consist of:
Undistributed net investment income ....................... $ 10,531,476
Net unrealized appreciation (depreciation) on:
Investments ............................................ 18,446,053
Foreign currency related transactions .................. (197)
Accumulated net realized loss ............................. (52,013,581)
Capital stock ............................................. 19,379,820
Additional paid-in capital ................................ 552,460,602
-------------
Net assets, at market value ................................. $ 548,804,173
=============
NET ASSET VALUE, offering and redemption price per
share ($548,804,173/58,139,460 outstanding
shares of capital stock, $.333 par value,
600,000,000 shares authorized) $9.44
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT INCOME
Income:
<S> <C> <C>
Dividends (net of withholding taxes of $525,179) ..... $ 3,004,295
Interest (net of withholding taxes of $3,093) ........ 1,982,854
------------
4,987,149
Expenses:
Management fee (Note C) .............................. $ 3,840,792
Shareholder and Transfer Agent services (Note C) ..... 998,363
Officers and directors fees and expenses (Notes C & D) 189,087
Custodian fees ....................................... 431,686
Printing ............................................. 290,889
Legal ................................................ 252,251
Auditing and accounting services ..................... 109,650
Federal and state registration ....................... 42,721
Other ................................................ 57,165 6,212,604
----------------------------
Net investment loss .................................. (1,225,455)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized loss from:
Investments ....................................... (21,046,440)
Options ........................................... (1,298,631)
Foreign currency related transactions ............. (9,521,339) (31,866,410)
Net unrealized appreciation (depreciation) ------------
during the period on:
Investments ....................................... (22,855,119)
Written options ................................... 226,928
Foreign currency related transactions ............. 8,668,747 (13,959,444)
----------------------------
Net loss on investment transactions .................. (45,825,854)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . $(47,051,309)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- --------------------------------------------------------------------------------
Operations:
<S> <C> <C>
Net investment loss ........................... $ (1,225,455) $ (2,599,796)
Net realized gain (loss) from investment
transactions ................................ (31,866,410) 42,025,485
Net unrealized appreciation (depreciation) on
investment transactions during the period .... (13,959,444) 2,264,434
------------- -------------
Net increase (decrease) in net assets resulting
from operations ............................. (47,051,309) 41,690,123
------------- -------------
Distributions to shareholders:
From net realized gains ($.80 per
share for December 31, 1994) ................ -- (42,020,462)
------------- -------------
In excess of net realized gains ($.11 and $.05
per share, respectively) .................... (5,803,249) (2,360,903)
------------- -------------
Fund share transactions:
Proceeds from shares sold ..................... 330,312,663 521,023,226
Net asset value of shares issued to
shareholders in reinvestment of
distributions ............................... 4,957,881 37,569,251
Cost of shares redeemed ..................... (319,319,066) (441,092,468)
------------- -------------
Net increase in net assets from
Fund share transactions ..................... 15,951,478 117,500,009
------------- -------------
INCREASE (DECREASE) IN NET ASSETS ............. (36,903,080) 114,808,767
Net assets at beginning of period ............. 585,707,253 470,898,486
------------- -------------
NET ASSETS AT END OF PERIOD (including
undistributed net investment income
of $10,531,476 and accumulated
distributions in excess
of net investment income of
$(11,758,799), respectively) ................ $ 548,804,173 $ 585,707,253
============= =============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period ..... 55,779,456 45,596,062
------------- -------------
Shares sold ................................... 37,050,849 44,011,661
Shares issued to shareholders in
reinvestment of distributions ............... 559,580 3,602,037
Shares redeemed ............................... (35,250,425) (37,430,304)
------------- -------------
Net increase in Fund shares ................... 2,360,004 10,183,394
------------- -------------
Shares outstanding at end of period ........... 58,139,460 55,779,456
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994(a) 1993(a) 1992 1991 1990 1989 1988 1987 1986(a)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.50 $10.33 $ 8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28 $15.53
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (loss) ........ (.01) (.05) (.05) (.05) (.03) .09 .04 .04 .16 .10
Net realized and
unrealized gain (loss)
on investments ....... (.94) 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13 5.81 9.34
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............ (.95) 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17 5.97 9.44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ............... -- -- -- -- -- (.09) (.08) (.02) (.20) (.02)
In excess of net
investment income .... -- -- (.28) -- -- -- -- -- -- --
From net realized
gains on investment
transactions ......... -- (.80) (.39) -- (.41) (1.10) (3.59) (3.88) (9.08) (4.67)
In excess of net
realized gains ....... (.11) (.05) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ... (.11) (.85) (.67) -- (.41) (1.19) (3.67) (3.90) (9.28) (4.69)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period ......... $ 9.44 $10.50 $10.33 $ 8.90 $10.69 $10.76 $14.27 $16.24 $16.97 $20.28
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ........ (9.07) 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40 33.01 77.54
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) .... 549 586 471 409 335 313 401 404 394 584
Ratio of operating
expenses to average
daily net assets (%) ... 1.21 1.08 1.25 1.42 1.26 1.05 1.02 1.01 .90 .70
Ratio of net investment
income to average
daily net assets (%) ... (.24) (.40) (.47) (.31) (.15) .72 .34 .28 .41 .51
Portfolio turnover rate (%) 69.9 74.3 81.7 47.0 46.4 52.7 60.4 38.8 34.0 38.2
<FN>
(a) Per share amounts have been calculated using weighted average shares
outstanding.
</FN>
</TABLE>
17
<PAGE>
THE JAPAN FUND, INC. 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. Securities valued in good
faith by the valuation committee of the Board of Directors at fair value
amounted to $6,953,317 (1.27% of net assets) and have been noted in the
investment portfolio as of December 31, 1995.
OPTIONS. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the
period, the Fund purchased put options on currencies as a hedge against
potential adverse price movements in the value of portfolio assets.
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-Counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
19
<PAGE>
- --------------------------------------------------------------------------------
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
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 daily 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate. During the period, the
Fund utilized forward contracts as a hedge in connection with portfolio
purchases and sales of securities denominated in foreign currencies and as a
hedge against changes in exchange rates relating to foreign currency denominated
assets.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
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. Under the United States-Japan
tax treaty, Japan imposes a withholding tax of 15% on dividends and 10% on
interest. There is currently no Japanese tax on capital gains.
At December 31, 1995, the Fund had a net tax basis capital loss carryforward of
approximately $23,266,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2003, the expiration date. In addition, from November 1, 1995 through December
31, 1995, the Fund incurred approximately $1,685,000 of net realized capital
losses. As permitted by tax regulations, the Fund intends to elect to defer
these losses and treat them as arising in the fiscal year ended December 31,
1996.
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. Earnings
and profits distributed to shareholders on redemption of Fund shares ("tax
equalization") may be utilized by the Fund, to the extent permissible, as part
of the Fund's dividends paid deduction on its federal income tax return.
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, foreign
denominated investments, passive foreign investment companies, and certain
securities sold at a loss. As a result, net investment income (loss) and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from
21
<PAGE>
- --------------------------------------------------------------------------------
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
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, 1995, purchases and sales of investment
securities (excluding short-term investments) aggregated $352,815,732 and
$376,852,354, respectively.
Transactions in written options for the year ended December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
OPTIONS ON CURRENCIES
----------------------------
PREMIUMS
JAPANESE YEN RECEIVED ($)
-----------------------------
<S> <C> <C>
Beginning of Period 4,177,500,000 1,861,822
Exercised (4,177,500,000) (1,861,822)
-------------- ----------
End of Period -- $ --
============== ==========
</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 an annual rate of 0.85% of 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
22
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
monthly. For the year ended December 31, 1995, the fee pursuant to the
Management Agreement amounted to $3,840,792, which was equivalent to an annual
effective rate of 0.75% 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. Effective January 1, 1995, the Adviser agreed to pay NICAM a fee equal to
an annual rate of 0.10% of the Fund's average daily net assets computed and
accrued daily and paid monthly. On December 31, 1995, the research contract with
NICAM terminated. For the year ended December 31, 1995 the fee pursuant to the
Research Agreement amounted to $512,970.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended December 31, 1995, the amount charged to the Fund by SSC aggregated
$779,092, of which $61,459 is unpaid at December 31, 1995.
The Fund pays each of its Officers and Directors not affiliated with the Adviser
an annual fee plus specified amounts for attended board and committee meetings.
For the year ended December 31, 1995, the Officers and Directors fees aggregated
$145,087.
During the year ended December 31, 1995, there were $186,917 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
individual's final year basic Directors fees and length of service. For the year
ended December 31, 1995, Directors' retirement benefits amounted to
23
<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------
$44,000. At December 31, 1995, the Fund has accrued $162,007 for such benefits.
E. LINE OF CREDIT
- --------------------------------------------------------------------------------
The Fund and several affiliated Funds ("The Participants") share in a $500
million revolving credit facility for temporary or emergency purposes, including
the meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated among each of the Participants. Interest is calculated based
on the market rates at the time of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the agreement. In addition, the
Fund also maintains an uncommitted line of credit.
24
<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, 1995, 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, 1995 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.
Boston, Massachusetts PRICE WATERHOUSE LLP
February 7, 1996
25
<PAGE>
THE JAPAN FUND, INC.
TAX INFORMATION
For its fiscal year ended December 31, 1995, 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 $528,125). The
total amount of taxes paid by the Fund to such countries was $.01 per share
(representing a total of $528,125).
OFFICERS AND DIRECTORS
Henry Rosovsky
Chairman of the Board and
Director
Professor, Harvard University; Director, Corning Inc., Paine Webber Group
Douglas M. Loudon*
President
William L. Givens
Director
President, Twain Associates
William H. Gleysteen, Jr.
Director
President, The Japan Society, Inc.
Nobuo Ishizaka
Director
Non-executive Director, Atlas Copco, Kaigai Bussan K.K., HFI Food, 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
O. Robert Theurkauf*
Director
Shoji Umemura
Director
Chairman, The Nikko Securities Co., Ltd.; Vice Chairman, Japan Securities
Dealers Association; Governor, Board of Governors, Tokyo Stock Exchange,
Association of Tokyo Stock Exchange Regular Members; Director, The Securities
Analysts Association of Japan; Executive Director, Federation of Economic
Organizations, Japan Federation of Employers Association; Advisor, Japan
Association of Corporate Executives; Advisor, Tokyo Chamber of Commerce and
Industry; Vice Chairman, Japan-Korea Economic Association; Member, Board of
Trustees, Waseda University; Chairman, Congregation, Waseda University
26
<PAGE>
THE JAPAN FUND, INC.
Hiroshi Yamanaka
Director
Advisor to the Board, The Meiji Mutual Life Insurance Company; Lifetime
Executive Director, Japan Association of Corporate Executives; Vice Chairman,
The Security Analysts Association of Japan; Governor, Board of Governors,
Tokyo Stock Exchange; Auditor, Bank of Tokyo, Ltd.; Director, Kirin Brewery
Co., Ltd., Nikon Corp.; Doctor of Commerce, Chuo University
Elizabeth J. Allan*
Vice President
William E. Holzer*
Vice President
Thomas W. Joseph*
Vice President
Seung Kwak*
Vice President
Edward J. O'Connell*
Vice President
Miyuki Wakatsuki
Vice President
Manager, Nikko International Capital Management Co., Ltd.
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
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
Robert G. Stone, Jr.
Former Chairman of the Board and Director, The Japan Fund, Inc.
Chairman of the Board, Kirby Corporation
* Scudder Stevens & Clark, Inc.
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
