Filed with the Securities and Exchange Commission on APril 30, 1998.
File No. 33-13863
File No. 811-1090
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 12
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
The Japan Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
345 Park Avenue, New York, NY 10154
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
Thomas F. McDonough
Scudder, Stevens & Clark, Inc.
Two International Place, Boston, MA 02110
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b)
X on May 1, 1998 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i)
on May 1, 1998 pursuant to paragraph (a)(i)
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following:
this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
<PAGE>
THE JAPAN FUND, INC.
CROSS-REFERENCE SHEET
Items Required By Form N-1A
PART A
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<S> <C> <C>
No. Item Caption Prospectus Caption
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial Information FINANCIAL HIGHLIGHTS
4. General Description of INVESTMENT OBJECTIVE, POLICIES AND STRATEGIES
Registrant Risk factors, Fund organization
5. Management of the Fund
FUND ORGANIZATION--Investment advisers; Transfer
agent, dividend-paying and shareholder service
agent; Distributor; Custodian and sub-custodian
SHAREHOLDER SERVICES--A team approach to
investing
5A. Management's Discussion of Fund NOT APPLICABLE
Performance
6. Capital Stock and Other SHAREHOLDER SERVICES--Shareholder inquiries
Securities DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and
capital gain distributions
TRANSACTION INFORMATION--Tax information
SHAREHOLDER SERVICES--Dividend reinvestment plan
7. Purchase of Securities Being PURCHASES AND REDEMPTIONS
Offered TRANSACTION INFORMATION
SHAREHOLDER SERVICES--Investment flexibility, Low minimum
investment, Dividend reinvestment plan
FUND ORGANIZATION--Distributor
8. Redemption or Repurchase PURCHASES AND REDEMPTIONS
TRANSACTION INFORMATION
9. Pending Legal Proceedings NOT APPLICABLE
<PAGE>
PART B
Caption in Statement of
Item No. Item Caption Additional Information
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and History JAPAN AND THE JAPANESE ECONOMY
13. Investment Objectives and INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Policies
14. Management of the Fund FUND ORGANIZATION
DIRECTORS AND OFFICERS
REMUNERATION
15. Control Persons and Principal FUND ORGANIZATION
Holders of Securities DIRECTORS AND OFFICERS
16. Investment Advisory and Other INVESTMENT ADVISORY ARRANGEMENTS
Services ADDITIONAL INFORMATION--Experts, Public Official Documents,
Other Information
17. Brokerage Allocation BROKERAGE AND PORTFOLIO TURNOVER
18. Capital Stock and Other FEATURES AND SERVICES OFFERED BY THE FUND--Dividend
Securities Reinvestment Plan
FUND ORGANIZATION
19. Purchase, Redemption and PURCHASES AND EXCHANGES REDEMPTIONS FEATURES AND SERVICES
Pricing of Securities Being OFFERED BY THE FUND--Distribution Plans
Offered SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES--United States Federal Income Taxation, Japanese
Taxation
21. Underwriters DISTRIBUTOR
22. Calculations of Yield NOT APPLICABLE
Quotations of Money Market Funds
23. Financial Statements FINANCIAL STATEMENTS
</TABLE>
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This prospectus sets forth concisely the information about The Japan Fund,
Inc., an open-end, diversified 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, 1998, 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 and is available along with other related materials on the
Securities and Exchange Commission's Internet Web site (http://www.sec.gov).
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 8
Investment results 10
Distribution and performance information 10
Fund organization 11
Purchases and redemptions 13
Transaction information 16
Shareholder services 18
Tax-advantaged retirement plans 20
The Scudder Family of Funds 21
How to contact The Japan Fund 22
Distributor: Scudder Investor Services, Inc.
THE JAPAN FUND, INC.
PROSPECTUS
MAY 1, 1998
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 Kemper Investments, Inc.
Investment Adviser
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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, 1997.
Investment management fees 0.77%
12b-1 fees NONE
Other expenses 0.44%
----
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."
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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. 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, 1997, which 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>
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YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997(a) 1996(a) 1995 1994(a) 1993(a) 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........ $ 8.33 $ 9.44 $10.50 $10.33 $ 8.90 $ 10.69 $10.76 $ 14.27 $16.24 $16.97
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Income from investment
operations:
Net investment
income (loss) ............. (.03) (.03) (.01) (.05) (.05) (.05) (.03) .09 .04 .04
Net realized and
unrealized gain (loss)
on investments ............ (1.16) (1.00) (.94) 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Total from investment
operations ................. (1.19) (1.03) (.95) 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Less distributions:
From net investment
income .................... -- -- -- -- -- -- -- (.09) (.08) (.02)
In excess of net
investment income ......... (.37) (.08) -- -- (.28) -- -- -- -- --
From net realized
gains on investment
transactions .............. -- -- -- (.80) (.39) -- (.41) (1.10) (3.59) (3.88)
In excess of net
realized gains ............ -- -- (.11) (.05) -- -- -- -- -- --
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Total distributions ........ (.37) (.08) (.11) (.85) (.67) -- (.41) (1.19) (3.67) (3.90)
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Net asset value,
end of period ............. $ 6.77 $ 8.33 $ 9.44 $10.50 $10.33 $ 8.90 $10.69 $ 10.76 $14.27 $16.24
======= ======= ====== ====== ====== ======= ====== ======= ====== ======
TOTAL RETURN (%) ............. (14.40) (10.92) (9.07) 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ........ 265 386 549 586 471 409 335 313 401 404
Ratio of operating
expenses to average
daily net assets (%) ....... 1.21 1.16 1.21 1.08 1.25 1.42 1.26 1.05 1.02 1.01
Ratio of net investment income
(loss) to average daily net
assets (%) ................. (.38) (.34) (.24) (.40) (.47) (.31) (.15) .72 34 .28
Portfolio turnover rate
(%) ........................ 96.4 72.6 69.9 74.3 81.7 47.0 46.4 52.7 60.4 38.8
Average commission
rate paid (b) .............. $ .0270 $ .0444 -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years ending on or after December 31, 1996.
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Shareholder benefits
o broad and diversified investment portfolio
o active professional management by Scudder Kemper Investments, 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 Kemper Investments, Inc.
o $2,500 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.
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 Kemper Investments, Inc. (the "Adviser") believes
that the potential for capital appreciation from investment in debt securities
equals or exceeds that available from investment in equity securities.
Investment strategies
The Fund currently intends to focus its investments in select Japanese
companies, whether large or small, that have an active market for their shares
and that show a potential for greater-than-average growth. These companies may
be situated in the post-industrial sectors of the economy, sensitive to consumer
demand, technology-driven, and globally competitive, including companies that
are sharing in the rapid growth of Japan's Asia-Pacific neighbors. The Fund
anticipates that most equity securities of Japanese companies in which it
invests, either directly or indirectly by means of American Depositary Receipts
or convertible debentures, will be listed on securities exchanges in Japan.
The Fund may also invest up to 30% of its net assets in equity securities
of Japanese companies which are traded in an over-the-counter market. These are
generally securities of relatively small or little-known companies that the
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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. It is impossible to predict how long
such alternative strategies will be utilized.
Why invest in the Fund?
The Japan Fund, Inc. is the oldest and largest U.S. mutual fund focusing on
Japan. With the second largest GNP in the world and its stock exchanges
comprising over 12% 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, and home entertainment equipment, but is
also home to some of the world's largest financial and utility companies, as
well as a new breed of entrepreneurial growth companies. Japan's economic wealth
is substantial, and the Fund believes that the depth and the breadth of the
Japanese economy offers attractive equity investment opportunities. The Fund is
structured to invest among the broad universe of publicly traded companies from
the largest blue chips to the smaller companies traded in the over-the-counter
market, and offers substantial diversification within the Japanese stock market.
Over the past 30 years, Japan has experienced significant 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. After a
speculative economic blow-off in the late 1980s, the Japanese economy and its
stock market have been in a challenging adjustment phase through much of the
1990s. Please see "Risk factors -- The Japanese economy and stock market" for
additional information about the Japanese economy.
While it is highly unlikely that Japan's economy will return to growing at
the phenomenal rates seen in the 1960s, 1970s and early 1980s, it should
continue to offer investors many attractive long-term investment opportunities.
The stock price adjustment of the last several years has resulted in many
Japanese stocks now selling at attractive valuations relative to cashflow,
assets, or sales. The Adviser believes that one of the key investment issues for
unlocking this hidden wealth for shareholders in Japanese corporations is to
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improve profit margins and return on equity. Because an increasing number in
Japanese management are becoming more shareholder and profit oriented, there may
be select value opportunities emerging in Japan. Moreover, some of the leading
Japanese companies, as well as the newer, smaller companies, continue to offer
above average growth and global competitiveness on the strength of their brands,
technology, distribution capability, or new products.
Investors undertaking to invest directly in Japanese securities often
encounter complications and extra 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 Fund's Adviser 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 has certain investment restrictions which are designed to reduce
the Fund's investment risk. Fundamental investment restrictions may not be
changed without a vote of shareholders; non-fundamental investment restrictions
may be changed by a vote of the Fund's Board of Directors. A complete listing of
investment restrictions is contained under "Investment Restrictions" in the
Fund's Statement of Additional Information.
As a matter of fundamental policy, the Fund may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Fund may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes, although the Fund may engage up to 5% of
total assets in reverse repurchase agreements or dollar rolls.
As a matter of fundamental policy, the Fund may not make loans except
through the lending of portfolio securities, the purchase of debt securities,
interests in indebtedness, or through repurchase agreements. The Fund has
adopted a non-fundamental policy restricting the lending of portfolio securities
to no more than 5% of total assets.
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 Corporation ("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.
Common stocks
Under normal circumstances, the Fund invests primarily in common stocks.
Common stock is issued by companies to raise cash for business purposes and
represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception, and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks
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also offer the greatest potential for gain on investment, compared to other
classes of financial assets such as bonds or cash equivalents.
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 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.
Illiquid securities
The Fund may invest in securities for which there is not an active trading
market or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities but carry the risk
that the Fund may not be able to dispose of them at an advantageous time or
price.
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 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
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
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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 to create leveraged exposure in the Fund. Please refer to "Risk
factors--Strategic Transactions and derivatives" for more information.
Risk factors
Investors should consider the following factors inherent in investment in
Japan.
Trade issues
Because of the concentration of Japanese exports in highly visible products
such as automobiles, machine tools, and semiconductors, and the large trade
surpluses ensuing therefrom, Japan is in a difficult phase in its relations with
its trading partners, particularly the United States, where the trade imbalance
is the greatest. Japan's trade surplus increased to $102 billion in 1997 from
$85 billion in 1996.
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.
The Japanese economy and stock market
Japanese economic growth has weakened since 1990. Easy monetary policy and
fiscal measures aimed at supporting economic activity and promoting financial
stability have only managed to hold recessionary elements in abeyance. The need
for structural reform of the economy remains. With the current unsettled
political situation, scandals in the bureaucracy and low consumer confidence,
there is the possibility that the Japanese economy may experience further
weakness before its fundamental problems are addressed and a more normal growth
rate is achieved.
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 30, 1997 was 59% 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.
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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
associated with the Fund, depending upon the composition of its portfolio at any
given time.
Investing in small company securities. The securities of small companies
are often traded over-the-counter and may not be traded in the volumes typical
on a national securities exchange. Consequently, in order to sell this type of
holding, the Fund may need to discount the securities from recent prices or
dispose of the securities over a long period of time. Prices for 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,
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their price may decrease, but to a lesser extent, if the value of the underlying
common stock decreases. Convertible securities generally entail less credit risk
than the issuer's common stock.
Illiquid securities. The absence of a trading market can make it difficult
to ascertain a market value for these 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.
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
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
Investment results
The Fund is designed for long-term investors who can accept international
stock-market risk. The value of the Fund's portfolio securities fluctuates with
market and economic conditions, causing Fund shares to fluctuate in value. In
addition, the Fund's investments are denominated in yen, the value of which
continually changes in relation to the dollar. This varying relationship will
also affect the value of the Fund's shares. Depending on when you sell your
shares, their value may be higher or lower than when you purchased them. In
return for accepting stock-market risk, you may earn a greater return on your
investment than from a money-market or income fund.
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
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distribution may be made 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 to individual shareholders at a maximum 20% or 28% rate
(depending on the Fund's holding period for the assets giving rise to the gain),
regardless of the length of time you have owned your shares. Distributions of
short-term capital gain are taxable as ordinary income.
The Fund sends you detailed tax information about the amount and type of
its distributions each year.
Performance information
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. Total return is the change in value of
an investment in the Fund for a specified period. Average annual total return
refers to the average annual compound rate of return of an investment in the
Fund assuming the investment has been held for one year, five years and ten
years, as of a stated ending date. Cumulative total return represents the
cumulative change in value of an investment in the Fund for various periods. All
types of total return calculations assume that all dividends and capital gains
distributions during the period were reinvested in shares of the Fund. Capital
change measures return from capital, including reinvestment of any capital gain
distributions but not reinvestment of dividends. Performance will vary based
upon, among other things, changes in market conditions and expenses.
Fund organization
The Fund, which was incorporated under the laws of the State of Maryland in
1961, is an open-end, diversified management investment company registered under
the Investment Company Act of 1940 (the "1940 Act"). The Fund's activities are
supervised by its Board of Directors. At the time of any election, shareholders
have one vote for each share held. The Fund is not required to and has no
current intention to hold annual shareholder meetings, although special meetings
may be called for purposes such as electing or removing Directors, changing
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.
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Investment adviser
In making investment decisions, the Fund retains Scudder Kemper
Investments, Inc., formerly known as 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.
Scudder, Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc. and Scudder has
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owns approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
The address of Scudder Kemper Investments, Inc. is 345 Park Avenue, New
York, New York 10154.
Like other mutual funds and financial and business organizations worldwide,
the Fund could be adversely affected if computer systems on which the Fund
relies, which primarily include those used by the Adviser, its affiliates or
other service providers, are unable to correctly process date-related
information on and after January 1, 2000. This risk is commonly called the Year
2000 Issue. Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the Fund's business and
operations. The Adviser has commenced a review of the Year 2000 Issue as it may
affect the Fund and is taking steps it believes are reasonably designed to
address the Year 2000 Issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 Issue will not have an adverse effect on the companies whose securities are
held by the Fund or on global markets or economies generally.
The Adviser received investment advisory and management fees for services
rendered to the Fund which totalled 0.77% of the Fund's average daily net assets
during the fiscal year ended December 31, 1997. 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.
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 the Adviser, 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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Custodian, fund accounting agent and sub-
custodian
Brown Brothers Harriman & Co. is the Fund's custodian and fund accounting
agent, 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 ($2,500 minimum)
By check
Checks should be made payable to "The Japan Fund, Inc." in the amount of
$2,500 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 $2,500 or more from another fund or class of a 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 regular trading on the
New York Stock Exchange (the "Exc hange") (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
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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 placed. If payment by check or federal reserve wire is not
received within three business days, the order is subject to cancellation 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 "QuickBuy"
If you elected "QuickBuy" 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 "QuickBuy,"
call 1-800-53-JAPAN for more information.
To purchase additional shares, call 1-800-53-JAPAN. Purchases may not be
for 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. "QuickBuy" 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 "QuickBuy" 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. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA 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
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CERTIFICATES TO THE FUND'S TRANSFER AGENT PRIOR TO REDEMPTION. Call or write The
Japan Fund Service Center for information on redemption of certificated shares.
If you hold Japan Fund shares in non-certificated form, you may redeem your
shares according to the following instructions.
By telephone
This is the quickest and easiest way to sell Japan Fund shares. You may
redeem any amount to your pre-designated bank account, and up to $100,000 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 "QuickSell"
If you elected "QuickSell" 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 "QuickSell," 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. "QuickSell" 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.
"QuickSell" 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 $100,000 we require an original signature and
an original signature guarantee for each person in whose name the account is
registered. (The Fund reserves the right, however, to require a signature
guarantee for all redemptions.) You can obtain a signature guarantee from most
banks, credit unions or savings associations, or from broker/dealers, municipal
securities broker/dealers, government securities broker/dealers, national
securities exchanges, registered securities associations, or clearing agencies
15
<PAGE>
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 $100,000 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. If you purchase shares by federal
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<PAGE>
funds wire, 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 may 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).
Purchase restrictions
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) for any reason including 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
17
<PAGE>
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 $2,500. Scudder
retirement plans have similar or lower minimum share balance requirements. A
shareholder may open an account with at least $1,000, if an automatic investment
plan of $100/month is established. Shareholders who maintain a non-fiduciary
account balance of less than $2,500 in the Fund without establishing an
automatic investment plan, will be assessed an annual $10.00 per fund charge
with the fee paid to the Fund. The $10.00 charge will not apply to shareholders
with a combined household account balance in any of the Scudder Funds of $25,000
or more. The Fund reserves the right, following 60 days' written notice to
shareholders, to redeem all shares in accounts below $250, 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. Retirement accounts and
certain other accounts will not be assessed the $10.00 charge or be subject to
automatic liquidation. Please refer to "Exchanges and Redemptions -- Other
Information" in the Fund's Statement of Additional Information for more
information.
Shareholder services
Shareholder statements
You will receive a detailed statement summarizing account activity,
including dividend and capital gain reinvestment, purchases and redemptions. 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
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investment program for your particular needs. Telephone redemption and telephone
exchange are subject to termination and their terms are subject to change at any
time by the Fund or the transfer agent.
Experienced professional management
Your investment in the Fund is actively managed under the guidelines
established by the Fund's Board of Directors. Professional management is an
important advantage for investors who do not have the time or expertise to
invest directly in individual securities.
A team approach to investing
The Japan Fund, Inc. is managed by a team of investment professionals, each
of whom plays 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 the Adviser's large staff of economists,
research analysts, traders, and other investment specialists who work in the
Adviser's offices across the United States and abroad. The Adviser believes its
team approach benefits Fund investors by bringing together many disciplines and
leveraging its 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 the Adviser 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 the Adviser 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 $2,500. 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.
19
<PAGE>
Tax-advantaged retirement plans
The Japan Fund, Inc. may be a good choice to help you meet
your retirement goals. Scudder Investor Services, Inc., underwriter of The Japan
Fund, Inc., offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder funds (except Scudder tax-free funds, which are
inappropriate for such plans) as pure no-load(TM) investment options to meet a
broad range of investment objectives. Using Scudder's retirement plans can help
shareholders save on current taxes while building their retirement savings.
o Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of up to $2,000 per person for anyone with earned income (up
to $2,000 per individual for married couples filing jointly, even if only
one spouse has 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 you no annual
custodial fee.
o Scudder Roth No-Fee IRAs. Similar to the traditional IRA in many respects,
these retirement plans provide a unique opportunity for qualifying
individuals to accumulate investment earnings tax free. Unlike a traditional
IRA, with a Roth IRA, if you meet the distribution requirements, you can
withdraw your money without paying any taxes on the earnings. No tax
deduction is allowed for contributions to a Roth IRA. The Scudder Roth IRA
charges you no annual custodial fee.
o 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.
o 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.
o 403(b) Plans. Retirement plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.
o 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. The Scudder SEP-IRA charges
you no annual custodial fee.
o 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 and most 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.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
20
<PAGE>
The Scudder Family of Funds
As a Japan Fund shareholder, you can receive information on the Scudder
Family of Funds if you wish to do so. This service is available wholly at the
option of the Japan Fund shareholder. The Scudder Family of Funds offers many
conveniences and services: free telephone exchanges and redemptions at any time
at net asset value, Scudder Funds Centers across the U.S., maintained by Scudder
Investor Services, Inc., for those shareholders who like to conduct business in
person and the Scudder Funds newsletter which reports periodically on the stock
and bond markets, and new Scudder investment products.
If you are interested, please contact a specialist at The Japan Fund
Service Center by calling 1-800-53-JAPAN.
21
<PAGE>
How to contact The Japan Fund
For investment information or questions about your 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)
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)
22
<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, 1998
- --------------------------------------------------------------------------------
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,
1998, 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 OF CONTENTS
Page
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS................................1
Investment Objective and Policies........................................1
Master/feeder structure..................................................2
Specialized Investment Techniques........................................2
Investment Restrictions.................................................11
JAPAN AND THE JAPANESE ECONOMY*...............................................13
Economic Trends.........................................................13
Industrial Production...................................................14
Energy..................................................................16
Labor...................................................................16
Prices..................................................................16
Balance of Payments.....................................................17
Foreign Trade...........................................................17
SECURITIES MARKETS IN JAPAN...................................................20
PURCHASES AND EXCHANGES.......................................................22
Additional Information About Opening An Account.........................22
Additional Information About Making Subsequent Investments..............22
Additional Information About Making Subsequent Investments by QuickBuy..23
Checks..................................................................23
Wire Transfer of Federal Funds..........................................24
Share Price.............................................................24
Share Certificates......................................................24
Other Information.......................................................24
Exchanges...............................................................25
REDEMPTIONS...................................................................26
Redemption by Telephone.................................................26
Redemption By QuickSell.................................................26
Redemption by Mail or Fax...............................................27
Redemption-in-Kind......................................................27
Other Information.......................................................28
FEATURES AND SERVICES OFFERED BY THE FUND.....................................28
The Pure No-Load(TM) Concept............................................28
Internet access.........................................................29
Dividends and Capital Gains Distribution Options........................30
Scudder Investor Centers................................................30
Reports to Shareholders.................................................30
Transaction Summaries...................................................31
THE SCUDDER FAMILY OF FUNDS...................................................31
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
SPECIAL PLAN ACCOUNTS.........................................................35
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension
Plans for Corporations and Self-Employed Individuals.................36
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations
and Self-Employed Individuals........................................36
Scudder IRA: Individual Retirement Account.............................36
Scudder Roth IRA: Individual Retirement Account........................37
Scudder 403(b) Plan.....................................................37
Automatic Withdrawal Plan...............................................37
Group or Salary Deduction Plan..........................................38
Automatic Investment Plan...............................................38
Uniform Transfers/Gifts to Minors Act...................................38
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................39
PERFORMANCE AND OTHER INFORMATION.............................................39
Comparison of Fund Performance..........................................40
FUND ORGANIZATION.............................................................44
INVESTMENT ADVISORY ARRANGEMENTS..............................................45
Personal Investments by Employees of the Adviser........................47
DIRECTORS AND OFFICERS........................................................48
REMUNERATION..................................................................50
DISTRIBUTOR...................................................................51
TAXES.........................................................................52
United States Federal Income Taxation...................................52
Japanese Taxation.......................................................56
PORTFOLIO TRANSACTIONS........................................................56
Brokerage Commissions...................................................56
NET ASSET VALUE...............................................................57
ADDITIONAL INFORMATION........................................................58
Experts.................................................................58
Public Official Documents...............................................58
Other Information.......................................................58
FINANCIAL STATEMENTS..........................................................59
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 Kemper Investments, 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.
Master/feeder structure
The Board of Directors has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
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
2
<PAGE>
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.
Illiquid Securities. The Fund may occasionally purchase securities other
than in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities," "not readily
marketable," or "illiquid" restricted securities, i.e., which cannot be sold to
the public without registration under the Securities Act of 1933 (the "1933
Act") or the availability of an exemption from registration (such as Rules 144
or 144A) or because they are subject to other legal or contractual delays in or
restrictions on resale.
The absence of a trading market can make it difficult to ascertain a
market value for illiquid securities. Disposing of illiquid securities 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. The
Fund may have to bear the extra expense of registering such securities for
resale and the risk of substantial delay in effecting such registration. Also
market quotations are less readily available. The judgment of the Adviser may at
times play a greater role in valuing these securities than in the case of
illiquid securities.
Generally speaking, restricted securities may be sold in the U.S. only to
qualified institutional buyers, or in a privately negotiated transaction to a
limited number of purchasers, or in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration, or in a public offering for which a registration
statement is in effect under the 1933 Act. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public, and in such event the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading.
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
3
<PAGE>
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.
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
4
<PAGE>
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
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 to create leveraged exposure in the Fund.
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
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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.
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
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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.
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.
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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
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.
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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
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
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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 any liquid
assets to the extent Fund obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or any liquid assets at least equal to the
current amount of the obligation. 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 any liquid assets 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 any liquid 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 any liquid 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.
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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.")
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):
The Fund may not, as a fundamental policy:
(a) borrow money, except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having jurisdiction
from time to time;
(b) issue senior securities, except as permitted under the 1940 Act and
as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(c) purchase physical commodities or contracts relating to physical
commodities;
(d) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
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(e) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except 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;
(f) make loans to other persons except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with the Fund's investment objective and
policies may be deemed to be loans; or
(g) concentrate its investments in a particular industry, as that term
is used in the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond that specified limit resulting from a
change in values or net assets will not be considered a violation.
The Fund may not, as a nonfundamental policy:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by engaging
in reverse repurchase agreements, dollar rolls, or other investments
or transactions described in the Fund's registration statement which
may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar rolls
in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;
(5) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf
of the Fund and the premiums paid for such 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;
(6) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value); and
(7) lend portfolio securities in an amount greater than 5% of its total
assets.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation.
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.
12
<PAGE>
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. In the
1980s, as Japan experienced a sharp appreciation of its currency, Japanese
manufacturers increasingly moved their production offshore, while domestic
demand was driven by a boom in consumption, housing, construction, and private
capital expenditures. After the sharp collapse in the stock market, which began
in 1990s, the Japanese economy has been in an adjustment phase, dealing with
excess capacity and lower growth.
Another development in the Japanese economy in the 1990s was a growing
trend of deregulation and globalization. Import restrictions on many products,
ranging from meats to gasoline were gradually lifted, and deregulation proceeded
in industries ranging from retail, communication, transportation, finance, and
many others.
In the 1990s, asset price declines and excess capacity in many sectors
have continued to support a largely disinflationary environment.
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
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 31, 1997, Japan's
gross domestic product in constant prices increased at an average annual
compound growth rate of 2.8% and 1.4%, respectively. The low rate of growth in
the past five years has resulted from Japan's attempt to cope with the aftermath
of speculative expansion of the late eighties. Several fiscal stimulus packages
have failed to initiate a robust recovery. Growth of 1.0% in 1992 was followed
by an increase of only 0.3% in 1993, 0.6% in 1994 and 1.5% 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 15, 1997, the yen was 126 to the dollar, a depreciation of
36% from its high in 1995. Further Government stimulus and easy money policies,
the depreciation of the yen and the front-loading of demand for durable goods
and housing investment before the
- ----------
* Where figures in tables under this caption have been rounded off, the
totals may not necessarily agree with the sum of figures.
13
<PAGE>
consumption tax hike on April 1, 1997 have resulted in increasing activity
during 1996. Gross domestic product rose 3.9% in 1996. In 1997, the growth rate
of gross domestic product slowed to 0.9% mainly due to a drop off in consumer
spending and housing investment in reaction to the consumption tax hike.
TO BE UPDATED
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.
Gross Domestic Product
(In trillions of yen)
1992 1993 1994 1995 1996 1997
GDP at Current Prices 471.0 475.4 479.3 483.2 500.4 507.3
Consumption 315.6 323.5 331.9 337.9 347.6 356.4
Private 272.3 278.7 286.2 290.5 299.3 307.5
Public 43.3 44.8 45.7 47.4 48.3 48.9
Fixed Investment 143.5 140.4 137.3 137.6 148.3 143.7
Private 108.2 99.7 96.0 96.3 104.5 104.1
Public 35.3 40.7 41.3 41.3 43.8 39.6
Change in Inventories 1.5 0.6 0.0 0.5 1.2 1.1
Net Exports of Goods and
Services 10.4 10.9 10.0 7.1 2.7 6.0
Exports of Goods and
Services 47.3 44.2 44.4 45.4 49.7 56.4
Imports of Goods and
Services -36.9 -33.3 -34.4 -38.3 -47.0 50.4
GDP at Constant (1990)
Prices 450.9 452.3 455.2 461.9 480.0 484.3
GDP Deflator (1990=100) 104.4 105.1 105.3 104.6 104.1 104.7
Percentage Increase of GDP
At Current Prices 2.8% 0.9% 0.8% 0.8% 3.4% 1.5%
At Constant Prices 1.0% 0.3% 0.6% 1.5% 3.9% 0.9%
Deflator 1.8% 0.07% 0.2% -0.6% -0.5% 0.6%
Percentage Distribution
of GDP
Consumption 67.0% 68.0% 69.2% 69.9% 69.6% 70.2%
Fixed Investment 30.5% 24.6% 23.3% 23.5% 24.2% 23.6%
Change in Inventories 0.3% 0.2% 0.0% 0.2% 0.2% 0.2%
Exports of Goods and
Services 10.1% 9.3% 9.3% 9.4% 9.9% 11.1%
Imports of Goods and
Services -7.8% -7.0% -7.2% -7.9% -9.4% -9.9%
----- ----- ----- ----- ----- -----
Total GDP 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Economic Planning Agency, Quarterly Report on National Accounts (March
1998).
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 1997 (with 1990 as 100):
14
<PAGE>
INDICES OF INDUSTRIAL PRODUCTION
1990=100
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Japan 95.6 91.2 91.8 94.9 97.7 101.9
United States 99.6 104.6 110.3 115.7 119.8 125.8
Germany ('91=100) 98.6 92.6 96.6 98.1 99.8 100.8*
United Kingdom 96.3 99.1 104.5 106.7 107.9 109.7*
France 98.6 93.9 97.4 99.0 99.8 103.4*
Italy 97.8 94.4 101.7 107.9 104.8 118.4*
Canada 96.9 101.8 107.9 112.4 114.0 119.5*
* January 1997 through November 1997
Source: IMF, International Financial Statistics (March 1998).
OECD, Main Economic Indicators (February 1998).
The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1989 through 1994:
GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996**
<S> <C> <C> <C> <C> <C> <C> <C>
Agriculture, Forestry and
Fisheries 2.6% 2.5% 2.4% 2.3% 2.1% 2.1% 1.9%
Mining 0.2 0.3 0.2 0.2 0.2 0.2 0.2
Construction 9.8 10.1 10.2 10.3 10.8 10.8 10.3
Manufacturing 28.2 28.2 28.1 27.1 25.5 24.5 24.7
Electricity, Gas and Water 2.8 2.6 2.6 2.7 2.7 2.8 2.8
Wholesale and Retail Trade 13.4 13.6 13.7 13.1 12.9 12.7 12.7
Finance and Insurance 6.4 5.9 5.5 5.2 4.7 5.2 4.8
Real Estate
Transportation, 10.9 10.9 10.9 11.5 12.2 12.7 12.9
Communication and Other
Public Utilities 6.9 6.6 6.5 6.4 6.4 6.4 6.5
Services 14.4 14.8 15.1 16.0 16.7 16.8 17.0
Government Services 7.7 7.6 7.5 7.6 7.7 7.9 8.1
Private Non-Profit
Institutions 2.0 2.0 2.0 2.0 2.1 2.2 2.3
Import Duty 0.6 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) (4.7)
Statistical Discrepancy (0.2) (0.0) 0.1 0.1 0.1 0.1 (0.1)
----- ----- --- --- --- --- -----
Total 100.0% 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.
** Data available in June, 1998.
Source: Economic Planning Agency, Annual Report on National Accounts (1997).
15
<PAGE>
Energy
Japan has historically depended on oil for most of its energy
requirements. Virtually all of its oil is imported, the majority from the Middle
East. Oil price changes used to have a major impact on the domestic economy, but
now their influence is relatively diminished.
Japan has worked to reduce its dependence on oil by encouraging energy
conservation and use of alternative fuels. In addition to conservation efforts,
a restructuring of industry, with emphasis shifting from basic industries to
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 1996 approximately 65 million persons, or approximately 52% of the
Japanese population, were employed, of which approximately 6% were employed in
agriculture, forestry and fisheries, 33% in mining, construction and
manufacturing and 33% in trade, finance, transportation and communication, and
29% 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, 1995 and
1996 that exceeded the rise in wages, unit labor costs declined 0.8% in 1994,
1.3% in 1995 and 2.9% in 1996.
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 2.1 2.9 -0.8
1995 3.3 4.7 -1.3
1996 2.5 5.6 -2.9
1997 2.8p. N.A. N.A.
p. = preliminary
Source: Ministry of Labor, Monthly Labor Statistics (Mar. 1998); Productivity
Research Institute, Quarterly Journal of Productivity Statistics (Wages
are for manufacturers who employ 30 or more persons.)
Prices
In 1997 the wholesale price index rose by 1.5% and the consumer price
index rose by 1.7%.
16
<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
(1900 = 100)
1992 1993 1994 1995 1996 1997
Japan 98.7 95.0 93.0 92.2 92.3 93.7
United States 100.8 102.3 103.6 107.3 109.8 109.8
Germany ('91=100) 101.4 101.6 102.2 104.0 103.5 104.8
United Kingdom 108.7 113.0 115.8 120.6 123.9 125.2
France* 97.1 94.4 95.4 101.1 98.5 97.9
Italy 107.4 112.9 117.2 129.3 134.0 134.2**
Canada 99.4 103.0 109.3 117.4 117.9 118.9
* Intermediate Industrial Goods
** January 1997 through November 1997
Source: IMF, Int'l Financial statistics (March 1998) OECD, Main Economic
Indicators (February 1998)
COMPARATIVE CONSUMER PRICE INDICES
(1900 = 100)
1992 1993 1994 1995 1996 1997
Japan 105.1 106.4 107.1 107.0 107.2 109.0
United States 107.4 110.6 113.4 116.6 120.0 122.9
Germany ('91=100) 105.1 109.7 112.7 114.8 116.5 118.6
United Kingdom 109.8 111.5 114.3 118.2 121.1 124.9
France 105.7 107.9 109.7 111.6 113.9 115.2
Italy 111.7 116.7 121.4 127.8 132.8 135.4*
Canada 107.2 109.2 109.4 111.8 113.5 115.3
* January 1997 through November 1997
Source: IMF, Int'l Financial Statistics (March 1998)
Balance of Payments
During the 1980s, Japan recorded increased trade surpluses and became the
world's major creditor nation. In 1997, Japan registered a surplus of
(Y)11,435.7 ($94.5 billion) in its current account. This surplus was
predominantly due to a surplus of (Y)12,329.1 ($101.98 billion) in its trade
account.
In 1997, Japan registered an outflow of (Y)15,765.1 ($130.3 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, 1997, exports and imports represented approximately 11.1% and 9.9%,
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.
17
<PAGE>
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, the People's Republic of China and the Middle East.
The following table shows (i) indices in yen terms of the value, volume
and unit value (a measure of average prices) of Japanese exports and imports and
(ii) the Japanese terms of trade (the ratio of export to import prices), which
is an indicator of a country's comparative advantage in trade. During 1994-95,
the terms of trade improved as a result of the higher yen and generally
declining world commodity prices. The terms of trade slightly lowered in 1996
and 1997 as a result of the rise in import prices reflecting lower yen rate.
FOREIGN TRADE OF JAPAN
(1990 = 100)
Value Index Volume Index Unit Value Index
----------- ------------ ---------------- Terms
Exports Imports Exports Imports Exports Imports of Trade
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
1996 107.9 112.2 107.2 140.8 100.7 79.7 126.3
1997 122.9 121.0 117.4 144.6 104.6 83.7 125.1
Source: Ministry of Finance, The Summary Report on Trade of Japan (Dec. 1997)
The following table sets forth the composition of Japan's exports and
imports by major commodity groups:
COMPOSITION OF JAPAN'S EXPORTS AND IMPORTS
Japan's Exports 1991 1992 1993 1994 1995 1996 1997
Textile Products 2.5% 2.5% 2.3% 2.1% 2.0% 2.1% 2.0%
Metals & Metal Products 6.7 6.3 6.4 6.1 6.5 6.2 6.4
Machinery & Equipment:
Ships 2.1 2.3 2.8 2.9 2.4 2.2 2.2
Motor Vehicles 17.4 17.8 16.2 14.4 12.0 12.3 14.0
TV & Radio
Receivers 1.7 1.6 1.4 1.2 1.0 0.9 0.8
Motorcycles 0.9 1.1 1.2 1.0 0.9 1.0 0.9
Scientific,
medical & optical
instruments 4.1 4.0 3.9 4.0 4.2 4.2 4.3
Other 49.0 48.8 50.5 52.5 54.2 53.5 51.5
Total 75.2 75.6 76.0 76.0 74.7 74.1 73.7
Chemicals 5.6 5.6 5.6 6.0 6.8 7.0 7.1
Foods & Beverages 0.6 0.6 0.6 0.5 0.5 0.5 0.5
Other Exports 9.4 9.4 9.6 9.3 9.5 10.1 10.3
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------
Japan's Imports 1991 1992 1993 1994 1995 1996 1997
Foods & Beverages 14.6% 16.0% 16.4% 17.0% 15.2% 14.5% 13.6%
Textile Materials 1.0 0.9 0.6 0.7 0.5 0.3 0.5
Chemicals 7.4 7.4 7.5 7.4 7.3 6.7 6.9
Mineral Fuels:
Petroleum 12.7 12.9 11.6 10.1 8.9 9.6 10.3
Coal 2.7 2.6 2.5 2.1 2.0 2.0 2.0
Other 7.7 7.1 6.2 5.2 5.0 5.7 6.1
Total 23.1 22.6 20.3 17.4 15.9 17.3 18.4
18
<PAGE>
Japan's Imports 1991 1992 1993 1994 1995 1996 1997
Metal Ores & Scrap 3.7 3.3 2.4 2.7 2.3 2.0 2.2
Machinery & Equipment 18.1 18.4 19.4 21.7 26.3 27.5 28.0
Other Imports 32.1 31.4 32.9 38.1 33.5 31.7 30.4
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------
Source: Ministry of Finance, The Summary Report - Trade of Japan (Dec. 1997).
The following table indicates the geographic distribution of Japan's trade
in recent years.
GEOGRAPHIC DISTRIBUTION OF JAPAN'S EXPORTS AND IMPORTS
Japan's Exports 1991 1992 1993 1994 1995 1996 1997
Developed Areas
U.S.A. 29.1% 28.2% 29.2% 29.7% 27.3% 27.2% 27.8%
EC 18.8 18.4 15.7 14.5 15.9 15.3 15.6
Australia 2.1 2.1 2.1 2.2 1.8 1.8 1.9
Canada 2.3 2.1 1.7 1.5 1.3 1.2 1.4
Others 3.9 3.6 3.0 2.8 1.7 1.8 1.7
--- --- --- --- --- --- ---
Total 56.2 54.4 51.7 50.7 48.0 47.3 48.4
Developing Areas
S.E. Asia 30.6% 30.7% 32.5% 35.0% 38.3% 38.3% 36.5%
Middle East 3.9 4.5 3.7 2.8 2.3 2.7 2.8
Latin America 4.1 4.6 4.7 4.7 4.4 4.4 5.0
Africa 1.1 1.2 1.2 1.0 0.9 0.7 0.6
Others 0.3 0.3 0.4 0.4 0.5 0.5 0.6
--- --- --- --- --- --- ---
Subtotal 40.0 41.3 42.5 43.9 46.4 41.6 45.5%
Former Soviet Union 0.7% 0.3% 0.4% 0.3% 0.3% 0.3% 0.3%
China 2.7 3.5 4.8 4.7 5.0 5.3 5.2
Others 0.4 0.5 0.5 0.4 0.3 0.6 0.6
--- --- --- --- --- --- ---
Subtotal 3.8 4.3 5.7 5.4 5.6 6.2 6.1
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------
Japan's Exports 1991 1992 1993 1994 1995 1996 1997
Developed Areas
U.S.A. 22.5% 22.4% 23.0% 22.8% 22.4% 22.7% 22.3%
EC 13.4 13.4 12.5 12.9 14.5 14.1 13.3
Australia 5.5 5.3 5.1 5.0 4.3 4.1 4.3
Canada 3.3 3.3 3.4 3.2 3.2 2.9 2.9
Others 4.7 4.5 4.1 4.3 3.2 2.9 1.8
--- --- --- --- --- --- ---
Total 49.4 48.9 48.1 48.2 47.6 46.7 45.8
Developing Areas
S.E. Asia 24.8% 24.7% 25.2% 24.7% 25.3% 25.1% 23.9%
Middle East 12.4 12.5 11.3 10.2 9.4 10.1 11.4
Latin America 4.2 3.7 3.5 3.5 3.5 3.3 3.4
Africa 0.8 0.7 0.8 0.6 0.6 0.6 0.6
Others 0.3 0.4 1.1 1.2 1.7 1.2 1.0
--- --- --- --- --- --- ---
Subtotal 42.5 42.0 41.9 40.2 40.0 40.3 40.3
Former Soviet Union 1.4% 1.0% 1.2% 1.3% 1.4% 1.1% 1.3%
China 6.0 7.3 8.5 10.0 10.7 11.6 12.4
Others 0.7 0.8 0.8 0.9 0.3 0.3 0.2
--- --- --- --- --- --- ---
Subtotal 8.1 9.1 10.5 12.2 12.4 13.0 13.9
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------
Source: Ministry of Finance, The Summary Report--Trade of Japan (December 1997).
19
<PAGE>
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,
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 1988 through 1997.
<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>
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 1585.87 1193.16 1577.70 1852.13 1194.77 1488.40
1996 22666.80 19161.71 19361.35 1722.13 1448.45 1470.94 1747.17 1316.25 1330.55
1997 20681.07 14775.22 15258.74 1560.28 1130.00 1175.03 1333.11 708.23 721.53
</TABLE>
Sources: *Tokyo Stock Exchange, Annual Securities Statistics (1996); Monthly
Statistics Report (Dec. 1988, 1989, 1990, 1991, 1993, 1994, 1995, 1996,
1997).
**Annual Statistics of OTC Stocks (1997), 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. In 1996, the Index declined 6.8% to 1470.94 and in
1997, 20.1% to 1175.03. 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.
20
<PAGE>
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>
1992 1993 1994 1995 1996 1997
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
(in billions
of yen) 289,483 7,943 324,357 11,228 358,392 14,558 365,716 14,535 347,578 14,904 280,930 9,228
Daily Average
Trading Volume
(000 shares) 268,857 1,767 353,394 4,374 342,163 8,994 369,613 9,763 405,549 9,766 439,049 5,614
Number of
Listed
Companies 1,651 436 1,667 477 1,689 564 1,714 678 1,766 762 1,805 834
</TABLE>
Source: Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1998).
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.
The proportion of trading by institutional investors had tended to
increase at the expense of individuals, but in the last three years of stock
price declines, 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:
Financial Business
Institutions Corporations Individuals Foreigners Other
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
1996 32.6 5.9 23.3 36.4 2.8
1997 28.6 5.9 24.7 37.1 3.5
Source: Tokyo Stock Exchange, Annual Securities Statistics (1997).
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 the period
from 1993 through 1996 due in part to a recovery in stock prices but also to a
decline in earnings. The rate of return declined 6% in 1996 and 19.2% in 1997
largely as a result in the decline in stock prices. In 1996 and 1997, the return
on the TOPIX registered minus figures, but price/earnings ratio at the end of
1997 became the same.
AVERAGE PRICE/EARNINGS RATIOS AND RATES OF RETURN
Average
Price/Earnings Rate of
Ratio Return*
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
1996 79.3 -6.0
1997 37.6 -19.2
* Rates of return in yen calculated on basis of closing prices and average
dividends for each year.
21
<PAGE>
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1991, 1992, 1993,
1994, 1995, 1996, 1997); Monthly Statistics Report (Dec. 1989, 1990,
1991, 1992, 1993, 1994, 1995, 1996, 1997).
Following is a statistical comparison between the Tokyo Stock Exchange
(both sections) and the New York Stock Exchange for the six years ending 1997:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
TSE NYSE TSE NYSE TSE NYSE TSE NYSE TSE NYSE TSE NYSE
--- ---- --- ---- --- ---- --- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Companies 1651 2063 1667 2362 1689 2570 1714 2675 1766 2907 1805 3047
Aggregate Market Value
in Billions of Dollars* 2331 4035 2898 4545 3590 4448 3557 6000 2996 7300 2162 9413
as Percentage of GDP 61 67 68 72 75 66 76 83 69 96 56 116
Turnover Ratio (%) 20 40 26 50 25 51 27 59 29 63 31 69
</TABLE>
* Calculated on the basis of the yen conversion rate published by the IMF.
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1996).
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, 1993, 1994, 1995,
1996 and 1997.
EQUITY STOCK MARKETS OF THE WORLD
(dollars in billions)
<TABLE>
<CAPTION>
December 1993 December 1994 December 1995 December 1996 December 1997
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States 4467.0 38.4 4626.3 36.6 6338.0 41.9 7,835.9 45.1 8,607.4 47.2
Japan 2885.4 24.8 3624.5 28.7 3582.7 23.7 3,071.0 17.7 2,287.8 12.5
United Kingdom 1189.9 10.2 1145.0 9.1 1354.3 9.0 1,740.1 10.0 2,097.6 11.5
Canada 296.6 2.5 288.0 2.3 333.4 2.2 463.6 2.7 543.3 3.0
Federal Republic
of Germany 442.6 3.8 476.9 3.8 579.5 3.8 648.3 3.7 825.2 4.5
Australia 196.2 1.7 212.4 1.7 245.4 1.6 306.4 1.8 284.7 1.6
Switzerland 243.8 2.1 284.0 2.2 401.6 2.7 406.6 2.3 579.3 3.2
France 453.4 3.9 444.3 3.5 504.5 3.3 600.8 3.5 677.9 3.7
Netherlands 171.2 1.5 224.4 1.8 304.3 2.0 393.4 2.3 358.3 2.0
Hong Kong 383.2 3.3 241.2 1.9 274.4 1.8 393.4 2.3 340.7 1.9
Other 908.6 7.8 1072.8 8.5 1197.2 7.9 1,531.9 8.8 1,630.1 8.9
----- --- ------ --- ------ --- ------- --- ------- ---
Total $11,637.9 100.00% $12,639.8 100.00% $15,115.3 100.00% $17,391.4 100.00% $18,232.3 100.00%
</TABLE>
Source: Morgan Stanley Capital International (Quarterly 1993:1, 1994:1, 1995:1,
1996:1, 1997:1, 1998:1).
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 $2,500 through
Scudder Investor Services, Inc. by letter, fax, or telephone.
The minimum initial purchase amount is less than $2,500 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
22
<PAGE>
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.
Additional Information About Making Subsequent Investments by QuickBuy
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 QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
Exchange, normally 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. QuickBuy 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 QuickBuy 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. QuickBuy transactions are not
available for most retirement plan accounts. However, QuickBuy transactions are
available for Scudder IRA accounts.
In order to request purchases by QuickBuy, 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 QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 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.
23
<PAGE>
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.
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
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also 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 Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
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.
24
<PAGE>
The Fund may issue shares at net asset value in connection with any merger
or consolidation with, or acquisition of the assets of, any investment company
or personal holding company, subject to the requirements of the 1940 Act.
Exchanges
The procedure for exchanging shares from The Japan Fund, Inc. into shares
of another Scudder fund, when the new account is established with the same
registration, telephone option, dividend option and address as the present
account, is set forth under "Purchases and Redemptions -- Opening An Account" in
the Fund's prospectus. If an exchange involves establishing a new account, at
least $1000 must be exchanged. If the exchange is made into an existing account,
at least $100 must be exchanged. If the account receiving the exchange proceeds
is to be different in any respect, the exchange request must be in writing and
must contain a signature guarantee as described under "Purchases and Redemption
- -- Selling Fund Shares -- Signature guarantees" in the Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day will ordinarily be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading will be executed on the following business day. Notwithstanding
the foregoing, if a shareholder requests to exchange his or her Japan Fund
shares for shares in another fund in the Scudder Family of Funds, and in
connection therewith receives Fund portfolio securities in payment for those
Fund shares (see "REDEMPTIONS" below), there will be a delay in repurchasing
shares in such other fund owing to the time required to liquidate such
securities on the shareholder's behalf and to remit the proceeds of such
liquidation to the Fund's transfer agent. Accordingly, an exchange order in
those instances (1) may not be executed for up to seven business days after the
exchange request is received in good order and (2) will be executed at the net
asset value next determined after the transfer agent's receipt of such
liquidation proceeds.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from the Fund or another
Scudder Fund to an existing account in the Fund or another Scudder Fund 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
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 Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds. For more information, please call
1-800-225-5163.
25
<PAGE>
REDEMPTIONS
(See "Purchases and Redemptions" and "Transaction Information"
in the Fund's prospectus.)
Redemption by Telephone
Shareholders currently receive the right automatically, without having to
elect it, to redeem by telephone up to $100,000 to their address of record. In
order to request redemptions by telephone, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account to which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate section on
the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
Pension and Profit-Sharing, Scudder 401(k) and Scudder 403(b)
Planholders) who wish to establish telephone redemption to a
predesignated bank account or who want to change the bank account
previously designated to receive redemption proceeds should either
return a Telephone Redemption Option Form (available upon request)
or send a letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly as the
shareholder's name(s) appears on the account. A signature and a
signature guarantee are required for each person in whose name the
account is registered.
Telephone redemption is not available with respect to shares represented
by share certificates.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone redemption
proceeds are advised that if the savings bank is not a participant in the
Federal Reserve System, redemption proceeds must be wired through a
commercial bank which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested that investors
wishing to use a savings bank discuss wire procedures with their bank and
submit any special wire transfer information with the telephone redemption
authorization. If appropriate wire information is not supplied, redemption
proceeds will be mailed to the designated bank.
The Fund employs procedures, including recording telephone calls, testing
a caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted for seven (7) business days following their purchase.
Redemption By QuickSell
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 QuickSell program may sell shares of the Fund by telephone. To sell
shares by QuickSell, 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. QuickSell 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. QuickSell transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
26
<PAGE>
In order to request redemptions by QuickSell, 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 QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell 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.
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.
27
<PAGE>
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.
Shareholders should maintain a share balance worth at least $2,500 ($1,000
for IRAs, Uniform Gift to Minors Act, and Uniform Trust to Minors Act accounts),
which amount may be changed by the Board of Trustees. Scudder retirement plans
have similar or lower minimum balance requirements. A shareholder may open an
account with at least $1,000 ($500 for an UGMA, UTMA, IRA and other retirement
accounts), if an automatic investment plan (AIP) of $100/month ($50/month for an
UGMA, UTMA, IRA and other retirement accounts) is established.
Shareholders who maintain a non-fiduciary account balance of less than
$2,500 in the Fund, without establishing an AIP, will be assessed an annual
$10.00 per fund charge with the fee to be reinvested in the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $25,000 or more. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account. The Fund
will mail the proceeds of the redeemed account to the shareholder at the address
of record. Reductions in value that result solely from market activity will not
trigger an involuntary redemption. UGMA, UTMA, IRA and other retirement accounts
will not be assessed the $10.00 charge or be subject to automatic liquidation.
FEATURES AND SERVICES OFFERED BY THE FUND
(See "Shareholder benefits" in the Fund's prospectus.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its funds from the vast
majority of mutual funds available today. The primary distinction is between
load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for the
sale and distribution of fund shares. There are three types of loads: front-end
loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not a fund also
charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Rules of Fair Practice, a mutual fund
can
28
<PAGE>
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.
===============================================================================
Scudder No-Load Fund
Pure No-Load(TM) 8.50% Load Load Fund with with 0.25%
YEARS Fund Fund 0.75% 12b-1 Fee 12b-1 Fee
- --------------------------------------------------------------------------------
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
===============================================================================
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.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability. A
section entitled "Planning Resources" provides information on asset allocation,
tuition, and retirement planning to users who fill out interactive "worksheets."
Investors can easily establish a "Personal Page," that presents price
information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties on
Prodigy since 1988 and has participated since 1994 in GALT's Networth "financial
marketplace" site on the Internet. The firm made Scudder Funds information
available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password.
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As an additional security measure, users can change their current password or
disable access to their portfolio through the World Wide Web.
An Account Activity option reveals a financial history of transactions for
an account, with trade dates, type and amount of transaction, share price and
number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See "How to
contact Scudder" in the Funds' prospectuses for the address.
Reinvestment is usually made at the closing net asset value determined on
the business day following the record date. Investors may leave standing
instructions with the 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 a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
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
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan
must reinvest any dividends or capital gains. For most retirement plan accounts,
the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies 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 but should be mailed to "The Scudder Funds" at the address
listed under "How to contact Scudder" in the prospectuses.
Reports to Shareholders
The Trust issues 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 financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Funds.
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<PAGE>
Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectuses.)
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.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.
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. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
New York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
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 Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund seeks to provide Pennsylvania taxpayers
with income exempt from both Pennsylvania personal income tax and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of investment-grade municipal securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
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 International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. 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 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 by governments and
corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will have
some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors with
a balance of growth and income by investing in a select mix of Scudder
money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select mix
of Scudder equity mutual funds designed to provide long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total return
for investors. Total return consists of any capital appreciation plus
dividend income and interest. To achieve this objective, the Portfolio
invests in a select mix of established international and global Scudder
funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies in
the real estate industry.
33
<PAGE>
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund seeks long-term growth of capital through investment in
undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of capital
by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund seeks to provide long-term growth of capital
with reduced share price volatility compared to other growth mutual funds.
Scudder Large Company 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 Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies poised
to be leaders in the 21st century.
SCUDDER CHOICE SERIES
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the development,
production or distribution of technology-related products or services.
GLOBAL GROWTH
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.
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<PAGE>
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 Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity securities
and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital appreciation
through investment primarily in the securities of Latin American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) of
Japanese companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
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 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.
35
<PAGE>
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 $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples if only one spouse has
earned income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------
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
36
<PAGE>
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.)
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%
- -------------------------------------------------------------------------
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
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund(s) may be purchased as the underlying investment for an
individual Retirement Account which meets the requirements of Section 408A of
the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions from a Roth IRA are taxable
and subject to a 10% tax penalty unless an exception applies. Exceptions to the
10% penalty include: disability, excess medical expenses, the purchase of health
insurance for an unemployed individual and education expenses.
An individual with an income of less than $100,000 (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
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 may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Payments are mailed at the
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<PAGE>
end of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be reinvested in additional shares. Shares are then liquidated as
necessary to provide for withdrawal payments. Since the withdrawals are in
amounts selected by the investor and have no relationship to yield or income,
payments received cannot be considered as yield or income on the investment and
the resulting liquidations may deplete or possibly extinguish the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Fund's prospectus. Any such requests must
be received by the Fund's transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Corporation or its agent on written notice, and
will be terminated when all shares of the Fund under the Plan have been
liquidated or upon receipt by the Corporation of notice of death of the
shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
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 trustees
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 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 redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
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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 12/31/97
One Year Five Years Ten Years
-------- ---------- ---------
-14.40 -1.16 -1.02
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):
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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 12/31/97
One Year Five Years Ten Years
-------- ---------- ---------
-14.40 -5.66 -9.72
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 foreign
currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part of the Fund's investment performance. Historical
information on the value of the dollar versus foreign currencies 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
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against these currencies. 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.
Unmanaged indices with which the Fund's performance may be compared include, but
are not limited to, the following:
The Europe/Australia/Far East (EAFE) Index
International Finance Corporation's Latin America Investable Total
Return 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
From time to time, in marketing and other Fund literature,
(Trustees)(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
41
<PAGE>
investment objective, the average portfolio maturity, credit quality of the
securities held, and interest rate movements. For equity funds, factors include
a fund's overall investment objective, the types of equity securities held and
the financial position of the issuers of the securities. The risks/returns
associated with an investment in international bond or equity funds also will
depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Fund, including reprints of, or selections from, editorials or articles about
this Fund. Sources for Fund performance information and articles about the Fund
include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
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<PAGE>
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC'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 Business 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.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news 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.
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<PAGE>
The 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 issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because they
assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity, due
partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S. investments
strike the best balance between risk and reward.
FUND ORGANIZATION
(See "Fund organization" in the Fund's prospectus.)
TO BE UPDATED
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.
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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, 1998, 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) 484,446 shares or 1.16% of the shares of the Fund.
As of March 31, 1998, 5,352,016 shares in the aggregate, 12.85% 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, 1998, no person owned
beneficially more than 5% of the Fund's outstanding shares except as stated
above.
INVESTMENT ADVISORY ARRANGEMENTS
(See "Fund organization" in the Fund's prospectus.)
At a special meeting held on December 21, 1993, shareholders of the Fund
approved an Investment Management Agreement with Scudder, Stevens & Clark, Inc.,
succeeding Asia Management as the Fund's investment adviser. This agreement has
the effect of reducing the total advisory fees paid by the Fund. The
shareholders' approval of this agreement was ratified at a special meeting held
on July 22, 1994.
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. 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 Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
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
Pathway Series, 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
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<PAGE>
Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The Japan
Fund, Inc., The Latin America Dollar Income Fund, Inc. and Scudder Spain and
Portugal 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 $13 billion and includes the AARP Growth
Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed Investment
Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between Scudder, Stevens & Clark, Inc. and AMA
Solutions, Inc., a subsidiary of the American Medical Association (the "AMA"),
dated May 9, 1997, Scudder has agreed, subject to applicable state regulations,
to pay AMA Solutions, Inc. royalties in an amount equal to 5% of the management
fee received by Scudder with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM Program. Scudder will
also pay AMA Solutions, Inc. a general monthly fee, currently in the amount of
$833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLinkSM Program will be a customer of Scudder (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
The Investment Management Agreement between the Fund and the Adviser dated
and effective January 1, 1994, (the "Agreement"), was last approved by the
Directors on December 31, 1997 and will continue in effect until October 31,
1998 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.
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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.
Under the Agreement the Fund is responsible for all of its other expenses
including: organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the fees and
expenses of the Transfer Agent; the cost of preparing share certificates or any
other expenses of issue, sale, underwriting, distribution, redemption or
repurchase of shares; the expenses of and the fees for registering or qualifying
securities for sale; the fees and expenses of Directors, officers and employees
of the Fund who are not affiliated with the Adviser; the cost of printing and
distributing reports and notices to stockholders; and the fees and disbursements
of custodians. The Fund may arrange to have third parties assume all or part of
the expenses of sale, underwriting and distribution of shares of the Fund. The
Fund is also responsible for its expenses of shareholders' meetings, the cost of
responding to shareholders' inquiries, and its expenses incurred in connection
with litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Directors of the Fund with respect thereto. The
custodian agreement provides that the custodian shall compute the net asset
value.
The Agreement expressly provides that the Adviser shall not be required to
pay a pricing agent of any Fund for portfolio pricing services, if any.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.
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
47
<PAGE>
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.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Name, Age and Address Position with Fund Principal Occupation***
- --------------------- ------------------ -----------------------
<S> <C> <C>
Henry Rosovsky (70)* Chairman of the Board Professor,
Harvard University and Director Harvard University
17 Quincy Street
Cambridge, MA 02138
Lynn Birdsong (51)# President Managing Director,
Scudder Kemper Investments,
Inc.
William L. Givens (68) Director President,
Twain Associates, Inc. Twain Associates
553 Boylston Street
Brookline, MA 02146
William H. Gleysteen, Jr. (71) Director Consultant
4937 Crescent Street
Bethesda, MD 20816
John F. Loughran (66) Director Retired Senior Adviser for
711 Silvergate Avenue Asia Pacific to J.P. Morgan
Point Loma & Co., Inc.
San Diego, CA 92106
Yoshihiko Miyauchi (62) Director President and Chief
World Trade Center Executive Officer of ORIX
Building 2-4-1 Corporation
Hamamatsu-cho, Minato-ku
Tokyo, Japan
William V. Rapp (59) Director Managing Director,
131 Begbie Rue Associates;
University of Victoria Professor, University of
Victoria, BC Canada Victoria; Senior Research
Fellow, Columbia University
Center on Japan Economy
and Business
O. Robert Theurkauf (70)@# Director Advisory Managing Director,
Scudder Kemper Investments,
Inc.
Hiroshi Yamanaka (85) Director Adviser to the Board,
Meiji Mutual Life The Meiji Mutual Life
Insurance Company Insurance Company
2-1-1, Marunouchi, Chiyoda-ku
Tokyo, Japan
Allan Comrie (78) Honorary Director Director,
40 Sheridan Drive Petroleum & Resources
New Canaan, CT 06840 Corp., The Adams Express Co.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with Fund Principal Occupation***
- --------------------- ------------------ -----------------------
<S> <C> <C>
Jonathan Mason (82) Honorary Director Retired First Vice President
12092 Longwood Green Drive Prudential-Bache Securities,
West Palm Beach, FL 33414 Inc.
James W. Morley (76) Honorary Director Professor of Political
145 Piermont Road Science Emeritus
Closter, NJ 07624 Columbia University
Robert G. Stone, Jr. (75) Honorary Director Chairman of the Board
Kirby Corporation and Director,
405 Lexington Ave - 39th Fl. Kirby Corporation
New York, NY 10174
Shoji Umemura (78)* Honorary Director Board Counselor,
The Nikko Securities Co., Ltd. The Nikko Securities Co.,
3-1-1, Marunouchi, Chiyoda-ku Ltd.
Tokyo, Japan
Elizabeth J. Allan (44)# Vice President Senior Vice President,
Scudder Kemper Investments,
Inc.
William E. Holzer (48)# Vice President Managing Director,
Scudder Kemper Investments,
Inc.
Thomas W. Joseph (58)**+ Vice President Senior Vice President,
Scudder Kemper Investments,
Inc.
Seung K. Kwak (36)# Vice President Managing Director,
Scudder Kemper Investments,
Inc.
Miyuki Wakatsuki (61) Vice President General Manager,
17-9, Nihonbashi-Hakozakicho Japan Fund Office,
Chuo-Ku Nikko International Capital
Tokyo 103, Japan Management Co., Ltd.
Gina Provenzano (55)# Vice President and Vice President,
Treasurer Scudder Kemper Investments,
Inc.
Kathryn L. Quirk (44)# Vice President and Managing Director,
Secretary Scudder Kemper Investments,
Inc.
Thomas F. McDonough (50)+ Assistant Secretary Senior Vice President,
Scudder Kemper Investments,
Inc.
John R. Hebble (39)+ Assistant Treasurer Senior Vice President,
Scudder Kemper Investments,
Inc.
</TABLE>
49
<PAGE>
* Director considered by the Fund and its counsel to be an "interested
person" (as defined in the 1940 Act) of the Fund or its investment manager
because of his affiliation with a broker-dealer.
** 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.
@ Director considered by the Fund and its counsel to be an "interested
person" (as defined in the 1940 Act) of the Fund or of its investment
manager because of his employment by Scudder Kemper.
# Address = 345 Park Avenue, New York, New York 10154-0010.
+ Address = Two International Place, Boston, Massachusetts 02110-4103
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 Kemper Investments, 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. Each of the Directors who is not
affiliated with Scudder Kemper Investments, 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 with the exception of the Chairman of the Board,
who receives $16,000 annually. Each Director also receives 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 Kemper Investments, Inc., or any of its other affiliates. Each
unaffiliated Director also receives $750 per committee meeting attended. As of
July 30, 1992, Honorary Directors of the Fund received $1,000 for each Board
meeting attended. For the year ended December 31, 1997, total expenses were
$183,937 of which $134,763 were fee related and $53,527 was pension plan
related.
Under the Fund's Directors' Retirement Plan (the "Retirement Plan"),
Non-Interested Directors retiring at or after age 72 with five or more years of
service are entitled to receive, each year for ten years, a payment equal to 50
to 100 percent (depending on the number of years of service) of the basic
annnual Directors' retainer on the retirement date. Non-interested Directors who
retire after age 62 but before age 72 are entitled to the same annual payments,
reduced by 3 percent for each year by which their retirement precedes age 72.
The obligations of the Fund to pay benefits and expenses under the Retirement
Plan will not be secured or funded in any manner and such obligations will not
have preference over the lawful claims of the Fund's creditors or stockholders.
Upon the retirement of a Non-interested Director, the Fund, at its option, may
purchase an annuity contract to meet its obligation to the Non-interested
Director.
Scudder supervises the Fund's investments, pays the compensation and
certain expenses of its personnel who serve as Directors and officers of the
Fund and receives a management fee for its services. Several of the Fund's
officers and Directors are also officers, Directors, employees or stockholders
of Scudder, The Nikko Securities Co., Ltd. Or Nikko International Capital
Management Co., Ltd., and participate in the fees paid to those firms, although
the Fund makes no direct payments to them other than for reimbursement of travel
expenses in connection with their attendance at Directors' and committee
meetings. The Investment Management Agreement dated December 31, 1997 omitted
the provision referencing the Fund's ability to obtain services from Nikko
International Capital Management Co., Ltd. pursuant to a separate Agreement.
That agreement was terminated effective December 31, 1995.
50
<PAGE>
The following table shows the aggregate compensation received by each
unaffiliated director during 1997 from The Japan Fund and from all Scudder funds
as a group.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Pension or Estimated Total
Retirement Annual Compensation From
Aggregate Benefits Accrued Benefits the Fund and Fund
Name of Director Compensation* As Part of Fund Upon Complex **
Expenses Retirement
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
William L. Givens $21,317 $4,372 $6,000 $25,689 (1 Fund)
- ----------------------------------------------------------------------------------------------
William H. $14,750 $5,498 $3,000 $141,648 (14 Funds)
Gleysteen, Jr.
- ----------------------------------------------------------------------------------------------
John F. Loughran $11,750 $4,724 $6,000 $16,474 (1 Fund)
- ----------------------------------------------------------------------------------------------
Yoshihiko $12,250 $2,149 $6,000 $14,399 (1 Fund)
Miyauchi
- ----------------------------------------------------------------------------------------------
William V. Rapp $15,500 $2,499 $6,000 $17,999 (1 Fund)
- ----------------------------------------------------------------------------------------------
Henry Rosovsky $26,250 $2,776 $6,000 $29,026 (1 Fund)
- ----------------------------------------------------------------------------------------------
Hiroshi Yamanaka $7,750 $7,803 $6,000 $15,553 (1 Fund)
- ----------------------------------------------------------------------------------------------
Tristan E. Beplat $0 $200 N/A $200 (1 Fund)
Honorary Director
- ----------------------------------------------------------------------------------------------
Allan Comrie $5,196 $4,789 $5,196 $9,985 (1 Fund)
Honorary Director
- ----------------------------------------------------------------------------------------------
Jonathan Mason $6,000 $6,703 $6,000 $12,703 (1 Fund)
Honorary Director
- ----------------------------------------------------------------------------------------------
James W. Morley $6,000 $5,988 $6,000 $11,988 (1 Fund)
Honorary Director
- ----------------------------------------------------------------------------------------------
Robert G. Stone, Jr. $8,000 $6,026 $6,000 $14,026 (2 Funds)
Honorary Director
- ----------------------------------------------------------------------------------------------
</TABLE>
* Includes pension or retirement benefits.
** Includes pension or retirement benefits accrued.
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,
51
<PAGE>
Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund, AARP
Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds. Scudder Kemper
Investments, Inc., pays the expenses of the operations of Scudder Investor
Services, Inc., with which it is affiliated.
NOTE: Although the Fund does not currently have a 12b-1 Plan and shareholder
approval would be required in order to adopt one, the underwriting agreement
provides that the Fund will also pay those fees and expenses permitted to be
paid or assumed by the Fund pursuant to a 12b-1 Plan, if any, adopted by the
Fund, notwithstanding any other provision to the contrary in the underwriting
agreement, and the Fund or a third party will pay those fees and expenses not
specifically allocated to the Distributor in the underwriting agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of the Fund.
TAXES
(See "Distribution and performance information--Dividends and Capital Gains
Distributions" and "Transaction Information -- Tax Information, Tax
Identification Number" in the Fund's prospectus.)
United States Federal Income Taxation
The following is a general discussion of certain U.S. federal income tax
consequences relating to the status of the Fund and to the tax treatment of
distributions by the Fund to shareholders. This discussion is based on the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
Revenue Rulings and judicial decisions as of the date hereof, all of which may
be changed either retroactively or prospectively. This discussion does not
address all aspects of U.S. federal income taxation that may be relevant to
shareholders in light of their particular circumstances or to shareholders
subject to special treatment under U.S. federal income tax laws (e.g., certain
financial institutions, insurance companies, dealers in stock or securities,
tax-exempt organizations, persons who have entered into hedging transactions
with respect to shares of the Fund, persons who borrow in order to acquire
shares, and certain foreign taxpayers).
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;
and (b) 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
52
<PAGE>
subject to tax at regular U.S. federal corporate income tax rates on any income
or gains which are not treated as distributed and, under certain circumstances,
in respect of investments in passive foreign investment companies as described
below. Furthermore, the Fund will also be subject to a U.S. federal corporate
income tax with respect to distributed amounts in any year that it fails to
qualify as a regulated investment company or fails to meet the applicable
distribution requirement. Although all or a portion of the Fund's taxable income
(including any net capital gains) for a calendar year may be distributed in
January of the following year, such a distribution may be treated for U.S.
federal income tax purposes as having been received by shareholders during the
calendar year. In addition, the Fund intends to make sufficient distributions in
a timely manner in order to ensure that it will not be subject to the 4% U.S.
federal excise tax on certain undistributed income of regulated investment
companies.
The Fund generally intends to distribute all of its net investment income,
net short-term capital gains and net long-term capital gains (which consist of
net long-term capital gains in excess of net short-term capital losses) in a
timely manner. If any net capital gains are retained by the Fund for
reinvestment, requiring Federal income taxes to be paid thereon by the Fund, the
Fund will elect to treat such capital gains as having been distributed to
shareholders. As a result, each shareholder will report such capital gains as
long-term capital gains, will be able to claim his share of U.S. federal income
taxes paid by the Fund on such gains as a credit or refund against his own U.S.
federal income tax liability and will be entitled to increase the adjusted tax
basis of his Fund shares by the difference between his pro rata share of such
gains and the related credit or refund.
The Fund may invest in shares of certain foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). If
the Fund received a so-called "excess distribution" with respect to PFIC stock,
the Fund itself might 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 would 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 would 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 would be characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
Recently enacted legislation will allow the Fund to make an election to
mark to market its shares of PFICs 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. If the Fund's adjusted basis in the shares of a PFIC exceeds the shares'
fair market value at the end of a taxable year, the Fund would be entitled to a
deduction equal to the lesser of (a) this excess and (b) its previous income
inclusions in respect of such stock under the mark-to-market rules that have not
been offset by such deductions. 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 by the Fund 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.
53
<PAGE>
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. The Fund
will designate the portions of any capital gains dividend that are taxable at a
rate of 28% and 25% in the hands of individuals and other non-corporate
shareholders. Distributions in excess of the Fund's current and accumulated
earnings and profits will, as to each shareholder, be treated as a tax-free
return of capital, to the extent of a shareholder's adjusted basis in his shares
of the Fund, and as a capital gain thereafter (if the shareholder held his
shares of the Fund as capital assets).
Shareholders electing to receive distributions in the form of additional
shares will be treated for U.S. federal income tax purposes as receiving a
distribution in an amount equal to the fair market value, determined as of the
distribution date, of the shares received and will have a cost basis in each
share received equal to the fair market value of a share of the Fund on the
distribution date.
All distributions of net investment income and net capital gains, whether
received in shares or in cash, must be reported by each shareholder on his U.S.
federal income tax return. A distribution will be treated as paid during a
calendar year if it is declared by the Fund in October, November or December of
the year to holders of record in such a month and paid by January 31 of the
following year. Such distributions will be taxable to shareholders as if
received on December 31 of such prior year, rather than in the year in which the
distributions are actually received.
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.
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. Long-term capital gains recognized by
individuals and other non-corporate shareholders on a sale or redemption of
shares will be taxed at the rate of 28% if the shareholder's period for the
shares is not more that 18 months and at the rate of 20% if the shareholder's
period for the shares is more than 18 months. 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 shares. For purposed of determining whether shares have been
held for six months or less, a shareholder's holding period is suspended for any
periods during which the shareholder's risk of loss is diminished as a result of
holding one or more other positions in substantially similar or related property
or through certain options or short sales. It is unclear how capital losses that
are treated as long-term under this rule offset gains taxable at the rate of 28%
and 20%, respectively, in the hands of individuals and other non-corporate
shareholders.
54
<PAGE>
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 may file an
election with the Internal Revenue Service to "pass-through" to the Fund's
shareholders the amount of foreign income taxes paid by the Fund. Pursuant to
this election a shareholder will: (a) include in gross income (in addition to
taxable dividends actually received) the shareholder's pro rata share of the
foreign income taxes paid by the Fund; (b) treat the shareholder's pro rata
share of such foreign income taxes as having been paid by the shareholder; and
(c) subject to certain limitations, be entitled either to deduct the
shareholder's pro rata share of such foreign income taxes in computing the
shareholder's taxable income or to use it as a foreign tax credit against U.S.
income taxes. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. A shareholder's election to deduct rather than
credit such foreign taxes may increase the shareholder's alternative minimum tax
liability, if applicable. Shortly after any year for which it makes such an
election, the Fund will report to its shareholders, in writing, the amount per
share of such foreign tax that must be included in each shareholder's gross
income and the amount which will be available for deduction or credit.
Generally, a credit for foreign income taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax (before the credit)
attributable to the shareholder's total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by the Fund from its
foreign source income will be treated as foreign source income. The Fund's gains
and losses from the sale of securities, and currency gains and losses, will
generally be treated as derived from U.S. sources. The limitation on the foreign
tax credit is applied separately to foreign source "passive income," such as the
portion of dividends received from the Fund which qualifies as foreign source
income. Because of these limitations, a shareholder may be unable to claim a
credit for the full amount of the shareholder's proportionate share of the
foreign income taxes paid by the Fund. A shareholder's ability to claim a credit
for foreign taxes paid by the Fund may also be limited by applicable period
requirements.
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
55
<PAGE>
capital gains and amounts retained by the Fund which are designated as
undistributed capital gains ordinarily will be subject to U.S. income tax at a
rate of 30% if such individual is physically present in the U.S. for 183 days or
more during the taxable year and, in the case of gain arising from the sale or
redemption of Fund shares, either the gain is attributable to an office or other
fixed place of business maintained by the shareholder in the United States or
the shareholder has a "tax home" in the United States.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of investment in the Fund.
Notices. Shareholders will be notified annually by the Fund as to the U.S.
federal income tax status of the dividends, distributions, and deemed
distributions made by the Fund to its shareholder. Furthermore, shareholders
will also receive, if appropriate, various written notices after the close of
the Fund's taxable year regarding the U.S. federal income tax status of certain
dividends, distributions and deemed distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year.
Japanese Taxation
The operations of the Fund as described herein do not, in the opinion of
Nagashima & Ohno, Japanese counsel for the Fund, involve the creation in Japan
of a "permanent establishment" of the Fund by reason only of dealing in Japanese
securities (whether or not such dealings are effected through securities firms
or banks licensed in Japan) provided such dealings are conducted by the Fund
from outside of Japan pursuant to the tax convention between the United States
and Japan (the "Convention") as currently in force. Pursuant to the Convention,
a Japanese withholding tax at the maximum rate of 15% is, with certain
exceptions, imposed upon dividends paid by a Japanese corporation to the Fund.
Pursuant to the present terms of the Convention, interest received by the Fund
from sources within Japan is subject to a Japanese withholding tax at a maximum
rate of 10%. In the opinion of Nagashima & Ohno, pursuant to the Convention,
capital gains of the Fund arising from its investments as described herein are
not taxable in Japan.
Generally, the Fund will be subject to the Japan securities transaction
tax on its sale of certain securities in Japan. The current rates of such tax
range from 0.03% to 0.30% depending upon the particular type of securities
involved. Transactions involving equity securities are currently taxed at the
highest rate.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and
56
<PAGE>
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions for the Fund to pay a
brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research, market or statistical information. The Adviser will not place
orders with broker/dealers on the basis that the broker/dealer has or has not
sold shares of the Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund, and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Directors review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
Total brokerage commissions paid by the Fund amounted to $__________ for
1997, $__________ for 1996 and $__________ for 1995. 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 $303,671 for 1996, $186,917 for 1995 and $60,488
for 1994. Such amounts represented _ %, 7.6% and 2.3% 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, 1997, 1996 and 1995, there were ___ 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 1997, 1996 and 1995 was 96.4%,
72.6%, and 69.9%, respectively.
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, Martin Luther King, Jr. 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
57
<PAGE>
value a particular debt security pursuant to these valuation methods, the value
of such security is the most recent bid quotation supplied by a bona fide
marketmaker. If it is not possible to value a particular debt security pursuant
to the above methods, the Adviser may calculate the price of that debt security,
subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
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, 1997, attached to this Statement of Additional
Information, have been examined by Price Waterhouse LLP, 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.
58
<PAGE>
The Fund employs Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, as Custodian and Fund Accounting Agent. Sumitomo Trust and
Banking Co. (Tokyo Office) is employed as Sub-Custodian.
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, 1997, the Fund was charged by Scudder Service Corporation $516,112,
of which $37,442 was unpaid at December 31, 1997.
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
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 10 through 23, inclusive, in the Annual Report to the shareholders of the
Fund dated December 31, 1997, and are deemed to be a part of this Statement of
Additional Information.
59
<PAGE>
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
[logo]
[logo]
THE JAPAN FUND, INC.
Annual Report
December 31, 1997
A pure no-load(TM) mutual fund
Scudder Kemper Investments, Inc.
Investment Manager
<PAGE>
THE JAPAN FUND, INC.
CONTENTS
Portfolio Management Discussion................................... 3
Reviews the period's investing strategies, financial markets,
and economic conditions
Performance Update................................................ 8
Portfolio Summary................................................. 9
Investment Portfolio.............................................. 10
Itemized list of your Fund's portfolio holdings
Financial Statements.............................................. 14
Financial Highlights.............................................. 17
Notes to Financial Statements..................................... 18
Report of Independent Accountants................................. 23
Tax Information................................................... 24
Stockholder Meeting Results....................................... 25
Officers and Directors............................................ 27
How to Contact The Japan Fund............................. Back cover
2
<PAGE>
THE JAPAN FUND, INC.
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
1997 was another trying year for investors in Japanese equities. With
the 7.95% depreciation in the yen and the 20.10% decline in the stock market,
the dollar based TOPIX experienced a total return of -28.05%. In contrast, The
Japan Fund provided a total return of -14.40%, outperforming the TOPIX
benchmark.
Despite the poor performance of Japanese equities over the period, as
outlined in a special letter to shareholders of The Japan Fund, dated January
16, 1998, as well as in the following discussion, we believe the foundation is
being laid for an improved business and investment climate in Japan. This view
is supported by both improved equity valuations and the ongoing trend toward
deregulation of the Japanese economy.
Review of 1997
The Japanese stock market and the yen rallied in the first half of
1997, as the front-loading of demand before the consumption tax hike in April
raised hopes of a gradual reflation in the Japanese economy. In addition, the
government's rescue plan for the ailing Nippon Credit Bank was viewed as an
indication of progress toward getting financial system risks under control, and
nascent corporate initiatives in share buybacks and management stock options
reflected a new sensitivity to stock price levels by a growing number of
Japanese corporate managers.
However, optimism eroded rapidly in the latter half of the year as
economic activity stalled after the fiscal retrenchment became effective.
Furthermore, the currency and stock market crisis in Southeast Asia in late
summer threatened to slow the only vibrant engine of growth in Japan, the export
sector. Finally, a series of major bankruptcies in the fall, culminating in the
collapse of a major bank, Hokkaido Takushoku Bank, and a major securities
company, Yamaichi Securities, the largest post-war bankruptcy, caused a severe
loss of confidence in the strength of the Japanese financial system, uncertainty
among consumers about their employment prospects, and a cynicism regarding the
ability of the authorities to contain the economic and financial downturn. The
two trillion yen surprise tax cut announced in December failed to reverse this
negative market sentiment. The yen entered into a new bout of weakness in the
second half of the year, and the TOPIX closed 1997 near its record low for the
post-1990 bear market.
3
<PAGE>
THE JAPAN FUND, INC.
PORTFOLIO MANAGEMENT DISCUSSION
There were some bright spots within the stock market, however. The growing
deregulation and globalization of the Japanese economy continued to support a
polarization between the "winners" and the "losers" in the stock market.
Non-bank financial companies, global companies, and the strongest companies in
their respective industries retained much of their value, while the weaker
companies and industries were sold mercilessly. This polarization significantly
boosted the performance of The Japan Fund versus the overall market. The Fund's
core holdings among global companies, such as Canon, Sony, and Ricoh, its core
holdings among non-bank financials, such as Nichiei, Shohkoh Fund, and Orix, as
well as the Fund's major holdings among industry leaders such as Secom, Nomura
Securities, and Nippon Meat Packers, buttressed the Fund's performance in a
falling market.
Improved Valuations Support Outlook
The overall market sentiment in Tokyo as we enter 1998 is very weak, and
the visible economic and earnings prospects indicate a possibility of further
near term weakening of the yen and the stock market. However, an objective
analysis of market valuations gives some signs of encouragement for the
fundamental investor. This is because we believe that valuations for many of the
companies in the Japanese market may have by now, to a large extent, discounted
the worst of the market's fears. At the end of 1997, over half of the companies
on the Tokyo Stock Exchange First Section were selling below book value and at
price-earnings ratios of less than 25, while nearly the same number offered
dividend yields in excess of the 10-year Japanese government bond yield.
Because of the major waves of deregulation and global competition, some of
the cheapest stocks may be on their way to bankruptcy. However, we believe that
many others that have been similarly sold down have the potential to cut costs,
expand margins and boost earnings once the management becomes more stock price
and earnings driven. And this change in Japanese corporate governance from an
emphasis on stakeholders -- employees, creditors, suppliers, buyers -- to an
emphasis on equity shareholders appears to be gaining momentum. As visible
evidence of such a trend, stock buybacks and introduction of management stock
options are accelerating and increasingly becoming mainstream, rather than
maverick, activities.
4
<PAGE>
THE JAPAN FUND, INC.
PORTFOLIO MANAGEMENT DISCUSSION
To be sure, stock market movements often overshoot fair valuations by
large magnitudes and for protracted durations, both on the upside and downside.
A highly visible catalyst is often needed for market dynamics to be reversed and
for attractive values to come into focus. While it is difficult to predict the
nature and timing of such a catalyst, we believe that several potential
developments could act as a trigger for any market rebound.
First, the Hashimoto regime is currently claiming both fiscal balance
and economic stimulus as policy goals; a capitulation on the goal of budget
retrenchment would help restore confidence in the prospects for recovery.
Second, radical changes in the stock market, the financial system, and corporate
structures would also fuel the necessary change in market dynamics. These could
include massive infusion of public money to shore up bank capital, a large
reduction in corporate taxes or taxation on dividends, or a creation of some
mechanisms to offset sales of cross-holdings with share buybacks. Finally, as
valuations of even sound businesses get cheap enough, merger and acquisition
("M&A") activity that attempts to unlock the large corporate wealth -- assets,
brand, distribution, or technology -- may lead to a reappraisal of "value" in
Japanese corporations. Already, the management of Nidec, one of The Japan Fund's
top holdings, has begun to acquire other publicly traded companies with strong
technology, established production and distribution channels, and capable
personnel at attractive prices. The continued dissolution of cross-holdings and
the already visible signs that the banks are moving away from protecting their
"convoy" of borrowers indicate that the "normal" capital market dynamics of M&A
activity should occur in Japan in a matter of time. The Japanese market should
no longer be immune to market discipline, and these forces may speed the pace of
much-needed consolidation and restructuring in many Japanese industries.
Portfolio Focus on "Winners" from Deregulation
The Japan Fund continues to focus on the likely "winners" in an environment
of deregulation and globalization. Global companies, smaller and medium size
growth companies with the potential to become future blue chips, and leading
domestic companies with attractive valuations continue to be the backbone of the
Fund. Among the Fund's top ten holdings at 1997-end were: Canon, Nintendo, and
Shimano among global companies;
5
<PAGE>
THE JAPAN FUND, INC.
PORTFOLIO MANAGEMENT DISCUSSION
Unicharm, Shohkoh Fund, and Nidec among potential blue chips; and Secom, Orix,
and Nomura Securities among domestic industry leaders.
To position the Fund for 1998, we have added to investments in the food and
pharmaceutical industries, first, to add to the defensiveness of the portfolio
given uncertainties in economic and market prospects, and second, to seize the
upside opportunity afforded by the attractive M&A valuation of some of these
companies. For example, House Foods and Yamanouchi Pharmaceutical boast strong
brands, competitive positions, and distribution, and carry large net cash on
their balance sheets equal to a substantial portion of their stock market
capitalizations. Moreover, they generate steady and growing streams of free cash
flow which we believe are undervalued by the stock market.
In the financial sector, while Nomura Securities is among our top holdings
because of its prospects as a "winner" in its industry, we have also added Daiwa
and Nikko Securities, given that they now sell for less than their current net
asset values, not including the hidden value of their asset management
subsidiaries, despite having among the top three domestic securities
distribution networks. We have also initiated preliminary investments in some of
the major banks since November, as we believe that the collapse of bank stocks
to levels 80% below their peak and valuations relative to operating profits on
par with global valuations indicate that the market may finally be discounting
much of their bad debt risks. Moreover, the changes we observe in some of the
leading banks' managements from asset expansion orientation to asset downsizing
and margin expansion indicate a potential for substantial improvement in
shareholder returns once the bad debt issues are cleared. We are even beginning
to see evidence that some of the leading banks have joined the better known
global companies in leading Japanese corporate governance to a greater
shareholder orientation. We believe that these recent additions should boost the
Fund's performance on the next market upturn, as well as over the longer term.
A Stronger Foundation for Japanese Equities
While further bankruptcies among the weaker publicly traded companies,
especially in industries such as construction, finance, and basic materials, may
6
<PAGE>
be possible, and the stock market may be vulnerable to more volatility in the
short term, we view such shocks as the necessary cost of removing excess
capacity, forcing consolidation and restructuring of Japanese corporations that
will emerge as stronger and more profitable global players. We believe that the
current turmoil is not the start of a meltdown of the Japanese financial system,
but the birth pains of a new, more global, and ultimately stronger corporate
sector in Japan.
Unlike its Asian neighbors, Japan still boasts one of the top credit
ratings in terms of sovereign risk, the largest current account surplus in the
world, a motivated and well educated work force, a deep capital and technology
base, and a group of world class companies who are leading the way to a more
shareholder oriented corporate management. We believe the Fund is well
positioned to capitalize on the long-term opportunity presented by one of the
world's largest and most highly developed economies, and thank you for your
continued investment.
Sincerely,
/s/Lynn Birdsong, /s/Henry Rosovsky,
Lynn Birdsong, Henry Rosovsky,
President Chairman
The Japan Fund:
A Team Approach to Investing
The Japan Fund is managed by a team of Scudder Kemper Investments, Inc. (SKI)
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 a 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
SKI'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 SKI 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 SKI in
1987 and has numerous years of Pacific Basin research and investing experience.
7
<PAGE>
THE JAPAN FUND, INC.
PERFORMANCE UPDATE as of December 31, 1997
- -----------------------------------------------------------------
THE JAPAN FUND, INC.
- -----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/97 $10,000 Cumulative Annual
- ---------------------------------------
SCUDDER SHORT TERM BOND FUND
- ---------------------------------------
1 Year $ 8,560 -14.40% -14.40%
5 Year $ 9,434 -5.66% -1.16%
10 Year $ 9,028 -9.72% -1.02%
- ---------------------------------------
TOPIX
- ---------------------------------------
1 Year $ 7,195 -28.05% -28.05%
5 Year $ 8,974 -10.26% -2.14%
10 Year $ 6,839 -31.61% -3.72%
- ---------------------------------------
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
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
- ----------------------
'87 $10,000
'88 $11,940
'89 $13,329
'90 $11,148
'91 $11,495
'92 $ 9,570
'93 $11,832
'94 $13,020
'95 $11,839
'96 $10,546
'97 $ 9,028
TOPIX
Year Amount
- ----------------------
'87 $10,000
'88 $13,320
'89 $14,226
'90 $ 9,122
'91 $ 9,887
'92 $ 7,621
'93 $ 9,458
'94 $11,534
'95 $11,385
'96 $ 9,506
'97 $ 6,839
The Tokyo Stock Exchange Stock Price Index (TOPIX) is an unmanaged
capitalization weighted measure (adjusted in U.S. dollars) of all shares listed
on the first section of the Tokyo Stock Exchange. Index returns assume dividends
reinvested net of withholding tax and, unlike Fund returns, do not reflect any
fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods Ended December 31
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 16.24 $ 14.27 $ 10.76 $ 10.69 $ 8.90 $ 10.33 $ 10.50 $ 9.44 $ 8.33 $ 6.77
INCOME DIVIDENDS.. $ .02 $ .08 $ .09 $ -- $ -- $ .28 $ -- $ -- $ .08 $ .37
CAPITAL GAINS
DISTRIBUTIONS..... $ 3.88 $ 3.59 $ 1.10 $ .41 $ -- $ .39 $ .85 $ .11 $ -- $ --
FUND TOTAL
RETURN (%)........ 19.40 11.63 -16.36 3.11 -16.74 23.64 10.03 -9.07 -10.92 -14.40
INDEX TOTAL
RETURN (%)........ 33.19 6.79 -35.88 8.39 -22.92 24.07 21.96 -1.29 -16.51 -28.05
</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.
8
<PAGE>
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------------------------------------------------
ASSET ALLOCATION
- ---------------------------------------------------------------------------
Equity Holdings 94%
Cash Equivalents 4%
Foreign Debt 2%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The Fund is substantially fully
invested in Japanese equities.
- ---------------------------------------------------------------------------
SECTOR DIVERSIFICATION (Excludes 4% Cash Equivalents)
- ---------------------------------------------------------------------------
Financial 22%
Consumer Discretionary 16%
Manufacturing 16%
Consumer Staples 15%
Technology 10%
Service Industries 7%
Construction 5%
Media 3%
Health 2%
Other 4%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Among financial companies,
Japanese banks are not only
attractively valued but are
increasingly focused on
shareholder returns.
- ---------------------------------------------------------------------------
TEN LARGEST HOLDINGS (38% of Portfolio)
- ---------------------------------------------------------------------------
1. UNI-CHARM CO., LTD.
Leading manufacturer of sanitary napkins and paper diapers
2. NIDEC CORP..
Top global manufacturer of small-scale motors for hard disc drives
3. NINTENDO CO., LTD.
Leading game equipment manufacturer
4. SECOM CO., LTD.
Leading electronic security system operator
5. NOMURA SECURITIES CO., LTD.
Leading Japanese securities broker and underwriter
6. CANON INC.
Leading producer of visual image and information equipment
7. SHIMANO INC.
Top global producer of bicycle parts
8. SHOHKOH FUND & CO., LTD.
Leading finance company for small and medium-sized firms
9. ORIX CORP.
Largest leasing company in Japan
10. SAKURA BANK, LTD.
Full service bank
Top holdings include global
companies, leading domestic
companies, and tomorrow's
potential blue chips.
- ---------------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio, see page
10. A monthly Investment Portfolio Summary and quarterly Portfolio Holdings
are available upon request.
9
<PAGE>
THE JAPAN FUND, INC.
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount(b) Value($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------
3.7% REPURCHASE AGREEMENTS
-----------------------------------------------------------------------------
9,801,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette dated 12/31/97 at 6.5% to
be repurchased on 1/2/98 at $9,804,539
collateralized by a $9,864,000 U.S. Treasury
Note, 5.875%, 6/30/00 (Cost $9,801,000) ...... 9,801,000
----------
-----------------------------------------------------------------------------
2.3% FOREIGN BONDS-NON U. S. $ DENOMINATED
-----------------------------------------------------------------------------
JPY 459,000,000 Sony Corp., 0.15%, 3/30/01 (Cost $4,833,572) .. 6,220,750
----------
-----------------------------------------------------------------------------
6.1% CONVERTIBLE BONDS
-----------------------------------------------------------------------------
MEDIA 1.3%
Print Media JPY 478,000,000 Softbank Corp., Zero Coupon, 3/31/00 .......... 3,403,828
MANUFACTURING 2.0% ----------
Office Equipment/
Supplies JPY 445,000,000 Ricoh Co., Ltd., 1.5%, 3/29/02 ................ 5,431,317
----------
TECHNOLOGY 2.8%
Electronic Components/
Distributors 1.1% JPY 263,000,000 Nidec Corp., 1.0%, 9/30/03 .................... 2,960,260
----------
Electronic Data
Processing 0.7% JPY 162,000,000 Fujitsu Ltd., 1.95%, 3/31/03 (c) .............. 1,765,130
----------
Semiconductors 1.0% JPY 232,000,000 NEC Corp., 1%, 9/30/11 ........................ 1,954,058
JPY 62,000,000 Tokyo Electron Ltd., 0.9%, 9/30/03 ............ 626,646
----------
2,580,704
----------
TOTAL CONVERTIBLE BONDS (Cost $16,515,705) 16,141,239
----------
-----------------------------------------------------------------------------
87.9% COMMON STOCKS
-----------------------------------------------------------------------------
Shares
----------
CONSUMER DISCRETIONARY 13.8%
Recreational Products 8.9% 123,300 Nintendo Co., Ltd. ............................ 12,084,533
437,000 Shimano Inc. .................................. 8,030,628
131,100 Square Co., Ltd. .............................. 3,633,859
----------
23,749,020
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE JAPAN FUND, INC.
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurants 1.5% 104,271 Genki Sushi Co., Ltd. ......................... 1,149,696
320 Yoshinoya D&C Co., Ltd. ....................... 2,928,025
----------
4,077,721
----------
Specialty Retail 3.4% 168,300 Fast Retailing Co., Ltd. ...................... 2,693,315
53,000 Ryohin Keikaku Co., Ltd. ...................... 3,490,046
754,000 Senshukai ..................................... 2,828,943
----------
9,012,304
----------
CONSUMER STAPLES 13.8%
Department & Chain Stores 1.1% 84,500 FamilyMart Co., Ltd. .......................... 3,028,025
Food & Beverage 5.3% ----------
88,400 Ariake Japan Co., Ltd. ........................ 2,876,723
350,000 Fujicco Co., Ltd. ............................. 2,947,933
362,000 House Foods Industry .......................... 4,712,098
280,600 Rock Field Co., Ltd. (c) ...................... 3,738,469
----------
14,275,223
----------
Package Goods/
Cosmetics 6.1% 460,800 Uni-Charm Co., Ltd. ........................... 16,300,888
----------
Textiles 1.3% 1,678,000 Gunze, Ltd. ................................... 2,775,253
162,000 Nisshinbo Industries Inc. ..................... 682,236
----------
3,457,489
HEALTH 2.4% ----------
Pharmaceuticals 299,000 Yamanouchi Pharmaceutical Co., Ltd. ........... 6,410,413
FINANCIAL 24.4% ----------
Banks 8.5% 1,245,000 Asahi Bank Ltd. ............................... 5,052,450
370,000 Industrial Bank of Japan, Ltd. ................ 2,634,763
2,441,000 Sakura Bank Ltd. .............................. 6,971,616
302,000 Sanwa Bank, Ltd. .............................. 3,052,374
1,092,000 Tokai Bank .................................... 5,083,737
----------
22,794,940
----------
Other Financial
Companies 15.9% 1,339,000 Daiwa Securities Co., Ltd. .................... 4,613,706
156,000 Jafco Co. Ltd. ................................ 5,554,364
44,876 Nichiei Co., Ltd. ............................. 4,776,236
1,203,000 Nikko Securities Co., Ltd. .................... 3,187,121
644,000 Nomura Securities Co., Ltd. ................... 8,580,092
111,400 Orix Corp. .................................... 7,762,175
26,200 Shohkoh Fund & Co., Ltd. ...................... 7,984,380
----------
42,458,074
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
THE JAPAN FUND, INC.
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MEDIA 1.3%
Print Media 135,300 Softbank Corp. ................................ 3,522,358
----------
SERVICE INDUSTRIES 4.3%
Environmental Services 0.9% 145,000 Sanix Inc. .................................... 2,331,547
Miscellaneous Commercial ----------
Services 3.4% 140,000 Secom Co., Ltd. ............................... 8,940,276
----------
Miscellaneous Consumer
Services 0.0% 1,180 H.I.S. Co., Ltd. .............................. 20,510
----------
DURABLES 1.6%
Automobiles 85,000 FCC Co., Ltd. ................................. 898,162
242,100 Kyokuto Kaihatsu Kogyo Co., Ltd. .............. 921,315
1,010,000 ShinMaywa Industries, Ltd. .................... 2,474,732
----------
4,294,209
----------
MANUFACTURING 13.1%
Containers & Paper 1.8% 968,000 Hokuetsu Paper Mills, Ltd. .................... 4,410,107
69,000 Nippon Paper Industries Co. ................... 270,505
----------
4,680,612
----------
Diversified
Manufacturing 1.8% 96,000 Mitsubishi Heavy Industries, Ltd. ............. 399,877
327,000 Sumitomo Electric Industries, Ltd. ............ 4,456,815
----------
4,856,692
----------
Electrical Products 3.5% 286,000 Matsushita Electric Works, Inc. ............... 2,474,579
2,750,000 Yaskawa Electric Corp. ........................ 6,843,415
----------
9,317,994
----------
Industrial Specialty 1.0% 945,000 NHK Spring Co., Ltd. .......................... 2,532,542
----------
Machinery/Components/
Controls 2.0% 1,350 Keyence Corp. ................................. 199,502
316,000 Minebea Co., Ltd. ............................. 3,387,443
20,800 SMC Corp. ..................................... 1,831,547
----------
5,418,492
----------
Office Equipment/
Supplies 3.0% 347,000 Canon Inc. .................................... 8,077,182
----------
TECHNOLOGY 6.6%
Electronic Components/
Distributors 6.6% 294,100 Nidec Corp. ................................... 12,385,528
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
THE JAPAN FUND, INC.
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
70,000 TDK Corp. ..................................... 5,274,119
------------
17,659,647
------------
Semiconductors 0.0% 1,300 Advantest Corp. ............................... 73,660
------------
ENERGY 0.9%
Oil & Gas Production 880,000 Nippon Oil Co., Ltd. .......................... 2,270,750
------------
METALS & MINERALS 0.9%
Steel & Metals 835,000 Nisshin Steel Co., Ltd. ....................... 914,280
1,233,000 Sumitomo Metal Industries, Ltd. ............... 1,576,654
------------
2,490,934
------------
CONSTRUCTION 4.8%
Building Materials 1.5% 1,120,000 Chichibu Onada Cement Corp. ................... 2,058,193
1,607,000 Sumitomo Osaka Cement Co., Ltd. ............... 2,017,979
------------
4,076,172
------------
Homebuilding 2.9% 795,000 Daito Trust Construction Co., Ltd. ............ 4,851,570
500,000 Daiwa House Industry Co., Ltd. ................ 2,641,654
------------
7,493,224
------------
Miscellaneous 0.4% 480,000 Toshiba Engineering & Construction Co., Ltd. 1,102,603
------------
TOTAL COMMON STOCKS (Cost $322,853,198) ....... 234,723,501
------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $354,003,475) (a) ...................... $266,886,490
============
</TABLE>
(a) The cost for federal income tax purposes was $359,769,583. At December 31,
1997, net unrealized depreciation for all securities based on tax cost was
$92,883,093. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $4,180,092 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$97,063,185.
(b) Principal amount stated in U.S. dollars unless otherwise noted.
(c) Securities valued in good faith by the Valuation Committee of the Board of
Directors at fair value amounted to $5,503,599 (2.1% of net assets). Their
values have been estimated by the Board of Directors in the absence of
readily ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market for the
securities existed, and the difference could be material. The cost of these
securities at December 31, 1997 aggregated $6,297,674. These securities may
also have certain restrictions as to resale.
CURRENCY ABBREVIATIONS
JPY Japanese Yen
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
THE JAPAN FUND, INC.
FINANCIAL STATEMENTS
-----------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost
$354,003,475) ................................. $266,886,490
Foreign currency holdings, at market (identified
cost $199,444) ................................ 199,923
Receivable for investments sold .................. 5,540,548
Receivable for fund shares sold .................. 577,903
Dividends and interest receivable ................ 88,063
Other assets ..................................... 10,756
-----------
Total assets .................................. 273,303,683
LIABILITIES
Payable for fund shares redeemed ................. $ 7,317,930
Accrued management fee ........................... 189,252
Other payables and accrued expenses .............. 614,570
------------
Total liabilities ............................. 8,121,752
------------
Net assets, at market value ...................... $265,181,931
============
NET ASSETS Net assets consist of:
Undistributed net investment income ........... $ 2,596,688
Net unrealized appreciation (depreciation) on:
Investments ................................ (87,116,985)
Foreign currency related transactions ...... 19,930
Accumulated net realized loss ................. (44,950,757)
Paid-in capital ............................... 394,633,055
------------
Net assets, at market value ...................... $265,181,931
NET ASSET VALUE, offering and redemption price per ============
share ($265,181,93 / 139,174,523 outstanding
shares of capital stock, $.333 par value,
600,000,000 shares authorized) .................. $ 6.77
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
THE JAPAN FUND, INC.
FINANCIAL STATEMENTS
-----------------------------------------------------------
STATEMENT OF OPERATIONS
-----------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Income:
Dividends (net of withholding taxes of $358,517) ........ $ 2,031,290
Interest (net of withholding taxes of $23,023) .......... 1,170,869
------------
3,202,159
Expenses:
Management fee .......................................... $ 2,949,980
Shareholder and Transfer Agent services ................. 651,091
Officers and directors fees and expenses ................ 183,937
Custodian and accounting fees ........................... 296,108
Reports to shareholders ................................. 138,760
Legal ................................................... 203,878
Auditing ................................................ 57,800
Registration fees ....................................... 44,336
Other ................................................... 135,339 4,661,229
----------------------------
Net investment income (loss) ............................ (1,459,070)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments .......................................... 22,390,976
Futures .............................................. 109,316
Foreign currency related transactions ................ (1,285,585) 21,214,707
------------
Net unrealized appreciation (depreciation) during
the period on:
Investments .......................................... (56,894,450)
Foreign currency related transactions ................ 6,356 (56,888,094)
----------------------------
Net gain (loss) on investment transactions .............. (35,673,387)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS ...................................... $(37,132,457)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
THE JAPAN FUND, INC.
FINANCIAL STATEMENTS
-----------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
INCREASE (DECREASE) IN NET ASSETS 1997 1996
--------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income (loss) ................ $ (1,459,070) $ (1,630,209)
Net realized gain (loss) from investment
transactions ............................. 21,214,707 44,197
Net unrealized appreciation (depreciation)
on investment transactions
during the period ........................ (56,888,094) (48,654,817)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ................ (37,132,457) (50,240,829)
------------ ------------
Distributions to shareholders:
In excess of net investment income .......... (14,966,112) (3,998,120)
------------ ------------
Fund share transactions:
Proceeds from shares sold ................... 359,886,210 187,023,459
Net asset value of shares issued to
shareholders in reinvestment of
distributions ............................ 12,571,505 3,312,548
Cost of shares redeemed ..................... (441,141,177) (298,937,269)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions .................. (68,683,462) (108,601,262)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS ........... (120,782,031) (162,840,211)
Net assets at beginning of period ........... 385,963,962 548,804,173
------------ ------------
NET ASSETS AT END OF PERIOD (including
undistributed net income of $2,596,688 and
accumulated distributions in excess of net
investment income of $9,942,905,
respectively) ............................ $265,181,931 $385,963,962
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period ... 46,358,011 58,139,460
------------ ------------
Shares sold ................................. 43,064,968 20,114,876
Shares issued to shareholders in reinvestment
of distributions ......................... 1,805,563 380,640
Shares redeemed ............................. (52,054,019) (32,276,965)
------------ ------------
Net increase (decrease) in Fund shares ...... (7,183,488) (11,781,449)
------------ ------------
Shares outstanding at end of period ......... 39,174,523 46,358,011
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
THE JAPAN FUND, INC.
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997(a) 1996(a) 1995 1994(a) 1993(a) 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........ $ 8.33 $ 9.44 $10.50 $10.33 $ 8.90 $ 10.69 $10.76 $ 14.27 $16.24 $16.97
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Income from investment
operations:
Net investment
income (loss) ............. (.03) (.03) (.01) (.05) (.05) (.05) (.03) .09 .04 .04
Net realized and
unrealized gain (loss)
on investments ............ (1.16) (1.00) (.94) 1.07 2.15 (1.74) .37 (2.41) 1.66 3.13
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Total from investment
operations ................. (1.19) (1.03) (.95) 1.02 2.10 (1.79) .34 (2.32) 1.70 3.17
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Less distributions:
From net investment
income .................... -- -- -- -- -- -- -- (.09) (.08) (.02)
In excess of net
investment income ......... (.37) (.08) -- -- (.28) -- -- -- -- --
From net realized
gains on investment
transactions .............. -- -- -- (.80) (.39) -- (.41) (1.10) (3.59) (3.88)
In excess of net
realized gains ............ -- -- (.11) (.05) -- -- -- -- -- --
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Total distributions ........ (.37) (.08) (.11) (.85) (.67) -- (.41) (1.19) (3.67) (3.90)
------- ------- ------ ------ ------ ------- ------ ------- ------ ------
Net asset value,
end of period ............. $ 6.77 $ 8.33 $ 9.44 $10.50 $10.33 $ 8.90 $10.69 $ 10.76 $14.27 $16.24
======= ======= ====== ====== ====== ======= ====== ======= ====== ======
TOTAL RETURN (%) ............. (14.40) (10.92) (9.07) 10.03 23.64 (16.74) 3.11 (16.36) 11.63 19.40
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ........ 265 386 549 586 471 409 335 313 401 404
Ratio of operating
expenses to average
daily net assets (%) ....... 1.21 1.16 1.21 1.08 1.25 1.42 1.26 1.05 1.02 1.01
Ratio of net investment income
(loss) to average daily net
assets (%) ................. (.38) (.34) (.24) (.40) (.47) (.31) (.15) .72 34 .28
Portfolio turnover rate
(%) ........................ 96.4 72.6 69.9 74.3 81.7 47.0 46.4 52.7 60.4 38.8
Average commission
rate paid (b) .............. $ .0270 $ .0444 -- -- -- -- -- -- -- --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years ending on or after December 31, 1996.
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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
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 other than money market securities 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. Money market
instruments purchased with an original 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.
FUTURES CONTRACTS. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the period, the
Fund purchased securities index futures as a temporary substitute for purchasing
selected investments.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the
18
<PAGE>
THE JAPAN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
value of the securities or currencies hedged. When utilizing futures contracts
to hedge the Fund gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.
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.
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.
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, as amended, applicable to regulated investment companies. Under the United
States-Japan tax treaty, Japan imposes a
19
<PAGE>
THE JAPAN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
withholding tax of 15% on dividends and 10% on interest. There is currently no
Japanese tax on capital gains.
At December 31, 1997, the Fund had a net tax basis capital loss carryforward of
approximately $35,818,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2003 ($23,266,000), December 31, 2004 ($7,417,000) and December 31, 2005
($5,135,000), the respective expiration dates, whichever occurs first. In
addition, from November 1, 1997 through December 31, 1997, the Fund incurred
approximately $3,367,000 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, 1998.
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 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, 1997, purchases and sales of investment
securities (excluding short-term investments) aggregated $347,242,536 and
$425,071,695, respectively.
The aggregate face value of futures contracts opened and closed during the year
ended December 31, 1997 was $51,016,027.
20
<PAGE>
THE JAPAN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
C. RELATED PARTIES
- --------------------------------------------------------------------------------
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Directors and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, 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 monthly. For the year ended December 31, 1997, the fee pursuant to
these agreements amounted to $2,949,980, which was equivalent to an annual
effective rate of 0.77% of the Fund's average daily net assets.
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, 1997, the amount charged to the Fund by SSC aggregated
$516,112, of which $37,442 is unpaid at December 31, 1997.
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, 1997, the Officers and Directors fees and
expenses aggregated $130,410, of which $3,253 is unpaid at December 31, 1997.
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, 1997, Directors' retirement benefits amounted to $53,527. At
December 31, 1997, the Fund has accrued $222,099 for such benefits.
21
<PAGE>
THE JAPAN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
E. LINES 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.
22
<PAGE>
THE JAPAN FUND, INC.
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 investment portfolio, 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, 1997, 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, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 12, 1998
23
<PAGE>
THE JAPAN FUND, INC.
TAX INFORMATION (UNAUDITED)
For its fiscal year ended December 31, 1997, the total amount of income received
by the Fund from sources within foreign countries and possessions of the United
States was $0.05 per share (representing a total of $1,932,688). The total
amount of taxes paid by the Fund to such countries was $0.01 per share
(representing a total of $381,540).
24
<PAGE>
THE JAPAN FUND, INC.
STOCKHOLDER MEETING RESULTS
A Special Meeting of Stockholders (the "Meeting") of The Japan Fund, Inc. (the
"Fund") was held on October 16, 1997, at the offices of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, MA 02110. At the Meeting, as adjourned and reconvened, the
following matters were voted upon by the stockholders (the resulting votes for
each matter are presented below). With regard to certain proposals, it was
recommended that the Meeting be reconvened in order to provide stockholders with
an additional opportunity to return their proxies. The date of the reconvened
meeting at which the matters were decided is noted after the proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
23,348,850 1,636,844 739,489 82,554
2. To elect Directors.
Number of Votes:
----------------
Director For Withheld
-------- --- --------
William L. Givens 24,023,641 1,784,096
William H. Gleysteen, Jr. 24,094,511 1,713,226
John F. Loughran 24,135,004 1,672,733
Yoshihiko Miyauchi 24,097,287 1,710,450
William V. Rapp 24,168,116 1,639,621
Henry Rosovsky 24,109,905 1,697,832
O. Robert Theurkauf 24,169,124 1,638,613
Hiroshi Yamanaka 24,011,364 1,796,373
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise. (Approved on December 2, 1997.)
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
24,135,077 3,305,664 1,494,670 13,298
25
<PAGE>
4. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ---------
<S> <C> <C> <C> <C>
4.1 Diversification 20,203,566 2,504,659 1,221,053 1,878,459
4.2 Borrowing 19,991,302 2,715,590 1,222,386 1,878,459
4.3 Senior securities 20,104,543 2,595,333 1,229,402 1,878,459
4.4 Concentration 20,126,367 2,574,688 1,228,223 1,878,459
4.5 Underwriting of securities 20,167,474 2,523,879 1,237,925 1,878,459
4.6 Investment in real estate 20,144,018 2,237,256 1,548,004 1,878,459
4.7 Purchase of physical commodities 19,814,687 2,275,636 1,838,955 1,878,459
4.8 Lending 19,851,510 2,273,475 1,804,293 1,878,459
</TABLE>
5. To ratify the selection of Price Waterhouse L.L.P. as the Fund's
independent accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
23,662,444 739,385 1,405,908
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
26
<PAGE>
THE JAPAN FUND, INC.
OFFICERS AND DIRECTORS
Henry Rosovsky
Chairman of the Board and Director
Professor, Harvard University; Director, Corning Inc., Paine Webber Group
Lynn Birdsong*
President
William L. Givens
Director
President, Twain Associates
William H. Gleysteen, Jr.
Director
Consultant; Guest Scholar, Brookings Institute
John F. Loughran
Director
Director, The Finisterre Fund
Yoshihiko Miyauchi
Director
President and CEO, ORIX Corporation
William V. Rapp
Director
Academic Director, International Relations, Yale University; Senior
Research Fellow, Columbia University; Managing Director, Rue Associates
O. Robert Theurkauf*
Director
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, The Bank of Tokyo-Mitsubishi, Ltd., The
Mitsubishi Foundation, Mitsubishi Research Institute; Director, Kirin Brewery
Co., Ltd., Seijo Gakuen; 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
HONORARY DIRECTORS
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
Emeritus and Director, Kirby Corporation
Shoji Umemura
Former Director of The Japan Fund, Inc.
Board Counselor, The Nikko Securities Co., Ltd.; Counselor, Tokyo Stock
Exchange; Advisor, Japan Securities Dealers Association, Association of Tokyo
Stock Exchange Regular Members; Director, The Securities Analysts Association
of Japan; Advisor, Japan Association of Corporate Executives; Associate
Advisor, Tokyo Chamber of Commerce and Industry; Vice President, Japan-Korea
Economic Association; Member, Executive Board, Waseda University; Chairman,
Congregation, Waseda University
* Scudder Kemper Investments, Inc.
27
<PAGE>
[LOGO]
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 617-295-1000)
The Japan Fund
Shareholder Service Center
Two International Place
Boston, MA 02110
Scudder Kemper Investments, Inc.
Investment Manager
<PAGE>
THE JAPAN FUND, INC.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
a. Financial Statements:
Included in Part A:
Financial Highlights for the ten fiscal
years ended December 31, 1997 to be
filed by amendment
Included in Part B:
Statement of Assets and Liabilities, as of December 31, 1997 to be filed by amendment
Statement of Operations for the fiscal year ended December 31, 1997 to be filed by
amendment Statements of Changes in Net Assets for the two fiscal years ended
December 31, 1997 to be filed by amendment Financial Highlights for the ten fiscal
years ended December 31, 1997 to be filed by amendment Notes to Financial Statements to
be filed by amendment Report of Independent Accountants are to be filed by amendment
Statements, schedules and historical information other than those listed above have been omitted
since they are either not applicable or are not required.
b. Exhibits:
All references are to the Registrant's Registration Statement on Form N-1A as filed with the Securities
and Exchange Commission on April 29, 1987. File nos. 33-13863 & 811-1090 (the "Registration
Statement").
1. (a) Articles of Incorporation.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(b) Articles of Amendment and Restatement of the Articles of
Incorporation.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
2. (a) Registrant's By-Laws.
(b) Amendment to Registrant's By-Laws dated January 28, 1993.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(c) Amendment to Registrant's By-Laws dated July 23. (Incorporated by
reference to the Post-Effective Amendment No. 11 to the
Registration Statement.)
(d) Amendment to Registrant's By-Laws dated April 25, 1996.
(Incorporated by reference to Exhibit 2(d) to Post-Effective
Amendment No. 10 to the Registration Statement.)
(e) Amendment to Registrant's By-Laws dated October 25, 1996.
(Incorporated by reference to Exhibit 2(e) to Post-Effective
Amendment No. 10 to the Registration Statement.)
Part C - Page 1
<PAGE>
3. Inapplicable.
4. Specimen of shares representing shares of capital stock of $.33
1/3 par value. (Incorporated by reference to Exhibit 4 to
Post-Effective Amendment No. 2 to the Registration Statement.)
5. (a) Investment Management Agreement between the Registrant
and Asia Management Corporation ("Asia Management") dated May 24,
1991. (Incorporated by reference to the Post-Effective Amendment
No. 11 to the Registration Statement.)
(b) Advisory Agreement between Asia Management and The Nikko Research
Center, Ltd. ("Nikko") dated July 1, 1986.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(c) Investment Management Agreement between Asia Management and The
Nikko International Capital Management Co., Ltd. dated May 24,
1991. (Incorporated by reference to the Post-Effective Amendment
No. 11 to the Registration Statement.)
(d) Agreement between Scudder, Stevens & Clark Ltd. and Asia Management
dated July 24, 1984. (Incorporated by reference to the Post-Effective
Amendment No. 11 to the Registration Statement.)
(e) Investment Management Agreement between the Registrant and
Scudder, Stevens & Clark, Inc. dated January 1, 1994.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(f) Research Agreement between Scudder and The Nikko International
Capital Management Co., Ltd. dated January 1, 1994. (Incorporated by
reference to the Post-Effective Amendment No. 11 to the
Registration Statement.)
(g) Investment Management Agreement between the Registrant and Scudder
Kemper Investments, Inc. dated December 31, 1997.
6. Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., formerly Scudder Fund Distributors, Inc., dated
August 14, 1987. (Incorporated by reference to the Post-Effective
Amendment No. 11 to the Registration Statement.)
7. Form of Directors' Retirement Plan.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
Part C - Page 2
<PAGE>
8. (a) Custodian Agreement between the Registrant and Brown Brothers
Harriman & Co. ("Brown Brothers").
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(b) Sub-Custodian Agreement between Brown Brothers Harriman & Company
and Citibank, N.A.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(c) Custodian Agreement between the Registrant and Brown Brothers
dated April 21, 1995.
(Incorporated by reference to Exhibit 8(c) to Post-Effective
Amendment No. 9 to the Registration Statement.)
9. (a) Transfer Agency and Service Agreement and Fee Schedule between
the Registrant and Scudder Service Corporation dated May 1, 1990.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(b) Shareholder Service Agreement and Fee Schedule between the
Registrant and Scudder Service Corporation dated August 14, 1987.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(c) COMPASS and TRAK 2000 Service Agreement dated July 19, 1996.
(Incorporated by reference to Exhibit 9(c) to Post-Effective
Amendment No. 10 to the Registration Statement.)
10. Inapplicable.
11. Inapplicable.
12. Inapplicable.
13. Inapplicable.
14. (a) Scudder Flexi-Plan for Corporations and Self-Employed Individuals.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(b) Scudder Individual Retirement Plan.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(c) Scudder Funds 403(b) Plan.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
(d) Scudder Employer - Select 403(b) Plan.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
Part C - Page 3
<PAGE>
(e) Scudder Cash or Deferred ProfitSharing Plan under Section 401(k).
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
15. Inapplicable.
16. Performance Information.
(Incorporated by reference to the Post-Effective Amendment No. 11 to
the Registration Statement.)
17. Inapplicable.
18. Inapplicable.
</TABLE>
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities as of February 10, 1998
(1) (2)
Title of Class Number of Shareholders
Shares of capital stock 25,362
($.33 1/3 par value)
Item 27. Indemnification.
A policy of insurance covering Scudder, Stevens & Clark, Inc.,
its subsidiaries including Scudder Investor Services, Inc.,
and all of the registered investment companies advised by
Scudder, Stevens & Clark, Inc. insures the Registrant's
Directors and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent,
error or accidental omission in the scope of their duties.
Article Eighth of Registrant's Articles of Incorporation
provides as follows:
EIGHTH: Each director and officer (and his heirs,
executors and administrators) shall be indemnified by the
Corporation against reasonable costs and expenses incurred by
him in connection with any action, suit or proceeding to which
he is made a party by reason of his being or having been a
director or officer of the Corporation, except in relation to
any action, suit or proceeding in which he has been adjudged
liable because of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office. In the absence of an adjudication which
expressly absolves the director or officer of liability to the
Corporation or its stockholders for willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, or in the event of a
settlement, each director and officer (and his heirs,
executors and administrators) shall be indemnified by the
Corporation against payment made, including reasonable costs
and expenses, provided that such indemnity shall be
conditioned upon receipt by the Corporation of a written
opinion of independent counsel selected by the Board of
Directors, or the adoption by a majority of the entire Board
(in which majority there shall not be included any director
who shall have or shall at any time have had any financial
interest adverse to the Corporation in such action, suit or
proceeding or the subject matter or outcome thereof) of a
resolution, to the effect that the director or officer has no
liability by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office. The indemnity provided herein shall, in
the event of the settlement of any such action, suit or
proceeding, not exceed the costs and expenses (including
attorneys' fees) which would reasonably have been incurred if
such action, suit or proceeding had been litigated to a final
Part C - Page 4
<PAGE>
conclusion. Such a determination by independent counsel or by
the Board of Directors and the payment of amounts by the
Corporation on the basis thereof shall not prevent a
stockholder from challenging such indemnification by
appropriate legal proceeding on the grounds that the director
or officer was liable because of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. The foregoing rights
and indemnification shall not be exclusive of any other right
to which the officers and directors may be entitled according
to law.
Reference is hereby made to the Underwriting
Agreement between the registrant and Scudder Investor
Services, Inc., formerly Scudder Fund Distributors, Inc.,
filed as Exhibit 6 to the Initial Registration Statement, with
respect to the indemnification provisions thereunder.
Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Item 28. Business or Other Connections of Investment Adviser
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such
have corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 28.
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
<TABLE>
<CAPTION>
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Zurich Holding Company of Americao
Part C - Page 5
<PAGE>
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of Americao
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark
Overseas Corporationoo Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Markus Rohrbasser Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zurich Insurance Company of Switzerland##
President, Director, Chairman of the Board, ZKI Holding Corporation xx
Cornelia M. Small Vice President, Scudder Kemper Investments, Inc.**
Part C - Page 6
<PAGE>
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporationoo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
</TABLE>
Item 29. Principal Underwriters.
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 29.
Part C - Page 7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
William S. Baughman Vice President None
Two International Place
Boston, MA 02110
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
Thomas F. McDonough Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President None
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President and Vice President and
345 Park Avenue Assistant Clerk Secretary
New York, NY 10154
Robert A. Rudell Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President None
Two International Place
Boston, MA 02110
</TABLE>
(c)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other Compensation
Underwriter Commissions and Repurchases Commissions
Scudder Investor None None None None
Services, Inc.
</TABLE>
Part C - Page 8
<PAGE>
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by the Registrant at its
offices, 345 Park Avenue, New York, NY 10154 with the
exception of the accounts, books and other documents relating
to the duties of the registrant's custodian, which are
maintained by the registrant's custodian, Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109.
Records relating to the duties of the Registrant's transfer
agent are maintained by Scudder Service Corporation, Two
International Place, Boston, Massachusetts 02110-4103.
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
Inapplicable.
Part C - Page 9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and the State of New York,
on the 15th day of April, 1998.
THE JAPAN FUND, INC.
By /s/Lynn Birdsong
----------------------
Lynn Birdsong
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
/s/Henry Rosovsky
- --------------------------------------
Henry Rosovsky* Chairman of the Board and Director April 15, 1998
/s/Lynn Birdsong
- --------------------------------------
Lynn Birdsong President (Principal Executive April 15, 1998
Officer)
/s/Gina Provenzano
- --------------------------------------
Gina Provenzano* Treasurer (Principal Financial and April 15, 1998
Accounting Officer) and Vice President
/s/William L. Givens
- --------------------------------------
William L. Givens* Director April 15, 1998
/s/William H. Gleysteen, Jr.
- --------------------------------------
William H. Gleysteen, Jr. * Director
April 15, 1998
/s/John F. Loughran
- --------------------------------------
John F. Loughran* Director April 15, 1998
/s/Yoshihiko Miyauchi
- --------------------------------------
Yoshihiko Miyauchi* Director April 15, 1998
<PAGE>
/s/William V. Rapp
- --------------------------------------
William V. Rapp* Director April 15, 1998
/s/O. Robert Theurkauf
- --------------------------------------
O. Robert Theurkauf* Director April 15, 1998
/s/Hiroshi Yamanaka
- --------------------------------------
Hiroshi Yamanaka* Director April 15, 1998
*By:/s/Kathryn L. Quirk
----------------------
Kathryn L. Quirk,
Attorney-in-fact pursuant to powers of attorney contained in the signature
pages of Post-Effective Amendment No. 9 to the Registration Statement.
</TABLE>
2
<PAGE>
File No. 33-13863
File No. 811-1090
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 12
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 23
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
THE JAPAN FUND, INC.
<PAGE>
THE JAPAN FUND
EXHIBIT INDEX
Exhibit 5 (g)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 13 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
Februrary 12, 1998, relating to the financial statements and financial
highlights of The Japan Fund, Inc., which appear in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Financial highlights" in the
Prospetus and under the heading "Expert" in the Statement of Additional
Information.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 27, 1998
<TABLE> <S> <C>
<ARTICLE>6
<LEGEND>
This schedule contains summary financial information extracted from
The Japan Fund, Inc. Annual Report for the fiscal year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER>0
<NAME> The Japan Fund, Inc.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 354,003,475
<INVESTMENTS-AT-VALUE> 266,886,490
<RECEIVABLES> 6,206,514
<ASSETS-OTHER> 210,679
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 273,303,683
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,121,752
<TOTAL-LIABILITIES> 8,121,752
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 394,633,055
<SHARES-COMMON-STOCK> 39,174,523
<SHARES-COMMON-PRIOR> 46,358,011
<ACCUMULATED-NII-CURRENT> 2,596,688
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (44,950,757)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (87,097,055)
<NET-ASSETS> 265,181,931
<DIVIDEND-INCOME> 2,031,290
<INTEREST-INCOME> 1,170,869
<OTHER-INCOME> 0
<EXPENSES-NET> 4,661,229
<NET-INVESTMENT-INCOME> (1,459,070)
<REALIZED-GAINS-CURRENT> 21,214,707
<APPREC-INCREASE-CURRENT> (56,888,094)
<NET-CHANGE-FROM-OPS> (37,132,457)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,966,112)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 43,064,968
<NUMBER-OF-SHARES-REDEEMED> (52,054,019)
<SHARES-REINVESTED> 1,805,563
<NET-CHANGE-IN-ASSETS> (120,782,031)
<ACCUMULATED-NII-PRIOR> (9,942,905)
<ACCUMULATED-GAINS-PRIOR> (37,203,728)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,949,980
<INTEREST-EXPENSE> 1,191
<GROSS-EXPENSE> 4,661,229
<AVERAGE-NET-ASSETS> 384,792,280
<PER-SHARE-NAV-BEGIN> 8.33
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> (1.16)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.37)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 6.77
<EXPENSE-RATIO> 1.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
