Filed with the Securities and Exchange Commission on April 30, 1999.
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.
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Post-Effective Amendment No. 15
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26
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The Japan Fund, Inc.
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(Exact Name of Registrant as Specified in Charter)
345 Park Avenue, New York, NY 10154
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2561
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Maureen E. Kane
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
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(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, 1999 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on _________ 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.
PROSPECTUS
MAY 1, 1999
The fund is managed to provide long-term capital appreciation by investing
primarily in Japanese securities.
[GRAPHIC OMITTED]
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
No-load/No Sales Charges
Scudder Kemper Investments, Inc.
Investment Adviser
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
1 Fund Description
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An overview of the 1 Investment objective
fund's goal, strategy 1 Main investment strategy
and main risks 2 Other investments
2 Risk management strategies
3 Main risks
4 About the Fund
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Additonal information 4 Past performance
that you should know 5 Fee and expense information
about the fund 6 Investment adviser
6 Portfolio management
7 Distributions
8 Taxes
9 Financial highlights
10 About Your Investment
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Information about 10 Transaction information
managing your fund 11 Buying and selling shares
account 12 Purchases
13 Exchanges and redemptions
<PAGE>
Fund Description
Investment objective
The fund seeks to provide long-term capital appreciation. The fund's investment
objective may not be changed without shareholder approval. Unless otherwise
indicated, the fund's other investment policies may be changed without a vote of
the shareholders.
Main investment strategies
The fund pursues its objective by investing at least 80% of its assets in
Japanese securities (including American Depository Receipts). The term Japanese
securities includes securities issued by companies organized under the laws of
Japan ("Japanese companies"), companies affiliated with Japanese companies and
companies, wherever organized, that derive 50% or more of their revenues from
Japan. The fund intends to focus its investments in the equity securities of
select Japanese companies, both large and small, that have an active market for
their securities and that show a potential for greater-than-average growth.
The fund invests primarily in the common stock of Japanese companies. The fund
anticipates that most equity securities of Japanese companies in which it
invests will be listed on Japanese securities exchanges. However, the fund may
also invest up to 30% of its net assets in equity securities that are traded in
an over-the-counter market. These are generally securities of relatively small
or little-known companies that the portfolio managers believe have above-average
earnings growth potential.
In evaluating a particular investment, the fund's management considers a number
of factors, including:
o the size of the company;
o the depth and quality of the company's management;
o the company's product line, business strategy or competitive position in
its industry;
o marketing and technical strengths;
o research and development efforts;
o financial strength;
o cost structure;
o revenue and earnings growth potential; and
o price-earnings ratios and other stock valuation measures.
1
<PAGE>
A security is typically sold when, in the opinion of the portfolio management
team: the stock has reached its fair market value and its appreciation is
limited; a company's fundamentals and competitive strength have deteriorated;
the portfolio management team loses confidence in the company's management; the
fund's portfolio is too heavily weighted in a particular stock or industry; or
more attractive alternatives are available in other companies or sectors.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, preferred stock, debt securities convertible into
common stock and common stock purchase warrants, as well as debt securities of
varying maturities, such as those issued by the government of Japan and Japanese
companies, when the fund's management believes that the potential for capital
appreciation from debt securities equals or exceeds that available from equity
securities. The debt securities in which the fund may invest are rated no lower
than BBB by Standard & Poor's Corporation or Baa by Moody's Investors Service,
Inc. or, if unrated, are of equivalent quality as determined by the investment
manager. The fund may also invest to a limited extent in options, futures and
other derivatives (financial instruments whose value is based on indices,
commodities or securities).
The fund may invest up to 20% of its assets in cash or in short-term government
or other short-term prime obligations.
Risk management strategies
The fund manages risk by diversifying its investments within the Japanese stock
market among the broad universe of publicly-traded Japanese companies, from the
largest blue-chip companies to smaller companies that are traded in the
over-the-counter market.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives may magnify losses.
As a temporary defensive measure, the fund may invest more than 20% of its
assets in cash or in short-term government or other short-term prime
obligations. In such a case, the fund would not be pursuing, and may not
achieve, its objective.
2
<PAGE>
Main risks
The primary factor affecting this fund's performance is stock market movements
in Japan. Downturns in the Japanese stock markets may contribute to weakness in,
or could have an adverse impact on, the Japanese economy. Smaller companies are
especially sensitive to these factors and may even become valueless. Foreign
investments carry added risks due to the possibility of inadequate or inaccurate
financial information about companies, potential political disturbances and
fluctuations in currency exchange rates. To the extent that investments are
denominated in foreign currencies, adverse changes in the values of foreign
currencies may have a significant negative effect on any returns from these
investments. Moreover, if the portfolio managers' strategy or certain securities
do not perform as expected, the fund could substantially underperform other
mutual funds that invest in Japan or lose money. To the extent that the fund
invests in bonds, the most significant risk is that interest rates will rise,
and the prices of bonds held by the fund will fall in proportion to their
duration (a measure of sensitivity to interest rate movements). It is also
possible that bonds in the fund's portfolio could be downgraded in credit rating
or go into default.
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
current economic condition remains uncertain and unemployment remains relatively
high. In addition, Japan's political regime has entered a period of change in
the 1990s and political uncertainty may add to the risks of investing in Japan.
To the extent the fund invests in small companies, these investments may pose
additional risks. Small companies can be especially sensitive to market shifts
and isolated business difficulties. This is because small companies often serve
niche markets and have limited product lines. They also generally lack cash
reserves and access to capital that allow larger companies to weather difficult
financial times. Small companies as a group, or individual small companies, may
not perform as well as expected. Securities of small companies are often thinly
traded and could be harder to value or sell at a fair price.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
3
<PAGE>
About the Fund
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
[The following information was represented by a bar graph in the printed
materials.]
Total returns for years ended December 31
1989 ........................... 11.63
1990 ...........................-16.36
1991 ........................... 3.11
1992 ...........................-16.74
1993 ........................... 23.64
1994 ........................... 10.03
1995 ........................... -9.07
1996 ...........................-10.92
1997 ...........................-14.40
1998 ........................... 24.29
During the fund's last 10 years of operation, the fund's highest return for a
calendar quarter was 26.98% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -22.44% (the third quarter of 1990).
The fund's year-to-date total return as of March 31, 1999, was 15.73%.
Average annual total returns
For periods ended December 31, 1998 Fund MSCI Japan Index
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One Year 24.29% 5.05%
Five Year -1.05% -3.69%
Ten Year -0.62% -5.33%
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The MSCI Japan Index is a capitalization weighted index (adjusted in U.S.
dollars) of companies in Japan intended to replicate the industry composition of
the local market. The chosen list of stocks include a representative sampling of
large, medium and small capitalization weighted stocks, taking each stock's
liquidity into account.
The returns of the index assume dividend reinvestment net of withholding tax
and, unlike fund returns, do not reflect any fees or expenses.
4
<PAGE>
Fee and expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund.
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Shareholder Fees (fees paid directly from your investment):
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Maximum sales charge (load) imposed on purchases (as % of
offering price) NONE
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Maximum deferred sales charge (load) NONE
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Maximum sales charge (load) imposed on reinvested NONE
dividends/distribution
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Redemption fee (as % of amount redeemed, if applicable) NONE*
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Exchange fee NONE
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Annual Fund Operating Expenses (expenses that are deducted from fund assets):
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Management fee 0.78%
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Distribution (12b-1) fees NONE
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Other expenses 0.48%
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Total annual fund operating expenses 1.26%
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* You may redeem by writing or calling the fund. If you wish to receive your
redemption proceeds via wire transfer, there is a $5 wire service fee. For
additional information, please see "About Your Investment -- Exchanges and
redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000. It assumes a 5% annual return, the
reinvestment of all dividends and distributions and no changes in expenses. The
expenses would be the same whether you sold your shares at the end of each
period or continued to hold them. Actual fund expenses and returns vary from
year to year, and may be higher or lower than those shown.
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One Year $ 128
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Three Years $ 400
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Five Years $ 692
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Ten Years $ 1,523
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5
<PAGE>
Investment adviser
The fund retains the investment management firm of Scudder Kemper Investments,
Inc., (the "Adviser"), 345 Park Avenue, New York, New York, to manage the fund's
daily investment and business affairs subject to the policies established by the
fund's Board of Directors (the "Board"). The Adviser actively manages your
investment in the fund. Professional management can be an important advantage
for investors who do not have the time or expertise to invest directly in
individual securities.
For the fiscal year ended December 31, 1998, the Adviser received an investment
management fee of 0.78% of the fund's average daily net assets on an annual
basis.
Portfolio management
The fund 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.
The following investment professionals are associated with the fund as
indicated:
Joined the
Name and Title Fund Responsibilities and Background
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Seung Kwak 1989 Mr. Kwak joined the Adviser in 1988.
Lead Portfolio Manager Mr. Kwak assumed responsibility for
the fund's investment strategy and
daily operations in 1994 and has
been a member of the portfolio
management team since 1989. He began
his investment career in 1985.
Elizabeth J. Allan 1987 Ms. Allan joined the Adviser in 1987
Portfolio Manager as a portfolio manager. Ms. Allan
helps set the fund's general
investment strategy. She began her
investment career in 1982.
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6
<PAGE>
Year 2000 readiness
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. The 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, such as problems with calculating net asset value and difficulties
in implementing the fund's purchase and redemption procedures. 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 issuers whose securities are held by the fund or on global
markets or economies generally.
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,
annually in December. An additional distribution may be made at a later date, if
necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such 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.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of the fund. If an investment is in the form of
a retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among funds are also taxable
events.
7
<PAGE>
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders regardless of the length of time shareholders have owned shares.
Short-term capital gains and any other taxable income distributions are taxable
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 of 15% on dividends and of 10% on interest under the tax treaty 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.
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount shortly before the date of a distribution because you
may receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss, which may be long-term or short-term, generally depending on how long
you owned the shares.
The fund sends detailed tax information about the amount and type of its
distributions by January 31 of the following year.
The fund may 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 who fail to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Any such withheld amounts may be credited against
the shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
adviser regarding the particular consequences of an investment in the fund.
8
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the fund's
financial performance for the periods indicated. Certain information reflects
financial results for a single fund share. The total return figures represent
the rate that an investor would have earned (or lost) on an investment in the
fund assuming reinvestment of all dividends and distributions. This information
has been audited by PricewaterhouseCoopers LLP, whose report, along with the
fund's financial statements, is included in the annual report, which is
available upon request by calling Japan Fund Specialists at 1-800-53-JAPAN.
The Japan Fund, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998(a) 1997(a) 1996(a) 1995 1994(a)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of -------------------------------------------------------------------
period ....................... $6.77 $8.33 $9.44 $10.50 $10.33
-------------------------------------------------------------------
Income from investment
operations:
Net investment income (loss) ... (.01) (.03) (.03) (.01) (.05)
Net realized and unrealized gain
(loss) on investments ........ 1.65 (1.16) (1.00) (.94) 1.07
-------------------------------------------------------------------
Total from investment operations 1.64 (1.19) (1.03) (.95) 1.02
-------------------------------------------------------------------
Less distributions:
In excess of net investment
income ....................... (.08) (.37) (.08) -- --
From net realized gains on
investment transactions ...... -- -- -- -- (.80)
In excess of net realized gains -- -- -- (.11) (.05)
-------------------------------------------------------------------
Total distributions ............ (.08) (.37) (.08) (.11) (.85)
-------------------------------------------------------------------
-------------------------------------------------------------------
Net asset value, end of period.. $8.33 $6.77 $8.33 $9.44 $10.50
-------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Total Return (%) ............... 24.29 (14.40) (10.92) (9.07) 10.03
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................. 347 265 386 549 586
Ratio of operating expenses to
average daily net assets (%).. 1.26 1.21 1.16 1.21 1.08
Ratio of net investment income
(loss) to average daily
net assets (%) ............... (.14) (.38) (.34) (.24) (.40)
Portfolio turnover rate (%) .... 90.4 96.4 72.6 69.9 74.3
</TABLE>
(a) Based on monthly average shares outstanding during the period.
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9
<PAGE>
About Your Investment
Transaction information
Share price
Brown Brothers Harriman & Co., the fund's fund accounting agent, determines the
net asset value per share of the fund as of the close of regular trading on the
New York Stock Exchange, normally 4 p.m. eastern time, on each day the New York
Stock Exchange is open for trading.
Net asset value per share is calculated by dividing the value of total fund
assets, less all liabilities, by the total number of shares outstanding. Market
prices are used to determine the value of the fund's assets. If a market price
is not readily available for a security or if a security's price is not
considered to be market indicative, that security may be valued by another
method that the Board or its delegate believes accurately reflects fair value.
In those circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
To the extent that the fund invests in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the fund does not price
their shares. As a result, the net asset value of the fund may change at a time
when shareholders are not able to purchase or redeem their shares.
Processing time
All purchase and redemption requests received in good order at the fund's
transfer agent by the close of regular trading on the New York Stock Exchange
are executed at the net asset value per share calculated at the close of trading
that day. All other requests that are in good order will be executed the
following business day.
Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. The fund will normally send
redemption proceeds within one business day following the redemption request,
but may take up to seven business days (or longer in the case of shares recently
purchased by check). For more information, please call 1-800-53-JAPAN.
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 reject or
limit purchases of fund shares (including exchanges) for any reason, including
when there is evidence of a pattern of frequent
10
<PAGE>
purchases and sales made in response to short-term fluctuations in the fund's
share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in the fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to the fund.
The fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
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 at the address indicated on the back cover
of this prospectus.
Other policies
The fund reserves the right to redeem in kind. That is, it may honor redemption
requests with readily marketable fund securities instead of cash. There may be
transaction costs associated with converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
11
<PAGE>
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- please review the
appropriate plan literature. Make checks payable to "The Japan Fund, Inc."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
By regular mail to: The Japan Fund Service Center
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Japan Fund Service Center
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
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By Wire Call 1-800-53-JAPAN for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Scudder Investor Centers to complete your
application with the help of a Scudder representative.
Scudder Investor Centers are located in Boca Raton, Boston,
Chicago, New York and San Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- please review the
appropriate plan literature. Make checks payable to "The Japan Fund, Inc."
- --------------------------------------------------------------------------------
By Mail Send a check with the tear-off stub from your account
statement, or with a letter of instruction including your
account number and the complete fund name, to the
appropriate address listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-53-JAPAN for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Scudder Investor Centers to make an
additional investment in your Scudder fund account. Scudder
Investor Center locations are listed above.
- --------------------------------------------------------------------------------
By Telephone Call 1-800-53-JAPAN for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-53-JAPAN for more
information and an enrollment form.
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12
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investment is $2,500 to establish a new account and $100 to exchange
among existing accounts.
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By Telephone To speak with a service representative, call 1-800-53-JAPAN
from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), The
Scudder Automated Information Line, call 1-800-343-2890 (24
hours a day).
- --------------------------------------------------------------------------------
By Mail or Fax Print or type your instructions and include:
- the name of the fund and class and the account number
you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to
exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions by The Japan Fund Service Center
regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Japan Fund Service Center
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-53-JAPAN
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAILTM, The
Scudder Automated Information Line, call 1-800-343-2890 (24
hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
- --------------------------------------------------------------------------------
By Mail or Fax Send your instructions for redemption to the
appropriate address or fax number above and include:
- the name of the fund and class and account number you
are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
By Automatic If the value of your account is $10,000 or more, you may
Withdrawal Plan arrange to receive automatic cash payments periodically. Call
1-800-53-JAPAN for more information and an enrollment form.
- --------------------------------------------------------------------------------
13
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more detailed
information on fund investments and operations. The Shareholder Services Guide
contains more detailed information about purchases and sales of fund shares. The
semiannual and annual shareholder reports contain a discussion of the market
conditions and the investment strategies that significantly affected the fund's
performance during the last fiscal year, as well as a listing of portfolio
holdings and financial statements. These and other fund documents may be
obtained without charge from the following sources:
- --------------------------------------------------------------------------------
By Telephone Call The Japan Fund Service Center at 1-800-53-JAPAN
or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (and is legally a part of this prospectus).
Investment Company Act file number: 811-1090
[SOY INK LOGO] PRINTED WITH [RECYCLE LOGO] Printed on recycled paper
SOY INK
83-2-59
PR069599
<PAGE>
THE JAPAN FUND, INC.
A No-Load (No Sales Charges) Mutual
Fund That Seeks Long-Term Capital
Appreciation By Investing Primarily in the
Equity Securities of Japanese
Companies
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
- --------------------------------------------------------------------------------
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,
1999, as amended from time to time. A copy of the prospectus 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.
The Annual Report to Shareholders of The Japan Fund, Inc. dated December
31, 1998 is incorporated by reference and is hereby deemed to be part of this
Statement of Additional Information.
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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................................................12
Economic Trends.........................................................13
Industrial Production...................................................14
Energy..................................................................15
Labor...................................................................16
Prices..................................................................16
Balance of Payments.....................................................17
Foreign Trade...........................................................17
SECURITIES MARKETS IN JAPAN...................................................21
PURCHASES AND EXCHANGES AND "BUYING AND SELLING SHARES".......................25
Additional Information About Opening An Account.........................25
Additional Information About Making Subsequent Investments..............25
Additional Information About Making Subsequent Investments by
QuickBuy..............................................................26
Checks..................................................................26
Wire Transfer of Federal Funds..........................................26
Share Price.............................................................27
Share Certificates......................................................27
Other Information.......................................................27
Exchanges...............................................................27
REDEMPTIONS...................................................................28
Redemption by Telephone.................................................28
Redemption By QuickSell.................................................29
Redemption by Mail or Fax...............................................29
Redemption-in-Kind......................................................30
Other Information.......................................................30
FEATURES AND SERVICES OFFERED BY THE FUND.....................................30
The No-Load Concept.....................................................30
THE SCUDDER FAMILY OF FUNDS...................................................33
SPECIAL PLAN ACCOUNTS.........................................................38
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension
Plans for Corporations and Self-Employed Individuals.................38
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations
and Self-Employed Individuals........................................38
Scudder IRA: Individual Retirement Account..............................38
Scudder Roth IRA: Individual Retirement Account.........................39
Scudder 403(b) Plan.....................................................39
Automatic Withdrawal Plan...............................................40
Group or Salary Deduction Plan..........................................40
Automatic Investment Plan...............................................40
Uniform Transfers/Gifts to Minors Act...................................40
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................41
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TABLE OF CONTENTS (continued)
Page
PERFORMANCE AND OTHER INFORMATION.............................................41
Comparison of Fund Performance..........................................42
Taking a Global Approach................................................46
FUND ORGANIZATION.............................................................46
INVESTMENT ADVISORY ARRANGEMENTS..............................................47
Personal Investments by Employees of the Adviser........................49
DIRECTORS AND OFFICERS........................................................50
REMUNERATION..................................................................52
DISTRIBUTOR...................................................................53
TAXES.........................................................................54
United States Federal Income Taxation...................................54
Japanese Taxation.......................................................58
NET ASSET VALUE...............................................................59
ADDITIONAL INFORMATION........................................................60
Experts.................................................................60
Public Official Documents...............................................60
Other Information.......................................................60
FINANCIAL STATEMENTS..........................................................61
APPENDIX
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Investment Objective and Policies
The Japan Fund, Inc. (the "Fund") is a no-load, 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 the 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 investments 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, such as
those of the Japanese government and 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 and cash
equivalents. 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 that the Adviser believes have the
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 for the purpose of
exercising control over management or that would involve promotion or business
management or that would subject the Fund to unlimited liability .
The Fund may also invest up to 30% of its net assets in the equity
securities of Japanese companies that are traded in an over-the-counter market
rather than listed on a securities exchange. These are generally securities of
relatively small or little-known companies that the Fund's national 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, borrow money and issue
bonds, notes and obligations, as permitted by the laws of the state 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
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.
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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 of the Fund
(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 fund 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 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.
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<PAGE>
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
Corporation ("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 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 that
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.
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<PAGE>
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 Adviser 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 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
4
<PAGE>
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 for a variety
of purposes, such as hedging various market risks, managing the effective
maturity or duration of the fixed-income securities in the Fund's portfolio, or
enhancing 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.
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 instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps, or options on currencies or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, Strategic Transactions may also include
new techniques, investments or strategies that are permitted as regulatory
changes occur. 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 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 will not be used
to alter the fundamental investment purposes and characteristics of the Fund and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of 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 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."
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<PAGE>
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 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.
6
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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 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, and for
duration management, risk management purposes and return enhancements. 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 instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of 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 for bona fide hedging, risk management (including duration management) or
other portfolio management and return enhancement 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
7
<PAGE>
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, primarily in order to hedge, or manage the risk of, 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 in a manner
similar 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 generally
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund generally 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
8
<PAGE>
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, index and other 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 will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, 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,
9
<PAGE>
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.
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
10
<PAGE>
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 of 1986, as
amended, (the "Code") for qualification as a regulated investment company. (See
"TAXES.")
Investment Restrictions
The following restrictions may not be changed with respect to the Fund
without the approval of a majority of the outstanding voting securities of the
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (i) 67% of the shares
of the Fund present at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund.
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;
(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 following restrictions are not fundamental and may be changed by the
Fund without shareholder approval, in compliance with applicable law, regulation
or regulatory policy.
The Fund may not, as a nonfundamental policy:
11
<PAGE>
(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.
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.
- ----------
* WHERE FIGURES IN TABLES UNDER THIS CAPTION HAVE BEEN ROUNDED OFF, THE
TOTALS MAY NOT NECESSARILY AGREE WITH THE SUM OF FIGURES.
12
<PAGE>
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, 1998, Japan's
gross domestic product in constant prices increased at an average annual
compound growth rate of 2.1% and 1.1%, respectively. In 1996, the gross domestic
product grew at a high rate of 5.0% in reflection of the front-loading of
housing investment before the consumption tax hike scheduled on April 1, 1997 .
In 1997, the growth rate of gross domestic product slowed to 1.4% mainly due to
a drop off in consumer spending and housing investment in reaction to the
consumption tax hike. In 1998, the gross domestic product decreased by 2.8%
affected by the reduced fixed investment at private sector and continuous
stagnation of consumer spending.
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.
13
<PAGE>
Gross Domestic Product
(In trillions of yen)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GDP at Current Prices 475.4 479.3 483.2 500.3 507.9 495.2
Consumption 323.5 331.9 337.9 347.8 355.9 354.3
Private 278.7 286.2 290.5 299.3 306.4 304.4
Public 44.8 45.7 47.4 48.4 49.5 49.9
Fixed Investment 140.4 137.3 137.6 147.4 144.0 129.8
Private 99.7 96.0 96.3 103.7 104.4 90.9
Public 40.7 41.3 41.3 43.7 39.6 38.9
Change in Inventories 0.6 0.0 0.5 2.4 1.9 1.3
Net Exports of Goods and Services 10.9 10.0 7.1 2.7 6.0 9.8
Exports of Goods and Services 44.2 44.4 45.4 49.7 56.3 55.3
Imports of Goods and Services -33.3 -34.4 -38.3 -47.0 -50.3 -45.5
GDP at Constant (1990) Prices 452.3 455.2 461.9 485.2 492.1 478.3
GDP Deflator (1990=100) 105.1 105.3 104.6 103.1 103.2 103.5
Percentage Increase of GDP
At Current Prices 0.9% 0.8% 0.8% 3.5% 1.5% -2.5%
At Constant Prices 0.3% 0.6% 1.5% 5.0% 1.4% -2.8%
Deflator 0.07% 0.2% -0.6% -1.4% 0.1% 0.3%
Percentage Distribution of GDP
Consumption 68.0% 69.2% 69.9% 69.5% 70.1% 71.5%
Fixed Investment 24.6% 23.3% 23.5% 29.5% 28.4% 26.2%
Change in Inventories 0.2% 0.0% 0.2% 0.5% 0.4% 0.3%
Exports of Goods and Services 9.3% 9.3% 9.4% 9.9% 11.1% 11.2%
Imports of Goods and Services -7.0% -7.2% -7.9% -9.4% -9.9% -9.2%
----- ----- ----- ----- ----- -----
Total GDP 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Source: Economic Planning Agency, Quarterly Report on National Accounts (March
1999).
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 1998 (with 1990 as 100):
14
<PAGE>
INDICES OF INDUSTRIAL PRODUCTION
1990=100
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Japan 91.2 91.8 94.9 97.7 101.9 98.7*
United States 104.6 110.3 115.7 119.8 125.7 129.4***
Germany 95.1 99.0 99.7 99.3 102.1 105.3**
United Kingdom 99.1 104.5 106.7 107.9 109.4 109.7**
France 93.9 97.4 99.0 100.0 103.0 108.2***
Italy 96.5 101.5 107.0 105.3 107.6 109.3**
Canada 101.3 107.8 112.8 114.3 120.3 122.6***
* January 1998 through March 1998
** January 1998 through June 1998
*** January 1998 through September 1998
Source: IMF, International Financial Statistics (January 1999).
The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1990 through 1996:
GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997**
---- ---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Agriculture, Forestry and Fisheries 2.5% 2.4% 2.3% 2.1% 2.1% 1.9% 1.9% n.a.
Mining 0.3 0.2 0.2 0.2 0.2 0.2 0.2 n.a.
Construction 10.1 10.2 10.3 10.8 10.8 10.4 10.6 n.a.
Manufacturing 28.2 28.1 27.1 25.5 24.5 24.7 24.3 n.a.
Electricity, Gas and Water 2.6 2.6 2.7 2.7 2.8 2.8 2.8 n.a.
Wholesale and Retail Trade 13.6 13.7 13.1 12.9 12.7 12.6 12.1 n.a.
Finance and Insurance 5.9 5.5 5.2 4.7 5.2 5.0 4.7 n.a.
Real Estate Transportation, 10.9 10.9 11.5 12.2 12.7 12.9 13.2 n.a.
Communication and Other
Public Utilities 6.6 6.5 6.4 6.4 6.4 6.5 6.7 n.a.
Services 14.8 15.2 16.0 16.7 16.8 17.0 17.5 n.a.
Government Services 7.6 7.5 7.6 7.7 7.9 8.0 8.0 n.a.
Private Non-Profit Institutions 2.0 2.0 2.0 2.1 2.2 2.3 2.3 n.a.
Import Duty 0.6 0.6 0.6 0.6 0.6 0.6 0.6 n.a.
Imputed Interest (5.8) (5.5) (5.4) (4.8) (4.9) (5.0) (4.5) n.a.
Statistical Discrepancy 0.0 (0.1) (0.0) 0.1 0.1 (0.1) (0.3) n.a.
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% n.a.
</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 1999.
Source: Economic Planning Agency, Annual Report on National Accounts (1998).
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.
15
<PAGE>
Japan has worked to reduce its dependence on oil by encouraging energy
conservation and use of alternative fuels. In addition to conservation efforts,
a restructuring of industry, with emphasis shifting from basic industries to
processing and assembly type industries, has also contributed to the reduction
of oil consumption. Despite Japan's sustained economic growth, crude oil imports
have not increased materially since 1979.
Labor
In 1998, approximately 65 million persons, or approximately 60% of the
Japanese population, were employed, of which approximately 5.3% were employed in
agriculture, forestry and fisheries, 31.5% in mining, construction and
manufacturing and 36.8% in trade, finance, transportation and communication, and
25.9% 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.
In 1992 and 1993, 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 1.0% in 1995, 2.4% in 1996 and 2.3% in 1997. In 1998, despite the
average wage of manufacturers declined for the first time in past 45 years, the
unit labor costs increased 2.7% due to the sharp decline in productivity.
MANUFACTURING
Productivity (#)
Wages (annual percentage change) Unit Labor Costs
----- -------------------------- ----------------
1990 5.3 4.0* 1.2
1991 3.4 2.4* 1.0
1992 1.2 -5.3* 6.9
1993 0.1 -1.7 1.8
1994 2.1 2.5 -0.4
1995 3.3 4.3 -1.0
1996 2.5 5.0 -2.4
1997 2.9 5.3 -2.3
1998 -1.2 -3.8 2.7
Source: Ministry of Labor, Monthly Labor Statistics (March 1999); Productivity
Research Institute, Quarterly Journal of Productivity Statistics. (Wages are for
manufacturers who employ 30 or more persons.)
(#) 1995=100
* 1990=100
Prices
In 1998, the wholesale price index declined by 1.6% and the consumer price
index rose by 0.6%, according to the Bank of Japan's statistics.
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)
1993 1994 1995 1996 1997 1998*
---- ---- ---- ---- ---- -----
Japan 95.0 93.0 92.2 92.3 93.7 92.9
United States 102.3 103.6 107.3 109.8 109.8 107.4
Germany (`91=100) 101.6 102.2 104.0 103.6 104.7 104.8**
United Kingdom 113.0 115.8 120.7 123.9 125.2 126.0
France (#) 94.4 95.4 101.2 98.5 97.9 97.5
Italy 112.9 117.2 129.2 134.0 134.2 N.A.
Canada 103.0 109.3 117.4 117.9 118.9 118.7
(#) Intermediate Industrial Goods
* January 1998 through September 1998
** January 1998 through June 1998
Source: IMF, International Financial Statistics (January 1999).
COMPARATIVE CONSUMER PRICE INDICES
(1900=100)
1993 1994 1995 1996 1997 1998*
---- ---- ---- ---- ---- -----
Japan 106.4 107.1 107.0 107.2 109.0 109.5
United States 110.6 113.4 116.6 120.0 122.9 124.5
Germany (`91=100) 109.7 112.7 114.8 116.5 118.6 119.7
United Kingdom 111.5 114.3 118.2 121.1 124.9 128.7
France 107.9 109.7 111.6 113.9 115.2 116.0
Italy 116.7 121.4 127.8 132.8 135.5 138.0
Canada 109.2 109.4 111.8 113.5 115.4 116.4
* January 1998 through September 1998
Source: IMF, International Financial Statistics (January 1999).
Balance of Payments
During the 1980s, Japan recorded increased trade surpluses and became the
world's major creditor nation. In 1998, Japan registered a surplus of
(Y)15,860.8 billion ($120.9 billion) in its current account. This surplus was
predominantly due to a surplus of (Y)15,993.2 billion ($121.9 billion) in its
trade account.
In 1998, Japan registered an outflow of (Y)17,135.5 billion ($130.6
billion) in its capital and financial 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, 1998, exports and imports represented approximately 11.2% and 9.2%,
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 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. In
1998, the terms of trade improved slightly mainly because of lower import
prices.
FOREIGN TRADE OF JAPAN
(1995=100)
<TABLE>
<CAPTION>
Terms of
Value Index Volume Index Unit Value Index Trade
----------- ------------ ---------------- -----
Exports Imports Exports Imports Exports Imports
<S> <C> <C> <C> <C> <C> <C> <C>
1992 103.6 93.6 97.1 75.4 106.7 124.1 85.9
1993 96.8 85.0 95.4 79.0 101.5 107.6 94.3
1994 97.5 89.1 96.9 89.5 100.7 99.5 101.2
1995 100.0 100.0 100.0 100.0 100.0 100.0 100.0
1996 107.7 120.4 101.2 105.6 106.4 114.0 93.3
1997 122.7 129.8 113.1 107.4 108.4 120.9 89.7
1998 121.9 116.2 111.6 101.7 109.2 114.3 95.6
</TABLE>
Source: Ministry of Finance, The Summary Report on Trade of Japan (December
1998).
18
<PAGE>
The following table sets forth the composition of Japan's exports and
imports by major commodity groups:
COMPOSITION OF JAPAN'S EXPORTS AND IMPORTS
<TABLE>
<CAPTION>
Japan's Exports 1992 1993 1994 1995 1996 1997 1998
- --------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Textile Products 2.5% 2.3% 2.1% 2.0% 2.1% 2.0% 1.9%
Metals & Metal Products 6.3 6.4 6.1 6.5 6.2 6.4 6.3
Machinery & Equipment:
Ships 2.3 2.8 2.9 2.4 2.2 2.2 2.5
Motor Vehicles 17.8 16.2 14.4 12.0 12.3 14.0 15.4
TV & Radio Receivers 1.6 1.4 1.2 1.0 0.9 0.8 1.0
Motorcycles 1.1 1.2 1.0 0.9 1.0 0.9 1.2
Scientific, medical &
optical instruments 4.0 3.9 4.0 4.2 4.2 4.3 4.2
Other 48.8 50.5 52.5 54.2 53.5 51.5 41.1
Total 75.6 76.0 76.0 74.7 74.1 73.7 73.6
Chemicals 5.6 5.6 6.0 6.8 7.0 7.1 7.0
Foods & Beverages 0.6 0.6 0.5 0.5 0.5 0.5 0.5
Other Exports 9.4 9.6 9.3 9.5 10.1 10.3 10.7
----- ----- ----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
<CAPTION>
Japan's Imports 1992 1993 1994 1995 1996 1997 1998
- --------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Foods & Beverages 16.0% 16.4% 17.0% 15.2% 14.5% 13.6% 14.8
Textile Materials 0.9 0.6 0.7 0.5 0.3 0.5 1.4
Chemicals 7.4 7.5 7.4 7.3 6.7 6.9 7.4
Mineral Fuels:
Petroleum 12.9 11.6 10.1 8.9 9.6 10.3 8.0
Coal 2.6 2.5 2.1 2.0 2.0 2.0 2.2
Other 7.1 6.2 5.2 5.0 5.7 6.1 5.1
Total 22.6 20.3 17.4 15.9 17.3 18.4 15.3
Metal Ores & Scrap 3.3 2.4 2.7 2.3 2.0 2.2 2.2
Machinery & Equipment 18.4 19.4 21.7 26.3 27.5 28.0 30.4
Other Imports 31.4 32.9 38.1 33.5 31.7 30.4 28.5
----- ----- ----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
</TABLE>
Source: Ministry of Finance, The Summary Report -- Trade of Japan (December
1998).
19
<PAGE>
The following table indicates the geographic distribution of Japan's trade
in recent years.
GEOGRAPHIC DISTRIBUTION OF JAPAN'S EXPORTS AND IMPORTS
<TABLE>
<CAPTION>
Japan's Exports 1992 1993 1994 1995 1996 1997 1998
- --------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Developed Areas
U.S.A 28.2% 29.2% 29.7% 27.3% 27.2% 27.8% 30.5%
EC 18.4 15.7 14.5 15.9 15.3 15.6 18.4
Australia 2.1 2.1 2.2 1.8 1.8 1.9 2.1
Canada 2.1 1.7 1.5 1.3 1.2 1.4 1.6
Others 3.6 3.0 2.8 1.7 1.8 1.7 2.5
----- ----- ----- ----- ----- ----- -----
Subtotal 54.4 51.7 50.7 48.0 47.3 48.4 55.1
Developing Areas
S.E. Asia 30.7% 32.5% 35.0% 38.3% 38.3% 36.5% 29.5%
Middle East 4.5 3.7 2.8 2.3 2.7 2.8 3.2
Latin America 4.6 4.7 4.7 4.4 4.4 5.0 5.4
Africa 1.2 1.2 1.0 0.9 0.7 0.6 1.0
Others 0.3 0.4 0.4 0.5 0.5 0.6 0.0
----- ----- ----- ----- ----- ----- -----
Subtotal 41.3 42.5 43.9 46.4 41.6 45.5 39.1
Former Soviet Union 0.3% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3%
China 3.5 4.8 4.7 5.0 5.3 5.2 5.2
Others 0.5 0.5 0.4 0.3 0.6 0.6 0.3
----- ----- ----- ----- ----- ----- -----
Subtotal 4.3 5.7 5.4 5.6 6.2 6.1 5.8
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
<CAPTION>
Japan's Imports 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Developed Areas
U.S.A 22.4% 23.0% 22.8% 22.4% 22.7% 22.3% 23.9%
EC 13.4 12.5 12.9 14.5 14.1 13.3 13.9
Australia 5.3 5.1 5.0 4.3 4.1 4.3 4.6
Canada 3.3 3.4 3.2 3.2 2.9 2.9 2.7
Others 4.5 4.1 4.3 3.2 2.9 1.8 3.5
----- ----- ----- ----- ----- ----- -----
Subtotal 48.9 48.1 48.2 47.6 46.7 45.8 48.6
Developing Areas
S.E. Asia 24.7% 25.2% 24.7% 25.3% 25.1% 23.9% 23.9%
Middle East 12.5 11.3 10.2 9.4 10.1 11.4 9.1
Latin America 3.7 3.5 3.5 3.5 3.3 3.4 3.3
Africa 0.7 0.8 0.6 0.6 0.6 0.6 0.6
Others 0.4 1.1 1.2 1.7 1.2 1.0 0.0
----- ----- ----- ----- ----- ----- -----
Subtotal 42.0 41.9 40.2 40.0 40.3 40.3 36.8
Former Soviet Union 1.0% 1.2% 1.3% 1.4% 1.1% 1.3% 1.0%
China 7.3 8.5 10.0 10.7 11.6 12.4 13.2
Others 0.8 0.8 0.9 0.3 0.3 0.2 0.4
----- ----- ----- ----- ----- ----- -----
Subtotal 9.1 10.5 12.2 12.4 13.0 13.9 14.6
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
</TABLE>
Source: Ministry of Finance, The Summary Report -- Trade of Japan (December
1998).
20
<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 1989 through 1998.
<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>
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
1998 17264.34 12879.97 13842.17 1300.30 980.11 1086.99 842.05 610.99 724.99
</TABLE>
* Tokyo Stock Exchange, Annual Securities Statistics (1998); Monthly
Statistics Report (Dec. 1989, 1990, 1991, 1993, 1994, 1995, 1996, 1997,
1998).
** Annual Statistics of OTC Stocks (1998), 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.
21
<PAGE>
The following tables present 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>
1993 1994 1995
TSE OTC TSE OTC TSE OTC
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Market Capitalization
(in billions of yen) 324,357 11,228 358,392 14,558 365,716 14,535
Daily Average Trading
Volume (000 shares) 353,394 4,374 342,163 8,994 369,613 9,763
Number of Listed Companies 1,667 477 1,689 564 1,714 678
<CAPTION>
1996 1997 1998
TSE OTC TSE OTC TSE OTC
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Market Capitalization
(in billions of yen) 347,578 14,904 280,930 9,228 275,181 7,742
Daily Average Trading
Volume (000 shares) 405,549 9,766 439,049 5,614 498,730 5,035
Number of Listed Companies 1,766 762 1,805 834 1,838 856
</TABLE>
Source: Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1999).
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:
22
<PAGE>
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
1998 26.0 5.7 27.6 36.2 4.5
Source: Tokyo Stock Exchange, Annual Securities Statistics (1998).
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
1998 103.1 -6.3
* Rates of return in yen calculated on basis of closing prices and average
dividends for each year.
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1992, 1993, 1994,
1995, 1996, 1997, 1998); Monthly Statistics Report (Dec. 1992, 1993, 1994, 1995,
1996, 1997, 1998).
Following is a statistical comparison between the Tokyo Stock Exchange
(both sections) and the New York Stock Exchange (the "Exchange") for the six
years ending 1998:
1993 1994 1995
TSE NYSE TSE NYSE TSE NYSE
--- ---- --- ---- --- ----
Number of Companies 1667 2362 1689 2570 1714 2675
Aggregate Market Value
In Billions of Dollars* 2898 4545 3590 4448 3557 6000
As Percentage of GDP 68 72 75 66 76 83
Turnover Ratio (%) 26 50 25 51 27 59
23
<PAGE>
1996 1997 1998
TSE NYSE TSE NYSE TSE NYSE
--- ---- --- ---- --- ----
Number of Companies 1766 2907 1805 3047 1838 3114
Aggregate Market Value
in Billions of Dollars* 2996 7300 2162 9413 2098 10300
As Percentage of GDP 69 96 56 116 56 119
Turnover Ratio (%) 29 63 31 69 35 76
* Calculated on the basis of the yen conversion rate published by the IMF.
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1998).
The following tables, compiled by Morgan Stanley Capital International,
set forth the size of the Japanese equity market in comparison with that of
other major equity markets for the years ending December 31, 1994, 1995, 1996,
1997 and 1998.
EQUITY STOCK MARKETS OF THE WORLD
(dollars in billions)
<TABLE>
<CAPTION>
December 1994 December 1995 December 1996
$ % $ % $ %
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
United States 4626.3 36.6 6338.0 41.9 7,835.9 45.1
Japan 3624.5 28.7 3582.7 23.7 3,071.0 17.7
United Kingdom 1145.0 9.1 1354.3 9.0 1,740.1 10.0
Canada 288.0 2.3 333.4 2.2 463.6 2.7
Federal Republic of Germany 476.9 3.8 579.5 3.8 648.3 3.7
Australia 212.4 1.7 245.4 1.6 306.4 1.8
Switzerland 284.0 2.2 401.6 2.7 406.6 2.3
France 444.3 3.5 504.5 3.3 600.8 3.5
Netherlands 224.4 1.8 304.3 2.0 393.4 2.3
Hong Kong 241.2 1.9 274.4 1.8 393.4 2.3
Other 1072.8 8.5 1197.2 7.9 1,531.9 8.8
------ --- ------ --- ------- ---
Total $12,639.8 100.00% $15,115.3 100.00% $17,391.4 100.00%
<CAPTION>
December 1997 December 1998
$ % $ %
--- --- --- ---
<S> <C> <C> <C> <C>
United States 8,607.4 47.2 11,721.5 50.7
Japan 2,287.8 12.5 2,447.5 10.6
United Kingdom 2,097.6 11.5 2,346.2 10.1
Canada 543.3 3.0 513.2 2.2
Federal Republic of Germany 825.2 4.5 1,181.1 5.1
Australia 284.7 1.6 326.5 1.4
Switzerland 579.3 3.2 696.7 3.0
France 677.9 3.7 982.6 4.2
Netherlands 358.3 2.0 578.4 2.5
Hong Kong 340.7 1.9 347.9 1.5
Other 1,630.1 8.9 1994.6 8.6
------- --- ------ ---
Total $18,232.3 100.00% $23,136.2 100.00%
</TABLE>
Source: Morgan Stanley Capital International (Quarterly 1995:1, 1996:1, 1997:1,
1998:1, 1999:1).
24
<PAGE>
PURCHASES AND EXCHANGES AND "BUYING AND SELLING SHARES"
(See "About Your Investment" and "Buying and Selling
Shares" 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. (the "Distributor") by letter, fax, TWX or
telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Advisor or any affiliated
organization and their immediate families, members of the NASD, and banks may
open an account by wire. These investors must call 1-800-225-5163 to get an
account number. During the call, the investor will be asked to indicate the Fund
name, amount to be wired ($2,500 minimum), name of bank or trust company from
which the wire will be sent, the exact registration of the new account, the
Taxpayer Identification or Social Security number, address and telephone number.
The investor must then call its bank to arrange a wire transfer to The Scudder
Funds, State Street Bank and Trust Company, Boston, MA 02110, ABA Number
011000028, DDA Account Number: 9903-5552. The investor must send the completed
and signed application to the Fund promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500 ($1,000
for fiduciary accounts such as IRAs, and custodial accounts such as Uniform Gift
to Minor Act (UGMA) and Uniform Trust to Minor Act (UTMA) accounts), which
amount may be changed by the Board of Directors. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (paid to the Fund) for any
non-fiduciary/custodial account without an AIP in place and a
balance of less then $2,500; and
o redeem all shares in Fund accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of
the account. The Fund will mail the proceeds of the redeemed account
to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Family of Funds of $100,000 or more, as
well as group retirement and certain other accounts, will not be subject to a
fee or automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three (3) business
days. If payment is not received within that time, the order is subject to
cancellation. 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
25
<PAGE>
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 that 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 worth of shares. To purchase
shares by QuickBuy, shareholders should call before the close of regular trading
on the Exchange, normally 4 p.m. Eastern Standard 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 Scudder Service Corporation (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 for $100 or more 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 of the Fund are purchased by a check that proves to be
uncollectible, the Fund reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Fund shall have the authority, as agent of the shareholder, to
redeem shares in the account to reimburse the Fund or the principal underwriter
for the loss incurred. Investors whose orders have been canceled may be
prohibited from or restricted in placing future orders in the Fund or any of the
other funds in the Scudder Family of Funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on 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 the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge for
the service. Presently, the Distributor pays a fee for receipt by the Brown
Brothers Harriman & Company (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 include 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 the Custodian is not open to receive such federal
funds on behalf of the Fund.
26
<PAGE>
Share Price
Purchases will be filled without sales charge at the net asset value next
computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading 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 the Distributor,
it is the responsibility of the member broker, rather than the Fund, to forward
the purchase order to the Transfer Agent by the close of regular trading on the
Exchange.
Share Certificates
Due to the desire of Fund management to afford ease of redemption,
certificates will not be issued to indicate ownership in the Fund. Share
certificates now in a shareholder's possession may be sent to the Transfer Agent
for cancellation and credit to such shareholder's account. Shareholders who
prefer may hold the certificates in their possession until they wish to exchange
or redeem such shares.
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 Directors 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 Board of Directors and the Distributor may suspend or
terminate the offering of shares of the Fund at any time for any reason.
The Tax Identification Number section of the application must be completed
when opening an account. Applications and purchase orders without a correct
certified Tax Identification Number and certain other certified information
(e.g., from exempt organizations, certification of exempt status) will be
returned to the investor. The Fund reserves the right, following 30 days'
notice, to redeem all shares in accounts without a correct 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.
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 Fund 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 "Exchanges and redemptions -- To exchange shares" 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 "Transaction information --
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 shares of the
Fund 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
27
<PAGE>
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 Fund 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 Fund
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.
REDEMPTIONS
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.
28
<PAGE>
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. 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, normally 4:00 p.m. Eastern Standard Time, 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.
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 to which the redemption proceeds will be credited.
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 a 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 certificates 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.
29
<PAGE>
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 1940 Act as a result of which the Fund is obligated to
redeem shares, with respect to any one shareholder during any 90-day period,
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund at the beginning of the period. The tax consequences to a redeeming
shareholder are the same whether the shareholder receives cash or securities in
payment for his shares.
If redemption payment is made in portfolio securities, the redeeming
shareholder will incur brokerage commissions and Japanese sales taxes in
converting those securities into cash. In addition, the conversion of securities
into cash may expose the shareholder to stock market risk and currency exchange
risk.
If a shareholder receives portfolio securities upon redemption of his Fund
shares, he may request that such securities either (1) be delivered to him or
his designated agent or (2) be liquidated on his behalf and the proceeds of such
liquidation (net of any brokerage commissions and Japanese sales taxes) remitted
to him.
Other Information
All redemption requests must be directed to the Fund's Transfer Agent.
Redemption requests that are delivered to the Fund rather than to the Fund's
Transfer Agent will be forwarded to the Transfer Agent, and processed at the
next calculated NAV after receipt by the Transfer Agent.
The value of shares redeemed or repurchased may be more or less than the
shareholder's cost depending on the net asset value at the time of redemption or
repurchase. The Fund does not impose a redemption or repurchase charge.
Redemption of shares, including an exchange into another fund in the Scudder
Family of Funds, may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES")
Shareholders who wish to redeem shares from Special Plan Accounts should
contact the employer, trustee or custodian of the Plan for the requirements.
FEATURES AND SERVICES OFFERED BY THE FUND
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of mutual
fund fee structures, and of how Scudder distinguishes its Scudder Family of
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.
30
<PAGE>
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 Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase no-load to
distinguish Scudder funds and classes from other no-load 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 Family of Funds 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.
================================================================================
No-Load Fund
Scudder 8.50% Load Load Fund with with 0.25%
Years No-Load 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
================================================================================
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://www.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.
The Adviser 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 -- The Adviser 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.
The Adviser'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. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
31
<PAGE>
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
"Purchases" 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 "Purchases" in the prospectus.
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.
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.
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<PAGE>
THE SCUDDER FAMILY OF FUNDS
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 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.
- ----------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
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 high income while managing
its portfolio in a way that is consistent with maintaining a high degree
of stability of shareholders' capital. It does this by investing mainly in
bonds with short remaining maturities.
Scudder GNMA Fund seeks to provide high income. It does this by investing
mainly in "Ginnie Maes": mortgage-backed securities that are issued or
guaranteed by the Government National Mortgage Association
(GNMA).
Scudder Income Fund seeks to provide high income while managing its
portfolio in a way that is consistent with the prudent investment of
shareholders' capital. It does this by using a flexible investment program
that emphasizes high-grade bonds.
Scudder Corporate Bond Fund seeks to provide high income. It does this by
investing mainly in corporate bonds.
Scudder High Yield Bond Fund seeks to provide high income and,
secondarily, capital appreciation . It does this by investing mainly in
lower rated, higher yielding corporate bonds, often called junk bonds.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
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
investment approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity securities.
Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.
Scudder Select 500 Fund seeks to provide long-term growth and income
through investment in selected stocks of companies in the S&P 500 Index.
Scudder 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.
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<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 Select 1000 Growth Fund seeks to provide long-term growth of
capital through investment in selected stocks of companies in the Russell
1000 Growth Index.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
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.
GLOBAL EQUITY
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 Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
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.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign companies
with high growth potential.
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.
- ----------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
36
<PAGE>
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.
INDUSTRY SECTOR FUNDS
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.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of capital
on an after-tax basis through investment primarily in undervalued stocks
of small U.S. 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.
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<PAGE>
SPECIAL PLAN ACCOUNTS
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.
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 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 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 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.)
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<PAGE>
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
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 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 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 qualified higher education expenses.
An individual with an income of $100,000 or less (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
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<PAGE>
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
Code. In general, employees of tax-exempt organizations described in Section
501(c)(3) of the 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 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 -- To sell
shares" 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 Fund 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 Fund 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 and 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 Fund and
its agents reserve the right to establish a maintenance charge in the future
depending on the services required by the investor.
The Fund 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.
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The Fund 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.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
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 any such 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
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:
T = average annual total return
P = a hypothetical initial payment of $1,000
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 12/31/98
One Year Five Years Ten Years
-------- ---------- ---------
24.29% - 1.05% - 0.62%
Cumulative Total Return is the compound rate of return on a hypothetical initial
investment of $1000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions were reinvested in Fund shares.
Cumulative total return is calculated by finding the compound rates of return of
hypothetical investment over such period, according to the following formula
(cumulative total return is then expressed as a percentage):
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<PAGE>
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
Cumulative Total Return for periods ended 12/31/98
One Year Five Years Ten Years
-------- ---------- ---------
24.29% - 5.16% - 6.02%
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.
The index used in the risk return summary of the Fund's prospectus is
different from that used in the Fund's annual report and has been selected
because it is believed to better represent the securities and markets in which
the Fund typically invests. The Fund intends to change the index used in the
Fund's next annual report to conform to that used in the risk return summary of
the prospectus.
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<PAGE>
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 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 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, Directors and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
Government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity,
43
<PAGE>
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.
44
<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,
which 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.
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.
45
<PAGE>
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 United States 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
The Fund was incorporated under the laws of the State of Maryland in 1961.
The authorized capital stock of the Fund consists of 600,000,000 shares of
a par value of $.33 1/3 each -- all of one class and all having equal rights as
to voting, redemption, dividends and liquidation. All shares issued and
outstanding are fully paid and non-assessable, transferable, and redeemable at
net asset value at the option of the shareholder. Shares have no preemptive or
conversion rights.
The shares of the Fund have non-cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of directors
can elect 100% of the directors if they choose to do so, and, in such event, the
holders of the remaining less than 50% of the shares voting for the election of
directors will not be able to elect any person or persons to the Board of
Directors.
To the knowledge of the Fund, no person is a control person of the Fund
within the meaning ascribed to such term under the Securities Act of 1933, as
amended.
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<PAGE>
As of April 1, 1999, all Directors and Officers of the Fund as a group
owned beneficially (as that term is defined in Section 13(d) of the Securities
Exchange Act of 1934) less than 1% of the shares of the Fund.
As of April 1, 1999, 3,488,736 shares in the aggregate, 7.02% of the
outstanding shares of the Fund, were held in the name of National Financial
Services Co. (for the exclusive benefit of it's customers), One World Financial
Center, 200 Liberty Street, New York, NY, 10281, who may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the best of the Fund's knowledge, as of April 1, 1999, no person owned
beneficially more than 5% of the Fund's outstanding shares except as stated
above.
INVESTMENT ADVISORY ARRANGEMENTS
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.
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, Value Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Global/International Fund, Inc., Scudder Global High
Income Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder
International Fund, Inc., 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, The Argentina Fund, Inc., The
Brazil Fund, Inc., The Korea Fund, Inc. and The Japan 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 InvestmentLink(SM) Program. Scudder
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA
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<PAGE>
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
InvestmentLink(SM) Program will be a customer of Scudder (or of a subsidiary
thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLink(SM) 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 transaction between Scudder and Zurich resulted in the assignment of
the Fund's investment management agreement with Scudder, as a result, this
agreement was deemed to have been assigned and, therefore terminated at the
consummation of the transaction. In anticipation of the transaction, however, a
new investment management agreement between the Fund and the Adviser was
approved by the Fund's Board of Directors. At the special meetings of the Fund's
shareholders held on October 16, 1997, the shareholders also approved the
proposed new investment management agreement. The new investment management
agreement became effective as of December 31, 1997. On September 7, 1998, the
businesses of Zurich (including Zurich's 70% interest in the Adviser) and the
financial services businesses of B.A.T Industries p.c. ("B.A.T") were combined
to form a new global insurance and financial services company known as Zurich
Financial Services Group (the "September 1998 Transaction"). By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of the September 1998 Transaction, the Fund's existing
investment management agreement with the Adviser was again deemed to have been
assigned and, therefore, terminated. The Board of Directors approved a new
investment management agreement (the "Agreement") with the Adviser, which is
substantially identical to the investment management agreements dated December
31, 1997, except for the dates of execution and termination. The Agreement
became effective on September 7, 1998 and was approved at a special shareholder
meeting held on December 11, 1998.
The Agreement dated September 7, 1998 was approved by the Fund's Board of
Directors on July 9, 1998. The Agreement will continue in effect until September
30, 1999 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 by a
vote either of the Fund's Board of 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' 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 Code 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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<PAGE>
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 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.
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DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Underwriter,
Scudder Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
- --------------------- ------------------ ---------------------- --------------------------
<S> <C> <C> <C>
Henry Rosovsky (71)* Chairman of the Board Professor, ___
Harvard University and Director Harvard University
17 Quincy Street
Cambridge, MA 02138
Lynn Birdsong (52)# President Managing Director, Senior Vice President
Scudder Kemper
Investments, Inc.
William L. Givens (69) Director President, ___
Twain Associates, Inc. Twain Associates
553 Boylston Street
Brookline, MA 02146
John F. Loughran (67) Director Retired Senior Adviser for ___
711 Silvergate Avenue Asia Pacific to J.P.
Point Loma Morgan & Co., Inc.
San Diego, CA 92106
Yoshihiko Miyauchi (63) 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 (60) 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 (71)@# Director Advisory Managing ___
Director, Scudder Kemper
Investments, Inc.
Hiroshi Yamanaka (86) Director Adviser to the Board, ___
Meiji Mutual Life The Meiji Mutual Life
Insurance Company Insurance Company
2-1-1, Marunouchi,
Chiyoda-ku
Tokyo, Japan
William H. Gleysteen, Jr. (72) Honorary Director Consultant ___
4937 Crescent Street
Bethesda, MD 20816
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Position with Underwriter,
Scudder Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
- --------------------- ------------------ ---------------------- --------------------------
<S> <C> <C> <C>
Jonathan Mason (83) Honorary Director Retired First Vice ___
12092 Longwood Green Drive President Prudential-Bache
West Palm Beach, FL 33414 Securities, Inc.
James W. Morley (77) Honorary Director Professor of Political ___
145 Piermont Road Science
Closter, NJ 07624 Emeritus
Columbia University
Robert G. Stone, Jr. (76) Honorary Director Chairman of the Board ___
Kirby Corporation and Director,
405 Lexington Ave, 39th Fl. Kirby Corporation
New York, NY 10174
Shoji Umemura (79)* Honorary Director Board Counselor, ___
The Nikko Securities Co., Ltd. The Nikko Securities Co.,
3-1-1, Marunouchi, Ltd.
Chiyoda-ku
Tokyo, Japan
Elizabeth J. Allan (45)# Vice President Senior Vice President, ___
Scudder Kemper
Investments, Inc.
William E. Holzer (48)# Vice President Managing Director, ___
Scudder Kemper
Investments, Inc.
Thomas W. Joseph (59)+ Vice President Senior Vice President, Director, Vice President,
Scudder Kemper Treasurer and Assistant
Investments, Inc. Clerk
Seung K. Kwak (37)# Vice President Managing Director, ___
Scudder Kemper
Investments, Inc.
Miyuki Wakatsuki (62) Vice President General Manager, ___
17-9, Nihonbashi-Hakozakicho Japan Fund Office,
Chuo-Ku Nikko International
Tokyo 103, Japan Capital Management Co.,
Ltd.
Gina Provenzano (56)# Vice President and Vice President, ___
Treasurer Scudder Kemper
Investments, Inc.
Kathryn L. Quirk (45)# Vice President and Managing Director, Director, Senior Vice
Secretary Scudder Kemper President, Chief Legal
Investments, Inc. Officer and Assistant Clerk
Maureen E. Kane (37)+ Assistant Secretary Vice President, ___
Scudder Kemper
Investments, Inc.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Position with Underwriter,
Scudder Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
- --------------------- ------------------ ---------------------- --------------------------
<S> <C> <C> <C>
John R. Hebble (40)+ Assistant Treasurer Senior Vice President, ___
Scudder Kemper
Investments, Inc.
</TABLE>
* 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.
** 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 are 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, 1998, total expenses were
$206,665 of which $152,174 were fee related and $54,491 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 annual
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 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.
52
<PAGE>
The following table shows the aggregate compensation received by each
unaffiliated director during 1998 from The Japan Fund and from all Scudder funds
as a group. In 1998, the Directors of the Fund met 5 times.
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Accrued As Benefits From the Fund
Aggregate Part of Fund Upon and Fund
Name of Director Compensation* Expenses Retirement Complex**
- ---------------- ------------- -------- ---------- ---------
William L. Givens 17,750 4,499 6,000 17,750 (1 fund)
William H.
Gleysteen, Jr. 123,200 6,208 6,000 127,875 (15 funds)
John F. Loughran 0 5,295 6,000 0 (1 fund)
Yoshihiko Miyauchi 10,505 2,535 6,000 10,505 (1 fund)
William V. Rapp 14,750 2,880 6,000 14,750 (1 fund)
Henry Rosovsky 24,750 2,906 6,000 24,750 (1 fund)
Hiroshi Yamanaka 6,000 7,726 6,000 6,000 (1 fund)
Tristan E. Beplat
Honorary Director 0 0 0 0 (1 fund)
Allan Comrie
Honorary Director 5,196 4,496 5,196 5,196 (1 fund)
Jonathan Mason
Honorary Director 6,000 6,365 6,000 6,000 (1 fund)
James W. Morley
Honorary Director 7,000 5,663 6,000 7,000 (1 fund)
Robert G. Stone, Jr.
Honorary Director 8,000 5,718 6,000 8,000 (1 fund)
* Does not include pension or retirement benefits.
** Does not include pension or retirement benefits accrued.
DISTRIBUTOR
The Fund has an underwriting agreement with Scudder Investor Services,
Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Adviser. This
underwriting agreement dated September 7, 1998 will remain in effect until
October 31, 1999 and from year to year thereafter only if its continuance is
approved annually by a majority of the Fund's Board of Directors who are
non-interested persons of any such party and by vote of a majority of the Fund's
Board of Directors or a majority of the outstanding voting securities of the
Fund. The underwriting agreement was ratified by the Fund's Board of Directors
on October 15, 1998.
Under the underwriting agreement with the Distributor, the Fund is
responsible for: the payment of all fees and expenses in connection with the
preparation and filing with the SEC of the Fund's registration statement and
prospectuses and any amendments and supplements thereto; the registration and
qualification of shares for sale in the various jurisdictions, including
registering the Fund as a broker/dealer in various jurisdictions, as required;
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
issuance 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.
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
53
<PAGE>
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
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 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, U.S. 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 U.S. Government securities or securities of other regulated
investment companies) or in any issuers of the same industry that are controlled
by the Fund. The Fund anticipates that, in general, its foreign currency gains
will be directly related to its principal business of investing in stock and
securities.
Qualification and election as a "regulated investment company" involve no
supervision of investment policy or management by any government agency. As a
regulated investment company, the Fund generally will not be subject to U.S.
federal income tax on its net investment income and net long-term and short-term
capital gains, if any, that it distributes to its shareholders, provided that at
least 90% of its "investment company taxable income" (determined without regard
to the deduction for dividends paid) is distributed or deemed distributed. The
Fund will generally be subject to tax at regular U.S. federal corporate income
tax rates on any income or gains which are not treated as distributed and, under
certain circumstances, in respect of investments in passive foreign investment
companies as described below. Furthermore, the Fund will also be subject to a
U.S. federal corporate income tax with respect to distributed amounts in any
year that it fails to qualify as a regulated investment company or fails to meet
the applicable distribution requirement. Although all or a portion of the Fund's
taxable income (including any net capital gains) for a calendar year may be
distributed in January of the following year, such a distribution may be treated
for U.S. federal income tax purposes as having been received by shareholders
during the calendar year. In addition, the Fund intends to make sufficient
distributions in a timely manner in order to ensure that it will not be subject
to the 4% U.S. federal excise tax on certain undistributed income of regulated
investment companies.
54
<PAGE>
The Fund generally intends to distribute all of its net investment income,
net short-term capital gains and net long-term capital gains (which consist of
net long-term capital gains in excess of net short-term capital losses) in a
timely manner. If any net capital gains are retained by the Fund for
reinvestment, requiring federal income taxes to be paid thereon by the Fund, the
Fund will elect to treat such capital gains as having been distributed to
shareholders. As a result, each shareholder will report such capital gains as
long-term capital gains, will be able to claim his share of U.S. federal income
taxes paid by the Fund on such gains as a credit or refund against his own U.S.
federal income tax liability and will be entitled to increase the adjusted tax
basis of his Fund shares by the difference between his pro rata share of such
gains and the related credit or refund.
The Fund may invest in shares of certain foreign corporations that 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 that 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.
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 20% 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).
55
<PAGE>
Shareholders electing to receive distributions in the form of additional
shares will be treated for U.S. federal income tax purposes as receiving a
distribution in an amount equal to the fair market value, determined as of the
distribution date, of the shares received and will have a cost basis in each
share received equal to the fair market value of a share of the Fund on the
distribution date.
All distributions of net investment income and net capital gains, whether
received in shares or in cash, must be reported by each shareholder on his U.S.
federal income tax return. A distribution will be treated as paid during a
calendar year if it is declared by the Fund in October, November or December of
the year to holders of record in such a month and paid by January 31 of the
following year. Such distributions will be taxable to shareholders as if
received on December 31 of such prior year, rather than in the year in which the
distributions are actually received.
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 20% if the shareholder's period for the
shares is more than 12 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 purposes 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.
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
56
<PAGE>
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 that 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 the amounts distributed to them as
part of their pro rata portion of such taxes paid.
Backup Withholding. The Fund will be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to shareholders who
fail to provide the Fund with their correct Taxpayer Identification Number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
other shareholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against a shareholder's U.S. federal income tax liability.
Foreign Shareholders. A "Foreign Shareholder" is a person or entity that, for
U.S. federal income tax purposes, is a nonresident alien individual, a foreign
corporation, a foreign partnership, or a nonresident fiduciary of a foreign
estate or trust. If a distribution of the Fund's net investment income and net
short-term capital gains to a Foreign Shareholder is not effectively connected
with a U.S. trade or business carried on by the investor, such distribution will
be subject to withholding tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Foreign Shareholders may be subject to an increased U.S. federal income
tax on their income resulting from the Fund's election (described above) to
"pass-through" amounts of foreign taxes paid by the Fund, but may not be able to
claim a credit or deduction with respect to the withholding tax for the foreign
taxes treated as having been paid by them.
A Foreign Shareholder generally will not be subject to U.S. federal income
tax with respect to gain on the sale or redemption of shares of the Fund,
distributions from the Fund of net long-term capital gains, or amounts retained
by the Fund which are designated as undistributed capital gains unless the gain
is effectively connected with a trade or business of such shareholder in the
United States. In the case of a Foreign Shareholder who is a nonresident alien
individual, however, gain arising from the sale or redemption of shares of the
Fund, distributions of net long-term capital gains and amounts retained by the
Fund which are designated as undistributed capital gains ordinarily will be
subject to U.S. income tax at a rate of 30% if such individual is physically
present in the U.S. for 183 days or more during the taxable year and, in the
case of gain arising from the sale or redemption of Fund shares, either the gain
is attributable to an office or other fixed place of business maintained by the
shareholder in the United States or the shareholder has a "tax home" in the
United States.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of investment in the Fund.
Notices. Shareholders will be notified annually by the Fund as to the U.S.
federal income tax status of the dividends, distributions, and deemed
distributions made by the Fund to its shareholder. Furthermore, shareholders
will also receive, if appropriate, various written notices after the close of
the Fund's taxable year regarding the U.S. federal income tax status of certain
dividends, distributions and deemed distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year.
57
<PAGE>
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 or by the Fund's independent agent acting in the ordinary
course of its business in 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 the 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 routinely reviews commission rates, execution and settlement
services performed and makes 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 brokerage and research services to the Adviser or the
Fund. The term "research services" 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
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, if applicable, 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 services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer 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.
58
<PAGE>
Although certain research services 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 $789,290 for
1998, $1,764,425 for 1997 and $2,268,924 for 1996. Of such amounts, commissions
were paid by the Fund for brokerage services rendered by The Nikko Securities
Co., Ltd. ("Nikko Securities") in respect to portfolio transactions by the Fund
in the amounts of $84,085 for 1998, $68,159 for 1997 and $303,671 for 1996. Such
amounts represented 10.65%, 3.86% and 13.38% 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, 1998, 1997 and 1996, there were no commissions paid or accrued by
the Fund to J.P. Morgan Securities Asia, Ltd. The rate of total portfolio
turnover of the Fund for years 1998, 1997 and 1996 was 90.4%, 96.4% and 72.6%,
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, Dr. Martin Luther King, Jr. Day, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. 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
on the exchange on which it is traded as of the Value Time. 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") on such
exchange as of the Value Time. Lacking a Calculated Mean, the security is valued
at the most recent bid quotation on such exchange as of the Value Time. An
equity security that is traded on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") system will be valued at its most recent sale
price on such system as of the Value Time. Lacking any sales, the security will
be valued at the most recent bid quotation as of the Value Time. The value of an
equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, will be its most recent sale price. Lacking any sales,
the security will be valued at the Calculated Mean quotation for such security
as of the Value Time. Lacking a Calculated Mean quotation, the security will be
valued at the most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
at amortized cost, which the Board believes approximates market value. If it is
not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
59
<PAGE>
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 that, 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 Fund's prospectus and
the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 160 Federal Street,
Boston, Massachusetts 02110, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. PricewaterhouseCoopers LLP
is responsible for performing annual audits of the financial statements and
financial highlights of the Fund in accordance with generally accepted
accounting standards and the preparation of federal tax returns.
Public Official Documents
The documents referred to after the tabular and textual information
appearing herein under the caption "JAPAN AND THE JAPANESE ECONOMY" and
"SECURITIES MARKETS IN JAPAN" as being the source of the statistical or other
information contained in such tables or text are in all cases public official
documents of Japan, its agencies, The Bank of Japan or the Japanese Stock
Exchange, with the exception of the public official documents of the United
Nations and of the International Monetary Fund.
Other Information
Many of the investment changes in the Fund will be made at prices
different from those market prices prevailing at the time they may be reflected
in a regular report to shareholders of the Fund. These transactions will reflect
investment decisions made by the Fund's investment adviser in light of the
objectives and policies of the Fund, and such factors as its other portfolio
holdings and tax considerations and should not be construed as recommendations
for similar action by other investors.
The CUSIP number of The Japan Fund, Inc., is 471070-10-2.
The Fund employs Davis Polk and Wardwell as the Fund's counsel.
The Fund employs Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, as Custodian and Fund Accounting Agent. Bank of Tokyo --
Mitsubishi, Limited 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, 1998, the Fund was charged by Scudder Service Corporation $449,440,
of which $36,929 was unpaid at December 31, 1998.
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
60
<PAGE>
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 , including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights, notes
to financial statements in the Annual Report to the Shareholders of the Fund
dated December 31, 1998, and the unaudited semiannual report are incorporated
herein by reference and are hereby deemed to be a part of this Statement of
Additional Information.
61
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's, S&P and
Fitch to corporate and municipal bonds, corporate and municipal commercial paper
and municipal notes.
Corporate and Municipal Bonds
Moody's: The four highest ratings for corporate and municipal bonds are
"Aaa," "Aa," "A" and "Baa". Bonds rated "Aaa" are judged to be of the "best
quality" and carry the smallest degree of investment risk. Bonds rated "Aa" are
of "high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds rated
"A" possess many favorable investment attributes and are considered to be upper
medium grade obligations. Bonds rated "Baa" are considered to be medium grade
obligations, neither highly protected nor poorly secured. Moody's applies
numerical modifiers 1, 2 and 3 in each rating category from "Aa" through "Baa"
in its rating system. The modifier 1 indicates that the security ranks in the
higher end of the category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end.
S&P: The four highest ratings for corporate and municipal bonds are "AAA,"
"AA," "A" and "BBB". Bonds rated "AAA" have the highest ratings assigned by S&P
and have an extremely strong capacity to pay interest and repay principal. Bonds
rated "AA" have a "very strong capacity to pay interest and repay principal" and
differ "from the higher rated issues only in small degree". Bonds rated "A" have
a "strong capacity" to pay interest and repay principal, but are "somewhat more
susceptible to" adverse effects of changes in economic conditions or other
circumstances than bonds in higher rated categories. Bonds rated "BBB" are
regarded as having an "adequate capacity" to pay interest and repay principal,
but changes in economic conditions or other circumstances are more likely to
lead a "weakened capacity" to make such payments. The ratings from "AA" to "BBB"
may be modified by the addition of a plus or minus sign to show relative
standing within the category.
Fitch: The four highest ratings of Fitch for corporate and municipal bonds
are "AAA," "AA," "A" and "BBB". Bonds rated "AAA" are considered to be
investment-grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events. Bonds rated "AA" are
considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F1+". Bonds rated "A" are
considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and circumstances
than bonds with higher rates. Bonds rated "BBB" are considered to be investment
grade and of satisfactory credit quality. The obligor's ability to pay interest
and repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse effects
on these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with greater ratings.
Corporate and Municipal Commercial Paper
Moody's: The highest rating for corporate and municipal commercial paper
is "P-1" (Prime-1). Issuers rated "P-1" have a "superior ability for repayment
of senior short-term obligations".
S&P: The "A-1" rating for corporate and municipal commercial paper
indicates that the "degree of safety regarding timely payment is strong".
Commercial paper with "overwhelming safety characteristics" will be rated
"A-1+".
Fitch: The rating "F-1" is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated "F-1".
Municipal Notes
<PAGE>
Moody's: The highest ratings for state and municipal short-term
obligations are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG
3" in the case of an issue having a variable rate demand feature). Notes rated
"MIG 1" or "VMIG 1" are judged to be of the "best quality". Notes rated "MIG 2"
or "VMIG 2" are of "high quality," with margins or protection "ample although
not as large as in the preceding group". Notes rated "MIG 3" or "VMIG 3" are of
"favorable quality," with all security elements accounted for but lacking the
strength of the preceding grades.
S&P: The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest". Notes issued with "overwhelming safety characteristics"
will be rated "SP-1+". The "SP-2" rating reflects a "satisfactory capacity" to
pay principal and interest.
Fitch: The highest ratings for state and municipal short-term obligations
are "F-1+," "F-1," and "F-2".
<PAGE>
THE JAPAN FUND, INC.
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
- -------- --------
<S> <C> <C>
(a) (a)(1) Articles of Amendment and Restatement of the Articles of
Incorporation dated January 7, 1992.
(Incorporated by reference to Exhibit 1(b) to the Post-Effective
Amendment No. 11 to the Registration Statement.)
(a)(2) Articles of Amendment dated December 23, 1997.
(Incorporated by reference to Exhibit (a)(2) to the Post-Effective
Amendment No. 14 to the Registration Statement.)
(b) (b)(1) Registrant's By-Laws as amended through July 23, 1993 is filed
herein.
(b)(2) Amendment to Registrant's By-Laws dated July 22, 1995.
(Incorporated by reference to Exhibit (b)(2) to the Post-Effective
Amendment No. 14 to the Registration Statement.)
(b)(3) 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.)
(b)(4) 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.)
(b)(5) Amendment to Registrant's By-Laws dated October 16, 1997.
(Incorporated by reference to Exhibit (b)(5) to the Post-Effective
Amendment No. 14 to the Registration Statement.)
(b)(6) Amendment to Registrant's By-Laws dated August 14, 1998.
(Incorporated by reference to Exhibit (b)(6) to the Post-Effective
Amendment No. 14 to the Registration Statement.)
(b)(7) Amendment to Registrant's By-Laws dated April 22, 1999 is filed
herein.
(c) Not Applicable.
(d) (d)(1) Investment Management Agreement between the Registrant and Scudder
Kemper Investments, Inc. dated September 7, 1998.
(Incorporated by reference to Exhibit (d)(1) to the Post-Effective
Amendment No. 14 to the Registration Statement.)
(e) (e)(1) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc. dated September 7, 1998.
(Incorporated by reference to Exhibit (e)(1) to the Post-Effective
Amendment No. 14 to the Registration Statement.)
(f) Not Applicable.
Part C - Page 1
<PAGE>
(g) (g)(1) 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.)
(h) (h)(1) Transfer Agency and Service Agreement and Fee Schedule between the
Registrant and Scudder Service Corporation dated May 1, 1990.
(Incorporated by reference to Exhibit 9(a)(1) to the Post-Effective
Amendment No. 11 to the Registration Statement.)
(h)(2) Shareholder Service Agreement and Fee Schedule between the
Registrant and Scudder Service Corporation dated August 14, 1987.
(Incorporated by reference to Exhibit 9(b)(1) to the Post-Effective
Amendment No. 11 to the Registration Statement.)
(h)(3) 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.)
(i) Legal Consent if filed herein.
(j) Consent of Independent Auditors is filed herein.
(k) Not Applicable.
(l) Not Applicable.
(m) Not Applicable.
(n) Financial Data Schedules are filed herein.
(o) Not Applicable.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Registrant
- -------- -------------------------------------------------------------
None
Item 25. Indemnification
- -------- ---------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, 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 Amendment and
Restatement of the Articles of Incorporation dated January 7,
1992 provides as follows:
EIGHTH: (1) 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
Part C - Page 2
<PAGE>
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. 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.
(2) To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, no
director or officer of this Corporation shall be personally
liable to the Corporation or its stockholders for money
damages. No amendment of the charter of the Corporation or
repeal of any of its provisions shall limit or eliminate the
benefits provided to directors and officers under this
provision with respect to any act or omission which occurred
prior to such amendment or repeal. This paragraph (2) shall
not protect any director or officer of the Corporation against
any liability to the Corporation or to its security holders to
which he would be otherwise subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Item 26. 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 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<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.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Part C - Page 3
<PAGE>
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
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 America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk 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 Corporation oo
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 Financial Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
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
Part C - Page 4
<PAGE>
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 27. 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 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President President
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 None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Part C - Page 5
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
John R. Hebble Assistant Treasurer 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
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk None
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, Chief Vice President and
345 Park Avenue Legal Officer and Assistant Clerk Secretary
New York, NY 10154
Robert A. Rudell Director and 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 and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
Part C - Page 6
<PAGE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage
Underwriter Commissions and Repurchases Commissions Other Compensation
----------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. 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 29. Management Services
- -------- -------------------
Inapplicable.
Item 30. Undertakings
- -------- ------------
Inapplicable.
Part C - Page 7
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and 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 30th day of April, 1999.
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>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Henry Rosovsky
- --------------------------------------
Henry Rosovsky* Chairman of the Board and Director April 30, 1999
/s/ Lynn Birdsong
- --------------------------------------
Lynn Birdsong President (Principal Executive April 30, 1999
Officer)
/s/ Gina Provenzano
- --------------------------------------
Gina Provenzano* Treasurer (Principal Financial and April 30, 1999
Accounting Officer) and Vice President
/s/ Peter Booth
- --------------------------------------
Peter Booth Director April 30, 1999
/s/ William L. Givens
- --------------------------------------
William L. Givens* Director April 30, 1999
/s/ Thomas M. Hout
- --------------------------------------
Thomas M. Hout Director April 30, 1999
/s/ John F. Loughran
- --------------------------------------
John F. Loughran* Director April 30, 1999
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Yoshihiko Miyauchi
- --------------------------------------
Yoshihiko Miyauchi* Director April 30, 1999
/s/ William V. Rapp
- --------------------------------------
William V. Rapp* Director April 30, 1999
/s/ Takeo Shiina
- --------------------------------------
Takeo Shiina Director April 30, 1999
/s/ O. Robert Theurkauf
- --------------------------------------
O. Robert Theurkauf* Director April 30, 1999
/s/ Hiroshi Yamanaka
- --------------------------------------
Hiroshi Yamanaka* Director April 30, 1999
</TABLE>
*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.
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. 15
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 26
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
THE JAPAN FUND, INC.
<PAGE>
THE JAPAN FUND
EXHIBIT INDEX
(b)(1)
(b)(7)
(i)
(j)
(n)
EXHIBIT (b)(1)
THE JAPAN FUND, INC.
--------------------
BY-LAWS
--------------------
As Amended July 23, 1993
<PAGE>
BY-LAWS
of
THE JAPAN FUND, INC.
(a Maryland Corporation)
-------------------
ARTICLE I.
Meetings of Stockholders.
SECTION 1. Annual Meeting. The Corporation shall not be
required to hold an annual meeting of its stockholders in any year in which none
of the following is required to be acted on by the holders of the Corporation's
common stock under the Investment Company Act of 1940 (the "1940 Act"): (a)
election of directors, (b) approval of the Corporation's investment advisory
agreement, (c) ratification of the selection of independent public accountants
and (d) approval of the Corporation's distribution agreement. In the event that
the Corporation shall be required by the 1940 Act to hold an annual meeting of
stockholders, such meeting shall be held at a date and time set by the Board of
Directors in accordance with the 1940 Act. The stockholders' meeting held in
accordance with the preceding sentence shall for all purposes constitute the
annual meeting of stockholders for the fiscal year of the Corporation in which
the meeting is held. At any such meeting, the stockholders shall elect directors
to hold the offices of any directors who have held office for more than one year
or who have been elected by the Board of Directors to fill vacancies which
result from any cause. Except as the charter or statute provides otherwise, any
business may be considered at an annual meeting without the purpose of the
meeting having been specified in the notice. Failure to hold an annual meeting
does not invalidate the Corporation's existence or affect any otherwise valid
corporate acts. Annual meetings of stockholders may be held at any place within
the United States as determined by the Board of Directors.
SECTION 2. Special Meetings. Special meetings of stockholders
may be held for any purpose or purposes, at any place within the United States
as determined by the Board of Directors when called by the Chairman of the Board
or the President or the Secretary or by the Board of Directors, and shall be
called by the Secretary upon receipt of the request in writing signed by the
holders of shares entitled to not less than 25% of all the votes entitled to be
cast at such meeting, provided that (a) such request shall state the purpose or
purposes of such meetings and the matters proposed to be acted on and (b) the
stockholders requesting such meeting shall have paid to the Corporation the
reasonably estimated cost of preparing and mailing the notice thereof, which the
Secretary shall determine and specify to such stockholders. No special meeting
need be called upon the request of the holders of shares entitled to cast less
than a majority of all votes entitled to be cast at such meeting to consider any
matter which is substantially the same as a matter voted upon at any special
meeting of the stockholders held during the preceding 12 months.
2
<PAGE>
SECTION 3. Notice of Stockholders' Meeting. Written or printed
notice of the time and place, and in the case of special meetings, of the
purpose or purposes, of every meeting of the stockholders shall be given not
less than ten nor more than ninety days before the date of the meeting either by
personal delivery or by mailing the same with postage prepaid to every
stockholder entitled to vote at such meeting at his address as it appears on the
records of the Corporation.
SECTION 4. Quorum. The presence in person or by proxy of the
holders of record of a majority of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote thereat shall constitute
a quorum at any meeting of the stockholders. If at any meeting of the
stockholders there shall be less than a quorum present, stockholders holding a
majority of the shares represented at such meeting may, without further notice,
adjourn the same from time to time until a quorum shall attend, but no business
shall be transacted at any such adjourned meeting except such as might have been
lawfully transacted had the meeting not been adjourned. This Section 4 may be
altered, amended or repealed only upon the affirmative vote of the holders of a
majority of all the shares of the capital stock of the Corporation at the time
outstanding and entitled to vote.
SECTION 5. Voting. At all meetings of stockholders, each
stockholder of record entitled to vote thereat shall be entitled to one vote for
each share of stock standing in his name on the books of the Corporation on the
date fixed as hereinafter provided for the determination of stockholders
entitled to vote at such meeting, and action shall be taken and all questions
decided by the votes of the holders of a majority of the shares represented at
the meeting in person or by proxy and entitled to vote thereat except as
otherwise provided by the charter or by these By-Laws or by specific statutory
provision superseding the restrictions and limitations contained in the charter
or in these By-Laws.
SECTION 6. Closing of Transfer Books: Record Dates. The Board
of Directors may fix the time, not exceeding twenty days preceding the date of
any meeting of stockholders, of any dividend payment date or any date for the
allotment of rights, during which the books of the Corporation shall be closed
against transfers of stock. If such books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days immediately
preceding such meeting. In lieu of providing for the closing of the books
against transfers of stock as aforesaid, the Board of Directors may fix, in
advance, a date, not exceeding ninety days and not less than ten days preceding
the date of any meeting of stockholders, and not exceeding sixty days preceding
any dividend payment date or any date for the allotment of rights, as a record
date for the determination of the stockholders entitled to notice of and to vote
at such meeting, or entitled to receive such dividends or rights, as the case
may be; and only stockholders of record on such date shall be entitled to notice
of and to vote at such meeting or to receive such dividends or rights, as the
case may be. Subject to the provisions of the laws of Maryland, the Board of
Directors shall have the power to keep the books of the Corporation outside of
said State at such places as may from time to time be designated by them.
ARTICLE II.
Directors.
3
<PAGE>
SECTION 1. Powers. Except as otherwise provided by law, by the
charter or by these By-Laws, all the business and affairs of the Corporation
shall be managed and all the powers of the Corporation shall be exercised by its
Board of Directors. All acts done by any meeting of the Board of Directors or by
any person acting as a director, so long as his successor shall not have been
duly elected or appointed, shall, notwithstanding that it be afterwards
discovered that there was some defect in the election of the directors or such
person acting as a director or that they or any of them were disqualified to be
directors or a director, be as valid as if the directors or such person acting
as a director, as the case may be, had been duly elected and were or was
qualified to be the directors or a director of the Corporation.
An honorary director shall be invited to attend all meetings
of the Board of Directors but shall not be present at any portion of a meeting
from which the honorary director shall have been excluded by vote of the
directors. An honorary director shall not be a "Director" or "officer" within
the meaning of the Corporation's Certificate of Incorporation or of these
By-Laws, shall not be deemed to be a member of an "advisory board" within the
meaning of the Investment Company Act of 1940, as amended from time to time,
shall not hold himself out as any of the foregoing, and shall not be liable to
any person for any act of the Corporation. Notice of special meetings may be
given to an honorary director but the failure to give such notice shall not
affect the validity of any meeting or action taken thereat. An honorary director
shall not have the powers of a Director, may not vote at meetings of the Board
of Directors and shall not take part in the operation or governance of the
Corporation. An honorary director shall receive such compensation as determined
by the Board of Directors and may, in the discretion of the Board of Directors,
be reimbursed for expenses incurred in attending meetings of the Board of
Directors or otherwise.
SECTION 2. Number - Election - Term. The number of directors
shall be ten, but a majority of the entire Board of Directors may increase such
number at any time or from time to time to not more than twenty-one, and may
elect directors to fill the vacancies created by any such increase in the number
of directors; provided that no such vacancy may be so filled after the first
annual meeting of stockholders of the Corporation if immediately after filling
such vacancy less than two-thirds of the directors then holding office would
have been elected by the stockholders at an annual or special meeting. The Board
of Directors, by the vote of a majority of the entire Board, may likewise
decrease the number of directors to a number not less than three. At the first
annual meeting of stockholders and at each annual meeting thereafter, the
stockholders shall elect the Board of Directors. Each director shall hold office
until the next annual meeting and until his successor shall be elected and shall
qualify, subject to prior resignation or removal as hereinafter provided. The
Board of Directors shall designate one of its members to serve as Chairman of
the Board. The Chairman of the Board shall preside at each meeting of the Board.
He shall keep the Board of Directors fully informed and shall freely consult
with the Board concerning the business of the Corporation. He shall have such
other powers and perform such other duties as may, from time to time, be
specified by the Board of Directors. An honorary director shall serve for such
term as shall be specified in the resolution of the Board of Directors
appointing him or her until his or her earlier resignation or removal.
SECTION 3. Vacancies. In case of any vacancy in the Board of
Directors through death, resignation or other cause, other than an increase in
the number of directors, a majority of
4
<PAGE>
the remaining directors, although less than a quorum, may elect a successor to
hold office until the next annual meeting of the stockholders of the Corporation
and until his successor is duly elected and qualifies; provided that no such
vacancy may be so filled after the first annual meeting of stockholders of the
Corporation if immediately after filling such vacancy less than two-thirds of
the directors then holding office would have been elected by the stockholders at
an annual or special meeting thereof.
SECTION 4. Election of Entire New Board. If at any time after
the first annual meeting of stockholders of the Corporation a majority of the
directors in office shall consist of directors elected by the Board of
Directors, a meeting of the stockholders shall be called forthwith for the
purpose of electing the entire Board of Directors, and the terms of office of
the directors then in office shall terminate upon the election and qualification
of such Board of Directors. This Section 4 may be altered, amended or repealed
only upon the affirmative vote of the holders of a majority of all the shares of
the capital stock of the Corporation at the time outstanding and entitled to
vote.
SECTION 5. Removal. At any meeting of stockholders duly called
and at which a quorum is present, the stockholders may, by the affirmative vote
of the holders of a majority of the votes entitled to be cast thereon, remove
any director or directors from office, with or without cause, and may elect a
successor or successors to fill any resulting vacancies for the unexpired terms
of the removed directors. An honorary director may be removed from such a
position with or without cause by the vote of a majority of the Board of
Directors given at any regular meeting or special meeting.
SECTION 6. Meetings. The Board of Directors may from time to
time fix a place and time for the holding of regular meetings of the Board at
any place within the United States, and such meetings may be held on such
notice, if any, as the directors may from time to time determine. Special
meetings of the Board of Directors may also be held at any time or place within
the United States and for any purpose when called by the Chairman of the Board
or the President or any Vice President or the Secretary, or by not less than
one-third of the entire Board, or by any four directors if the entire Board
consists of more than twelve directors. However, with the concurrence of not
less than two-thirds of the entire Board, any such special meeting may be held
at a place outside the United States.
SECTION 7. Notice of Directors' Meetings. Notice of the time
and place (and of the purposes of the meeting when expressly required by law,
the charter or these By-Laws) of every meeting of the Board of Directors shall
be given by mail, telegraph, telephone or in person, to each director at his
address as it appears on the records of the Corporation not less than
twenty-four hours before the meeting; provided that, if any meeting of the Board
of Directors shall be called to be held outside the United States, the notice
thereof shall be given not less than three weeks before the meeting.
SECTION 8. Waiver of Notice - When Notice Not Necessary.
Whenever any notice of the time, place or purposes of any meeting of directors
or any committee thereof is required to be given under any provision of law, of
the charter or of the By-Laws, a waiver thereof in writing signed by the person
or persons entitled to such notice and filed with the records of the meeting,
whether before or after the holding thereof, or actual attendance at the
5
<PAGE>
meeting in person, shall be deemed equivalent to the giving of such notice to
such person or persons.
SECTION 9. Quorum - Voting. At all meetings of the Board of
Directors the presence of one-third of the whole number of directors as fixed
from time to time pursuant to the By-Laws, but in any case not less than two
directors, shall constitute a quorum for the transaction of all business, but if
a quorum be lacking at any meeting, a majority of those present may adjourn the
meeting to such time and place within the United States as they may determine,
and such meeting may be held as so adjourned without further notice if a quorum
is present. Subject to the provisions of the By-Laws as to notice, any business
that may come before any meeting of the Board of Directors at which a quorum
shall be present may be transacted thereat, and unless otherwise provided by
law, by the charter or by the By-Laws, all elections shall be had and all
questions shall be decided by the vote of a majority of the directors present.
SECTION 10. Meetings by Conference Telephone. Members of the
Board of Directors or any committee designated thereby may participate in a
meeting of such Board or committee by means of a conference telephone or similar
communications equipment enabling all persons participating in the meeting to
hear each other at the same time, and participation by such means shall
constitute presence in person at such meeting.
SECTION 11. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if a written consent to such
action is signed by all the members of the Board or of such committee, as the
case may be, and such written consent is filed with the minutes of proceedings
of the Board or such committee.
SECTION 12. Compensation of Directors. Directors shall be
entitled to receive such compensation from the Corporation for their services as
may from time to time be determined by the Board of Directors.
ARTICLE III.
Committees.
SECTION 1. Executive Committee. The Board of Directors may, in
each year, by the affirmative vote of a majority of the entire Board, elect from
the directors an Executive Committee to consist of such number of directors (not
less than three) as the Board may from time to time determine. The chairman of
the Committee shall be elected by the Board of Directors. The Board of Directors
by such affirmative vote shall have power at any time to change the members of
such Committee and may fill vacancies in the Committee by election from the
directors. When the Board of Directors is not in session, the Executive
Committee shall have and may exercise any or all of the powers of the Board of
Directors in the management of the business and affairs of the Corporation
(including the power to authorize the seal of the Corporation to be affixed to
all papers which may require it) except as provided by law and except the power
to increase or decrease the size of, or fill vacancies on, the Board, to remove
or appoint officers or to dissolve or change the permanent membership of the
Executive Committee, or to make or amend the By-Laws of the Corporation. The
Executive Committee may fix its own
6
<PAGE>
rules of procedure, and may meet when and as provided by such rules or by
resolution of the Board of Directors, but in every case the presence of a
majority shall be necessary to constitute a quorum. In the absence of any member
of the Executive Committee, the members thereof present at any meeting, whether
or not they constitute a quorum, may appoint a member of the Board of Directors
to act in the place of such absent member.
SECTION 2. Other Committees. The Board of Directors, by the
affirmative vote of a majority of the entire Board, may appoint other committees
which shall in each case consist of such number of members (not less than two)
who need not be members of the Board of Directors and shall have and may
exercise such powers as the Board may determine in the resolution appointing
them. A majority of all members of any such committee may determine its action
and fix the time and place of its meetings, unless the Board of Directors shall
otherwise provide. The Board of Directors, by the affirmative vote of a majority
of the entire Board, shall have power at any time to change the members and
powers of any such committee, to fill vacancies, and to discharge any such
committee.
ARTICLE IV.
Officers.
SECTION 1. Officers. The officers of the Corporation shall be
chosen by the Board of Directors as soon as may be practicable after
incorporation and thereafter annually. There shall be a President, a Secretary
and a Treasurer. The Board of Directors or the Executive Committee may also in
its discretion appoint other officers, including Vice Presidents, Assistant
Secretaries, Assistant Treasurers, and agents and employees, who shall have such
authority and perform such duties as the Board or the Executive Committee may
determine. The Board of Directors may fill any vacancy which may occur in any
office. Any two offices, except those of President and Vice President, may be
held by the same person, but no officer shall execute, acknowledge or verify any
instrument on behalf of the Corporation in more than one capacity, if such
instrument is required by law or these By-Laws to be executed, acknowledged or
verified by two or more officers on behalf of the Corporation.
SECTION 2. President. The President of the Corporation shall
be the Chief Administrative Officer of the Corporation. In the absence of the
Chairman of the Board, the President shall preside at all meetings of the
stockholders and of the Board of Directors. Subject to the control of the Board
of Directors, the President shall be the general executive and administrative
officer of the Corporation and shall have chief responsibility for the
day-to-day administration and operation of the Corporation. The President shall
keep the Board of Directors and the Chairman of the Board fully informed and
shall freely consult with them concerning the business of the Corporation. He
shall have such other powers and perform such other duties as may, from time to
time, be specified by the Board of Directors.
SECTION 3. Term of Office. The term of office of all officers
shall be one year and until their respective successors are chosen and
qualified, subject, however, to the provision for removal contained in the
charter. Any officer may be removed from office at any time with or without
cause by the vote of a majority of the entire Board of Directors.
7
<PAGE>
SECTION 4. Powers and Duties of Officers Other than the
President. The officers of the Corporation, other than the President, whose
powers and duties are set forth in Section 2 hereof, shall have the powers and
duties as generally pertain to their respective offices, as well as such powers
and duties as may from time to time be conferred by the Board of Directors or
the Executive Committee.
SECTION 5. Compensation. The officers of the Corporation shall
receive from the Corporation only such compensation as the Board of Directors
may from time to time determine.
SECTION 6. Surety Bonds. The Board of Directors may require
that any officer, agent or employee of the Corporation be bonded for the
faithful performance of his duty.
ARTICLE V.
Capital Stock.
SECTION 1. Certificate of Shares. Certificates for shares of stock of the
Corporation shall be in such form as the Board of Directors may from time to
time prescribe. No certificate shall be valid unless it is signed by the
Chairman of the Board, the President or a Vice President and by the Secretary or
an Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation and sealed with its seal, or bears the facsimile signatures of such
officers and a facsimile of such seal.
SECTION 2. Transfer of Shares. Shares of the Corporation shall
be transferable on the books of the Corporation by the holder thereof, in person
or by his duly authorized attorney or legal representative, (i) if a certificate
or certificates have been issued, upon surrender and cancellation of a
certificate or certificates for the same number of shares of the same class,
duly endorsed or accompanied by proper instruments of assignment and transfer,
with such proof of the authenticity of the signature as the Corporation or its
agents may reasonably require or (ii) as otherwise prescribed by the Board of
Directors.
SECTION 3. Stock Ledgers. The stock ledgers of the
Corporation, containing the names and addresses of the stockholders and the
number of shares held by them respectively, shall be kept at the principal
offices of the Corporation or, if the Corporation employs a transfer agent, at
the offices of the transfer agent of the Corporation.
SECTION 4. Lost, Stolen or Destroyed Certificates. The Board
of Directors or the Executive Committee may determine the conditions upon which
a new certificate of stock of the Corporation of any class may be issued in
place of a certificate which is alleged to have been lost, stolen or destroyed;
and may, in their discretion, require the owner of such certificate or his legal
representative to give bond, with sufficient surety to the Corporation and the
transfer agent of the Corporation, if any, to indemnify it and such transfer
agent against any and all loss or claims which may arise by reason of the issue
of a new certificate in the place of the one so lost, stolen or destroyed.
ARTICLE VI.
8
<PAGE>
Corporate Seal and Fiscal Year.
SECTION 1. Seal. The seal of the Corporation shall be in such form as the Board
of Directors shall approve, but shall contain the name of the Corporation and
the State and year of its incorporation.
SECTION 2. Fiscal Year. The fiscal year of the Corporation
shall be the period of twelve months ending on the last day of December in each
year.
ARTICLE VII.
Miscellaneous.
SECTION 1. Advisory Contract. Any advisory contract in effect
after the first annual meeting of stockholders of the Corporation, to which the
Corporation is or shall become a party, whereby, subject to the control of the
Board of Directors of the Corporation, the investment portfolio of the
Corporation shall be managed or supervised by the other party to such contract,
shall become effective and binding only upon the affirmative vote of a majority
of the outstanding voting securities of the Corporation (as defined in the 1940
Act). Any advisory contract to which the Corporation shall be a party whereby,
subject to the control of the Board of Directors of the Corporation, the
investment portfolio of the Corporation shall be managed or supervised by the
other party to such contract, shall provide, among other things, that such
contract cannot be transferred, assigned, sold or in any manner hypothecated or
pledged by the other party thereto.
SECTION 2. Reports to Stockholders. The books of account of
the Corporation shall be examined by an independent firm of public accountants
at the close of each annual and semi-annual fiscal period of the Corporation and
at such other times, if any, as may be directed by the Board of Directors of the
Corporation. A report to the stockholders based upon each such examination shall
be mailed to each stockholder of the Corporation, of record on such date with
respect to each report as may be determined by the Board of Directors, at his
address as the same appears on the books of the Corporation. Each such report
shall show the assets and liabilities of the Corporation as of the close of the
annual or semi-annual period covered by the report and the securities in which
the funds of the Corporation were then invested; such report shall show the
Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or semi-annual
period covered by the report and any amount paid during such period to any
security dealer, legal counsel, transfer agent, dividend disbursing agent,
registrar or custodian having a partner, officer or director who was also an
officer or director of the Corporation at any time during such period, and shall
set forth such other matters as the Board of Directors or such independent firm
of public accountants shall determine.
SECTION 3. Approval of Firm of Independent Public Accountants.
At every annual meeting of the stockholders of the Corporation there shall be
submitted for ratification or rejection the name of the firm of independent
public accountants which has been selected for the current fiscal year in which
such annual meeting is held by a majority of those members of the Board of
Directors who are not "interested persons" investment advisors of, or affiliated
persons
9
<PAGE>
of an investment advisor of, or officers or employees of, the Corporation, as
such terms are defined in the 1940 Act.
SECTION 4. Custodianship. All securities owned by the
Corporation and all cash, including, without limiting the generality of the
foregoing, the proceeds from sales of securities owned by the Corporation and
from the issuance of shares of the capital stock of the Corporation, payments of
principal upon securities owned by the Corporation and distributions in respect
of securities owned by the Corporation which at the time of payments are
represented by the distributing corporation to be capital distributions, shall
be held by a custodian which shall be a trust company, a private bank or a
national bank of good standing, having a capital, surplus and undivided profits
aggregating not less than ten million dollars ($10,000,000). The terms of
custody of such securities and cash shall include provisions to the effect that
the custodian shall deliver securities owned by the Corporation only (a) upon
sales of such securities for the account of the Corporation and receipt by the
custodian of payment therefor, (b) when such securities are called, redeemed or
retired or otherwise become payable, (c) for examination by any broker selling
any such securities in accordance with "street delivery" custom, (d) in exchange
for or upon conversion into other securities alone or other securities and cash
whether pursuant to any plan of merger, consolidation, reorganization,
recapitalization or readjustment, or otherwise, (e) upon conversion of such
securities pursuant to their terms into other securities, (f) upon exercise of
subscription, purchase or other similar rights represented by such securities,
(g) for the purpose of exchanging interim receipts or temporary securities for
definitive securities, or (h) for other proper corporate purposes. Such terms of
custody shall also include provisions to the effect that the custodian shall
hold the securities and funds of the Corporation in a separate account or
accounts and shall have sole power to release and deliver any such securities
and draw upon any such account, that the custodian shall deliver or pay out of
any such account any of the securities or funds of the Corporation only on
receipt by such custodian of written instructions from two or more persons
authorized by the Board of Directors to give such instructions on behalf of the
Corporation, except as to (b) and (g) above, and that the custodian shall
deliver cash of the Corporation required by this Section 4 to be deposited with
the custodian only upon the purchase of securities for the portfolio of the
Corporation and the delivery of such securities to the custodian, for the
purchase of shares of the capital stock of the Corporation, for the payment of
interest, dividends, taxes, advisory or supervisory fees or operating expenses,
for payments in connection with the conversion, exchange or surrender of
securities owned by the Corporation, for payments in connection with the
exercise of warrants or rights to subscribe to securities owned by the
Corporation, for conversion from United States dollars into a foreign currency
or from a foreign currency into United States dollars, or for other proper
corporate purposes. Upon the resignation or inability to serve of any such
custodian the Corporation shall (a) use its best efforts to obtain a successor
custodian, (b) require the cash and securities of the Corporation held by the
custodian to be delivered directly to the successor custodian, and (c) in the
event that no successor custodian can be found, submit to the stockholders of
the Corporation, before permitting delivery of such cash and securities to
anyone other than a successor custodian, the question whether the Corporation
shall be dissolved or shall function without a custodian; provided, however,
that nothing herein contained shall prevent the termination of any agreement
between the Corporation and any such custodian by the affirmative vote of the
holders of a majority of all the shares of the capital stock of the Corporation
at the time outstanding and entitled to vote. Upon its resignation or inability
to serve, the custodian may deliver any assets of the Corporation held by it to
a qualified bank or trust company in The City of New York selected
10
<PAGE>
by it, such assets to be held subject to the terms of custody which governed
such retiring custodian, pending action by the Corporation as set forth in this
Section 4.
SECTION 5. Information to Accompany Dividends. At the time of
the payment by the Corporation of any dividend to its stockholders, each
stockholder to whom such dividend is paid shall be notified of the account or
accounts from which it is paid and of the amount thereof paid from each such
account.
SECTION 6. Investment Restriction. In any case where an
officer or director of the Corporation or of any investment advisor of the
Corporation, or a member of an advisory committee or portfolio committee of the
Corporation, is also an officer or director of another corporation and the
purchase or sale of the securities issued by such other corporation is under
consideration, the officer, director or committee member concerned will abstain
from participating in any decision made on behalf of the Corporation to purchase
or sell any securities issued by such other corporation.
SECTION 7. Annual Statement of Affairs. The President, any
Vice President or the Treasurer of the Corporation shall prepare annually a full
and correct statement of the affairs of the Corporation, to include a balance
sheet and a financial statement of operations for the preceding fiscal year. The
statement of affairs shall be submitted at the annual meeting of the
stockholders, if any, and, within 20 days after the meeting (or, in the absence
of an annual meeting, within 120 days after the end of the fiscal year), placed
on file at the Corporation's principal office.
ARTICLE VIII
Amendment of By-Laws.
Except as provided in Section 4 of Article I hereof, Section 4
of Article II hereof and in this Article VIII, the By-Laws of the Corporation
may be altered, amended, added to or repealed by the stockholders or by majority
vote of the entire Board of Directors; but any such alteration, amendment,
addition or repeal of the By-Laws by action of the Board of Directors may be
altered or repealed by the stockholders. After the initial issue of any shares
of capital stock of the Corporation, this Article VIII may be altered, amended
or repealed only upon the affirmative vote of the holders of the majority of all
shares of the capital stock of the Corporation at the time outstanding and
entitled to vote.
11
Exhibit (b)(7)
THE JAPAN FUND, INC.
Amendment to the By-Laws
On April 22, 1999, the Board of Directors of The Japan Fund, Inc.
adopted the following resolution amending the By-Laws of the Fund.
RESOLVED, that, pursuant to the provision of Article VIII of
the Fund's By-Laws, the first sentence of Article II, Section
2 of the Fund's By-Laws is hereby amended to read as follows:
Section 2. Number - Election - Term. The number of directors
shall be ten, but a majority of the entire Board of Directors
may increase such number at any time or from time to time to
not more than twenty-one, and may elect directors to fill the
vacancies created by any such increase in the number of
directors; provided that no such vacancy may be so filled
after the first annual meeting of stockholders of the
Corporation if immediately after filling such vacancy less
than two-thirds of the directors then holding office would
have been elected by the stockholders at an annual or special
meeting.
Exhibit (i)
April 30, 1999
The Japan Fund, Inc.
345 Park Avenue
New York, New York 10154
Ladies and Gentlemen:
We have acted as special Maryland counsel to The Japan Fund, Inc. (the
"Fund"), a corporation organized under the laws of the State of Maryland on
August 10, 1961. The Fund is authorized to issue Six Hundred Million
(600,000,000) shares of Common Stock, $0.33-1/3 par value per share (each a
"Share" and collectively, the "Shares").
We understand that you are about to file with the Securities and
Exchange Commission, on Form N-1A, Post Effective Amendment No. 15 to the Fund's
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), and Amendment No. 26 to The Fund's Registration Statement
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") (collectively, the "Registration Statement"), in connection with the
continuous offering of the Shares of the Fund on and after May 1, 1999. We
understand that our opinion is required to be filed as an exhibit to the
Registration Statement.
In rendering the opinions set forth below, we have examined originals
or copies, certified or otherwise identified to our satisfaction, of the
following documents:
(i) the Registration Statement;
(ii) the Charter and Bylaws of the Fund;
(iii) a certificate of the Fund regarding certain matters in connection
with this opinion (the "Certificate");
(iv) a certificate of the Maryland State Department of Assessments and
Taxation dated April 29, 1999 to the effect that the Fund is duly incorporated
and existing under the laws of the State of Maryland and is in good standing and
duly authorized to transact business in the State of Maryland (the "Good
Standing Certificate"); and
(v) such other documents and matters as we have deemed necessary and
<PAGE>
The Japan Fund, Inc.
April 30, 1999
Page 2
appropriate to render this opinion, subject to the limitations, assumptions, and
qualifications contained herein.
As to any facts or questions of fact material to the opinions expressed
herein, we have relied exclusively upon the aforesaid documents and
certificates, and representations and declarations of the officers or other
representatives of the Fund. We have made no independent investigation
whatsoever as to such factual matters.
In reaching the opinions set forth below, we have assumed, without
independent investigation or inquiry, that:
(a) all documents submitted to us as originals are authentic; all
documents submitted to us as certified or photostatic copies conform to the
original documents; all signatures on all documents submitted to us for
examination are genuine; and all documents and public records reviewed are
accurate and complete;
(b) all representations, warranties, certifications and statements with
respect to matters of fact and other factual information (i) made by public
officers or (ii) made by officers or representatives of the Fund, including
certifications made in the Certificate, are accurate, true, correct and complete
in all material respects; and
(c) at no time prior to and including the date when all of the Shares
of the Fund are issued will (i) the Fund's Charter, Bylaws or the existing
corporate authorization to issue the Shares be amended, repealed or revoked; or
(ii) the total number of the issued Shares exceed 600,000,000.
Based on our review of the foregoing and subject to the assumptions and
qualifications set forth herein, it is our opinion that, as of the date of this
letter:
1. The Fund is a corporation duly organized, validly existing and,
based solely on the Good Standing Certificate, in good standing under the laws
of the State of Maryland.
2. The issuance and sale of the Shares pursuant to the Registration
Statement has been duly and validly authorized by all necessary corporate action
on the part of the Fund.
3. The Shares, when issued and sold by the Fund for cash consideration
pursuant to and in the manner contemplated by the Registration Statement, will
be legally and validly issued, fully paid and non-assessable.
In addition to the qualifications set forth above, the opinions set
forth herein are also subject to the following qualifications:
We express no opinion as to compliance with the Securities Act, the
Investment Company Act or the securities laws of any state with respect to the
issuance of Shares of
<PAGE>
The Japan Fund, Inc.
April 30, 1999
Page 3
the Fund. The opinions expressed herein concern only the effect of the laws
(excluding the principles of conflict of laws) of the State of Maryland as
currently in effect. We assume no obligation to supplement this opinion if any
applicable laws change after the date hereof, or if we become aware of any facts
that might change the opinions expressed herein after the date hereof.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act.
Sincerely yours,
/s/ Ober, Kaler, Grimes & Shriver,
a Professional Corporation
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A (the "Registration Statement")
of The Japan Fund, of our report dated February 17, 1999, on the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to the Shareholders of The Japan Fund, which is also incorporated by
reference into the Registration Statement. We further consent to the reference
to our Firm under the headings "Financial Highlights," in the Prospectus and
"Experts" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Japan
Fund Annual Report for the year ended 12/31/98 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> JAPAN FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 340,377,058
<INVESTMENTS-AT-VALUE> 347,236,276
<RECEIVABLES> 2,403,507
<ASSETS-OTHER> 511,741
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 350,151,524
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,025,883
<TOTAL-LIABILITIES> 3,025,883
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 404,799,498
<SHARES-COMMON-STOCK> 41,668,266
<SHARES-COMMON-PRIOR> 39,174,523
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (256,142)
<ACCUMULATED-NET-GAINS> (64,292,005)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,874,290
<NET-ASSETS> 347,125,641
<DIVIDEND-INCOME> 2,229,115
<INTEREST-INCOME> 1,183,844
<OTHER-INCOME> 0
<EXPENSES-NET> 3,840,364
<NET-INVESTMENT-INCOME> (427,405)
<REALIZED-GAINS-CURRENT> (22,778,794)
<APPREC-INCREASE-CURRENT> 93,971,345
<NET-CHANGE-FROM-OPS> 70,765,146
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,176,155)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 657,707,572
<NUMBER-OF-SHARES-REDEEMED> (646,061,885)
<SHARES-REINVESTED> 2,709,032
<NET-CHANGE-IN-ASSETS> 81,943,710
<ACCUMULATED-NII-PRIOR> 2,596,688
<ACCUMULATED-GAINS-PRIOR> (44,950,757)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,385,341
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,840,364
<AVERAGE-NET-ASSETS> 305,120,465
<PER-SHARE-NAV-BEGIN> 6.77
<PER-SHARE-NII> (0.01)
<PER-SHARE-GAIN-APPREC> 1.65
<PER-SHARE-DIVIDEND> (0.08)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.33
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
