May 1, 2000
Propspectus
THE JAPAN FUND, INC.
Advisor Classes A, B, and C
[JAPAN FUND LOGO]
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
Scudder Kemper Investments Inc.
Investment Advisor
<PAGE>
The Japan Fund, Inc.
How the fund works
2 Investment Approach
3 Main Risks To Investors
5 The Fund's Track Record
7 How Much Investors Pay
9 Other Policies and Risks
10 Who Manages and Oversees the Fund
How to invest in the fund
12 Choosing a Share Class
17 How to Buy Shares
18 How to Exchange or Sell Shares
19 Policies You Should Know About
25 Understanding Distributions and Taxes
<PAGE>
How the fund works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal, and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency. Their share
prices will go up and down, so be aware that you could lose money.
<PAGE>
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ticker symbols | Class A: AJPNX
| Class B: BJPNX
| Class C: CJPNX
The Japan Fund, Inc.
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Investment Approach
The fund seeks long-term capital appreciation by investing at least 80% of net
assets in Japanese securities (issued by Japan-based companies or their
affiliates, or by any company that derives more than half of its revenues from
Japan). The fund may invest in stocks of any size, including up to 30% of net
assets in smaller companies that are traded over-the-counter.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with effective
management, strong competitive positioning, active research and development and
sound balance sheets. The managers also evaluate fundamentals such as
price-to-earnings ratios.
Growth orientation. The managers prefer companies whose revenue or earnings seem
likely to grow faster than the average for their market and whose stock prices
appear reasonable in light of their business prospects.
Top-down analysis. The managers consider the economic outlooks for various
sectors and industries.
The managers may favor securities from different industries and companies at
different times while still maintaining variety in terms of the industries and
companies represented.
The fund will normally sell a security when it reaches a target price, its
fundamentals have changed, the managers believe other investments offer better
opportunities or when adjusting its emphasis on a given industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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OTHER INVESTMENTS
While most of the fund's investments are common stocks, the fund may also invest
in other types of equities, such as convertible securities, depositary receipts
and preferred stocks. The fund may also invest in debt securities rated in the
top four credit quality categories such as those issued by the Japanese
government or Japanese companies if the managers believe they offer greater
potential for capital growth.
Although the fund is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments.
2
<PAGE>
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[ICON] This fund may be of interest to long-term investors who want broad
exposure to Japanese stocks and understand the higher-than-average
volatility associated with the investment.
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Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the Japanese market. When Japanese stock prices
fall, you should expect the value of your investment to fall as well. The fact
that the fund focuses on a single country could affect fund performance. For
example, Japanese economic growth has weakened after the sharp collapse of the
stock market in the 1990's and the current economic condition remains uncertain.
Japanese companies could be hurt by such factors as a failure to achieve
economic recovery.
Japanese stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties, to a higher risk that
essential information may be incomplete or wrong. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies. Small companies may have limited business lines and
financial resources, making them especially vulnerable to business risks and
economic downturns. In addition, changing currency rates could add to the fund's
investment losses or reduce its investment gains.
3
<PAGE>
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies or other matters
o growth stocks may be out of favor for certain periods
o bonds will tend to fall in value as interest rates rise, and could decline
in credit quality or go into default
o securities traded over-the-counter may not be traded in the same volumes
and may be more volatile than those of larger companies traded on a
national securities exchange
o derivatives could produce disproportionate losses
o at times it could be hard to value some investments or to get an attractive
price for them
4
<PAGE>
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[ICON] While a fund's past performance isn't necessarily a sign of how it will
do in the future, it can be valuable for an investor to know. This page
looks at fund performance two different ways: year by year and over time.
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The Fund's Track Record
The bar chart shows how the total returns for the fund's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual returns for the fund's Class S shares and a broad-based market
index (which, unlike the fund, has no fees or expenses). The performance of both
the fund and the index varies over time. All figures on this page assume
reinvestment of dividends and distributions.
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Annual Total Returns (%) as of 12/31 each year
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
'90 -16.36
'91 3.11
'92 -16.74
'93 23.64
'94 10.03
'95 -9.07
'96 -10.92
'97 -14.40
'98 24.29
'99 119.88
2000 Total Return as of March 31: 5.87%
Best Quarter: 29.53%, Q3 1999 Worst Quarter: -22.44%, Q3 1990
5
<PAGE>
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Average Annual Total Returns (%) as of 12/31/1999
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1 Year 5 Years 10 Years
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Fund -- Class S 119.88 13.64 6.35
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Index 1 76.02 2.37 -0.92
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Index 2 61.53 1.96 -0.85
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Index 1: The Tokyo Stock Exchange Stock Price Index (TOPIX) is an unmanaged
capitalization-weighted measure (adjusted in U.S. dollars) of all shares listed
on the first section of the Tokyo Stock Exchange. Index returns assume dividends
are reinvested net of withholding tax.
Index 2: 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.
Effective 5/1/2000, the fund has adopted the TOPIX for its primary securities
market index over the MSCI Index, as the TOPIX better represents the securities
and markets in which the fund now invests.
Classes A, B and C shares do not have a full calendar year of performance, and
their past performance data is not provided. Although Class S shares are not
offered in this prospectus, they are invested in the same portfolio. Class S
shares' annual returns would differ only to the extent that the classes have
different fees and expenses.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
fund shares.
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Fee Table Class A Class B Class C
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Shareholder Fees (paid directly from your investment)
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Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
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Maximum Deferred Sales Charge
(Load) (as a % of redemption
proceeds) None* 4.00% 1.00%
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Annual Operating Expenses (deducted from fund assets)
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Management Fee+ 0.70% 0.70% 0.70%
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Distribution (12b-1) Fee None 0.75% 0.75%
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Other Expenses** 0.70% 0.72% 0.70%
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Total Annual Operating Expenses*** 1.40% 2.17% 2.15%
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* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a contingent deferred sales charge
of 1.00% if redeemed within one year of purchase and 0.50% if redeemed
during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total annual operating expenses are capped at 1.40%, 2.17% and
2.15% through 4/30/2001 for Class A, B and C shares, respectively.
+ Estimated management fee based on average net assets as of 3/31/2000.
Actual management fee for the year ended 12/31/1999 was 0.73% of average
net assets.
7
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Expense Example
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This example helps you compare each share class' ex-penses to those of other
funds. The example assumes the expenses above remain the same and that you
invested $10,000, earned 5% annual returns and reinvested all dividends and
distributions. This is only an example; your actual expenses will be different.
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1 Year 3 Years 5 Years 10 Years
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Expenses, assuming you sold your shares at the end of each period
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Class A shares $709 $992 $1,296 $2,158
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Class B shares 620 979 1,364 2,128
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Class C shares 318 673 1,154 2,482
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Expenses, assuming you kept your shares
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Class A shares $709 $992 $1,296 $2,158
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Class B shares 220 679 1,164 2,128
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Class C shares 218 673 1,154 2,482
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8
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o As a temporary defensive measure, the fund could shift up to 100% of its
assets into investments such as money market securities. This could prevent
losses, but would mean that the fund was not pursuing its goal.
o This fund may trade securities more actively than many funds, which could
mean higher expenses (thus lowering return) and higher taxable
distributions.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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FOR MORE INFORMATION
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
9
<PAGE>
Who Manages and Oversees the Fund
The investment advisor
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
The fund is managed by a team of investment professionals, who individually
represent different areas of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the fund managers are
Scudder Kemper's many economists, research analysts, traders, and other
investment specialists, located in offices across the United States and around
the world.
As payment for serving as investment advisor, Scudder Kemper receives a
management fee from the fund. For the most recent fiscal year, the actual amount
the fund paid in management fees was 0.73% of average daily net assets.
The portfolio managers
The following people handle the day-to-day management of the fund.
Seung Kwak Elizabeth J. Allan
Lead Portfolio Manager o Began investment career in 1982
o Began investment career in 1985 o Joined the advisor in 1987
o Joined the advisor in 1988 o Joined the fund team in 1987
o Joined the fund team in 1989
10
<PAGE>
How to invest in the fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing a Share Class
In this prospectus, there are three share classes for the fund. The fund offers
a fourth class separately. Each class has its own fees and expenses, offering
you a choice of cost structures. Class A, Class B and Class C shares are
intended for investors seeking the advice and assistance of a financial
representative, who may receive compensation for those services through sales
commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
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Classes and features Points to help you compare
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Class A o Sales charges of up to 5.75% o Some investors may be able to
when you buy shares reduce or eliminate their sales
charges; see next page
o In most cases, no sales
charge when you sell shares o Total annual operating
expenses are lower than those
o No distribution fee for Class B or Class C
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Class B o No charges when you buy o The deferred sales charge
shares rate falls to zero after
six years
o Deferred sales charge
declining from 4.00%, charged o Shares automatically convert
when you sell shares you bought to Class A after six years,
within the last six years which means lower annual
expenses going forward
o 0.75% distribution fee
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Class C o No charges when you buy o The deferred sales charge
shares rate is lower, but your
shares never convert to Class
o Deferred sales charge of A, so annual expenses remain
1.00%, charged when you sell higher
shares you bought within the
last year
o 0.75% distribution fee
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12
<PAGE>
Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Sales charge
Sales charge as a % as a % of your net
Your investment of offering price investment
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Up to $50,000 5.75% 6.10%
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$50,000-$99,999 4.50 4.71
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$100,000-$249,999 3.50 3.63
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$250,000-$499,999 2.60 2.67
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$500,000-$999,999 2.00 2.04
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$1 million or more See below and next page
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The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
13
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Shareholder Services
can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Shareholder Services can answer your questions and help you
determine if you're eligible.
14
<PAGE>
Class B shares
Class B shares can be a logical choice for long-term investors who prefer to see
all of their investment go to work right away, and can accept somewhat higher
annual expenses in exchange.
With Class B shares you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% is deducted
from fund assets during each of the first six years. This means the annual
expenses for Class B shares are somewhat higher (and their performance
correspondingly lower) compared to Class A shares, which don't have a 12b-1 fee.
After six years, Class B shares automatically convert to Class A, which has the
net effect of lowering the annual expenses from the seventh year on.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
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First year 4.00%
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Second or third year 3.00
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Fourth or fifth year 2.00
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Sixth year 1.00
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Seventh year and later None (automatic conversion to Class A)
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Shareholder Services can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
15
<PAGE>
Class C shares
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% is
deducted from fund assets each year. Because of this fee, the annual expenses
for Class C shares are similar to those of Class B shares, but higher than those
for Class A shares (and the performance of Class C shares is correspondingly
lower than that of Class A shares). However, unlike Class A shares, your entire
investment goes to work immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
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First year 1.00%
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Second year and later None
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This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Shareholder Services can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
16
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
<TABLE>
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First investment Additional investments
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<S> <C> <C>
$1,000 or more for regular $100 or more for regular
accounts accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
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Through a o Contact your representative o Contact your representative
financial using the method that's most using the method that's most
representative convenient for you convenient for you
- ---------------------------------------------------------------------------------------
By mail or o Fill out and sign an o Send a check made out to
express mail application "Kemper Funds" and a Kemper
(see below) investment slip to us at the
o Send it to us at the appropriate address below
appropriate address,
along with an investment o If you don't have an check
investment slip, simply
include a letter with your
name, account number, the
full name of the fund and
the share class and your
investment instructions
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By wire o Call (800) 621-1048 for o Call (800) 621-1048 for
instructions instructions
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By phone -- o Call (800) 621-1048 for
instructions
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With an -- o To set up regular
automatic investments, call
investment plan (800) 621-1048
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On the Internet -- o Go to www.kemper.com and
register
o Follow the instructions for
buying shares with money from
your bank account
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</TABLE>
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[ICON] Regular mail:
Kemper Funds, PO Box 219415, Kansas City, MO 64121-9415
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
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17
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
<TABLE>
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Exchanging into another fund Selling shares
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<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account most for over $50,000, can only
be ordered in writing with a
$100 or more for exchanges signature guarantee; if you're
between existing accounts in doubt, see page 22
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Through a o Contact your representative o Contact your representative
financial by the method that's most by the method that's most
representative convenient for you convenient for you
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By phone or o Call (800) 621-1048 for o Call (800) 621-1048 for
wire instructions instructions
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By mail, Write a letter that includes: Write a letter that includes:
express mail
or fax o the fund, class and account o the fund, class and number
(see previous account number you're from which you want to sell
page) exchanging out of shares
o the dollar amount or number o the dollar amount or number
of shares you want to of shares you want to sell
exchange
o your name(s), signature(s)
o the name and class of the and address, as they appear
fund you want to exchange on your account
into
o a daytime telephone number
o your name(s), signature(s)
and address, as they appear
on your account
o a daytime telephone number
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With a o To set up regular exchanges --
systematic from a Kemper fund account,
exchange plan call (800) 621-1048
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With a systematic -- o To set up regular cash
withdrawal plan payments from a Kemper fund
account, call (800) 621-1048
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On the Internet o Go to www.kemper.com and --
register
o Follow the instructions for
making on-line exchanges
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</TABLE>
18
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class A, Class B and Class C shares. The fund does have
another share class, which is described in a separate prospectus and which has
different fees, requirements and services.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 3 p.m. Central time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper Funds generally and on accounts held directly at Kemper. You can also use
it to make exchanges and sell shares.
19
<PAGE>
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[ICON] The Kemper Funds Web site can be a valuable resource for shareholders
with Internet access. Go to www.kemper.com to get up-to-date information,
review balances or even place orders for exchanges.
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EXPRESS-Transfer lets you set up a link between a Scudder or a Kemper Funds
account and a bank account. Once this link is in place, you can move money
between the two with a phone call. You'll need to make sure your bank has
Automated Clearing House (ACH) services. Transactions take two to three days to
be completed, and there is a $100 minimum. To set up EXPRESS-Transfer on a new
account, see the account application; to add it to an existing account, call
(800) 621-1048.
When you call us to sell shares, we may record the call, ask you for certain
information or take other steps designed to prevent fraudulent orders. It's
important to understand that, with respect to certain pre-authorized privileges,
as long as we take reasonable steps to ensure that an order appears genuine, we
are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are normally completed within 24 hours. The fund can only send
or accept wires of $1,000 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject purchase orders, for
these or other reasons.
20
<PAGE>
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one Kemper fund
into another don't affect CDSCs: for each investment you make, the date you
first bought Kemper shares is the date we use to calculate a CDSC on that
particular investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
21
<PAGE>
For Class A Shares purchased through the Large Order NAV Purchase Privilege,
redemption of shares whose dealer of record at the time of the investment
notifies Kemper Distributors that the dealer waives the applicable commission.
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Funds can answer your questions and help you determine if you are
eligible.
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or a Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Kemper Funds. You'll be reimbursed (in the form of fund shares) for
any CDSC you paid when you sold your shares. Future CDSC calculations will be
based on your original investment date, rather than your reinstatement date.
There is also an option that lets investors who sold Class B shares buy Class A
shares with no sales charge, although they won't be reimbursed for any CDSC they
paid. You can only use the reinstatement feature once for any given group of
shares. To take advantage of this feature, contact Shareholder Services or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received) although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
22
<PAGE>
- --------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
- --------------------------------------------------------------------------------
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")
Class B and Class C shares -- NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each share class in this prospectus, the price at which you sell shares is
also the NAV, although for Class B and Class C investors a CDSC may be taken out
of the proceeds (see "Choosing A Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
Because the fund invests in securities that are traded primarily in foreign
markets, the value of its holdings could change at a time when you aren't able
to buy or sell fund shares. This is because some foreign markets are open on
days when the fund doesn't price its shares.
23
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below $1,000
for the entire quarter; this policy doesn't apply to most retirement
accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; the fund generally won't make a redemption
in kind unless your requests over a 90-day period total more than $250,000
or 1% of the value of the fund's net assets
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
24
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, ask your tax
professional about the tax consequences of your investments, including
any state and local tax consequences.
- --------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase and sales of shares.) A fund
may not always pay a distribution for a given period.
By international treaty, 15% of dividends and 10% of interest received by the
fund is withheld for Japanese taxes. The amounts withheld are taxable to you as
a shareholder even though you don't receive them. However, you may be able to
claim a tax credit or a deduction for your portion of any foreign taxes
withheld.
The fund intends to pay dividends and distributions to its shareholders in
December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
25
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
- --------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o income dividends you receive from a fund
- --------------------------------------------------------------------------------
o short-term capital gains distributions received from a fund
- --------------------------------------------------------------------------------
Generally taxed at capital gains rates
- --------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o long-term capital gains distributions received from a fund
- --------------------------------------------------------------------------------
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends- received deduction for a portion
of income dividends they receive.
26
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
- --------------------------------------------------------------------------------
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of the fund's strategies on its
performance. they also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. To reduce costs, we mail one copy per household. For more copies,
call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials at the SEC's Public Reference Room in
Washington, DC or request them electronically at [email protected]
SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (202) 942-8090
Scudder Funds
c/o Kemper Distributors, Inc.
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
SEC File Number
The Japan Fund, Inc. 811-1090
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
<PAGE>
THE JAPAN FUND, INC.
Class S
PROSPECTUS
MAY 1, 2000
[LOGO]
Scudder Kemper Investments, Inc.
Investment Adviser
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
The Japan Fund, Inc.
How the fund works
2 Investment Approach
3 Main Risks To Investors
5 The Fund's Track Record
6 How Much Investors Pay
7 Other Policies and Risks
8 Who Manages and Oversees the Fund
9 Financial Highlights
How to invest in the fund
11 How to Buy Shares
12 How to Exchange or Sell Shares
13 Policies You Should Know About
18 Understanding Distributions and Taxes
<PAGE>
How the fund works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal, and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency. Their share
prices will go up and down, so be aware that you could lose money.
You can access all Scudder fund prospectuses online at: www.scudder.com
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol | SJPNX fund number | 069
The Japan Fund, Inc.
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks long-term capital appreciation by investing at least 80% of net
assets in Japanese securities (issued by Japan-based companies or their
affiliates, or by any company that derives more than half of its revenues from
Japan). The fund may invest in stocks of any size, including up to 30% of net
assets in smaller companies that are traded over-the-counter.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with effective
management, strong competitive positioning, active research and development and
sound balance sheets. The managers also evaluate fundamentals such as
price-to-earnings ratios.
Growth orientation. The managers prefer companies whose revenue or earnings seem
likely to grow faster than the average for their market and whose stock prices
appear reasonable in light of their business prospects.
Top-down analysis. The managers consider the economic outlooks for various
sectors and industries.
The managers may favor securities from different industries and companies at
different times while still maintaining variety in terms of the industries and
companies represented.
The fund will normally sell a security when it reaches a target price, its
fundamentals have changed, the managers believe other investments offer better
opportunities or when adjusting its emphasis on a given industry.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
While most of the fund's investments are common stocks, the fund may also invest
in other types of equities, such as convertible securities, depositary receipts
and preferred stocks. The fund may also invest in debt securities rated in the
top four credit quality categories such as those issued by the Japanese
government or Japanese companies if the managers believe they offer greater
potential for capital growth.
Although the fund is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments.
2
<PAGE>
- --------------------------------------------------------------------------------
[ICON] This fund may be of interest to long-term investors who want
broad exposure to Japanese stocks and understand the
higher-than-average volatility associated with the
investment.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the Japanese market. When Japanese stock prices
fall, you should expect the value of your investment to fall as well. The fact
that the fund focuses on a single country could affect fund performance. For
example, Japanese economic growth has weakened after the sharp collapse of the
stock market in the 1990's and the current economic condition remains uncertain.
Japanese companies could be hurt by such factors as a failure to achieve
economic recovery.
Japanese stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties, to a higher risk that
essential information may be incomplete or wrong. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies. Small companies may have limited business lines and
financial resources, making them especially vulnerable to business risks and
economic downturns. In addition, changing currency rates could add to the fund's
investment losses or reduce its investment gains.
3
<PAGE>
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies or other matters
o growth stocks may be out of favor for certain periods
o bonds will tend to fall in value as interest rates rise, and could
decline in credit quality or go into default
o securities traded over-the-counter may not be traded in the same
volumes and may be more volatile than those of larger companies traded
on a national securities exchange
o derivatives could produce disproportionate losses
o at times it could be hard to value some investments or to get an
attractive price for them
4
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of
how it will do in the future, it can be valuable for an
investor to know. This page looks at fund performance two
different ways: year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how returns for the fund's Class S shares have varied from
year to year, which may give some idea of risk. The table shows average annual
total returns for the fund's Class S shares and a broad-based market index
(which, unlike the fund, has no fees or expenses). The performance of both the
fund's shares and the index vary over time. All figures on this page assume
reinvestment of dividends and distributions.
- ---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- ---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
'90 -16.36
'91 3.11
'92 -16.74
'93 23.64
'94 10.03
'95 -9.07
'96 -10.92
'97 -14.40
'98 24.29
'99 119.88
2000 Total Return as of March 31: 5.87%
Best Quarter: 29.53%, Q3 1999 Worst Quarter: -22.44% Q3 1990
- ---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
- ---------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
Fund-- Class S 119.88 13.64 6.35
- ---------------------------------------------------------------
Index 1 76.02 2.37 -0.92
- ---------------------------------------------------------------
Index 2 61.53 1.96 -0.85
- ---------------------------------------------------------------
Index 1: The Tokyo Stock Exchange Stock Price Index (TOPIX) is an unmanaged
capitalization weighted measure (adjusted in U.S. dollars) of all shares listed
on the first section of the Tokyo Stock Exchange. Index returns assume dividends
are reinvested net of withholding tax.
Index 2: 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.
Effective 5/1/2000, the fund has adopted the TOPIX for its primary securities
market index over the MSCI Index, as the TOPIX better represents the securities
and markets in which the fund now invests.
5
<PAGE>
How Much Investors Pay
Class S shares of this fund have no sales charge or other shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly. This table shows fees for the fund's Class S shares.
- ---------------------------------------------------------------
Fee Table
- ---------------------------------------------------------------
Shareholder Fees (paid directly from your investment) None
- ---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- ---------------------------------------------------------------
Management Fee 0.73%
- ---------------------------------------------------------------
Distribution (12b-1) Fee None
- ---------------------------------------------------------------
Other Expenses* 0.27%
-------
- ---------------------------------------------------------------
Total Annual Operating Expenses 1.00%
- ---------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services, and
similar expenses, which may vary with fund size and other factors.
- ---------------------------------------------------------------
Expense Example
- ---------------------------------------------------------------
Based on the figures above, this example is designed to help you compare the
expenses of the fund's Class S shares to those of other funds. The example
assumes the expenses above remain the same and that you invested $10,000, earned
5% annual returns, reinvested all dividends and distributions and sold your
shares at the end of each period. This is only an example; your actual expenses
will be different.
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------
$102 $318 $552 $1,225
- ---------------------------------------------------------------
6
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points of the fund's
strategy and risks, there are a few other issues to know about:
o As a temporary defensive measure, the fund could shift up to 100% of
its assets into investments such as money market securities. This could
prevent losses, but would mean that the fund was not pursuing its goal.
o This fund may trade securities more actively than many funds, which
could mean higher expenses (thus lowering return) and higher taxable
distributions.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
7
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for
managing the fund, takes a team approach to asset management.
- --------------------------------------------------------------------------------
Who Manages and Oversees the Fund
The investment adviser
The fund's investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
The fund is managed by a team of investment professionals, who individually
represent different areas of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the fund managers are
Scudder Kemper's many economists, research analysts, traders, and other
investment specialists, located in offices across the United States and around
the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from the fund. For the most recent fiscal year, the actual amount
the fund paid in management fees was 0.73% of average daily net assets.
The portfolio managers
The following people handle the day-to-day management of the fund.
Seung Kwak Elizabeth J. Allan
Lead Portfolio Manager o Began investment career
o Began investment career in 1982
in 1985 o Joined the adviser in 1987
o Joined the adviser in 1988 o Joined the fund team
o Joined the fund team in 1987
in 1989
8
<PAGE>
Financial Highlights
This table is designed to help you understand the financial performance of the
fund's Class S shares in recent years. The figures in the first part of the
table are for a single share. The total return figures represent the percentage
that an investor in the fund would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the fund's financial
statements, is included in the annual report (see "Shareholder reports" on the
back cover).
The Japan Fund, Inc. -- Class S*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.33 $ 6.77 $ 8.33 $ 9.44 $10.50
---------------------------------------------
- -------------------------------------------------------------------------------------
Income (loss) from investment operations:
- -------------------------------------------------------------------------------------
Net investment income (loss) (a) (.02) (.01) (.03) (.03) (.01)
- -------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions 9.95 1.65 (1.16) (1.00) (.94)
---------------------------------------------
- -------------------------------------------------------------------------------------
Total from investment operations 9.93 1.64 (1.19) (1.03) (.95)
- -------------------------------------------------------------------------------------
Less distributions from:
- -------------------------------------------------------------------------------------
Net investment income (.08) -- -- -- --
- -------------------------------------------------------------------------------------
Net realized gains on investment
transactions (1.77) -- -- -- --
- -------------------------------------------------------------------------------------
In excess of net investment income -- (.08) (.37) (.08) --
- -------------------------------------------------------------------------------------
In excess of net realized gains -- -- -- -- (.11)
---------------------------------------------
- -------------------------------------------------------------------------------------
Total distributions (1.85) (.08) (.37) (.08) (.11)
- -------------------------------------------------------------------------------------
Net asset value, end of period $16.41 $ 8.33 $ 6.77 $ 8.33 $ 9.44
---------------------------------------------
- -------------------------------------------------------------------------------------
Total Return (%) 119.88 24.29 (14.40) (10.92) (9.07)
- -------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 1,089 347 265 386 549
- -------------------------------------------------------------------------------------
Ratio of expenses (%) 1.00 1.26 1.21 1.16 1.21
- -------------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) (.20) (.14) (.38) (.34) (.24)
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 114 90 96 73 70
- -------------------------------------------------------------------------------------
</TABLE>
* On May 1, 2000, existing shares of the fund were designated as Class S
shares.
(a) Based on monthly average shares outstanding during the period.
9
<PAGE>
How to invest in the fund
The following pages tell you how to invest in the fund and what to expect as a
shareholder. If you're investing directly with Scudder, all of this information
applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
<PAGE>
How to Buy Shares
Use these instructions to invest directly with Scudder. Make out your check to
"The Japan Fund, Inc."
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
First investment Additional investments
- ---------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
- ---------------------------------------------------------------------------------------
By mail or express o Fill out and sign an o Send a check and a Scudder
(see below) application investment slip to us at the
appropriate address below
o Send it to us at the
appropriate address, along o If you don't have an
with an investment check investment slip, simply include
a letter with your name,
account number, the full
name of the fund and your
investment instructions
- ---------------------------------------------------------------------------------------
By wire o Call 1-800-53-JAPAN for o Call 1-800-53-JAPAN for
instructions instructions
- ---------------------------------------------------------------------------------------
By phone -- o Call 1-800-53-JAPAN for
instructions
- ---------------------------------------------------------------------------------------
With an automatic -- o To set up regular investments
investment plan from a bank checking account,
call 1-800-53-JAPAN
- ---------------------------------------------------------------------------------------
On the Internet o Go to the "funds and prices" o Call 1-800-SCUDDER to ensure
section at www.scudder.com you have enabled electronic
services
o Access and print out an
on-line prospectus and a new o Go to www.scudder.com and
account application register
o Complete and return the o Follow the instructions for
application with your check buying shares with money from
your bank account
- ---------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-53-JAPAN
- ---------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[ICON] Regular mail:
The Japan Fund Service Center, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Japan Fund Service Center, 66 Brooks Drive, Braintree, MA
02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
- --------------------------------------------------------------------------------
11
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in an account opened directly
with Scudder.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
- ---------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 for IRAs) most for over $100,000, can
only be ordered in writing; if
$100 or more for exchanges you're in doubt, see page 15
between existing accounts
- ---------------------------------------------------------------------------------------
By phone or wire o Call 1-800-53-JAPAN for o Call 1-800-53-JAPAN for
instructions instructions
- ---------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
- ---------------------------------------------------------------------------------------
By mail, express Write a letter that includes: Write a letter that includes:
or fax (see
previous page) o the fund, class and account o the fund, class and account
number you're exchanging number from which you want to
out of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the o your name(s), signature(s)
fund you want to exchange into and address, as they appear on
your account
o your name(s), signature(s)
and address, as they appear o a daytime telephone number
on your account
o a daytime telephone number
- ---------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-53-JAPAN
- ---------------------------------------------------------------------------------------
On the Internet o Go to www.scudder.com and --
register
o Follow the instructions for
making on-line exchanges
- ---------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-53-JAPAN
- ---------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder
representative between 8 a.m. and 8 p.m.
Eastern time on any fund business day by
calling 1-800-53-JAPAN.
- --------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In either case, keep in mind that the information in this prospectus applies
only to the fund's Class S shares. The fund does have other share classes, which
are described in a separate prospectus and which have different fees,
requirements and services.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. Eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
13
<PAGE>
- --------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for
shareholders with Internet access. Go to www.scudder.com to
get up-to-date information, review balances or even place
orders for exchanges.
- --------------------------------------------------------------------------------
SAIL(TM), the Scudder Automated Information Line, is available 24 hours a day by
calling 1-800-343-2890. You can use SAIL to get information on Scudder funds
generally and on accounts held directly at Scudder. You can also use it to make
exchanges and sell shares.
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-53-JAPAN.
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The funds
can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
14
<PAGE>
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
15
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- --------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax,
you can always send us your order in writing.
- --------------------------------------------------------------------------------
How the fund calculates share price
The share price for the fund's Class S shares is its net asset value per share,
or NAV. To calculate NAV, the fund uses the following equation, taking figures
for this share class only:
TOTAL ASSETS - TOTAL LIABILITIES
- -------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
Because the fund invests in securities that are traded primarily in foreign
markets, the value of its holdings could change at a time when you aren't able
to buy or sell fund shares. This is because some foreign markets are open on
days when the fund doesn't price its shares.
16
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o charge you $10 a year if your account balance falls below $2,500, and
close your account and send you the proceeds if your balance falls
below $1,000; in either case, we will give you 60 days' notice so you
can either increase your balance or close your account (these policies
don't apply to retirement accounts, to investors with $100,000 or more
in Scudder fund shares or in any case where a fall in share price
created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; in most cases, the fund
generally won't make a redemption in kind unless your requests over a
90-day period total more than $250,000 or 1% of the value of the fund's
net assets
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
17
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's
always a good idea to ask your tax professional about the tax
consequences of your investments, including any state and
local tax consequences.
- --------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase and sales of shares.) A fund
may not always pay a distribution for a given period.
By international treaty, 15% of dividends and 10% of interest received by the
fund is withheld for Japanese taxes. The amounts withheld are taxable to you as
a shareholder even though you don't receive them. However, you may be able to
claim a tax credit or a deduction for your portion of any foreign taxes
withheld.
The fund intends to pay dividends and distributions to its shareholders in
December, and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
18
<PAGE>
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
- -----------------------------------------------------------------
o short-term capital gains from selling fund shares
- -----------------------------------------------------------------
o taxable income dividends you receive from the fund
- -----------------------------------------------------------------
o short-term capital gains distributions you receive from
the fund
- -----------------------------------------------------------------
Generally taxed at capital gains rates
- -----------------------------------------------------------------
o long-term capital gains from selling fund shares
- -----------------------------------------------------------------
o long-term capital gains distributions you receive from the
fund
- -----------------------------------------------------------------
The fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
19
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Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effect of the fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns and the fund's financial statements. Shareholders get these
reports automatically. To reduce costs, we mail one copy per household. For more
copies, call 1-800-53-JAPAN.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Scudder or the SEC (see below). Materials you
get from Scudder are free; those from the SEC involve a copying fee. If you
like, you can look over these materials at the SEC's Public Reference Room in
Washington, DC or request them electronically at [email protected].
Scudder Funds SEC
PO Box 2291 450 Fifth Street, N.W.
Boston, MA 02107-2291 Washington, DC 20549-0102
1-800-53-JAPAN 1-202-942-8090
www.scudder.com www.sec.gov
SEC File Number 811-1090
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
THE JAPAN FUND
Advisor Classes
CLASS A, CLASS B AND CLASS C
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, B and C Shares (the "A, B and C
Shares") of The Japan Fund (the "Fund"), an open-end management investment
company. It should be read in conjunction with the prospectus of the Shares
dated May 1, 2000. The prospectus may be obtained without charge from the Fund
at the address or telephone number on this cover or the firm from which this
Statement of Additional Information was received.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS...................................................2
INVESTMENT POLICIES AND TECHNIQUES........................................4
JAPAN AND THE JAPANESE ECONOMY...........................................14
SECURITIES MARKETS IN JAPAN..............................................20
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS................................23
PERFORMANCE..............................................................23
INVESTMENT MANAGER.......................................................27
CODE OF ETHICS...........................................................29
PRINCIPAL UNDERWRITER....................................................30
ADMINISTRATIVE SERVICES..................................................31
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICES AGENT.................31
PORTFOLIO TRANSACTIONS...................................................32
NET ASSET VALUE..........................................................33
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES............................34
SPECIAL FEATURES.........................................................43
DIRECTORS AND OFFICERS...................................................46
FUND ORGANIZATION........................................................50
TAXES....................................................................50
ADDITIONAL INFORMATION...................................................54
Scudder Kemper Investments, Inc. (the "Advisor") serves as the Fund's investment
manager.
The financial statements appearing in the Fund's December 31, 1999 Annual Report
to Shareholders are incorporated herein by reference.
<PAGE>
THE JAPAN FUND
CLASS A, CLASS B AND CLASS C SHARES
The Japan Fund, Inc. is a 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 offers the following classes of
shares: Class S, Class A, Class B and Class C shares. Only the Class A, B and C
shares of Japan Fund are offered herein.
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 Investment Company Act of 1940 (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:
(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,
2
<PAGE>
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.
Master/feeder structure. The Board of Directors has the discretion to retain the
current distribution arrangement for the Fund while investing 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.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Advisor. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the
3
<PAGE>
Fund, as a matter of non-fundamental policy, may not borrow for other than
temporary or emergency purposes (and not for leveraging).
INVESTMENT POLICIES AND TECHNIQUES
General. The Fund's investment objective is long-term capital appreciation,
which it seeks to achieve by investing primarily in the equity securities
(including American Depository 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 net
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 advisor, Scudder Kemper Investments, Inc. (the "Advisor"), 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 total 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 total 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 Advisor 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 Advisor
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.
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.
4
<PAGE>
It is the Fund's policy not to make loans, other than by way of making
investments in corporate debt securities or government obligations or commercial
paper as described above.
Specialized Investment Techniques
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries and because the Fund may hold foreign
currencies and forward contracts, futures contracts and options on futures
contracts on foreign currencies, the value of the assets of the Fund as measured
in U.S. dollars may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Fund may incur
costs in connection with conversions between various currencies. Although the
Fund values its assets daily in terms of U.S. dollars, it does not intend to
convert its holdings of foreign currencies into U.S. dollars on a daily basis.
It will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or
futures contracts to purchase or sell foreign currencies.
Depository Receipts. The Fund may invest indirectly in securities of emerging
country issuers through sponsored or unsponsored American Depository Receipts
("ADRs"), Global Depository Receipts ("GDRs"), International Depository Receipts
("IDRs") and other types of Depository Receipts (which, together with ADRs, GDRs
and IDRs are hereinafter referred to as "Depository Receipts"). Depository
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 Depository 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 Depository
Receipts. ADRs are Depository 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 Depository 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, Depository Receipts in registered form are designed for use in the
United States securities markets and Depository 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 Depository Receipts will be deemed to be investments in the
underlying securities. Depository Receipts other than those denominated in U.S.
dollars will be subject to foreign currency exchange rate risk. Certain
Depository Receipts may not be listed on an exchange and therefore may be
illiquid securities.
Debt Securities. When the Advisor 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 Advisor. Should the rating of a portfolio security be
downgraded, the Advisor 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
5
<PAGE>
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 Advisor may at times play a greater role in valuing these
securities than in the case of liquid 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.
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 Advisor to be at least
6
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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.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies
which seek to track the composition and performance of specific indexes or a
specific portion of an index. These index-based investments hold substantially
all of their assets in securities representing their specific index.
Accordingly, the main risk of investing in index-based investments is the same
as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio securities and due to
supply and demand for the instruments on the exchanges on which they are traded
(which may result in their trading at a discount or premium to their NAVs).
Index-based investments may not replicate exactly the performance of their
specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depository Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in
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the S&P MidCap 400 Index in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
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 fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
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, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a 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 Advisor'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 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 Advisor'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
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gains in the value of the Fund's position. In addition, futures and options
markets may not be liquid in all circumstances and certain over-the-counter
options may have no markets. As a result, in certain markets, the Fund might not
be able to close out a transaction without incurring substantial losses, if at
all. Although the use of futures and options transactions for hedging should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
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.
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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 Advisor 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, are determined to be of equivalent credit quality by the Advisor.
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 15% of its net 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, foreign
sovereign debt, 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 total 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 and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of 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 and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering
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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 similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
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 except as described below. 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 or cross 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
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option 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
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in value to a degree or in a direction that is not anticipated. Further, there
is the risk that the perceived correlation 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 Advisor, 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 Advisor'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 Advisor 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 or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures
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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 cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or 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 cash or
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
cash or 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 assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid 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 cash or liquid
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, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid 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 cash or liquid 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 liquid 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 assets
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 cash or liquid 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
13
<PAGE>
after the primary transaction no segregation is required, but if it terminates
prior to such time, cash or liquid 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.")
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 126 million. Life
expectancy is one of the highest in the world. Literacy in Japan approaches
100%. Nearly 90% of Japanese students graduate from high school. Approximately
37% go on to college or university. Approximately 45% of the total population of
Japan is concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya,
cities with some of the world's highest population densities.
Over the post war period Japan has experienced significant economic
development. Today Japan is the second largest industrial nation in the world in
terms of GDP, with the United States being the largest. During the era of high
economic growth in the 1960s and early 1970s the expansion was based on the
development of heavy industries such as steel and shipbuilding. In the 1970s,
Japan moved into assembly industries that employ high levels of technology and
consume relatively low quantities of resources, and since then has become a
major producer of automobiles and electrical and electronic products. In the
1980s, as Japan experienced a sharp appreciation of its currency, Japanese
manufacturers increasingly moved their production offshore, while domestic
demand was driven by a boom in consumption, housing, construction, and private
capital expenditures. After the sharp collapse in the stock market, which began
in 1990s, the Japanese economy has been in an adjustment phase, dealing with
excess capacity and lower growth.
Another development in the Japanese economy in the 1990s was a growing
trend of deregulation and globalization. Import restrictions on many products,
ranging from meats to gasoline were gradually lifted, and deregulation proceeded
in industries ranging from retail, communication, transportation, finance, and
many others.
In the 1990s, asset price declines and excess capacity in many sectors
have continued to support a largely disinflationary environment.
Japan's economy is a market economy in which industry and commerce are
predominantly privately owned and operated. However, the Government is involved
in establishing and meeting objectives for developing the economy and improving
the standard of living of the Japanese people. In order to achieve its economic
objectives, the Government has generally relied on providing the prerequisite
business environment and administrative guidance. The agencies of the Government
primarily concerned with economic policy and its implementation are the Economic
Planning Agency, The Ministry of Finance (MOF) and the Ministry of International
Trade and Industry (MITI). The Bank of Japan, Japan's central bank, also acts in
this field.
Economic Trends
During the ten and five-year periods ended December 31, 1999, Japan's
real gross domestic product in constant prices increased at an average annual
compound growth rate of 2.13% and 1.29%, respectively. In 1996, the gross
domestic product grew at a high rate of 5.0% due to 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 1.6% 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 2.5% affected by
reduced fixed investment in the private sector and continuous stagnation of
consumer spending. In 1999, real GDP grew 0.3% reflecting a slight improvement
in consumer spending, the largest component.
- ----------------------------------
* WHERE FIGURES IN TABLES UNDER THIS CAPTION HAVE BEEN ROUNDED OFF, THE
TOTALS MAY NOT NECESSARILY AGREE WITH THE SUM OF FIGURES.
14
<PAGE>
The following table sets forth the composition of Japan's gross
domestic product in yen and in percentage terms. In addition, the gross domestic
product in constant yen and the gross domestic deflator are shown.
GROSS DOMESTIC PRODUCT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Gross Domestic Product 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nominal GDP (in Billion of Yen) 483,220.2 500,309.7 509,645.3 489,499.3 495,375.1
- ----------------------------------------------------------------------------------------------------
Consumption 337,942.2 347,763.6 355,461.5 355,442.2 357,774.4
Private 290,523.6 299,340.7 305,906.7 304,765.8 306,789.6
Public 47,418.6 48,422.9 49,554.8 50,676.4 50,984.8
Fixed Investment 137,611.20 147,424.80 145,608.50 133,593.30 129,322.60
Private 96,268.70 103,679.30 106,062.60 95,550.00 89,466.00
Public 41,342.5 43,745.5 39,545.9 38,043.3 39,856.6
Inventory 545.9 2,443.4 2,559.1 (252.7) 176.9
Private 433.7 2,249.3 2,422.4 (171.6) 260.0
Public 112.2 194.1 136.7 (81.1) (83.1)
Net Exports of Goods & Services 7,121.0 2,677.9 6,016.2 9,716.6 8,101.1
Exports of Goods & Services 45,392.9 49,699.8 56,332.3 55,323.6 51,284.4
Imports of Goods & Services (38,271.9) (47,021.9) (50,316.1) (45,607.0) (43,183.3)
Real GDP 461,893.5 485,219.0 492,954.2 480,586.8 481,865.2
GDP Deflator (1990=100) 104.6 103.1 103.4 103.7 n.a.
- ----------------------------------------------------------------------------------------------------
Percentage Change of GDP 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Nominal GDP +0.8% +3.5% +1.9% -2.2% -0.6%
Consumption +1.8% +2.9% +2.2% -0.0% +0.7%
Fixed Investment +0.2% +7.1% -1.2% -8.3% -3.2%
Inventory +1,000.6% +347.6% +4.7% -109.9% -170.0%
Net Exports of Goods & Services -29.0% -62.4% +124.7% +61.5% -16.6%
Exports of Goods & Services +2.2% +9.5% +13.3% -1.8% -7.3%
Imports of Goods & Services +11.3% +22.9% +7.0% -9.4% -5.3%
Real GDP +1.5% +5.0% +1.6% -2.5% +0.3%
GDP Deflator -0.7% -1.4% +0.3% +0.3% n.a.
- ----------------------------------------------------------------------------------------------------
Percentage of Nominal GDP 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Consumption 69.9% 69.5% 69.7% 71.3% 72.2%
Fixed Investment 28.5% 29.5% 28.6% 26.8% 26.1%
Inventory 0.1% 0.5% 0.5% -0.1% 0.0%
Net Exports of Goods & Services 1.5% 0.5% 1.2% 1.9% 1.6%
Exports of Goods & Services 9.4% 9.9% 11.1% 11.1% 10.4%
Imports of Goods & Services 7.9% 9.4% 9.9% 9.1% 8.7%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Source: Economic Planning Agency, Quarterly Report on National Accounts
15
<PAGE>
Industrial Production
The following table sets forth indices of industrial production of
Japan and other selected industrial countries for the five years ending with
calendar year 1999 (with 1995 as 100):
INDICES OF INDUSTRIAL PRODUCTION
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Japan 100.00 102.90 107.30 99.70 99.33
United States 100.00 104.50 110.70 114.80 117.57
Germany 100.00 99.80 102.70 106.20 106.37
United Kingdom 100.00 101.10 101.90 102.50 102.80
France 100.00 100.30 104.10 108.80 n.a.
Italy 100.00 98.30 100.50 102.20 n.a.
Canada 100.00 100.10 104.00 109.10 113.67
- --------------------------------------------------------------------------------
Source: IMF, International Financial Statistics
The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1995 to 1999:
GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufacturing 95.7% 95.2% 95.2% 94.8% n.a.
Agriculture, Forestry and Fisheries 2.1% 2.0% 1.9% 1.9% n.a.
Mining 0.2% 0.2% 0.2% 0.2% n.a.
Construction 9.7% 9.4% 8.7% 8.2% n.a.
Manufacturing 27.4% 27.7% 28.4% 27.1% n.a.
Electricity, Gas and Water 2.7% 2.9% 2.8% 3.0% n.a.
Wholesale and Retail Trade 13.6% 12.9% 13.0% 12.8% n.a.
Finance and Insurance 5.4% 4.9% 5.2% 5.2% n.a.
Real Estate 11.8% 11.9% 12.0% 12.5% n.a.
Transportation & Communication 6.5% 6.6% 6.6% 6.6% n.a.
Services 16.4% 16.8% 16.5% 17.1% n.a.
Government Services 7.5% 7.3% 7.3% 7.5% n.a.
Private Non-Profit Institutions 2.2% 2.2% 2.2% 2.4% n.a.
Import Duty 0.9% 0.8% 0.8% 0.7% n.a.
(Deduction) Others 0.4% 0.5% 0.5% 0.5% n.a.
(Deduction) Imputed Interest 5.1% 4.5% 4.8% 4.8% n.a.
Statistical Discrepancy -0.7% -0.4% -0.2% -0.2% n.a.
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Total GDP 100.0% 100.0% 100.0% 100.0% n.a.
- -------------------------------------------------------------------------------------
</TABLE>
Source: Economic Planning Agency, Annual Report on National Accounts
* 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.
Energy
Japan has historically depended on oil for most of its energy
requirements. Virtually all of its oil is imported, the majority from the Middle
East. Oil price changes used to have a major impact on the domestic economy, but
now their influence is relatively diminished.
Japan has worked to reduce its dependence on oil by encouraging energy
conservation and the use of alternative fuels. In addition to conservation
efforts, industrial restructuring, with emphasis on 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.
16
<PAGE>
Labor
In 1999, approximately 67.8 million persons, or approximately 63% of
the Japanese population, were employed, of which approximately 4.2% were
employed in agriculture, forestry and fisheries, 32.7% in construction and
manufacturing and 6.8% in transportation and communications, 24.8% in wholesale
and retail trade, 4.1% in finance, and 27.4% 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.
- --------------------------------------------------------------------------------
Employee by type of work 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Agriculture, Forestry and Fisheries 5.3% 5.2% 5.1% 5.0% 4.2%
Construction 10.9% 11.0% 10.7% 10.7% 10.4%
Manufacturing 23.4% 23.1% 22.3% 21.9% 22.3%
Transportation & Communication 6.7% 6.6% 6.5% 6.6% 6.8%
Whole Trade, Retail Trade 23.7% 23.6% 24.0% 24.2% 24.8%
Financials 4.1% 4.1% 4.2% 4.1% 4.1%
Services 25.9% 26.4% 27.2% 27.5% 27.4%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YoY% Chg 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Wages Index +3.3% +2.5% +2.8% -1.1% -1.0%
Hours Worked Index +0.7% +0.8% -0.2% -1.8% +0.0%
Employment Index -1.9% -2.2% -0.9% -1.3% -2.6%
Labor Productivity - +3.2% +4.8% -4.1% n.a.
- --------------------------------------------------------------------------------
Source: Ministry of Labor, Monthly Labor (Wages are for manufacturers who
employ 30 or more persons.)
Prices
In 1999, the wholesale price index declined by 3.3% and the consumer
price index also declined by 0.3%.
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
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Japan 100.00 100.10 101.60 100.00 96.68
United States 100.00 102.30 102.30 99.70 100.58
Germany 100.00 99.60 100.70 100.30 99.03
United Kingdom 100.00 102.60 103.60 104.20 105.13
Italy 100.00 101.90 103.20 103.30 102.43
Canada 100.00 100.40 101.30 101.20 102.23
- --------------------------------------------------------------------------------
Source: IMF, International Financial Statistics
COMPARATIVE CONSUMER PRICE INDICES
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Japan 100.00 100.10 101.80 102.50 102.20
United States 100.00 102.90 105.30 107.00 109.30
Germany 100.00 101.50 103.30 104.30 104.83
United Kingdom 100.00 102.40 105.70 109.30 110.63
France 100.00 102.00 103.20 103.90 104.48
Italy 100.00 104.00 106.10 108.20 109.98
Canada 100.00 100.10 104.00 109.10 113.67
- --------------------------------------------------------------------------------
Source: IMF, International Financial Statistics
Balance of Payments
In 1999, Japan registered a surplus of Y12,197 billion ($110.1 billion)
in its current account. This surplus was predominantly due to a surplus of
Y14,054 billion ($ 127.7 billion) in its trade account. Japan also registered an
outflow of Y5,614.8 billion ($51.5 billion) in its capital and financial
account.
17
<PAGE>
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, 1999, exports and imports represented approximately 10.4% and 8.7%,
respectively, of Japan's nominal gross domestic product. Roughly three quarters
of Japan's exports are machinery and equipment including motor vehicles, machine
tools and electronic equipment. Japan's principal imports consist of raw
materials, foodstuff and fuels, such as oil and coal.
Japan's principal export markets are the United States, Canada, the
United Kingdom, Germany, Australia, Korea, Taiwan 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 fell slightly in 1996 and
1997 as a result of the rise in import prices reflecting the lower yen rate. In
1998, the terms of trade improved slightly mainly because of lower import
prices. In 1999, the terms of trade improved to the 1995 level largely because
of lower import prices as a result of the higher yen rate.
FOREIGN TRADE OF JAPAN
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Value Index
Exports 100.02 107.72 122.71 121.98 114.64
Imports 100.00 120.43 129.89 116.19 111.84
- --------------------------------------------------------------------------------
Volume Index
Exports 100.00 100.80 112.68 111.22 113.61
Imports 100.00 104.99 106.78 101.09 110.82
- --------------------------------------------------------------------------------
Unit Value Index
Exports 100.00 106.84 108.87 109.66 100.89
Imports 100.00 114.71 121.65 114.95 100.92
- --------------------------------------------------------------------------------
Terms of Trade 100.00 93.14 89.50 95.40 99.97
- --------------------------------------------------------------------------------
Source: Ministry of Finance, The Summary Report on Trade of Japan
The following table sets forth the composition of Japan's exports and
imports by major commodity groups:
- --------------------------------------------------------------------------------
Japan Exports 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Foods & Beverage 0.5% 0.5% 0.5% 0.5%
Textile Products 2.1% 2.0% 1.9% 1.9%
Chemicals 7.0% 7.1% 7.0% 7.4%
Non-Ferrous Metal 1.3% 1.2% 1.1% 1.1%
Metal Products 6.2% 6.4% 6.3% 5.7%
Machinery 24.7% 23.8% 22.5% 21.3%
Elec. Machinery 23.9% 23.6% 23.2% 24.3%
Visual Equipments 2.2% 2.1% 2.5% 2.5%
Audio Equipments 1.0% 0.9% 0.9% 0.8%
Others 20.8% 22.7% 22.3% 23.5%
Transport Equipments 20.7% 21.5% 23.2% 22.7%
Autos 12.7% 14.0% 15.4% 14.9%
Auto Parts 4.0% 3.5% 3.2% 3.4%
Motorcycles 1.0% 0.9% 1.2% 1.1%
Shipments 2.2% 2.2% 2.5% 2.2%
Precision Machinery 4.7% 4.8% 4.6% 5.1%
Other Exports 8.8% 9.0% 9.5% 10.0%
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Japan's Imports 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Foods & Beverages 14.3% 13.6% 14.8% 14.3%
Basic Materials 8.8% 8.7% 7.8% 7.2%
Minerals & Fuels 18.0% 18.4% 15.3% 16.0%
Coal 2.0% 2.0% 2.2% 1.8%
Petroleum 10.0% 10.3% 8.0% 8.6%
Others 6.0% 6.1% 5.2% 5.6%
Chemicals 6.6% 6.9% 7.4% 7.5%
Textile Materials 7.1% 6.6% 6.8% 6.7%
Non-Ferrous Metal 1.6% 1.5% 1.4% 1.4%
Metal Products 4.9% 5.3% 5.1% 4.6%
Machinery 27.4% 28.0% 30.5% 31.3%
Others 11.3% 10.9% 10.9% 10.9%
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Source: Ministry of Finance, The Summary Report -- Trade of Japan
The following table indicates the geographic distribution of Japan's trade in
recent years.
GEOGRAPHIC DISTRIBUTION OF JAPAN'S EXPORTS AND IMPORTS
- --------------------------------------------------------------------------------
Japan Exports 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developed Areas
U.S.A. 27.3% 27.2% 27.8% 30.5% 30.7%
EC 15.9% 15.3% 15.6% 18.4% 19.1%
Australia 1.8% 1.8% 1.9% 2.1% 2.0%
Canada 1.3% 1.2% 1.4% 1.6% 1.7%
Others 1.7% 1.8% 1.7% 2.5% 0.5%
----------------------------------------------------------------------------
Subtotal 48.0% 47.3% 48.4% 55.1% 54.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developing Areas
S.E.Asia 38.3% 38.3% 36.5% 29.5% 31.6%
Middle East 2.3% 2.7% 2.8% 3.2% 2.3%
Latin America 4.4% 4.4% 5.0% 5.4% 4.7%
Africa 0.9% 0.7% 0.6% 1.0% 1.3%
Others 0.5% 0.5% 0.6% 0.0% 0.0%
----------------------------------------------------------------------------
Subtotal 46.4% 46.6% 45.5% 39.1% 39.9%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Former Soviet Union 0.3% 0.3% 0.3% 0.3% 0.1%
China 5.0% 5.3% 5.2% 5.2% 5.6%
Others 0.3% 0.6% 0.6% 0.3% 0.4%
----------------------------------------------------------------------------
Subtotal 5.6% 6.2% 6.1% 5.8% 6.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
Japan's Imports 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developed Areas
U.S.A. 22.4% 22.7% 22.3% 23.9% 21.7%
EC 14.5% 14.1% 13.3% 13.9% 15.4%
Australia 4.3% 4.1% 4.3% 4.6% 4.1%
Canada 3.2% 2.9% 2.9% 2.7% 2.6%
Others 3.2% 2.9% 1.8% 3.5% 0.9%
----------------------------------------------------------------------
Subtotal 47.6% 46.7% 44.6% 48.6% 44.6%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developing Areas
S.E.Asia 25.3% 25.1% 23.9% 23.9% 25.8%
Middle East 9.4% 10.1% 11.4% 9.1% 9.8%
Latin America 3.5% 3.3% 3.4% 3.3% 3.1%
Africa 0.6% 0.6% 0.6% 0.6% 1.3%
Others 1.7% 1.2% 1.0% 0.0% 0.0%
----------------------------------------------------------------------
Subtotal 40.5% 40.3% 40.3% 36.9% 40.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Former Soviet Union 1.4% 1.1% 1.3% 1.0% 1.2%
China 10.7% 11.6% 12.4% 13.2% 13.8%
Others 0.3% 0.3% 0.2% 0.4% 0.3%
----------------------------------------------------------------------
Subtotal 12.4% 13.0% 13.9% 14.6% 15.3%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Source: Ministry of Finance, The Summary Report -- Trade of Japan
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.
A new market, named "Mothers", was established in the Tokyo Stock Exchange on
November 11, 1999. This market is designed to facilitate the public listing of
venture business-type small corporations. As of the end of March 2000, six
companies are listed on this market.
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 1990 though 1999.
20
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nikkei 225 High 38,712.88 27,146.91 23,801.18 21,148.11 21,552.81 20,011.76 22,666.80 20,681.07 17,264.34 18,934.34
Low 20,221.86 21,456.76 14,309.41 16,078.71 17,369.74 14,485.41 19,161.71 14,775.22 12,879.97 13,232.74
Close 23,848.71 22,983.77 16,924.95 17,417.24 19,723.06 19,868.15 19,361.35 15,258.74 13,842.17 18,934.34
- -----------------------------------------------------------------------------------------------------------------------------------
TSE/TOPIX High 2,867.70 2,028.85 1,763.43 1,698.67 1,712.73 1,585.87 1,722.13 1,560.28 1,300.30 1,722.20
Low 1,523.43 1,638.06 1,102.50 1,250.06 1,445.97 1,193.16 1,448.45 1,130.00 980.11 1,048.33
Close 1,733.83 1,714.68 1,307.66 1,439.31 1,559.09 1,577.70 1,470.94 1,175.03 1,086.99 1,722.20
- -----------------------------------------------------------------------------------------------------------------------------------
OTC High 4,149.20 3,333.78 2,022.41 1,728.13 2,002.73 1,852.13 1,747.17 1,333.11 842.05 2,423.15
Low 2,154.20 1,918.06 1,099.32 1,200.84 1,445.47 1,194.77 1,316.25 708.23 610.99 727.28
Close 2,175.48 1,946.14 1,227.93 1,447.60 1,776.05 1,488.40 1,330.55 721.53 724.99 2,270.14
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
YoY%Chg 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Nikkei 225 High -0.5% -29.9% -12.3% -11.1% +1.9% -7.2% +13.3% -8.8% -16.5% +9.7%
Low -33.0% +6.1% -33.3% +12.4% +8.0% -16.6% +32.3% -22.9% -12.8% +2.7%
Close -38.7% -3.6% -26.4% +2.9% +13.2% +0.7% -2.6% -21.2% -9.3% +36.8%
- -----------------------------------------------------------------------------------------------------------------------------------
TSE/TOPIX High -0.6% -29.3% -13.1% -3.7% +0.8% -7.4% +8.6% -9.4% -16.7% +32.4%
Low -35.6% +7.5% -32.7% +13.4% +15.7% -17.5% +21.4% -22.0% -13.3% +7.0%
Close -39.8% -1.1% -23.7% +10.1% +8.3% +1.2% -6.8% -20.1% -7.5% +58.4%
- -----------------------------------------------------------------------------------------------------------------------------------
OTC High +59.7% -19.7% -39.3% -14.6% +15.9% -7.5% -5.7% -23.7% -36.8% +187.8%
Low +63.8% -11.0% -42.7% +9.2% +20.4% -17.3% +10.2% -46.2% -13.7% +19.0%
Close -16.2% -10.5% -36.9% +17.9% +22.7% -16.2% -10.6% -45.8% +0.5% +213.1%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Tokyo Stock Exchange, Monthly Statistics Report and
Annual Statistics of OTC Stocks 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 2884.80 on December 18, 1989.
The TOPIX then declined heavily in 1990 and in 1992, and after showing a slight
rebound in 1993 and 1994, the Index continued to decline throughout 1996, 1997
and 1998 to the latest low of 980.11 on October 15, 1998. From the 1989 peak to
the 1998 bottom, the TOPIX registered a 66% drop. In 1999, the Tokyo stock
market showed a strong upturn led by information service sector. The OTC index
more than tripled in 1999.
[ORIGINAL DOCUMENT CONTAINS A MOUNTAIN CHART HERE SHOWING TOPIX AND
NIKKEI 225 BETWEEN THE DATES OF 5/87 AND 5/99]
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 five years.
21
<PAGE>
- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market Capitalization in billion of Yen)
TSE 365,716 347,578 280,930 275,181 456,027
OTC 14,535 14,904 9,228 7,742 27,411
- --------------------------------------------------------------------------------
Daily Average Trading Volume (000 shares)
TSE 369,680 405,541 436,416 445,872 585,937
OTC 9,763 9,766 5,614 5,036 16,877
- --------------------------------------------------------------------------------
Number of Listed Companies
TSE 1714 1766 1805 1838 1890
OTC 678 762 834 856 868
- --------------------------------------------------------------------------------
Source: Tokyo Stock Exchange, Monthly Securities Statistics
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.
In the past, the proportion of trading value by institutional investors
has tended to increase at the expense of individuals, but in the last three
years of stock price declines, the share of trading value represented by
financial institutions and business corporations has fallen while the value of
trading by foreigners has risen substantially. In 1999, the trading value by
individuals increased dramatically reflecting the stock market rally and brisk
demand for stock investment trusts, as can be seen in the following table:
- --------------------------------------------------------------------------------
(Trading Value, % of Total) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Individuals 26.9% 22.9% 16.9% 13.5% 29.0%
Foreigners 25.5% 29.7% 34.5% 39.2% 38.6%
Securities Companies 2.6% 2.8% 2.2% 1.9% 2.2%
Investment Trust 5.0% 5.4% 3.5% 2.1% 2.3%
Financial Institutions 32.3% 32.8% 37.2% 37.4% 22.3%
Others 0.9% 0.8% 0.7% 0.7% 0.6%
- --------------------------------------------------------------------------------
Customers' Account 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Source: Tokyo Stock Exchange, Annual Securities Statistics
(Trading Value; 1st and 2nd Sections of the Tokyo, Osaka and Nagoya Stock
Exchanges)
The following table shows the price/earning ratios, price/book value
ratio, and dividend yield for TOPIX for each of the past five 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 rose in the period from 1997 through 1999 due mainly to a decline in
earnings.
TOPIX VALUATIONS (PER, PBR, Div.Yield and Rate of Return)
- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price/Earnings Ratio ^1) 69.87 51.73 124.45 174.54 81.97
Price/Book Ratio ^1) 2.32 2.22 1.76 1.72 2.66
Dividend Yield ^1) 0.75 0.81 1.02 1.00 0.57
Rate of Return ^2) 3.70 -0.50 4.20 20.90 n.a.
- --------------------------------------------------------------------------------
Sources: 1) Nikkei, 2) Tokyo Stock Exchange
22
<PAGE>
Following is a statistical comparison between the Tokyo Stock Exchange
(both sections) and the New York Stock Exchange for the five years ending 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Number of Companies
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TSE 1,714 1,766 1,805 1,838 1,892
NYSE 2,675 2,907 3,047 3,114 3,025
- -------------------------------------------------------------------------------------------------
Aggregate Market Value
- -------------------------------------------------------------------------------------------------
In Billions of Dollars* TSE 3,554 2,997 2,162 2,389 4,475
NYSE 6,013 7,300 9,413 10,864 12,296
- -------------------------------------------------------------------------------------------------
As percentage of GDP TSE 76% 69% 55% 55% 94%
NYSE 81% 93% 113% 124% 133%
- -------------------------------------------------------------------------------------------------
Turnover Ratio (%)
- -------------------------------------------------------------------------------------------------
TSE 270% 29% 31% 35% 44%
NYSE 59% 63% 69% 76% 78%
- -------------------------------------------------------------------------------------------------
</TABLE>
Sources: Tokyo Stock Exchange, Annual Securities Statistics
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 five years ending December 31, 1999.
EQUITY STOCK MARKETS OF THE WORLD
(dollars in billions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(dollars in billion) December 1995 December 1996 December 1997 December 1998 December 1999
------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $6,338.0 41.9% $7,835.9 45.1% $8,607.4 47.2% $11,721.5 50.7% $15,370.0 48.6%
Japan $3,582.7 23.7% $3,071.0 17.7% $2,287.8 12.5% $2,447.5 10.6% $4,692.8 14.9%
United Kingdom $1,354.3 9.0% $1,740.1 10.0% $2,097.6 11.5% $2,346.2 10.1% $2,894.5 9.2%
Germany $579.5 3.8% $648.3 3.7% $825.2 4,5% $1,181.1 5.1% $1,447.1 4.6%
France $504.5 3.3% $600.8 3.5% $677.9 3.7% $982.6 4.2% $1,442.1 4.6%
Canada $333.4 2.2% $463.6 2.7% $543.3 3.0% $513.2 2.2% $762.8 2.4%
Netherlands $304.3 2.0% $393.4 2.3% $358.3 2.0% $578.4 2.5% $758.9 2.4%
Switzerland $401.6 2.7% $406.6 2.3% $579.3 3.2% $696.7 3.0% $676.3 2.1%
Hong Kong $274.4 1.8% $393.4 2.3% $340.7 1.9% $347.9 1.5% $583.4 1.8%
Australia $245.4 1.6% $306.4 1.8% $284.7 1.6% $326.5 1.4% $27.5 0.1%
Other $1,197.2 7.9% $1,531.9 8.8% $1,630.1 8.9% $1,994.6 8.6% $2,938.5 9.3%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Total $15,115.3 100.0% $17,391.4 100.0% $18,232.3 100.0% $23,136.2 100.0% $31,593.9 100.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Morgan Stanley Capital International, Quarterly Report
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
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
The Fund may advertise several types of performance information for a
class of shares, including "average annual total return" and "total return."
Performance information will be computed separately for each of Class A, Class
23
<PAGE>
B and Class C shares. Each of these figures is based upon historical results and
is not representative of the future performance of any class of shares of the
Fund.
There may be quarterly periods following the periods reflected in the
performance bar chart in the Fund's prospectus which may be higher or lower than
those included in the bar chart.
Average annual total return and total return measure both the net
investment income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio. The Fund's average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for each class of shares of the Fund for a specific
period is found by first taking a hypothetical $1,000 investment ("initial
investment") in the relevant class of Fund shares on the first day of the
period, adjusting to deduct the maximum applicable sales charge (in the case of
Class A Shares), and computing the "redeemable value" of that investment at the
end of the period. Average annual total return quotations will be determined to
the nearest 1/100th of 1%. The redeemable value in the case of Class B Shares or
Class C Shares include the effect of the applicable contingent deferred sales
charge that may be imposed at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted from
the result, which is then expressed as a percentage. Average annual total return
calculated in accordance with this formula does not take into account any
required payments for federal or state income taxes. Such quotations for Class B
Shares for periods over six years will reflect conversion of such shares to
Class A Shares at the end of the sixth year. The calculation assumes that all
income and capital gains dividends paid by the Fund have been reinvested at net
asset value on the reinvestment dates during the period. Average annual total
return may also be calculated in a manner not consistent with the standard
formula described above, without deducting the maximum sales charge or
contingent deferred sales charge.
Average annual total return measures net investment income and capital
gain or loss from portfolio investments, assuming reinvestment of all dividends.
On April 1, 2000, the fund offered an additional three classes of shares, namely
the Class A, B and C shares described herein. Prior to that date, the Fund
consisted of one class of shares which, on that date, were designated as Class S
shares of the Fund. Class S shares have no sales charges, Rule 12b-1 fees, or
Administrative Service Fees (ASF). Class B share performance is adjusted for the
applicable CDSC, which is 4% within the first year after purchase, declining to
0% after six years. Class C share performance is adjusted for a CDSC, which is
1% within the first year after purchase. The performance figures have not been
adjusted to reflect Rule 12b-1 fees of 0.75%, which are applicable to each of
Class B and C shares, and ASF of up to 0.25%, which are applicable to each of
Class A, B and C shares from the date of each such class's inception. The Rule
12b-1 fees and ASF applicable to the respective classes of shares of the Fund
will result in lower performance. Class S shares are subject to certain other,
or different levels of, expenses than Classes A, B and C shares. The expenses
applicable to Class S shares have been reflected in the performance presented.
The difference in expenses will affect performance.
The figures below are based on the actual performance of the Class S
shares, which are offered pursuant to a separate prospectus and Statement of
Additional Information, and show performance information for the period ended
December 31, 1999. Class A, Class B and Class C shares are newly offered
beginning May 1, 2000.
24
<PAGE>
Returns for the Class A, Class B and Class C shares reflect the
performance of the Class S shares for the period ended December 31, 1999,
restated to reflect the deduction of the current applicable sales charges (that
is, the maximum 5.75% sales charge for Class A shares or the deferred sales
charge in effect at the applicable period for Class B shares or Class C shares).
The Class A, Class B and Class C shares' average annual total returns have also
been restated to reflect an estimate of the difference in expense structure
among share classes.
All returns assume reinvestment of distributions at net asset value and
represent past performance; they do not guarantee future results. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Average Annual Total Returns
<TABLE>
<CAPTION>
For the period ended December
31, 1999 Class A* Class B* Class C* Class S*
<S> <C> <C> <C> <C>
One Year 106.24% 110.74% 117.25% 119.88%
Five Years 11.76% 12.06% 12.28% 13.64%
Ten Years 5.22% 5.08% 5.08% 6.35%
</TABLE>
* Class A, Class B and Class C shares commenced operations on May 1, 2000.
Calculation of the Fund's total return is not subject to a standardized
formula, except when calculated for the Fund's financial statements and
prospectus. Total return performance for a specific period is calculated by
first taking a hypothetical investment ("initial investment") in the applicable
relevant class of the Fund `shares on the first day of the period, either
adjusting or not adjusting to deduct the maximum sales charge (in the case of
Class A Shares), and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B Shares or Class C Shares may or may not include the
effect of the applicable contingent deferred sales charge that may be imposed at
the end of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value per share on
the reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the initial investment over the period. Total return
calculations that do not include the effect of the sales charge for Class A
Shares or the contingent deferred sales charge for Class B and Class C Shares
would be reduced if such charges were included.
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.
25
<PAGE>
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.
Comparison of Fund Performance
The Fund's performance figures are based upon historical results and
are not necessarily representative of future performance. The Fund's Class A
Shares are sold at net asset value plus a maximum sales charge of 5.75% of the
offering price. Class B and Class C Shares are sold at net asset value.
Redemption of Class B Shares may be subject to a contingent deferred sales
charge that is 4% in the first year following the purchase, declines by a
specified percentage each year thereafter and becomes zero after six years.
Redemption of Class C Shares may be subject to a 1% contingent deferred sales
charge in the first year following the purchase. Returns and net asset value
will fluctuate. Factors affecting the Fund's performance include general market
conditions, operating expenses and investment management. Any additional fees
charged by a dealer or other financial services firm would reduce returns
described in this section. Shares of the Fund are redeemable at the then current
net asset value, which may be more or less than original cost.
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.
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 Kemper growth fund will be compared to funds in the
growth fund category; a Kemper income fund will be compared to funds in the
income fund category; and so on. Kemper 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
26
<PAGE>
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 Advisor has under
management in various geographical areas may be quoted in advertising and
marketing materials.
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 Kemper funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
Government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
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.
INVESTMENT MANAGER
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 advisor. This
agreement has the effect of reducing the total advisory fees paid by the Fund.
The shareholders' approval of this agreement was ratified at a special meeting
held on July 22, 1994.
Scudder Kemper Investments, Inc. (the "Advisor"), an investment counsel
firm, acts as investment advisor 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.
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In 1953 the Advisor 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 December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Advisor, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Advisor. The Advisor's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. 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.
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 Advisor's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over 74 open and
closed-end mutual funds.
The Advisor maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor'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 Advisor with respect to the Funds 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 Advisor. Investment decisions for a 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 Advisor 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 a fund. Purchase and sale orders for a fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to that fund.
In certain cases, the investments for the fund are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor,
that have similar names, objectives and investment styles. You should be aware
that the Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Fund can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was
approved by the Directors on July 9, 1998, became effective September 7, 1998,
and was approved at a shareholder meeting held on December 11, 1998. The
Agreement will continue in effect until September 30, 2000 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 Advisor or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Fund's Directors
or of a majority of the outstanding voting securities of the Fund. The Agreement
may be terminated at any time without payment of penalty by either party on
sixty days' written notice and automatically terminate in the event of its
assignment.
Under the Agreement, the Advisor 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
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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.
Under the Agreement, the Advisor 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 Advisor 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 Advisor and makes available, without expense to the
Fund, the services of such Directors, officers and employees of the Advisor 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 Advisor 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 Advisor; 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 Advisor shall not be required
to pay a pricing agent of any Fund for portfolio pricing services, if any.
The Advisor may serve as advisor 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.
CODE OF ETHICS
The Fund, the Advisor and principal underwriter have each adopted codes
of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Advisor and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Advisor's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Advisor's Code of Ethics
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
quarterly reporting of
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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 Advisor's Code of
Ethics may be granted in particular circumstances after review by appropriate
personnel.
PRINCIPAL UNDERWRITER
Pursuant to an underwriting and distribution services agreement
("distribution agreement") with the Fund, Kemper Distributors, Inc. ("KDI"), 222
South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the Advisor, and
a wholly-owned subsidiary of the Advisor, is the principal underwriter and
distributor for the Class A, Class B and Class C shares of the Fund and acts as
agent of the Fund in the continuous offering of its shares. KDI bears all its
expenses of providing services pursuant to the distribution agreement, including
the payment of any commissions. The Fund pays the cost for the prospectus and
shareholder reports to be set in type and printed for existing shareholders, and
KDI, as principal underwriter, pays for the printing and distribution of copies
thereof used in connection with the offering of shares to prospective investors.
KDI also pays for supplementary sales literature and advertising costs. KDI may
enter into related selling group agreements with various broker-dealers,
including affiliates of KDI, that provide distribution services.
Class A Shares. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase,
Repurchase and Redemption of Shares," KDI retains the sales charge upon the
purchase of shares and pays or allows concessions or discounts to firms for the
sale of the Fund's Class A shares. The following information concerns the
underwriting commissions paid in connection with the distribution of the Fund's
Class S shares for the periods noted.
Class B and C Shares. The Fund has adopted plans under Rule 12b-1 under the 1940
Act that provide for fees payable as an expense of the Class B shares and Class
C shares that are used by KDI to pay for distribution and services for those
classes. Because 12b-1 fees are paid out of fund assets on an ongoing basis,
they will, over time, increase the cost of investment and may cost more than
other types of sales charges.
For its services under the distribution agreements, KDI receives a fee
from the Fund pursuant to a Rule 12b-1 Plan, payable monthly, at the annual rate
of 0.75% of average daily net assets of such Fund attributable to Class B
shares. This fee is accrued daily as an expense of Class B shares. KDI also
receives any contingent deferred sales charges received on redemptions of Class
B shares. See "Purchase, Repurchase and Redemption of Shares-Contingent Deferred
Sales Charge-Class B Shares." KDI currently compensates firms for sales of Class
B shares at a commission rate of 3.75%.
For its services under the distribution agreements, KDI receives a fee
from the Fund pursuant to a Rule 12b-1 Plan, payable monthly, at the annual rate
of 0.75% of average daily net assets of such Fund attributable to Class C
shares. This fee is accrued daily as an expense of Class C shares. KDI currently
advances to firms the first year distribution fee at a rate of 0.75% of the
purchase price of such shares. For periods after the first year, KDI currently
intends to pay firms for sales of Class C shares a distribution fee, payable
quarterly, at an annual rate of 0.75% of net assets attributable to Class C
shares maintained and serviced by the firm and the fee continues until
terminated by KDI or the Fund. KDI also receives any contingent deferred sales
charges received on redemptions of Class C shares. See "Purchase, Repurchase and
Redemption of Shares -Contingent Deferred Charge--Class C Shares."
Rule 12b-1 Plan. If a Rule 12b-1 Plan (the "Plan") is terminated in accordance
with its terms, the obligation of the Fund to make payments to KDI pursuant to
the Plan will cease and the Fund will not be required to make any payments past
the termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under the Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under the Plan
may or may not be sufficient to reimburse KDI for its expenses incurred. (See
"Principal Underwriter" for more information.)
Each distribution agreement and Rule 12b-1 Plan continues in effect
from year to year so long as such continuance is approved for each class at
least annually by a vote of the Board of the Fund, including the Board members
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the agreement. Each agreement automatically terminates in
the event of its assignment and may be terminated for a class at any time
without penalty by the Fund for that Fund or by KDI upon 60 days' notice.
Termination by the Fund with respect to a class may be by vote of a majority of
the Board or a majority of the Board members who are not interested persons of
the Fund and who have no direct or indirect financial interest in the agreement,
or a "majority of the outstanding voting securities" of the class of the Fund,
as defined under the 1940 Act. A Rule 12b-1 Plan may not be amended for a class
to increase the fee to be paid by the Fund with respect to such class without
approval by a majority of the outstanding voting securities
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of such class of the Fund and all material amendments must in any event be
approved by the Board in the manner described above with respect to the
continuation of the agreement.
ADMINISTRATIVE SERVICES
Administrative services are provided to the Fund under an
administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees.
Classes A, B and C pay KDI an administrative services fee, payable monthly, at
an annual rate of up to 0.25% of average daily net assets of the Class A, B and
C shares of the Fund.
KDI has entered into related arrangements with various broker-dealer
firms and other service or administrative firms ("firms"), that provide services
and facilities for their customers or clients who are investors in the Funds.
The firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Funds,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A shares, KDI pays each firm a service fee,
normally payable quarterly, at an annual rate of up to 0.25% of the net assets
in the Funds' accounts that it maintains and services attributable to Class A
shares, commencing with the month after investment. With respect to Class B and
Class C shares, KDI currently advances to firms the first-year service fee at a
rate of up to 0.25% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms a service fee at a rate of up to
0.25% (calculated monthly and normally paid quarterly) of the net assets
attributable to Class B and C shares maintained and serviced by the firm. After
the first year, a firm becomes eligible for the quarterly service fee and the
fee continues until terminated by KDI or the Fund. Firms to which service fees
may be paid may include affiliates of KDI. In addition, KDI may from time to
time, from its own resources, pay certain firms additional amounts for ongoing
administrative services and assistance provided to their customers and clients
who are shareholders of the Fund.
KDI also may provide some of the above services and may retain any
portion of the fee under the administrative agreement not paid to firms to
compensate itself for administrative functions performed for the Fund.
Currently, the administrative services fee payable to KDI is payable at the
annual rate of 0.25% based upon Fund assets in accounts for which a firm
provides administrative services and, effective January 1, 2000, the Fund will
pay KDI an administrative service fee at the annual rate of 0.15% based upon
Fund assets in accounts for which there is no firm (other than KDI) listed on
the Fund's records. The effective administrative services fee rate to be charged
against all assets of the Fund while this procedure is in effect will depend
upon the proportion of the Fund's assets that is in accounts for which a firm of
record provides administrative services. The Board of Directors, in its
discretion, may approve basing the fee to KDI at the annual rate of 0.25% on all
Fund assets in the future.
Certain Board members or officers of the Funds are also directors or
officers of the Advisor or KDI as indicated under "Officers and Board Members."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICES AGENT
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. Brown Brothers
attends to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Fund.
Kemper Service Company ("KSVC"), an affiliate of the Advisor, serves as
"Shareholder Service Agent" of the Fund, and as such, performs all duties as
transfer agent and dividend paying agent.
The Fund pays KSVC as follows: annual account fees of $10.00 ($18.00
for retirement accounts) plus set up charges, annual fees associated with the
contingent deferred sales charges (Class B only), an asset-based fee of 0.08%
and out-of-pocket reimbursement.
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Independent Accountants and Reports to Shareholders. The financial highlights 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, given on the authority of that firm as experts in
accounting and auditing. PricewaterhouseCoopers LLP audits the financial
statements of the Fund and provides other audit, tax and related services.
Shareholders will receive annual audited financial statement and semi-annual
unaudited financial statements.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor 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 Advisor seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
Scudder Investor Services ("SIS") with commissions charged on comparable
transactions, as well as by comparing commissions paid by the Fund to reported
commissions paid by others. The Advisor 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 Advisor 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 Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor 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
Advisor 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 Advisor 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 Advisor or the Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor 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 Advisor will
place orders for portfolio transactions through SIS, which is a corporation
registered as a broker/dealer and a subsidiary of the Advisor; the SIS will
place orders on behalf of the Fund with issuers, underwriters or other brokers
and dealers. The SIS will not receive any commission, fee or other remuneration
from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Advisor, it is the opinion of the Advisor that such
information only supplements the Advisor's own research effort since the
information must still be analyzed, weighed, and reviewed by the Advisor's
staff. Such information may be useful to the Advisor in providing services to
clients other than the Fund, and not all such information is used by the Advisor
in connection with the Fund. Conversely, such information provided to the
Advisor by broker/dealers through whom other clients of the Advisor effect
securities transactions may be useful to the Advisor in providing services to
the Fund.
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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.
For the fiscal years ended December 31, 1997, 1998 and 1999, Class S
shares of the Fund paid brokerage commissions of $1,764,425, $789,290 and
$2,227,639, respectively. For the fiscal year ended December 31, 1999, the
$1,993,279 (89 % of the total brokerage commissions paid) resulted from orders
placed consistent with the policy of obtaining the most favorable net results,
with brokers and dealers who provided supplementary research, market and
statistical information to the Fund or Adviser. 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, and $68,159 for 1997 Such amounts
represented 10.65% and 3.86% of the total brokerage commissions paid by the Fund
in such years, respectively. The total amount of brokerage transactions
aggregated $1,564,858,086, of which $1,376,888,882 (88% of all brokerage
transactions) were transactions which included research commissions. The
Directors review from time to time whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable. To date no such
recapture has been effected
The rate of total portfolio turnover of the Fund for years 1999, 1998
and 1997 was 114%, 90% and 96% respectively.
NET ASSET VALUE
The net asset value per share of the Fund is determined separately for
each class by dividing the value of the Fund's net assets attributable to that
class by the number of shares of that class outstanding. The per share net asset
value of the Class B and Class C shares of the Fund will generally be lower than
that of the Class A shares of the Fund because of the higher expenses borne by
the Class B and Class C shares. The net asset value of shares of the Fund is
computed as of the close of regular trading on 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. Net asset value per share of each class of Japan Fund is computed by
dividing the value of the total assets attributable to shares of a class, less
all liabilities attributable shares of that class, by the total number of
outstanding shares of that class.
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the Nasdaq
Stock Market ("Nasdaq") system is valued at its most recent sale price. Lacking
any sales, the security is valued at the most recent bid quotation. The value of
an equity security not quoted on the Nasdaq System, but traded in another
over-the-counter market, is its most recent sale price. Lacking any sales, the
security is valued at the Calculated Mean. Lacking a Calculated Mean, the
security is valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturities of sixty days or less shall be valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Advisor 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.
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If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
If a foreign exchange or market is closed on a day when the Exchange is
open, the value of a portfolio asset of the Fund that is traded in the
particular closed foreign exchange or market shall be the last available market
quotation from the date the foreign exchange or market was last open. If, in the
opinion of the Valuation Committee of the Fund, that value does not represent
the fair market value of the asset, the value of the asset shall be taken to be
an amount which, in the opinion of the Valuation Committee of the Fund,
represents fair market value on the basis of all available information.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Fund Shares are sold at their public offering price, which is the net
asset value per such shares next determined after an order is received in proper
form plus, with respect to Class A Shares, an initial sales charge. The minimum
initial investment for Class A, B or C is $1,000 and the minimum subsequent
investment is $100 but such minimum amounts may be changed at any time. The Fund
may waive the minimum for purchases by trustees, directors, officers or
employees of the Fund or the Advisor and its affiliates. An order for the
purchase of Shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
Purchase of Shares
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in
their initial and contingent deferred sales charge structures and in their
ongoing expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. Each
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge
5.75% of the public offering price waived or reduced for
certain purchases
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A
charge of 4% of redemption shares six years after
proceeds; declines to zero after issuance
six years
Class C Contingent deferred sales charge of 0.75% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
34
<PAGE>
(1) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales charge
if redeemed within one year of purchase and a 0.50% contingent deferred
sales charge if redeemed within the second year of purchase.
The minimum initial investment for each of Class A, B and C of the Fund is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account is $250 and the minimum
subsequent investment is $50. Under an automatic investment plan, such as
Bank Direct Deposit, Payroll Direct Deposit or Government Direct Deposit,
the minimum initial and subsequent investment is $50. These minimum amounts
may be changed at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may
not be available for certain types of account registrations. It is
recommended that investors not request share certificates unless needed for
a specific purpose. You cannot redeem shares by telephone or wire transfer
or use the telephone exchange privilege if share certificates have been
issued. A lost or destroyed certificate is difficult to replace and can be
expensive to the shareholder (a bond worth 2% or more of the certificate
value is normally required).
Initial Sales Charge Alternative - Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
Amount of Purchase As a Percentage of As a Percentage of as a Percentage of
- ------------------ Offering Price Net Asset Value* Offering Price
-------------- ---------------- --------------
<S> <C> <C> <C>
Up to $50,000 5.75 6.10 5.20
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
</TABLE>
* Rounded to the nearest one-hundredth percent.
The Fund receives the entire net asset value of all its shares sold.
KDI, the Fund's principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may re-allow to dealers up to the full applicable
sales charge, as shown in the above table, during periods and for transactions
specified in such notice and such re-allowances may be based upon attainment of
minimum sales levels. During periods when 90% or more of the sales charge is
re-allowed, such dealers may be deemed to be underwriters as that term is
defined in the Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a)
any purchaser, provided that the amount invested in such Fund or other Kemper
Fund listed under "Special Features -- Class A Shares -- Combined Purchases"
totals at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a), a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 100 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of the purchase of shares
purchased under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge. See "Redemption or Repurchase of Shares --
Contingent Deferred Sales Charge -- Large Order NAV Purchase Privilege."
KDI may at its discretion compensate investment dealers or other
financial services firms in connection with the sale of Class A shares of the
Fund at net asset value in accordance with the Large Order NAV Purchase
Privilege up to the following amounts: 1.00% of the net asset value of shares
sold on amounts up to $5 million, 0.50% on the next $45 million and 0.25% on
amounts over $50 million. The commission schedule will be reset on a calendar
year basis for sales of shares pursuant to the Large Order NAV Purchase
Privilege to employer-sponsored employee benefit plans using the subaccount
recordkeeping system made available through Kemper Service Company. For purposes
of determining the appropriate commission percentage to be applied to a
particular sale, KDI will consider the cumulative
35
<PAGE>
amount invested by the purchaser in the Fund and other Kemper Fund listed under
"Special Features -- Class A Shares -- Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above and including Class R shares of certain
Scudder Funds. The privilege of purchasing Class A shares of the Fund at net
asset value under the Large Order NAV Purchase Privilege is not available if
another net asset value purchase privilege also applies.
Class A shares of the Fund or of any other Kemper Fund listed under
"Special Features -- Class A Shares -- Combined Purchases" may be purchased at
net asset value in any amount by members of the plaintiff class in the
proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any
amount by certain professionals who assist in the promotion of Kemper Funds
pursuant to personal services contracts with KDI, for themselves or members of
their families. KDI in its discretion may compensate financial services firms
for sales of Class A shares under this privilege at a commission rate of 0.50%
of the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a)
officers, directors, employees (including retirees) and sales representatives of
the Fund, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Fund, for themselves or their spouses or dependent children; (c) any trust,
pension, profit-sharing or other benefit plan for only such persons; (d) persons
who purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (e) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the Fund's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of the Fund may be sold at net asset value through certain
investment advisers registered under the 1940 Act and other financial services
firms acting solely as agent for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
advisor or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund may
also issue Class A shares at net asset value in connection with the acquisition
of the assets of or merger or consolidation with another
36
<PAGE>
investment company, or to shareholders in connection with the investment or
reinvestment of income and capital gain dividends.
The sales charge scale is applicable to purchases made at one time by
any "purchaser" which includes: an individual; or an individual, his or her
spouse and children under the age of 21; or a director or other fiduciary of a
single trust estate or single fiduciary account; or an organization exempt from
federal income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares -- Contingent Deferred
Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale
at a commission rate of up to 3.75% of the amount of Class B shares purchased.
KDI is compensated by the Fund for services as distributor and principal
underwriter for Class B shares. See "Principal Underwriter."
Class B shares of the Fund will automatically convert to Class A shares
of the Fund six years after issuance on the basis of the relative net asset
value per share of the Class B shares. The purpose of the conversion feature is
to relieve holders of Class B shares from the distribution services fee when
they have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Fund account will be
converted to Class A shares on a pro rata basis. The conversion of Class B
Shares to Class A Shares may be subject to the continuing availability of an
opinion of counsel, ruling by the Internal Revenue Service or other assurance
acceptable to the Fund to the effect that (a) the assessment of the distribution
services fee with respect to Class B Shares and not Class A Shares does not
result in the Fund's dividends constituting "preferential dividends" under the
Internal Revenue Code, and (b) that the conversion of Class B Shares to Class A
Shares does not constitute a taxable event under the Internal Revenue Code. The
conversion of Class B Shares to Class A Shares may be suspended if such
assurance is not available. In that event, no further conversions of Class B
Shares would occur, and Shares might continue to be subject to the distribution
services fee for an indefinite period that may extend beyond the proposed
conversion date as described in the prospectus.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge --
Class C Shares." KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of such shares. For periods after the
first year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. In making
this decision, investors should review their particular circumstances carefully
with their financial representative. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than six years might consider Class B shares. Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might consider Class C shares. KDI has established the following procedures
regarding the purchase of Class A, Class B and Class C shares. These procedures
do not reflect in any way the suitability of a particular class of shares for a
particular investor and should not be relied upon as such. That determination
must be made by investors with the assistance of their financial representative.
Orders for Class B shares or Class C shares for $500,000 or more will be
declined. Orders for Class B shares or Class C shares by employer sponsored
employee benefit plans (not including plans under Code Section 403 (b)(7)
sponsored by a K-12 school district) using the subaccount record keeping system
made available through the Shareholder Service Agent ("KemFlex Plans") will be
invested instead in Class A shares at net asset value
37
<PAGE>
where the combined subaccount value in a Fund or other Kemper Mutual Funds
listed under "Special Features - Class A Shares - Combined Purchases" is in
excess of $1 million for Class B shares or $5 million for Class C shares
including purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features described under "Special Features." KemFlex Plans
that on May 1, 2000 have in excess of $1 million invested in Class B shares of
Kemper Mutual Funds, or have in excess of $850,000 invested in Class B shares of
Kemper Mutual Funds and are able to qualify for the purchase of Class A shares
at net asset value (e.g., pursuant to a Letter of Intent), will have future
investments made in Class A shares and will have the option to covert their
holdings in Class B shares to Class A shares free of any contingent deferred
sales charge on May 1, 2002. For more information about the three sales
arrangements, consult your financial representative or the Shareholder Service
Agent. Financial services firms may receive different compensation depending
upon which class of shares they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. KDI does not believe
that termination of a relationship with a bank would result in any material
adverse consequences to the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on
the amount of shares of the Fund sold under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company, (iii) the registered representative placing the trade is
a member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will,
from time to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Funds. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Funds, or other funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a
price based on the net asset value of the Fund next determined after receipt in
good order by KDI of the order accompanied by payment. However, orders received
by dealers or other financial services firms prior to the determination of net
asset value (see "Net Asset Value") and received in good order by KDI prior to
the close of its business day will be confirmed at a price based on the net
asset value effective on that day ("trade date"). The Fund reserves the right to
determine the net asset value more frequently than once a day if deemed
desirable. Dealers and other financial services firms are obligated to transmit
orders promptly. Collection may take significantly longer for a check drawn on a
foreign bank than for a check drawn on a domestic bank. Therefore, if an order
is accompanied by a check drawn on a foreign bank, funds must normally be
collected before shares will be purchased. See "Purchase and Redemption of
Shares."
Investment dealers and other firms provide varying arrangements for
their clients to purchase and redeem the Fund's shares. Some may establish
higher minimum investment requirements than set forth above. Firms may arrange
with their clients for other investment or administrative services. Such firms
may independently establish and charge additional amounts to their clients for
such services, which charges would reduce the clients' return. Firms also may
hold the Fund's shares in nominee or street name as agent for and on behalf of
their customers. In such instances, the Fund's transfer agent will have no
information with respect to or control over the accounts of specific
shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their firm. Certain of these firms
may receive compensation from the Fund through the Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing including, without limitation, transfers of registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of KDI, may receive compensation from the Fund through the
Shareholder Service Agent for these services. This prospectus should be read in
connection with such firms' material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders for any reason. Also, from
time to time, the Fund may temporarily suspend the offering of any class of its
shares to new investors. During the period of such suspension, persons who are
already shareholders of such class of
38
<PAGE>
such Fund normally are permitted to continue to purchase additional shares of
such class and to have dividends reinvested.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also 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 applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company,
811 Main Street, Kansas City, Missouri 64105-2005 or to the firm from which they
received this prospectus.
Redemption or Repurchase of Shares
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper Funds, Attention: Redemption Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557. When certificates for shares have
been issued, they must be mailed to or deposited with the Shareholder Service
Agent, along with a duly endorsed stock power and accompanied by a written
request for redemption. Redemption requests and a stock power must be endorsed
by the account holder with signatures guaranteed by a commercial bank, trust
company, savings and loan association, federal savings bank, member firm of a
national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, directors or guardians.
The redemption price for shares of a class of the Fund will be the net
asset value per share of that class of the Fund next determined following
receipt by the Shareholder Service Agent of a properly executed request with any
required documents as described above. Payment for shares redeemed will be made
in cash as promptly as practicable but in no event later than seven days after
receipt of a properly executed request accompanied by any outstanding share
certificates in proper form for transfer. When the Fund is asked to redeem
shares for which it may not have yet received good payment (i.e., purchases by
check, EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of
redemption proceeds until it has determined that collected funds have been
received for the purchase of such shares, which will be up to 10 days from
receipt by the Fund of the purchase amount. The redemption within two years of
Class A shares purchased at net asset value under the Large Order NAV Purchase
Privilege may be subject to a contingent deferred sales charge (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares"), the redemption
of Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below), and the
redemption of Class C shares within the first year following purchase may be
subject to a contingent deferred sales charge (see "Contingent Deferred Sales
Charge -- Class C Shares" below).
Because of the high cost of maintaining small accounts, the Fund may
assess a quarterly fee of $9 on any account with a balance below $1,000 for the
quarter. The fee will not apply to accounts enrolled in an automatic investment
program, Individual Retirement Accounts or employer-sponsored employee benefit
plans using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited
wire transfer redemptions and EXPRESS-Transfer transactions (see "Special
Features") and exchange transactions for individual and institutional accounts
and pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
39
<PAGE>
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian and custodian account
holders, provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders and guardian account
holders of custodial accounts for gifts and transfers to minors may exercise
this special privilege of redeeming shares by telephone request or written
request without signature guarantee subject to the same conditions as individual
account holders and subject to the limitations on liability described under
"General" above, provided that this privilege has been pre-authorized by the
institutional account holder or guardian account holder by written instruction
to the Shareholder Service Agent with signatures guaranteed. Telephone requests
may be made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value per Share Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege, although investors can still
redeem by mail. The Fund reserves the right to terminate or modify this
privilege at any time.
Contingent Deferred Sales Charge - Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed, excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer-sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal
40
<PAGE>
Plan at a maximum of 10% per year of the net asset value of the account; and (f)
redemptions of shares whose dealer of record at the time of the investment
notifies KDI that the dealer waives the discretionary commission applicable to
such Large Order NAV Purchase.
Contingent Deferred Sales Charge - Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
Year of Redemption Contingent Deferred
After Purchase Sales Charge
- -------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event
of the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
- -- Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge - Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed, excluding amounts not subject to the
charge. The contingent deferred sales charge will be waived: (a) in the event of
the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer-sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent, and (g) for redemption of shares by an employer sponsored employee
benefit plan that (i) offers funds in addition to Kemper Funds (i.e.,
"multi-manager"), and (ii) whose dealer of record has waived the advance of the
first year administrative service and distribution fees applicable to such
shares and agrees to receive such fees quarterly, and (h) redemption of shares
purchased through a dealer-sponsored asset allocation program maintained on an
omnibus record-keeping system provided the dealer of record has waived the
advance of the first year and administrative services and distribution fees
applicable to such shares and has agreed to receive such fees quarterly.
Contingent Deferred Sales Charge - General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value,
41
<PAGE>
the contingent deferred sales charge would be payable only with respect to
$10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of
share appreciation is subject to the charge. The charge would be at the rate of
3% ($300) because it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the
length of the period of ownership. Investments are tracked on a monthly basis.
The period of ownership for this purpose begins the first day of the month in
which the order for the investment is received. For example, an investment made
in March 1998 will be eligible for the second year's charge if redeemed on or
after March 1, 1999. In the event no specific order is requested when redeeming
shares subject to a contingent deferred sales charge, the redemption will be
made first from shares representing reinvested dividends and then from the
earliest purchase of shares. KDI receives any contingent deferred sales charge
directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Fund listed under "Special Features -- Class A Shares
- -- Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Funds. A shareholder of the Fund or other
Kemper Funds who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares -- Initial Sales Charge Alternative
- -- Class A Shares") or Class B shares or Class C shares and incurs a contingent
deferred sales charge may reinvest up to the full amount redeemed at net asset
value at the time of the reinvestment, in the same class of shares as the case
may be, of the Fund or of other Kemper Funds. The amount of any contingent
deferred sales charge also will be reinvested. These reinvested shares will
retain their original cost and purchase date for purposes of the contingent
deferred sales charge schedule. Also, a holder of Class B shares who has
redeemed shares may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in Class A shares of the Fund or of the other
Kemper Funds listed under "Special Features -- Class A Shares -- Combined
Purchases." Purchases through the reinvestment privilege are subject to the
minimum investment requirements applicable to the shares being purchased and may
only be made for Kemper Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
Redemption in Kind. Although it is the Fund's present policy to redeem in cash,
if the Board of Directors determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the SEC, taking such securities at the same value used to
determine net asset value, and selecting the securities in such manner as the
Board of Directors may deem fair and equitable. If such a distribution occurred,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. 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 value of net assets of the Fund at the
beginning of the period.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Adjustable Rate U.S. Government Fund, Kemper Aggressive
Growth Fund, Kemper Asian Growth Fund, Kemper Blue Chip Fund, Kemper California
Tax-Free Income Fund, Kemper Cash Reserves Fund, Kemper Contrarian Fund, Kemper
Diversified Income Fund, Kemper Emerging Markets Growth Fund, Kemper Emerging
Markets Income Fund, Kemper Europe Fund, Kemper Florida Tax-Free Income Fund,
Kemper Global Blue Chip Fund, Kemper Global Income Fund, Kemper Growth Fund,
Kemper High Yield Fund, Kemper High Yield Opportunity, Kemper Horizon 10+
Portfolio, Kemper Horizon 20+ Portfolio, Kemper Horizon 5 Portfolio, Kemper
Income And Capital Preservation Fund, Kemper Intermediate Municipal Bond, Kemper
International Fund, Kemper International Growth and Income Fund, Kemper Large
Company Growth Fund (currently available only to employees of Scudder Kemper
Investments, Inc.; not available in all states), Kemper Latin America Fund,
Kemper Municipal Bond Fund, Kemper New York Tax-Free Income Fund, Kemper Ohio
Tax-Free Income Fund, Kemper Quantitative Equity Fund, Kemper Research Fund
(currently available only to employees of Scudder Kemper Investments, Inc.; not
available in all states), Kemper Retirement Fund -- Series I, Kemper Retirement
Fund -- Series II, Kemper Retirement Fund -- Series III, Kemper Retirement Fund
- -- Series IV, Kemper Retirement Fund -- Series V, Kemper Retirement Fund --
Series VI, Kemper Retirement Fund --
42
<PAGE>
Series VII, Kemper Short-Intermediate Government Fund, Kemper Small Cap Value
Fund, Kemper Small Cap Value+Growth Fund (currently available only to employees
of Scudder Kemper Investments, Inc.; not available in all states), Kemper Small
Capitalization Equity Fund, Kemper Small Cap Relative Value Fund, Kemper
Technology Fund, Kemper Total Return Fund, Kemper U.S. Government Securities
Fund, Kemper U.S. Growth and Income Fund, Kemper U.S. Mortgage Fund, Kemper
Value+Growth Fund, Kemper Worldwide 2004 Fund, Kemper-Dreman High Return Equity
Fund, Kemper-Dreman Financial Services Fund, Scudder 21st Century Growth Fund
and Scudder High Yield Tax Free Fund ("Kemper Funds"). Except as noted below,
there is no combined purchase credit for direct purchases of shares of Zurich
Money Funds, Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash
Account Trust, Investors Municipal Cash Fund or Investors Cash Trust ("Money
Market Funds"), which are not considered "Kemper Funds" for purposes hereof. For
purposes of the Combined Purchases feature described above as well as for the
Letter of Intent and Cumulative Discount features described below, employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent or its affiliates may include:
(a) Money Market Funds as "Kemper Funds," (b) all classes of shares of any
Kemper Mutual Fund, and (c) the value of any other plan investments, such as
guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
Class A Shares - Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Funds listed above made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
KDI. The Letter, which imposes no obligation to purchase or sell additional
Class A shares, provides for a price adjustment depending upon the actual amount
purchased within such period. The Letter provides that the first purchase
following execution of the Letter must be at least 5% of the amount of the
intended purchase, and that 5% of the amount of the intended purchase normally
will be held in escrow in the form of shares pending completion of the intended
purchase. If the total investments under the Letter are less than the intended
amount and thereby qualify only for a higher sales charge than actually paid,
the appropriate number of escrowed shares are redeemed and the proceeds used
toward satisfaction of the obligation to pay the increased sales charge. The
Letter for an employer-sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Funds held of record as of the initial purchase date under the
Letter as an "accumulation credit" toward the completion of the Letter, but no
price adjustment will be made on such shares. Only investments in Class A shares
are included for this privilege.
Class A Shares - Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper Funds (computed at the maximum offering price at
the time of the purchase for which the discount is applicable) already owned by
the investor.
Class A Shares - Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Kemper Funds and shares of the Money
Market Funds listed under "Special Features -- Class A Shares -- Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of calculating the contingent deferred sales charge.
Class B Shares. Class B shares of the Fund and Class B shares of any other
Kemper Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
43
<PAGE>
Class B shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of calculating the contingent
deferred sales charge that may be imposed upon the redemption of the Class B
shares received on exchange, amounts exchanged retain their original cost and
purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any other
Kemper Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of determining whether there is a
contingent deferred sales charge that may be imposed upon the redemption of the
Class C shares received by exchange, they retain the cost and purchase date of
the shares that were originally purchased and exchanged.
General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). The Fund reserves
the right to invoke the 15-Day Hold Policy for exchanges of $1,000,000 or less
if, in the investment manager's judgment, the exchange activity may have an
adverse effect on the Fund. In particular, a pattern of exchanges that coincides
with a "market timing" strategy may be disruptive to the Fund and therefor may
be subject to the 15-Day Hold Policy.
For purposes of determining whether the 15-Day Hold Policy applies to a
particular exchange, the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control, direction or advice, including without limitation accounts administered
by a financial services firm offering market timing, asset allocation or similar
services. The total value of shares being exchanged must at least equal the
minimum investment requirement of the Kemper Fund into which they are being
exchanged. Exchanges are made based on relative dollar values of the shares
involved in the exchange. There is no service fee for an exchange; however,
dealers or other firms may charge for their services in effecting exchange
transactions. Exchanges will be effected by redemption of shares of the fund
held and purchase of shares of the other fund. For federal income tax purposes,
any such exchange constitutes a sale upon which a gain or loss may be realized,
depending upon whether the value of the shares being exchanged is more or less
than the shareholder's adjusted cost basis. Shareholders interested in
exercising the exchange privilege may obtain prospectuses of the other funds
from dealers, other firms or KDI. Exchanges may be accomplished by a written
request to KSvC, Attention: Exchange Department, P.O. Box 419557, Kansas City,
Missouri 64141-6557, or by telephone if the shareholder has given authorization.
Once the authorization is on file, the Shareholder Service Agent will honor
requests by telephone at 1-800-621-1048, subject to the limitations on liability
under "Redemption or Repurchase of Shares-- General." Any share certificates
must be deposited prior to any exchange of such shares. During periods when it
is difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Exchanges may
only be made for Kemper Funds that are eligible for sale in the shareholder's
state of residence. Currently, Tax-Exempt California Money Market Fund is
available for sale only in California and the portfolios of Investors Municipal
Cash Fund are available for sale only in certain states. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the Kemper
Fund. Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such Shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
44
<PAGE>
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (maximum
$50,000) from the shareholder's account at a bank, savings and loan or credit
union into the shareholder's Fund account. By enrolling in Bank Direct Deposit,
the shareholder authorizes the Fund and its agents to either draw checks or
initiate Automated Clearing House debits against the designated account at a
bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Shareholder Service Agent for appropriate forms. A shareholder may terminate
his or her Plan by sending written notice to Kemper Service Company, P.O. Box
419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will
become effective within thirty days after the Shareholder Service Agent has
received the request. A Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Fund may terminate or modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $100. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic
withdrawal plan will ordinarily be disadvantageous to the investor because the
investor will be paying a sales charge on the purchase of shares at the same
time that the investor is redeeming shares upon which a sales charge may have
already been paid. Therefore, the Fund will not knowingly permit additional
investments of less than $2,000 if the investor is at the same time making
systematic withdrawals. KDI will waive the contingent deferred sales charge on
redemptions of Class A shares purchased under the Large Order NAV Purchase
Privilege, Class B shares and Class C shares made pursuant to a systematic
withdrawal plan. The right is reserved to amend the systematic withdrawal plan
on 30 days' notice. The plan may be terminated at any time by the investor or
the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small Employers
("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA accounts and
prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit
plans, target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and
materials for establishing them are available from the Shareholder Service Agent
upon request. Investors should consult with their own tax advisors before
establishing a retirement plan.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange ("Exchange")
is closed other than customary weekend and holiday closings or during any period
in which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the SEC may by order permit for the protection of the Fund's shareholders.
45
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
Position with
Underwriter, Kemper
Name, Age and Address Position with Fund Principal Occupation** Distributors, Inc.
- --------------------- ------------------ ---------------------- ------------------
<S> <C> <C> <C>
Lynn S. Birdsong (53)# President and Director Managing Director,
Scudder Kemper
Investments, Inc.
William L. Givens (70) Chairman and Director President,
Twain Associates, Inc. Twain Associates
553 Boylston Street
Brookline, MA 02146
Thomas M. Hout (57) Director Senior Advisor,
Boston Consulting Group Boston Consulting Group
Exchange Place
Boston, MA 02109
John F. Loughran (68) Director Retired Senior Advisor for
Box 502 Asia Pacific to J.P.
95 Zukor Road Morgan & Co., Inc.
New York, NY 10956
Yoshihiko Miyauchi (64) Director Chairman and Chief
ORIX Corporation Executive Officer of ORIX
3-22-8 Shiba Corporation
Minato-ku
Tokyo 105-8683
Japan
William V. Rapp (61) Director Managing Director,
85 River Road Rue Associates;
Scarborough, NY 10510
Academic Director,
International Relations,
Yale University
Senior Research Associate,
Columbia University Center
on Japan Economy and
Business
Hiroshi Yamanaka (87) Director Honorary Senior Advisor to
Meiji Mutual Life the Board,
Insurance Company Meiji Mutual Life
1-1 Marunouchi, 2-chome Insurance Company
Chiyoda-ku
Tokyo 100, Japan
Takeo Shiina (70) Director Chairman, IBM Japan, Ltd.
IBM Japan, Ltd.
3-2-12 Roppongi, Minato-ku
Tokyo 106-8711
Japan
46
<PAGE>
Position with
Underwriter, Kemper
Name, Age and Address Position with Fund Principal Occupation** Distributors, Inc.
- --------------------- ------------------ ---------------------- ------------------
Henry Rosovsky (72)* Honorary Director Professor,
Harvard University Harvard University
17 Quincy Street
Cambridge, MA 02138
O. Robert Theurkauf Honorary Director Advisory Managing
Director, Scudder Kemper
Investments, Inc.
William H. Gleysteen, Jr. (73) Honorary Director Consultant
4937 Crescent Street
Bethesda, MD 20816
Jonathan Mason (84) Honorary Director Retired First Vice
12092 Longwood Green Drive President Prudential-Bache
West Palm Beach, FL 33414 Securities, Inc.
James W. Morley (78) Honorary Director Professor of Political
Rm. 905 International Affairs, Science Emeritus
Columbia University Columbia University
420 West 118the Street
New York, NY 10027
Robert G. Stone, Jr. (77) Honorary Director Chairman of the Board
Kirby Corporation and Director,
405 Lexington Ave, 39th Fl. Kirby Corporation
New York, NY 10174
Shoji Umemura (80)* Honorary Director Board Counselor,
The Nikko Securities Co., Ltd. The Nikko Securities Co.,
3-1 Marunouchi 3-chome Ltd.
Chiyoda-ku
Tokyo, Japan
Elizabeth J. Allan (46)# Vice President Senior Vice President,
Scudder Kemper
Investments, Inc.
William E. Holzer ( 50)# Vice President Managing Director,
Scudder Kemper
Investments, Inc.
Seung K. Kwak (38)# Vice President Managing Director,
Scudder Kemper
Investments, Inc.
Miyuki Wakatsuki (63) Vice President General Manager,
17-9, Nihonbashi-Hakozakicho Japan Fund Office,
Chuo-Ku Nikko International
Tokyo 103, Japan Capital Management Co.,
Ltd.
47
<PAGE>
Position with
Underwriter, Kemper
Name, Age and Address Position with Fund Principal Occupation** Distributors, Inc.
- --------------------- ------------------ ---------------------- ------------------
Gina Provenzano (58)# Vice President and Vice President,
Treasurer Scudder Kemper
Investments, Inc.
Kathryn L. Quirk (47)# Vice President and Managing Director,
Secretary Scudder Kemper
Investments, Inc.
Maureen E. Kane (38)+ Assistant Secretary Vice President, Scudder
Kemper Investments, Inc.
John R. Hebble (42)+ 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, Galvin and Birdsong, 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, 1999, total expenses were
$155,177.
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.
48
<PAGE>
The following table shows the aggregate compensation received by each
unaffiliated director during 1999 from The Japan Fund and from all Scudder funds
as a group. In 1999, the Directors of the Fund met 10 times.
<TABLE>
<CAPTION>
Pension or Retirement Estimated Total
Aggregate Benefits Accrued As Annual Benefits Compensation From the
Name of Director Compensation* Part of Fund Expenses Upon Retirement Fund and Fund Complex**
- ---------------- ------------- --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
Peter Booth $14,000 $600 $6,000 $14,000
William L. Givens $9,000 $6,000 $6,000 $10,500
Thomas M. Hout $14,750 $600 $6,000 $14,750
John F. Loughran $14,750 $6,000 $6,000 $14,750
Yoshihiko Miyauchi $10,500 $1,800 $6,000 $10,500
William V. Rapp $14,750 $5,400 $6,000 $14,750
Henry Rosovsky $24,750 $6,000 $6,000 $24,750
Hiroshi Yamanaka $6,000 $6,000 $6,000 $6,000
William H. Gleysteen, Jr. $8,603 $3,732 $3,732 $19,933
Honorary Director
Jonathan Mason $6,000 $6,000 $6,000 $6,000
Honorary Director
James W. Morley $8,000 $6,000 $6,000 $8,000
Honorary Director
Robert G. Stone, Jr. $9,000 $6,000 $6,000 $9,000
Honorary Director
</TABLE>
* Does not include pension or retirement benefits.
** Does not include pension or retirement benefits accrued.
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 - of which one hundred million (100,000,000) of
such shares are designated as "Class A" shares of Common Stock, fifty million
(50,000,000) of such shares are designated as "Class B" shares of Common Stock,
fifty million (50,000,000) of such shares are designated as "Class C" shares of
Common Stock, one hundred million (100,000,000) of such shares are designated as
"AARP Shares" of Common Stock and three hundred million (300,000,000) of such
shares are designated as "Class S" shares of Common Stock. The AARP shares are
not currently offered to shareholders. All shares issued and outstanding are
fully paid and non-assessable, transferable, and redeemable at net asset value,
subject to such changes as may be applicable, 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.
As of March 31, 2000, 12,809,764 shares in the aggregate, or 20.66% of
the outstanding shares of the Fund were held in the name of Charles Schwab, 101
Montgomery Street, San Francisco, CA 94101, who may be deemed to be the
beneficial owner of such shares, but disclaims any beneficial ownership therein.
As of March 31, 2000, 4,065,117 shares in the aggregate, or 6.55% of
the outstanding shares of the Fund were held in the name of Fidelity Investments
Institutional Operations Company, 100 Magellan Way, Covington, KY 41015, who may
be deemed to be the beneficial owner of such shares, but disclaims any
beneficial ownership therein. 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.
49
<PAGE>
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.
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.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable to
50
<PAGE>
shareholders to the extent of the Fund's earnings and profits, and would be
eligible for the dividends-received deduction in the case of corporate
shareholders.
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).
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
51
<PAGE>
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 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
52
<PAGE>
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.
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
53
<PAGE>
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.
ADDITIONAL INFORMATION
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
The CUSIP numbers of the classes are:
Class A : 471070-20-1
Class B : 471070-30-0
Class C : 471070-40-9
The Fund has a fiscal year ending December 31.
Many of the investment changes in the Fund will be made at prices
different from those 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 Advisor in light of the Fund's investment objectives and
policies, its other portfolio holdings and tax considerations, and should not be
construed as recommendations for similar action by other investors.
The Fund employs Davis Polk and Wardwell as the Fund's counsel.
The Fund's Class A, B and C Shares prospectus and this Statement of
Additional Information omit certain information contained in the Registration
Statement and its amendments which the Fund has filed with the SEC under the
Securities Act of 1933 and reference is hereby made to the Registration
Statement for further information with respect to the Fund and the securities
offered hereby. The Registration Statement and its amendments, are available for
inspection by the public at the SEC 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
and notes to financial statements in the Annual Report to the Shareholders of
the Fund dated December 31, 1999, are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
54
<PAGE>
THE JAPAN FUND, INC.
Class S Shares
A Mutual Fund That Seeks Long-Term Capital
Appreciation By Investing Primarily in the
Equity Securities of Japanese
Companies
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
- --------------------------------------------------------------------------------
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, 2000, 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,
1999 is incorporated by reference and is hereby deemed to be part of this
Statement of Additional Information.
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS..........................................................1
Investment Objective and Policies...............................................................1
Master/feeder Structure........................................................................2
Interfund Borrowing and Lending Program.........................................................2
Specialized Investment Techniques...............................................................3
Investment Restrictions........................................................................12
JAPAN AND THE JAPANESE ECONOMY..........................................................................13
Economic Trends................................................................................14
GROSS DOMESTIC PRODUCT..................................................................................14
Industrial Production..........................................................................16
INDICES OF INDUSTRIAL PRODUCTION.......................................................................16
Energy........................................................................................16
Labor.........................................................................................16
Prices.........................................................................................17
Balance of Payments............................................................................17
Foreign Trade..................................................................................18
SECURITIES MARKETS IN JAPAN.............................................................................20
PURCHASES AND EXCHANGES AND "BUYING AND SELLING SHARES".................................................23
Additional Information About Opening An Account................................................23
Minimum Balances...............................................................................24
Additional Information About Making Subsequent Investments.....................................24
Additional Information About Making Subsequent Investments by QuickBuy.........................24
Checks.........................................................................................25
Wire Transfer of Federal Funds.................................................................25
Share Price....................................................................................25
Share Certificates.............................................................................25
Other Information..............................................................................26
Exchanges......................................................................................26
REDEMPTIONS.............................................................................................27
Redemption by Telephone........................................................................27
Redemption By QuickSell........................................................................27
Redemption by Mail or Fax......................................................................28
Redemption-in-Kind.............................................................................28
Other Information..............................................................................29
FEATURES AND SERVICES OFFERED BY THE FUND...............................................................29
Internet Access...............................................................................29
Dividends and Capital Gains Distribution Options...............................................29
Reports to Shareholders........................................................................30
Transaction Summaries..........................................................................30
THE SCUDDER FAMILY OF FUNDS.............................................................................30
SPECIAL PLAN ACCOUNTS...................................................................................33
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals................................33
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations
and Self-Employed Individuals................................................................33
Scudder IRA: Individual Retirement Account.....................................................33
Scudder Roth IRA: Individual Retirement Account...............................................34
Scudder 403(b) Plan............................................................................34
Automatic Withdrawal Plan......................................................................34
Group or Salary Deduction Plan.................................................................35
Automatic Investment Plan......................................................................35
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Uniform Transfers/Gifts to Minors Act..........................................................35
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS...............................................................35
PERFORMANCE AND OTHER INFORMATION.......................................................................36
Comparison of Fund Performance.................................................................37
Taking a Global Approach.......................................................................39
FUND ORGANIZATION.......................................................................................39
INVESTMENT ADVISORY ARRANGEMENTS........................................................................40
CODE OF ETHICS..........................................................................................42
DIRECTORS AND OFFICERS..................................................................................42
REMUNERATION............................................................................................45
DISTRIBUTOR.............................................................................................46
TAXES ..................................................................................................47
United States Federal Income Taxation..........................................................47
Japanese Taxation..............................................................................50
PORTFOLIO TRANSACTIONS.................................................................................51
Brokerage Commissions..........................................................................51
Net Asset Value................................................................................52
ADDITIONAL INFORMATION..................................................................................53
Experts........................................................................................53
Public Official Documents......................................................................53
Other Information..............................................................................53
FINANCIAL STATEMENTS....................................................................................54
APPENDIX
Corporate and Municipal Bonds
Corporate and Municipal Commercial Paper
</TABLE>
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Investment Objective and Policies
The Japan Fund, Inc. (the "Fund") is a 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 offers the
following classes of shares: Class S, Class A, Class B and Class C shares. Only
the Class S shares are offered herein.
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 net
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 total 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 total 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.
Interfund Borrowing and Lending Program
The Fund has received exemptive relief from the SEC which permits the
Fund to participate in an interfund lending program among certain investment
companies advised by the Adviser. The interfund lending program allows the
participating funds to borrow money from and loan money to each other for
temporary or emergency purposes. The program is subject to a number of
conditions designed to ensure fair and equitable treatment of all participating
funds, including the following: (1) no fund may borrow money through the program
unless it receives a more favorable interest rate than a rate approximating the
lowest interest rate at which bank loans would be available to any of the
participating funds under a loan agreement; and (2) no fund may lend money
through the program unless it receives a more favorable return than that
available from an investment in repurchase agreements and, to the extent
applicable, money market cash sweep arrangements. In addition, a fund may
participate in the program only if and to the extent that such participation is
consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging).
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<PAGE>
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.
Depository Receipts. The Fund may invest indirectly in securities of emerging
country issuers through sponsored or unsponsored American Depository Receipts
("ADRs"), Global Depository Receipts ("GDRs"), International Depository Receipts
("IDRs") and other types of Depository Receipts (which, together with ADRs, GDRs
and IDRs are hereinafter referred to as "Depository Receipts"). Depository
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 Depository 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 Depository
Receipts. ADRs are Depository 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 Depository 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, Depository Receipts in registered form are designed for use in the
United States securities markets and Depository 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 Depository Receipts will be deemed to be investments in the
underlying securities. Depository Receipts other than those denominated in U.S.
dollars will be subject to foreign currency exchange rate risk. Certain
Depository Receipts may not be listed on an exchange and therefore may be
illiquid securities.
Debt Securities. When the Adviser believes that it is appropriate to do so in
order to achieve the Fund's objective of long-term capital growth, the Fund may
invest up to 20% of its total assets in debt securities of both foreign and
domestic issuers. Portfolio debt investments will be selected for their capital
appreciation potential on the basis of, among other things, yield, credit
quality, and the fundamental outlooks for currency and interest rate trends,
taking into account the ability to hedge a degree of currency or local bond
price risk. The Fund may purchase bonds, rated Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by Standard & Poor's
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 liquid
securities.
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<PAGE>
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.
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
4
<PAGE>
("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.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies
which seek to track the composition and performance of specific indexes or a
specific portion of an index. These index-based investments hold substantially
all of their assets in securities representing their specific index.
Accordingly, the main risk of investing in index-based investments is the same
as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio securities and due to
supply and demand for the instruments on the exchanges on which they are traded
(which may result in their trading at a discount or premium to their NAVs).
Index-based investments may not replicate exactly the performance of their
specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
5
<PAGE>
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
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
6
<PAGE>
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time they tend to limit any potential
gain which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such 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.
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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 15% of its net 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
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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 deutschemark (the "D-mark"), the Fund
holds securities denominated in schillings and the Adviser believes that the
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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,
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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 assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
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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:
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<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 126 million. Life
expectancy is one of the highest in the world. Literacy in Japan approaches
100%. Nearly 90% of Japanese students graduate from high school. Approximately
37% go on to college or university. Approximately 45% of the total population of
Japan is concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya,
cities with some of the world's highest population densities.
Over the post war period Japan has experienced significant economic
development. Today Japan is the second largest industrial nation in the world in
terms of GDP, with the United States being the largest. During the era of high
economic growth in the 1960s and early 1970s the expansion was based on the
development of heavy industries such as steel and shipbuilding. In the 1970s,
Japan moved into assembly industries that employ high levels of technology and
- --------
* Where figures in tables under this caption have been rounded off, the
totals may not necessarily agree with the sum of figures.
13
<PAGE>
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, 1999, Japan's
real gross domestic product in constant prices increased at an average annual
compound growth rate of 2.13% and 1.29%, respectively. In 1996, the gross
domestic product grew at a high rate of 5.0% due to 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 1.6% 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 2.5% affected by
reduced fixed investment in the private sector and continuous stagnation of
consumer spending. In 1999, real GDP grew 0.3% reflecting a slight improvement
in consumer spending, the largest component.
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.
14
<PAGE>
GROSS DOMESTIC PRODUCT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Gross Domestic Product 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nominal GDP (in Billion of Yen) 483,220.2 500,309.7 509,645.3 489,499.3 495,375.1
- ----------------------------------------------------------------------------------------------------
Consumption 337,942.2 347,763.6 355,461.5 355,442.2 357,774.4
Private 290,523.6 299,340.7 305,906.7 304,765.8 306,789.6
Public 47,418.6 48,422.9 49,554.8 50,676.4 50,984.8
Fixed Investment 137,611.20 147,424.80 145,608.50 133,593.30 129,322.60
Private 96,268.70 103,679.30 106,062.60 95,550.00 89,466.00
Public 41,342.5 43,745.5 39,545.9 38,043.3 39,856.6
Inventory 545.9 2,443.4 2,559.1 (252.7) 176.9
Private 433.7 2,249.3 2,422.4 (171.6) 260.0
Public 112.2 194.1 136.7 (81.1) (83.1)
Net Exports of Goods & Services 7,121.0 2,677.9 6,016.2 9,716.6 8,101.1
Exports of Goods & Services 45,392.9 49,699.8 56,332.3 55,323.6 51,284.4
Imports of Goods & Services (38,271.9) (47,021.9) (50,316.1) (45,607.0) (43,183.3)
Real GDP 461,893.5 485,219.0 492,954.2 480,586.8 481,865.2
GDP Deflator (1990=100) 104.6 103.1 103.4 103.7 n.a.
- ----------------------------------------------------------------------------------------------------
Percentage Change of GDP 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Nominal GDP +0.8% +3.5% +1.9% -2.2% -0.6%
Consumption +1.8% +2.9% +2.2% -0.0% +0.7%
Fixed Investment +0.2% +7.1% -1.2% -8.3% -3.2%
Inventory +1,000.6% +347.6% +4.7% -109.9% -170.0%
Net Exports of Goods & Services -29.0% -62.4% +124.7% +61.5% -16.6%
Exports of Goods & Services +2.2% +9.5% +13.3% -1.8% -7.3%
Imports of Goods & Services +11.3% +22.9% +7.0% -9.4% -5.3%
Real GDP +1.5% +5.0% +1.6% -2.5% +0.3%
GDP Deflator -0.7% -1.4% +0.3% +0.3% n.a.
- ----------------------------------------------------------------------------------------------------
Percentage of Nominal GDP 1995 1996 1997 1998 1999
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Consumption 69.9% 69.5% 69.7% 71.3% 72.2%
Fixed Investment 28.5% 29.5% 28.6% 26.8% 26.1%
Inventory 0.1% 0.5% 0.5% -0.1% 0.0%
Net Exports of Goods & Services 1.5% 0.5% 1.2% 1.9% 1.6%
Exports of Goods & Services 9.4% 9.9% 11.1% 11.1% 10.4%
Imports of Goods & Services 7.9% 9.4% 9.9% 9.1% 8.7%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Source: Economic Planning Agency, Quarterly Report on National Accounts
15
<PAGE>
Industrial Production
The following table sets forth indices of industrial production of
Japan and other selected industrial countries for the five years ending with
calendar year 1999 (with 1995 as 100):
INDICES OF INDUSTRIAL PRODUCTION
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Japan 100.00 102.90 107.30 99.70 99.33
United States 100.00 104.50 110.70 114.80 117.57
Germany 100.00 99.80 102.70 106.20 106.37
United Kingdom 100.00 101.10 101.90 102.50 102.80
France 100.00 100.30 104.10 108.80 n.a.
Italy 100.00 98.30 100.50 102.20 n.a.
Canada 100.00 100.10 104.00 109.10 113.67
- --------------------------------------------------------------------------------
Source: IMF, International Financial Statistics
The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1995 to 1999:
GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufacturing 95.7% 95.2% 95.2% 94.8% n.a.
Agriculture, Forestry and Fisheries 2.1% 2.0% 1.9% 1.9% n.a.
Mining 0.2% 0.2% 0.2% 0.2% n.a.
Construction 9.7% 9.4% 8.7% 8.2% n.a.
Manufacturing 27.4% 27.7% 28.4% 27.1% n.a.
Electricity, Gas and Water 2.7% 2.9% 2.8% 3.0% n.a.
Wholesale and Retail Trade 13.6% 12.9% 13.0% 12.8% n.a.
Finance and Insurance 5.4% 4.9% 5.2% 5.2% n.a.
Real Estate 11.8% 11.9% 12.0% 12.5% n.a.
Transportation & Communication 6.5% 6.6% 6.6% 6.6% n.a.
Services 16.4% 16.8% 16.5% 17.1% n.a.
Government Services 7.5% 7.3% 7.3% 7.5% n.a.
Private Non-Profit Institutions 2.2% 2.2% 2.2% 2.4% n.a.
Import Duty 0.9% 0.8% 0.8% 0.7% n.a.
(Deduction) Others 0.4% 0.5% 0.5% 0.5% n.a.
(Deduction) Imputed Interest 5.1% 4.5% 4.8% 4.8% n.a.
Statistical Discrepancy -0.7% -0.4% -0.2% -0.2% n.a.
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Total GDP 100.0% 100.0% 100.0% 100.0% n.a.
- -------------------------------------------------------------------------------------
</TABLE>
Source: Economic Planning Agency, Annual Report on National Accounts
* 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.
Energy
Japan has historically depended on oil for most of its energy
requirements. Virtually all of its oil is imported, the majority from the Middle
East. Oil price changes used to have a major impact on the domestic economy, but
now their influence is relatively diminished.
Japan has worked to reduce its dependence on oil by encouraging energy
conservation and the use of alternative fuels. In addition to conservation
efforts, industrial restructuring, with emphasis on 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
16
<PAGE>
In 1999, approximately 67.8 million persons, or approximately 63% of
the Japanese population, were employed, of which approximately 4.2% were
employed in agriculture, forestry and fisheries, 32.7% in construction and
manufacturing and 6.8% in transportation and communications, 24.8% in wholesale
and retail trade, 4.1% in finance, and 27.4% 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.
- --------------------------------------------------------------------------------
Employee by type of work 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Agriculture, Forestry and Fisheries 5.3% 5.2% 5.1% 5.0% 4.2%
Construction 10.9% 11.0% 10.7% 10.7% 10.4%
Manufacturing 23.4% 23.1% 22.3% 21.9% 22.3%
Transportation & Communication 6.7% 6.6% 6.5% 6.6% 6.8%
Whole Trade, Retail Trade 23.7% 23.6% 24.0% 24.2% 24.8%
Financials 4.1% 4.1% 4.2% 4.1% 4.1%
Services 25.9% 26.4% 27.2% 27.5% 27.4%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(YoY% Chg) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Wages Index +3.3% +2.5% +2.8% -1.1% -1.0%
Hours Worked Index +0.7% +0.8% -0.2% -1.8% +0.0%
Employment Index -1.9% -2.2% -0.9% -1.3% -2.6%
Labor Productivity - +3.2% +4.8% -4.1% n.a.
- --------------------------------------------------------------------------------
Source: Ministry of Labor, Monthly Labor (Wages are for manufacturers
who employ 30 or more persons.)
Prices
In 1999, the wholesale price index declined by 3.3% and the consumer
price index also declined by 0.3%.
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
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Japan 100.00 100.10 101.60 100.00 96.68
United States 100.00 102.30 102.30 99.70 100.58
Germany 100.00 99.60 100.70 100.30 99.03
United Kingdom 100.00 102.60 103.60 104.20 105.13
Italy 100.00 101.90 103.20 103.30 102.43
Canada 100.00 100.40 101.30 101.20 102.23
- --------------------------------------------------------------------------------
Source: IMF, International Financial Statistics
COMPARATIVE CONSUMER PRICE INDICES
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Japan 100.00 100.10 101.80 102.50 102.20
United States 100.00 102.90 105.30 107.00 109.30
Germany 100.00 101.50 103.30 104.30 104.83
United Kingdom 100.00 102.40 105.70 109.30 110.63
France 100.00 102.00 103.20 103.90 104.48
Italy 100.00 104.00 106.10 108.20 109.98
Canada 100.00 100.10 104.00 109.10 113.67
- --------------------------------------------------------------------------------
Source: IMF, International Financial Statistics
Balance of Payments
In 1999, Japan registered a surplus of Y12, 197 billion ($110.1
billion) in its current account. This surplus was predominantly due to a surplus
of Y14,054 billion ($ 127.7 billion) in its trade account. Japan also registered
an outflow of Y5,614.8 billion ($51.5 billion) in its capital and financial
account.
17
<PAGE>
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, 1999, exports and imports represented approximately 10.4% and 8.7%,
respectively, of Japan's nominal gross domestic product. Roughly three quarters
of Japan's exports are machinery and equipment including motor vehicles, machine
tools and electronic equipment. Japan's principal imports consist of raw
materials, foodstuff and fuels, such as oil and coal.
Japan's principal export markets are the United States, Canada, the
United Kingdom, Germany, Australia, Korea, Taiwan 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 fell slightly in 1996 and
1997 as a result of the rise in import prices reflecting the lower yen rate. In
1998, the terms of trade improved slightly mainly because of lower import
prices. In 1999, the terms of trade improved to the 1995 level largely because
of lower import prices as a result of the higher yen rate.
FOREIGN TRADE OF JAPAN
- --------------------------------------------------------------------------------
(1995=100) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Value Index
Exports 100.02 107.72 122.71 121.98 114.64
Imports 100.00 120.43 129.89 116.19 111.84
- --------------------------------------------------------------------------------
Volume Index
Exports 100.00 100.80 112.68 111.22 113.61
Imports 100.00 104.99 106.78 101.09 110.82
- --------------------------------------------------------------------------------
Unit Value Index
Exports 100.00 106.84 108.87 109.66 100.89
Imports 100.00 114.71 121.65 114.95 100.92
- --------------------------------------------------------------------------------
Terms of Trade 100.00 93.14 89.50 95.40 99.97
- --------------------------------------------------------------------------------
Source: Ministry of Finance, The Summary Report on Trade of Japan
The following table sets forth the composition of Japan's exports and
imports by major commodity groups:
COMPOSITION OF JAPAN'S EXPORTS AND IMPORTS
- --------------------------------------------------------------------------------
Japan Exports 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Foods & Beverage 0.5% 0.5% 0.5% 0.5%
Textile Products 2.1% 2.0% 1.9% 1.9%
Chemicals 7.0% 7.1% 7.0% 7.4%
Non-Ferrous Metal 1.3% 1.2% 1.1% 1.1%
Metal Products 6.2% 6.4% 6.3% 5.7%
Machinery 24.7% 23.8% 22.5% 21.3%
Elec. Machinery 23.9% 23.6% 23.2% 24.3%
Visual Equipments 2.2% 2.1% 2.5% 2.5%
Audio Equipments 1.0% 0.9% 0.9% 0.8%
Others 20.8% 22.7% 22.3% 23.5%
Transport Equipments 20.7% 21.5% 23.2% 22.7%
Autos 12.7% 14.0% 15.4% 14.9%
Auto Parts 4.0% 3.5% 3.2% 3.4%
Motorcycles 1.0% 0.9% 1.2% 1.1%
Shipments 2.2% 2.2% 2.5% 2.2%
Precision Machinery 4.7% 4.8% 4.6% 5.1%
Other Exports 8.8% 9.0% 9.5% 10.0%
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Japan's Imports 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Foods & Beverages 14.3% 13.6% 14.8% 14.3%
Basic Materials 8.8% 8.7% 7.8% 7.2%
Minerals & Fuels 18.0% 18.4% 15.3% 16.0%
Coal 2.0% 2.0% 2.2% 1.8%
Petroleum 10.0% 10.3% 8.0% 8.6%
Others 6.0% 6.1% 5.2% 5.6%
Chemicals 6.6% 6.9% 7.4% 7.5%
Textile Materials 7.1% 6.6% 6.8% 6.7%
Non-Ferrous Metal 1.6% 1.5% 1.4% 1.4%
Metal Products 4.9% 5.3% 5.1% 4.6%
Machinery 27.4% 28.0% 30.5% 31.3%
Others 11.3% 10.9% 10.9% 10.9%
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Source: Ministry of Finance, The Summary Report -- Trade of Japan
The following table indicates the geographic distribution of Japan's
trade in recent years.
GEOGRAPHIC DISTRIBUTION OF JAPAN'S EXPORTS AND IMPORTS
- --------------------------------------------------------------------------------
Japan Exports 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developed Areas
U.S.A. 27.3% 27.2% 27.8% 30.5% 30.7%
EC 15.9% 15.3% 15.6% 18.4% 19.1%
Australia 1.8% 1.8% 1.9% 2.1% 2.0%
Canada 1.3% 1.2% 1.4% 1.6% 1.7%
Others 1.7% 1.8% 1.7% 2.5% 0.5%
----------------------------------------------------------------------------
Subtotal 48.0% 47.3% 48.4% 55.1% 54.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developing Areas
S.E.Asia 38.3% 38.3% 36.5% 29.5% 31.6%
Middle East 2.3% 2.7% 2.8% 3.2% 2.3%
Latin America 4.4% 4.4% 5.0% 5.4% 4.7%
Africa 0.9% 0.7% 0.6% 1.0% 1.3%
Others 0.5% 0.5% 0.6% 0.0% 0.0%
----------------------------------------------------------------------------
Subtotal 46.4% 46.6% 45.5% 39.1% 39.9%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Former Soviet Union 0.3% 0.3% 0.3% 0.3% 0.1%
China 5.0% 5.3% 5.2% 5.2% 5.6%
Others 0.3% 0.6% 0.6% 0.3% 0.4%
----------------------------------------------------------------------------
Subtotal 5.6% 6.2% 6.1% 5.8% 6.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
Japan's Imports 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developed Areas
U.S.A. 22.4% 22.7% 22.3% 23.9% 21.7%
EC 14.5% 14.1% 13.3% 13.9% 15.4%
Australia 4.3% 4.1% 4.3% 4.6% 4.1%
Canada 3.2% 2.9% 2.9% 2.7% 2.6%
Others 3.2% 2.9% 1.8% 3.5% 0.9%
----------------------------------------------------------------------
Subtotal 47.6% 46.7% 44.6% 48.6% 44.6%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Developing Areas
S.E.Asia 25.3% 25.1% 23.9% 23.9% 25.8%
Middle East 9.4% 10.1% 11.4% 9.1% 9.8%
Latin America 3.5% 3.3% 3.4% 3.3% 3.1%
Africa 0.6% 0.6% 0.6% 0.6% 1.3%
Others 1.7% 1.2% 1.0% 0.0% 0.0%
----------------------------------------------------------------------
Subtotal 40.5% 40.3% 40.3% 36.9% 40.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Former Soviet Union 1.4% 1.1% 1.3% 1.0% 1.2%
China 10.7% 11.6% 12.4% 13.2% 13.8%
Others 0.3% 0.3% 0.2% 0.4% 0.3%
----------------------------------------------------------------------
Subtotal 12.4% 13.0% 13.9% 14.6% 15.3%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Source: Ministry of Finance, The Summary Report -- Trade of Japan
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.
A new market, named "Mothers", was established in the Tokyo Stock Exchange on
November 11, 1999. This market is designed to facilitate the public listing of
venture business-type small corporations. As of the end of March 2000, six
companies are listed on this market.
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 1990 though 1999.
20
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nikkei 225 High 38,712.88 27,146.91 23,801.18 21,148.11 21,552.81 20,011.76 22,666.80 20,681.07 17,264.34 18,934.34
Low 20,221.86 21,456.76 14,309.41 16,078.71 17,369.74 14,485.41 19,161.71 14,775.22 12,879.97 13,232.74
Close 23,848.71 22,983.77 16,924.95 17,417.24 19,723.06 19,868.15 19,361.35 15,258.74 13,842.17 18,934.34
- -----------------------------------------------------------------------------------------------------------------------------------
TSE/TOPIX High 2,867.70 2,028.85 1,763.43 1,698.67 1,712.73 1,585.87 1,722.13 1,560.28 1,300.30 1,722.20
Low 1,523.43 1,638.06 1,102.50 1,250.06 1,445.97 1,193.16 1,448.45 1,130.00 980.11 1,048.33
Close 1,733.83 1,714.68 1,307.66 1,439.31 1,559.09 1,577.70 1,470.94 1,175.03 1,086.99 1,722.20
- -----------------------------------------------------------------------------------------------------------------------------------
OTC High 4,149.20 3,333.78 2,022.41 1,728.13 2,002.73 1,852.13 1,747.17 1,333.11 842.05 2,423.15
Low 2,154.20 1,918.06 1,099.32 1,200.84 1,445.47 1,194.77 1,316.25 708.23 610.99 727.28
Close 2,175.48 1,946.14 1,227.93 1,447.60 1,776.05 1,488.40 1,330.55 721.53 724.99 2,270.14
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
YoY%Chg 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Nikkei 225 High -0.5% -29.9% -12.3% -11.1% +1.9% -7.2% +13.3% -8.8% -16.5% +9.7%
Low -33.0% +6.1% -33.3% +12.4% +8.0% -16.6% +32.3% -22.9% -12.8% +2.7%
Close -38.7% -3.6% -26.4% +2.9% +13.2% +0.7% -2.6% -21.2% -9.3% +36.8%
- -----------------------------------------------------------------------------------------------------------------------------------
TSE/TOPIX High -0.6% -29.3% -13.1% -3.7% +0.8% -7.4% +8.6% -9.4% -16.7% +32.4%
Low -35.6% +7.5% -32.7% +13.4% +15.7% -17.5% +21.4% -22.0% -13.3% +7.0%
Close -39.8% -1.1% -23.7% +10.1% +8.3% +1.2% -6.8% -20.1% -7.5% +58.4%
- -----------------------------------------------------------------------------------------------------------------------------------
OTC High +59.7% -19.7% -39.3% -14.6% +15.9% -7.5% -5.7% -23.7% -36.8% +187.8%
Low +63.8% -11.0% -42.7% +9.2% +20.4% -17.3% +10.2% -46.2% -13.7% +19.0%
Close -16.2% -10.5% -36.9% +17.9% +22.7% -16.2% -10.6% -45.8% +0.5% +213.1%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Tokyo Stock Exchange, Monthly Statistics Report and
Annual Statistics of OTC Stocks 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 2884.80 on December 18, 1989.
The TOPIX then declined heavily in 1990 and in 1992, and after showing a slight
rebound in 1993 and 1994, the Index continued to decline throughout 1996, 1997
and 1998 to the latest low of 980.11 on October 15, 1998. From the 1989 peak to
the 1998 bottom, the TOPIX registered a 66% drop. In 1999, the Tokyo stock
market showed a strong upturn led by information service sector. The OTC index
more than tripled in 1999.
[ORIGINAL DOCUMENT CONTAINS A MOUNTAIN CHART HERE SHOWING TOPIX AND
NIKKEI 225 BETWEEN THE DATES OF 5/87 AND 5/99]
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 five years.
21
<PAGE>
- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Market Capitalization in billion of Yen)
TSE 365,716 347,578 280,930 275,181 456,027
OTC 14,535 14,904 9,228 7,742 27,411
- --------------------------------------------------------------------------------
Daily Average Trading Volume (000 shares)
TSE 369,680 405,541 436,416 445,872 585,937
OTC 9,763 9,766 5,614 5,036 16,877
- --------------------------------------------------------------------------------
Number of Listed Companies
TSE 1714 1766 1805 1838 1890
OTC 678 762 834 856 868
- --------------------------------------------------------------------------------
Source: Tokyo Stock Exchange, Monthly Securities Statistics
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.
In the past, the proportion of trading value by institutional investors
has tended to increase at the expense of individuals, but in the last three
years of stock price declines, the share of trading value represented by
financial institutions and business corporations has fallen while the value of
trading by foreigners has risen substantially. In 1999, the trading value by
individuals increased dramatically reflecting the stock market rally and brisk
demand for stock investment trusts, as can be seen in the following table:
- --------------------------------------------------------------------------------
(Trading Value, % of Total) 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Individuals 26.9% 22.9% 16.9% 13.5% 29.0%
Foreigners 25.5% 29.7% 34.5% 39.2% 38.6%
Securities Companies 2.6% 2.8% 2.2% 1.9% 2.2%
Investment Trust 5.0% 5.4% 3.5% 2.1% 2.3%
Financial Institutions 32.3% 32.8% 37.2% 37.4% 22.3%
Others 0.9% 0.8% 0.7% 0.7% 0.6%
- --------------------------------------------------------------------------------
Customers' Account 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Source: Tokyo Stock Exchange, Annual Securities Statistics
(Trading Value; 1st and 2nd Sections of the Tokyo, Osaka and
Nagoya Stock Exchanges)
The following table shows the price/earning ratios, price/book value
ratio, and dividend yield for TOPIX for each of the past five 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 rose in the period from 1997 through 1999 due mainly to a decline in
earnings.
TOPIX VALUATIONS (PER, PBR, Div.Yield and Rate of Return)
- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price/Earnings Ratio ^1) 69.87 51.73 124.45 174.54 81.97
Price/Book Ratio ^1) 2.32 2.22 1.76 1.72 2.66
Dividend Yield ^1) 0.75 0.81 1.02 1.00 0.57
Rate of Return ^2) 3.70 -0.50 4.20 20.90 n.a.
- --------------------------------------------------------------------------------
Sources: 1) Nikkei, 2) Tokyo Stock Exchange
22
<PAGE>
Following is a statistical comparison between the Tokyo Stock Exchange
(both sections) and the New York Stock Exchange for the five years ending 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Number of Companies
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TSE 1,714 1,766 1,805 1,838 1,892
NYSE 2,675 2,907 3,047 3,114 3,025
- -------------------------------------------------------------------------------------------------
Aggregate Market Value
- -------------------------------------------------------------------------------------------------
In Billions of Dollars* TSE 3,554 2,997 2,162 2,389 4,475
NYSE 6,013 7,300 9,413 10,864 12,296
- -------------------------------------------------------------------------------------------------
As percentage of GDP TSE 76% 69% 55% 55% 94%
NYSE 81% 93% 113% 124% 133%
- -------------------------------------------------------------------------------------------------
Turnover Ratio (%)
- -------------------------------------------------------------------------------------------------
TSE 270% 29% 31% 35% 44%
NYSE 59% 63% 69% 76% 78%
- -------------------------------------------------------------------------------------------------
</TABLE>
Sources: Tokyo Stock Exchange, Annual Securities Statistics
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 five years ending December 31, 1999.
EQUITY STOCK MARKETS OF THE WORLD
(dollars in billions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(dollars in billion) December 1995 December 1996 December 1997 December 1998 December 1999
------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $6,338.0 41.9% $7,835.9 45.1% $8,607.4 47.2% $11,721.5 50.7% $15,370.0 48.6%
Japan $3,582.7 23.7% $3,071.0 17.7% $2,287.8 12.5% $2,447.5 10.6% $4,692.8 14.9%
United Kingdom $1,354.3 9.0% $1,740.1 10.0% $2,097.6 11.5% $2,346.2 10.1% $2,894.5 9.2%
Germany $579.5 3.8% $648.3 3.7% $825.2 4,5% $1,181.1 5.1% $1,447.1 4.6%
France $504.5 3.3% $600.8 3.5% $677.9 3.7% $982.6 4.2% $1,442.1 4.6%
Canada $333.4 2.2% $463.6 2.7% $543.3 3.0% $513.2 2.2% $762.8 2.4%
Netherlands $304.3 2.0% $393.4 2.3% $358.3 2.0% $578.4 2.5% $758.9 2.4%
Switzerland $401.6 2.7% $406.6 2.3% $579.3 3.2% $696.7 3.0% $676.3 2.1%
Hong Kong $274.4 1.8% $393.4 2.3% $340.7 1.9% $347.9 1.5% $583.4 1.8%
Australia $245.4 1.6% $306.4 1.8% $284.7 1.6% $326.5 1.4% $27.5 0.1%
Other $1,197.2 7.9% $1,531.9 8.8% $1,630.1 8.9% $1,994.6 8.6% $2,938.5 9.3%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Total $15,115.3 100.0% $17,391.4 100.0% $18,232.3 100.0% $23,136.2 100.0% $31,593.9 100.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Morgan Stanley Capital International, Quarterly Report
- --------------------
* Where figures in tables under this caption have been rounded off, the
totals may not necessarily agree with the sum of figures.
PURCHASES AND EXCHANGES AND "BUYING AND SELLING SHARES"
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
23
<PAGE>
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 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
24
<PAGE>
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.
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.
25
<PAGE>
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 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
26
<PAGE>
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.
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.
27
<PAGE>
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.
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.
28
<PAGE>
Other Information
All redemption requests must be directed to the Fund's Transfer Agent.
Redemption requests that are delivered to the Fund rather than to the Fund's
Transfer Agent will be forwarded to the Transfer Agent, and processed at the
next calculated NAV after receipt by the Transfer Agent.
The value of shares redeemed or repurchased may be more or less than
the shareholder's cost depending on the net asset value at the time of
redemption or repurchase. The Fund does not impose a redemption or repurchase
charge. Redemption of shares, including an exchange into another fund in the
Scudder Family of Funds, may result in tax consequences (gain or loss) to the
shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
FEATURES AND SERVICES OFFERED BY THE FUND
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.
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.
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.
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
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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.
Reports to Shareholders
The Fund 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 Fund presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Fund.
Transaction Summaries
An annual summary of all transactions in the Fund account are available
to shareholders. The summary may be obtained by calling 1-800-225-5163.
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.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
Scudder Government Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series+
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
TAX FREE
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
- --------
+ 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 Massachusetts Limited Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder 500 Index Fund
Scudder Real Estate Investment Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
- --------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund***
Scudder International Growth Fund
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
- --------
** 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.
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Scudder Technology Fund
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
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.
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. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. 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 IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
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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, even 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.
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account ("Roth IRA") which meets the requirements of
Section 408A of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain 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
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. 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
34
<PAGE>
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, and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change payee must be submitted in writing, signed
exactly as the account is registered and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent 10 days prior to the date of the first automatic
withdrawal. 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 which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the 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.
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
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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 will be computed separately for each class
of shares of the Fund and 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 12/31/99
Class S shares*
One Year Five Years Ten Years
-------- ---------- ---------
119.88% 13.64% 6.35%
*On May 1, 2000, existing shares of the fund were designated as Class S shares.
Cumulative Total Return is the compound rate of return on a hypothetical initial
investment of $1000 for a specified period. Cumulative total return quotations
reflect the change in the price of the Fund's shares and assume that all
dividends and capital gains distributions were reinvested in Fund shares.
Cumulative total return is calculated by finding the compound rates of return of
hypothetical investment over such period, according to the following formula
(cumulative total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
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<PAGE>
Cumulative Total Return for periods ended 12/31/99
Class S shares*
One Year Five Years Ten Years
-------- ---------- ---------
119.88% 89.51% 85.12%
* On May 1, 2000, existing shares of the fund were designated
as Class S shares.
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.
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:
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<PAGE>
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, 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.
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<PAGE>
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.
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 -- of which one hundred million (100,000,000) of
such shares are designated as "Class A" shares of Common Stock, fifty million
(50,000,000) of such shares are designated as "Class B" shares of Common Stock,
fifty million (50,000,000) of such shares are designated as "Class C" shares of
Common Stock, one hundred million (100,000,000) of such shares are designated as
"AARP Shares" of Common Stock and three hundred million (300,000,000) of such
shares are designated as "Class S" shares of Common Stock. The AARP shares are
not currently offered to shareholders. All shares issued and outstanding are
fully paid and non-assessable, transferable, and redeemable at net asset value,
subject to such changes as may be applicable, at the option of the shareholder.
Shares have no preemptive or conversion rights.
39
<PAGE>
The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and, in such
event, the holders of the remaining less than 50% of the shares voting for the
election of directors will not be able to elect any person or persons to the
Board of Directors.
To the knowledge of the Fund, no person is a control person of the Fund
within the meaning ascribed to such term under the Securities Act of 1933, as
amended.
As of March 31, 2000, 12,809,764 shares in the aggregate, or 20.66% of
the outstanding shares of the Fund were held in the name of Charles Schwab, 101
Montgomery Street, San Francisco, CA 94101, who may be deemed to be the
beneficial owner of such shares, but disclaims any beneficial ownership therein.
As of March 31, 2000, 4,065,117 shares in the aggregate, or 6.55% of
the outstanding shares of the Fund were held in the name of Fidelity Investments
Institutional Operations Company, 100 Magellan Way, Covington, KY 41015, who may
be deemed to be the beneficial owner of such shares, but disclaims any
beneficial ownership therein.
To the best of the Fund's knowledge, as of March 31, 2000, 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.
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Adviser, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Adviser. The Adviser's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. 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.
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. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over 74 open and
closed-end mutual funds.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world, researching
40
<PAGE>
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
Funds 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 a 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 a fund. Purchase and sale orders for a fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to that fund.
In certain cases, the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser,
that have similar names, objectives and investment styles. You should be aware
that the Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Fund can be expected to vary from those of these other mutual funds.
The present investment management agreement (the "Agreement") was
approved by the Directors on July 9, 1998, became effective September 7, 1998,
and was approved at a shareholder meeting held on December 11, 1998. The
Agreement will continue in effect until September 30, 2000 and from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Directors who are not parties to such Agreement or interested
persons of the Adviser or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Fund's Directors
or of a majority of the outstanding voting securities of the Fund. The Agreement
may be terminated at any time without payment of penalty by either party on
sixty days' written notice and automatically terminate 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.
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.
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<PAGE>
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.
CODE OF ETHICS
The Fund, the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Fund and employees of the Adviser and principal underwriter are permitted
to make personal securities transactions, including transactions in securities
that may be purchased or held by the Fund, subject to requirements and
restrictions set forth in the applicable Code of Ethics. The Adviser's Code of
Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
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
quarterly 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
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter, Scudder
Name, Age and Address Position with Fund Principal Occupation** Investor Services, Inc.
- --------------------- ------------------ ---------------------- -----------------------
<S> <C> <C> <C>
Lynn S. Birdsong (53)# President and Director Managing Director, Senior Vice President
Scudder Kemper
Investments, Inc.
William L. Givens (70) Chairman and Director President, ___
Twain Associates, Inc. Twain Associates
553 Boylston Street
Brookline, MA 02146
Thomas M. Hout (57) Director Senior Advisor, ___
Boston Consulting Group Boston Consulting Group
Exchange Place
Boston, MA 02109
42
<PAGE>
Position with
Underwriter, Scudder
Name, Age and Address Position with Fund Principal Occupation** Investor Services, Inc.
- --------------------- ------------------ ---------------------- -----------------------
John F. Loughran (68) Director Retired Senior Adviser for ___
Box 502 Asia Pacific to J.P.
95 Zukor Road Morgan & Co., Inc.
New York, NY 10956
Yoshihiko Miyauchi (64) Director President and Chief ___
ORIX Corporation Executive Officer of ORIX
3-22-8 Shiba Corporation
Minato-ku
Tokyo 105-8683
Japan
William V. Rapp (61) Director Managing Director, ___
85 River Road Rue Associates;
Scarborough, NY 10510 Academic Director,
International Relations,
Yale University
Senior Research
Associate,
Columbia University Center
on Japan Economy and
Business
Hiroshi Yamanaka (87) Director Honorary Senior Adviser to ___
Meiji Mutual Life the Board,
Insurance Company Meiji Mutual Life
1-1 Marunouchi, 2-chome Insurance Company
Chiyoda-ku
Tokyo 100, Japan
Takeo Shiina (70) Director Chairman, IBM Japan, Ltd. ___
IBM Japan, Ltd.
3-2-12 Roppongi, Minato-ku
Tokyo 106-8711
Japan
William H. Gleysteen, Jr. (73) Honorary Director Consultant ___
4937 Crescent Street
Bethesda, MD 20816
Henry Rosovsky (72)* Honorary Director Professor, ___
Harvard University Harvard University
17 Quincy Street
Cambridge, MA 02138
O. Robert Theurkauf Honorary Director Advisory Managing
Director, Scudder Kemper
Investments, Inc.
Jonathan Mason (84) Honorary Director Retired First Vice ___
12092 Longwood Green Drive President Prudential-Bache
West Palm Beach, FL 33414 Securities, Inc.
43
<PAGE>
Position with
Underwriter, Scudder
Name, Age and Address Position with Fund Principal Occupation** Investor Services, Inc.
- --------------------- ------------------ ---------------------- -----------------------
James W. Morley (78) Honorary Director Professor of Political ___
Rm. 905 International Affairs, Science Emeritus
Columbia University Columbia University
420 West 118the Street
New York, NY 10027
Robert G. Stone, Jr. (77) Honorary Director Chairman of the Board ___
Kirby Corporation and Director,
405 Lexington Ave, 39th Fl. Kirby Corporation
New York, NY 10174
Shoji Umemura (80)* Honorary Director Board Counselor, ___
The Nikko Securities Co., Ltd. The Nikko Securities Co.,
3-1 Marunouchi 3-chome Ltd.
Chiyoda-ku
Tokyo, Japan
Elizabeth J. Allan (46)# Vice President Senior Vice President, ___
Scudder Kemper
Investments, Inc.
William E. Holzer ( 50)# Vice President Managing Director, ___
Scudder Kemper
Investments, Inc.
Seung K. Kwak (38)# Vice President Managing Director, ___
Scudder Kemper
Investments, Inc.
Miyuki Wakatsuki (63) Vice President General Manager, ___
====
17-9, Nihonbashi-Hakozakicho Japan Fund Office,
Chuo-Ku Nikko International
Tokyo 103, Japan Capital Management Co.,
Ltd.
Gina Provenzano (58)# Vice President and Vice President, ___
Treasurer Scudder Kemper
Investments, Inc.
Kathryn L. Quirk (47)# Vice President and Managing Director, Director, Senior Vice
Secretary Scudder Kemper President, Chief Legal
Investments, Inc. Officer and Assistant Clerk
Maureen E. Kane (38)+ Assistant Secretary Vice President, Scudder ___
=====
Kemper Investments, Inc.
John R. Hebble (42)+ Assistant Treasurer Senior Vice President, ___
=====
Scudder Kemper
Investments, Inc.
</TABLE>
44
<PAGE>
* Director considered by the Fund and its counsel to be an "interested
person" (as defined in the 1940 Act) of the Fund or its investment
manager because of his affiliation with a broker-dealer.
** Unless otherwise stated, all the directors and officers of the Fund
have been associated with their respective companies for more than five
years, but not necessarily in the same capacity.
# Address = 345 Park Avenue, New York, New York 10154-0010.
+ Address = Two International Place, Boston, Massachusetts 02110-4103
The Executive Committee of the Fund's Board of Directors, which
currently consists of Messrs. Loughran, Galvin and Birdsong , 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, 1999, total expenses were
$155,177.
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.
45
<PAGE>
The following table shows the aggregate compensation received by each
unaffiliated director during 1999 from The Japan Fund and from all Scudder funds
as a group. In 1999, the Directors of the Fund met 10 times.
<TABLE>
<CAPTION>
Pension or Retirement Estimated Total
Aggregate Benefits Accrued As Annual Benefits Compensation From the
Name of Director Compensation* Part of Fund Expenses Upon Retirement Fund and Fund Complex**
- ---------------- ------------- --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
Peter Booth $14,000 $600 $6,000 $14,000
William L. Givens $9,000 $6,000 $6,000 $10,500
Thomas M. Hout $14,750 $600 $6,000 $14,750
John F. Loughran $14,750 $6,000 $6,000 $14,750
Yoshihiko Miyauchi $10,500 $1,800 $6,000 $10,500
William V. Rapp $14,750 $5,400 $6,000 $14,750
Henry Rosovsky $24,750 $6,000 $6,000 $24,750
Hiroshi Yamanaka $6,000 $6,000 $6,000 $6,000
William H. Gleysteen, Jr. $8,603 $3,732 $3,732 $19,933
Honorary Director
Jonathan Mason $6,000 $6,000 $6,000 $6,000
Honorary Director
James W. Morley $8,000 $6,000 $6,000 $8,000
Honorary Director
Robert G. Stone, Jr. $9,000 $6,000 $6,000 $9,000
Honorary Director
</TABLE>
* 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 October 15, 1999 will remain in effect until
October 31, 2000 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, 1999.
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.
46
<PAGE>
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.
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.
47
<PAGE>
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable to shareholders to the extent of the
Fund's earnings and profits, and would be eligible for the dividends-received
deduction in the case of corporate shareholders.
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).
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
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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 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.
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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.
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
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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.
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.
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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.
For the fiscal years ended December 31, 1997, 1998 and 1999, Class S
shares of the Fund paid brokerage commissions of $1,764,425, $789,290 and
$2,227,639, respectively. For the fiscal year ended December 31, 1999, the
$1,993,279 (89 % of the total brokerage commissions paid) resulted from orders
placed consistent with the policy of obtaining the most favorable net results,
with brokers and dealers who provided supplementary research, market and
statistical information to the Fund or Adviser. 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, and $68,159 for 1997 Such amounts
represented 10.65% and 3.86% of the total brokerage commissions paid by the Fund
in such years, respectively. The total amount of brokerage transactions
aggregated $1,564,858,086, of which $1,376,888,882 (88% of all brokerage
transactions) were transactions which included research commissions. The
Directors review from time to time whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable. To date no such
recapture has been effected.
The rate of total portfolio turnover of the Fund for years 1999, 1998
and 1997 was 114%, 90% and 96% 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 separately for each class of shares by dividing the value of the
total assets of the Fund, less all liabilities attributable to that class, by
the total number of shares of that class 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.
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An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner 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.
If a foreign exchange or market is closed on a day when the Exchange is
open, the value of a portfolio asset of the Fund that is traded in the
particular closed foreign exchange or market shall be the last available market
quotation from the date the foreign exchange or market was last open. If, in the
opinion of the Valuation Committee of the Fund, that value does not represent
the fair market value of the asset, the value of the asset shall be taken to be
an amount which, in the opinion of the Valuation Committee of the Fund,
represents fair market value on the basis of all available information.
ADDITIONAL INFORMATION
Experts
The financial highlights 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, given on the authority of
that firm as experts in accounting and auditing. PricewaterhouseCoopers LLP
audits the financial statements of the Fund and provides other audit, tax and
related services.
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 Class S shares of the Fund 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.
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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, 1999, the Fund was charged by Scudder Service Corporation $516,599
aggregated, of which $74,848 was unpaid at December 31, 1999.
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 Class S prospectus and this Statement of Additional
Information omit certain information contained in the Registration Statement
which the Fund has filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and reference is hereby made to the
Registration Statement for further information with respect to the Fund and the
securities offered hereby. This Registration Statement is available for
inspection by the public at the Securities and Exchange Commission in
Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of the
Fund, together with the Report of Independent Accountants, Financial Highlights
and notes to financial statements in the Annual Report to the Shareholders of
the Fund dated December 31, 1999, and the unaudited semiannual report are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
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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".
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Municipal Notes
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".
