BOARD OF DIRECTORS
William G. Barker, Jr.
George H. Chiftenden
Haruo Sawada
Chor Weng Tan
Arthur R. Taylor
John F. Wallace
OFFICERS
Haruo Sawada, President
Mitsutoyo Kohno, Vice President
John J. Boretti, Secretary and Treasurer
Terence R Brennan, Assistant Secretary and
Assistant Treasurer
MANAGER
Nomura Asset Management U.S.A. Inc. JAPAN
180 Maiden Lane OTC Equity
New York, New York 10038-4936 Fund, Inc.
Internet Address
www.nomura-asset.com
INVESTMENT ADVISER
Nomura Asset Management Co., Ltd.
2-1-14 Nihonbashi, Chuo-ku,
Tokyo 103-8260, Japan
CUSTODIAN, DIVIDEND PAYING AGENT, TRANSFER
AGENT AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8209
Boston, Massachusetts 02266-8209
COUNSEL
Brown & Wood LLP
One World Trade Center ANNUAL REPORT
New York, New York 10048-0557
INDEPENDENT ACCOUNTANTS FEBRUARY 28, 1999
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036-2798
JAPAN OTC EQUITY FUND, INC.
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4936
- ------------------------------------------------------------------------------
This Report, including the Financial Statements, is transmitted to the
Shareholders of Japan OTC Equity Fund, Inc. for their information. This is not
a prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the Report.
<PAGE>
JAPAN OTC EQUITY FUND, INC.
April 23, 1999
To Our Shareholders:
We present the Annual Report of the Japan OTC Equity Fund, Inc. (the
"Fund") for the fiscal year ended February 28, 1999. The Net Asset Value per
Share ("NAV") of the Fund increased by 20.9% for the year, reflecting the
overall strength of the Japanese OTC market. The change in NAV represents the
change in share price and the reinvestment of a $0.005 per share dividend from
net investment income paid in December 1998. The closing market price of the
Fund on February 28, 1999 on the New York Stock Exchange was $6.25, representing
a premium of 6.7% to the NAV of $5.86. The net assets of the Fund amounted to
$66,739,570 on February 28, 1999.
The TOPIX, consisting of all companies listed on the Tokyo Stock Exchange
(the "TSE"), declined by 6.4% and the Nikkei Average Index (a price weighted
index of 225 leading stocks on the TSE) decreased by 9.2%, in United States
dollar terms, for the year ended February 28, 1999. The Nikkei OTC Average Index
(the "OTC Index"), a price-weighted index of the quotations of the OTC
registered stocks, and the Index of the Japan Securities Dealers Association
Quotation System (the "JASDAQ Index"), a capitalization -weighted index of all
OTC stocks, increased by 17.6% and 16.9%, respectively, in U.S. dollar terms,
during the same period. The Japanese yen appreciated by 6.3% against the U.S.
dollar during the year and played a positive role in the dollar-based
performance of the various indices.
The Fund outperformed both the OTC Index and the JASDAQ Index by 3.3% and
4.0%, respectively, during the year due to the stock selection in the
Consumption and Information and Software sectors.
The NAV of the Fund increased by 29.2% for the quarter ended February 28,
1999. During the same period, the TOPIX, the Nikkei Average Index, the OTC
Index, and the JASDAQ Index increased by 1.7%, 0.3%, 33.1%, and 29.8%,
respectively, in U.S. dollar terms. The Japanese yen appreciated by 3.9% during
the last quarter. For the quarter ended February 28, 1999, the Fund
underperformed the OTC index and the JASDAQ Index by 3.9% and 0.6%,
respectively.
The Portfolio
The Fund increased its equity exposure from 97.0% at November 30, 1998 to
98.5% at February 28, 1999. The Fund was diversified into 81 issues, which 42
issues were OTC stocks, comprising 63.3% of the total portfolio on February 28,
1999.
During the last quarter, the Fund eliminated nine stocks from the
portfolio: Misumi Corp., distributor of precision machinery parts; Sony Music
Entertainment (Japan), Inc., comprehensive entertainment software; Union Tool
Co., Ltd., printed circuit board drills; Fast Retailing Co., Ltd., casual
clothing; Japan Industrial Land Development Co., Ltd., civil engi neering;
Square Co., Ltd., games software; Japan Lifeline Co., Ltd., medical supplies;
O.A. System Plaza Co., Ltd., personal computers and peripherals and Tiemco Ltd.,
fishing goods.
Nine new issues were added to the portfolio during the last quarter: Nippon
Cable Systems Inc., control cables; Otsuka Kagu, Ltd., furniture; THK Co.,
linear motion systems for industrial machines; Kadokawa Shoten Publishing Co.,
Ltd., publishing and printing; Funai Electric Co., Ltd., electric parts;
Matsumotokiyoshi Co., Ltd., drug store chain; Paltek Corp., semiconductor
trading; Round One Corp., gaming; and Uoriki Co., Ltd., fresh fish and sushi
stores.
Japanese Economy and Stock Market Outlook
During the quarter ended February 28, 1999, the OTC Index extended its
recovery which began in mid-October 1998. At the early stage of the current
recovery, the Japanese OTC stock market initially reacted to a rebound of the
TSE First Section. The TSE First Section increase had been triggered by the
enactment of the Financial Sector Revitalization Bill, the strong rebound in the
U.S. and European stock markets, and the discussions of a coalition between the
ruling Liberal Democratic Party and the Liberal Party.
However, the OTC Index has since continued to outpace the TOPIX. The main
market ran out of momentum following the sudden demise and nationalization of
Nippon Credit Bank, the collapse of the Japanese government bond market, and the
strong appreciation of the Japanese yen. In contrast, the Japanese OTC stock
market continued its strong recovery amid active trading. The rally has been
especially strong for Initial Public Offerings ("IPOs"), mainly due to their
conservative pricing at low valuations. Investors, including individuals, are
returning to the Japanese OTC market, attracted by the performance of the IPOs.
Furthermore, the outstanding performance of some small capitalization stocks in
the U.S., including internet stocks, has also had a positive impact on the
Japanese OTC market.
By the end of February, the OTC Index had reached 900 level for the first
time since October 1997. The OTC Index appreciated by 28.2% on a Japanese yen
basis, and outperformed the TOPIX by 30.2 percentage points during the quarter.
From the bottom of the stock market in mid-October, 1998, the Japanese OTC
market had recovered approximately 50% by February 28, 1999.
The market capitalization of the Japanese OTC market recovered to the ten
trillion Japanese yen level in late February. This level was last reached in
March 1998. The increase in value was partly supported by the new listing of
Oracle Corporation Japan, which had a market capitalization of 850 billion
Japanese yen and accounted for more than 8% of the entire Japanese OTC market at
the end of the quarter.
Activity among the various investor categories has altered since the
beginning of this year. Individuals, who were once net sellers, became net
buyers in February. Investment Trust Funds have also been net buyers since
January. Meanwhile, foreign investors and domestic pension funds, who were
previously major net buyers, were both net sellers during February.
The Fund believes that the OTC market still offers excellent potential for
long-term investors, considering that valuations are still relatively low,
although it is questionable whether it can sustain the current pace of recovery
without any improvement in the economic fundamentals.
Domestic economic conditions remain depressed, with just a few exceptions,
such as personal computers and car sales. The sustainability of growth in even
these limited sectors is uncertain given the tough employment conditions. The
consensus real gross domestic product for fiscal year 1999 is zero to minus
1.0%, while the fiscal year 1998 forecast is minus 2.2% to minus 2.5%.
The Fund will continue to focus on those companies that possess high
quality management, a unique competitive edge, excellent long-term potential,
and attractive valuations. For the time being, the Fund will maintain its
overweight positions in some of the more defensive growth issues, in
consideration of the sluggish economic outlook. At the same time, the Fund will
seek opportunities to add cyclical stocks with long-term potential, in
preparation for an eventual economic recovery.
We appreciate your continuing support of your Fund,
Haruo Sawada
- ------------------------------------------------------------------------------
Nomura Asset Management Co., Ltd. ("NAM') provides investment recommendations to
Nomura Asset Management U.S.A. Inc. ("NAM-U.S.A."), the Manager of the Fund. Mr.
Haruo Sawada, President of the Fund and President of NAM-U.S.A., is primarily
responsible for the day-to-day management of the Fund's portfolio. Mr. Sawada
has held such responsibilities for the Fund and has served as President of
NAM-U.S.A. since 1997.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
INTERNET WEBSITE
NAM-U.S.A. (the "Manager") has established an Internet website which
highlights the Manager's history, its investment philosophy and process and
products, which includes the Fund. The Internet web address is
www.nomura-asset.com. We invite you to view the Internet website.
- ------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
FUND HIGHLIGHTS-FEBRUARY 28,1999
KEY STATISTICS:
<S> <C> <C> <C>
Net Assets .........................................................................$66,739,570
Net Asset Value per Share ................................................................$5.86
Closing NYSE Market Price ................................................................$6.25
Percentage Change in Net Asset Value per Share*+ .........................................20.9%
Percentage Change in NYSE Market Price*+ ..................................................8.8%
MARKET INDICES:
Percentage change in market indices:*
YEN U.S.$
--- -----
TOPIX ..................................................................................(12.0%) (6.4%)
Nikkei Average .........................................................................(14.6%) (9.2%)
JASDAQ ...................................................................................10.0% 16.9%
Nikkei OTC Average .......................................................................10.6% 17.6%
*From March 1, 1998 through February 28, 1999.
+Reflects the percentage change in share price and reinvestment of income dividends.
</TABLE>
<TABLE>
ASSET ALLOCATION:
Japanese Equities
<S> <C>
OTC Stocks ............................................................63.3%
TSE First and Second Section Stocks ...................................35.2
Cash and Cash Equivalents ..............................................2.7
------
Total Investments ....................................................101.2
Liabilities in Excess of Other Assets, Net ............................(1.2)
------
Net Assets ...........................................................100.0%
======
</TABLE>
<TABLE>
<CAPTION>
INDUSTRY DIVERSIFICATION:
% Of %Of
Not Assets Not Assets
<S> <C> <C> <C>
Miscellaneous Manufacturing ..................11.6 Wholesale...........................5.0
Retail .......................................10.2 Chemicals...........................4.7
Electronics ...................................7.9 Telecommunications..................4.3
Information and Software ......................7.3 Real Estate and Warehouse...........3.8
Banks and Finance .............................6.7 Textiles and Apparel................2.4
Food and Manufacturing ........................6.6 Automotive Equipment and Parts......2.2
Electric ......................................5.9 Publishing and Printing.............1.3
Machinery and Machine Tools ...................5.4 Transportation......................1.0
Restaurants ...................................5.4 Construction and Housing............0.9
Services ......................................5.2 Gaming..............................0.7
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Security Value Not Assets
- -------- ------ ----------
<S> <C> <C>
Hikari Tsushin, Inc. .........................................$2,615,404 3.9
Watami Food Service Co., Ltd. .................................2,478,816 3.7
Bellsystems 24, Inc. ..........................................2,006,661 3.0
Ryohin Keikaku Co., Ltd. ......................................1,759,201 2.6
Nichii Gakkan Company .........................................1,697,062 2.6
Aiful Corporation .............................................1,688,378 2.5
Nippon Kanzai Co., Ltd. .......................................1,666,371 2.5
Fujimi Inc ....................................................1,568,981 2.4
Aeon Credit Service Co. Ltd. ..................................1,548,653 2.3
Ariake Japan Co., Ltd. ........................................1,532,145 2.3
</TABLE>
<PAGE>
JAPAN OTC EQUITY FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Japan OTC Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Japan OTC Equity Fund, Inc.
(the "Fund") at February 28, 1999, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the America
New York New York 10036
April 7, 1999
SCHEDULE OF INVESTMENTS*
FEBRUARY 28,1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ------ --------
<S> <C> <C> <C> <C>
EQUITY SECURITIES
AUTOMOTIVE EQUIPMENT AND PARTS
FCC Co., Ltd. ...................................... 65,000 $ 1,919,452 $ 712,449 1.1
Clutches
Nippon Cable Systems Inc. .......................... 50,000 251,858 354,538 0.5
Control cables
SPK Corporation .................................... 71,000 1,118,597 401,079 0.6
---------- --------- ---
Replacement parts
Total Automotive Equipment and Parts ............... 3,289,907 1,468,066 2.2
---------- --------- ---
BANKS AND FINANCE
Aeon Credit Service Co., Ltd. ...................... 24,200 727,865 1,548,653 2.3
Credit cards
Aiful Corporation .................................. 25,000 1,714,558 1,688,378 2.5
Consumer loans
Shohkoh Fund & Co., Ltd. ........................... 3,000 763,104 1,259,643 1.9
---------- --------- ---
Small to medium-size business financing
Total Banks and Finance ............................ 3,205,527 4,496,674 6.7
---------- --------- ---
See notes to financial statements
</TABLE>
JAPAN- OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ------ --------
<S> <C> <C> <C> <C>
CHEMICALS
Arisawa Manufacturing Co., Ltd. .............................. 44,000 $ 484,594 $ 445,546 0.7
Glassfibers and insulating resins
C. Uyemura & Co., Ltd. ....................................... 21,000 541,760 658,657 1.0
Chemicals
FP Corporation ............................................... 26,300 781,664 820,455 1.2
Polystyrene and other synthetic resin foodware
Matsumoto Yushi-Seiyaku Co., Ltd. ............................ 45,000 955,354 823,321 1.2
Analgesic anti-inflammatory agents
Tigers Polymer Corp. ........................................ 108,000 805,042 373,340 0.6
--------- ------- ---
Rubber and resin hoses
Total Chemicals .............................................. 3,568,414 3,121,319 4.7
CONSTRUCTION AND HOUSING
Nishio Rent All Co., Ltd. .................................... 53,900 1,103,215 387,645 0.6
Construction equipment rentals
Token Corporation ............................................ 38,000 578,687 206,973 0.3
--------- ------- ---
Condominium building and leasing
Total Construction and Housing ............................... 1,681,902 594,618 0.9
--------- ------- ---
ELECTRIC
Citizen Electronics Co., Ltd. ................................ 29,900 683,575 1,210,067 1.8
Electric parts
Funai Electric Co. Ltd. ...................................... 11,000 962,371 978,458 1.5
Electric parts
Kitagawa Industries Co., Ltd. ................................ 39,600 1,261,934 281,128 0.4
Electromagnetic and plastic molded parts
Mirai Industry Co., Ltd. ..................................... 96,000 1,670,098 979,385 1.5
Plastic molded electric materials
Nippo, Ltd. .................................................. 24,000 401,329 107,247 0.2
Plastic molded electric materials
Nippon Ceramic Co., Ltd. ..................................... 34,000 430,645 361,199 0.5
--------- ------- ---
Fine ceramic-based sensors
Total Electric ............................................... 5,409,952 3,917,484 5.9
--------- --------- ---
ELECTRONICS
Aval Data Corporation ........................................ 66,000 538,821 278,234 0.4
Computer peripheral equipment
Canare Electric Co., Ltd. .................................... 24,600 336,968 213,634 0.3
Coaxial cables
Fukuda Denshi Co. ............................................ 40,000 1,015,850 512,626 0.8
Medical electronic equipment
1-0 Data Device Inc .......................................... 29,400 911,701 738,687 1.1
Memory boards for personal computers
Japan CBM Corp. .............................................. 65,600 1,890,770 912,609 1.4
Electronic calculators and watches
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Not
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Miyota Co., Ltd. ............................................... 60,000 $ 500,507 $ 445,175 0.7
Watches, quartz oscillators and electronic image equipment
Roland Corporation .............................................. 36,000 634,811 1,016,821 1.5
Electronic keyboard musical instruments
Yamaichi Electronics Co., Ltd.................................... 60,000 1,436,64 1,138,232 1.7
Integrated circuit sockets
---------- ---------- ----
Total Electronics ............................................... 7,266,07 5,256,01 7.9
---------- ---------- ----
FOOD AND MANUFACTURING
Ariake Japan Co., Ltd. .......................................... 47,200 615,852 1,532,145 2.3
Natural seasonings
Hokuto Corporation .............................................. 58,000 1,435,683 1,437,714 2.1
Mushroom grower
Hurxley Corp. ................................................... 30,000 603,626 720,880 1.1
Japanese lunch-boxes
Q'sai Co., Ltd. ................................................. 35,000 477,512 708,233 1.1
Frozen and processed food products
--------- ---------- ----
Total Food and Manufacturing .................................... 3,132,673 4,398,972 6.6
--------- ---------- ----
GAMING
Round One Corp. ................................................. 237 328,219 481,573 0.7
--------- ---------- ----
Gaming
INFORMATION AND SOFTWARE
Bellsystem 24, Inc. ............................................. 7,000 921,008 2,006,661 3.0
Telemarketing
Daitec Co., Ltd. ................................................ 29,300 668,355 469,373 0.7
Information processing
Data Communication System Co., Ltd. ............................. 36,000 483,009 1,001,644 1.5
Software developer
Fuji Soft ABC Inc. .............................................. 25,000 546,978 1,416,467 2.1
Computer systems
--------- ---------- ----
Total Information and Software .................................. 2,619,350 4,894,145 7.3
--------- ---------- ----
MACHINERY AND MACHINE TOOLS
Disco Corp. ..................................................... 17,500 365,071 590,194 0.9
Dicing saws for semiconductors
Nippon Pillar Packing Co., Ltd. ................................. 150,000 1,851,304 639,939 1.0
Industrial mechanical seals
Nitto Kohki Co., Ltd. ........................................... 62,000 1,655,854 522,744 0.8
Machine tools
Sansei Yusoki Co., Ltd. ......................................... 97,000 1,409,202 404,831 0.6
Stage mechanisms for theaters
THK Co., Ltd. ................................................... 55,100 733,388 775,827 1.2
Linear motion systems for industrial machines
Yushin Precision Equipment Co., Ltd. ............................ 38,500 598,771 636,230 0.9
Injection-molding related machinery
--------- ---------- ----
Total Machinery and Machine Tools ............................... 6,613,590 3,569,765 5.4
--------- ---------- ----
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
MISCELLANEOUS MANUFACTURING
Avex inc. ....................................................... 21,000 $ 776,422 $ 1,002,150 1.5
Video products
Dainichi Co., Ltd. .............................................. 115,200 1,892,244 301,100 0.5
Kerosene stoves and oil-fan heaters
Fancl Corp. ..................................................... 10,000 466,887 1,349,016 2.0
Cosmetics and toiletries
Fuji Seal, Inc. ................................................. 14,000 578,567 1,107,205 1.7
Packing materials
Fujimi Inc. ..................................................... 37,900 1,787,165 1,568,981 2.4
Polishing materials for silicone wafers
G.L. Sciences, Inc. ............................................. 45,000 901,575 637,410 1.0
Chromatographs
King Jim Co., Ltd. .............................................. 61,600 1,555,743 410,303 0.6
Office supplies
Milbon Co., Ltd. ................................................ 45,000 664,361 1,073,732 1.6
Hair-care products for beauty salons
Nippon Hi-Pack Co., Ltd. ........................................ 110,000 802,339 215,168 0.3
Corrugated cardboard products
---------- ---------- -----
Total Miscellaneous Manufacturing ............................... 9,425,303 7,665,065 11.6
---------- ---------- -----
PUBLISHING AND PRINTING
Kadokawa Shoten Publishing Co., Ltd. ............................ 10,000 439,036 885,292 1.3
---------- ---------- -----
Publishing and printing
REAL ESTATE AND WAREHOUSE
Meiwa Estate Co., Ltd. .......................................... 26,000 546,551 537,077 0.8
Developer
Nippon Kanzai Co., Ltd. ......................................... 108,000 992,376 1,666,371 2.5
Comprehensive building maintenance
Sekiwa Real Estate, Ltd. ........................................ 97,000 997,882 335,315 0.5
Leasing subsidiary of Sekisui House, Ltd., homebuilders
---------- ---------- -----
Total Real Estate and Warehouse ................................. 2,536,809 2,538,763 3.8
---------- ---------- -----
RESTAURANTS
Joyfull Co., Ltd. ............................................... 113,000 1,343,375 1,143,291 1.7
Roadside restaurants
Watami Food Service Co., Ltd. ................................... 60,000 746,461 2,478,816 3.7
Restaurant chain
---------- ---------- -----
Total Restaurants ............................................... 2,089,836 3,622,107 5.4
---------- ---------- -----
RETAIL
Circle K Japan Co., Ltd. ........................................ 22,900 755,845 1,025,243 1.5
Convenience stores
H.I.S. Co., Ltd. ................................................ 27,000 946,376 660,175 1.0
Airline discount tickets
Himaraya Co., Ltd. .............................................. 94,700 1,751,845 694,650 1.1
Sporting goods
See notes to financial statements
</TABLE>
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESrMENTS*-Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Matsumotokiyoshi Co., Ltd. ...................................... 16,400 $ 605,337 $ 667,864 1.0
Drug store chain
Otsuka Kagu, Ltd. ............................................... 7,600 487,449 638,219 1.0
Furniture
Ryohin Keikaku Co., Ltd. ........................................ 13,000 811,446 1,759,201 2.6
Clothes, sundry goods, and foods
Sunkus & Associates, Inc. ....................................... 21,000 410,796 485,140 0.7
Convenience stores
Uoriki Co., Ltd. ................................................ 40,000 782,912 876,860 1.3
Fresh fish and sushi stores
---------- ---------- -----
Total Retail .................................................... 6,552,006 6,807,352 10.2
---------- ---------- -----
SERVICES
Arrk Corporation ................................................ 80,000 1,773,144 627,292 0.9
Product testing
Fujitsu Support and Service Inc. ................................ 10,000 508,061 742,802 1.1
Information services
Fujitsu System Construction, Ltd. ............................... 40,000 621,622 411,113 0.6
Constructs, maintains and manages information systems
Nichii Gakkan Company ........................................... 32,000 1,510,928 1,697,062 2.6
Hospital administrative services
---------- ---------- -----
Total Services .................................................. 4,413,755 3,478,269 5.2
---------- ---------- -----
TELECOMMUNICATIONS
C Cube Corp. .................................................... 100,000 720,722 236,078 0.4
Telecommunications engineering
Hikari Tsushin Inc. ............................................. 22,000 693,222 2,615,404 3.9
Telecommunications equipment
---------- ---------- -----
Total Telecommunications ........................................ 1,413,944 2,851,482 4.3
---------- ---------- -----
TEXTILES AND APPAREL
Nichimen Infinity Inc. .......................................... 51,300 1,034,040 743,949 1.1
Casual clothing
Nishimatsuya Chain Co., Ltd. .................................... 50,000 681,252 893,723 1.3
Clothing for children
---------- ---------- -----
Total Textiles and Apparel ...................................... 1,715,292 1,637,672 2.4
---------- ---------- -----
TRANSPORTATION
Japan Logistic Systems Corp. .................................... 61,000 591,154 154,294 0.2
Truck transporter
Sakai Moving Service Co., Ltd. .................................. 29,900 811,837 277,307 0.4
Mover of household goods
Yusen Air & Sea Service Co., Ltd. ............................... 28,000 479,491 247,881 0.4
International air cargo transporter
---------- ---------- -----
Total Transportation ............................................ 1,882,482 679,482 1.0
---------- ---------- -----
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Wholesale
ArcLand Sakamoto Co., Ltd. ...................................... 75,600 $ 947,942 637,410 0.9
Home appliances
Hakuto Co., Ltd. ................................................ 63,600 895,880 1,442,469 2.2
Electric parts
Kondotec Inc. ................................................... 39,000 176,142 207,158 0.3
Construction material
Paltek Corp. .................................................... 33,000 720,054 781,839 1.2
Semiconductor trading
Toba, Inc. ...................................................... 62,000 1,229,663 292,736 0.4
------------ ------------ -----
Trading company for control systems
Total Wholesale ................................................. 3,969,681 3,361,612 5.0
------------ ------------ -----
TOTAL INVESTMENTS IN EOUITY SECURITIES .......................... $ 71,553,752 $ 65,725,730 98.5
============ ============ =====
</TABLE>
<TABLE>
<CAPTION>
Principal
INVESTMENTS IN SHORT-TERM SECURITIES Amount
---------
<S> <C> <C> <C> <C>
Time Deposit
State Street Bank and Trust Company, interest bearing call
account 4.50% due 3/l/99 .................................. $1,798,467 1,798,467 1,798,467 2.7
------------ ------------ -----
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES ................... 1,798,467 1,798,467 2.7
------------ ------------ -----
INVESTMENTS IN FOREIGN CURRENCY
State Street Bank and Trust Company, 0.25%-interest
bearing call account ..................................... JPY 405,874 3,422 3,422 0.0
------------ ------------ -----
TOTAL INVESTMENTS IN FOREIGN CURRENCY ........................ 3,422 3,422 0.0
------------ ------------ -----
TOTAL INVESTMENTS ............................................ 73,355,641 67,527,619 101.2
LIABILITIES IN EXCESS OF OTHER ASSETS, NET ................... (787,557) (788,049) (1.2)
------------ ------------ -----
NET ASSETS ................................................... $ 72,568,084 $ 66,739,570 100.0
============ ============ =====
*The description following each investment is unaudited and not covered by the Report of Independent Accountants.
</TABLE>
Portfolio securities and foreign currency holdings
were translated at the following exchange rate
as of February 28, 1999.
Japanese Yen JPY Yl18.605 = $1.00
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF ASSETS AND UA13ILMES
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at market value (cost-$71,553,752) .............................................. $65,725,730
Investments in short-term securities, at market value (Cost-$1,798,467) .................................... 1,798,467
Investments in foreign currency, at market value (cost-$3,422) ............................................. 3,422
Receivable for dividends and interest, net of withholding taxes ............................................ 41,276
-------------
Total Assets .......................................................................................... 67,568,895
-------------
LIABILITIES:
Payable for investments purchased .......................................................................... 640,880
Accrued management fee ..................................................................................... 51,219
Other accrued expenses ..................................................................................... 137,226
-------------
Total Uabilities ...................................................................................... 829,325
-------------
NET ASSETS:
Capital stock (par value of 11,387,819 shares of capital stock outstanding, authorized
100,000,000, par value $0.10 each) ....................................................................... 1,138,782
Paid-in capital ............................................................................................ 121,867,884
Accumulated net realized loss on investments and foreign currency transactions ............................. (50,106,988)
Unrealized net depreciation on investments and foreign exchange ............................................ (5,828,514)
Accumulated net investment loss ............................................................................ (331,594)
-------------
Net Assets ............................................................................................ $ 66,739,570
=============
Net asset value per share .................................................................................. $5.86
=============
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28,1999
<S> <C> <C>
INCOME:
Dividend income (less $76,958 withholding taxes) ...........................................$436,095
Interest income ..............................................................................68,020
--------
Total Income ............................................................................... $ 504,115
---------
EXPENSES:
Management fee ..............................................................................556,245
Custodian fees ..............................................................................111,150
Shareholder reports ......................................................................... 55,115
Auditing and tax reporting fees ..............................................................50,654
Legal fee.....................................................................................40,150
Directors'fees and expenses ..................................................................40,075
Registration fees ............................................................................24,548
Annual meeting expenses ......................................................................20,075
Transfer agency fees .........................................................................17,337
Insurance .....................................................................................2,500
Miscellaneous .................................................................................9,855
-------
Total Expenses ............................................................................... 927,704
---------
INVESTMENT LOSS-NET .......................................................................... (423,589)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized loss on investment and foreign currency transactions:
Net realized loss on investments ............................................................. (3,800,322)
Net realized loss on foreign exchange ........................................................ (2,557,217)
-----------
Net realized loss on investments and foreign exchange ........................................ (6,357,539)
Change in net unrealized appreciation on translation of foreign currency and other
assets and liabilities denominated in foreign currency ..................................... 7,037,606
Change in net unrealized depreciation on investments ......................................... 11,292,101
----------
Net realized and unrealized gain on investments and foreign exchange ......................... 11,972,168
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......................................... $11,548,579
===========
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended
February 28,
FROM INVESTMENT ACTIVITIES:
1999 1998
---- ----
<S> <C> <C>
Net investment loss .............................................................. $ (423,589) $ (670,960)
Net realized loss on investments ................................................. (3,800,322) (5,014,160)
Net realized loss on foreign exchange ............................................ (2,557,217) (1,981,699)
Change in net unrealized appreciation (depreciation) on
investments and foreign exchange ............................................... 18,329,707 (9,479,435)
---------- -----------
increase (decrease) in net assets derived from investment activities ............. 11,548,579 (17,146,254)
---------- -----------
FROM CAPITAL SHARE TRANSACTIONS:
Net asset value of shares issued to shareholders on reinvestment of dividends
from net investment income (317 shares
in 1999 and 3,502 shares in 1998) .............................................. 1,659 15,183
----- ------
Increase in net assets derived from capital share transactions ................... 1,659 15,183
----- ------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($0.005 per share in 1999 and $0.08 per
share in 1998) ................................................................. (56,937) (910,716)
------ -------
Decrease in net assets derived from distributions to shareholders ................ (56,937) (910,716)
------ -------
Net increase (decrease) in net assets ............................................ 11,493,301 (18,041,787)
---------- ----------
NET ASSETS:
Beginning of year ................................................................ 55,246,269 73,288,056
---------- ----------
End of year (including accumulated net investment losses of
$331,594 and $539,953, respectively) ........................................... $66,739,570 $ 55,246,269
========== ==========
</TABLE>
See notes to financial statements
JAPAN OTC EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Japan OTC Equity Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund was incorporated in Maryland on January 25, 1990 and
investment operations commenced on March 21, 1990. A second public offering of
the Fund's shares on June 2, 1994 resulted in the issuance of 2,875,000 shares
of the Fund's common stock at the subscription price of $12.125 per share. Net
proceeds to the Fund were $32,610,919 after deducting offering costs,
underwriting discounts and commissions. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of Securities - Investments traded in the over-the-counter
market are valued at the last reported sales price as of the close of business
on the day the securities are being valued or, if none is available, at the mean
of the bid and offer price at the close of business on such day or, if none is
available, the last reported sales price. Portfolio securities which are traded
on stock exchanges are valued at the last sales price on the principal market on
which securities are traded or lacking any sales, at the last available bid
price. Short- term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity at the date of purchase was 60 days or
less, or by amortizing their value on the 61 st day prior to maturity if their
term to maturity at the date of purchase exceeded 60 days. Securities and other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund.
(b) Foreign Currency Transactions - Transactions denominated in Japanese
yen are recorded in the Fund's records at the current prevailing rate at the
time of the transaction. Asset and liability accounts that are denominated in
yen are adjusted to reflect the current exchange rate at the end of the period.
Transaction gains or losses resulting from changes in the exchange rate during
the reporting period or upon settlement of foreign currency transactions are
included in operations for the current period.
The net assets of the Fund are presented at the exchange rate and market
values at the end of the period. The Fund isolates that portion of the change in
unrealized appreciation (depreciation) included in the statement of operations
arising as a result of changes in Japanese yen rates at February 28, 1999 on
investments and other assets and liabilities. Net realized foreign exchange
gains or losses includes gains or losses arising from sales of portfolio
securities, sales and maturities of short-term securities, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid.
(c) Security Transactions, Investment Income and Distributions to
Shareholders - Security transactions are accounted for on the trade date.
Dividend income and distributions are recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Realized gains and losses on
the sale of investments are calculated on the identified cost basis.
Distributions from net investment income and net realized gains are
determined in accordance with Federal income tax regulations, which may differ
from generally accepted accounting principles. To the extent these "book/tax"
differences are permanent in nature (i.e., that they result from other than
timing of recognition-"temporary"), such accounts are reclassified within the
capital accounts based on their Federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net realized gains for financial reporting purposes, but not for tax
purposes, are reported as distributions in excess of net realized gains.
(d) Income Taxes - A provision for United States income taxes has not been
made since it is the intention of the Fund to qualify as a regulated investment
company under the Internal Revenue Code and to distribute within the allowable
time limit all taxable income to its shareholders.
Under Japanese tax laws, a withholding tax is imposed on dividends at a
rate of 15% and on interest at a rate of 10% and such withholding taxes are
reflected as a reduction of the related revenue. There is no withholding tax on
realized gains.
(e) Capital Account Reclassification - For the year ended February 28,
1999, the Fund's accumulated net realized loss was increased by $301,361 and
paid in capital was decreased by $387,524, with an offsetting decrease in
accumulated net investment loss of $688,885. This adjustment was primarily the
result of the reclassification of foreign currency gains, losses and gains from
the sale of investments in passive foreign investment companies and
reclassification of the net operating loss.
(f) Use of Estimates in Financial Statement Preparation - The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from these estimates.
(g) Concentration of Risk - A significant portion of the Fund's net assets
consists of Japanese securities which involve certain considerations and risks
not typically associated with investments in the United States. In addition to
the smaller size, and greater volatility, there is often substantially less
publicly available information about Japanese issuers than there is about U.S.
issuers. Future economic and political developments in Japan could adversely
affect the value of securities in which the Fund is invested. Further, the Fund
may be exposed to currency devaluation and other exchange rate fluctuations.
2. Management Agreement and
Transactions With Affiliated Persons
Nomura Asset Management U.S.A. Inc. acts as the Manager of the Fund
pursuant to a management agreement. Under the agreement, the Manager provides
all office space, facilities and personnel necessary to perform its duties.
Pursuant to such management agreement, the Manager has retained its parent
company, Nomura Asset Management Co., Ltd. (the "Investment Adviser"), to act as
investment adviser for the Fund.
As compensation for its services to the Fund, the Manager receives a
monthly fee at the annual rate of 1.10% of the value of the Fund's average
weekly net assets not in excess of $50 million, 1.00% of the Fund's average
weekly net assets in excess of $50 million but not exceeding $100 million and
.90% of the Fund's average weekly net assets in excess of $100 million. For
services performed under the Investment Advisory Agreement, the Investment
Adviser receives a monthly fee from the Manager at the annual rate of .50% of
the Fund's average weekly net assets not in excess of $50 million, .45% of the
Fund's average weekly net assets in excess of $50 million but not in excess of
$100 million and, .40% of the Fund's average weekly net assets in excess of $100
million. Under the Management Agreement, the Fund paid or accrued fees to the
Manager of $556,245 for the year ended February 28, 1999. Under the Investment
Advisory Agreement, the Manager informed the Fund that the Investment Adviser
earned fees of $253,062 for the year ended February 28, 1999. At February 28,
1999, the fee payable to the Manager, by the Fund, was $51,219.
Certain officers and/or directors of the Fund are officers and/or directors
of the Manager. The Nomura Securities Co., Ltd. (the Manager's indirect parent)
earned $14,734 in commissions on the execution of portfolio security
transactions for the year ended February 28, 1999. The Fund pays each Director
not affiliated with the Manager an annual fee of $5,000 plus $500 per meeting
attended, together with such Director's actual expenses related to attendance at
meetings. Such fees and expenses for unaffiliated Directors aggregated $34,028
for the year ended February 28, 1999.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the year ended February 28, 1999 were
$18,196,080 and $17,474,198, respectively.
As of February 28, 1999, net unrealized depreciation on investments
exclusive of investments in foreign currency and short-term securities for
Federal income tax purposes was $5,828,022 of which $16,390,867 related to
appreciated securities and $22,218,889 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies
and short-term securities of $1,801,889, at February 28, 1999 for Federal income
tax purposes was $71,553,752. In accordance with U.S. Treasury regulations, the
Fund elected to defer $1,921,789 of net realized capital losses arising after
October 31, 1998. Such losses are treated for tax purposes as arising on March
1, 1999. The Fund has a capital loss carryforward as of February 28, 1999 of
$48,177,478 of which $3,388,715 expires in 2001, $10,818,209 expires in 2002,
$12,082,012 expires in 2004, $6,448,950 expires in 2005, $6,238,208 expires in
2006 and $9,201,384 expires in 2007.
JAPAN OTC EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS-Continued
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding
throughout the period.
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------------------------------
February 28, February 29, February 28,
--------------------------------- ------------- --------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..................... $4.85 $6.44 $7.82 $8.59 $11.05
------- ------ ----- ----- ------
Net investment loss .................................. (0.04) (0.06) (0.09) (0.07) (0.09)
Net realized and unrealized gain
(loss) on investments and foreign currency ........ 1.06 (1.45) (1.25) (0.70) (2.41)
------- ------ ------ ----- ------
Total from investment operations ..................... 1.02 (1.51) (1.34) (0.77) (2.50)
Distributions to shareholders from:
Net investment income ................................ (0.01) (0.08) (0.04 -- --
------- ------ ----- ----- -----
Total distributions .................................... (0.01) (0.08) (0.04) 0.00 0.00
Increase in net asset value from capital
shares transaction* .................................. -- -- -- -- 0.04
------- ------ ----- ----- -----
Net asset value, end of year ........................... $5.86 $4.85 $6.44 $7.82 $8.59
======= ====== ===== ===== =====
Market value, end of year .............................. $6.250 $5.750 $6.375 $8.500 $8.625
Total investment return**............................... 8.8% (8.5%) (24.6%) (1.4%) (38.9%)
Net asset value total return***......................... 20.9% (23.4%) (17.2%) (9.0%) (22.3%)
Ratio to average net assets/supplemental data:
Net assets, end of year (in 000) ...................... $66,740 $55,246 $73,288 $88,966 $97,833
Operating expenses ..................................... 1.80% 1.71% 1.70% 1.47% 1.42%
Net investment loss ................................... (0.82%) (1.0%) (1.1%) (0.83%) (0.78%)
Portfolio turnover ..................................... 35% 29% 71% 79% 20%
</TABLE>
** based on market value per share, adjusted for reinvestment of income
dividends and capital share transactions. Total return does not reflect
sales commissions.
***Based on net asset value per share, adjusted for reinvestment of income
dividends and capital share transactions. Total return does not reflect
sales commissions.
* Increase due to second public offering, net of offering cost of $505,487
(see note 1).
- -------------------------------------------------------------------------------
U.S. TAX INFORMATION (Unaudited)
The Fund intends to make an election under Internal Revenue Code Section
853 to pass through foreign taxes paid by the Fund to its shareholders. The
total amount of foreign taxes that will be passed through to the shareholders
for the fiscal year ended February 28, 1999 is $80,025. The foreign source
income for information reporting purposes is $513,053. This information is
given to meet certain requirements of the Internal Revenue Code. Shareholders
should refer to their Form 1099-DIV to determine the amounts includable on
their respective tax returns for 1999.
- -------------------------------------------------------------------------------
<PAGE>
JAPAN OTC EQUITY FUND, INC.
REVIEW OF THE FUND'S MARKET PRICE COMPARED TO NET ASSET VALUE
Shares of closed-end investment companies, including funds focusing on a
single country, have at various times traded at both premiums and discounts to
their net asset value ("NAV"). Although the shares of the Fund frequently have
traded at such a premium, they also have traded at a discount from NAV.
Since the Fund was established, the Board of Directors on a quarterly basis
has reviewed the trading price of the Fund's shares. The purpose of such review
has been to determine whether a discount exists and, if so, whether it would be
in shareholders' overall best interests for the Fund to conduct share
repurchases, make an issuer tender offer for shares or consider another means of
possibly reducing the discount. For example, the Board of Directors has also
considered whether it would be in the best interests of the Fund to convert to
an open-end fund or to an interval fund, which is a form of investment company
that makes periodic share repurchases at prices based on NAV.
To date, the Board of Directors has not authorized open-market share
repurchases or a tender offer for shares of the Fund. The Board of Directors
also has not felt that it would be in the best interests of the Fund or its
shareholders to convert to an open-end fund or to have interval fund status. As
a "country fund", emphasizing a particular segment of the market, the Fund's NAV
is more volatile than might be the case for a fund with a broader investment
focus. The Board of Directors believe that converting the Fund to either an
open-end or interval fund would subject the Fund to redemptions or repurchases
at times when liquidation of portfolio securities could disadvantage remaining
shareholders, and they believe that the recent volatility of the financial
markets in Japan supports their view. Additionally, since an open-end fund has a
limited ability to invest in illiquid securities, such a conversion could hinder
the Fund's ability to pursue its investment objectives. The Board of Directors
intend to continue to review, on a quarterly basis, the trading market for the
Fund's shares.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by NAM-U.S.A. or other Fund service
providers do not properly address this problem prior to January 1, 2000.
NAM-U.S.A. has hired consultants to analyze these issues and to implement any
system modifications necessary to prepare for the Year 2000. In addition,
NAM-U.S.A. has sought assurances from the Fund's other service providers that
they are taking all necessary steps to ensure that their computer systems will
accurately reflect the Year 2000, and NAM-U.S.A. will continue to monitor the
situation. However, no assurance can be given that the Fund's service providers
have anticipated every step necessary to avoid any adverse effect on the Fund
attributable to the Year 2000 Problem.
In addition, the companies in which the Fund invests, the markets for their
securities and related securities trade processing could be adversely affected
by the Year 2000 Problem. If the value of a Fund investment is adversely
affected by a Year 2000 Problem, the Fund's investment return will be reduced.
<PAGE>
JAPAN OTC EQUITY FUND, INC.
Supplemental Shareholder Information (Unaudited)
The 1998 Annual Meeting of the Shareholders of the Fund was held at the
Fund's offices, 180 Maiden Lane, New York, New York on November 10, 1998. The
purpose of the meeting was to elect six Directors to serve for the ensuing year;
consider and act upon a proposal to ratify the selection of
PricewaterhouseCoopers LLP as independent accountants of the Fund for its fiscal
year ending February 28, 1999; and to transact such other business as may
properly come before the Meeting or any adjournment thereof.
At the Meeting, the following persons were elected by the shareholders to
serve as Directors of the Fund: William G. Barker, Jr., George H. Chittenden,
Haruo Sawada, Chor Weng Tan, Arthur R. Taylor, and John F. Wallace. The
shareholders ratified the selection of PricewaterhouseCoopers LLP, to serve as
the Fund's independent accountants for the fiscal year ending February 28, 1999.
No other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
1. To elect the Fund's Board of Directors:
<TABLE>
<CAPTION>
% of % of
Shares Voted outstanding Shares Voted outstanding
For Shares Withhold Authority Shares
------------ ----------- ------------------ -----------
<S> <C> <C> <C> <C>
William G. Barker, Jr. .........................8,303,151 72.9 317,784 2.8
George H. Chittenden ...........................8,327,167 73.1 293,768 2.6
Haruo Sawada ...................................8,313,437 73.0 307,498 2.7
Chor Weng Tan ..................................8,312,361 73.0 308,574 2.7
Arthur R. Taylor ...............................8,309,761 73.0 311,174 2.7
John F. Wallace ................................8,342,572 73.3 278,363 2.4
</TABLE>
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants of the Fund:
<TABLE>
<CAPTION>
% of % of % of
Shares Voted outstanding Shares Voted outstanding Shares outstanding
For Shares Against Shares Abstained Shares
------------ ----------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
8,328,331 73.1 86,542 0.8 206,062 1.8
</TABLE>
<PAGE>
JAPAN OTC EQUITY FUND, INC.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan (the "Plan") is available automatically for
any holder of Common Stock with shares registered in his/her own name who wishes
to purchase additional shares with income dividends or capital gains
distributions received on shares owned, unless such shareholder elects to
receive all dividends and capital gain distributions in cash, paid by check and
mailed to the shareholder. If a shareholder holds shares in his/her own name,
communications regarding the Plan should be addressed to the Plan Agent, State
Street Bank and Trust Company, P. 0. Box 8209, Boston, Massachusetts 02266-8209.
Under the Plan, shareholders appoint the Plan Agent to reinvest dividends and
distributions in shares of the Fund. Such shares will be acquired by the Plan
Agent for shareholders either through open market purchases if the Fund is
trading at a discount or through the issuance of authorized but unissued shares
if the Fund is trading at net asset value or a premium. If the market price of a
share on the payable date of a dividend or distribution is at or above the
Fund's net asset value per share on such date, the number of shares to be issued
by the Fund to each shareholder receiving shares in lieu of cash dividends or
distributions will be determined by dividing the amount of the cash dividends or
distributions to which such shareholder would be entitled by the greater of the
net asset value per share on such date or 95% of the market price of a share on
such date. If the market price of a share on such distribution date is below the
net asset value per share, the number of shares to be issued to such
shareholders will be determined by dividing such amount, less brokerage
commission, by the per share market price.
Purchases will be made by the Plan Agent from time to time on the New York
Stock Exchange (the "Exchange") or elsewhere to satisfy dividend and
distribution investment requirements under the Plan. Purchases will be suspended
on any day when the closing price (or the mean between the closing bid and ask
prices if there were no sales) of the shares on the Exchange on the preceding
trading day was higher than the net asset value per share. If on the dividend
payable date, purchases by the Fund are insufficient to satisfy dividend or
distribution investments and on the last trading day immediately preceding the
dividend payable date the closing price or the mean between the closing bid and
ask prices of the shares is lower than or the same as the net asset value per
share, the Plan Agent will continue to purchase shares until all investments by
shareholders have been completed or the closing price or the mean between the
bid and ask prices of the shares becomes higher than the net asset value, in
which case the Fund will issue the necessary additional shares from authorized
but unissued shares. If on the last trading day immediately preceding the
dividend payable date, the closing price or the mean between the bid and ask
prices of the shares is higher than the net asset value per share and if the
number of shares previously purchased on the Exchange or elsewhere is
insufficient to satisfy dividend investments, the Fund will issue the necessary
additional shares from authorized but unissued shares. There will be no
brokerage charges with respect to shares issued directly by the Fund to satisfy
the dividend investment requirements. However, each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Fund's open
market purchases of shares. In each case, the cost per share of shares purchased
for each shareholder's account will be the average cost, including brokerage
commissions, of any shares purchased in the open market plus the cost of any
shares issued by the Fund. For the fiscal year ended February 28, 1999, the Fund
issued 317 new shares for dividend reinvestment purposes. The Fund did not
purchase any shares on the open market for dividend reinvestment purposes.
Shareholders who elect to hold their shares in the name of a broker or
other nominee should contact such broker or other nominee to determine whether
they may participate in the Plan. To the extent such participation is permitted,
the Plan Agent will administer the Plan on the basis of the number of shares
certified from time to time by the broker as representing the total amount
registered in the shareholder's name and held for the account of beneficial
owners who are participating in such Plan. Shareholders that participate in the
Plan holding shares in a brokerage account may not be able to transfer the
shares to another broker and continue to participate in the Plan. Shareholders
who are participating in the Plan may withdraw from the Plan at any time. There
will be no penalty for withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin it at any time. Changes in
participation in the Plan should be made by contacting the Plan Agent if the
shares are held in the shareholder's own name and must be in writing and should
include the shareholder's name and address as they appear on the account
registration. If the shares are held in the name of a broker or other nominee,
such person should be contacted regarding changes in participation in the Plan.
Upon withdrawal from the Plan, the Plan Agent will deliver to the shareholder a
certificate or certificates for the appropriate number of full shares and a cash
payment for any fractional shares. In lieu of receiving a certificate, the
shareholder may request the Plan Agent to sell part or all of the shareholder's
shares at the market price and remit the proceeds to the shareholder, net of any
brokerage commissions. A $2.50 fee will be charged by the Plan Agent upon any
cash withdrawal or termination. An election to withdraw from the Plan will,
until such election is changed, be deemed to be an election by a shareholder to
take all subsequent distributions in cash. An election will be effective only
for a dividend or distribution if it is received by the Plan Agent not less than
10 days prior to such record date.
The Plan Agent will maintain all shareholders' accounts in the Plan, and
furnish written confirmation of all transactions in such account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant may be held by the Plan Agent in non-certificated form in
the name of the participant, and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan.
The automatic reinvestment of dividends will not relieve participants of
any income taxes that may be payable (or required to be withheld) on such
dividends. Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for Federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive and
should have a cost basis in the shares received equal to such amount.
The Fund reserves the right to amend or terminate the Plan as applied to
any dividend paid subsequent to written notice of the change sent to
participants in the Plan at least 90 days before the record date for such
dividend. There is no service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable by
the participants. All correspondence concerning the Plan, including requests for
additional information about the Plan, should be directed to the Plan Agent.
SHAREHOLDERS ACCOUNT INFORMATION
Shareholders whose accounts are held in their own name may contact the Fund's
transfer agent, State Street bank and Trust company at (800) 426-5523 for
information converning their accounts.
