As filed with the Securities and Exchange Commission on September 15, 1999
Securities Act File No. 333-
Investment Company Act File No. 811-05992
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / PRE-EFFECTIVE AMENDMENT NO.
/ / POST-EFFECTIVE AMENDMENT NO. AND/OR
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/ / AMENDMENT NO. 8
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Japan OTC Equity Fund, Inc.
(Exact Name of Registrant as Specified In Charter)
180 Maiden Lane
New York, New York 10038
(Address of Principal Executive Offices)
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(212) 509-8181
(Registrant's Telephone Number, including Area Code)
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John F. Wallace
Japan OTC Equity Fund, Inc.
180 Maiden Lane, New York, NY 10038
(Name and Address of Agent for Service)
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Copies to:
Brown & Wood LLP Rogers & Wells LLP
One World Trade Center 200 Park Avenue
New York, New York 10048-0557 New York, New York 10166-0153
Attention: John A. MacKinnon, Esq. Attention: Leonard B. Mackey, Esq.
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Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), other than securities offered only
in connection with dividend or interest reinvestment plans, check the
following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /X/_________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. / /________________
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
====================================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Being Offering Price Aggregate Registration
Securities Being Registered Registered(1) Per Unit(1) Offering Price(1) Fee(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par value) 3,800,939 shares $12.63 $48,005,860 $13,345.63
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
==============================================================================
<PAGE>
SUBJECT TO COMPLETION - DATED SEPTEMBER 15, 1999
JAPAN OTC EQUITY FUND, INC.
__________ Shares of Common Stock
Issuable upon Exercise of
Rights to Subscribe for these Shares
Japan OTC Equity Fund, Inc., referred in this Prospectus as the Fund, is
issuing non-transferable rights to its shareholders. You will receive one
right for each share you own at the close of business on the record date,
_________, 1999. These rights will entitle you to subscribe for one new share
of the Fund's common stock for every three rights you receive. Record date
shareholders who receive less than three rights will be entitled to purchase
one share. Record date shareholders who exercise all their rights may purchase
shares not acquired by other record date shareholders in this rights offering
subject to limitations described in this Prospectus. The Fund may increase the
number of shares that may be subscribed for in this offering by up to 25% of
the primary subscription (as defined in this Prospectus), or an additional
__________ shares, for a total of __________ shares, to honor record date
shareholder requests to purchase more shares.
The rights are non-transferable and therefore may not be purchased or sold.
The rights will not be admitted for trading on the New York Stock Exchange,
known as the NYSE, or any other exchange. The Fund's outstanding shares are
listed, and the shares issued in this offer will be listed, on the NYSE under
the symbol "JOF." On ___________, 1999, the net asset value per Fund share, or
NAV, was $__________, and the last reported sales price of a share on the NYSE
was $__________.
The subscription price per share will be ____% of the lower of (1) the average
of the last reported sales price per share on the NYSE for the five trading
days ending with the day the offer expires or (2) the NAV as of the close of
trading on the NYSE on that day. You will not know the actual subscription
price per share at the time of exercise. Therefore, you will be required
initially to pay for the shares at the estimated subscription price of _____
per share (based on approximately __% of the last reported sales price on
________, 1999). This offer will expire at 5:00 P.M., New York City time, on
________ , 1999 unless the Fund extends the offering as described in the
Prospectus.
--------------
Per Share Total
--------- -----
Estimated Subscription Price..................... $ $
Sales Load....................................... $ $
Proceeds to the Fund*............................ $ $
- -------------
The estimated subscription price is based on __% of the last reported
sales price per share on the NYSE on _______, 1999. The proceeds to the
Fund assume all ________ shares are purchased at this estimated price. If
the Fund increases the number of shares subject to subscription by up to
___________ as described above, the proceeds to the Fund would be
$___________.
*Before deduction of expenses incurred by the Fund related to the offer
estimated at $_________, including an aggregate of up to $_______ to be
paid to the Dealer Manager as partial reimbursement for its expenses.
The Fund is a non-diversified, closed-end management investment company. The
Fund's investment objective is to provide shareholders with long-term capital
appreciation primarily through investments in equity securities traded in the
Japanese over-the-counter market, also known as the OTC market. Nomura Asset
Management U.S.A. Inc. has served as the Fund's manager since the Fund's
inception in 1990. Nomura Asset Management Co., Ltd. (including its
predecessor) has served as the Fund's investment advisor since the Fund's
inception. The manager and investment advisor are affiliates of The Nomura
Securities Co., Ltd., Tokyo, Japan.
The value of an investment in the Fund changes with changes in the values of
the Fund's investments. Many factors can affect those values. An investment in
the Fund involves certain risks, including market risks and fluctuations in
foreign exchange rates. See "Risk Factors and Special Considerations"
beginning on page ___ and page ___ of this Prospectus.
If you do not exercise your rights, you will, upon the completion of the
offer, own a smaller proportional interest in the Fund than you do now.
Because the subscription price per share will be less than the NAV on the
expiration date and because the Fund will incur expenses related to the
offering, record date shareholders will also experience an immediate dilution,
which could be substantial, of the aggregate NAV of their shares. This
dilution will disproportionately affect record date shareholders who do not
exercise their rights in full. In addition, there also may be substantial
dilution to the extent that the Fund increases the number of shares subject to
subscription by up to 25% in order to satisfy over-subscription requests. The
Fund cannot state precisely the extent of this dilution because the Fund does
not know what the NAV or the subscription price per share will be when the
offer expires, how many rights will be exercised or the exact expenses of the
offer.
--------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
-------------
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read and retain it for future references.
--------------
[Dealer Manager]
--------------
The date of this Prospectus is ____________, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
[to come]
<PAGE>
PROSPECTUS SUMMARY
This portion of the Prospectus summarizes information contained elsewhere in
the Prospectus. The summary is not complete and does not contain all of the
information that you should consider before purchasing Fund shares. You should
read the entire Prospectus carefully, especially the risks of investing in the
shares discussed under "Risk Factors and Special Considerations."
Purpose of the Offer The Board of Directors of the Fund has
determined that it is in the best interests
of the Fund and its existing shareholders
to increase the assets of the Fund
available for investment, thereby allowing
the Fund to more fully take advantage of
available investment opportunities. In
reaching its decision, the Board of
Directors was advised by Nomura Asset
Management U.S.A. Inc., the Fund's manager,
and Nomura Asset Management Co., Ltd., the
Fund's investment advisor, that the
availability of new assets would give the
Fund additional investment flexibility to
take advantage of what the manager and
investment advisor believe to be attractive
investment opportunities without being
required to sell current portfolio
positions that it desires to retain, and to
avoid transaction costs and negative price
impact on positions that can occur with
Japanese OTC market trading. The Board of
Directors also took into account that a
well-subscribed rights offering would
likely reduce the Fund's expense ratio,
which would be of long-term benefit to
shareholders. In addition, the Board of
Directors considered that this rights
offering could result in an improvement in
the liquidity of the trading market for the
Fund's shares on the NYSE. The Board of
Directors also considered that this rights
offering would give record date
shareholders the opportunity to purchase
shares at a price _______________________,
and might increase the level of market
interest in the Fund. The Board of
Directors also considered the proposed
terms of the offer, the expenses of the
offer, and its dilutive effect on
exercising and non-exercising record date
shareholders.
There can be no assurance that the offer
will be successful, or that other assets
will be invested to the Fund's advantage or
that by increasing the size of the Fund,
the Fund's expense ratio, will be lowered.
The manager and the investment advisor will
benefit from the offer because they receive
management and advisory fees based on the
average net assets of the Fund, which will
increase as a result of the offer. In
addition, ______, the dealer manager for
the offer, will receive a dealer manager
fee and soliciting dealer fees as described
below.
<TABLE>
<S> <C> <C>
Important Terms of the Offer Aggregate number of shares _________ (not including
Offered up to ____ additional
shares the Fund may issue
to cover over-subscription
requests).
Number of non-transferable One right for each whole
rights issued to each record share owned on the record
date shareholder date.
Subscription ratio One share for every three
rights (1-for-3); record
date shareholders issued
fewer than three rights
may purchase one share at
the subscription price.
Subscription price per share ___% of the lower of (1)
the average of the last
reported sales price of a
Fund share on the NYSE for
the five trading days
ending with the day the
offer expires or (2) the
NAV as of the close of
trading on the NYSE on
that date.
Estimated subscription price per ___________________
share
Expiration date 5:00 P.M., New York City
time, on ___________ __ 1999,
unless the offer is
extended.
</TABLE>
Over-Subscription Privilege Record date shareholders who fully exercise
all of the rights issued to them may
subscribe for shares that were not
subscribed for by other record date
shareholders. If enough shares are
available, all of these requests will be
honored in full. If these requests for
shares exceed the shares available, the
Fund may determine after the expiration of
the offer, in the discretion of the Board
of Directors, to issue up to an additional
25% of the shares available pursuant to the
offer (up to an additional ____ shares) in
order to cover these requests. Regardless
of whether the Fund issues such additional
shares, to the extent shares are not
available to honor all requests, the
available shares will be allocated pro rata
among those record date shareholders who
over-subscribe based on the number of
rights originally issued to them by the
Fund.
<TABLE>
<CAPTION>
Important Dates to Remember Event Date
----- ----
<S> <C> <C>
Record Date ...._________ ___, 1999
Subscription Period................. _________ ___, 1999 to
_________ ___, 1999*
Expiration Date and
Pricing Date..................... _________ ___, 1999*
Subscription Certificates and
Payment for Shares Due**.......... _________ ___, 1999*
Notice of Guaranteed Delivery
Due.............................. __________ ___, 1999*
Subscription Certificate and
Payment for Guarantees
Of Delivery Due**................ __________ ___, 1999*
Confirmation Mailed to
Participants..................... __________ ___, 1999*
Final Payment for Shares***...... __________ ___, 1999*
</TABLE>
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* Unless the offer is extended.
** A record date shareholder
exercising rights must deliver by
the expiration date either (i) a
subscription certificate and
payment for shares or (ii) a
notice of guaranteed delivery.
*** Additional amount due (in the
event the subscription price
exceeds the estimated
subscription price).
A more detailed description of the
subscription certificate and notice of
guaranteed delivery can be found on page
____.
Non-transferability of Rights The rights are non-transferable and,
therefore, may not be purchased or sold.
Rights not exercised will expire without
residual value when the offer expires. The
rights will not be listed for trading on
the NYSE or any other securities exchange.
The shares to be issued pursuant to the
offer will be listed for trading on the
NYSE, subject to official notice of
issuance.
Method of Exercising Rights The rights are
evidenced by subscription certificates that
will be mailed to record date shareholders
or their nominees, except foreign record
date shareholders [and their nominees]. If
you wish to exercise your rights, you may
do so in the following ways:
1. Complete and sign the subscription
certificate. Mail it in the envelope
provided or deliver the completed and
signed subscription certificate with
payment in full to State Street Bank and
Trust Company at the address indicated
on the subscription certificate. Your
completed and signed subscription
certificate and payment must be received
by the expiration of the offer (5:00
P.M., New York City time, on ________
___, 1999, unless the offer is
extended); or
2. Contact your broker-dealer, banker or
trust company which can arrange, on your
behalf, pursuant to a notice of
guaranteed delivery, to guarantee
delivery of payment and delivery of a
properly completed and executed
subscription certificate by the close of
business on the third business day after
the expiration date of the offer. A fee
may be charged for this service. The
notice of guaranteed delivery must be
received on or before the expiration of
the offer.
Fractional shares will not be issued. After
the exercise of rights, record date
shareholders who have remaining less than
three rights will not be able to purchase a
share upon exercise of these remaining
rights, which will expire without any
residual value. Record date shareholders
who receive less than three rights,
however, may purchase one share at the
subscription price. Record date
shareholders may request additional shares
under the over-subscription privilege.
Offering Fees and Expenses The Fund has agreed to pay the dealer
manager a fee for its financial advisory
and marketing services equal to ___% of the
aggregate subscription price for each share
issued pursuant to the offer. The dealer
manager will reallow a part of its fees to
other broker-dealers that have assisted in
soliciting the exercise of rights as
described in this Prospectus. Other
offering expenses incurred by the Fund are
estimated at $_____, which includes up to
$_____ that may be paid to the dealer
manager as partial reimbursement for its
expenses relating to the offer.
Foreign Restrictions The Fund will not mail subscription
certificates to record date shareholders
whose record addresses are outside the
United States. Foreign record date
shareholders or their nominees will receive
written notice of the offer. State Street
Bank and Trust Company, the subscription
agent, will hold their rights until
instructions are received to exercise the
rights. If no instructions are received
prior to or on the expiration date, the
rights will expire.
Use of Proceeds Based on the estimated subscription price
of $________ per share, the estimated net
proceeds of the offer are approximately
$_______. This amount assumes that all
_______ shares offered in the primary
subscription are sold and that the offering
expenses are $________. If, as described
above, the Fund increases the number of
shares subject to subscription by 25% in
order to satisfy over-subscription
requests, the additional net proceeds will
be approximately $_______.
The Fund's manager and the investment
advisor will seek to invest the proceeds of
the offering in accordance with the Fund's
investment objective within 30 days after
completion of the offering. However, the
investment of such proceeds may take up to
three months after completion of the
offering, depending on market conditions
and the availability of appropriate
securities. Until invested, the proceeds of
the offer will be held in yen-denominated
or U.S. dollar-denominated fixed-income
securities and other permitted investments.
These temporary investments will not be
consistent with the Fund's objective.
Information Agent Please direct all questions or
inquiries relating to the offer to the
Fund's information agent at:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072-2586
Telephone: (800)_______-_______
Shareholders may also contact their
broker-dealers or nominees for information
with respect to the offer.
Information Regarding the The Fund has been a non-diversified,
Fund closed-end management investment company
since its initial public offering in 1990.
The Fund invests primarily in equity
securities traded in the Japanese OTC
market. The Fund was incorporated under the
laws of the State of 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 net proceeds of
$32.6 million. As of August 31, 1999, the
Fund had net assets of approximately
$148,906,000.
The Fund's investment objective is to
provide shareholders with long-term capital
appreciation primarily through investments
in equity securities traded in the Japanese
OTC market. At all times, except during
temporary defensive periods, the Fund will
maintain at least 65% of its total assets
in equity securities traded in the Japanese
OTC market. The Fund anticipates that,
under normal circumstances, it will invest
at least 80% of its total assets in equity
securities traded in the Japanese OTC
market. At August 31, 1999, approximately
69.6% of the Fund's total assets were
invested in equity securities traded in the
Japanese OTC market. There can be no
assurance that the Fund will achieve its
investment objective.
The Japanese OTC Market The Fund's Manager believes that the
Japanese OTC market offers investment
opportunities for investors seeking
long-term capital appreciation who are
willing to assume the risks associated with
an investment in the Fund. The Japanese OTC
market represents the principal trading
market for small capitalization growth
companies which do not meet the rigorous
entry requirements of the major Japanese
stock exchanges and offers the opportunity
to invest in Japan. Additionally, the
Manager believes the companies registered
on the Japanese OTC market are generally in
a more developmental stage than are
exchange listed companies and may offer
exposure to markets or industries in which
exchange listed companies are less
involved. The number of companies
registered on the Japanese OTC market
increased from 263 in 1990 to 856 at August
31, 1999. From January 1, 1999 through
August 31, 1999, 30 companies were newly
registered on the Japanese OTC market. In
the opinion of the manager, the Japanese
OTC market will continue to attract a large
number of new registrations over the next
few years.
Management and Investment Nomura Asset Management U.S.A. Inc. is the
Advisory Arrangements Fund's manager and Nomura Asset Management
Co., Ltd. is the Fund's investment advisor.
The manager and the investment advisor are
affiliated with The Nomura Securities Co.,
Ltd., the largest securities company in
Japan. The investment advisor, together
with its affiliates, had approximately
$____ billion in assets under management as
of August 31, 1999.
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
You should consider the following factors, as well as the other information in
this Prospectus, before making an investment in the Fund under this offer.
Dilution--Net Asset Value and Non-Participation in the Offer. Upon completion
of the offer, shareholders who do not fully exercise their rights will own a
smaller proportional interest in the Fund than would be the case if the offer
had not been made. Furthermore, the subscription price per share for the offer
will be lower than the Fund's NAV. Any rights offering priced at a discount to
the Fund's NAV and involving payment of expenses by the Fund entails some
dilution in the NAV. Dilution is the decrease in NAV that results from the
Fund's issuance of new shares at a discount to NAV when the rights are
exercised and from the Fund's payment of the expenses of the offer. The offer
will result in a dilution of NAV for all shareholders, which will
disproportionately affect shareholders who do not exercise their rights. In
addition, there also may be substantial dilution to the extent that the Fund
increases the number of shares subject to subscription by up to 25% in order
to satisfy over-subscription requests. Although it is not possible to state
precisely the amount of the decrease in NAV because it is not known at the
date of this Prospectus how many shares will be subscribed for or what the
subscription price will be, the dilution might be substantial.
Net Asset Value Discount. Shares of closed-end investment companies frequently
trade at a discount from their NAV (the market price per share is less than
the value per share of the net assets). This characteristic is a risk separate
and distinct from the risk that the Fund's NAV will decrease as a result of
its investment activities and may be greater for investors expecting to sell
their shares relatively soon after completion of this offering. The Fund's
shares have traded in the market above, at and below NAV since the
commencement of the Fund's operations. The Fund cannot predict whether its
shares will trade at, above or below NAV in the future. Accordingly, the Fund
is designed primarily for long-term investors and should not be considered a
vehicle for trading purposes.
Foreign Investment Risk. Because the Fund primarily invests in securities
of Japanese issuers, it offers investors the potential for more
diversification than an investment only in securities of U.S. issuers.
However, such investments involve special risks not present in U.S.
investments that may increase the chances that the Fund will lose money. In
particular, prices of foreign securities may fluctuate more than prices of
securities traded in the U.S. The securities in which the Fund invests are
usually denominated in Japanese Yen. Changes in foreign currency exchange
rates affect the value of the Fund's portfolio. Investments in foreign markets
also may be adversely affected by governmental actions and political and
economic developments. Another foreign market risk includes difficulties in
enforcing favorable legal judgments in foreign courts.
Investing in Japan and the Japanese OTC Market. In addition to the risks of
international investment generally, investments in Japan and the Japanese OTC
market involve special risks, including volatility of prices of securities
traded in the Japanese OTC market. Trading of equity securities in the
Japanese OTC market is conducted by securities companies and not on a
recognized stock exchange. Consequently, securities traded in the Japanese OTC
market may, from time to time, and especially in declining markets, become
illiquid and experience short-term price volatility and wide spreads between
bid and offer prices. The Japanese OTC market represents the principal trading
market for small capitalization growth companies. Such companies are subject
to greater and more unpredictable price changes than larger capitalization
securities or the stock markets as a whole. The combination of price
volatility and the limited liquidity of the Japanese OTC market may have an
adverse effect on the investment performance of the Fund. Consequently, the
Fund should be considered a vehicle for diversification of investment and not
a balanced investment program.
Year 2000. In addition, as further described under the caption Year 2000
Issues, 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 an investment by the Fund is
adversely affected by the Year 2000 Problem, the Fund's investment return will
be reduced.
Currency Hedging Transactions. The Fund may engage in certain forward foreign
currency hedging transactions to reduce its exposure to currency fluctuations.
If the Fund incorrectly forecasts currency movements or other factors, the
Fund's performance could suffer. The Fund also may suffer a loss if the other
party to the transaction fails to meet its obligations. The Fund is not
required to use hedging and may choose not to do so.
Non-diversification. The Fund is "non-diversified," which means that it may
invest in a smaller number of securities than many other equity funds. As a
result, changes in the value of a single security may have a more significant
effect, either negative or positive, on the Fund's NAV.
Anti-takeover Provisions. The Fund's Articles of Incorporation include
provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund or to change the
composition of its Board of Directors and could have the effect of depriving
shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund.
<PAGE>
FEE TABLE
The following tables are intended to assist shareholders in understanding
the various cost and expenses that a shareholder in this Offer will bear,
directly or indirectly.
<TABLE>
<S> <C> <C>
Shareholder Transaction Expenses:
Sales Load Fee (as a percentage of subscription price paid
directly from your Investment)(a)....................... ____%
Annual Expenses (as a percentage of net assets
attributable to Common Stock)(b):
Management Fees (c)....................................... ____%
Other Expenses............................................ ___%
Total Annual Expenses..................................... ___%
</TABLE>
- ------------
(a) The Fund has agreed to pay _______________, the Dealer Manager, a fee for
its financial advisory and marketing services equal to _____% of the
aggregate subscription price for each share issued pursuant to the Offer.
The Dealer Manager will reallow to other broker-dealers solicitation fees
equal to ____% of the subscription price per share for each share issued
pursuant to the Offer as a result of their soliciting efforts. Other
offering expenses to be incurred by the Fund are estimated at $_______,
which includes up to $_______ that may be paid to the Dealer Manager as
partial reimbursement for its expenses relating to the Offer. These fees
and expenses will be borne by the Fund and indirectly by all of the
Fund's shareholders, including those shareholders who do not exercise
their rights.
(b) Amounts are estimated for the Fund's current fiscal year after giving
effect to anticipated net proceeds of the Offer assuming that all of the
rights are exercised, that the maximum number of over-subscription shares
are issued and that the Fund incurs estimated offering expenses of
$_________.
c) See "Management and Investment Advisory Arrangements" - page ___.
Example
The following Example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in the Fund through this offering. The amounts
are based upon payment by an investor of a _____% sales load and payment by
the Fund of operating expenses at the levels set forth in the above table.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
A shareholder would directly or indirectly
pay the following expenses on a $1,000
investment in the Fund, assuming a 5% annual
return throughout the relevant period and
reinvestment of all dividends and other
distributions at NAV $__ $__ $___ $___
</TABLE>
The foregoing fee table and example are intended to assist shareholders in
understanding the costs and expenses that a shareholder in the Fund will bear
directly or indirectly.
The Example set forth above assumes reinvestment of all dividends and other
distributions at NAV, payment of a ____% sales load and annual expense ratio
of ___% The table above and the assumption in the Example of a 5% annual
return are required by Securities and Exchange Commission regulations
applicable to all management investment companies. Your annual return may be
more or less than the 5% used in this Example. In addition, while the Example
assumes reinvestment of all dividends and other distributions at NAV,
participants in the Dividend Reinvestment Plan may receive shares purchased or
issued at a price or value different from NAV.
The Example should not be considered a representation of future expenses or
returns, and the Fund's actual expenses and returns may be more or less than
those shown.
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a share of the
Fund's Common Stock outstanding throughout each period presented. Except for
the period from March 1, 1999 through August 31, 1999, the financial
highlights for each period presented have been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants, whose reports
thereon were unqualified. [The financial highlights should be read in
conjunction with the financial statements and notes thereto, included in the
Fund's February 28, 1999 Annual Report and August 31, 1999 semi-annual report
and included in this prospectus.]
Selected Per Share Data and Ratios for a Share of the Fund's Common Stock
Outstanding Throughout each Period.
<TABLE>
<CAPTION>
Six Month
Period Ended For the Year Ended
August 31, 1999 ---------------------------------------------------------------
(Unaudited) February 28 February 29 February 28
------------------- --------------------------- --------------- ---------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $5.86 $4.85 $6.44 $7.82 $8.59 $11.05
-------- ------- ------- ------- ------- -------
Net investment income (loss)......... (0.03) (0.04) (0.06) (0.09) (0.07) (0.09)
Net realized and unrealized gain
(loss) on Investments and foreign
currency.. 7.25 1.06 (1.45) (1.25) (0.70) (2.41)
-------- ------- ------- ------- ------- -------
Total from investment operations..... 7.22 1.02 (1.51) (1.34) (0.77) (2.50)
Distributions to shareholders from:
Net investment income................ -- (0.01) (0.08) (0.04) -- --
Net realized capital gains........... -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Total distributions.................... 0.00 (0.01) (0.08) (0.04) 0.00 0.00
Increase in net asset value from capital
Shares transactions***.............. -- -- -- -- -- 0.04
-------- ------- ------- ------- ------- -------
Net asset value, end of period......... $13.08 $5.86 $4.85 $6.44 $7.82 $8.59
======== ======= ======= ======= ======= =======
Market value, end of period............ $11.875 $6.250 $5.750 $6.375 $8.500 $8.625
Total investment return +.............. 90.0% 8.8% (8.5%) (24.6%) (1.4%) (38.9%)
Net asset value total return++......... 123.2% 20.9% (23.4%) (17.2%) (9.0%) (22.3%)
Ratio to average net assets/supplemental
data:
Net assets, end of period (in thousands) $148,906 $66,740 $55,246 $73,288 $88,966 $97,833
Operating expenses..................... 1.32%+ 1.80% 1.71% 1.70% 1.47% 1.42%
Net investment loss.................... (0.68%)+ (0.82%) (1.0%) (1.1%) (0.83%) (0.78%)
Portfolio turnover..................... 27% 35% 29% 71% 79% 20%
(footnotes on next page)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended March 21,
-------------------------------------------------- 1990* to
February 28 February 29 February 28
----------------------------- ----------------- ---------------
1994 1993 1992 1991
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $7.26 $9.66 $9.99 $11.08**
------- ------- ------- -------
Net investment income (loss).............. (0.09) (0.07) (0.06) 0.24
Net realized and unrealized gain
(loss) on Investments and foreign
currency.............................. 3.88 (2.33) (0.08) (0.63)
------- ------- ------- -------
Total from investment operations.......... 3.79 (2.40) (0.14) (0.39)
Distributions to shareholders from:
Net investment income..................... -- -- -- (0.24)
Net realized capital gains.................. -- -- (0.19) (0.46)
------- ------- -------- --------
Total distributions......................... 0.00 0.00 (0.19) (0.70)
------- ------- -------- --------
Increase in net asset value from capital
Shares transactions***.................... -- -- -- --
------- ------- ------- --
Net asset value, end of period.............. $11.05 $7.26 $9.66 $9.99
======= ======= ======= =======
Market value, end of period................. $14.125 $8.125 $10.125 $12.625
Total investment return +................... 73.8% (19.8%) (18.3%) 14.2%
Net asset value total return++.............. 52.2% (24.8%) (1.5%) (2.1%)
Ratio to average net assets/supplemental data:
Net assets, end of period (in thousands).... $93,985 $61,755 $82,196 $85,021
Operating expenses.......................... 1.55% 1.59% 1.51% 1.43%+
Net investment loss......................... (0.98%) (0.95%) (0.58%) 2.19%+
Portfolio turnover.......................... 36% 32% 36% 32%
- -------------
* Commencement of operations.
** Net of offering cost ($0.08).
*** Increase due to second public offering, net of offering cost of $505,487. (See footnote 1 in the
February 28, 1999 Annual Report.)
+ Based on market value per share, adjusted for reinvestment of
distributions and capital share transactions. Total return does not
reflect sales commissions.
++ Based on net asset value per share, adjusted for reinvestment of
distributions and capital share transactions. Total return does not
reflect sales commissions.
+ Annualized
</TABLE>
<PAGE>
THE FUND
The Fund was incorporated under the laws of the State of Maryland on January
25, 1990 and is registered with the Securities and Exchange Commission (the
"SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"),
as an investment company. The Fund commenced operations on March 21, 1990. The
Fund's principal office is located at 180 Maiden Lane, New York, NY
10038-4936, and its telephone number is (800) 833-0018. As of August 31, 1999,
the Fund had net assets of approximately $148,906,000. The Manager and
Investment Advisor are registered with the SEC under the Investment Advisers
Act of 1940, as amended.
The Fund is a non-diversified closed-end management investment company.
Closed-end investment companies differ from open-end management investment
companies (commonly referred to as "mutual funds") because closed-end
investment companies have a fixed capital base and do not redeem shares at
NAV. Many closed-end funds trade on the NYSE. Mutual funds issue securities
redeemable at NAV at any time at the option of the shareholder and typically
engage in a continuous offering of their shares. For these reasons, mutual
funds are subject to periodic asset in-flows and out-flows that can complicate
portfolio management. Closed-end investment companies do not face the prospect
of having to liquidate portfolio holdings to satisfy redemptions at the option
of shareholders or to maintain cash positions to meet the possibility of
redemptions and can therefore remain fully invested.
USE OF PROCEEDS
If all the rights are exercised in full at the subscription price of $_______
per share, the net proceeds of the Offer to the Fund assuming all _______
shares offered in the primary subscription are sold are estimated to be
approximately $_______, after deducting offering expenses payable by the Fund
estimated at approximately $______. If the Fund increases the number of shares
subject to subscription by up to 25%, or _______ shares, in order to satisfy
over-subscription requests, the additional net proceeds will be approximately
$_______. The net proceeds of this offering will be invested in accordance
with the Fund's investment objective and policies and investment restrictions
described herein. The Fund's Manager will seek to invest the proceeds of the
offering in accordance with the Fund's investment objective within 30 days
after completion of the offering. However, the investment of such proceeds may
take up to three months after completion of the offering, depending on market
conditions and the availability of appropriate securities. See "The Japanese
OTC Market - Liquidity of the Japanese OTC Market." Pending such investment,
it is anticipated that the proceeds will be invested in yen-denominated or
U.S. dollar-denominated fixed-income securities and other permitted
investments. See "Investment Objective and Policies." These temporary
investments will not be consistent with the Fund's investment objective.
MARKET AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded both at a premium and at a discount
in relation to NAV. The Fund's shares recently have been trading at times at a
discount from and at times at a premium to NAV. As discussed above, shares of
closed-end investment companies frequently trade at a discount from NAV.
The shares are listed and traded on the NYSE under the ticker symbol "JOF."
The rights will not be admitted for trading on the NYSE or any other stock
exchange. The following table shows the high and low sales prices of the
Fund's shares on the NYSE, the high and low NAV per share, and the high and
low premium or discount at which the Fund's shares were trading for each
fiscal quarter during its two most recent fiscal years and since the beginning
of the current fiscal year.
<TABLE>
<CAPTION>
PREMIUM/ Reported
MARKET (DISCOUNT) NYSE Volume
PRICE* NAV TO NAV (Daily Average)
----------------------- ------------------ ------------------ ---------------
Quarter Ended High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
February 28, 1997 $7.500 $6.2500 $7.29 $6.29 9.13% (7.68)% 55,674
May 31, 1997 $7.375 $5.875 $6.99 $5.77 4.17% (2.60)% 40,521
August 31, 1997 $7.3750 $6.1875 $7.46 $5.98 3.47% (7.84)% 34,655
November 30, 1997 $6.3750 $4.875 $5.89 $4.48 17.19% 0.51% 66,586
February 28, 1998 $5.8125 $4.5 $5.02 $4.17 27.26% 8.57% 54,989
May 31, 1998 $5.75 $5.000 $4.81 $4.29 24.73% 13.02% 32,070
August 31, 1998 $5.6875 $3.875 $4.42 $3.88 33.20% (0.13)% 30,575
November 30, 1998 $6.375 $3.9375 $4.49 $3.56 42.39% 1.06% 51,949
February 28, 1999 $6.2500 $4.9375 $5.86 $4.63 20.14% 1.39% 45,915
May 31, 1999 $8.9375 $6.0625 $8.12 $6.04 21.07% (0.85)% 76,003
August 31, 1999 $12.3125 $7.875 $12.63 $8.16 6.26% (14.13)% 102,820
------------
*Source: Bloomberg Financial Markets
</TABLE>
The Fund's NAV at the close of business on __________ ___, 1999 (the last
trading date on which the Fund publicly reported its NAV prior to the
announcement of the Offer) and on ________ ___, 1999 (the last trading date on
which the Fund publicly reported its NAV prior to the date of this Prospectus)
was $_______ and $_______ respectively. The last reported sales price of the
Fund's shares on the NYSE on those dates was $________ and $________,
respectively.
THE OFFER
Purpose of the Offer
The Board of Directors of the Fund has determined that the Offer is in the
best interests of the Fund and its existing shareholders because it represents
an opportunity to increase the assets of the Fund available for investment,
thereby enabling the Fund to take advantage more fully of existing and future
investment opportunities that may be or may become available, consistent with
the Fund's investment objective of long-term capital appreciation through
investment primarily in equity securities traded in the Japanese OTC market.
In reaching its decision, the Board of Directors considered, among other
matters, advice by the Manager and Investment Advisor that new funds would
permit the Fund to take advantage of available investment opportunities
without having to sell portfolio securities that the Manager believes should
be held, and incurring transaction costs and negative price impact on
positions that can occur with Japanese OTC market trading. The Manager
believes current market opportunities to be particularly attractive in the
Japanese OTC market. Specifically, those opportunities include cyclical stocks
that could benefit in a recovery of the Japanese economy, financial services
companies that could take advantage of long-term growth in such areas as
credit card penetration, and internet-related and service sector companies
that could benefit from accelerating deregulation in Japan. Additionally, the
Fund could take advantage of potential continued strength in the initial
public offering ("IPO") market. The Board of Directors considered that the
Offer also provides existing shareholders the exclusive opportunity to
purchase shares at a discount to both the net asset value and market price per
share. The Board of Directors also considered that increasing the size of the
Fund through the Offer may result in certain economies of scale which could in
turn lower the Fund's expenses as a percentage of net assets. The Board of
Directors believes that any resulting reduced expense ratio would be of
long-term benefit to the Fund, and that a well-subscribed rights offering
could increase liquidity on the NYSE where shares of the Fund's Common Stock
are traded. The Board of Directors also considered the proposed terms of the
Offer, the expenses of the Offer, and its dilutive effect on exercising and
non-exercising record date shareholders.
There can be no assurance that the Offer will be successful or that by
increasing the size of the Fund, the expense ratio will be lowered.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings of shares from time to time for a number of shares and on
terms that may or may not be similar to this Offer. Any such future offering
will be made in accordance with the 1940 Act.
Terms of the Offer
The Fund is issuing to its shareholders of record as of the close of business
on _________, 1999, non-transferable rights entitling the holders to subscribe
for an aggregate of _______ shares of the Fund's common stock (______ shares
if the Fund increases the number of shares available by up to 25% in
connection with the over-subscription privilege described below). The Fund is
issuing to each record date shareholder one right for each whole share owned
as of the record date. Only record date shareholders will be issued rights and
will be entitled to participate in the Offer. Three rights entitle the holder
to subscribe for one Fund share (1-for-3). A record date shareholder's right
to acquire, during the subscription period at the subscription price, one
share for every three rights held is referred to in this Prospectus as the
primary subscription. Record date shareholders who receive less than three
rights will be entitled to purchase one share at the subscription price.
The rights may be exercised at any time during the subscription period, which
commences on _________, 1999 and ends at 5:00 P.M., New York City time, on
_________, 1999, unless the subscription period is extended. The rights are
evidenced by Subscription Certificates that will be mailed to record date
shareholders, except foreign record date shareholders.
Unsubscribed shares will be offered, by means of an over-subscription
privilege, to those record date shareholders who have exercised all rights
issued to them and who wish to acquire more than the number of shares they are
otherwise entitled to purchase pursuant to the primary subscription.
Over-subscription shares will be allotted as more fully discussed below.
Fractional shares will not be issued on the exercise of fractional rights.
Accordingly, shares may be purchased in the primary subscription only pursuant
to the exercise of whole rights. For example, if a record date shareholder
owns 100 shares, that record date shareholder will receive 100 rights;
although the record date shareholder may exercise 33.33 rights that record
date shareholder will only be able to purchase 33 shares, with the unexercised
fractional rights expiring. However, record date shareholders holding fewer
than three shares will be entitled to subscribe for one share pursuant to the
primary subscription.
There is no minimum number of rights that must be exercised in order for the
Offer to close.
Over-Subscription Privilege
If record date shareholders do not exercise all the rights issued to them, any
shares represented by unexercised rights will be offered by means of the
over-subscription privilege to the record date shareholders who have exercised
all the rights issued to them and who wish to subscribe for additional shares.
Only record date shareholders who exercise all the rights issued to them may
indicate on the Subscription Certificate, which they or their nominees submit
with respect to the exercise of the rights issued to them, how many shares
they desire to purchase pursuant to the over-subscription privilege. If
sufficient shares remain after completion of the primary subscription, all
over-subscription requests will be honored in full. If sufficient shares are
not available after completion of the primary subscription to honor all
over-subscription requests, the Fund may determine after the expiration of the
Offer, in the discretion of the Board of Directors, to issue up to an
additional 25% of the shares available pursuant to the Offer (up to an
additional ____ shares) in order to cover the over-subscription requests.
Regardless of whether the Fund issues such additional shares, and to the
extent shares are not available to honor all over-subscription requests, the
available shares will be allocated among those who over-subscribe so that the
number of shares issued to participating record date shareholders will
generally be in proportion to the number of shares owned by such shareholders
on the record date. The allocation process may involve a series of allocations
in order to assure the total number of shares available for over-subscription
is distributed on a pro rata basis.
Banks, broker-dealers, trustees and other nominee holders of rights will be
required to certify to the subscription agent, before any over-subscription
privilege may be exercised with respect to any particular beneficial owner, as
to the aggregate number of rights exercised pursuant to the primary
subscription and the number of shares subscribed for pursuant to the
over-subscription privilege by such beneficial owner and that such beneficial
owner's primary subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certification Forms will be
distributed to banks, brokers, trustees and other nominee holders of rights
with the Subscription Certificates.
The Fund will not offer or sell any shares that are not subscribed for
pursuant to the primary subscription or the over-subscription privilege.
Subscription Price
The subscription price for each share to be issued pursuant to the Offer will
be ___% of the lower of (1) the average of the last reported sales price per
share on the NYSE for the five trading days ending with the day the Offer
expires or (2) the NAV as of the close of trading on the NYSE on that day. For
example, if the average of the last reported sales price per share on the NYSE
on the expiration date on the four preceding business days is ____, and the
closing NAV per share on the expiration date is ____, the subscription price
will be ____ (____% of ____). If, however, the average of the last reported
sales price per share on the NYSE on the expiration date and on the four
preceding business days is ____, and the closing NAV per share on the
expiration date is ____, the subscription price will be ____ (____% of ____).
Exercising rights holders will not know the actual subscription price at the
time of exercise and will be required to pay for the shares at the estimated
subscription price of $___ per share (based on approximately __% of the last
reported sales price on ______, 1999). The actual subscription price may be
more than the estimated subscription price.
The Fund announced the Offer on __________, 1999. The Fund's NAV at the close
of business on ________, 1999 (the last trading date on which the Fund
publicly reported its NAV prior to the announcement) and on ________, 1999
(the last trading date on which the Fund publicly reported its NAV prior to
the date of this Prospectus) was ___ and ___, respectively. The last reported
sales price of the Fund's shares on these dates was ____ and _____,
respectively.
Non-Transferability of Rights
The rights are non-transferable and, therefore, may not be purchased or sold.
Rights not exercised will expire without residual value when the Offer
expires. The rights will not be listed for trading on the NYSE or any other
securities exchange. However, the shares to be issued pursuant to the Offer
will be listed for trading on the NYSE, subject to notice of issuance.
Expiration of the Offer
The Offer will expire at 5:00 P.M., New York City time, on _________, 1999,
unless the Offer is extended. The rights will expire on the expiration date.
Because the Offer expires and the shares will be priced on the same date,
record date shareholders who decide to acquire shares in the primary
subscription or pursuant to the over-subscription privilege will not know the
subscription price of the shares when they make their decision. Any extension
of the Offer will be followed as promptly as practicable by an announcement of
that fact. The announcement will be issued no later than 9:00 A.M., New York
City time, on the next business day following the expiration date. The Fund
may make any announcement regarding the extension of the Offer by a release to
the Dow Jones News Service or other means as the Fund deems appropriate.
Subscription Agent
The Subscription Agent is State Street Bank and Trust Company. The
Subscription Agent will receive for its administrative, processing, invoicing
and other services as Subscription Agent, a fee estimated to be approximately
$______, plus reimbursement for its out-of-pocket expenses related to the
Offer estimated to be approximately $______. The Subscription Agent is also
the Fund's transfer agent, dividend-paying agent and registrar for the shares.
Questions regarding the Subscription Certificates should be directed to (800)
_______-_______ (toll free); shareholders may also consult their
broker-dealers or nominees.
Completed Subscription Certificates must be sent together with proper payment
of the subscription price for all shares subscribed for in the primary
subscription and pursuant to the over-subscription privilege (for record date
shareholders) to the Subscription Agent by one of the methods described below.
Alternatively, a Notice of Guaranteed Delivery may be sent by facsimile to
(_______) _______-_______ to be received by the Subscription Agent prior to
5:00 P.M., New York City time, on the expiration date. Facsimiles should be
confirmed by telephone at (800) _______-_______. The Fund will accept only
properly completed and executed Subscription Certificates actually received at
any of the addresses listed below, prior to 5:00 P.M., New York City time, on
the expiration date by the close of business on the third business day after
the expiration date following timely receipt of a Notice of Guaranteed
Delivery.
<TABLE>
<CAPTION>
BY FIRST CLASS MAIL: BY HAND OR OVERNIGHT COURIER:
- -------------------- -----------------------------
<S> <C>
State Street Bank and Trust Company Security Transfer and Reporting Services, Inc.
Boston EquiServe Division c/o EquiServe
150 Royall Street 100 William Street Galleria
Canton, Massachusetts 02021-1031 New York, New York 10038
</TABLE>
Delivery to an address other than one of the addresses
listed above will not constitute valid delivery
Method for Exercising Rights
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Restrictions," will be mailed to record date shareholders
or, if a record date shareholder's shares are held by Cede & Co. FAST or any
other depository or nominee on their behalf, to Cede & Co. FAST or such
depository or nominee. Rights may be exercised by completing and signing the
Subscription Certificate that accompanies this Prospectus and mailing it in
the envelope provided, or otherwise delivering the completed and signed
Subscription Certificate to the Subscription Agent, together with payment in
full for the shares at the estimated subscription price by the expiration
date. Rights may also be exercised by contacting your broker-dealer, banker or
trust company, which can arrange, on your behalf, to guarantee payment and
delivery of a properly completed and executed Subscription Certificate
pursuant to a Notice of Guaranteed Delivery by the close of business of the
third business day after the expiration date. A fee may be charged for this
service. Because fractional shares will not be issued, record date
shareholders who have remaining, after exercising rights, less than three
rights, will be unable to purchase a share upon the exercise of these
remaining rights. These remaining rights will expire without residual value
and shareholders will not be entitled to receive any cash in lieu thereof. For
example, if a record date shareholder owns 301 shares, that record date
shareholder will receive 301 rights, but may only exercise 300 rights for the
purchase of 100 shares, with the unexercised remaining rights expiring.
However, record date shareholders who receive fewer than three shares will be
entitled to subscribe for one share at the subscription price pursuant to the
primary subscription. Record date shareholders who fully exercise their rights
may request additional rights pursuant to the over-subscription privilege.
Completed Subscription Certificates must be received by the Subscription Agent
prior to 5:00 P.M., New York City time, on the expiration date at one of the
addresses set forth above (unless the guaranteed delivery procedures are
complied with as described below under "Payment for Shares").
Shareholders Who are Record Owners. To exercise their rights, record date
shareholders may choose between either option to exercise their rights set
forth under "Payment for Shares" below. If time is of the essence, option (2)
under "Payment for Shares" below will permit delivery of the Subscription
Certificate and payment after the expiration date.
Shareholders Whose Shares are Held By a Nominee. Record date shareholders
whose shares are held by a nominee such as a bank, broker-dealer or trustee
must contact that nominee to exercise their rights. In that case, the nominee
will complete the Subscription Certificate on behalf of the record date
shareholder and arrange for proper payment by one of the methods set forth
under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should notify the
respective beneficial owner of such shares as soon as possible to ascertain
each beneficial owner's intentions and to obtain instructions with respect to
the rights. If the beneficial owner so instructs, the nominee should complete
the Subscription Certificate and submit it to the Subscription Agent with the
proper payment as described under "Payment for Shares" below.
Information Agent
Any questions or requests for assistance concerning the method of subscribing
for shares or for additional copies of this Prospectus or Subscription
Certificates or Notices of Guaranteed Delivery may be directed to the
Information Agent as its telephone number and address listed below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072-2586
Toll Free: (_______)_______-_______
Broker-dealers and banks, please call: (_______)_______-_______
Record date shareholders may also contact their broker-dealers or nominees for
information with respect to the Offer. The Information Agent will receive a
fee estimated to be $_____, plus reimbursement for its out-of-pocket expenses
related to the Offer, estimated to be a maximum of $______.
Payment for Shares
Record date shareholders who wish to acquire shares in the primary
subscription and pursuant to the over-subscription privilege may choose
between the following methods of payment:
1. A record date shareholder may send the Subscription Certificate together
with payment for the shares acquired in the primary subscription and any
additional shares subscribed for pursuant to the over-subscription
privilege to the subscription agent. Payment should be calculated on the
basis of the estimated subscription price of $_______ per share for all
shares subscribed. A subscription will be accepted when payment, together
with a properly completed and executed Subscription Certificate, is
received by the Subscription Agent's office at one of the addresses set
forth above no later than 5:00 P.M., New York City time, on the
expiration date. The Subscription Agent will deposit all checks and money
orders received by it for the purchase of shares into a segregated
interest-bearing account (the interest from which will inure to the
benefit of the Fund) pending proration and distribution of shares. A
payment pursuant to this method must be in U.S. dollars by money order or
check drawn on a bank or branch located in the United States, must be
payable to "Japan OTC Equity Fund, Inc." and must accompany a properly
completed and executed Subscription Certificate for such payment to be
accepted. Exercise by this method is subject to actual collection of
checks by 5:00 P.M., New York City time, on the expiration date. Because
uncertified personal checks may take at least five business days to
clear, shareholders are strongly urged to pay, or arrange for payment, by
means of a certified or cashier's check or money order.
2. Alternatively, a bank, a trust company or a NYSE member subscription will
be accepted by the Subscription Agent if, prior to 5:00 P.M., New York
City time, on the expiration date, the Subscription Agent has received a
Notice of Guaranteed Delivery by facsimile or otherwise from a bank, a
trust company or a NYSE member, guaranteeing delivery of (i) payment of
the estimated subscription price of $_______ per share for the shares
subscribed for in the primary subscription and any additional shares
requested pursuant to the over-subscription privilege, and (ii) a
properly completed and executed Subscription Certificate. The
Subscription Agent will not honor a Notice of Guaranteed Delivery unless
a properly completed and executed Subscription Certificate and full
payment for the shares is received by the Subscription Agent by the close
of business on the third business day after the expiration date
(__________, 1999, unless the Offer is extended.)
Within eight business days after the expiration date, (________, 1999, unless
the Offer is extended), the confirmation date, a confirmation will be sent by
the Subscription Agent to each subscribing record date shareholder (or, if the
shareholder's shares are held by Cede & Co. FAST or any other depository or
nominee on such record date shareholder's behalf, to Cede & Co. FAST or such
depository or nominee), showing (i) the number of shares acquired in the
primary subscription, (ii) the number of shares, if any, acquired pursuant to
the over-subscription privilege, (iii) the subscription price per share and
total purchase price of the shares, and (iv) any additional amount payable by
such record date shareholder to the Fund or any excess to be refunded by the
Fund to such shareholder, in each case based on the subscription price. If any
record date shareholder exercises his or her right to acquire shares pursuant
to the over-subscription privilege, any such excess payment that would
otherwise be refunded to the record date shareholder will be applied by the
Fund toward payment for shares acquired pursuant to the exercise of the
over-subscription privilege. Any additional payment required from a record
date shareholder must be received by the subscription agent within ten
business days after the confirmation date (__________, 1999, unless the Offer
is extended). Any excess payment to be refunded by the Fund to a record date
shareholder will be mailed by Subscription Agent to such record date
shareholder as promptly as possible. All payments by a record date shareholder
must be in U.S. dollars by money order or check drawn on a bank or branch
located in the United States and payable to "Japan OTC Equity Fund, Inc."
The Subscription Agent will deposit all checks received by it prior to the
final payment date into a segregated interest-bearing account (which interest
will inure to the benefit of the Fund) pending proration and distribution of
the shares.
Whichever of the two methods described above is used, issuance and delivery of
certificates for the shares purchased are subject to collection of checks and
actual payment pursuant to any Notice of Guaranteed Delivery.
If a record date shareholder who acquires shares pursuant to the primary
subscription or the over-subscription privilege does not make payment of any
additional amounts due by the tenth business day after the confirmation date,
the Fund reserves the right to take any or all of the following actions: (i)
sell such subscribed and unpaid-for shares to other record date shareholders,
(ii) apply any payment actually received toward the purchase of the greatest
whole number of shares that could be acquired by such record date shareholder
upon the exercise of the primary subscription and/or over-subscription
privilege, and/or (iii) exercise any and all other rights or remedies to which
the Fund may be entitled.
The method of delivery to the Fund of Subscription Certificates and payment of
the subscription price will be at the election and risk of the exercising
rights holders, but if sent by mail it is recommended that such certificates
and payments be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery
to the Subscription Agent and clearance of payment prior to 5:00 P.M., New
York City time, on the expiration date. Because uncertified personal checks
may take at least five business days to clear, you are strongly urged to pay,
or arrange for payment, by means of certified or cashier's check or money
order.
All questions concerning the timeliness, validity, form and eligibility of any
exercise of rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion. The Subscription Agent will not be
under any duty to give notification of any defect or irregularity in
connection with the submission of Subscription Certificates or incur any
liability for failure to give such notification.
Exercising rights holders will have no right to rescind their subscription
after receipt of their payment for shares by the Subscription Agent, except as
provided below under "Notice of Net Asset Value Decline."
Delivery of Share Certificates
Certificates representing shares acquired in the primary subscription will be
mailed promptly after the expiration of the Offer once full payment for such
shares has been received and cleared. Certificates representing shares
acquired pursuant to the over-subscription privilege will be mailed as soon as
practicable after full payment for such shares has been received and cleared
and all allocations have been completed. Participants in the Fund's Dividend
Reinvestment Plan will have any shares acquired in the primary subscription
and pursuant to the over-subscription privilege credited to their accounts
under the Dividend Reinvestment Plan. Participants in the Fund's Dividend
Reinvestment Plan wishing to exercise rights issued with respect to the shares
held in their accounts under the Dividend Reinvestment Plan must exercise such
rights in accordance with the procedures set forth above. Record date
shareholders whose shares are held of record by Cede & Co. FAST or by any
other depository or nominee on their behalf or their broker-dealer's behalf
will have any shares acquired in the primary subscription credited to the
account of Cede & Co. FAST or such other depository or nominee. Shares
acquired pursuant to the over-subscription privilege will be certificated, and
certificates representing such shares will be sent directly to Cede & Co. FAST
or such other depository or nominee. Share certificates will not be issued for
shares credited to Dividend Reinvestment Plan accounts.
Foreign Restrictions
Subscription Certificates will not be mailed to record date shareholders whose
record addresses are outside the United States. Foreign record date
shareholders or their nominees will receive written notice of the Offer. The
rights issued to foreign record date shareholders will be held by the
Subscription Agent for their accounts until instructions are received to
exercise the rights. Rights issued to foreign record date shareholders will
expire unexercised if instructions are not submitted to the Subscription Agent
prior to or on the expiration date.
Federal Income Tax Consequences of the Offer
The following is a general summary of the material Federal income tax
consequences of the Offer under the provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations thereunder as now
in effect that are generally applicable to record date shareholders that are
United States persons within the meaning of the Code, and does not cover
foreign, state or local taxes. The Code and regulations are subject to change
by legislative or administrative action, which may be retroactive. Exercising
rights holders should consult their tax advisors regarding specific questions
as to Federal, foreign, state or local taxes.
Shareholders will not recognize any taxable income either upon the receipt or
the exercise of the rights. If the fair market value of the rights on the date
of distribution is less than 15% of the fair market of the shareholder's
shares of the Fund's common stock to which the rights relate and the
shareholder does not make the election described below, the shareholder's
basis in the rights is zero. A shareholder may, however, irrevocably elect to
allocate its existing basis in the related shares between such shares and the
rights based upon the relative fair market values of such shares and the
rights as of the date of their issuance. The shareholder's basis in the shares
would then be reduced by an amount equal to the basis allocated to the rights.
This election must be made in a statement attached to the shareholder's
Federal income tax return for the year in which the rights are received. If
the fair market value of the rights on the date of distribution is equal to at
least 15% of the shareholder's shares to which they relate, the shareholder
will be required to allocate its existing basis in those shares between such
shares and the rights based upon the relative fair market values of such
shares and the rights as of the date of their issuance. As with respect to the
election described above, the shareholder's basis in the shares would then be
reduced by an amount equal to the basis allocated to the rights. The basis of
any shares acquired by a shareholder's exercise of its rights will be equal to
the sum of the subscription price of the shares, the basis of the rights and
any servicing fee charged to the shareholder by the shareholder's
broker-dealer, bank or trust company. The gain or loss recognized by a
shareholder upon the sale of a share acquired by the exercise of a right will
be capital gain or loss (assuming the share is held as a capital asset at the
time of sale). This gain or loss will be long-term capital gain or loss if the
share has been held for more than one year at the time of sale. A
shareholder's holding period for a share acquired upon the exercise of a right
begins with the date of exercise. No loss will be realized if rights which
have a tax basis expire without exercise. In such event, the basis in the
unexercised rights will be added back to the shareholder's basis in the
related shares.
Notice of NAV Decline
The Fund has undertaken to suspend the Offer until it amends this Prospectus
if, subsequent to _______ __, 1999 (the effective date of the Fund's
registration statement), the Fund's NAV declines more than 10% from its NAV as
of that date. In such event, the Fund would extend the expiration date and
notify record date shareholders that the NAV has declined more than 10%, that
the Offer is suspended and that exercising rights holders may cancel their
exercise of rights.
Employee Benefit Plan Considerations
Shareholders who are employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), (including corporate
savings and 401(k) plans), Keogh or H.R. 10 plans of self-employed individuals
and individual retirement accounts, collectively, retirement plans, should be
aware that additions to the retirement plan (other than rollovers or
trustee-to-trustee transfers from other retirement plans) in order to exercise
rights would be treated as contributions to the retirement plan and, when
taken together with contributions previously made, may result in, among other
things, excise taxes for excess or nondeductible contributions. In the case of
retirement plans qualified under section 401(a) of the Code and certain other
retirement plans, additional cash contributions could cause the maximum
contribution limitations of section 415 of the Code or other qualification
rules to be violated. They may also be a reportable distribution and there may
be other adverse tax and ERISA consequences if rights are sold or transferred
by a retirement plan.
Retirement plans and other tax exempt entities, should also be aware that if
they borrow in order to finance their exercise of rights, they may become
subject to the tax on unrelated business taxable income under section 511 of
the Code.
ERISA contains fiduciary responsibility requirements, and ERISA and the Code
contain prohibited transaction rules, that may bear upon the exercise of
rights. Due to the complexity of these rules and the penalties for
noncompliance, retirement plans should consult with their counsel and other
advisors regarding the consequences under ERISA and the Code of their exercise
of rights.
Distribution Arrangements
___________________, a broker-dealer and member of thc National Association of
Securities Dealers, Inc., will act as the Dealer Manager for the Offer. Under
the terms and subject to the conditions contained in the Dealer Manager
Agreement dated the date hereof, the Dealer Manager will provide financial
advisory and marketing services in connection with the Offer and will solicit
the exercise of rights and participation in the over-subscription privilege by
record date shareholders. The Offer is not contingent upon any number of
rights being exercised. The Fund has agreed to pay the Dealer Manager a fee
for financial advisory and marketing services equal to ___% of the aggregate
subscription price for each share issued pursuant to the Offer. The Dealer
Manager will reallow to other broker-dealers solicitation fees equal to ____%
of the subscription price per share for each share issued pursuant to the
Offer as a result of their soliciting efforts.
In addition, the Fund has agreed to reimburse the Dealer Manager up to an
aggregate of $_____ for its reasonable expenses incurred in connection with
the Offer. The Fund and Manager have each agreed to indemnify the Dealer
Manager or contribute to losses arising out of certain liabilities including
liabilities under the Securities Act of 1933 (the "1933 Act"). The Dealer
Manager Agreement also provides that the Dealer Manager will not be subject to
any liability to the Fund in rendering the services contemplated by such
agreement except for any act of bad faith, willful misconduct or gross
negligence of the Dealer Manager or reckless disregard by the Dealer Manager
of its obligations and duties under such agreement.
The Fund has agreed not to offer or sell, or enter into any agreement to sell,
any equity or equity-related securities of the Fund or securities convertible
into such securities for a period of 180 days after the date of the Dealer
Manager Agreement, except for the shares issued in reinvestment of dividends
or other distributions or other limited circumstances.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a non-diversified closed-end management investment company
designed primarily for long-term investment, and investors should not consider
it a vehicle for trading purposes. See "Investment Objective and Policies."
Set forth below is a description of certain risks and special considerations
relating to the Offer and investing in the Fund.
Dilution -- Net Asset Value and Non-Participation in the Offer
Upon completion of the Offer, shareholders who do not fully exercise their
rights will own a smaller proportional interest in the Fund than would be the
case if the Offer had not been made. The subscription price per share is ____%
of the lower of (1) the average of the last reported sales price of a Fund
share on the NYSE for the five trading days ending with the day the Offer
expires or (2) the NAV as of the close of trading on the NYSE on that date.
The subscription price is lower than the Fund's NAV. Any rights offering
priced at a discount to the Fund's NAV entails some dilution in the NAV.
Dilution is the decrease in NAV that results from the Fund's issuance of new
shares at a discount to NAV when the rights are exercised and from the Fund's
payment of the expenses of the Offer. The Offer will result in a dilution of
NAV for all Fund shareholders, which will disproportionately affect
shareholders who do not exercise their rights. In addition, there also may be
substantial dilution to the extent that the Fund increases the number of
shares subject to subscription by up to 25% in order to satisfy
over-subscription requests. Although it is not possible to state precisely the
amount of the decrease in NAV because it is not known at the date of this
Prospectus how many shares will be subscribed for, or what the subscription
price will be, the dilution could be substantial. For example, assuming all
the rights are exercised at the estimated subscription price of $____ (which
is ___% of the Fund's market price as of _____ __, 1999), the Fund issues an
additional 25% of shares to satisfy over-subscription requests and assuming
the deduction of all expenses related to the issuance of the shares, the
Fund's NAV per share would be reduced by approximately $____ per share or ____
%. This dilution of NAV will disproportionately affect shareholders who do not
exercise their rights.
The Japanese OTC Market
Because the Fund invests primarily in equity securities traded in the Japanese
OTC market, a shareholder in the Fund should be aware of certain special
considerations relating to Japan, the Japanese OTC market and international
investment generally which are not typically involved in a U.S. investment.
The Fund should be considered a vehicle for diversification of investment and
not a balanced investment program
Although the Japanese OTC market has recently experienced substantial recovery
in aggregate market capitalization and trading volume, there have been periods
in which aggregate market capitalization and trading volume have declined
substantially. In addition, the Japanese OTC Market may from time to time
experience periods of high volatility. See "Japanese OTC Market Corrections"
below. Japanese equity securities, including securities traded on the OTC
market, have generally exhibited a high price to earnings ratio (relative to
the U.S. securities markets). See "The Japanese OTC Market."
Trading of equity securities in the Japanese OTC market is conducted by
securities companies in Japan, primarily through an organization which acts as
a "matching agent", or market makers, and not on a recognized stock exchange.
Consequently, securities traded in the Japanese OTC market may, from time to
time, and especially in declining markets, become illiquid and experience
short-term price volatility and wide spreads between bid and offer prices. The
combination of price volatility and the limited liquidity of the Japanese OTC
market may have an adverse effect on the investment performance of the Fund.
In periods of rapid price increases, the limited liquidity of the Japanese OTC
market restricts the Fund's ability to adjust its portfolio quickly in order
to take full advantage of a significant market increase, and conversely during
periods of rapid price declines, it restricts the ability of the Fund to
dispose of securities quickly in order to realize gains previously made or to
limit losses on securities held in its portfolio.
Investment in Japan
Investments in the Fund involve certain risks not typically associated with
domestic investments. These risks include fluctuations in foreign exchange
rates, future political and economic developments, the possible imposition of,
or changes in, exchange controls or other Japanese governmental laws or
restrictions applicable to such investments, diplomatic developments and
natural disasters. These risks are discussed below.
Political Factors. Japan has a parliamentary form of government. The
legislative power is vested in the Japanese Diet, which consists of a House of
Representatives and a House of Councillors. The major political parties
represented in the Diet are Liberal-Democratic Party ("LDP"), The Democratic
Party of Japan, Komei Party, Liberal Party, Japan Communist Party, and Social
Democratic Party. Japan was governed nationally by conservative political
parties for about 50 years. In June 1998, the departures of Social Democratic
Party (formerly the Social Democratic Party of Japan) and Sakigake Party from
the coalition left LDP the only ruling party. After LDP's losses in the House
of Councillors election in July 1998, Prime Minister Hashimoto resigned, and
Mr. Obuchi became LDP's president and the Prime Minister. After this, LDP and
Liberal Party agreed to form a coalition government, and in January 1999, the
current Obuchi government was established with the appointment of Liberal
Party's Mr. Noda as the Minister of Home Affairs. There can be no assurance
that the Japanese government will not be subject to abrupt or unexpected
changes in the future that may have an adverse impact on the Japanese OTC
market. Recent and future developments in the domestic political environment
in Japan may lead to changes in policy that might adversely affect the Fund.
Economic Factors. Although the Japanese economy had grown substantially until
the 1980's, the rate of growth has slowed substantially in the 1990's. The
Japanese economy experienced negative growth in 1998, for the first time since
1974. During 1996, 1997 and 1998, the Japanese economy grew at rates of 5.0%,
1.4% and (2.8%), respectively, as measured by real gross domestic product.
From January 1, 1999 to August 31, 1999, the Japanese economy grew at an
annualized rate of ___%.
Japan's early reliance on heavy industries has since shifted to higher
technology products assembly and, most recently, to automobile, electrical and
electronic production Japan's success in exporting its products and recent
sluggish domestic demand has generated a sizeable trade surplus. This trade
surplus has caused tensions at times between Japan and some of its trading
partners. In particular, Japan's trade relations with the United States have
recently been the subject of discussion and negotiation between the two
nations. The United States has imposed certain measures designated to address
trade issues in specific industries. These measures and similar measures in
the future may adversely affect the performance of the Fund.
Japan's economy has typically exhibited low inflation and low interest rates.
There can be no assurance that low inflation and low interest rates will
continue, and it is likely that a reversal of such factors would adversely
affect the Japanese economy. Moreover, the Japanese economy may differ,
favorably or unfavorably, from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.
Exchange Rate Fluctuations. Since the Fund invests primarily in securities
denominated in yen, changes in exchange rates between the U.S. dollar and the
yen affect the U.S. dollar value of the Fund's assets. Currency exchange rate
fluctuations can decrease or eliminate income available for distribution or
conversely increase income available for distribution. Forces of supply and
demand on the foreign exchange markets determine the rate of exchange. These
forces are in turn affected by the international balance of payments and other
economic, political and financial conditions, government intervention,
speculation and other factors.
The following table sets forth certain information as to yen per U.S. dollar
exchange rates for the years 1989 through 1998 and for the period from January
1, 1999 through August 31, 1999.
<TABLE>
<CAPTION>
Yen per U.S. $1.00
--------------------------------------------
High(1) Low(1) Average(2)
------- ------ ----------
<S> <C> <C> <C>
1989.......................................... 123.80 151.35 137.96
1990.......................................... 124.05 160.35 144.81
1991.......................................... 125.10 142.02 134.54
1992.......................................... 118.60 134.95 126.65
1993.......................................... 100.40 125.95 111.18
1994.......................................... 96.35 113.60 102.23
1995.......................................... 79.75 104.70 94.06
1996.......................................... 103.97 116.18 108.79
1997.......................................... 110.68 131.60 121.00
1998.......................................... 113.81 147.64 130.90
1999 (through August 31)...................... 108.65 124.75 117.98
</TABLE>
1) High and low rates include intraday transactions.
2) Average rates indicate average of the most actively traded rates at the end
of each month.
On August 31, 1999, the most actively traded interbank rate on the Tokyo
foreign exchange market, as reported by The Bank of Japan, was $1.00 =
Yen 110.17-110.20. The recent relative strength of the yen to the U.S. dollar
may adversely affect the economy of Japan, and, in particular, the export
sector thereof.
The Fund may engage in a variety of currency hedging transactions. These
transactions involve certain special risks. See "Investment Objective and
Policies - Other Investment Policies - Hedging Foreign Currency Risks."
Portfolio Securities. Portfolio securities held by the Fund are not registered
with the U.S. Securities and Exchange Commission nor are the issuers thereof
subject to the reporting requirements of such agency. There may be less
publicly available information about issuers of the Fund's portfolio
securities than about U.S. companies and such issuers may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. companies are subject.
Japanese OTC Market Corrections. Share prices of companies listed on Japanese
stock exchanges and on the Japanese OTC market reached historical peaks (which
were later referred to as the "bubble") as well as historically high trading
volumes in 1989 and 1990. Since then, stock prices in both markets have
decreased significantly, with both listed and OTC stock prices reaching their
lowest levels in the fourth quarter of 1998. During the period from January 1,
1989 through the second quarter of 1999, the highest Nikkei stock average and
Nikkei OTC average were 38,915.87 and 4,149.20, respectively, and the lowest
for each were 12,879.97 and 610.99, respectively. There can be no assurance
that additional market corrections will not occur.
Trading of securities on the Japanese over-the-counter market is regulated
primarily by the Japan Securities Dealers Association (the "JSDA"). The JSDA
reports the daily high and low selling prices and the last selling price at or
immediately prior to 3:00 p.m., Tokyo time, on each day and the volumes of the
shares of Japanese corporations registered with the JSDA as OTC registered
stock traded over-the-counter by the member firms of the JSDA. At August 31,
1999, there were 856 OTC registered stocks and, for the period from January 1,
through August 31, 1999, the average daily reported volume of shares traded
over-the-counter was approximately 15.895 million shares.
The Nikkei Over-the-Counter Stock Average (the "Nikkei OTC Average") is a
price weighted index of the quotations of the OTC registered stocks traded by
members of the JSDA. The Tokyo Stock Exchange is the principal Japanese stock
exchange. The most widely followed price index of stocks listed on the Tokyo
Stock Exchange is the Nikkei Stock Average, a price weighted index of selected
stocks listed on the First Section of the Tokyo Stock Exchange. The following
table shows, for the periods indicated, the high and low closing prices of the
Nikkei OTC Average and the Nikkei Stock Average:
<TABLE>
<CAPTION>
Nikkei OTC Average Nikkei Stock Average
------------------ --------------------
Calendar year High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1994 ....................................... 2,002.73 1,445.47 21,552.81 17,369.74
1995 ....................................... 1,852.13 1,194.77 20,011.76 14,485.41
1996 ....................................... 1,747.17 1,316.25 22,666.80 19,161.71
1997 1st quarter ......................... 1,333.11 1,127.03 19,446.00 17,303.65
2nd quarter ......................... 1,223.22 1,032.49 20,681.07 17,485.75
3rd quarter ......................... 1,217.25 905.35 20,575.26 17,683.27
4th quarter ......................... 873.96 774.80 17,842.16 14,775.22
1998 1st quarter ......................... 842.05 722.66 17,624.34 14,664.44
2nd quarter ......................... 784.97 749.46 16,536.66 14,715.38
3rd quarter ......................... 798.87 659.77 16,731.92 13,406.39
4th quarter ......................... 724.99 610.99 15,207.77 12,879.97
1999 1st quarter ......................... 1,062.70 727.28 16,378.78 13,232.74
2nd quarter ......................... 1,488.14 1,086.10 17,782.79 15,972.68
3rd quarter(through Aug 31)............ 1,731.82 1,521.13 18,532.58 17,084.24
Source: Nihon Keizai Shimbun
</TABLE>
Net Asset Value Discount
Shares of closed-end investment companies frequently trade at a discount from
their net asset value. Since it commenced operations, the Fund has traded at a
discount from net asset value as high as ___% and at a premium above net asset
value as high as ____%. As of _________, 1999, the Fund's shares were trading
at a ___% discount from net asset value. The net asset value of the Fund's
shares will fluctuate with price changes of the Fund's portfolio securities.
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 the Manager or other Fund service providers do
not properly address this problem prior to January 1, 2000. The Manager has
hired consultants to analyze these issues and to implement any system
modifications necessary to prepare for the Year 2000. In addition, the Manager
has sought assurance 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 the Manager 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. 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's investment is adversely affected by the Year 2000 Problem, the
Fund's investment return will be reduced.
Fees and Expenses
The management fee and other operating expenses of the Fund may be higher than
the management fees and operating expenses of other mutual funds managed by
other investment advisors of investment companies investing exclusively in the
securities of U.S. issuers. The management fees and operating expenses,
however, are believed by the Manager to be comparable to expenses of other
management investment companies that invest primarily in the securities of
issuers in Japan with investment objectives similar to the investment
objective of the Fund. See "Fund Expenses."
Non-Diversified Status
The Fund is registered as a "non-diversified" investment company and therefore
may invest more than 5% of its total assets in the securities of any single
issuer, subject to the diversification requirements of Subchapter M of the
Code, applicable to the Fund. Since the Fund may invest a relatively high
percentage of its assets in the securities of a limited number of issuers, the
Fund may be more susceptible than a more widely-diversified fund to any single
economic, political or regulatory occurrence.
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. See "Capital Stock - Certain
Provisions of the Articles of Incorporation."
PORTFOLIO COMPOSITION
The following table sets forth certain information with respect to the
composition of the Fund's portfolio of investments at the conclusion of the
last four fiscal quarters:
<TABLE>
<CAPTION>
The Fund's Portfolio of Investments by Industry
(as a percentage of net assets)
Quarter Ended
-----------------------------------------------------------------------
November 30, February 28, May 31, August 31,
1998 1999 1999 1999
----------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Equity Investments:
Automotive Equipment and Parts........... 1.9% 2.2% 2.4% 3.5
Banks and Finance........................ 8.2 6.7 6.2 5.3
Chemicals................................ 5.6 4.7 5.3 5.1
Construction and Housing................ 1.1 0.9 0.5 0.2
Electric................................. 4.4 5.9 4.6 4.5
Electronics.............................. 9.1 7.9 5.4 6.5
Food and Manufacturing................... 7.1 6.6 7.7 7.7
Gaming................................... 0.0 0.7 1.0 0.8
Information and Software................. 9.9 7.3 5.8 6.7
Machinery and Machine Tools.............. 5.9 5.4 7.3 6.5
Miscellaneous Manufacturing.............. 10.2 11.6 12.1 12.7
Non-Ferrous.............................. 0.0 0.0 0.0 0.5
Publishing and Printing.................. 0.0 1.3 0.0 0.0
Real Estate and Warehouse................ 3.9 3.8 4.0 3.1
Restaurants.............................. 5.1 5.4 5.1 4.5
Retail................................... 9.4 10.2 9.2 12.6
Securities............................... 0.0 0.0 0.0 0.7
Services................................. 5.8 5.2 5.7 5.3
Telecommunications....................... 3.3 4.3 5.4 5.2
Textiles and Apparel..................... 1.3 2.4 4.7 3.5
Transportation........................... 1.3 1.0 1.4 1.3
Wholesale................................ 3.5 5.0 4.4 3.6
--------- ---- ---- -----
Total Investments in Equity Securities..... 97.0% 98.5% 98.2% 99.8%
========= ==== ==== ======
</TABLE>
At no time during the last four quarters did the Fund's equity investments
constitute less than 95% of the Fund's total investment portfolio.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with long-term
capital appreciation primarily through investments in equity securities traded
in the Japanese OTC market. At all times, except during temporary defensive
periods, the Fund will maintain at least 65% of its total assets in equity
securities traded in the Japanese OTC market. The Fund anticipates that, under
normal circumstances, it will invest at least 80% of its total assets in
equity securities traded in the Japanese OTC market. For purposes of these
percentages of the Fund's assets, equity securities acquired in the Japanese
OTC market and subsequently listed on a stock exchange will continue to be
treated as OTC securities. Currently, common stocks and a small number of
convertible debenture issues are traded in the Japanese OTC market. For
purposes of the Fund's investment objective, convertible debentures are deemed
to constitute equity securities. Dividend income is generally not an important
consideration in selecting portfolio securities. The investment objective
described in this paragraph is a fundamental policy of the Fund and may not be
changed without the approval of the holders of a majority of the Fund's
outstanding securities (which for this purpose and under the 1940 Act means
the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of
the outstanding shares). There can be no assurance that the Fund will realize
its investment objective.
The Manager believes that the Japanese OTC market offers investment
opportunities for investors seeking capital appreciation who are willing to
assume the risks associated with an investment in the Fund. The Japanese OTC
market represents the principal trading market for small capitalization growth
companies that do not meet the rigorous entry requirements of the major
Japanese stock exchanges and offers the opportunity to invest in Japan's
emerging growth markets or industries. Additionally, the Manager believes that
companies registered on the Japanese OTC market are generally in a more
developmental stage than are exchange listed companies and may offer exposure
to markets or industries in which exchange listed companies are less involved.
Investments in smaller, less seasoned companies may present greater potential
for capital appreciation; however, they also involve greater risks than are
customarily associated with more established companies.
A relatively large percentage of companies traded in the Japanese OTC market
are involved in the service industry and other non-manufacturing industries
which the Manager believes have growth potential. Moreover, since joining the
Japanese OTC market is often the first step in raising equity from the public,
the Japanese OTC market comprises many companies that have potential for
growth. The Manager believes that as long as the Japanese economy grows
through increased domestic demand, it is likely that investment opportunities
in the Japanese OTC market will increase in terms of the number of registered
companies and the types of industries in which these companies are involved.
The number of companies registered on the Japanese OTC market increased from
263 in 1990 to 856 at August 31, 1999. From January 1, 1999 through August 31,
1999, 30 companies were newly registered on the Japanese OTC market. In the
opinion of the Manager, the Japanese OTC market will continue to attract a
large number of new registrations over the next few years.
As described more fully below under "The Japanese OTC Market-Market Growth,"
the Japanese OTC market has generally experienced sustained growth in
aggregate market capitalization and trading volume; however, there have been
periods in which aggregate market capitalization and trading volume have
declined. For the five-year period from January 1, 1994 through December 31,
1998, the Japanese OTC market had an annualized return of positive ____%
before dividends (as measured by the Nikkei OTC Average Price Index) as
compared to an annualized return for the Second Section of the Tokyo Stock
Exchange (which is comprised of small capitalization stocks) of negative ___%
before dividends for the same period (as measured by the Tokyo Stock Exchange
Second Section Stock Price Index). Of course, historical data may not be an
indication of future performance.
The Fund invests the balance of its assets not invested in the Japanese OTC
market in equity securities of small capitalization growth companies which are
traded on Japanese securities exchanges (such as the Second Section of the
Tokyo Stock Exchange) and in yen-denominated or U.S. dollar-denominated
fixed-income securities. These fixed-income securities include non-convertible
preferred stock, debt securities, obligations issued or guaranteed by the U.S.
or Japanese government or their agencies or instrumentalities and money market
instruments (such as short term obligations issued or guaranteed by the U.S.
or Japanese government, commercial paper and time deposits, certificates of
deposit and bankers' acceptances of U.S. or Japanese banks).
A small number of convertible debenture issues are traded in the Japanese OTC
market. A convertible debenture is a debt security that may be converted into
shares of an underlying common stock. Convertible debentures entitle the
holder to receive interest payments paid thereon until such time as the
convertible debenture matures or is redeemed or until the holder elects to
exercise the conversion privilege.
It is anticipated that pending investment in the Japanese OTC market, the Fund
will invest the proceeds of this offering primarily in the yen-denominated or
U.S. dollar-denominated fixed-income securities described above. Additionally,
the Fund may, as a temporary defensive measure, invest up to 100% of its total
assets in yen-denominated or U.S. dollar-denominated fixed-income securities
of the type described above.
The Fund seeks to identify and invest in companies it believes offer potential
for long-term capital appreciation. In evaluating prospective investments, the
Manager and the Investment Advisor utilize internal financial, economic and
credit analysis resources as well as information obtained from other sources.
A number of OTC issuers have only recently registered on the Japanese OTC
market, and there has been a limited availability of secondary investment
research reports prepared by investment analysts and securities companies
relating to OTC issuers compared to the reports available on issuers with
securities listed on the major Japanese stock exchanges. As a result, the
Manager believes that familiarity with such market is essential to increasing
the potential for long-term capital appreciation. As noted below, the Manager
and the Investment Advisor have extensive experience in managing investments
in Japan. However, there can be no assurance that the Manager or the
Investment Advisor will be able to identify and invest in companies that will
appreciate in value over time.
Other Investment Policies
The Fund has adopted certain other policies as set forth below:
Borrowings. The Fund is authorized to borrow money in amounts of up to 10% of
the value of its total assets at the time of such borrowings. Borrowings by
the Fund create an opportunity for greater total return but, at the same time,
increase exposure to capital risk. In addition, borrowed funds are subject to
interest costs that may offset or exceed the return earned on the borrowed
funds.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Under such agreements, the seller agrees, upon entering
into the contract, to repurchase the security at a mutually agreed upon time
and price in a specified currency, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period although it may be affected by currency
fluctuations. In the event of a default under a repurchase agreement, the rate
of return to the Fund would be dependent upon intervening fluctuations of the
market value of such security and the accrued interest on the security. In
such event, the Fund would have rights against the seller for breach of
contract with respect to any losses arising from market fluctuations following
the failure of the seller to perform.
Hedging Foreign Currency Risks. The Fund is authorized to deal in forward
foreign exchange between the U.S. dollar and the yen as a hedge against
possible variations in the foreign exchange rate between these currencies.
This is accomplished through contractual agreements to purchase or sell a
specified currency at a specified future date (up to one year) and price at
the time of the contract. The Fund's dealings in forward foreign exchange are
limited to hedging involving either specific transactions or portfolio
positions. The Fund does not intend to utilize hedging techniques to a
significant extent. The Fund is also authorized to purchase or sell listed or
OTC foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar-denominated securities owned by the Fund, sold by
the Fund but not yet delivered, or committed or anticipated to be purchased by
the Fund.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline, and it precludes the opportunity for gain
if the value of the hedged currency should rise. Moreover, it may not be
possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation it anticipates. The cost to the Fund of engaging
in foreign currency transactions varies with such factors as the currency
involved, the length of the contract period and the market conditions then
prevailing. Since transactions in foreign currency exchange are usually
conducted on a principal basis, no fees or commissions are involved.
Although certain risks are involved in options and futures transactions, the
Fund believes that, because it is authorized to engage in options and futures
transactions only for currency hedging purposes, the options and futures
portfolio strategies of the Fund do not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions. As
of the date of this Prospectus, the Fund has not engaged in any options and
futures transactions.
See "Appendix I-Hedging Foreign Currency Risks" for a more detailed discussion
of foreign currency hedging transactions.
THE JAPANESE OTC MARKET
Overview of Japanese Securities Markets
The Japanese OTC market was initially one of the smallest securities markets
in Japan. However, the Japanese OTC market has generally experienced sustained
growth in market capitalization and trading value. At August 31, 1999, the
Japanese OTC market comprised 856 registered companies (including The Bank of
Japan) with an aggregate market capitalization of approximately $177.7 billion
(Yen 19.6 trillion) (excluding The Bank of Japan). The average monthly trading
value for the period from January 1, through July 31, 1999, as reported by the
JSDA, was approximately $5.9 billion (Yen 657.6 billion). The Japanese OTC
market is supervised by the JSDA, a regulatory body comprised of registered
securities brokers in Japan.
The stock trading markets in Japan are divided into the exchange markets and
the OTC market. The exchange market is highly systemized. The chief
characteristics of the exchange market are: prices are consecutively
determined every day on which sessions are held; trading is limited to
members, who are required to possess certain qualifications; trading is
limited to listed stocks which have met certain basic standards; in connection
with the trading of listed stocks, a centralized market had been adopted so
that buy and sell orders may converge on the market and trading contracts are
concluded based upon the principles of competitive bidding; in December 1998,
off-exchange trading was officially permitted with certain limitations in
order to simplify the settling of accounts, a system of clearing accounts has
been adopted; and to assure fairness in trading, the exchange reserves the
right to supervise trading by enacting appropriate regulations regulating
stock trading and to provide punishment for any violation thereof. The
Japanese OTC market is less systemized than the stock exchanges. Its
characteristics include the following: no single centralized marketplace
similar to an exchange exists; trading is primarily conducted through a
central processing agent responsible for matching buy and sell orders received
from securities companies on behalf of investors, or market makers; stocks
traded through the market making system are not traded through the central
processing agent; prices are determined through the matching of buy and sell
orders when trading is conducted thorough the central processing agent, and
trades of certain stocks may not be effected on days when the matching of buy
and sell orders for such stocks does not occur.
There are currently eight stock exchanges in Japan. These include the Tokyo
Stock Exchange, the Osaka Securities Exchange, the Nagoya Stock Exchange, the
Niigata Stock Exchange, the Kyoto Stock Exchange, the Fukuoka Stock Exchange,
the Hiroshima Stock Exchange, and the Sapporo Stock Exchange. Among them, the
Niigata Stock Exchange and the Hiroshima Stock Exchange will be merged into
the Tokyo Stock Exchange in 2000 and there may be another move toward
restructuring since competition to attract investors and issuers is
intensifying. The largest and most prestigious of the exchanges is the Tokyo
Stock Exchange, which in 1998 accounted for 78% of the value of the
transactions on all Japanese stock exchanges. Consequently, the Tokyo Stock
Exchange is widely regarded as the central marketplace for all of Japan. The
Tokyo Stock Exchange is divided into a First and Second Section. The First
Section is for established companies which meet stringent listing criteria.
Such listing criteria relate to the size and business condition of the issuing
company, the liquidity of its securities and other factors pertinent to
investor protection. The Second Section is for smaller companies and newly
listed issuers. At July 31, 1999, there were 1,340 companies listed on the
First Section of the Tokyo Stock Exchange with an aggregate market
capitalization of approximately $3.2 trillion (Yen 369 trillion) and 518
companies listed on the Second Section with an aggregate market capitalization
of approximately $127 billion (Yen 14.8 trillion). The Average monthly trading
value for 1998 for the First and Second Sections of the Tokyo Stock Exchange
was approximately $61.1 billion (Yen 8.0 trillion) and $885 million (Yen 116
billion), respectively.
Historical Background and Development of the Japanese OTC Market
Although there have been companies traded over-the-counter in Japan since the
late 1940s, the official Japanese OTC market was not established until 1963
when market regulations were first introduced. At such time, the JSDA became
the supervisory authority responsible for overseeing the activities of the new
market. At the conclusion of 1963, 129 companies were registered with the JSDA
for trading on the Japanese OTC market. However, the Japanese OTC market
subsequently contracted such that at the conclusion of 1976 only 85 companies
were registered for trading. In an effort to alter this trend, the JSDA and
Japanese securities companies established Nihon Tento Shoken K.K. ("NTS")
(current JASDAQ Services Co.) to coordinate the trading of OTC shares. JASDAQ
Services Co. is owned by its president, the JSDA and 159 securities companies
that are members of the JSDA, including The Nomura Securities Co., Ltd.
("Nomura Securities"). The role of JASDAQ Services Co. is to act as the
matching agent between securities companies wishing to trade in OTC shares;
this role has grown to the extent that, by December 1998 when the market
making system was first applied to OTC registered stocks other than OTC
special market stocks, over 95 percent of all OTC market trading was being
handled through JASDAQ Services Co., using the Japanese Securities Dealer
Association Quotation system ("JASDAQ"). From 1977 through 1987, the number of
registered companies increased from 85 to 151. From 1988 to 1999, the Japanese
OTC market experienced significant growth in the number of registered
companies from 196 companies at the conclusion of 1988 to 856 at the end of
August 1999.
The JSDA has played an active role in the development of the Japanese OTC
market. In response to the interim report of the Securities and Exchange
Council which was presented in June 1983, reform measures to enhance further
the effectiveness of the Japanese OTC market and its ability to attract
investors and issuers were taken by the JSDA. These measures include those
aimed at facilitating trading communications through the introduction of
electronic equipment, the imposition of requirements applicable to securities
companies that act as dealers in the OTC market, the relaxation of
registration standards and the elimination of restrictions on additional
public offerings by OTC companies. Since then, the Japanese OTC market has
developed as the place for small and medium-sized companies to raise funds.
In recent years, however, the growth rates of the number of registered
companies and their fund raising have been declining. It has been pointed out
in recent years that the OTC market faces the following problems; there have
been only a few initial public offerings ("IPOs") by venture businesses with
high growth potential; the liquidity of the market is low, reflecting a low
demand for OTC stocks among investors after IPOs are completed; price
information at the time of IPO often lacks transparency and does not fully
reflect market forces. In order to solve these problems, various reform plans
have been considered and studied, especially by the JSDA since the mid-1990s
and then progressively implemented.
In reaction to the criticism against limited public offerings by venture
businesses, the OTC registration standard was amended in July 1995, and the
OTC special market was opened, paving the way to public offering by research
and development-oriented enterprises, including companies not currently making
any profits. The JSDA further amended the registration standard on November
27, 1998. The former two standards for regular and special issues have been
replaced with two new standards for general companies and venture businesses.
The eight stock exchanges in Japan have tailored their entry requirements in
order to attract companies of a particular size. For example, the Second
Section of the Tokyo Stock Exchange (which has less restrictive requirements
than the First Section) generally requires a company to have a minimum of one
million shares outstanding, over 800 shareholders and net assets of over $9.1
million (Yen 1 billion). The entry requirements for the Japanese OTC market are
considerably less restrictive than those of the Japanese exchanges. Regarding
the number of shares outstanding, the qualitative condition that smooth
distribution should be ensured has been introduced instead of the former
quantitative condition of a minimum of two million shares outstanding. Entry
requirements for the Japanese OTC market include: a minimum of 300
shareholders (400 when the number of shares outstanding is between 10 and 20
million, and 500 when the number of shares outstanding is over 20 million),
the company must be earning a net profit on both a consolidated and
non-consolidated basis (no standard for venture businesses) and the company
must have minimum net assets of $1.8 million (Yen 200 million) (Yen 500
million market capitalization at the time of public offering for venture
businesses) are required for OTC registration. Consequently, the Japanese OTC
Market has traditionally attracted smaller growth companies.
With respect to liquidity concerns, market making has become applicable to all
OTC registered stocks with the amendment, on November 27, 1998, of "the
regulation regarding OTC stock market trading and other trading over the
counter". Although market making had been conducted continuously for the OTC
special market stocks, it was first applied to OTC registered stocks other
than the OTC special market stocks in December 1998. The features of the new
market making system include: This new system is designed for issues defined
as market maker issues reported by more than two securities companies for
their market making; the market maker is required to continuously present sell
and buy quotations, but no limit is set for the spread between sell quotations
and buy quotations; member securities companies other than market makers are
required to trade market maker issues within the best bid and offer; and
market maker issues are not traded through JASDAQ Services Co. At August 31,
1999, 34 issues were traded through the market making system.
With regard to price transparency at the time of an initial public offering,
the bidding method adopted in April 1989 was modified to employ the book
building method, in which the public offering price is determined on the basis
of the demand estimated through hearings with institutional investors.
The competition among stock exchanges and the OTC market has recently
intensified in Japan, since some stock exchanges are trying to attract
investors and issuers by relaxing their entry requirements. In the opinion of
the Manager, the continued growth of the Japanese OTC market is dependent upon
the ability of such market to attract investors and to register new or
developing businesses which prove ultimately to be successful. Historically,
exchange listed companies in Japan have enjoyed access to the relatively
inexpensive sources of equity capital which are available in Japan. This
access has proven to be a major advantage over overseas competition. The Fund
believes that new or developing businesses (especially companies operating in
specialized areas or with specialized products) which do not meet the
requirements for listing on the First or Second Section of the Tokyo Stock
Exchange will look to the Japanese OTC market to provide them with the
opportunity to raise equity capital to finance their future development.
Whether the large funds available in Japan for investment will be channeled in
the future to such companies through the Japanese OTC market will depend on
whether those funds, and investors generally, are attracted to the Japanese
OTC market as a means of obtaining appropriate investment returns.
Sector Analysis
The Japanese OTC market includes a broad cross-section of companies involved
in many different parts of the economy. The Manager believes that an
attractive aspect of the Japanese OTC market is the number of companies
involved in the service industry and other non-manufacturing industries which
the Manager believes have growth potential (such as software, leisure and
commerce). The service industry sector of the economy is perceived by the
Manager to have potential for growth over the next decade, with consequent
benefits for service-oriented companies.
The Manager further believes that an important factor in the future growth of
the Japanese economy will be the ability of Japanese industry to innovate and
develop new, technologically advanced areas such as semiconductors,
telecommunications, factory automation and genetic engineering. The Manager
believes that it is likely that companies registered on the Japanese OTC
market will be involved in this process and that investment in the OTC market
will provide investors with potential for exposure to Japan's future growth.
Set forth below are the industry sector weightings of the First and Second
Sections of the Tokyo Stock Exchange and the Japanese OTC market as of August
31, 1999:
<TABLE>
<CAPTION>
Tokyo Stock Tokyo Stock Japanese OTC
Exchange Exchange
First Section Second Section Market
------------------- ------------------- ----------------------
Number of Number of Number of
Industry Sector % Companies % Companies % Companies
- --------------- - --------- - --------- - ---------
<S> <C> <C> <C> <C> <C> <C>
Fishery/Agriculture.................. 0.09 7 0.00 0 0.57 3
Mining............................... 0.09 8 0.13 1 0.00 0
Construction......................... 2.10 115 1.97 35 1.44 56
Foods................................ 2.81 66 3.85 27 1.84 30
Textiles............................. 1.11 50 1.38 16 0.25 11
Pulp & Paper......................... 0.60 17 0.20 5 0.22 5
Chemicals............................ 4.64 102 1.94 28 6.33 48
Pharmaceutical....................... 4.32 34 1.78 6 0.59 8
Oil & Coal........................... 0.53 9 0.26 3 0.03 1
Rubber............................... 0.89 11 0.14 5 0.16 5
Glass & Ceramics..................... 0.86 24 0.96 14 0.84 18
Iron & Steel......................... 1.46 36 0.43 13 0.16 8
Non-Ferrous Metals................... 0.99 24 0.59 10 0.12 7
Metal Products....................... 0.57 31 1.39 21 0.72 21
Machinery............................ 3.42 105 4.10 49 9.94 45
Electrical Appliances................ 16.64 139 7.83 49 6.62 71
Transportation Equipment............. 7.90 61 1.95 27 1.02 24
Precision Instruments................ 0.91 19 1.02 9 0.88 13
Other Products....................... 2.08 39 14.46 19 3.39 36
Electric/Gas......................... 3.41 14 0.45 3 0.02 1
Land Transportation.................. 3.28 31 0.76 8 0.43 15
Marine Transportation................ 0.26 11 0.38 8 0.08 3
Air Transportation................... 0.39 4 0.05 1 0.47 1
Warehouse............................ 0.17 12 0.63 13 0.60 6
Communications....................... 7.84 5 0.00 0 8.89 2
Wholesale............................ 3.89 86 4.91 43 11.48 139
Retail............................... 5.21 78 13.79 28 13.07 112
Bank................................. 13.27 97 0.23 2 0.07 1
Brokerage........................... 2.06 17 1.21 5 0.29 7
Insurance............................ 1.33 14 0.00 0 0.04 1
Other financial...................... 2.66 22 10.43 5 2.41 5
Real Estate.......................... 0.87 23 2.74 7 1.41 12
Service.............................. 3.35 48 20.03 44 25.64 141
------ ----- ------ --- ------ ---
Total............................. 100.00 1,359 100.00 504 100.00 856
====== ===== ====== === ====== ===
</TABLE>
Notes: 1) Weightings are based on market capitalization.
2) All data have been calculated by the Manager in accordance
with the industry classifications established by the Tokyo
Stock Exchange.
3) The Bank of Japan is excluded.
Source:
Most Actively Traded Japanese OTC Companies
As noted above, 856 companies (excluding The Bank of Japan) with an aggregate
market capitalization of approximately $177. 7 billion (Yen 19.6 trillion)
were traded on the Japanese OTC market at August 31, 1999. Set forth below is
information relating to the thirty most actively traded companies (market
capitalization of over Yen 50 billion) traded on the Japanese OTC market in
the period from September 1998 to August 1999. The information is presented
separately in terms of both U.S. dollars and Japanese yen. At August 31, 1999,
these companies comprised approximately 31.1% of the aggregate market
capitalization of the 856 companies, excluding The Bank of Japan, traded on
the Japanese OTC market as of such date:
<PAGE>
<TABLE>
<CAPTION>
Most Actively Traded Japanese OTC Companies(1)
(in $)
Average
Monthly Market Share- After
1999 Market Prices Trading Capital- Holders' Tax Net Total Div'd P/E
(US$)(2) Volume ization Equity Income Assets Yield Ratio
-------------------- (3) (4) (5) (5) (5) (6)
Name Business High Low Close (000 (US$ (US$ (US$ (US$ (%) (x)
- ---- -------- ---- --- ----- ----- ----- ----- ----- ----- --- ---
shs.) mil.) mil.) mil.) mil.)
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Bodysonic Movie maker 16.87 1.11 14.41 10,553 727 17.19 3.89 75.18 - 186.8
2 THK Bearing maker 30.51 10.60 30.43 5,637 3520 664.36 34.04 1,647.61 0.42 -
3 JAFCO Venture 77.13 22.97 70.69 2,637 3403 787.07 (69.85) 2,120.58 0.30 -
capital
4 Trend Micro Software maker 218.68 54.25 218.68 2,320 4644 103.75 8.93 147.96 0.04 520.3
5 KIS Denki Home 30.94 7.63 27.12 2,005 439 158.59 11.32 354.78 0.56 38.8
electronics
retail
6 Amway Japan Direct mail 11.78 7.63 10.43 2,119 1502 537.03 108.31 934.30 8.13 13.9
sales
7 Aruze Pachinko 118.66 20.00 88.15 2,015 7482 611.70 181.48 1,220.42 0.19 41.2
machine maker
8 Oracle Corp. System vender 133.92 60.39 115.27 2,777 9823 383.30 67.55 535.27 0.66 145.4
Japan
9 Yamada Denki Home 63.40 20.68 59.33 1,651 1275 252.25 26.12 666.34 0.33 48.8
electronics
retail
10 InterQ Internet 197.49 135.62 165.28 2,129 1007 3.31 0.83 9.97 - 1212.2
provider
11 Mandom Cosmetics 33.57 6.87 31.79 1,066 729 225.81 13.42 352.59 0.53 54.4
maker
12 Innotech Semicon-related 32.80 4.83 29.58 1,037 527 163.88 (25.41) 637.37 0.21 -
trading
13 Venture Link Franchise 38.82 3.31 36.96 968 573 44.41 (1.62) 112.66 0.23 -
chain support
14 I-O Data PC memory 40.18 15.26 33.65 1,071 499 159.10 10.93 276.92 0.45 45.7
Device supplier
15 Yoshinoya Fast food 24.58 10.43 22.04 975 1460 516.50 45.24 646.34 1.04 32.3
D & C chain
16 United Arrows Clothing 171.22 105.95 160.20 1,401 1274 21.79 9.75 56.65 0.04 130.7
retail
17 Avex Music producer 198.34 41.53 183.93 1,167 2188 184.52 33.66 369.07 0.30 65.0
18 Daiichikosho Karaoke 34.75 9.15 34.58 710 648 564.03 19.55 1,425.11 0.86 33.2
equipment
19 Justsystem PC software 16.19 5.85 15.26 905 458 187.52 (44.51) 314.99 - -
developer
20 Aucnet Used car 80.61 15.26 73.74 770 769 47.66 0.65 97.19 0.19 1177.8
auctioneer
21 Goodwill Group Human 406.85 194.95 406.85 1,050 1660 6.22 (0.83) 51.07 0.02 -
resources
provider
22 H.I.S Airline 36.87 17.71 31.36 688 532 180.01 11.01 409.58 0.42 48.3
ticket retail
23 Megachips Custom LSI 150.03 36.87 127.99 714 1483 55.30 7.19 156.67 0.07 206.4
maker
24 Square Software maker 46.02 18.65 46.02 674 1503 293.74 35.18 487.95 0.76 42.7
25 Japan Computer 27.29 8.31 22.04 722 424 90.13 11.95 288.60 0.38 35.5
Business wholesale
Computer
26 Hokuto Mushroom 58.06 20.09 47.72 677 837 144.35 15.88 229.09 0.44 52.7
grower
27 Alpha Systems Software 94.93 49.58 62.30 839 544 24.75 4.16 86.42 0.24 130.8
developer
28 Fujimi Polishing 59.33 32.21 47.47 527 741 269.43 22.98 337.36 0.45 32.2
material maker
29 Gulliver Used cars 81.45 21.19 73.32 798 549 14.00 4.68 58.07 0.06 117.4
International retail
30 Joint Condominium 95.78 10.26 73.74 979 478 19.27 5.67 205.26 0.29 84.4
developer
Average of 30 companies(7) 1,719 1,723.3 224.37 18.41 477.04 0.65 187.4
===== ======= ====== ===== ====== ==== =====
Notes: 1) These activity traded issues were chosen on the basis of actual trading value for the six-month period through August
1999. Exchange rate used: Yen 117.98/$1.00
2) High and low prices are adjusted for free share distributions.
3) Average of September, 1998 through August, 1999.
4) As of August 31, 1999.
5) Figures based upon fiscal years ending in 1998. Losses are indicated in parentheses.
6) Based on fiscal year 1998 actual earnings reported by Toyo Keizai.
7) Simple average.
Source: Nomura Asset Management Co., Ltd.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MOst Actively Traded Japanese OTC Companies(1)
(in Yen)
Average
Monthly Market Share- After
1999 Market Prices Trading Capital- Holders' Tax Net Total Div'd P/E
()(2) Volume ization Equity Income Assets Yield Ratio
-------------------- (3) (4) (5) (5) (5) (6)
Name Business High Low Close (000 shs.) (bil.) (mil.) (mil.) (mil.) (%) (x)
- ---- -------- ---- --- ----- ---------- -------- ------ ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Bodysonic Movie maker 1,990 131 1,700 10,553 85.8 2,028 459 8,870 - 186.8
2 THK Bearing maker 3,600 1,250 3,590 5,637 415.3 78,381 4,016 194,385 0.42 -
3 JAFCO Venture capital 9,100 2,710 8,340 2,637 401.5 92,859 (8,241) 250,186 0.30 -
4 Trend Micro Software maker 25,800 6,400 25,800 2,320 547.9 12,240 1,053 17,456 0.04 520.3
5 KIS Denki Home electronics 3,650 900 3,200 2,005 51.8 18,711 1,336 41,857 0.56 38.8
retail
6 Amway Japan Direct mail sales 1,390 900 1,230 2,119 177.2 63,359 12,778 110,229 8.13 13.9
7 Aruze Pachinko machine 14,000 2,360 10,400 2,015 882.7 72,168 21,411 143,985 0.19 41.2
maker
8 Oracle Corp. System vender 15,800 7,125 13,600 2,777 1158.9 45,222 7,969 63,151 0.66 145.4
Japan
9 Yamada Home electronics 7,480 2,440 7,000 1,651 150.5 29,760 3,082 78,615 0.33 48.8
Denki retail
10 InterQ Internet provider 23,300 16,000 19,500 2,129 118.8 391 98 1,176 - 1212.2
11 Mandom Cosmetics maker 3,960 810 3,750 1,066 86.1 26,641 1,583 41,598 0.53 54.4
12 Innotech Semicon-related 3,870 570 3,490 1,037 62.1 19,334 (2,998) 75,197 0.21 -
trading
13 Venture Franchise chain 4,580 390 4,360 968 67.6 5,239 (191) 13,292 0.23 -
Link support
14 I-O Data PC memory supplier 4,740 1,800 3,970 1,071 58.9 18,771 1,290 32,671 0.45 45.7
Device
15 Yoshinoya Fast food chain 2,900 1,230 2,600 975 172.2 60,937 5,337 76,255 1.04 32.3
D & C
16 United Clothing retail 20,200 12,500 18,900 1,401 150.3 2,571 1,150 6,683 0.04 130.7
Arrows
17 Avex Music producer 23,400 4,900 21,700 1,167 258.2 21,770 3,971 43,543 0.30 65.0
18 Daiichikosho Karaoke equipment 4,100 1,080 4,080 710 76.5 66,544 2,307 168,135 0.86 33.2
19 Justsystem PC software 1,910 690 1,800 905 54.0 22,124 (5,251) 37,162 - -
developer
20 Aucnet Used car auctioneer 9,510 1,800 8,700 770 90.7 5,623 77 11,466 0.19 1177.8
21 Goodwill Human resources 48,000 23,000 48,000 1,050 195.8 734 (98) 6,025 0.02 -
Group provider
22 H.I.S Airline ticket 4,350 2,090 3,700 688 62.7 21,237 1,299 48,322 0.42 48.3
retail
23 Megachips Custom LSI maker 17,700 4,350 15,100 714 175.0 6,524 848 18,484 0.07 206.4
24 Square Software maker 5,430 2,200 5,430 674 177.4 34,655 4,151 57,568 0.76 42.7
25 Japan Business Computer wholesale 3,220 980 2,600 722 50.1 10,633 1,410 34,049 0.38 35.5
Computer
26 Hokuto Mushroom grower 6,850 2,370 5,630 677 98.8 17,031 1,874 27,028 0.44 52.7
27 Alpha Software developer 11,200 5,850 7,350 839 64.2 2,920 491 10,196 0.24 130.8
Systems
28 Fujimi Polishing material 7,000 3,800 5,600 527 87.4 31,787 2,711 39,802 0.45 32.2
maker
29 Gulliver Used cars retail 9,610 2,500 8,650 798 64.8 1,652 552 6,851 0.06 117.4
International
30 Joint Condominium 11300 1,210 8700 979 56.4 2,273 669 24,216 0.29 84.4
developer
Average of 30 companies(7) 1,719 203.3 26,471 2,171 56,282 0.65 187.4
====== ===== ======= ====== ======= ==== =====
</TABLE>
Notes: 1) These activity traded issues were chosen on the basis of actual
trading value for the six-month period through August 1999.
2) High and low prices are adjusted for free share distributions.
3) Average of September, 1998 through August, 1999.
4) As of August 31, 1999.
5) Figures based upon fiscal years ending in 1998. Losses are
indicated in parentheses.
6) Based on fiscal year 1998 actual earnings reported by Toyo Keizai.
7) Simple average.
Source: Nomura Asset Management Co., Ltd.
Market Growth
As stated above, the Japanese OTC market has generally experienced significant
growth in terms of the number of registered companies and aggregate market
capitalization. The growth of the Japanese OTC market for the period January
1, 1989 through July 31, 1999, is illustrated by the table set forth below:
<TABLE>
<CAPTION>
% of Second Section of
Tokyo Stock Exchange
Number of ---------------------------
Registered Monthly Trading Year-end Trading Market
Year Companies Value Market Capitalization(2) Value Capitalization(2)
- ---- ------------- ------------------------- ------------------------- ------- -----------------
(Year End) (US$) (? (US$) (? Billions) (%) (%)
Millions)
(Thousands) (Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1989 263 1,235,445 170,442 85,293 12,231 30.1 60.4
1990 342 3,476,300 503,403 87,326 11,824 58.3 84.0
1991 430 3,102,631 417,428 102,834 12,880 132.2 107.5
1992 436 712,278 90,210 63,650 7,934 88.1 93.6
1993 477 2,146,123 238,606 100,349 11,228 89.4 104.0
1994 568 4,378,617 447,626 145,828 14,558 111.0 89.6
1995 678 5,213,183 490,352 141,247 14,535 119.0 93.9
1996 762 4,519,101 491,633 128,510 14,904 123.0 133.2
1997 834 1,830,198 221,454 71,021 9,227 128.2 131.4
1998 856 969,396 126,894 67,208 7,742 109.5 104.7
1999(1) 858 5,539,533 659,244 158,574 18,278 230.3 124.2
Note: (1) Through July 31.
(2) Excluding The Bank of Japan.
Source: Japan Securities Dealers Associations.
</TABLE>
Due to the sharp decline in listed stock prices in 1990, new public offerings
of shares of already listed or OTC registered companies were suspended from
March 1990 to December 1993, with limited exceptions. Similarly, due to the
sharp decline in OTC registered stock prices, new registrations of OTC stock
were suspended during the period from December 1991 to May 1992. The Ministry
of Finance, eight stock exchanges and the JSDA officially lifted the
restrictions on the number of IPO companies in December 1994. During 1999
(through August 31), 30 companies had completed initial public offerings and
registered their shares on the Japanese OTC market.
Market Performance
There are two indices for the Japanese OTC market: the Nikkei OTC Average and
the JASDAQ Index. The Nikkei OTC Average is published twice a day by Nihon
Keizai Shimbun in its morning and evening editions. The Nikkei OTC Average is
a price weighted index which includes all companies registered on the Japanese
OTC market except for The Bank of Japan. The indices utilized below for the
Tokyo Stock Exchange include the Nikkei Stock Average (the "Nikkei Average"),
a price weighted index of 225 selected stocks listed on the First Section of
the Tokyo Stock Exchange; the TOPIX, a capitalization weighted index of all
stocks listed on the First Section of the Tokyo Stock Exchange; and the Tokyo
Stock Exchange Second Section Stock Price Index (the "TSE Second Section
Index"), a capitalization weighted index of all stocks listed on the Second
Section of the Tokyo Stock Exchange. Since December 28, 1992, the JSDA has
published a capitalization weighted index, known as the JASDAQ Index, of all
stocks registered on the Japanese OTC market except for The Bank of Japan.
However, since the data in the JASDAQ Index is only available since October
28, 1991, the use of this index for long-term performance comparisons is still
limited although it provides some useful information concerning relevant
market activity.
Set forth below is certain statistical performance information relating to
the Japanese OTC market and the First and Second Sections of the Tokyo Stock
Exchange. These figures relate to the compounded annualized return as
measured by various indices for specified periods through August 31, 1999.
<TABLE>
<CAPTION>
Compounded Annualized Return
(U.S. $ Basis)
Nikkei TSE
OTC Nikkei Second Section
Period Ending August 31, 1999 Average Average TOPIX Index
- ----------------------------- ------- ------- ----- -----
(%) (%) (%) (%)
<S> <C> <C> <C> <C>
1 year................................... 213.3 58.7 69.1 157.8
2 years.................................. 36.1 1.8 5.1 28.6
3 years.................................. 2.5 (5.3) (2.4) 4.2
4 years.................................. 1.7 (3.9) (2.5) 4.3
5 years.................................. (3.8) (5.2) (4.3) (1.9)
6 years.................................. 0.5 (4.0) (3.4) 0.4
7 years.................................. 5.2 1.1 2.4 6.1
8 years.................................. (2.1) (0.4) 0.6 1.1
9 years.................................. (4.1) (1.4) (0.4) (2.0)
10 years................................. 3.4 (4.0) (3.1) (0.5)
Notes: Returns shown above exclude dividends.
Source: Nomura Asset Management Co., Ltd.
Set forth below is the rate of correlation during the period from August 31,
1994 through August 31, 1999, between the Japanese OTC market and the First
and Second Sections of the Tokyo Stock Exchange as measured by the
representative indices.
</TABLE>
<TABLE>
<CAPTION>
Correlation Coefficient (1)
Annualized Nikkei TSE
Standard OTC Nikkei Second Section
Deviation(2) Average Average TOPIX Index
<S> <C> <C> <C> <C> <C>
Nkkei OTC Average 31.6% 1.00 0.73 0.79 0.93
Nikkei Average 22.9% 1.00 0.97 0.82
TOPIX 21.5% 1.00 0.88
TSE Second Section Index 27.8% 1.00
Notes: 1) Correlation Coefficients have been calculated by the
Investment Advisor based on monthly changes in the indices for
the five-year period ended August 31, 1999, and indicate the
degree of relationship between two indices. Correlation
Coefficients can range between -1.00 and +1.00, with 0.0
showing no relationship, +1.00 showing perfect positive
correlation and -1.00 showing perfect inverse correlation.
2) Standard deviation is based on monthly changes in the indices
for the five-year period ended August 31, 1999.
Source: Nomura Asset Management Co., Ltd.
</TABLE>
For the five-year period ended August 31,1999, the Nikkei OTC Average had a
compounded annualized rate of return of (3.8%) as compared to that for TOPIX
of (4.3%) in U.S. dollar terms. The sharp rise of the Nikkei OTC Average
during the last one year by 213.3%, compared to a 58.7% rise of TOPIX, almost
offset its relatively weak performance against TOPIX for the preceding four
years. The TSE Second Section Index, which represents smaller capitalization
issues, recorded a higher compounded annualized rate of return of (1.9%) than
did the Nikkei OTC Average during such five-year period.
The Nikkei OTC Average exhibited low correlation with the Nikkei Average and
TOPIX and relatively high correlation with the TSE Second Section Index. The
higher correlation between the Nikkei OTC Average and the TSE Second Section
Index is attributable to the fact that both markets are dominated by small
capitalization issues.
The volatility of the Nikkei OTC Average was higher than that of any index
discussed above, when volatility is measured by standard deviations of monthly
changes in the indices for the same five-year period. The Manager believes
that Japanese OTC stocks may experience even greater volatility relative to
that of exchange listed stocks than the above data suggest.
Set forth below is further information concerning the performance of the
Japanese OTC market and the First and Second Sections of the Tokyo Stock
Exchange, as measured by the representative indices in yen terms. The
information is presented on a quarterly basis for the period form the first
quarter of 1994 through the second quarter of 1999.
<TABLE>
<CAPTION>
Quarterly Changes in Market Indices
(% changes; (Yen) basis)
Nikkei TSE
OTC Nikkei Second Section
Average Average TOPIX Index
<S> <C> <C> <C> <C> <C>
1994 1Q 19.9 9.7 8.6 17.8
2Q 11.0 8.0 7.0 13.7
3Q (4.7) (5.2) (5.8) (10.2)
4Q (3.3) 0.8 (1.1) (4.8)
1995 1Q (23.4) (18.2) (16.1) (19.5)
2Q (8.3) (10.1) (8.5) (12.6)
3Q 17.0 23.4 20.1 24.7
4Q 2.0 10.9 9.7 10.1
1996 1Q 5.2 7.7 3.8 0.2
2Q 10.9 5.3 4.6 8.7
3Q (9.2) (4.3) (5.0) (6.1)
4Q (15.6) (10.2) (9.6) (13.5)
1997 1Q (14.7) (7.0) (6.6) (9.9)
2Q 7.6 14.5 13.1 12.4
3Q (25.9) (13.2) (10.7) (22.5)
4Q (20.3) (14.7) (15.4) (16.5)
1998 1Q 9.1 8.3 6.5 11.9
2Q (3.4) (4.2) (1.7) (2.4)
3Q (13.2) (15.3) (15.2) (13.9)
4Q 9.9 3.3 4.2 4.9
1999 1Q 46.6 14.4 16.6 34.1
2Q 40.0 10.7 11.8 35.9
Source: Nomura Asset Management Co., Ltd.
</TABLE>
The following graph compares the relative performance of the Japanese OTC
market, as measured by the Nikkei OTC Average, and the First Section of the
Tokyo Stock Exchange, as measured by the Nikkei Average, for the period from
March 1, 1990 through August 31, 1999.
(GRAPH CHART OMITTED)
[insert description of graph]
JAPANESE OTC MARKET INDEX & NIKKEI AVERAGE COMPARISON
Source: Nomura Asset Management Co., Ltd.
Liquidity of the Japanese OTC Market
The liquidity of the Japanese OTC market is limited by the small number of
publicly held shares which trade on a regular basis. The overall market
liquidity has, however, improved in recent years. Average monthly trading
value has increased from or $1,235 million ((Yen)170 billion) in 1989 to $5,540
million or (Yen)659 billion in 1999 (through July 31). During the same period,
the market liquidity of the Japanese OTC market has increased significantly
relative to the Second Section of the Tokyo Stock Exchange. The average
monthly trading value of the Japanese OTC market as a percentage of the
average monthly trading value of the Second Section of the Tokyo Stock
Exchange increased from 30.1% in 1989 to 230.3% in 1999 (through July 31). The
increasing number of new companies registering with the Japanese OTC market
and growing institutional investor interest in the market have contributed to
the growth of the trading value. The Manager expects the market liquidity to
improve further as the number of OTC registered companies should continue to
increase.
Regulation of the Japanese OTC Market
The principal securities law in Japan is the Securities and Exchange Law (Law
No. 25 of 1948, as amended) (the "Securities and Exchange Law"). This law
provides overall regulation for the issuance of securities in public and
private offerings and for secondary market trading. Corporate issuers that
have registered securities under the Securities and Exchange Law, as well as
corporate issuers whose securities are listed on the Japanese stock exchanges
or are registered on the Japanese OTC market, become subject to the disclosure
requirement that they file annual securities reports, semi-annual reports and
extraordinary reports with the Director of Local Finance Bureau (or Fukuoka
Branch), an organ of the Ministry of Finance ("MOF"), pursuant to the
Securities and Exchange Law, which reports are made available for public
inspection. Further, registered OTC corporations must also file copies of such
reports with the JSDA for public inspection.
The so-called "five percent rule" of the Securities and Exchange Law is
applicable to publicly traded corporations, including registered OTC
corporations. When any person has become, solely or jointly, the holder of
more than five percent of the total voting shares issued by such a company, a
report concerning such shareholding must be filed with the Director of Local
Finance Bureau (or Fukuoka Branch) within five business days. A similar report
must also be made in respect of any subsequent change of one percent or more
in any such shareholding. For this purpose, voting shares issuable to such
person upon the conversion of convertible securities or the exercise of
warrants are taken into account in determining both the number of shares held
by such person and the issuer's total voting shares outstanding. Copies of
each such report must be furnished to the issuer of such securities and each
Japanese stock exchange on which the securities are listed or, in the case of
a registered OTC corporation, the JSDA.
The tender offer rules under the Securities and Exchange Law are applicable to
equity or equity-related securities issued by a company which is subject to
periodic disclosure requirements, such as a listed corporation or a registered
OTC corporation. All purchases of such securities made outside any Japanese
stock exchange or the OTC market must comply with the procedures provided in
such rules unless expressly exempted therefrom.
In the aftermath of irregularities and scandals in the Japanese securities
markets uncovered in 1991, the Securities and Exchange Law was amended with
effect from January 1, 1992, to prohibit securities companies from operating
discretionary accounts and from loss compensation or provision of artificial
gains in securities transactions, directly or indirectly, to their customers
and making offers or agreements with respect thereto except in the case of
compensation for damages, with the confirmation of the MOF, arising from
certain types of misconduct or failure to act on the part of securities
companies. Investors are prohibited from demanding that a securities company
agree to effect, and from receiving after such demand, directly or indirectly,
such loss compensation or gain provision.
The Securities and Exchange Surveillance Commission (the "Commission") was
established in July 1992 as an independent agency to the MOF to ensure
fairness of securities transactions. The Commission is comprised of three
commissioners appointed to a term of three years by the Prime Minister with
the Diet's consent and is supported by a staff of more than one hundred
persons. The Commission's authority to investigate cases involving allegations
of illegal conduct, such as insider trading and market manipulation on the OTC
market as well as on exchanges, includes broad investigatory powers and, in
addition, with the warrant of a court, compulsory entrance, search and
seizure. For such investigation purposes, certain investigatory powers are
delegated to the Commission. The Commission is empowered to refer a criminal
case to the public prosecutor's office, but the Commission has no power to
issue an administrative sanction, the exercise of such power being reserved to
other regulators upon the advice of the Commission.
The regulations on unfair transactions in securities markets under the
Securities and Exchange Law were amended in 1992 to cover the OTC market. Such
regulations include prohibitions against market manipulation and insider
trading. Provisions which prohibit directors, statutory auditors and principal
shareholders from effecting short swing transactions, which provisions
correspond to Section 16(b) of the U.S. Securities Exchange Act of 1934, as
amended (the "1934 Act"), are also applicable to registered OTC companies.
Likewise, the reporting obligations of directors, statutory auditors and
principal shareholders with respect to the purchase or sale of securities
issued by the subject corporation are applicable to persons associated with
registered OTC corporations.
Effective April 1, 1993, the Securities and Exchange Law was amended, among
other respects, (i) to permit banks and securities companies to compete in
each other's business field, subject to various regulations and restrictions,
(ii) to broaden the definition of "securities" under the Securities and
Exchange Law and (iii) to clarify and rationalize the concept of public
offering versus private placement and related regulations.
In parallel with the relaxation of restriction on repurchase by a corporation
of its own shares under the Commercial Code, with effect from December 1,
1994, the Securities and Exchange Law was amended to include relevant
provisions concerning self tender offer.
In a move toward separation of public finance section and finance business
section within the MOF, in June 1997 the Law Establishing Financial
Supervisory Agency was enacted. Pursuant to the Law, the Financial Supervisory
Agency (the "FSA") was established as an external agency of the Prime
Minister's Office in June 1998 with duties to regulate banking, insurance,
securities and other financial businesses and to make surveillance to insure
fairness of securities transactions. The Commission was then placed under the
FSA. Financial planning and other certain financial administration remained
with the MOF.
To implement measures to deal with failing financial institutions, the Law
Establishing Financial Reconstruction Commission was enacted in October 1998
and came into force as of December 15, 1998, whereby the Law Establishing
Financial Supervisory Agency was abolished. The Financial Reconstruction
Commission (the "FRC") was then established as an external agency of the Prime
Minister's Office. The FSA was also put under authority of the FRC; the
Commission under authority of the FSA.
The current regulators that enforce the Securities and Exchange Law consist of
the MOF, the FRC, the FSA and the Commission. A summary of the present
regulatory scheme is described below. Disclosure regulation is under the
control of the MOF. Regulation of financial institutions including securities
companies is administered by the FSA. Regulation of JSDA and exchanges is
under common control of the MOF and the FRC. Most of investors protection fund
regulation is under control of the MOF. With respect to regulation of
fraudulent transactions, the Commission has duties to make surveillance, the
MOF has powers to impose administrative sanctions on issuers of securities and
the FSA has powers to impose administrative sanctions on securities companies.
As part of implementation of an overall financial system reform plan, the
so-called Japanese version of the "Big Bang," the Financial System Reform Law,
including an amendment to the Securities and Exchange Law, was enacted in June
1998. The Law came into effect as of December 1, 1998, except that the shift
to disclosure based primarily on consolidated accounting came into effect as
of April 1, 1999, liberalization of brokerage commissions for stock trading is
scheduled to come into force on October 1, 1999, and the remaining
restrictions on business scope of securities subsidiaries of banks are
scheduled to be lifted between October 1, 1999 and March 31, 2000.
Major amendments to provisions of the Securities and Exchange Law in light of
OTC market regulation include: complete lifting of the ban on securities
derivatives, diversification of business operations of securities companies,
liberalization of brokerage commissions for stock trading, shift from
licensing system to registration system for securities companies, shift to
disclosure based primarily on consolidated accounting, strengthening of
insider trading and other fair trading rules, and introduction of investor
protection fund system.
The JSDA is a self-regulatory organization incorporated with authorizations
from and under supervision of the MOF and the FRC pursuant to the Securities
and Exchange Law. Its principal purposes are to insure fairness of and
facilitate securities transactions and to provide for protection of investors.
All registered Japanese securities companies and foreign securities companies
with registered principal branches in Japan are effectively required to be
members of the JSDA, which also has registered financial institutions
conducting securities business within certain limits as special members.
The JSDA is the organization in Japan primarily responsible for the
supervision of the Japanese OTC market. The JSDA has adopted Rules of Fair
Practice, which prescribe requirements applicable to transactions by its
members in Japanese OTC market transactions. These requirements include, among
other things, prohibitions against undertaking an order at the market price
(rather than at a specified price) from customers. The Rules of Fair Practice
also provide for the publication of quotations of registered OTC securities,
and set forth the requirements governing eligibility for registration on the
Japanese OTC market and impose disclosure requirements for its members who act
as sponsors with respect to registered OTC issuers. The JSDA also requires
that registered OTC corporations make timely disclosure with respect to their
financial position as well as the occurrence of events having a material
effect on the business of such corporations. Following the introduction of new
insider trading regulations, the JSDA has strengthened its regulations
concerning insider trading (particularly relating to monitoring such trading),
and its members have been asked to introduce new internal regulations setting
forth preventative measures against insider trading by their customers. The
JSDA may suspend transactions in registered OTC securities and cancel the
registration of corporate issuers on the OTC market in the event of a failure
to observe the requirements under the Rules of Fair Practice. The JSDA has
also adopted a Uniform Practice Code in order to standardize business
practices in an effort to achieve efficiency and to eliminate disputes
pertaining to OTC market transactions.
A custody and book-entry transfer and settlement system in effect since
October 1992 is currently available for all registered OTC securities. Under
this system, shareholders may deposit share certificates with the Japan
Securities Depositary Center ("JASDEC") through participants in the system
(which normally will be securities companies). The deposited shares will be
registered in the name of JASDEC in the OTC company's register of
shareholders. The beneficial owners of the deposited shares will be recorded
in the register of beneficial owners to be prepared by the OTC company and
will be entitled to the same rights and benefits as the shareholders
registered in the register of shareholders of the OTC company. For the purpose
of transferring the deposited shares, delivery of share certificates is not
required.
Recent Incentive Measures for Japanese Venture Businesses
Various incentive measures have been undertaken in the belief that the
creation of new venture businesses is critical for the restructuring of
Japanese industry and the promotion of the Japanese economy.
In April 1998, the Law Concerning Promotion for Transfer of Technological
Developments made by Universities, etc. to the Private Sector was enacted. The
purpose of this law is to promote the transfer of technological developments
from public or private universities and other research centers to the private
industrial sectors through Technological Licensing Organizations. Various
government subsidies and guarantees are applied to the approved TLOs.
In December 1998, the Law Concerning Promotion for Creation of New Business
was enacted. Under this law, the Small and Medium Companies Enterprise Agency
provides subsidies or equity to new businesses identified by such Agency.
In addition to other national measures, many regional governments and public
and private foundations and organizations are providing equity, subsidies,
loan or loan guarantees to venture businesses and also assisting the education
of venture capitalists.
JAPANESE FOREIGN EXCHANGE AND FOREIGN TRADE LAW
General
The Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders and
ministerial ordinances thereunder (the "Foreign Exchange Law") govern certain
aspects relating to the transfer of the shares and acquisition and holding of
the shares by "exchange non-residents" and by "foreign investors" (both as
hereinafter defined).
"Exchange non-residents" are defined as individuals who are not resident in
Japan and corporations whose principal offices are located outside Japan.
Generally, branches and other offices located within Japan of non-resident
corporations are regarded as exchange residents of Japan and branches and
other offices of Japanese corporations located outside Japan are regarded as
exchange non-residents of Japan.
"Foreign investors" are defined to be (i) individuals not resident in Japan,
(ii) corporations which are organized under the laws of foreign countries or
whose principal offices are located outside Japan and (iii) corporations not
less than 50 per cent. of the shares of which are held by (i) and/or (ii), or
a majority of the officers (or officers having the power or representation) of
which are non-resident individuals.
Pursuant to the amendments to the Foreign Exchange Law effected from April 1,
1998, with minor exceptions, all aspects of the foreign exchange and foreign
trade transactions which under the previous law were subject to licensing or
other approval or prior notification requirements were substituted by the post
facto reporting requirement.
The Fund is considered to be an exchange non-resident and foreign shareholder.
Acquisition of Shares
In general, the acquisition of shares of a Japanese company listed on a
Japanese stock exchange or traded on an OTC market in Japan ("listed shares")
by an exchange non-resident from an exchange resident of Japan is not subject
to the prior filing requirement, provided that the Foreign Exchange Law gives
the Minister of Finance the power in certain very exceptional circumstances to
require prior approval for any such acquisition. An exchange resident who
transferred listed shares to an exchange non-resident for value exceeding
(Yen)100 million must file a report concerning the transfer of securities with
the Minister of Finance within 20 days of the date of such transfer.
If a foreign shareholder acquires listed shares and as a result of such
acquisition, aggregated with their existing holdings, if any, such foreign
investor and certain related parties hold 10% or more of the issued shares of
the relevant company, the foreign investor must file a report of such
acquisition with the Minister of Finance and any other competent Minister
within 15 days from and including the date of such acquisition. In certain
exceptional cases, however, a prior notification of such acquisition must be
filed with the Minister of Finance and any other competent Minister, who may
modify or prohibit the proposed acquisition.
Dividends and Proceeds of Sales
Under the Foreign Exchange Law as currently in effect, dividends paid on, and
the proceeds of sales in Japan of, shares held by exchange non-residents may,
in general, be converted into any foreign currency and repatriated abroad. The
acquisition of shares by exchange non-residents by way of stock splits is not
subject to any of the foregoing requirements.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities (which for this purpose and under
the 1940 Act means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of
closed-end investment companies where no underwriter's or dealer's
commission or profit, other than customary broker's commission, is
involved and only if immediately thereafter not more than 10% of the
Fund's total assets would be invested in such securities.
3. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real
estate or interests therein or issued by companies which invest in
real estate or interests therein and the Fund may deal in forward
foreign exchange and the Fund may purchase and sell financial and
currency options futures contracts and related options.
4. Issue senior securities or borrow amounts in excess of 10% of' its
total assets taken at value.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
selling portfolio securities.
6. Make loans to other persons, except that the Fund may purchase debt
securities and enter into repurchase agreements in accordance with
its investment objective and policies.
7. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities (the deposit or payment
by the Fund of initial or variation margin in connection with
futures contracts and options transactions is not considered the
purchase of a security on margin).
8. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except to the
extent described herein.
9. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single
industry.
An additional investment restriction adopted by the Fund, which may be changed
by the Board of Directors, provides that the Fund may not mortgage, pledge,
hypothecate or in any manner transfer, as security for indebtedness, any
securities owned or held by the Fund except as may be necessary in connection
with borrowings mentioned in (4) above or except as may be necessary in
connection with futures and options transactions.
If a percentage restriction on investment policies or the investment or use of
assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute, at least annually, substantially all its net
investment income and its net capital gains, if any. However, as of February
28, 1999, the Fund had a capital loss carryforward which will offset capital
gain net income realized by the Fund after that date until the capital loss
carryforward has been completely offset or has expired. As a result, gains
realized by the Fund from the sale or other disposition of portfolio
securities and from certain transactions in futures and options will not give
rise to net capital gains until the capital loss carryforward has been
eliminated. The Fund does not intend to distribute amounts realized from such
transactions until its capital loss carryforward has been eliminated. For
details concerning the Fund's capital loss carryforward, see the Financial
Statements. See "Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to shareholders may be
automatically reinvested in shares of the Fund. Dividends and distributions
are taxable to shareholders under certain circumstances as described below,
whether they are reinvested in shares of the Fund or received in cash.
TAXES
General. It is the Fund's intention to distribute substantially all of the
Fund's net investment income if any, in dividend payments declared at least
annually. All net realized capital gains, if any, will be distributed to the
Fund's shareholders at least annually. Dividends and distributions may be
automatically reinvested in shares of the Fund at net asset value without an
initial sales charge. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash.
The Code requires a regulated investment company to pay a nondeductible 4%
excise tax to the extent the Fund does not distribute, during each calendar
year, the sum of 98% of its ordinary income, determined on a calendar year
basis, and 98% of its capital gains, determined, in general, on an October 31
year end, plus certain undistributed amounts from previous years. While the
Fund intends to distribute its income and capital gains in the manner
necessary to minimize imposition of the 4% excise tax, there can be no
assurance that a sufficient amount of the Fund's taxable income and capital
gains will be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Distributions. Dividends paid by the Fund from the Fund's ordinary income or
from an excess of net short-term capital gains over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends") are
taxable to shareholders as ordinary income. Distributions made from an excess
of net long-term capital gains over net short-term capital losses ("capital
gain dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time a shareholder has owned Fund shares. Any loss
upon the sale of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any long-term capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's shares, and
after such adjusted tax basis is reduced to zero, will constitute capital
gains to such holder (assuming the shares are held as a capital asset).
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any capital gain dividends as well as any amount of capital gain dividends.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from
ordinary income or capital gains, generally will not be eligible for the
dividends received deduction allowed to corporations under the Code. If the
Fund pays a dividend in January which was declared in October, November or
December of the previous year to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which the dividend was declared.
Foreign Withholding Taxes. Ordinary income dividends paid by the Fund to
shareholders who are nonresident aliens or foreign entities will be subject to
a 30% U.S. withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisors concerning the
applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may be subject to withholding and
other taxes imposed by Japan. Tax conventions between Japan and the U.S. may
reduce or eliminate such taxes. Shareholders may be able to claim U.S. foreign
tax credits with respect to such taxes, subject to certain conditions and
limitations contained in the Code. For example, certain retirement accounts
cannot claim foreign tax credits on investments in foreign securities held in
the Fund. In addition, recent legislation permits a foreign tax credit to be
claimed with respect to withholding tax on a dividend only if the shareholder
meets certain holding period requirements. The Fund also must meet these
holding period requirements, and if the Fund fails to do so, it will not be
able to "pass through" to shareholders the ability to claim a credit or a
deduction for the related foreign taxes paid by the Fund. If the Fund
satisfies the holding period requirements and if more than 50% in value of the
Fund's total assets at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible and may file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will
be required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them directly, and deduct such proportionate shares in
computing their taxable incomes or, alternatively, use them as foreign tax
credits against their U.S. income taxes. No deductions for foreign taxes,
moreover, may be claimed by non-corporate shareholders that do not itemize
deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting
from the Fund's election described in this paragraph but not be able to claim
a credit or deduction against such U.S. tax for foreign taxes treated as
having been paid by such shareholder. The Fund will report annually to its
shareholders the amount per share of such withholding taxes and other
information needed to claim the foreign tax credit.
Backup Withholding. Under certain provisions of the Code, some shareholders
may be subject to a 31% withholding tax on ordinary income dividends, capital
gain dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding.
A loss realized on a sale of shares of the Fund will be disallowed if other
Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
The Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. If the Fund purchases shares of an investment company
(or similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distribution from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Corporation may be eligible to
make an election with respect to certain PFICs in which the Fund owns shares
that will allow it to avoid the taxes on excess distributions. However, such
election may cause the Fund to recognize income in a particular year in excess
of the distributions received from PFICs. Alternatively, under recent
legislation the Fund could elect to "mark-to-market" at the end of each
taxable year all shares that it holds in PFICs. If it made this election, the
Fund would recognize as ordinary income any increase in the value of such
shares over their adjusted basis and as ordinary loss any increase in such
value to the extent it did not exceed prior increases. By making the
mark-to-market election, the Fund could avoid imposition of the interest
charge with respect to its distributions from PFICs, but in any particular
year might be required to recognize income in excess of the distributions the
Fund received from PFICs and its proceeds from disposition of PFIC stock.
Any dividends paid shortly after a purchase of Fund shares by an investor may
have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends. Furthermore, such dividends,
although in effect a return of capital, are subject to Federal income taxes.
Therefore, prior to purchasing shares of the Fund, the investor should
carefully consider the impact of dividends, including capital gain dividends,
which are expected to be or have been announced.
Special Rules for Certain Foreign Currency Transactions
In general, gains from foreign currencies and from foreign currency options,
foreign currency futures and forward foreign exchange contracts relating to
investments in stock, securities or foreign currencies will be qualifying
income for purposes of determining whether the Fund qualifies as a RIC. It is
currently unclear, however, who will be treated as the issuer of a foreign
currency instrument or how foreign currency options, futures and forward
foreign currency contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions in
a foreign currency other than the taxpayer's functional currency (i.e., unless
certain rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from certain debt instruments, from certain
forward contracts, from futures contracts that are not "regulated futures
contracts" and from unlisted options will be treated as ordinary income or
loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. In general, however,
such Code Section 988 gains or losses will increase or decrease the amount of
the Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary income dividend distributions, and all
or a portion of distributions made before the losses were realized but in the
same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing each shareholder's basis in the Fund shares
(assuming the shares were held as a capital asset).
The Fund may effect forward foreign exchange transactions that are subject to
the provisions of Code Section 1256. Such forward foreign exchange contracts
that are "section 1256 contracts" will be "marked to market" for Federal
income tax purposes at the end of each taxable year, i.e., each forward
foreign exchange contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, if the Fund is eligible to make
and does make a special election, gain or loss from transactions in forward
foreign exchange contracts subject to Code section 1256 will be 60% long-term
and 40% short-term capital gain or loss. Application of these rules to section
1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest rates with respect
to its investments.
Code section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain sales of securities
and certain closing transactions in forward foreign exchange contracts.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes. Certain states exempt from state income taxation dividends paid
by RICs which are derived from interest on U.S. Government obligations. State
law varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Japanese Taxes
In the opinion of Hamada & Matsumoto, Japanese counsel for the Fund, the
operations of the Fund as described in this Prospectus will not subject the
Fund to any Japanese income, capital gains or other taxes except for
withholding taxes on interest and dividends paid to the Fund by Japanese
corporations. In the opinion of such counsel, under the tax convention between
the United States and Japan (the "Convention") as currently in force, a
Japanese withholding tax at a rate of 15% is, with certain exceptions, imposed
upon dividends paid by Japanese corporations 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 rate of 10%.
Foreign, State and Local Taxes
Ordinary income and capital gain dividends may also be subject to state and
local taxes. Shareholders are advised to consult their own tax advisors
concerning foreign, state and local tax matters.
The foregoing is only a summary of certain rules and tax consequences
affecting the Fund and its shareholders. Shareholders are advised to consult
their own tax advisors with respect to the particular tax consequences to them
of an investment in the Fund.
-------------
Shareholders are urged to consult their own tax advisors regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors also
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of six individuals, four of whom
are not "interested persons" of the Fund as defined in the 1940 Act (the
"non-interested Directors"). 'The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the 1940 Act. The
Directors of the Fund are also directors of Jakarta Growth Fund, Inc., and
Korea Equity Fund, Inc., closed end non-diversified investment companies and
Nomura Pacific Basin Fund, Inc., an open-end diversified investment company
also managed by the Manager and advised by the Investment Advisor.
The Directors and principal executive officers of the Fund, their ages and
their principal occupations for at least the last five years are set fort
below. Unless otherwise noted, the address of each Director and officer is 180
Maiden Lane, New York, New York 10038-4936.
WILLIAM G. BARKER, JR. (66) - Director(2) - 111 Parsonage Road, Greenwich,
Connecticut 06830. Consultant to the television industry since 1991.
GEORGE H. CHITTENDEN (82) - Director(2) - 155 Buffalo Bay Neck Road, Madison,
Connecticut 06443. Director of Bank Audi (USA).
NOBUO KATAYAMA (52) - President and Director(1)(2) - President and Director of
the Manager since 1999. Marketing Officer of NAM from 1997 to 1999, Director
and Chief Portfolio Manager thereof from 1993 to 1997.
CHOR WENG TAN (63) - Director(2) - 3 Park Avenue, New York, New York 10016.
Managing Director for Education, The American Society of Mechanical
Engineering, since 1991. Director of Tround International, Inc. from 1984 to
1997.
ARTHUR R. TAYLOR (64) - Director(2) - 2400 Chew Street, Allentown,
Pennsylvania 18104. President of Muhlenberg College since 1992. Dean of the
Faculty of Business of Fordham University from 1985 to 1992. Chairman of
Arthur R. Taylor & Co. (investment firm). Director of Louisiana Land &
Exploration Company and Pitney Bowes, Inc. from 1982 to 1997.
JOHN F. WALLACE (71) - Vice President and Director(1)(2) - Senior Vice
President of the Manager since 1981, Secretary thereof since 1976, Treasurer
thereof since 1984 and Director thereof since 1986.
KEISUKE HARUGUCHI (49) - Vice President(1)(2) - Senior Vice President and
Director of the Manager since 1999; Senior Manager of the Investment Advisor
from 1997 to 1998; Manager of The Nomura Securities from 1994 to 1996.
JOHN J. BORETTI (47) - Secretary and Treasurer(1)(2) - Senior Vice President
of the Manager since 1996. Vice President and Chief Financial Officer of
Kidder Peabody Asset Management, Inc. and Kidder, Peabody Mutual Funds and
Vice President of Kidder, Peabody & Co., Inc. from 1993 to 1995.
- ------------
(1) "Interested person", as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director or officer of one or more other
investment companies for which the Manager or the Investment Advisors acts as
investment advisors.
The Fund's Audit and Nominating Committees consist of all non-affiliated
Directors. As of August 31, 1999, the Directors and officers of the Fund as a
group owned an aggregate of less than 1% of the outstanding shares of the
Fund.
Compensation of Directors
The Fund pays fees to each Director not affiliated with the Manager an annual
fee of $5,000 plus $500 per meeting attended, together with such Director's
actual out-of-pocket expenses related to attendance at such meetings. Fees and
out-of-pocket expenses paid to unaffiliated Directors aggregated $34,028 for
the year ended February 28, 1999.
The following table sets forth for the periods indicated compensation paid by
the Fund to its Directors and the aggregate compensation paid by all
investment companies managed by the Manager or advised by the Investment
Advisor to the Directors:
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued as from
From Fund for Part of Fund Complex Paid to
Its Fiscal Year Fund Expense for its Directors During the
Name of Director Ended Fiscal Year Ended Calendar Year Ended
February 28, 1999 February 28, 1999 December 31, 1998*
----------------- ----------------- ------------------
<S> <C> <C>
William G. Barker, Jr. $7,000 None $29,000
George H. Chittenden $7,000 None $29,000
Nobuo Katayama** -- None --
Chor Weng Tan $7,000 None $29,000
Arthur R. Taylor $7,000 None $29,000
John F. Wallace -- None --
- -----------
* In addition to the Fund the "Fund Complex" includes Jakarta Growth Fund,
Inc., Korea Equity Fund, Inc. and Nomura Pacific Basin Fund, Inc.
** Elected as a Director effective June 1, 1999.
</TABLE>
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS
The Manager
Nomura Asset Management U.S.A. Inc. (the "Manager") acts as the management
company for the Fund. The Manager, a New York corporation with its office
located at 180 Maiden Lane, New York, New York 10038-4936, is a majority-owned
subsidiary of Nomura Asset Management Co., Ltd. (the "Investment Advisor").
The Manager also provides global investment advisory services, primarily with
respect to Japanese securities and other Pacific Basin securities, for U.S.
institutional clients. The Manager also acts as one of the investment advisors
to six other investment companies (three of which are registered as investment
companies under the 1940 Act).
Under its management agreement with the Fund (the "Management Agreement"), the
Manager agrees to provide, or arrange for the provision of, investment
advisory and management services to the Fund, subject to the oversight and
supervision of the Board of Directors of the Fund. In addition to the
management of the Fund's portfolio in accordance with the Fund's investment
objective and policies and the responsibility for making decisions to buy,
sell or hold particular securities, the Manager is obligated to perform, or
arrange for the performance of the administrative and management services
necessary for the operation of the Fund. The Manager is also obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties thereunder.
Mr. Nobuo Katayama, President of the Fund and President of the Manager, is
primarily responsible for the day-to-day management of the portfolio of the
Fund. Mr. Katayama has held such responsibilities for the Fund since 1999
and has served as President of the Manager since 1999.
The Investment Advisor
In accordance with the terms of the Management Agreement, the Manager has
retained the Investment Advisor to act as the investment advisor for the Fund.
Pursuant to the investment advisory agreement between the Manager and the
Investment Advisor (the "Investment Advisory Agreement"), the Investment
Advisor has agreed to furnish the Fund with economic research, securities
analysis and investment recommendations and to review and render investment
advice with respect to the Fund. The Investment Advisor is not responsible for
the actual portfolio decisions of the Fund
The Investment Advisor, a Japanese corporation with its principal office
located at 2-1-14, Nihonbashi, Chuo-ku, Tokyo 103-8260, Japan, provides
investment advisory services for Japanese and international clients. The
Investment Advisor, together with its affiliates, had approximately $120
billion in assets under management as of March 31, 1999. The Investment
Advisor is owned approximately 30% by The Nomura Group Companies, including 5%
owned directly by Nomura Securities and approximately 70% owned by
unaffiliated persons with no single shareholder owning more than 5%. Nomura
Securities is the largest securities company in Japan.
Compensation and Expenses
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 (i.e., the average weekly value of the total assets of the Fund minus
the sum of accrued liabilities of the Fund) not in excess of $50 million,
1.00% of the Fund's average weekly net assets in excess of $50 million but not
in excess of $100 million and .90% of the Fund's average weekly net assets in
excess of $100 million. This fee is higher than that paid by most management
investment companies, but is comparable to fees paid by many U.S. investment
companies that invest primarily in a single foreign country. For services
performed under the Investment Advisory Agreement, the Investment Advisor
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. For purposes of this calculation, average weekly net assets are
determined at the end of each month on the basis of the average net assets of
the Fund for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week.
For the fiscal years ended February 28, 1999, February 28, 1998, and February
28, 1997, the Fund paid or accrued on behalf of the Manager aggregate
management fees of $556,245, $710,467, and $979,956, respectively. The Manager
informed the Fund that during the same fiscal years, the Manager paid
aggregate advisory fees of $253,062, $315,425, and $446,749, respectively, to
the Investment Advisor.
The Manager and the Investment Advisor will benefit from the Offer because
their fees are based on the average of the net assets of the Fund at the end
of each month included in the applicable performance period. It is not
possible to state precisely the amount of additional compensation the Manger
and the Investment Advisor will receive as a result of the Offer because it is
not known how many shares will be subscribed for and because the proceeds of
the Offer will be invested in additional portfolio securities which will
fluctuate in value. However, based on the estimated proceeds from the Offer,
assuming all the Rights are exercised in full at the estimated Subscription
Price of $__ per share, assuming the Fund issues an additional 25% of shares
to satisfy over-subscription requests and after payment of the Dealer Manager
fees and estimate of expenses, the Manager fees and the Investment Advisor
would receive additional annual fees of approximately $___ as a result of the
increase in assets under management over the Fund's current assets under
management.
The Management Agreement obligates the Manager to provide, or arrange for the
provision of, investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund, as well as the
fees of all Directors of the Fund who are affiliated persons of the Manager or
any of its affiliates. The Fund pays all other expenses incurred in its
operation, including, among other things, taxes; expenses for legal, tax and
auditing services; listing fees; costs of printing proxies, stock
certificates, shareholder reports and prospectuses; charges of the custodian,
sub-custodians and transfer agent; Securities and Exchange Commission fees;
expenses of registering the shares under Federal, state or foreign laws; fees
and expenses of unaffiliated Directors; accounting and pricing costs
(including the weekly calculation of net asset value); insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Fund.
Duration and Termination
Unless earlier terminated as described below, the Management Agreement and the
Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Fund and (b) by a majority of the Directors
who are not parties to such contracts or interested persons (as defined in the
1940 Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the shareholders of the Fund.
Enforceability
The Fund has been advised that there is substantial doubt as to the
enforceability in the courts of Japan of judgments against the Investment
Advisor predicated upon the civil liability provisions of the Federal
securities laws of the United States. The Investment Advisor is advised by
U.S. counsel with respect to the Federal securities laws of the United States.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Manager seeks to obtain the
best results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and the facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Manager generally
seeks reasonably competitive dealer spreads or commission rates, the Fund does
not necessarily pay the lowest spread or commission available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. The Fund expects that, consistent with
its policy of obtaining best net results and subject to the requirements of
the 1940 Act, a substantial amount of its portfolio transactions conducted on
an agency basis may be conducted through Nomura Securities. In addition,
subject to obtaining best net results, securities companies which provide
supplemental investment research to the Manager, may receive orders for
transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Manager under the
Management Agreement, and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information. It is
possible that certain of the supplementary investment research so received
will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, the Fund
may be the primary beneficiary of the research or services received as a
result of portfolio transactions effected for such other accounts or
investment companies.
The securities in which the Fund invests are traded primarily on the
over-the-counter market. As described under "The Japanese OTC Market," NTS
acts as a matching agent for securities companies wishing to trade OTC equity
securities. The Fund anticipates that a significant percentage of the orders
it places with securities companies for the purchase and sale of OTC
securities will continue to be placed by such firms with NTS. At present,
these transactions are generally effected on an agency basis by securities
companies in Japan since these firms do not typically maintain trading
positions in OTC equity securities. At times, securities companies may execute
OTC equity securities transactions on an agency basis without utilizing the
services of NTS. In effecting trades in OTC equity securities, including
trades effected through NTS, securities companies charge commissions to their
customers; the commission rates normally follow a schedule and vary based upon
the size of the transaction.
Because of the affiliation of Nomura Securities with the Fund, the Fund is
prohibited from engaging in certain transactions involving Nomura Securities
or its affiliates absent an exemptive order under the 1940 Act. Without such
an order, the Fund is prohibited from engaging in portfolio transactions with
Nomura Securities or its affiliates acting as principal. In addition, the Fund
is subject to limitations in purchasing securities in offerings in which
Nomura Securities or any of its affiliates participates as an underwriter and
may only affect such transactions in accordance with a Rule adopted under the
1940 Act. Since underwritten offerings of publicly-traded Japanese common
stocks are currently made at discounts (typically up to 10%) from current
market prices, the Fund's inability to purchase in such offerings would
prevent the Fund from taking advantage of such discounted prices.
Nomura Securities or any of its affiliates may serve as the Fund's broker in
transactions conducted on an exchange and in over-the-counter transactions
conducted on an agency basis. Costs associated with transactions in foreign
securities are generally higher than with transactions in U.S. securities,
although, as noted above, the Fund will endeavor to achieve the best net
results in effecting such transactions. For the fiscal year ended February 28,
1999, the Fund paid total brokerage commissions of $115,939, of which $14,734,
or 12.7%, was paid to Nomura Securities and its affiliates for effecting 17.8%
of the aggregate amount of transactions on which the Fund paid brokerage
commissions. For the fiscal year ended February 28, 1998, the Fund paid total
brokerage commissions of $145,421, of which $1,597, or 1.1%, was paid to
Nomura Securities and its affiliates for effecting 2.7% of the aggregate
amount of transactions on which the Fund paid brokerage commissions. For the
fiscal year ended February 28, 1997, the Fund paid total brokerage commissions
of $516,769, of which $17,696, or 3.4%, was paid to Nomura Securities and its
affiliates for effecting 1.8% of the aggregate amount of transactions on which
the Fund paid brokerage commissions.
Portfolio Turnover
The Manager will effect portfolio transactions without regard to holding
period, if, in its judgment, such transactions are advisable in light of a
change in circumstance in general market, economic or financial conditions. As
a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. Accordingly, while the Fund anticipates that
its annual turnover rate should not exceed 100% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. High
portfolio turnover involves correspondingly greater transaction costs in the
form of dealer spreads and brokerage commissions, which are borne directly by
the Fund.
JAPANESE FOREIGN INVESTMENT AND EXCHANGE CONTROL LAWS
In general, the acquisition of shares in a Japanese company listed on any
stock exchange in Japan or registered on the Japanese OTC market ("listed
shares") from a resident of Japan (including a corporation) by a non-resident
of Japan (including a corporation) requires prior notification to the MOF of
the proposed transaction. If the acquisition is made from or through a
securities company designated by the MOF, such prior notification is not
required, subject to the quantity restrictions referred to below. The Foreign
Exchange and Foreign Trade Control Law of Japan, as amended and cabinet orders
and regulations thereunder currently in effect (the "Foreign Exchange
Controls") give the MOF the power, in certain limited and exceptional
circumstances, to require prior approval for any such acquisition.
If a foreign investor intends to acquire listed shares of a Japanese
corporation and as a result of such acquisition the foreign investor would
directly or indirectly hold 10% or more of the total outstanding shares of
that corporation, such foreign investor is, in general, required to report
such acquisition to the MOF and certain other government ministers within 15
days from and including the date of such acquisition. In certain exceptional
cases, prior notification is required before such an acquisition. The Fund is
considered a foreign investor for this purpose.
The acquisition of shares by non-resident shareholders by way of dividends in
shares or stock splits as well as the acquisition of shares of a Japanese
company that are listed on a Japanese stock exchange or registered on the
Japanese OTC market by non-residents upon exercise of warrants or conversion
of convertible bonds issued outside Japan are not subject to any of the
foregoing prior notification requirements. Under the Foreign Exchange
Controls, dividends paid on shares held by non-residents of Japan and the
proceeds of any sales of shares within Japan may, in general, be converted
into any foreign currency and repatriated abroad. The Fund is considered a
non-resident of Japan for this purpose.
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), unless a
holder of Common Stock otherwise elects, all dividend and capital gains
distributions will be automatically reinvested by State Street Bank and Trust
Company, as agent for shareholders in administering the Plan (the "Plan
Agent"), in additional shares of Common Stock of the Fund. Holders of Common
Stock who elect not to participate in the Plan will receive all distributions
in cash paid by check mailed directly to the shareholder of record (or, if the
shares are held in street or other nominee name, then to such nominee) by
State Street Bank and Trust Company, as dividend disbursing agent. Such
participants may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to State Street Bank and Trust Company, as dividend paying agent,
at the address set forth below. Participation in the Plan is completely
voluntary and may be terminated or resumed at any time without penalty by
written notice if received by the Plan Agent not less than 10 days prior to
any dividend record date; otherwise such termination will be effective with
respect to any subsequently declared dividends and distributions.
Whenever the Fund declares an income dividend or a capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan
will receive the equivalent in shares of Common Stock. The shares will be
acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional shares
of unissued but authorized shares of Common Stock from the Fund ("newly issued
shares") or (ii) by purchase of outstanding shares of Common Stock on the open
market ("open-market purchases") on the NYSE or elsewhere. If on the payment
date for the dividend, the NAV per share of the Common Stock is equal to or
less than the market price per share of the Common Stock plus estimated
brokerage commissions (such condition being referred to herein as "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued; provided, that the maximum discount from the
then current market price per share on the date of issuance may not exceed 5%.
If on the dividend payment date, the net asset value per share is greater than
the market value (such condition being referred to herein as "market
discount"), the Plan Agent will invest the dividend amount in shares acquired
on behalf of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. If, before the Plan Agent has
completed its open-market purchases, the market price of a share of Common
Stock exceeds the net asset value per share, the average per share purchase
price paid by the Plan Agent may exceed the net asset value of the Fund's
shares, resulting in the acquisition of fewer shares than if the dividend had
been paid in newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan provides
that if the Plan Agent is unable to invest the full dividend amount in
open-market purchases during the purchase period or if the market discount
shifts to a market premium during the purchase period, the Plan Agent will
cease making open-market purchases and will invest the uninvested portion of
the dividend amount in newly issued shares at the close of business on the
last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant are held by the Plan Agent in non-certificated form in the name of
the participant, and each shareholder's proxy includes those shares purchased
or received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent administers
the Plan on the basis of the number of shares certified from time to time by
the record shareholders as representing the total amount registered in the
record shareholder's name and held for the account of beneficial owners who
are to participate in the Plan.
There are no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant is charged a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends. Currently, a $2.50
fee will be charged by the Plan Agent upon any cash withdrawal or termination.
This amount is in addition to any brokerage commissions charged participants
upon any cash withdrawal or termination of participation in the Plan.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal income tax that may be payable (or required to be
withheld) on such dividends. See "Taxes."
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Taxes" for a discussion of taxation of dividends.
Further experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct 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 should be directed to the Plan Agent at
P.O. Box 8209, Boston, Massachusetts 02266-8209.
NET ASSET VALUE
Net asset value per share is determined on the last business day in each week
based on valuations made as of 5:00 p.m., Tokyo time on such day. Tokyo time
is 14 hours ahead of Eastern Standard Time. If the last business day of a week
is a holiday in Japan, the Fund intends to determine its net asset value as of
5:00 p.m., Tokyo time on the prior business day in Japan. The net asset value
is computed by dividing the value of the securities held by the Fund plus any
cash or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time. Expenses, including the fees
payable to the Manager, are accrued on a daily basis. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the date of valuation.
Securities traded in the over-the-counter market are valued at the last
reported sales price available to the Fund 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 available to the Fund. Portfolio
securities which are traded on stock exchanges are valued at the last sale
price on the principal market on which such securities are traded, as of the
close of business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Other investments, including futures
contracts and related options, are stated at market value or otherwise at the
fair value at which it is expected they may be resold, as determined in good
faith by or under the direction of the Board of Directors.
Securities and 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. Such valuations and procedures are
reviewed periodically by the Board of Directors.
CAPITAL STOCK
The Fund is authorized to issue 100,000,000 shares of capital stock, par value
$.10 per share, all of which shares have been classified as Common Stock.
At August 31, 1999 there were 11,387,819 issued and outstanding shares of
Common Stock. The shares outstanding and those Shares offered hereby, when
issued and paid for, will be fully paid and non-assessable. Shareholders are
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders upon liquidation of the Fund. Shareholders are
entitled to one vote for each share held.
The Fund currently sends to its shareholders quarterly reports showing the
Fund's portfolio and other information. An annual report, containing financial
statements audited by independent accountants, is sent to shareholders each
year.
Set forth below is information with respect to the Common Stock as of August
31, 1999:
Amount Issued and
Amount Amount Held by Fund Outstanding
Authorized or for its Account (exclusive of Fund holdings)
100,000,000 shares 0 shares 11,387,819 shares
To the knowledge of the Fund, no person or entity owned of record or
beneficially 5% or more of the Fund's shares on August 31, 1999.
Repurchase of Shares and Conversion to Open-End Investment Company
The Fund's shares have generally traded at a premium in relation to net asset
value, and the public offering price for the Shares represents a discount from
NAV of approximately ____% over the per share net asset value of $______ on
________, 1999. However, shares of closed-end investment companies frequently
trade at a discount from net asset value. In recognition of the possibility
that the Fund's shares may trade at a discount in the future, the Fund may
from time to time take action to attempt to reduce or eliminate a market value
discount from net asset value, either by repurchasing Fund shares in the open
market when it can do so at prices below the current net asset value per
share, or by making a tender offer for shares of the Fund. The Board of
Directors considers making such repurchases or tender offers on a quarterly
basis. There is no assurance that the Directors will approve such repurchases
and/or tender offers.
There can be no assurance that repurchasing or tendering for shares of the
Fund will result in the shares trading at a price equal to their net asset
value. The market price of the shares of the Fund varies from net asset value
from time to time. When the Fund repurchases its shares in the market at a
price below their net asset value, the net asset value per share of those
shares that remain outstanding will be increased, but this does not
necessarily mean that the market price of those outstanding shares will be
affected either positively or negatively. The market price of the Fund's
shares is determined by, among other things, the relative demand for and
supply of such shares in the market, the Fund's investment performance, the
Fund's dividends and yield, and investor perception of the Fund's overall
attractiveness as an investment as compared with other investment
alternatives.
Subject to the Fund's fundamental policy with respect to borrowings, the Fund
may incur debt to finance repurchases and tenders of shares. See "Investment
Restrictions." However, the payment of interest on such borrowings will
increase the Fund's expenses and consequently reduce net income. In addition,
the Fund is required under the 1940 Act to maintain "asset coverage" of not
less than 300% of its "senior securities representing indebtedness" as such
terms are defined in the 1940 Act.
Any tender offer by the Fund will be made at a price based upon the net asset
value of the shares at the close of business on the last date of the tender
offer. No repurchases of shares will be made by the Fund during a tender
offer. Each offer will be made and shareholders notified in accordance with
the requirements of the 1934 Act as amended, and the 1940 Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. When a tender offer is authorized by the Fund's Board
of Directors, a shareholder wishing to accept the offer will be required to
tender all (but not less than all) of the shares owned by such shareholder (or
attributed to him for Federal income tax purposes under Section 318 of the
Code). The Fund will purchase all shares tendered in accordance with the terms
of the offer unless it determines to accept none of them (based upon one of
the conditions set forth below). Persons tendering shares may be required to
pay a service charge to help defray certain costs of the transfer agent. Any
such service charges will not be deducted from the consideration paid for the
tendered shares. During the period of a tender offer, the Fund's shareholders
will be able to determine the Fund's current net asset value (which will be
calculated weekly) by use of a toll-free telephone number or its Internet
website www.nomura-asset.com.
It is the Board of Directors' present policy (which may be changed by them)
not to authorize share repurchases or accept tenders if (1) such transactions,
if consummated, would result in delisting of the Fund's shares from the NYSE,
or cause the Fund to fail to qualify as a regulated investment company under
the Code; (2) the amount of securities tendered would require liquidation of
such a substantial portion of the Fund's investments that the Fund would not
be able to liquidate portfolio securities in an orderly manner in light of
existing market conditions and such liquidation would have an adverse effect
on the net asset value of the Fund or cause adverse tax consequences to the
detriment of the non-tendering Fund shareholders; or (3) there is, in the
judgment of the Directors, any material (a) legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) suspension of or limitation on prices for
trading securities generally on the NYSE or any foreign exchange on which
portfolio securities of the Fund are traded, (c) declaration of a banking
moratorium by Japanese or U.S. Federal or state authorities or any suspension
of payment by banks in Japan, the United States or the State of New York, (d)
limitation affecting the Fund or the issuers of its portfolio securities
imposed by U.S. Federal or state or foreign authorities on the extension of
credit by lending institutions or on the exchange of foreign currency, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States or Japan, or (f)
other event or condition which would have a material adverse effect on the
Fund or its shareholders. The Directors may modify these conditions in light
of further experience.
Although the Directors believe that share repurchases generally would have a
favorable effect on the market price of the Fund's shares, it should be
recognized that the acquisition of shares by the Fund will decrease its total
assets and therefore may increase the Fund's expense ratio.
In addition, if Fund shares are trading at a discount from net asset value,
the Board of Directors may also consider whether to submit to shareholders a
proposal that the Fund be converted to an open-end investment company. Any
such proposal would require the favorable votes of the Fund's outstanding
shares then entitled to vote and of the Directors as specified below.
Shareholders of an open-end investment company may require the company to
redeem their shares at any time (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption
charge, if any, as might be in effect at the time of redemption. The Board of
Directors may, however, determine that the Fund should not take any action to
convert the Fund to an open-end investment company or that, due to the
characteristics of the Fund's portfolio securities, it may be inappropriate to
convert the Fund to an open-end investment company.
Any decision by the Board of Directors to authorize a tender offer or share
repurchase will depend on the Fund's ability to obtain financing for the
transaction at a level which the Directors believe will have a significant
beneficial effect on the remaining Fund shareholders.
Certain Provisions of the Articles of Incorporation
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. A Director may be removed
from office only for cause by vote of the holders of at least 75% of the
shares of the Fund entitled to be voted on the matter.
As permitted by the Maryland General Corporation Law ("MGCL"), the Fund has
elected to be subject to the provisions of Section 3-602 of the MGCL which
deals with certain "business combinations," with "interested shareholders." An
"interested shareholder" is defined, in essence, as any person owning
beneficially, directly or indirectly, ten percent or more of the outstanding
voting stock of a Maryland corporation, unless the Board of Directors approved
the transaction whereby the person becomes the beneficial owner of ten percent
or more of the voting stock. A "business combination" is defined to include,
among other things, any merger or similar transaction subject to a statutory
vote and additional transactions involving transfers of assets or securities
in specified amounts to interested shareholders or their affiliates. Unless an
exemption to Section 3-602 applies, the Fund may not engage in any business
combination with an interested shareholder for a period of five years after
the interested shareholder became an interested shareholder, and thereafter
may not engage in a business combination unless it is recommended by the Board
of Directors and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by the holders of all outstanding voting stock of
the Fund, and (ii) 66 2/3% of the votes entitled to be cast by all holders of
outstanding shares of voting stock other than voting stock held by the
interested shareholder.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least 75% of the Fund's shares, then entitled to be voted, to
approve, adopt or authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with other corporations,
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities),
(iii) a liquidation or dissolution of the Fund, or
(iv) conversion of the Fund from a closed-end to an open-end investment
company,
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with
the by-laws, in which case the affirmative vote of a majority of the Fund's
shares is required.
The affirmative vote of 75% or more of the outstanding shares of the Fund then
entitled to vote is required to amend any or all of the foregoing provisions
and certain other provisions contained in the Articles of Incorporation.
The Board of Directors has determined that the super-majority voting
requirements described above, which are greater than the minimum requirement
under Maryland law or the 1940 Act, are generally in the best interests of
shareholders. Reference should be made to the Articles of Incorporation on
file with the U.S. Securities and Exchange Commission for the full text of
these provisions.
The provisions of the Articles of Incorporation described above and the Fund's
right to repurchase its shares could have the effect of depriving shareholders
of the opportunity to sell their shares at a premium over prevailing market
prices, by discouraging a third party from seeking to obtain control of the
Fund in a tender offer or similar transaction. The overall effect of these
provisions is to render more difficult the accomplishment of a merger or the
assumption of control by another entity or person.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The custodian, transfer agent, dividend disbursing agent and registrar for the
shares of the Fund is State Street Bank and Trust Company, P.O. Box 8209,
Boston, Massachusetts 02266-8209.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby will
be passed upon for the Fund by Brown & Wood LLP, New York, New York and for
the Dealer Manager by Rogers & Wells LLP, New York, New York. Brown & Wood LLP
and Rogers & Wells LLP may rely on an opinion of _________________, with
respect to matters of Maryland law. Matters of Japanese law will be passed
upon for the Fund and the Dealer Manager by Hamada & Matsumoto, Tokyo, Japan.
EXPERTS
The financial statements of the Fund for the year ended February 28, 1999,
included in this Prospectus have been so included in reliance on the report
dated April 7, 1999 of PricewaterhouseCoopers LLP, 1177 Avenue of the
Americas, New York, New York 10036, independent accountants, as experts in
accounting and auditing. The Fund's independent accountants are responsible
for auditing the annual financial statements of the Fund.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the 1934 Act, as
amended, and the 1940 Act and in accordance therewith is required to file
reports, proxy statements and other information with the Commission. Any such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Northeast Regional Office at Seven World
Trade Center, Suite 1300, New York, New York 10048; Pacific Regional Office at
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and
Midwest Regional Office at Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street. N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a web
site at http://www.sec.gov containing reports, proxy and information regarding
registrants, including the Fund, that file electronically with the Commission.
Reports, proxy statements and other information concerning the Fund can also
be inspected at the offices of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005. On occasion, the Fund may compare its performance to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc. or other industry publications. As with other performance
data, performance comparisons should not be considered indicative of the
Fund's relative performance for any future period.
Additional information regarding the Fund and the shares offered hereby is
contained in the Registration Statement on Form N-2, including amendments, and
exhibits thereto, relating to the shares filed by the Fund with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
and exhibits thereto. For further information with respect to the Fund and the
shares, reference is made to the Registration Statement. Statements contained
in this Prospectus as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment
of certain fees prescribed by the Commission.
FINANCIAL STATEMENTS
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
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS*
FEBRUARY 28,1999
% of
Market Net
Shares Cost Value Assets
------ ---- ------ --------
EQUITY SECURITIES
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
% 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
I-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
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
% of
Market Net
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 1,436,646 1,138,232 1.7
Integrated circuit sockets
---------- ---------- ----
Total Electronics ............................................... 7,266,074 5,256,018 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
--------- ---------- ----
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
% 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>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
% 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
---------- ---------- -----
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 1999
% 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
============ ============ =====
INVESTMENTS IN SHORT-TERM SECURITIES Amount
---------
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.
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
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999
<S> <C>
ASSETS:
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 Liabilities..................................................................................... 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
=============
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28,1999
INCOME:
<S> <C> <C>
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
+========== ==========
See notes to financial statements
</TABLE>
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 Advisor"), to act
as investment advisor 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
Advisor 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 Advisor 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.
<TABLE>
<CAPTION>
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.
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%
+ 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).
</TABLE>
Appendix I
HEDGING FOREIGN CURRENCY RISKS
The Fund is authorized to deal in forward foreign exchange between the
U.S. dollar and the Japanese yen as a hedge against possible variations in the
foreign exchange rate between these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price at the time of the contract. The Fund's
dealings in forward foreign exchange will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is
the purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund, either existing or anticipated, in
connection with the purchase and sale of its portfolio securities, or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not commit to additional position
hedging contracts if it has outstanding net liabilities of more than 15% of
its total assets from such contracts. Hedging against a decline in the value
of a currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value of the hedged
currency should rise. Moreover, it may not be possible for the Fund to hedge
against a devaluation that is so generally anticipated that the Fund is not
able to contract to sell the currency at a price above the devaluation level
it anticipates.
The Fund is also authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by
the Fund but not yet delivered, or committed or anticipated to be purchased by
the Fund. As an illustration, the Fund may use such techniques to hedge the
stated value in U.S. dollars of an investment in a yen-denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency
put option enabling it to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a
loss in the value of the yen relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or in part,
the cost of acquiring such a put option, the Fund may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date. By selling such call option in this
illustration, the Fund gives up on the opportunity to profit without limit
from increases in the relative value of the yen to the dollar.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or to sell a currency at a fixed price by a future date. Listed options
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike
prices and expiration dates. OTC options are two-party contracts and have
negotiated strike prices and expiration dates. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified
amount of a currency for a set price on a future date. Futures contracts and
options on futures contracts are traded on boards of trade or futures
exchanges. The Fund will not speculate in foreign currency options, futures or
related options. Accordingly, the Fund will not hedge a currency substantially
in excess of the market value of the securities denominated in such currency
which it owns, the expected acquisition price of securities which it has
committed or anticipates to purchase which are denominated in such currency,
and, in the case of securities which have been sold by the Fund but not yet
delivered, the proceeds thereof in its denominated currency. Further, the Fund
will segregate at its custodian cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or yen having a market value substantially representing any subsequent
decrease in the market value of such hedged security, less any initial or
variation margin held in the account of its broker. The Fund may not incur
potential net liabilities of more than 33 1/3 % of its total assets from
foreign currency options, futures or related options.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any such
contracts and options.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline, and it precludes the opportunity for gain
if the value of the hedged currency should rise. Moreover, it may not be
possible for the Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the currency at a
price above the devaluation it anticipates. The cost to the Fund of engaging
in foreign currency transactions varies with such factors as the currency
involved, the length of the contract period and the market conditions then
prevailing. Since transactions in foreign currency exchange are usually
conducted on a principal basis, no fees or commissions are involved.
Although certain risks are involved in options and futures transactions,
the Fund believes that, because it will engage in options and futures
transactions only for currency hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions.
The Fund must meet certain Federal income tax requirements under the Code, in
order to qualify for the special tax treatment afforded regulated investment
companies, including a requirement that less than 30% of its gross income be
derived from the sale or other disposition of securities held for less than
three months. Additionally, the Fund is required to meet certain
diversification requirements under the Code.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures. There can be no assurance, however, that a
liquid secondary market will exist at any specific time. Thus, it may not be
possible to close an options or futures transaction. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio. Due to the high volatility in the
price of options, the Fund bears a significant risk of losing the entire
premium when it purchases put or call options. There is also the risk of loss
by the Fund of margin deposits or collateral in the event of bankruptcy of a
broker with whom the Fund has an open position in an option or futures
contract. The risk of loss from investing in futures transactions is
theoretically unlimited.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by
commodity exchanges which limit the amount of fluctuation in a futures
contract price during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures positions. Prices have
in the past moved beyond the daily limit on a number of consecutive trading
days.
The successful use of these transactions also depends on the ability of
the Fund to forecast correctly the direction and extent of foreign exchange
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a futures contract is held by the Fund or
move in a direction opposite to that anticipated, the Fund may realize a loss
on the hedging transaction which is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Financial Statements:
Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of February 28, 1999
Schedule of Investments as of February 28, 1999
Notes to Financial Statements
Statement of Assets, Liabilities and Capital as of __________, 1999.
(2) Exhibits:
(a) -- Articles of Incorporation of the Fund
(b) -- By-Laws of the Fund
(c) -- Not applicable
(d)(1) -- Portions of the Articles of Incorporation and By-Laws of
the Fund defining the rights of holders of shares of
Common Stock of the Fund (a)
(d)(2) -- Form of specimen certificate for shares of Common Stock of
the Fund
(d)(3) -- Form of Exercise Form.*
(d)(4) -- Form of Notice of Guaranteed Delivery.*
(d)(5) -- Form of Nominee Holder Over-Subscription Form.*
(d)(6) -- Form of Beneficial Owner Certification.*
(d)(7) -- Form of Subscription Rights Agency Agreement.*
(e) -- Form of Dividend Reinvestment Plan
(f) -- Not applicable
(g)(1) -- Form of Management Agreement between the Fund and Nomura
Asset Management U.S.A. Inc.
(g)(2) -- Form of Investment Advisory Agreement between the Fund and
Nomura Asset Management Co., Ltd.
(h) -- Form of Dealer Manager Agreement between the Fund and *
(i) -- Not applicable
(j) -- Custodian Contract between the Fund and State Street Bank
and Trust Company
(k) -- Registrar, Transfer Agency and Service Agreement between the
Fund and State Street Bank and Trust Company
(1) -- Opinion and consent of Brown & Wood LLP, counsel to the Fund*
(m) -- Not applicable
(n) -- Consent of PricewaterhouseCoopers LLP, independent
auditors for the Fund
(o) -- Not applicable
(p) -- Certificate of Nomura Securities International, Inc.*
(q) -- Not applicable
(r)(1) -- Financial Data Schedule for the year ended February 28, 1999.
(r)(2) -- Financial Data Schedule for the six months ended August 31,
1999.*
- ------------
(a) Reference is made to Article V, Article VI (Sections 3 and 6), Article
VII, Article VIII, Article X, Article XII, Article XIII, Article XIV and
Article XV of the Fund's Articles of Incorporation, filed as Exhibit (a)
to this Registration Statement; and Article II, Article III (sections 1,
3 and 5), Article VI, Article VII, Article XII, Article XIII and Article
IV of the Registrant's By-Laws, filed as Exhibit (b) to this Registration
Statement.
* To be filed by amendment.
Item 25. Marketing Arrangements.
See Dealer Manager Agreement filed as Exhibit (h).
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<CAPTION>
<S> <C> <C>
Registration fees............................................................................. $ *
Stock Exchange listing fee.................................................................... *
Printing...................................................................................... *
Subscription Agent fees and expenses.......................................................... *
Information Agent fees and expenses........................................................... *
Dealer Manager fees and expense reimbursement................................................. *
Legal fees and expenses....................................................................... *
Accounting fees and expenses.................................................................. *
NASD fees..................................................................................... *
Miscellaneous................................................................................. ________
Total.................................................................................... $ *
============
</TABLE>
- ------------
*To be provided by amendment.
Item 27. Persons Controlled by or Under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities as of September 3, 1999:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
- -------------- ------------------------
<S> <C> <C>
Common Stock ($0.10 par value per share)............................ 305
</TABLE>
Item 29. Indemnification.
Reference is made to Article VI of the Fund's Articles of
Incorporation, Article VI of Fund's By-Laws, Section 2-418 of the Maryland
General Corporation Law, the Management Agreement filed as Exhibit (g)(1), the
Investment Advisory Agreement filed as Exhibit (g)(2) and the Dealer Manager
Agreement filed as Exhibit (h).
Article VI of the By-Laws provides that each officer and director of
the Fund shall be indemnified by the Fund to the full extent permitted under
the General Laws of the State of Maryland, subject to the provisions of the
Investment Company Act of 1940 (the "1940 Act"). The Fund has been advised
that such indemnity shall not protect any such person against any liability to
the Fund or any stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office. Absent
a court determination that an officer or director seeking indemnification was
not liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Fund to indemnify such person must be based upon
the reasonable determination of independent counsel of non-party independent
directors, after review of the facts, that such officer or director is not
guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for
actions based upon the 1940 Act may be concerned, such payments will be made
only on the following conditions: (i) the advances must be limited to amounts
used, or to be used, for the preparation or presentation of a defense to the
action, including costs connected with the preparation of a settlement; (ii)
advances may be made only upon receipt of a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive from the
Fund by reason of indemnification; and (iii) (a) such promise must be secured
by a surety bond, other suitable insurance or an equivalent form of security
which assures that any repayments may be obtained by the Fund without delay or
litigation, which bond, insurance or other form of security must be provided
by the recipient of the advance, or (b) a majority of a quorum of the Fund's
disinterested, non-party Directors, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily available
facts, that the recipient of the advance ultimately will be found entitled to
indemnification.
The Fund may purchase insurance on behalf of an officer or director
protecting such person, to the full extent permitted under the General Laws of
the State of Maryland, from liability arising from his activities as officer
or director of the Fund. The Fund, however, may not purchase insurance on
behalf of any officer or director of the Fund that protects or purports to
protect such person from liability to the Fund or to its shareholders to which
such officer or director would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Reference is made to Section ____ of the Dealer Manager Agreement
filed as Exhibit (h) to this Registration Statement, to Article V of the
Management Agreement filed as Exhibit (g)(1) herewith relating to limitation
of liability of the Manager, and to Article IV of the Investment Advisory
Agreement filed as Exhibit (g)(2) herewith for provisions relating to
limitation of liability of the Investment Adviser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "1933 Act") may be permitted to directors,
officers and controlling persons of the Fund and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Fund has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Fund of expenses
incurred or paid by a director, officer, or controlling person of the Fund and
the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person or the principal underwriter in connection with the shares
being registered, the Fund will, unless in the opinion of its counsel the
matter has been settled by the controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
Item 30. Business and Other Connections of the Investment Advisor.
Pursuant to the management and advisory arrangements described in the
Prospectus constituting Part A of this Registration Statement, the Fund's
Manager, Nomura Asset Management U.S.A. Inc. is responsible for providing the
Fund with advisory services. The Manager has entered into an Investment
Advisory Agreement with Nomura Asset Management Co., Ltd. (the "Investment
Advisor").
(a) The Manager provides investment advisory services to United
States and foreign clients. The Manager also acts as an investment advisor to
Jakarta Growth Fund, Inc. and Korea Equity Fund, Inc., (registered closed-end
investment companies) and Nomura Pacific Basin Fund, Inc., (a registered
open-end investment company). The principal address of the Manager is 180
Maiden Lane, New York, New York 10038-4936.
Set forth below is a list of each executive officer and director of
the Manager. indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
August 31, 1997 for his own account or in the capacity of director, officer,
partner or trustee.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME MANAGEMENT VOCATION OR EMPLOYMENT
---- ---------- ------------------------------------
<S> <C> <C>
Nobuo Katayama........... President and Director Marketing Officer of the Investment Advisor from
1997 to 1999.
John F. Wallace.......... Senior Vice President, None.
Treasurer, Secretary and
Director
Keisuke Haruguchi........ Senior Vice President and Director Senior Manager of Investment Advisor from 1997 to
1998.
Marti G. Subrahmanyam.... Director Professor, Stern School of Business, New York
University since 1974.
Brian X. Fitzgibbon...... Senior Vice President None.
Milton J. Ezrati......... Senior Vice President None.
John J. Boretti.......... Senior Vice President None.
Michael A. Morrongiello.. Senior Vice President Vice President of Bankers Trust Company from 1988
to 1998.
</TABLE>
(b) The Investment Advisor provides investment advisory services to
Japanese and international clients. The Investment Advisor is an investment
advisor to Jakarta Growth Fund, Inc. and Korea Equity Fund, Inc. (registered
closed-end investment companies) and Nomura Pacific Basin Fund, Inc. (a
registered open-end investment company). The principal address of NAM is
2-1-14, Nihonbashi, Chuo-ku, Tokyo 103-8260, Japan.
Set forth below is a list of the principal officers and directors of
the Investment Advisor indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since August 31, 1997 for his own account or in the capacity of director,
officer, partner or trustee.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE INVESTMENT ADVISOR PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------- ----------------------------------
<S> <C> <C>
Hitoshi Tonomura......... Chairman President of the Investment Advisor from 1997 to 1999.
Akira Kiyokawa........... President President of The Nomura Trust and Banking Co. Ltd.
from 1993 to 1999.
Atsushi Kinebuchi........ Executive Managing Director None.
Takanori Tanabe.......... Executive Managing Director None
Hisaaki Hino............. Executive Managing Director Director of Morgan Trust Bank from 1993 to 1998.
Kenjiro Hayashi.......... Director Executive Vice President of Nomura Research Institute
since 1992.
Haruo Miyako............. Senior Executive Officer Managing Director of the Investment Advisor from 1996
to 1998.
Yasuo Takebayashi........ Senior Executive Officer Managing Director of the Investment Advisor from 1996
to 1998.
Takanori Shimizu......... Senior Executive Officer Managing Director of the Investment Advisor from 1997
to 1998.
Akio Nakaniwa............ Senior Executive Officer Director of Nomura Securities from 1994 to 1998.
Hiroshi Tsujimura........ Executive Officer Director of Nomura Securities from 1997 to 1998.
Yukio Suzuki............. Executive Officer Director of Nomura Securities from 1997 to 1999.
Mitsunori Minamio........ Executive Officer Director of the Investment Advisor from 1996 to 1998.
Yasunobu Watase.......... Executive Officer Director of Nomura Securities from 1997 to 1999.
Naotake Hirasawa......... Executive Officer Director of the Investment Advisor from 1997 to 1998.
Takashi Harino........... Executive Officer Director of the Investment Advisor from 1997 to 1998,
Director of Nomura Asset Management (U.S.A.) Inc.
from 1996 to 1997.
Takahide Mizuno.......... Executive Officer Director of the Investment Advisor from 1997 to 1998,
Chief Investment Officer of the Investment Advisor
in 1997.
Yuji Mayaji.............. Executive Officer Investment Officer of the Investment Advisor in 1998,
Director of Research of The Sumitomo Trust and
Banking Co., Ltd. from 1995 to 1998.
Takahisa Matsuura........ Executive Officer Senior Investment Officer of the Investment Advisor
from 1998 to 1999 and General Manager of Nomura
Securities from 1996 to 1998.
Masato Tanaka............ Executive Officer General Manager of Nomura Securities from 1996 to
1999.
</TABLE>
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by
Section 31 (a) of the Investment Company Act of 1940, as amended, and the
rules promulgated thereunder are maintained at the offices of the Fund (180
Maiden Lane, New York, New York 10038-4936), and State Street Bank and Trust
Company, P.O. Box 8209, Boston, Massachusetts 02266-8209, its custodian and
transfer agent.
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(1) The Registrant undertakes to suspend offering of its shares until it
amends its prospectus if (a) subsequent to the effective date of its
Registration Statement, the NAV of its shares declines more than 10
percent from its NAV as of the effective date of the Registration
Statement or (b) the NAV increases to an amount greater than its net
proceeds as stated in the prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) (a) The Registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant under Rule 497(h) under
the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) The Registrant hereby undertakes that for the purposes of
determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(6) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, and State of New York, on the 15th day of
September, 1999.
JAPAN OTC EQUITY FUND, INC.
(Registrant)
By: /s/ NOBUO KATAYAMA
-----------------------------
(Nobuo Katayama, President)
Each person whose signature appears below hereby authorizes Nobuo Katayama and
John F. Wallace, or each of them, as attorney-in-fact, to sign on his or her
behalf, individually and in each capacity stated below, any amendment to this
Registration Statement (including post-effective amendments) and to file the
same, with all exhibits thereto, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following person in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C> <C>
Director and President
/S/ NOBUO KATAYAMA (Principal Executive Officer) September 15, 1999
- -------------------------------------------
(NOBUO KATAYAMA)
Director
/S/ JOHN F. WALLACE (Principal Financial and September 15 1999
- ------------------------------------------- Accounting Officer)
(JOHN F. WALLACE)
/S/ WILLIAM G. BARKER, JR. Director September 15 1999
- -------------------------------------------
(WILLIAM G. BARKER, JR.)
/S/ GEORGE H. CHITTENDEN Director September 15 1999
- -------------------------------------------
(GEORGE H. CHITTENDEN)
Director
- -------------------------------------------
(CHOR WENG TAN)
Director
- -------------------------------------------
(ARTHUR R. TAYLOR)
</TABLE>
EXHIBIT INDEX
(a) Articles of Incorporation
(b) By-laws
(d)(2) Form of Specimen Certificate
(e) Dividend Reinvestment Plan
(g)(1) Form of Management Agreement
(g)(1) Form of Investment Advisory Agreement
(j) Form of Custodian Contract
(k) Form of Registrar, Transfer Agency and Service Agreement
(n) Consent of PricewaterhouseCoopers LLP
(r)(1) Financial Data Schedule
Exhibit (a)
ARTICLES OF INCORPORATION
OF
JAPAN OTC EQUITY FUND, INC.
...............................................................................
THE UNDERSIGNED, John A. MacKinnon, whose post office address is c/o
Brown & Wood, One World Trade Center, New York, New York 10048, being at least
eighteen (18) years of age, does hereby act as an incorporator, under and by
virtue of the General Laws of the State of Maryland authorizing the formation
of corporations and with the intention of forming a corporation.
NAME
The name of the Corporation is JAPAN OTC EQUITY FUND, INC. (the
"Corporation").
PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed is to act
as a closed-end, management investment company under the federal Investment
Company Act of 1940, as amended, and to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations by the
General Laws of the State of Maryland now or hereafter in force.
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated, a corporation
of this State, and the post office address of the resident agent is 32 South
Street, Baltimore, Maryland 21202.
CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall have
authority to issue is One Hundred Million (100,000,000) shares, all of one
class called Common Stock, of the par values of Ten Cents ($0.10) per share
and of the aggregate par value of Ten Million Dollars ($10,000,000).
The Board of Directors may classify and reclassify any unissued shares of
capital stock into one or more additional or other classes or series as may be
established from time to time by setting or changing in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms of
such shares of stock and pursuant to such classification or reclassification
to increase or decrease the number of authorized shares of any existing class
or series.
Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, the holders of each class or series of capital stock shall be entitled
to dividends and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and distributions paid
with respect to the various classes or series of capital stock may vary among
such classes and series.
Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, on each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one vote for
each share standing in such holder's name on the books of the Corporation,
irrespective of the class or series thereof, and all shares of all classes and
series shall vote together as a single class; provided, however, that as to
any matter with respect to which a separate vote of any class or series is
required by the Investment Company Act of 1940, as amended, and in effect from
time to time, or any rules, regulations or orders issued thereunder, or the
Maryland General Corporation Law, such requirement as to a separate vote by
that class or series shall apply in addition to a general vote of all classes
and series as described above.
Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or
series of capital stock of the Corporation (or of any class or series entitled
to vote thereon as a separate class or series) to take or authorize any
action, the Corporation is hereby authorized (subject to the requirements of
the Investment Company Act of 1940, as amended, and in effect from time to
time, and any rules, regulations and orders issued thereunder) to take such
action upon the concurrence of a majority of the aggregate number of shares of
capital stock of the Corporation entitled to vote thereon (or a majority of
the aggregate number of shares of a class or series entitled to vote thereon
as a separate class or series).
Unless otherwise expressly provided in the charter of the Corporation,
including any Articles Supplementary creating any class or series of capital
stock, in the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of all classes and
series of capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the Corporation,
to share ratably in the remaining net assets of the Corporation.
Any fractional shares shall carry proportionately all the rights of a whole
share, excepting any right to receive a certificate evidencing such fractional
share, but including, without limitation, the right to vote and the right to
receive dividends.
All persons who shall acquire stock in the Corporation shall acquire the same
subject to the provisions of the charter and By-Laws of the Corporation. As
used in the charter of the Corporation, the terms "charter" and "Articles of
Incorporation" shall mean and include the Articles of Incorporation of the
Corporation as amended, supplemented and restated from time to time by
Articles of Amendment, Articles Supplementary, Articles of Restatement or
otherwise.
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE DIRECTORS AND STOCKHOLDERS
The number of directors of the Corporation shall be three (3), which number
may be increased pursuant to the By-Laws of the Corporation but shall never be
less than three (3). The names of the directors who shall act until the first
annual meeting or until their successors are duly elected and qualify are:
Takeo Nakamura
Haruo Sawada
John F. Wallace
The Board of Directors of the Corporation is hereby empowered to authorize the
issuance from time to time of shares of capital stock, whether now or
hereafter authorized, for such consideration as the Board of Directors may
deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the
General Laws of the State of Maryland.
Each director and such officer of the Corporation shall be indemnified by the
Corporation to the full extent permitted by the General Laws of the State of
Maryland, subject to the requirements of the Investment Company Act of 1940,
as amended. No amendment of these Articles of Incorporation or repeal of any
provision hereof shall limit or eliminate the benefits provided to directors
and officers under this provisions in connection with any act or omission that
occurred prior to such amendment or repeal.
To the fullest extent permitted by the General Laws of the State of Maryland,
subject to the requirements of the Investment Company Act of 1940, as amended,
no director or officer of the Corporation shall be personally liable to the
Corporation or its security holders for money damages. No amendment of these
Articles of Incorporation or repeal of any provision hereof shall limit or
eliminate the benefits provided to directors and officers under this provision
in connection with any act or omission that occurred prior to such amendment
or repeal.
The Board of Directors of the Corporation may make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law
which is specified as not subject to alteration or repeal by the Board of
Directors, subject to the requirements of the Investment Company Act of 1940,
as amended.
A director elected by the holders of capital stock may be removed for cause
(but not without cause), but only by action taken by the holders of at least
seventy-five percent (75%) of the shares of capital stock then entitled to
vote in an election to fill that directorship.
DENIAL OF PREEMPTIVE RIGHTS
No shareholder of the Corporation shall be reason of his holding
shares of capital stock have any preemptive or preferential right to purchase
or subscribe to any shares of capital stock of the Corporation, now or
hereafter to be authorized, or any notes, debentures, bonds or other
securities convertible into shares of capital stock, now or hereafter to be
authorized, whether or not the issuance of any such shares, or notes,
debentures, bonds or other securities would adversely affect the dividend or
voting rights of such shareholder; and the Board of Directors may issue shares
of any class of the Corporation, or any notes, debentures, bonds, other
securities convertible into shares of any class, either whole or in part, to
the existing shareholders.
DETERMINATION BINDING
Any determination made in good faith, so far as accounting matters
are involved, in accordance with accepted accounting practice by or pursuant
to the direction of the Board of Directors, as to the amount of assets,
obligations or liabilities of the Corporation, as to the amount of net income
of the Corporation from dividends and interest for any period or amounts at
any time legally available for the payment of dividends, as to the amount of
any reserves or charges set up and the proprietary thereof, as to the time of
or purpose for creating reserves or as to the use, alteration or cancellation
of any reserves or charges (whether or not any obligation or liability for
which such reserves or charges shall have been created, shall have been paid
or discharged or shall be then or thereafter required to be paid or
discharged), as to the price of any security owned by the Corporation or as to
any other matters relating to the issuance, sale, redemption or other
acquisition or disposition of securities or shares of capital stock of the
Corporation, and any reasonable determination made in good faith by the Board
of Directors as to whether any transaction constitutes a purchase of
securities on "margin", a sale of securities "short", or an underwriting of
the sale of, or a participation in any underwriting or selling group in
connection with the public distribution of, any securities, shall be final and
conclusive, and shall be binding upon the Corporation and all holders of its
capital stock, past, present and future, and shares of the capital stock of
the Corporation are issued and sold on the condition and understanding,
evidenced by the purchase of shares of capital stock or acceptance of share
certificates, that any and all such determination shall be binding as
aforesaid. No provision of these Articles of Incorporation shall be effective
to (a) require a waiver of compliance with any provision of the Securities Act
of 1933, as amended, or the Investment Company Act of 1940, as amended, or of
any valid rule, regulation or order of the Securities and Exchange Commission
thereunder or (b) protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or its security holders
to which he would otherwise be subject by reason of willful malfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
ELECTION BY INVESTMENT COMPANY
Pursuant to Section 3-603(e)(1) of the Maryland General Corporation
Law, the Corporation hereby elects to have the provisions of Section 3-602 of
the Maryland General Corporation Law apply to "business combinations" of the
Corporation with "interested stockholders" of the Corporation, as such terms
are defined in Section 3-601 of the Maryland General Corporation Law.
PRIVATE PROPERTY OF STOCKHOLDERS
The private property of shareholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
CONVERSION TO OPEN-END COMPANY
Notwithstanding any other provisions of these Articles of
Incorporation or the By-laws of the Corporation, a favorable vote of the
holders of at least seventy-five percent (75%) of the outstanding shares of
capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize an amendment to these Articles of
Incorporation of the Corporation that makes Common Stock a "redeemable
security" (as that term is defined in section 2(a)(32) the Investment Company
Act of 1940, as amended), unless such action has previously been approved,
adopted or authorized by the affirmative vote of at least two-thirds of the
total number of directors fixed in accordance with the By-Laws of the
Corporation, in which case the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Corporation entitled to vote
thereon shall be required.
MERGER, SALE OF ASSETS, LIQUIDATION
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, a favorable vote of the
holders of at least seventy-five percent (75%) of the outstanding shares of
capital stock of the Corporation entitled to be voted on the matter shall be
required to approve, adopt or authorize (i) a merger or consolidation or
statutory share exchange of the Corporation with any other corporation, (ii) a
sale of all or substantially all of the assets of the Corporation (other than
in the regular course of its investment activities), or (iii) a liquidation or
dissolution of the Corporation, unless such action has previously been
approved, adopted or authorized by the affirmative vote of at least two-thirds
of the total number of directors fixed in accordance with the By-Laws of the
Corporation, in which case the affirmative vote of the holders of a majority
of the outstanding shares of capital stock of the Corporation entitled to vote
thereon shall be required.
CONSENT OF STOCKHOLDERS
Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, any action taken by the
written consent of the holders of the outstanding shares of the capital stock
of the Corporation must be taken by unanimous written consent of the holders
of the outstanding shares of capital stock of the Corporation entitled to be
voted on the matter.
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in the manner now
or hereafter prescribed by statute, including any amendment which alters the
contract rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholders' rights and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation (and notwithstanding the fact
that a lesser percentage may be specified by law these Articles of
Incorporation or the By-Laws of the Corporation, the amendment or repeal of
Section (5) of Article V, Section (1), Section (3), Section (4), Section (5)
and Section (6) of Article VI, Article IX, Article X, Article XI, Article XII,
Article XIII Article XIV, or Article XV, of these Articles of Incorporation
shall require the affirmative vote of the holders of at least seventy-five
percent (75%) of the outstanding shares of capital stock of the Corporation
entitled to be voted on the matter.
IN WITNESS WHEREOF, the undersigned incorporator of JAPAN OTC EQUITY
FUND, INC. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be his act and further acknowledges that, to the best
of his knowledge, the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
Dated the 11th day of January, 1990.
/s/ John A. MacKinnon
Exhibit (b)
BY-LAWS
OF
JAPAN OTC EQUITY FUND, INC.
Offices
Principal Office. The principal office of the Corporation shall be in
the City of Baltimore, State of Maryland.
Principal Executive Office. The principal executive office of the
Corporation shall be at 180 Maiden Lane, New York, New York 10038.
Other Offices. The Corporation may have such other offices in such
places as the Board of Directors may from time to time determine.
Meetings of Stockholders
Annual Meeting. The annual meeting of the stockholders of the
Corporation for the election of directors and for the transaction of such
other business as may properly be brought before the meeting shall be held on
such day in August of each year as shall be designated annually by the Board
of Directors.
Special Meetings. Special meetings of the stockholders, unless
otherwise provided by law or by the Charter, may be called for any purpose or
purposes by a majority of the Board-of Directors, the President, or on the
written request of the holders of the outstanding shares of capital stock of
the corporation entitled to vote at such meeting to the extent permitted by
Maryland law.
Place of Meetings. The annual meeting and any special meeting of the
stockholders shall be held at such place within the United States as the Board
of Directors may from time to time determine.
Notice of Meetings; Waiver of Notice. Notice of the place, date and
time of the holding of each annual and special meeting of the stockholders and
the purpose or purposes of each special meeting shall be given personally or
by mail, not less than ten nor more than ninety days before the date of such
meeting, to each stockholder entitled to vote at such meeting and to each
other stockholder entitled to notice of the meeting. Notice by mail shall be
deemed to be duly given when deposited in the United States mail addressed to
the stockholder at his address as it appears on the records of the
Corporation, with Postage thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall
fix a new record date for an adjourned meeting, or the adjournment is for more
than one hundred and twenty days after the original record date, notice of
such adjourned meeting need not be given if the time and place to which the
meeting shall be adjourned were announced at the meeting at which the
adjournment is taken.
Quorum. At all meetings of the stockholders, the holders of a
majority of the shares of stock of the Corporation entitled to vote at the
meeting, present in person or by proxy, shall constitute a quorum for the
transaction of any business, except as otherwise provided by statute or by the
Charter. In the absence of a quorum no business may be transacted, except that
the holders of a majority of the shares of stock present in person or by proxy
and entitled to vote may adjourn the meeting from time to time, without notice
other than announcement thereat except as otherwise required by these By-Laws,
until the holders of the requisite amount of shares of Stock shall be so
present. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called. The absence from any meeting, in person or by proxy, of
holders of the number of shares of stock of the Corporation in excess of a
majority thereof which may be required by the laws of the State of Maryland,
the Investment Company Act of 1940, as amended, or other applicable statute,
the Charter, or these By-Laws, for action upon any given matter shall not
prevent action at such meeting upon any other matter or matters which may
properly come before the meeting, if there shall be present thereat, in person
or by proxy, holders of the number of shares of stock of the Corporation
required for action in respect of such other matter or matters.
Organization. At each meeting of the stockholders, the Chairman of
the Board (if one has been designated by the Board), or in his absence or
inability to act, the President, or in the absence or inability to act of the
Chairman of the Board and the President, a Vice President, shall act as
chairman of the meeting. The Secretary, or in his absence or inability to act,
any person appointed by the chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
Order of Business. The order of business at all meetings of the
stockholders shall be as determined by the chairman of the meeting.
Voting. Except as otherwise provided by statute or the Charter, each
holder of record of shares of stock of the Corporation having voting power
shall be entitled at each meeting of the stockholders to one vote for every
share of such stock standing in his name on the record of stockholders of the
Corporation as of the record date determined pursuant to Section 9 of this
Article or if such record date shall not have been so fixed, then at the later
of (i) the close of business on the day on which notice of the meeting is
mailed or (ii) the thirtieth day before the meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney- in- fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases where such proxy states that
it is irrevocable and where an irrevocable proxy is permitted by law. Except
as otherwise provided by statute, the Charter or these By-Laws, any corporate
action to be taken by vote of the stockholders shall be authorized by a
majority of the total votes cast at a meeting of stockholders by the holders
of shares present in person or represented by proxy and entitled to vote on
such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute
or these By-Laws, or determined by the chairman of the meeting to be
advisable, any such vote need not be by ballot. on a vote by ballot, each
ballot shall be signed by the stockholder voting, or by his proxy, if there be
such Proxy, and shall state the number of shares voted.
Fixing of Record Date. The Board of Directors may set a record date
for the purpose of determining stockholders entitled to vote at any meeting of
the stockholders. The record date, which may not be prior to the close of
business on the day the record date is fixed, shall be not more than ninety
nor less than ten days before the date of the meeting of the stockholders. All
persons who were holders of record of shares at such time, and not others,
shall be entitled to vote at such meeting and any adjournment thereof.
Inspectors. The Board may, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting or any adjournment
thereof. If the inspectors shall not be so appointed or if any of them shall
fail to appear or act, the chairman of the meeting may, and on the request of
any stockholder entitled to vote thereat shall, appoint inspectors. Each
inspector, before entering upon the discharge of his duties, shall take and
sign an oath to execute faithfully the duties of inspector at such meeting
with strict impartiality and according to the best of his ability. The
inspectors shall determine the number of shares outstanding and the voting
powers of each, the number of shares represented at the meeting, the existence
of a quorum, the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions arising
in connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the chairman
of the meeting or any stockholder entitled to vote thereat, the inspectors
shall make a report in writing of any challenge, request or matter determined
by them and shall execute a certificate of any fact found by them. No director
or candidate for the office of director shall act as inspector of an election
of directors. Inspectors need not be stockholders.
Consent of Stockholders in Lieu of Meeting. Except as otherwise
provided by statute or the Charter, any action required to be taken at any
annual or special meeting of stockholders, or any action which may be taken at
any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if the following are filed
with the records of stockholders meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stockholder entitled to vote
on the matter and (ii) a written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not entitled to vote
thereat.
Board of Directors
General Powers. Except as otherwise provided in the Charter, the
business and affairs of the Corporation shall be managed under the direction
of the Board of Directors. All powers of the Corporation may be exercised by
or under authority of the Board of Directors except as conferred on or
reserved to the stockholders by law or by the Charter or these By-Laws.
Number of Directors. The number of directors shall be fixed from time
to time by resolution of the Board of Directors adopted by a majority of the
Directors then in office; provided, however, that the number of directors
shall in no event be less than three nor more than fifteen. Any vacancy
created by an increase in Directors may be filled in accordance with Section 6
of this Article III. No reduction in the number of directors shall have the
effect of removing any director from office prior to the expiration of his
term unless such director is specifically removed pursuant to Section 5 of
this Article III at the time of such decrease. Directors need not be
stockholders. As long as any preferred stock of the Corporation is
outstanding, the number of Directors shall be not less than five.
Election and Term of Directors. Directors shall be elected annually,
by written ballot at the annual meeting of stockholders, or a special meeting
held for that purpose. The term of off ice of each director shall be from the
time of his election and qualification until the annual election of directors
next succeeding his election and until his successor shall have been elected
and shall have qualified, or until his death, or until he shall have resigned,
or have been removed as hereinafter provided in these By-Laws, or as otherwise
provided by statute or the Charter.
Resignation. A director of the Corporation may resign at any time by
giving written notice of his resignation to the Board or the Chairman of the
Board or the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Removal of Directors. Any director of the corporation may be removed
for cause (but not without cause) by the stockholders by a vote of
seventy-five percent (75%) of the outstanding shares of capital stock then
entitled to vote in the election of such director.
Vacancies. Subject to the provisions of the Investment Company Act of
1940, as amended, any vacancies in the Board, whether arising from death,
resignation, removal, an increase in the number of directors or any other
cause, shall be filled by a vote of the Board of Directors in accordance with
the Charter.
Place of Meetings. Meetings of the Board may be held at such place as
the Board may from time to time determine or as shall be specified in the
notice of such meeting.
Regular Meeting. Regular meetings of the Board may be held without
notice at such time and place as may be determined by the Board of Directors.
Special Meetings. Special meetings of the Board may be called by two
or more directors of the Corporation or by the chairman of the Board or the
President.
Telephone Meetings. Members of the Board of Directors or of any
committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in a meeting by
these means constitutes presence in person at the meeting.
Notice of Special Meetings. Notice of each special meeting of the
Board shall be given by the Secretary as hereinafter provided, in which notice
shall be stated the time and place of the meeting. Notice of each such meeting
shall be delivered to each director, either personally or by telephone or any
standard form of telecommunication, at least twenty-four hours before the time
at which such meeting is to be held, or by first-class mail, postage prepaid,
addressed to him at his residence or usual place of business, at least three
days before the day on which such meeting is to be held.
Waiver of Notice of Meetings. Notice of any special meeting need not
be given to any director who shall, either before or after the meeting, sign a
written waiver of notice which is filed with the records of the meeting or who
shall attend such meeting. Except as otherwise specifically required by these
By-Laws, a notice or waiver or notice of any meeting need not state the
purposes of such meeting.
Quorum and Voting. One-third, but not less than two, of the members
of the entire Board shall be present in person at any meeting of the Board in
order to constitute a quorum for the transaction of business at such meeting,
and except as otherwise expressly required by statute, the Charter, these
By-Laws, the Investment Company Act of 1940, as amended, or other applicable
statute, the act of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board. In the absence of a
quorum at any meeting of the Board, a majority of the directors present
thereat may adjourn such meeting to another time and place until a quorum
shall be present thereat. Notice of the time and place of any such adjourned
meeting shall be given to the directors who were not present at the time of
the adjournment and, unless such time and place were announced at the meeting
at which the adjournment was taken, to the other directors. At any adjourned
meeting at which a quorum is present, any business may be transacted which
might have been transacted at the meeting as originally called.
Organization. The Board may, by resolution adopted by a majority of
the entire Board, designate a Chairman of the Board, who shall preside at each
meeting of the Board. In the absence or inability of the chairman of the Board
to preside at a meeting, the President or, in his absence or inability to act,
another director chosen by a majority of the directors present, shall act as
chairman of the meeting and preside thereat. The Secretary (or, in his absence
or inability to act, any person appointed by the Chairman) shall act as
secretary of the meeting and keep the minutes thereof.
Written Consent of Directors in Lieu of a Meeting. Subject to the
provisions of the Investment Company Act of 1940, as amended, any action
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in writing, and the
writings or writing are filed with the minutes of the proceedings of the Board
or committee.
Compensation. Directors may receive compensation for services to the
Corporation in their capacities as directors or otherwise in such manner and
in such amounts as may be fixed from time to time by the Board.
Investment Policies. It shall be the duty of the Board of Directors
to direct that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
Prospectus of the Corporation included in the registration statement of the
Corporation relating to the initial public offering of its capital stock, as
filed with the Securities and Exchange Commission (or as such investment
policies and restrictions may be modified by the Board of Directors, or, if
required, by majority vote of the stockholders of the Corporation in
accordance with the Investment Company Act of 1940, as amended) and as
required by the Investment Company Act of 1940, as amended. The Board however,
may delegate the duty of management of the assets and the administration of
its day to day operations to an individual or corporate management company
and/or investment adviser pursuant to a written contract or contracts which
have obtained the requisite approvals, including the requisite approvals of
renewals thereof, of the Board of Directors and/or the stockholders of the
Corporation in accordance with the provisions of the Investment Company Act of
1940, as amended.
Committees
Executive Committee. The Board may, by resolution adopted by a
majority of the entire board, designate an Executive Committee consisting of
two or more of the directors of the corporation, which committee shall have
and may exercise all the powers and authority of the Board with respect to
all matters other than:
o the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the
Charter;
o the filling of vacancies on the Board of Directors;
o the fixing of compensation of the directors for serving on
the Board or on any committee of the Board, including the
Executive Committee;
o the approval or termination of any contract with an
investment adviser or principal underwriter, as such terms
are defined in the Investment Company Act of 1940, as
amended, or the taking of any other action required to be
taken by the Board of Directors by the Investment Company
Act of 1940, as amended;
o the amendment or repeal of these By-Laws or the adoption of
new By-Laws;
o the amendment or repeal of any resolution of the Board which
by its terms may be amended or repealed only by the Board;
o the declaration of dividends and the issuance of capital
stock of the Corporation; and
o the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its Proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
Other Committees of the Board. The Board of Directors may from time
to time, by resolution adopted by a majority of the whole Board, designate one
or more other committees of the Board, each such committee to consist of two
or more directors and to have such powers and duties as the Board of Directors
may, by resolution, prescribe.
General. One-third, but not less than two, of the members of any
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and
the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of
any committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board
shall have the power at any time to change the membership of any committee, to
fill all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall
be deemed to prevent the Board from appointing one or more committees
consisting in whole or in part of persons who are not directors of the
Corporation; provided, however, that no such committee shall have or may
exercise any authority or power of the Board in the management of the business
or affairs of the Corporation.
OFFICERS, AGENTS AND EMPLOYEES
Number of Qualifications. The officers of the Corporation shall be a
President, who shall be a director of the Corporation, a Secretary and a
Treasurer, each of whom shall be elected by the Board of Directors. The Board
of Directors may elect or appoint one or more Vice Presidents and may also
appoint such other officers, agents and employees as it may deem necessary or
proper. Any two or more offices may be held by the same person, except the
offices of President and Vice President, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity. Such officers
shall be elected by the Board of Directors each year at its first meeting held
after the annual meeting of stockholders, each to hold office until the next
meeting of the stockholders and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board may from time to time elect, or delegate to the President the power to
appoint, such officers (including one or more Assistant Vice Presidents, one
or more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such officers and agents shall have such duties and shall hold their offices
for such terms as may be prescribed by the Board or by the appointing
authority.
Resignations. Any officer of the Corporation may resign at any time
by giving written notice of resignation to the Board, the Chairman of the
Board, President or the Secretary. Any such resignation shall take effect at
the time specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt; and, unless
otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Removal of Officer, Agent or Employee. Any officer, agent or employee
of the Corporation may be removed by the Board of Directors with or without
cause at any time, and the Board may delegate such power of removal as to
agents and employees not elected or appointed by the Board of Directors. Such
removal shall be without prejudice to such person's contract rights, if any,
but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Vacancies. A vacancy in any office, whether arising from death,
resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the of f ice which shall be vacant in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Compensation. The compensation of the officers of the Corporation
shall be fixed by the Board of Directors, but this power may be delegated to
any officer in respect of other officers under his control.
Bonds or Other Security. If required by the Board, any officer, agent
or employee of the Corporation shall give a bond or other security for the
faithful performance of his duties, in such amount and with such surety or
sureties as the Board may require.
President. The President shall be the chief executive officer of the
Corporation. In the absence of the Chairman of the Board (or if there be
none), he shall preside at all meetings of the stockholders and of the Board
of Directors. He shall have, subject to the control of the Board of Directors,
general charge of the business and affairs of the Corporation. He may employ
and discharge employees and agents of the Corporation, except such as shall be
appointed by the Board, and he may delegate these powers.
Vice President. Each Vice President shall have such powers and
perform such duties as the Board of Directors or the President may from time
to time prescribe.
Treasurer. The Treasurer shall
have charge and custody of, and be responsible for, all the funds and
securities of the Corporation, except those which the Corporation has placed
in the custody of a bank or trust company or member of a national securities
exchange (as that term is defined in the Securities Exchange Act of 1934, as
amended) pursuant to a written agreement designating such bank or trust
company or member of a national securities exchange as custodian of the
property of the Corporation;
keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
cause all moneys and other valuable to be deposited to the credit of
the Corporation;
receive, and give receipts for, moneys due and payable, to the
Corporation from any source whatsoever;
disburse the funds of the Corporation and supervise the investment of
its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
in general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Board or the President.
Secretary. The Secretary shall
keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the Board
and the stockholders;
see that all notices are duly given in accordance with the provisions
of these By-Laws and as required by law;
be custodian of the records and the seal of the Corporation and affix
and attest the seal to all stock certificates of the Corporation (unless the
seal of the Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all other documents to
be executed on behalf of the Corporation under its seal;
see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept
and filed; and
in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board or the President.
Delegation of Duties. In case of the absence of any officer of the
Corporation, or for any other reason that the Board may deem sufficient, the
Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any director.
Indemnification
Each officer and director of the Corporation shall be indemnified by
the Corporation to the full extent permitted under the General Laws of the
State of Maryland, except that such indemnity shall not protect any such
person against any liability to the Corporation or any stockholder thereof to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, gross, negligence or reckless disregard of the duties involved in
the conduct of his office. Absent a court determination that an officer or
director seeking indemnification was not liable on the merits or guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, the decision by the Corporation
to indemnify such person must be based upon the reasonable determination of
independent counsel or non-party independent directors, after review of the
facts, that such officer or director is not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
The Corporation may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the General
Laws of the State of Maryland, from liability arising from his activities as
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any Officer or director of the Corporation
that protects or purports to protect such person from liability to the
Corporation or to its stockholders to which such officer or director would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Corporation may indemnify or purchase insurance to the extent
provided in this Article VI on behalf of an employee or agent who is not an
officer or director of the Corporation.
CAPITAL STOCK
Stock Certificates. Each holder of stock of the Corporation shall be
entitled upon request to have a certificate or certificates, in such form as
shall be approved by the Board, representing the number of shares of stock of
the Corporation owned by him, provided, however, that certificates for
fractional shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by or in the name of the
Corporation by the President or a Vice President and by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with
the seal of the Corporation. Any or all of the signatures or the seal on the
certificate may be a facsimile. in case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate shall be issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or registrar were
still in office at the date of issue.
Books of Account and Record of Stockholders. There shall be kept at
the principal executive office of the Corporation correct and complete books
and records of account of all the business and transactions of the
Corporation. There shall be made available upon request of any stockholder, in
accordance with Maryland law, a record containing the number of shares of
stock issued during a specified period not to exceed twelve months and the
consideration received by the Corporation for each such share.
Transfers of Shares. Transfers of shares of stock of the Corporation
shall be made on the stock records of the Corporation only by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and on surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions,
and to vote as such owner, and the Corporation shall not be bound to recognize
any equitable or legal claim to or interest in any such share or shares on the
part of any other person.
Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to
bear the signature or signatures of any of them. '
Lost, Destroyed or Mutilated Certificates. The holder of any
certificates representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have been
mutilated, and the Board may, in its discretion, require such owner or his
legal representatives to give to the Corporation a bond in such sum, limited
or unlimited, and in such form and with such surety or sureties, as the Board
in its absolute discretion shall determine, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss
or destruction of any such certificate, or issuance of a new certificate.
Anything herein to the contrary notwithstanding, the Board, in its absolute
discretion, may refuse to issue any such new certificate, except pursuant to
legal proceedings under the laws of the State of Maryland.
Fixing of a Record Date for Dividends and Distributions. The Board
may fix, in advance, a date not more than ninety days preceding the date fixed
for the payment of any dividend or the making of any distribution or the
allotment of rights to subscribe for securities of the Corporation, or for the
delivery of evidences of rights or evidences of interests arising out of any
change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Information to Stockholders and Others. Any stockholder of the
Corporation or his agent may inspect and copy during usual business hours the
Corporation's By-Laws, minutes of the proceedings of its stockholders, annual
statements of its affairs, and voting trust agreements on file at its
principal office.
SEAL
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner
reproduced.
FISCAL YEAR
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 31st day of August.
DEPOSITORIES AND CUSTODIANS
Depositories. The funds of the Corporation shall be deposited with
such banks or other depositories as the Board of Directors of the Corporation
may from time to time determine.
Custodians. All securities and other investments shall be deposited
in the safe keeping of such banks or other companies as the Board of Directors
of the Corporation may from time to time determine. Every arrangement entered
into with any bank or other company for the safe keeping of the securities and
investments of the Corporation shall contain provisions complying with the
Investment Company Act of 1940, as amended, and the general rules and
regulations thereunder.
EXECUTION OF INSTRUMENTS
Checks, Notes, Drafts, etc. Checks, notes, drafts, acceptances, bills
of exchange and other orders or obligations for the payment of money shall be
signed by such officer or officers or person or persons as the Board of
Directors by resolution shall from time to time designate.
Sale or Transfer of Securities. Stock certificates, bonds or other
securities at any time owned by the Corporation may be held on behalf of the
Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board
and, when so authorized to be held on behalf of the Corporation or sold,
transferred or otherwise disposed of, may be transferred from the name of the
Corporation by the signature of the President or a Vice President or the
Treasurer or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of independent public accountants which shall sign or
certify the financial statements of the Corporation which are filed with the
Securities and Exchange Commission shall be selected annually by the Board of
Directors and ratified by the stockholders in accordance with the provisions
of the Investment Company Act of 1940, amended.
ANNUAL STATEMENT
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of
the Corporation and at such other times as may be directed by the Board. A
report to the stockholders based upon each such examination shall be mailed to
each stockholder of the Corporation of record on such date with respect to
each report as may be determined by the Board, at his address as the same
appears on the books of the Corporation. Such annual statement shall also be
available at the annual meeting of stockholders and be placed on file at the
Corporation's principal office in the State of Maryland. Each such report
shall show the assets and liabilities of the Corporation as of the close of
the annual or quarterly period covered by the report and the securities in
which the funds of the Corporation were then invested. Such report shall also
show the Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or quarterly
period covered by the report and any other information required by the
Investment Company Act of 1940, as amended, and shall set forth such other
matters as the Board or such firm of independent public accountants shall
determine.
AMENDMENTS
These By-Laws or any of them may be amended, altered or repealed at
any regular meeting of the stockholders or at any special meeting of the
stockholders by a favorable vote of the holders of at least seventy-five
percent (75%) of the outstanding shares of capital stock of the Corporation
entitled to be voted on the matter, provided that notice of the proposed
amendment, alteration or repeal be contained in the notice of such special
meeting. These By-Laws may also be amended, altered or repealed by the
affirmative vote of a majority of the Board of Directors at any regular or
special meeting of the Board of Directors, except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the Investment Company Act of 1940, as amended.
Exhibit (d)(2)
COMMON STOCK COMMON STOCK
Number Shares
See Reverse For Certain Definitions This certificate is transferable
in Boston or in New York
JAPAN OTC EQUITY FUND, INC.
Acct. No. Alpha Code A Maryland Corporation Cusip
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.10 PAR VALUE OF
Japan OTC Equity Fund, Inc.
transferable on the books of said Corporation in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated: -------------------------
President
[Corporate Seal]
-------------------------
Secretary
Countersigned and Registered:
STATE STREET BANK AND TRUST COMPANY
Transfer Agent and Registrar
- -------------------------
Authorized Signature
JAPAN OTC EQUITY FUND, INC.
The Corporation will furnish without charge to each stockholder who
so requests a statement of the powers, designations, preferences and relative
participating, optional or other special rights of each class of shares or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Any such request should be made to the Secretary of
the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT--
_______Custodian_______
(Cust) (Minor)
TEN ENT--as tenants by under Uniform Gifts to Minors Act _______
the entireties (State)
JT TEN --as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer
unto ___________________________
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________________________ _______ Shares
(Please print or typewrite name and address of assignee)
of the capital stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint _____________________ Attorney to
transfer the said shares on the books of the within-named Corporation with
full power of substitution in the premises.
Dated:__________________
X:___________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the certificate in every
particular, without alteration or
enlargement, or any change whatever.
Exhibit (e)
JAPAN OTC EQUITY FUND, INC.
TERMS AND CONDITIONS OF
DIVIDEND REINVESTMENT PLAN
APPOINTMENT OF AGENT. YOU, ______________________ WILL ACT AS AGENT
FOR ME, AND WILL OPEN AN ACCOUNT FOR ME UNDER THE DIVIDEND REINVESTMENT PLAN
(THE "PLAN") IN THE SAME NAME AS MY PRESENT SHARES OF COMMON STOCK, PAR VALUE
$.10 PER SHARE ("COMMON STOCK"), OF JAPAN OTC EQUITY FUND, INC. (THE "FUND")
ARE REGISTERED, AND WILL AUTOMATICALLY PUT INTO EFFECT FOR ME THE DIVIDEND
REINVESTMENT OPTION OF THE PLAN AS OF THE FIRST RECORD DATE FOR A DIVIDEND OR
CAPITAL GAINS DISTRIBUTION (COLLECTIVELY REFERRED TO HEREIN AS A "DIVIDEND"),
PAYABLE AT THE ELECTION OF SHAREHOLDERS IN CASH OR SHARES OF COMMON STOCK.
DIVIDENDS PAYABLE IN COMMON STOCK. MY PARTICIPATION IN THE PLAN
CONSTITUTES AN ELECTION BY ME TO RECEIVE DIVIDENDS IN SHARES OF COMMON STOCK
WHENEVER THE FUND DECLARES A DIVIDEND. IN SUCH EVENT, THE DIVIDEND AMOUNT
SHALL AUTOMATICALLY BE MADE PAYABLE TO ME ENTIRELY IN SHARES OF COMMON STOCK
WHICH SHALL BE ACQUIRED BY THE AGENT FOR MY ACCOUNT, DEPENDING UPON THE
CIRCUMSTANCES DESCRIBED IN PARAGRAPH 3, EITHER (I) THROUGH RECEIPT OF
ADDITIONAL SHARES OF UNISSUED BUT AUTHORIZED SHARES OF COMMON STOCK FROM THE
FUND ("NEWLY ISSUED SHARES") AS DESCRIBED IN PARAGRAPH 6 OR (II) BY PURCHASE
OF OUTSTANDING SHARES OF COMMON STOCK ON THE OPEN MARKET ("OPEN-MARKET
PURCHASES") AS DESCRIBED IN PARAGRAPH 7.
DETERMINATION OF WHETHER NEWLY-ISSUED SHARES OR OPEN MARKET
PURCHASES. IF ON THE PAYMENT DATE FOR THE DIVIDEND (THE "VALUATION DATE"), THE
NET ASSET VALUE PER SHARE OF THE COMMON STOCK, AS DEFINED IN PARAGRAPH 8, IS
EQUAL TO OR LESS THAN THE MARKET PRICE PER SHARE OF THE COMMON STOCK, AS
DEFINED IN PARAGRAPH 8, PLUS ESTIMATED BROKERAGE COMMISSIONS (SUCH CONDITION
BEING REFERRED TO HEREIN AS "MARKET PREMIUM"), THE AGENT SHALL INVEST THE
DIVIDEND AMOUNT IN NEWLY ISSUED SHARES ON MY BEHALF AS DESCRIBED IN PARAGRAPH
6. IF ON THE VALUATION DATE, THE NET ASSET VALUE PER SHARE IS GREATER THAN THE
MARKET VALUE (SUCH CONDITION BEING REFERRED TO HEREIN AS "MARKET DISCOUNT"),
THE AGENT SHALL INVEST THE DIVIDEND AMOUNT IN SHARES ACQUIRED ON MY BEHALF IN
OPEN-MARKET PURCHASES AS DESCRIBED IN PARAGRAPH 7.
PURCHASE PERIOD FOR OPEN-MARKET PURCHASES. IN THE EVENT OF A MARKET
DISCOUNT ON THE VALUATION DATE, THE AGENT SHALL HAVE UNTIL THE LAST BUSINESS
DAY BEFORE THE NEXT EX-DIVIDEND DATE WITH RESPECT TO THE SHARES OF COMMON
STOCK OR IN NO EVENT MORE THAN 30 DAYS AFTER THE VALUATION DATE (THE "LAST
PURCHASE DATE") TO INVEST THE DIVIDEND AMOUNT IN SHARES ACQUIRED IN
OPEN-MARKET PURCHASES EXCEPT WHERE TEMPORARY CURTAILMENT OR SUSPENSION OF
PURCHASES IS NECESSARY TO COMPLY WITH APPLICABLE PROVISIONS OF FEDERAL
SECURITIES LAWS.
FAILURE TO COMPLETE OPEN-MARKET PURCHASES DURING PURCHASE PERIOD. IF
THE AGENT IS UNABLE TO INVEST THE FULL DIVIDEND AMOUNT IN OPEN-MARKET
PURCHASES DURING THE PURCHASE PERIOD BECAUSE THE MARKET DISCOUNT HAS SHIFTED
TO A MARKET PREMIUM OR OTHERWISE, THE AGENT WILL INVEST THE UNINVESTED PORTION
OF THE DIVIDEND AMOUNT IN NEWLY ISSUED SHARES AT THE CLOSE OF BUSINESS ON THE
LAST PURCHASE DATE AS DESCRIBED IN PARAGRAPH 4; EXCEPT THAT THE AGENT MAY NOT
ACQUIRE NEWLY ISSUED SHARES AFTER THE VALUATION DATE UNDER THE FOREGOING
CIRCUMSTANCES UNLESS IT HAS RECEIVED A LEGAL OPINION THAT REGISTRATION OF SUCH
SHARES IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933 OR UNLESS THE SHARES
TO BE ISSUED ARE REGISTERED UNDER SUCH ACT.
ACQUISITION OF NEWLY-ISSUED SHARES. IN THE EVENT THAT ALL OR PART OF
THE DIVIDEND AMOUNT IS TO BE INVESTED IN NEWLY ISSUED SHARES, YOU SHALL
AUTOMATICALLY RECEIVE SUCH NEWLY-ISSUED SHARES OF COMMON STOCK, INCLUDING
FRACTIONS, FOR MY ACCOUNT, AND THE NUMBER OF ADDITIONAL NEWLY-ISSUED SHARES OF
COMMON STOCK TO BE CREDITED TO MY ACCOUNT SHALL BE DETERMINED BY DIVIDING THE
DOLLAR AMOUNT OF THE DIVIDEND ON MY-SHARES TO BE INVESTED IN NEWLY-ISSUED
SHARES BY THE NET ASSET VALUE PER SHARE OF COMMON STOCK ON THE DATE THE SHARES
ARE ISSUED (THE VALUATION DATE IN THE CASE OF AN INITIAL MARKET PREMIUM OR THE
LAST PURCHASE DATE IN CASE THE AGENT IS UNABLE TO COMPLETE OPEN-MARKET
PURCHASES DURING THE PURCHASE PERIOD); PROVIDED, THAT THE MAXIMUM DISCOUNT
FROM THE THEN CURRENT MARKET PRICE PER SHARE ON THE DATE OF ISSUANCE SHALL NOT
EXCEED 5%.
MANNER OF MAKING OPEN-MARKET PURCHASES. IN THE EVENT THAT THE
DIVIDEND AMOUNT IS TO BE INVESTED IN SHARES OF COMMON STOCK ACQUIRED IN
OPEN-MARKET PURCHASES, YOU SHALL APPLY THE AMOUNT OF SUCH DIVIDEND ON MY
SHARES (LESS MY PRO RATA SHARE OF BROKERAGE COMMISSIONS INCURRED WITH RESPECT
TO YOUR OPEN-MARKET PURCHASES) TO THE PURCHASE ON THE OPEN MARKET OF SHARES OF
THE COMMON STOCK FOR MY ACCOUNT. OPEN-MARKET PURCHASES MAY BE MADE ON ANY
SECURITIES EXCHANGE WHERE THE COMMON STOCK IS TRADED, IN THE OVER-THE-COUNTER
MARKET OR IN NEGOTIATED TRANSACTIONS AND MAY BE ON SUCH TERMS AS TO PRICE,
DELIVERY AND OTHERWISE AS YOU SHALL DETERMINE. MY FUNDS HELD BY YOU UNINVESTED
WILL NOT BEAR INTEREST, AND IT IS UNDERSTOOD THAT, IN ANY EVENT, YOU SHALL
HAVE NO LIABILITY IN CONNECTION WITH ANY INABILITY TO PURCHASE SHARES WITHIN
30 DAYS AFTER THE INITIAL DATE OF SUCH PURCHASE AS HEREIN PROVIDED, OR WITH
THE TIMING OF ANY PURCHASES AFFECTED. YOU SHALL HAVE NO RESPONSIBILITY AS TO
THE VALUE OF THE COMMON STOCK ACQUIRED FOR MY ACCOUNT. FOR THE PURPOSES OF
CASH INVESTMENTS YOU MAY COMMINGLE MY FUNDS WITH THOSE OF OTHER SHAREHOLDERS
OF THE FUND FOR WHOM YOU SIMILARLY ACT AS AGENT, AND THE AVERAGE PRICE
(INCLUDING BROKERAGE COMMISSIONS) OF ALL SHARES PURCHASED BY YOU AS AGENT IN
THE OPEN MARKET SHALL BE THE PRICE PER SHARE ALLOCABLE TO ME IN CONNECTION
WITH OPEN-MARKET PURCHASES.
MEANING OF MARKET PRICE AND NET ASSET VALUE. FOR ALL PURPOSES OF THE
PLAN: (A) THE MARKET PRICE OF THE COMMON STOCK ON A PARTICULAR DATE SHALL BE
THE LAST SALES PRICE ON THE NEW YORK STOCK EXCHANGE (THE "EXCHANGE") ON THAT
DATE, OR, IF THERE IS NO SALE ON THE EXCHANGE ON THAT DATE, THEN THE MEAN
BETWEEN THE CLOSING BID AND ASKED QUOTATIONS FOR SUCH STOCK ON THE EXCHANGE ON
SUCH DATE AND (B) NET ASSET VALUE PER SHARE OF THE COMMON STOCK ON A
PARTICULAR DATE SHALL BE AS DETERMINED BY OR ON BEHALF OF THE FUND.
REGISTRATION OF SHARES ACQUIRED PURSUANT TO THE PLAN. YOU MAY HOLD MY
SHARES OF COMMON STOCK ACQUIRED PURSUANT TO THE PLAN, TOGETHER WITH THE SHARES
OF OTHER SHAREHOLDERS OF THE FUND ACQUIRED PURSUANT TO THE PLAN, IN
NONCERTIFICATED FORM IN YOUR NAME OR THAT OF YOUR NOMINEE. YOU WILL FORWARD TO
ME ANY PROXY SOLICITATION MATERIAL AND WILL VOTE ANY SHARES SO HELD FOR ME
ONLY IN ACCORDANCE WITH THE PROXY RETURNED BY ME TO THE FUND. UPON MY WRITTEN
REQUEST, YOU WILL DELIVER TO ME, WITHOUT CHARGE, A CERTIFICATE OR CERTIFICATES
FOR THE FULL SHARES HELD BY YOU FOR MY ACCOUNT.
CONFIRMATIONS. YOU WILL CONFIRM TO ME EACH ACQUISITION MADE FOR MY
ACCOUNT AS SOON AS PRACTICABLE BUT NOT LATER THAN 60 DAYS AFTER THE DATE
THEREOF.
FRACTIONAL INTERESTS. ALTHOUGH I MAY FROM TIME TO TIME HAVE AN
UNDIVIDED FRACTIONAL INTEREST (COMPUTED TO THREE DECIMAL PLACES) IN A SHARE OF
THE FUND, NO CERTIFICATES FOR A FRACTIONAL SHARE WILL BE ISSUED. HOWEVER,
DIVIDENDS AND DISTRIBUTIONS ON FRACTIONAL SHARES WILL BE CREDITED TO MY
ACCOUNT. IN THE EVENT OF TERMINATION OF MY ACCOUNT UNDER THE PLAN, YOU WILL
ADJUST FOR ANY SUCH UNDIVIDED FRACTIONAL INTEREST IN CASH AT THE MARKET VALUE
OF THE FUND'S SHARES AT THE TIME OF TERMINATION LESS THE PRO RATA EXPENSE OF
ANY SALE REQUIRED TO MAKE SUCH AN ADJUSTMENT.
STOCK DIVIDENDS OR SHARE PURCHASE RIGHTS. ANY STOCK DIVIDENDS OR
SPLIT SHARES DISTRIBUTED BY THE FUND ON SHARES HELD BY YOU FOR ME WILL BE
CREDITED TO MY ACCOUNT. IN THE EVENT THAT THE FUND MAKES AVAILABLE TO ITS
SHAREHOLDERS RIGHTS TO PURCHASE ADDITIONAL SHARES OR OTHER SECURITIES, THE
SHARES HELD FOR ME UNDER THE PLAN WILL BE ADDED TO OTHER SHARES HELD BY ME IN
CALCULATING THE NUMBER OF RIGHTS TO BE ISSUED TO ME.
SERVICE FEE. YOUR SERVICE FEE FOR HANDLING CAPITAL GAINS
DISTRIBUTIONS OR INCOME DIVIDENDS WILL BE PAID BY THE FUND. I WILL BE CHARGED
FOR MY PRO RATA SHARE OF BROKERAGE COMMISSIONS ON ALL OPEN MARKET PURCHASES.
TERMINATION OF ACCOUNT. I MAY TERMINATE MY ACCOUNT UNDER THE PLAN BY
NOTIFYING YOU IN WRITING. SUCH TERMINATION WILL BE EFFECTIVE IMMEDIATELY IF MY
NOTICE IS RECEIVED BY YOU NOT LESS THAN TEN DAYS PRIOR TO ANY DIVIDEND OR
DISTRIBUTION RECORD DATE; OTHERWISE SUCH TERMINATION WILL BE EFFECTIVE ON THE
FIRST TRADING DAY AFTER THE PAYMENT DATE FOR SUCH DIVIDEND OR DISTRIBUTION
WITH RESPECT TO ANY SUBSEQUENT DIVIDEND OR DISTRIBUTION. THE PLAN MAY BE
TERMINATED BY YOU OR THE FUND UPON NOTICE IN WRITING MAILED TO ME AT LEAST 90
DAYS PRIOR TO ANY RECORD DATE FOR THE PAYMENT OF ANY DIVIDEND OR DISTRIBUTION
BY THE FUND. UPON ANY TERMINATION YOU WILL CAUSE A CERTIFICATE OR CERTIFICATES
FOR THE FULL SHARES HELD FOR ME UNDER THE PLAN AND CASH ADJUSTMENT FOR ANY
FRACTION TO BE DELIVERED TO ME WITHOUT CHARGE. IF I ELECT BY NOTICE TO YOU IN
WRITING IN ADVANCE OF SUCH TERMINATION TO HAVE YOU SELL PART OR ALL OF MY
SHARES AND REMIT THE PROCEEDS TO ME, YOU ARE AUTHORIZED TO DEDUCT BROKERAGE
COMMISSIONS FOR THIS TRANSACTION FROM THE PROCEEDS.
AMENDMENT OF PLAN. THESE TERMS AND CONDITIONS MAY BE AMENDED OR
SUPPLEMENTED BY YOU OR THE FUND AT ANY TIME OR TIMES BUT, EXCEPT WHEN
NECESSARY OR APPROPRIATE TO COMPLY WITH APPLICABLE LAW OR THE RULES OR
POLICIES OF THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, ONLY BY MAILING TO ME APPROPRIATE WRITTEN NOTICE AT LEAST 90 DAYS
PRIOR TO THE EFFECTIVE DATE THEREOF. THE AMENDMENT OR SUPPLEMENT SHALL BE
DEEMED TO BE ACCEPTED BY ME UNLESS, PRIOR TO THE EFFECTIVE DATE, THEREOF, YOU
RECEIVE WRITTEN NOTICE OF THE TERMINATION OF MY ACCOUNT UNDER THE PLAN. ANY
SUCH AMENDMENT MAY INCLUDE AN APPOINTMENT BY YOU IN YOUR PLACE AND STEAD OF A
SUCCESSOR AGENT UNDER THESE TERMS AND CONDITIONS, WITH FULL POWER AND
AUTHORITY TO PERFORM ALL OR ANY OF THE ACTS TO BE PERFORMED BY THE AGENT UNDER
THESE TERMS AND CONDITIONS. UPON ANY SUCH APPOINTMENT OF AN AGENT FOR THE
PURPOSE OF RECEIVING DIVIDENDS AND DISTRIBUTIONS, THE FUND WILL BE AUTHORIZED
TO PAY TO SUCH SUCCESSOR AGENT, FOR MY ACCOUNT, ALL DIVIDENDS AND
DISTRIBUTIONS PAYABLE ON COMMON STOCK OF THE FUND HELD IN MY NAME OR UNDER THE
PLAN FOR RETENTION OR APPLICATION BY SUCH SUCCESSOR AGENT AS PROVIDED IN THESE
TERMS AND CONDITIONS.
EXTENT OF RESPONSIBILITY OF AGENT. YOU SHALL AT ALL TIMES ACT IN GOOD
FAITH AND AGREE TO USE YOUR BEST EFFORTS WITHIN REASONABLE LIMITS TO INSURE
THE ACCURACY OF ALL SERVICES PERFORMED UNDER THIS AGREEMENT AND TO COMPLY WITH
APPLICABLE LAW, BUT ASSUME NO RESPONSIBILITY AND SHALL NOT BE LIABLE FOR LOSS
OR DAMAGE DUE TO ERRORS UNLESS SUCH ERROR IS CAUSED BY YOUR NEGLIGENCE, BAD
FAITH, OR WILLFUL MISCONDUCT OR THAT OF YOUR EMPLOYEES.
GOVERNING LAW. THESE TERMS AND CONDITIONS SHALL BE GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CONFLICTS OF LAWS
PROVISIONS.
Exhibit (g)(1)
MANAGEMENT AGREEMENT
AGREEMENT made this ____ day of ______________ 1997, by and between
JAPAN OTC EQUITY FUND, INC., a Maryland corporation (hereinafter referred to
as the "Fund"), and NOMURA ASSET MANAGEMENT U.S.A. INC., a New York
corporation (hereinafter referred to as the "Manager").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as a non-diversified,
closed-end, management investment company registered under the Investment
Company Act of 1940, as amended (hereinafter referred to as the "Investment
Company Act"); and
WHEREAS, the Manager is willing to provide management and investment
advisory services to the Fund on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties hereto as herein set forth, the parties covenant and
agree as follows:
ARTICLE I
DUTIES OF THE MANAGER
The Fund hereby retains the Manager to act as the manager of the Fund
and to furnish the Fund with the management and investment advisory services
described below, subject to the policies of, review by and overall control of
the Board of Directors of the Fund, for the period and on the terms and
conditions set forth in this Agreement. The Manager hereby accepts such
employment and agrees during such period, at its own expense, to render, or
arrange for the rendering of, such services and to assume the obligations
herein set forth for the compensation provided for herein.
(a) Management and Administrative Services. The Manager shall
perform, or supervise the performance of, the management and administrative
services necessary for the operation of the Fund including administering
shareholder accounts and handling shareholder relations. The Manager shall
provide the Fund with office space, equipment and facilities and such other
services as the Manager, subject to review by the Board of Directors of the
Fund, shall from time to time determine to be necessary or useful to perform
its obligations under this Agreement. The Manager shall also, on behalf of the
Fund, conduct relations with custodians, depositories, transfer agents,
dividend disbursing agents, other shareholder servicing agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers,
banks and such other persons in any such other capacity deemed to be necessary
or desirable. The Manager shall generally monitor the Fund's compliance with
investment policies and restrictions as set forth in filings made by the Fund
under Federal securities laws. The Manager shall make reports to the Board of
Directors of the Fund of the performance of its obligations hereunder and
furnish advice and recommendations with respect to such other aspects of the
business and affairs of the Fund as it shall determine to be desirable. The
Manager and each of its affiliates shall for all purposes herein be deemed to
be an independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
(b) Investment Advisory Services. The Manager shall provide the Fund
with such investment research, advise and supervision as the latter may from
time to time consider necessary for the proper supervision of the assets of
the Fund. The Manager shall act as investment adviser to the Fund and as such
shall furnish continuously an investment program for the Fund and shall
determine from time to time which securities shall be purchased, sold or
exchanged and what portion of the assets of the Fund shall be held in the
various securities in which the Fund invests, options, futures, options on
futures or in cash, subject always to the restrictions of the Articles of
Incorporation and By-Laws of the Fund, as amended from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions
as the same are set forth in filings made by the Fund under Federal securities
laws. The Manager shall make decisions for the Fund as to foreign currency
matters and make determinations as to foreign exchange contracts. The Manager
shall make recommendations as to the manner in which voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
portfolio securities shall be exercised. Should the Board of Directors of the
Fund at any time, however, make any definite determination as to investment
policy and notify the Manager thereof in writing, the Manager shall be bound
by such determination for the period, if any, specified in such notice or
until similarly notified that such determination has been revoked. The Manager
shall take, on behalf of the Fund, all actions which it deems necessary to
implement the investment policies determined as provided above, and in
particular to place all orders for the purchase or sale of portfolio
securities for the Fund's account with brokers or dealers selected by it, and
to that end, the Manager is authorized as the agent of the Fund to give
instructions to the Custodian of the Fund as to deliveries of securities and
payments of cash for the account of the Fund. In connection with the selection
of such brokers or dealers and the placing of such orders, the Manager is
directed at all times to seek to obtain executions and price within the policy
guidelines determined by the Board of Directors of the Fund and set forth in
the filings made by the Fund under Federal securities laws. Subject to this
requirement and the provisions of the Investment Company act, the Securities
Exchange Act of 1934, as amended, and other applicable provisions of law, the
Manager may select brokers or dealers with which it, or the Fund, is
affiliated.
ARTICLE II
ALLOCATION OF CHARGES AND EXPENSES
(a) The Manager. The Manager assumes and shall pay for maintaining
the staff and personnel necessary to perform its obligations under this
Agreement and shall, at its own expense, provide the office space, equipment
and facilities which it is obligated to provide under Article I hereof, and
shall pay all compensation of officers of the Fund and all directors of the
Fund who are "affiliated persons" (as defined in the Investment Company Act)
of the Manager.
(b) The Fund. The Fund assumes and shall pay or cause to be paid all
other expenses of the Fund, including, without limitation: organization costs,
taxes, expenses for legal and auditing services, costs of printing proxies,
stock certificates, shareholder reports, prospectuses, charges of the
Custodian, any Sub-Custodian and Transfer and Dividend Disbursing Agent,
expenses of portfolio transactions, Securities and Exchange Commission and
stock exchange fees, expenses of registering the Fund's shares under Federal,
state and foreign laws, expenses of administering any dividend reinvestment
plan (except to the extent set forth in such plan), fees and actual
out-of-pocket expenses of directors who are not affiliated persons of the
Manager, accounting and pricing costs (including the calculation of the net
asset value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other like expenses properly
payable by the Fund.
ARTICLE III
COMPENSATION OF THE MANAGER
For the services rendered, the equipment and facilities furnished and
expenses assumed by the Manager, the Fund shall pay to the Manager at the end
of each calendar month a fee based upon the average daily value of the net
assets of the Fund, at the annual rate of 1.10% of the Fund's average weekly
net assets (i.e., the average weekly value of the total assets of the Fund,
minus the sum of liabilities of the Fund), not in excess of $50 million, 1.00%
of the Fund's average weekly net assets in excess of $50 million but not in
excess of $100 million and .90% of the Fund's average weekly net assets in
excess of $100 million, commencing on the day following effectiveness hereof.
For purposes of this calculation, average weekly net assets is determined at
the end of each month on the basis of the average net assets of the Fund for
each week during the month. The assets for each weekly period are determined
by averaging the net assets at the last business day of the prior week. If
this Agreement becomes effective subsequent to the first day of a month or
shall terminate before the last day of a month, compensation for that part of
the month this Agreement is in effect shall be prorated in a manner consistent
with the calculation of the fee as set forth above. During any period when the
determination of net asset value is suspended by the Board of Directors of the
Fund, the average net asset value of a share for the last week prior to such
suspension shall for this purpose be deemed to be the net asset value at the
close of each succeeding week until it is again determined.
ARTICLE IV
INVESTMENT ADVISORY AGREEMENT
This Agreement is entered into with the understanding that the
Manager will enter into an Investment Advisory Agreement with Nomura Asset
Management Co., Ltd., in the form attached hereto as Exhibit A, in which the
Manager will contract for advisory services and pay the Investment Adviser
compensation for its services out of the compensation received hereunder
pursuant to Article III at the rates set forth therein. Such Investment
Advisory Agreement will be coterminous with this Management Agreement.
ARTICLE V
LIMITATION OF LIABILITY OF THE MANAGER
The Manager shall not be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties,
or by reason of reckless disregard of its obligations and duties hereunder. As
used in this Article V, the term "Manager" shall include any affiliates of the
Manager performing services for the Fund contemplated hereby and directors,
officers and employees of the Manager as well as the corporation itself.
ARTICLE VI
ACTIVITIES OF THE MANAGER
The services of the Manager to the Fund are not to be deemed to be
exclusive, the Manager and any person controlled by or under common control
with the Manager (for purposes of this Article VI referred to as "affiliates")
being free to render services to others. It is understood that directors,
officers, employees and shareholders of the Fund are or may become interested
in the Manager and its affiliates, as directors, officers, employees,
partners, and shareholders or otherwise and that directors, officers,
employees, partners, and shareholders of the Manager and its affiliates are or
may become similarly interested in the Fund, and that the Manager is or may
become interested in the Fund as shareholder or otherwise.
ARTICLE VII
DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as of the date first above
written and shall remain in force until _______________, 1999 and thereafter,
but only so long as such continuance is specifically approved at least
annually by (i) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Fund, and (ii) a majority
of those directors who are not parties to this Agreement or interested persons
of any such party cast in person at a meeting called for the purpose of voting
on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Board of Directors of the Fund or by vote of a majority of
the outstanding voting securities of the Fund, or by the Manager, on sixty
days' written notice to the other party. This Agreement shall automatically
terminate in the event of its assignment.
ARTICLE VIII
AMENDMENTS OF THE AGREEMENT
This Agreement may be amended by the parties only if such amendment
is specifically approved by (i) the vote of a majority of outstanding voting
securities of the Fund, and (ii) a majority of those directors who are not
parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
ARTICLE IX
DEFINITIONS OF CERTAIN TERMS
The terms "vote of a majority of outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to
such exemptions as may be granted by the Securities and Exchange Commission
under said Act.
ARTICLE X
GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
JAPAN OTC EQUITY FUND, INC.
By_________________________
NOMURA ASSET MANAGEMENT U.S.A. INC.
By_________________________________
Exhibit (g)(2)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this ____ day of ______________ 1997, by and between
NOMURA ASSET MANAGEMENT U.S.A. INC., a New York corporation (hereinafter
referred to as the "Manager"), and NOMURA ASSET MANAGEMENT CO., LTD., a
Japanese corporation (hereinafter referred to as the "Investment Adviser").
W I T N E S S E T H :
WHEREAS, Japan OTC Equity Fund, Inc. (the "Fund") is engaged in
business as a non-diversified, closed-end, management investment company
registered under the Investment Company Act of 1940, as amended (hereinafter
referred to as the "Investment Company Act"); and
WHEREAS, the Manager and the Investment Adviser are engaged in
business as registered investment advisers under the Investment Advisers Act
of 1940, as amended; and
WHEREAS, the Manager has entered into a management agreement with the
Fund of even date herewith (the "Management Agreement"); and
WHEREAS, the Investment Adviser is willing to provide investment
advisory services to the Manager in connection with the Fund's operations on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties hereto as herein set forth, the parties covenant and
agree as follows:
ARTICLE I
Duties of the Investment Adviser
Subject to the broad supervision of the Manager and the Fund, the
Investment Adviser shall provide the Manager with such economic research,
securities analysis and investment recommendations as the latter may from time
to time consider necessary for the proper supervision of the Fund's assets.
The Investment Adviser shall continuously review the Fund's holdings and shall
make recommendations as to which securities shall be purchased, sold or
exchanged and what portion of the assets of the Fund shall be held in the
various securities in which the Fund invests, subject always to the
restrictions of the Articles of Incorporation and By-Laws of the Fund, as
amended from time to time, the provisions of the Investment Company Act and
the statements relating to the Fund's investment objective, investment
policies and investment restrictions as the same are set forth in filings made
by the Fund under Federal securities laws. The Investment Adviser shall make
recommendations as to foreign currency matters and the advisability of
entering into foreign exchange contracts. The Investment Adviser shall also
make recommendations as to the manner in which voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
portfolio securities shall be exercised.
ARTICLE II
Allocation of Charges and Expenses
The Investment Adviser shall furnish, at its own expense, all
administrative services, office space, equipment and facilities, investment
advisory, statistical and research services, and executive, supervisory and
clerical personnel necessary to carry out its obligations under this
Agreement.
ARTICLE III
Compensation of the Investment Adviser
For the services to be rendered as provided herein, the Manager shall
pay to the Investment Adviser at the end of each calendar month a fee based
upon the average weekly value of the net assets of the Fund at the annual rate
of 0.50% of the Fund's average weekly net assets (i.e., the average weekly
value of the total assets of the Fund minus the sum of accrued liabilities of
the Fund), 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, commencing on
the day following effectiveness hereof. For purposes of this calculation,
average weekly net assets is determined at the end of each month on the basis
of the average net assets of the Fund for each week during the month. The
assets for each weekly period are determined by averaging the net assets at
the last business day of the prior week. If this Agreement becomes effective
subsequent to the first day of a month or shall terminate before the last day
of a month, compensation for that part of the month that this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the
fee as set forth above. During any period when the determination of net asset
value is suspended by the Board of Directors of the Fund, the average net
asset value of a share for the last week prior to such suspension shall for
this purpose be deemed to be the net asset value at the close of each
succeeding week until it is again determined.
ARTICLE IV
Limitation of Liability of the Investment Adviser
The Investment Adviser shall not be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its duties,
or by reason of reckless disregard of it's obligations and duties hereunder.
As used in this Article IV, the term "Investment Adviser" shall include any
affiliates of the Investment Adviser performing services for the Fund
contemplated hereby and directors, officers, partners and employees of the
Investment Adviser and such affiliates.
ARTICLE V
Activities of the Investment Adviser
The services of the Investment Adviser to the Fund are not to be
deemed to be exclusive, the Investment Adviser and any person controlled by or
under common control with the Investment Adviser (for the purpose of this
Article V referred to as "affiliates") being free to render services to
others. It is understood that directors, officers, employees and shareholders
of the Manager are or may become interested in the Investment Adviser and its
affiliates, as directors, officers, employees, partners and shareholders or
otherwise and that directors, officers, employees, partners and shareholders
of the Investment Adviser and its affiliates are or may become similarly
interested in the Manager or the Fund, and that the Investment Adviser is or
may become interested in the Manager or the Fund as shareholder or otherwise.
ARTICLE VI
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until _______________, 1999 and thereafter,
but only so long as the Management Agreement remains in force and provided
that such continuance is specifically approved at least annually by (i) the
Board of Directors of the Fund or by the vote of a majority of the outstanding
voting securities of the Fund and (ii) a majority of those directors who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Manager, by vote of a majority of the outstanding voting
securities of the Fund or by the Investment Adviser, on sixty days' written
notice to the parties. This Agreement shall automatically terminate in the
event of its assignment.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment
is specifically approved by (i) the vote of a majority of outstanding voting
securities of the Fund, and (ii) a majority of those directors who are not
parties to this Agreement or interested persons of any such party cast in
person at a meeting for the purpose of voting on such approval.
ARTICLE VIII
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act of 1940 and the Rules and Regulations thereunder, subject,
however, to such exemptions as may be granted by the Securities and Exchange
Commission under said Act.
ARTICLE IX
Governing Law
This Agreement shall be construed in accordance with laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
NOMURA ASSET MANAGEMENT U.S.A. INC.
By_______________________________
NOMURA ASSET MANAGEMENT CO., LTD.
By_______________________________
Exhibit (j)
CUSTODIAN CONTRACT
BETWEEN
JAPAN OTC EQUITY FUND, INC.
AND
STATE STREET BANK AND TRUST COMPANY
<PAGE>
Table of Contents
Page
1. Employment of Custodian and Property to be Held by It...................1
2. Duties of the Custodian with Respect to Property of the Fund
Held By the Custodian in the United States..............................2
2.1 Holding Securities................................................2
2.2 Delivery of Securities............................................2
2.3 Registration of Securities........................................6
2.4 Bank Accounts.....................................................6
2.5 Availability of Federal Funds.....................................7
2.6 Collection of Income..............................................7
2.7 Payment of Fund Monies............................................8
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased........................................................10
2.9 Appointment of Agents............................................10
2.10 Deposit of Securities in Securities Systems......................11
2.11 Segregated Account...............................................14
2.12 Ownership Certificates for Tax Purposes..........................15
2.13 Proxies..........................................................15
2.14 Communications Relating to Fund Portfolio Securities.............16
2.15 Reports to Fund by Independent Public Accountants................16
3. Duties of the Custodian with Respect to Property of the Fund
Held Outside of the United States......................................17
3.1 Appointment of Foreign Sub-Custodians............................17
3.2 Assets to be Held................................................17
3.3 Foreign Securities Depositories..................................17
3.4 Segregation of Securities........................................18
3.5 Agreements with Foreign Banking Institutions.....................18
3.6 Access of Independent Accountants of the Fund....................19
3.7 Reports by Custodian.............................................19
3.8 Transactions in Foreign Custody Account..........................19
3.9 Liability of Foreign Sub-Custodians..............................20
3.10 Liability of Custodian...........................................20
3.11 Reimbursement for Advances.......................................21
3.12 Monitoring Responsibilities......................................21
3.13 Branches of U.S. Banks...........................................22
4. Proper Instructions....................................................22
5. Actions Permitted without Express Authority............................23
6. Evidence of Authority..................................................23
7. Duties of Custodian with Respect to the Books of Account
and Calculation of Net Asset Value and Net Income......................24
8. Records................................................................24
9. Opinion of Fund's Independent Accountant...............................25
10. Compensation of Custodian..............................................25
11. Responsibility of Custodian............................................25
12. Effective Period, Termination and Amendment............................27
13. Successor Custodian....................................................28
14. Interpretive and Additional Provisions.................................29
15. Massachusetts Law to Apply.............................................30
16. Prior Contracts........................................................30
<PAGE>
CUSTODIAN CONTRACT
This Contract between Japan OTC Equity Fund, Inc., a corporation
organized and existing under the laws of Maryland, having its principal place
of business at 180 Maiden Lane, New York, New York, 10038, hereinafter called
the "Fund", and State Street Bank and Trust Company, a Massachusetts trust
company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian".
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the
United States ("foreign securities") pursuant to the provisions of the
Articles of Incorporation. The Fund agrees to deliver to the Custodian all
securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all
securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, $___ par
value ("Shares"), of the Fund as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian. Upon receipt of
"Proper Instructions" (within the meaning of Article 4), the Custodian shall
from time to time employ one or more sub-custodians located in the United
States, but only in accordance with an applicable vote by the Board of
Directors of the Fund, and provided that the Custodian shall have no more or
less responsibility or liability to the Fund on account of any actions or
omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in
accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it
in the United States, including all domestic securities owned by the
Fund, other than securities which are maintained pursuant to Section
2.10 in a clearing agency which acts as a securities depository or in
a book-entry system authorized by the U.S. Department of the
Treasury, collectively referred to herein as "Securities System" and
(b) commercial paper of an issuer for which State Street Bank and
Trust Company acts as issuing and paying agent ("Direct Paper") which
is deposited and/or maintained in the Direct Paper System of the
Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("Direct Paper Account") only
upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Fund
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Fund;
3) In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
. name of the Fund or into the name of any nominee or
nominees of the Custodian or into the name or nominee name
of any agent appointed pursuant to Section 2.9 or into the
name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence
representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities
are to be delivered to the Custodian;
7) Upon the sale of such securities for the account-of the
Fund, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the
Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise
from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts
or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if
any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities
made by the Fund, but only against receipt of adequate
collateral as agreed upon from time to time by the
Custodian and the Fund, which may be in the form of cash or
obligations issued by the United States government, its
agencies or instrumentalities, except that in connection
with any loans for which collateral is to be credited to
the Custodian's account in the book-entry system authorized
by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of
securities owned by the Fund prior to the receipt of such
collateral;
11) For delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but
only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 193 4 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance
with the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or
any similar organization or organizations, regarding
account deposits in connection with transactions by the
Fund;
14) For any other proper corporate purpose, but only upon
receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Directors or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth
the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose,
and naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of
the Custodian which nominee shall be assigned exclusively to the
Fund, unless the Fund has authorized in writing the `appointment of a
nominee to be used in common with other registered investment
companies having the same investment adviser as the Fund, or in the
name or nominee name of any agent appointed pursuant to Section 2.9
or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on
behalf of the Fund under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund
directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect
income due the Fund on such securities and to notify the Fund on a
best efforts basis only of relevant corporate actions including,
without limitation, pendency of calls, maturities, tender or exchange
offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to
the terms of this Contract, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Fund, other than cash maintained by
the Fund. in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds held by
the Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary
or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall be
approved by vote of a majority of the Board of Directors of the Fund.
Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to United States registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a
timely basis all income and other payments with respect to United
States bearer securities if, on the date of payment by the issuer,
such securities are held by the Custodian or its agent thereof and
shall credit such income, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other
income items requiring presentation as and when they become due and
shall collect interest when due on securities held hereunder. Income
due the Fund on United States securities loaned pursuant to the
provisions of Section 2.2 (10) shall be the responsibility of the
Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which the Fund is
properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out monies of the Fund in the
following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account
of the Fund but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian
(or any bank, banking firm or trust company doing business
in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund
or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in
the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in
Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD,(i) against delivery of the securities
either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with
such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund
or (e) for transfer to a time deposit account of the Fund
in any bank, whether domestic or foreign; such transfer may
be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 4;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments
for the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be
in whole or part capitalized or treated as deferred
expenses;
4) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
5) For payment of the amount of dividends received in respect
of securities sold short;
6) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring
such purpose to be a proper purpose, and naming the person
or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Article 2 as the Custodian may
from time to time direct; provided, however, that the appointment of
any agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a
clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934,
which acts as a securities depository, or in the book-entry system
authorized by the U.S. Department of the Treasury and certain federal
agencies, collectively referred to herein as "Securities System" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep domes tic securities of the Fund in
a Securities System provided that such securities are
represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities
belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased
for the account of the Fund upon (i) receipt of advice from
the Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to
the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the
Securities System of transfers of domestic securities for
the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to
the Fund at its request. Upon request, the Custodian shall
furnish the Fund confirmation of each transfer to or from
the account of the Fund in the form of a written advice or
notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in
the Securities System for the account of the Fund;
4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding domestic securities deposited
in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 12
hereof;
6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Securities
System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any
of its or their employees or from failure of the Custodian
or any such agent to enforce effectively such rights as it
may have against the Securities System; at the election of
the Fund, it shall be entitled to be subjugated to the
rights of the Custodian with respect to any claim against
the Securities System or any other person which the
Custodian may have as a consequence of any such loss or
damage if and to the extent that the Fund has not been made
whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by the Fund in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper
Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of
the Fund which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to
the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the
records of the Custodian to reflect such payment and
transfer of securities to the account of the Fund. The
Custodian shall transfer securities sold for the account of
the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment
for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of
a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to
the Fund copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account
of the Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained
in an account by the Custodian pursuant to Section 2.10 hereof, (i)
in accordance with the provisions of any agreement among the Fund,
the Custodian and a broker-dealer registered under the Exchange Act
and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures
Trading Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for
purposes of segregating cash or government securities in connection
with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund,
(iii) for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other pro per corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held by it
and in connection with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise
than in the name of the Fund or a nominee of the Fund, all proxies,
without indication of the manner in which such proxies are to be
voted, and shall promptly deliver to the Fund such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to
the Fund all written information (including, without limitation,
pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund and the maturity of
futures contracts purchased or sold by the Fund) received by the
Custodian from issuers of the domestic securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall
transmit promptly to the Fund all written information received by the
Custodian from issuers of the domestic securities whose tender or
exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with
respect to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take
such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
shall provide the Fund, at such times as the Fund may reasonably
require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including domestic securities deposited and/or maintained
in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient
scope and in sufficient detail, as may reasonably be required by the
Fund, to provide reasonable assurance that any material inadequacies
would be disclosed by such examination, and, if there are no such
inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States.
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 4 of this
Contract, together with a certified resolution of the Fund's Board of
Directors, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more
such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to:
(a) "foreign securities", as defined in paragraph (c)(1) of Rule
17f-5 under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may
determine to be reasonably necessary to effect the Fund's foreign
securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Fund
shall be maintained in foreign securities depositories only through
arrangements implemented by the foreign banking institutions serving
as sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books
as belonging to the Fund, the foreign securities of the Fund held by
each foreign sub-custodian. Each agreement pursuant to which the
Custodian employs a foreign banking institution shall require that
such institution establish a custody account for the Custodian on
behalf of the Fund and physically segregate in that account,
securities and other assets of the Fund, and, in the event that such
institution deposits the Fund's securities in a foreign securities
depository, that it shall identify on its books as belonging-to the
Custodian, as agent for the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the Fund's
assets will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership of the Fund's
assets will be freely transferable without the payment of money or
value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund;
(d) officers of or auditors employed by, or other representatives of
the Custodian, including to the extent permitted under applicable law
the independent public accountants for the Fund, will be given access
to the books and records of the foreign banking institution relating
to its actions under its agreement with the Custodian; and (e) assets
of the Fund held by the foreign sub-custodian will be subject only to
the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the
books and records of any foreign banking institution employed as a
foreign sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Fund's securities and other assets
and advises or notifications of any transfers of securities to or
from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of the Fund indicating, as to
securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis
to the foreign securities of the Fund held outside the United States
by foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of the Fund and delivery of securities
maintained for the account of the Fund may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment. for such securities
from such purchaser or dealer. (c) Securities maintained in the
custody of a foreign sub-custodian may be maintained in the name of
such entity's nominee to the same extent as set forth in Section 2.3
of this Contract, and the Fund agrees to hold any such nominee
harmless from any liability as a holder of re cord of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable
care in the performance of its duties and to indemnify, and hold
harmless, the Custodian and each Fund from and against any loss,
damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claims against a
foreign banking institution as a consequence of any such loss,
damage, cost, expense, liability or claim if and to the extent that
the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the
Custodian shall not be liable for any loss. damage, cost, expenses
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this paragraph 3.10, in
delegating custody duties to State Street London Ltd., the Custodian
shall not be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or
sale of foreign exchange or of contracts for foreign exchange, or in
the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property
at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the fund, during the month of June, information concerning the
foreign sub-custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Fund in
connection with the initial approval of this Contract. In addition,
the Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not
the subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent
thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Fund assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph I of this contract. (b)
Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
4. Proper Instructions
Proper Instructions as used herein means a writing signed or
initialed by one or more person or persons as the Board of Directors shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all oral
instructions to be confirmed in writing. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the authorization by the Board of
Directors of the Fund accompanied by a detailed description of procedures
approved by the Board of Directors, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Directors and the Custodian are satisfied
that- such procedures afford adequate safeguards for the Fund's assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which requires
a segregated asset account in accordance with Section 2.11.
5. Actions Permitted without Express Authority.
The Custodian may in its discretion, without express authority from
the Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Fund except as otherwise directed by
the Board of Directors of the Fund.
6. Evidence of Authority.
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Directors of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Directors pursuant to the Articles of
Incorporation as described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written notice to the
contrary.
7. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information
to the entity or entities appointed by the Board of Directors of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do
so by the Fund, shall itself keep such books of account and/or compute such
net asset value per share. If so directed, the Custodian shall also calculate
weekly the net income of the Fund as described in the Fund's currently
effective prospectus and shall advise the Fund and the Transfer Agent weekly
of the total amounts of such net income and, if instructed in writing by an
officer of the Fund to do so, shall advise the Transfer Agent periodically of
the division of such net income among its various components. The calculations
of the net asset value per share and the weekly income of the Fund shall be
made at the time or times described from time to time in the Fund's currently
effective prospectus.
8. Records.
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 3la-l and 3la-2
thereunder. All such records shall be the property of the Fund and shall at
all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by the Fund and held by the Custodian and shall, when requested to do so
by the Fund and for such compensation as shall be agreed upon between the Fund
and the Custodian, include certificate numbers in such tabulations.
9. Opinion of Fund's Independent Accountant.
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-2, and Form N-SAR or
other annual reports to the Securities and Exchange Commission and with
respect to any other requirements of such Commission.
10. Compensation of Custodian.
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
11. Responsibility of Custodian.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability to the Fund
for any action taken or omitted by it in good faith without negligence. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained
in the custody of a foreign banking institution, a foreign securities
depository or a branch of a U.S. bank as contemplated by paragraph 3.11
hereof, the Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from, or caused by, the direction of or
authorization by the Fund to maintain custody or any securities or cash of the
Fund in a foreign country including, but not limited to, losses resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to
take such action, shall provide indemnity to the Custodian in an amount and
form satisfactory to it.
If the Fund
requires the Custodian to advance cash or securities for any purpose
or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property
at any time held for the account of the Fund shall be security
therefor and should the fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
12. Effective Period, Termination and Amendment.
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided,
may be amended at any time by mutual agreement of the parties hereto and may
be terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors of the Fund has approved the initial use
of a particular Securities System and the receipt of an annual certificate of
the Secretary or an Assistant Secretary that the Board of Directors has
reviewed the use by the Fund of such Securities System, as required in each
case by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not act under Section 2.10A hereof in the absence of
receipt of an initial certificate of the Secretary or an Assistant Secretary
that the Board of Directors has approved the initial use of the Direct Paper
System and the receipt of an annual certificate of the Secretary or an
Assistant Secretary that the Board of Directors has reviewed the use by the
Fund of the Direct Paper System; provided further, however, that the Fund
shall not amend or terminate this Contract in contravention of any applicable
federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund may at any time by action
of its Board of Directors (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
13. Successor Custodian.
If a successor custodian shall be appointed by the Board of Directors
of the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Directors of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Directors shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act
of 1940. doing business in Boston, Massachusetts, of its own selection, having
an aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and
other properties held by the Custodian and all instruments held by the
Custodian relative thereto and all other property held by it under this
Contract and to transfer to an account of such successor custodian all of the
Fund's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or
of the Board of Directors to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions.
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall
be annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
15. Massachusetts Law to Apply.
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts. 16. Prior Contracts. This Contract supersedes and terminates,
as of the date hereof, all prior contracts between the Fund and the Custodian
relating to the custody of the Fund's assets.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized ____ representative
____ and its seal to be hereunder ____ affixed as of the day of 199 .
ATTEST JAPAN OTC EQUITY FUND, INC.
_____________________________ By_______________________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
_____________________________ By_______________________________________
Assistant Secretary Vice President
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of Japan OTC Equity
Fund, Inc. for use as sub-custodians for the Fund's securities and other
assets:
(Insert banks and securities depositories)
Certified:
_____________________________
Fund's Authorized Officer
Date:________________________
EXHIBIT 1
CUSTODIAN AGREEMENT
TO:
Gentlemen:
The undersigned ("State Street") hereby requests that you (the
"Bank") establish a custody account and a cash account for each State Street
client whose account is identified to this Agreement. Each such custody or
cash account as applicable will be referred to herein as the "Account" and
will be subject to the following terms and conditions:
1. The Bank shall hold as agent for State Street and shall physically
segregate In the Account such cash, bullion, coin, stocks, shares, bonds,
debentures, notes and other securities and other property which Is delivered
to the Bank for that State Street Account (the "Property").
2. (a) Without the prior approval of State Street It will not deposit
securities in any securities depository or utilize a clearing agency,
incorporated or organized under the laws of a country other than the United
States, unless such depository or clearing house operates the central system
for handling of securities or equivalent book-entries In that country or
operates a transnational system for the central handling of securities or
equivalent book-entries.
(b) When Securities held for an Account are deposited in a securities
depository or clearing agency by the Bank, the Bank shall identify on its
books as belonging to State Street as agent for such Account, the Securities
so deposited.
The Bank represents that either:
3. (a) It currently has stockholders' equity in excess of $200
million (US dollars or the equivalent of US dollars computed in accordance
with generally accepted US accounting principles) and will promptly inform
State Street in the event that there appears to be a substantial likelihood
that its stockholders' equity will decline below $200 million, or in any
event, at such time as Its stockholders' equity In fact declines below $200
million; or
(b) It Is the subject of an exemptive order issued by the United
States Securities and Exchange Commission, which such order permits State
Street to employ the Bank as a subcustodian, notwithstanding the fact that the
Bank's stockholders' equity is currently below $200 million or may in the
future decline below $200 million due to currency fluctuation.
4. Upon the written instructions of State Street as permitted by
Section 8, the Bank is authorized to pay out cash from the Account and to
sell, assign, transfer, deliver or exchange, or to purchase for the Account,
any and all stocks, shares, bonds, debentures, notes and other securities
("Securities"), bullion, coin and other property, but only as provided in such
written Instructions. The Bank shall not be held liable for any act or
omission to act on instructions given or purported to be given should there be
any error In such instructions.
5. Unless the Bank receives written instructions of State Street to
the contrary, the Bank Is authorized:
a. To promptly receive and collect all income and principal with
respect to the Property and to credit cash receipts to the
Account;
b. To promptly exchange Securities where the exchange is purely
ministerial (including, without limitation, the exchange of
temporary Securities for those In definitive form and the
exchange of warrants, or other documents of entitlement to
Securities, for the Securities themselves);
c. To promptly surrender Securities at maturity or when called for
redemption upon receiving payment therefor;
d. Whenever notification of a rights entitlement or a fractional
interest resulting from a rights Issue, stock dividend or stock
split Is received for the Account and such rights entitlement or
fractional interest bears an expiration date, the Bank will
endeavor to obtain State Street's Instructions, but should these
not be received in time for the Bank to take timely action, the
Bank Is authorized to sell such rights entitlement or fractional
interest and to credit the Account;
e. To hold registered in the name of the nominee of the Bank or its
agents such Securities as are ordinarily held In registered
form;
f. To execute in State Street's name for the Account, whenever the
Bank deems It appropriate, such ownership and other certificates
as may be required to obtain the payment of Income from the
Property; and
g. To pay or cause to be paid from the Account any and all taxes
and levies In the nature of taxes imposed on such assets by any
governmental authority, and shall use reasonable efforts to
promptly reclaim any foreign withholding tax relating to the
Account.
6. If the Bank shall receive any proxies, notices, reports, or other
communications relative to any of the Securities of the Account in connection
with tender offers; reorganizations, mergers, consolidations, or similar
events which may have an impact upon the issuer thereof, the Bank shall
promptly transmit any such communication to State Street by means as will
permit State Street to take timely action with respect thereto.
7. The Bank is authorized In its discretion to appoint brokers and
agents in connection with the Bank's handling of transactions relating to the
Property provided that any such appointment shall not relieve the Bank of any
of its responsibilities or liabilities hereunder. .
8. Written instructions shall include (i) instructions in writing
signed by such persons as are designated In writing by State Street, (ii)
telex or tested telex instructions of State Street, (iii) other forms of
instruction in computer readable form as shall be customarily utilized for the
transmission of like information and (iv) such other forms of communication as
from time to time shall be agreed upon by State Street and the Bank.
9. The Bank shall supply periodic reports with respect to the
safekeeping of assets held by It under this Agreement. The content of such
reports shall include but not be limited to any transfer to or from any
Account held by the Bank hereunder and such other information as State Street
may reasonably request.
10. In addition to Its obligations under Section 2 hereof, the Bank
shall maintain such other records as may be necessary to identify the assets
hereunder as belonging to each State Street client Identified to this
Agreement from time to time.
11. The Bank agrees that Its books and records relating to its
actions under this Agreement shall be opened to the physical, on-premises
inspection and audit at reasonable times by officers of, auditors employed by
or other representatives of State Street (including to the extent permitted
under law the Independent public accountants for any entity whose Property is
being held hereunder) and shall be retained for such period as shall be agreed
by State Street and the Bank.
12. The Bank shall be entitled to reasonable compensation for its
services and expenses as custodian under this Agreement, as agreed upon from
time to time by the Bank and State Street.
13. The Bank shall exercise reasonable care In the performance of its
duties as are set forth or contemplated herein or contained in instructions
given to the Bank which are not contrary to this Agreement, and shall maintain
adequate insurance and agrees to indemnify and hold State Street and each
Account from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the Bank's performance of its obligations
hereunder.
14. The Bank agrees that (I) the Property Is not subject to any
right, charge, security Interest, lien or claim of any kind in favor of the
Bank or any of its agents or its creditors except a claim of payment for their
safe custody and administration and (ii) the beneficial ownership of the
Property shall be freely transferable without the payment of money or other
value other than for safe custody or administration.
15. This Agreement may be terminated by the Bank or State Street by
at least 60 days' written notice to the other, sent by registered mail or
express courier. The Bank, upon the date this Agreement terminates pursuant to
notice which has been given in a timely fashion, shall deliver the Property in
accordance with written instructions of State Street specifying the name(s) of
the person(s) to whom the Property shall be delivered.
16. The Bank and State Street shall each use its best efforts to
maintain the confidentiality of the Property in each Account, subject,
however, to the provisions of any laws requiring the disclosure of the
Property.
17. The Bank agrees to follow such Operating Requirements as State
Street may require from time to time. A copy of the current State Street
Operating Requirements is attached as an exhibit to this Agreement.
18. Unless otherwise specified in this Agreement, all notices with
respect to matters contemplated by this Agreement shall be deemed duly given
when received in writing or by tested telex by the Bank or State Street at
their respective addresses set forth below, or at such other address as
specified in each case in a notice similarly given:
To State Street: Global Custody Services Division
STATE STREET BANK AND TRUST
COMPANY
P. O. Box 470
Boston, Massachusetts 02102
To the Bank:
19. This Agreement shall be governed by and construed in accordance
with the laws of _____________________.
Please acknowledge your agreement to the foregoing by executing a
copy of this letter.
Very truly yours,
STATE STREET BANK AND TRUST
COMPANY
By______________________________
Agreed to by:
By__________________________________
Date________________________________
Exhibit (k)
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
between
JAPAN OTC EQUITY FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 13th day of March , 1990 , by and between
JAPAN OTC EQUITY FUND, INC., a Maryland corporation, having its principal
office and place of business at 180 Maiden Lane, New York, New York, 10038
(the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company having its principal office and place of business at 225 Franklin
Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its registrar,
transfer agent, dividend disbursing agent, custodian of certain retirement
plans and agent in connection with certain other activities and the Bank
desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Terms of Appointment; Duties of the Bank
Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints the Bank to act as, and the Bank agrees to
act as registrar, transfer agent for the Fund's authorized and issued shares
of its common stock ("Shares"), dividend disbursing agent, custodian of
certain retirement plans and agent in connection with any dividend
reinvestment plan as set out in the prospectus of the Fund, corresponding to
the date of this Agreement.
The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and the Bank, the Bank shall:
Issue and record the appropriate number of Shares as authorized and
hold such Shares in the appropriate Shareholder account;
Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate documentation;
Execute transactions directly with broker-dealers authorized by the
Fund who shall thereby be deemed to be acting on behalf of the Fund;
Prepare and transmit payments for dividends and distributions
declared by the Fund;
Act as agent for Shareholders pursuant to the dividend reinvestment
and cash purchase plan as amended from time to time in accordance with the
terms of the agreement to be entered into between the Shareholders and the
Bank in substantially the form attached as Exhibit A hereto;
Issue replacement certificates for those certificates alleged to have
been lost, stolen or destroyed upon receipt by the Bank of indemnification
satisfactory to the Bank and protecting the Bank and the Fund, and the Bank as
its option, may issue replacement certificates in place of mutilated stock
certificates upon presentation thereof and without such indemnity; and
Report abandoned property to the various states as authorized by the
Fund per policies and principals agreed upon by the Fund and the Bank.
In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: (i) perform all
of the customary services of a registrar, transfer agent, dividend disbursing
agent, custodian of certain retirement plans and agent of the dividend
reinvestment and cash purchase plan as described in Article 1 consistent with
those requirements in effect as at the date of this Agreement. The detailed
definition, frequency, limitations and associated costs (if any) set out in
the attached fee schedule, include but are not limited to: maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies and mailing Shareholder reports to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts where applicable, preparing and filing U.S. Treasury Department Forms
1099 and other appropriate forms required with respect to dividends and
distributions by federal authorities for all registered Shareholders.
Fees and Expenses
For the performance by the Bank pursuant to this Agreement, the Fund
agrees to pay the Bank an annual maintenance fee as set out in the initial fee
schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject
to mutual written agreement between the Fund and the Bank.
In addition to the fee paid under Section 2.01 above, the Fund agrees
to reimburse the Bank for out-of-pocket expenses or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. In addition,
any other expenses incurred by the Bank at the request or with the consent of
the Fund, will be reimbursed by the Fund.
The Fund agrees to pay all fees and reimbursable expenses within five
days following the receipt of the respective billing notice. Postage and the
cost of materials for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to the Bank by the Fund
at least seven (7) days prior to the mailing date of such materials.
Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
It is duly qualified to carry on its business in the Commonwealth of
Massachusetts.
It is empowered under applicable laws and by its Charter and By-Laws
to enter into and perform this Agreement.
All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
It is a corporation duly organized and existing and in good standing
under the laws of Maryland.
It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
All corporate proceedings required by said Articles of Incorporation
and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
It is a closed-end, diversified investment company registered under
the Investment Company Act of 1940, as amended.
To the extent required by federal securities laws a registration
statement under the Securities Act of 1933, as amended is currently effective
and appropriate state securities law filings have been made with respect to
all Shares of the Fund being offered for sale; information to the contrary
will result in immediate notification to the Bank.
It shall make all required filings under federal and state securities
laws.
Indemnification
The Bank shall not be responsible for, and the Fund shall indemnify
and hold the Bank harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out of
or attributable to:
All actions of the Bank or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
The Fund's lack of good faith, negligence or willful misconduct which
arise out of the breach of any representation or warranty of the Fund
hereunder.
The reliance on or use by the Bank or its agents or subcontractors of
information, records and documents which (i) are received or relied upon by
the Bank or its agents or subcontractors and/or furnished to it or performed
by or on behalf of the Fund, and (ii) have been prepared, maintained and/or
performed by the Fund or any other person or firm on behalf of the Fund.
The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund.
The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities laws or regulations
of any state that such Shares be registered in such state or in violation of
any stop order or other determination or ruling by any federal agency or any
state with respect to the offer or sale of such Shares in such state.
The Bank shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by the Bank as a result of the Bank's lack of good faith,
negligence or willful misconduct.
At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable
and shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. The Bank,
its agents and subcontractors shall be protected and indemnified in acting
upon any paper or document furnished by or on behalf of the Fund, reasonably
believed to be genuine and to have been signed by the proper person or
persons, or upon any instruction, information, data, records or documents
provided the Bank or its agents or subcontractors by telephone, in person,
machine readable input, telex, CRT data entry or other similar means
authorized by the Fund, and shall not be held to have notice of any change of
authority of any person, until receipt of written notice thereof from the
Fund. The Bank, its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signatures of the officers of the Fund,
and the proper countersignature of any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to
the other for any damages resulting from such failure to perform or otherwise
from such causes.
Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim.
The party who may be required to indemnify shall have the option to
participate with the party seeking indemnification in the defense of such
claim. The party seeking indemnification shall in no case confess any claim or
make any compromise in any case in which the other party may be required to
indemnify it except with the other party's prior written consent.
Covenants of the Fund and the Bank
The Fund shall promptly furnish to the Bank the following:
A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of the Bank and the execution and delivery of
this Agreement.
A copy of the Articles of Incorporation and By-Laws of the Fund and
all amendments thereto.
The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the. Investment Company Act of 1940, as amended, and
the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
The Bank and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement
shall remain confidential, and shall not be voluntarily disclosed to any other
person, except as may be required by law.
In cases of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instruct ions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be
held liable for the failure to exhibit the Shareholder records to such person.
Termination of Agreement
This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund. Additionally, the Bank reserves the right to charge for any other
reasonable expenses associated with such termination and/or a charge
equivalent to the average of three (3) month's fees.
Assignment
Except as provided in Section 3.03 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered
as a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange
Act of 1934, as amended ("Section 17A(c)(l)"), (ii) a BFDS subsidiary duly
registered as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS
affiliate; provided, however, that the Bank shall be as fully responsible to
the Fund for the acts and omissions of any subcontractor as it is for its own
acts and omissions.
Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the
Board of Directors of the Fund.
Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject hereof
whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
JAPAN OTC EQUITY FUND, INC.
BY:________________________
ATTEST:
- -----------------------------
STATE STREET BANK AND TRUST COMPANY
BY:________________________________
Vice President
ATTEST:
- -----------------------------
Assistant Secretary
Exhibit (n)
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this registration statement on Form N-2 (the
"Registration Statement") of our report dated May 11, 1999, relating to the
financial statements and financial highlights appearing in the April 7, 1999
Annual Report to Shareholders of the Japan OTC Equity Fund, Inc., which also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" and "Experts"
in the Prospectus.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
September ___, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 73352219
<INVESTMENTS-AT-VALUE> 67524197
<RECEIVABLES> 41276
<ASSETS-OTHER> 3422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 67568895
<PAYABLE-FOR-SECURITIES> 640880
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 188445
<TOTAL-LIABILITIES> 829325
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 122255408
<SHARES-COMMON-STOCK> 11387819
<SHARES-COMMON-PRIOR> 11387502
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (1020479)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (49805627)
<ACCUM-APPREC-OR-DEPREC> (5828514)
<NET-ASSETS> 66739570
<DIVIDEND-INCOME> 436095
<INTEREST-INCOME> 68020
<OTHER-INCOME> 0
<EXPENSES-NET> (927704)
<NET-INVESTMENT-INCOME> (423589)
<REALIZED-GAINS-CURRENT> (6357539)
<APPREC-INCREASE-CURRENT> (8329707)
<NET-CHANGE-FROM-OPS> 11548579
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (56937)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1659
<NET-CHANGE-IN-ASSETS> 11493301
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (539953)
<OVERDIST-NET-GAINS-PRIOR> (43448088)
<GROSS-ADVISORY-FEES> 556245
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 927704
<AVERAGE-NET-ASSETS> 51478195
<PER-SHARE-NAV-BEGIN> 4.85
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 1.06
<PER-SHARE-DIVIDEND> (0.01)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 5.86
<EXPENSE-RATIO> 1.80
</TABLE>
Brown & Wood llp
One World Trade Center
New York, N.Y. 10048
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
Writer's Direct Dial
(212) 839-5394
September 15, 1999
VIA ELECTRONIC FILING
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Division of Investment Management
Re: Japan OTC Equity Fund, Inc.
Registration Statement on Form N-2
Proposed Common Stock Rights Offering
Ladies and Gentlemen:
On behalf of Japan OTC Equity Fund, Inc. (the "Fund"), transmitted
herewith for filing with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), and the Investment Company Act of 1940, as amended (the "Investment
Company Act"), is the Fund's Registration Statement on Form N-2, including the
exhibits thereto (the "Registration Statement"), relating to the offering of
additional shares of the Fund's common stock, with a par value of $0.10 per
share (the "Common Stock"), pursuant to a proposed rights offering.
Prior to this filing, a wire transfer in the amount of $13,345.63 in
payment of the registration fee was made to the Commission's designated
lockbox at Mellon Bank in Pittsburgh, Pennsylvania.
This filing is intended to comply with Rule 421 under the Securities
Act. In that regard, the front and back Cover Pages, Prospectus Summary and
Risk Factors and Special Considerations sections of the Prospectus
constituting Part A of the Registration Statement are written using "Plain
English" principles.
To the extent the staff of the Division of Investment Management (the
"Staff") determines to review this filing, in Investment Company Act Release
No. 13768 (February 15, 1991) (the "Release"), the Division of Investment
Management announced review procedures for investment companies providing for
expedited cursory or partial review of investment company registration
statements, in the discretion of the Staff, if certain conditions are met. The
Release requests that information be furnished to the Staff concerning the
extent to which the current filing contains disclosure information that is
similar to information contained within filings of the same complex that
previously were reviewed by the Commission.
In that regard, reference is made to the Fund's Registration
Statement on Form N-2 (the "1994 Registration Statement") (File Nos. 33-78030,
811-05992) relating to the Fund's Common Stock, which was reviewed by the
Staff and was declared effective by the Commission on June 2, 1994. The 1994
Registration Statement contains substantially similar information as that set
forth in the Registration Statement (updated for certain non-material changes
and to provide current financial information) with respect to the following
matters:
Prospectus Summary
- ------------------
- - The Japanese OTC Market
- - Management and Investment Advisory Arrangements
- - Risk Factors and Special Considerations--Foreign Market Risk
- - Risk Factors and Special Considerations--Investing in Japan and the
Japanese OTC Market
- - Risk Factors and Special Considerations--Market Risk
- - Risk Factors and Special Considerations--Currency Hedging Transactions
- - Risk Factors and Special Considerations--Non-diversification
- - Risk Factors and Special Considerations--Anti-takeover Provisions
Prospectus
- ----------
- - Financial Highlights
- - The Fund
- - Market and Net Asset Value Information
- - Risk Factors and Special Considerations--The Japanese OTC Market
- - Risk Factors and Special Considerations--Investment in Japan
- - Risk Factors and Special Considerations--Political and Economic Factors
- - Risk Factors and Special Considerations--Exchange Rate Fluctuations
- - Risk Factors and Special Considerations--Political and Economic Factors
- - Risk Factors and Special Considerations--Portfolio Securities
- - Risk Factors and Special Considerations--Japanese OTC Market
Corrections
- - Risk Factors and Special Considerations--Operating Expenses
- - Risk Factors and Special Considerations--Net Asset Value Discount
- - Risk Factors and Special Considerations--Non-Diversified Status
- - Risk Factors and Special Considerations--Certain Provisions of the
Articles of Incorporation
- - Portfolio Composition
- - Investment Objective and Policies
- - The Japanese OTC Market
- - Japanese OTC Market Index & Nikkei Average Comparison
- - Investment Restrictions
- - Dividend and Distributions
- - Taxes
- - Directors and Officers
- - Management and Investment Advisory Arrangements
- - Portfolio Transactions
- - Japanese Foreign Investment and Exchange Control Laws
- - Dividend Reinvestment Plan
- - Net Asset Value
- - Capital Stock
- - Custodian
- - Transfer Agent, Dividend Disbursing Agent and Registrar
- - Legal Opinions
- - Experts
- - Available Information
- - Financial Statements
- - Appendix I--Hedging Foreign Currency Risks
With regard to the Prospectus section captioned "Risk Factors and
Special Considerations--Year 2000," reference is made to the Registration
Statement on Form N-1A of Nomura Pacific Basin Fund, Inc. (the "NPBF
Registration Statement") (File Nos. 2-96612, 811-4269) relating to that fund's
shares of common stock, which was became effective on July 30, 1999 pursuant
to Rule 485(b) under the Securities Act. The NPBF Registration Statement
contains substantially identical information to that set forth in the
Registration Statement under the caption captioned "Risk Factors and Special
Considerations--Year 2000." The Fund and Nomura Pacific Basin Fund, Inc. are
funds in the same Fund Complex.
As John MacKinnon of this firm recently discussed with Mr. Michael
Shaffer of the staff, the disclosure concerning both the terms of the rights
offering, and the considerations relating to such offering, is substantially
similar to the information in the Registration Statement on Form N-2 (the
"Alliance Registration Statement") (File Nos. 333-77839, 811-08702) relating
to the offering by Alliance All-Market Advantage Fund of additional shares of
that fund's shares of common stock pursuant to a rights offering. The
Commission in June 1999 declared the Alliance Registration Statement, which
had been reviewed by the Staff, effective. In accordance with the discussion
with Mr. Shaffer, we are able to confirm that the Alliance Registration
Statement contains substantially similar information to that set forth in the
Alliance Registration Statement with respect to the following matters:
Prospectus Summary
- ------------------
- - Purpose of the Offer
- - Important Terms of the Offer
- - Over-Subscription Privilege
- - Important Dates to Remember
- - Non-transferability of Rights
- - Method of Exercising Rights
- - Offering Fees and Expenses
- - Foreign Restrictions
- - Use of Proceeds
- - Information Agent
- - Information Regarding the Fund
- - Risk Factors and Special Considerations--Dilution--Net Asset Value
and Non-Participation in the Offer
- - Risk Factors and Special Considerations--Net Asset Value Discount
- - Risk Factors and Special Considerations--Year 2000
Prospectus
- ----------
- - Cover Page
- - Fee Table
- - Use of Proceeds
- - The Offer
- - Risk Factors and Special Considerations--Dilution--Net Asset Value
and Non-Participation in the Offer
It is contemplated that the Fund's proposed rights offering will be
structured in a manner substantially identical to the rights offering for
Alliance All-Market Advantage Fund, Inc. For example, it is presently
contemplated that the Fund's Board of Directors will approve the following
transaction structure relating to the Fund's proposed rights offering (the
same structure utilized in the Alliance All-Market Advantage Fund, Inc. rights
offering): (i) shareholders will receive the right to subscribe for one new
share of Common Stock for every three rights that they receive, (ii) the
rights will be non-transferable, and (iii) the subscription price will be
determined by formula. Although the Fund and Alliance All-Market Advantage
Fund, Inc. are not in the same Fund Complex, the Fund nonetheless believes
that the Registration Statement sections delineated above should require only
expedited cursory or partial review because those sections contain disclosure
information that is substantially identical to information contained within
the filings for a rights offering conducted only a few months earlier that was
structured substantially identical to the Fund's proposed rights offering.
In light of the substantial similarity between the Registration
Statement and those previously reviewed by the Staff, we respectfully request
expedited cursory or partial review of the Registration Statement by the
Staff. Since the contemplated offering may be affected by changes in market
conditions and the Fund desires to commence its rights offering on or about
October 19, 1999, we would appreciate any comments you may have prior to that
date.
The Fund believes that the presentation of information in the
Prospectus and the Prospectus Summary contained therein provides a "clear,
concise, and understandable" explanation of the Fund's policies and, to the
extent possible given the relatively detailed nature of the proposed rights
offering, avoids "the use of technical or legal terms, complex language, or
excessive detail" as required by Part A of General Instructions to Form N-2.
Should you have any questions relating to this filing either to the
undersigned at (212) 839-5394 or to John A. MacKinnon of this firm at (212)
839-5534. Thank you for your attention to this filing.
Very truly yours,
Robert J. Borzone, Jr.
Transmission
cc: John F. Wallace, Nomura Asset Management U.S.A. Inc.
