As filed with the Securities and Exchange Commission on October 22, 1999
Securities Act File No. 333-87159
Investment Company Act File No. 811-05992
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM N-2
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|X| PRE-EFFECTIVE AMENDMENT NO. 1
|_| POST-EFFECTIVE AMENDMENT NO. AND/OR
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| AMENDMENT NO. 9
---------------------------
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)
----------------------------------------
(212) 509-8181
(Registrant's Telephone Number, including Area Code)
----------------------------------------------------
John F. Wallace
Japan OTC Equity Fund, Inc.
180 Maiden Lane, New York, NY 10038
(Name and Address of Agent for Service)
---------------------------------------
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.
---------------------------
Approximate date of proposed public offering: As soon as practicable after
the effective date of this Registration Statement.
---------------------------
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. |_| ____________________
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 Offering Price Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($0.10 par value) 3,800,939 shares $12.63(1) $48,005,860(1) $13,345.63(2)
955,236 $12.16(3) $11,615,670(3) $ 3,229.16(4)
--------- ----- ----------- ----------
4,756,175* $59,621,530* $16,574.79*
=====================================================================================================================
</TABLE>
(1) Estimated Pursuant to Rule 457(c) under the Securities Act of 1933 on
the basis of the market price per share on September 9, 1999 for the filing of
the Fund's Registration Statement on September 15, 1999.
(2) Previously paid in connection with the filing of the Fund's
Registration Statement on September 15, 1999.
(3) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 on
the basis of the market price per share on October 18, 1999 for the filing of
this Pre-Effective Amendment No. 1 to the Fund's Registration Statement.
(4) Paid herewith via transmission to the designated lockbox at Mellon
Bank in Pittsburgh, PA.
*Total
-----------------------
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 OCTOBER 22, 1999
JAPAN OTC EQUITY FUND, INC.
3,804,940 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, October 25,
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 951,235 shares, for a total of
4,756,175 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 October 19, 1999, the net asset value per Fund
share, or NAV, was $13.52 and the last reported sales price of a share on the
NYSE was $12.6875.
The subscription price per share will be 95% 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
$12.05 per share (based on approximately 95% of the last reported sales price on
October 19, 1999). This offer will expire at 5:00 P.M., New York City time, on
November 19, 1999 unless the Fund extends the offering as described in the
Prospectus.
------------------
Per Share Total
--------- -----
Estimated Subscription Price.................... $12.05 $45,849,527
Sales Load...................................... $ 0.45 $ 1,719,357
Proceeds to the Fund*........................... $11.60 $44,130,170
- ----------
The estimated subscription price is based on 95% of the last reported
sales price per share on the NYSE on October 19, 1999. The proceeds to the
Fund assume all 3,804,940 shares are purchased at this estimated price. If
the Fund increases the number of shares subject to subscription by up to
951,235 as described above, the proceeds to the Fund would be $55,162,712.
*Before deduction of expenses incurred by the Fund related to the offer
estimated at $500,000, including an aggregate of up to $100,000 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 18 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 reference.
------------------
PaineWebber Incorporated
------------------
The date of this Prospectus is October ___, 1999.
1
<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. The Fund could then be in a
position 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. That
flexibility would enable the Fund 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. The Fund could also 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 below market price per
share and/or net asset value per share, 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 the dilutive
effect of the offer on exercising and
non-exercising record date shareholders.
There can be no assurance that the offer
will be successful, that other assets will
be invested to the Fund's advantage or that
the Fund's expense ratio will be lowered by
increasing the size of the Fund.
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, PaineWebber Incorporated, the
dealer manager for the offer, will receive a
dealer manager fee and soliciting dealer
fees as described below.
Important Terms of the Offer Aggregate number of shares offered
3,804,940 (not including up to 951,235
additional shares the Fund may issue to
cover over-subscription requests).
Number of non-transferable rights issued to
each record date shareholder
One right for each whole share owned on the
record 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
95% 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.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Estimated subscription price per share
$12.05
Expiration date
5:00 P.M., New York City time, on November
19, 1999, unless the offer is extended.
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 951,235 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>
Record Date............................. October 25, 1999
Subscription period..................... October 25, 1999 to November 19, 1999*
Expiration date and pricing date........ November 19, 1999*
Subscription certificates and
payment for shares due**............. November 19, 1999*
Notice of guaranteed delivery due....... November 19, 1999*
Subscription certificate and payment
for guarantees of delivery due**..... November 24, 1999*
Confirmation mailed to participants..... December 2, 1999*
Final payment for shares***............. December 16, 1999*
</TABLE>
-------------
* 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.
A notice of guaranteed delivery is a
form sent by your broker-dealer, bank
or trust company that guarantees on
your behalf delivery of the
subscription certificate and payment
by the close of business on the third
business day after the expiration
date.
*** 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 16.
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 the NYSE being officially
notified of the issuance of those shares.
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
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
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 November 19, 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. Regardless, record date shareholders
who fully exercise all their rights 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 3.75% of the
aggregate subscription price for each share
issued pursuant to the offer. The dealer
manager will reallow 2.50% of the
subscription price for shares issued
pursuant to the Offer to certain
broker-dealers, including the Dealer
Manager, that have assisted in soliciting
the exercise of rights as described in this
Prospectus. Other offering expenses incurred
by the Fund are estimated at $500,000, which
includes up to $100,000 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
$12.05 per share, the estimated net proceeds
of the offer are approximately $43,630,170.
This amount assumes that all 3,804,940
shares offered in the primary subscription
are sold and that the offering expenses are
$500,000. 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
$11,032,542.
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: (877) 460-9334
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Shareholders may also contact their broker
or nominees for information with respect to
the offer.
Information Regarding the Fund The Fund has been a non-diversified,
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 to the Fund 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
77.0% 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 exchange. Additionally, the manager
believes the companies registered on the
Japanese OTC market are generally in an
earlier stage of their business cycle 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 $160
billion in assets under management as of
August 31, 1999.
- --------------------------------------------------------------------------------
5
<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. The Fund primarily invests in securities of
Japanese issuers. 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 in U.S. dollar terms. 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 investment primarily in equity securities traded in the Japanese
OTC market 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. These provisions 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.
- --------------------------------------------------------------------------------
6
<PAGE>
FEE TABLE
The following tables are intended to assist shareholders in understanding
the various costs and expenses that a shareholder in this Offer will bear,
directly or indirectly.
Shareholder Transaction Expenses:
Sales Load (as a percentage of subscription price paid
directly from your Investment)(a)........................ 3.75%
Annual Expenses (as a percentage of net assets attributable to Common
Stock)(b):
Management Fees (c)...................................0.95%
Other Expenses........................................0.32%
----
Total Annual Expenses.................................1.27%
- ----------
(a) The Fund has agreed to pay PaineWebber Incorporated, the Dealer Manager, a
fee for its financial advisory and marketing services equal to 3.75% of
the aggregate subscription price for each share issued pursuant to the
Offer. The Dealer Manager will reallow to certain broker-dealers,
including the Dealer Manager, solicitation fees equal to 2.50% 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 $500,000, which includes up to
$100,000 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
$500,000.
(c) See "Management and Investment Advisory Arrangements"--page 41.
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 3.75% 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 $50 $76 $105 $185
</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 should not be considered a representation of future expenses,
and the Fund's actual expenses may be more or less than those shown.
7
<PAGE>
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>
For the Year Ended
Six Month -----------------------------------------------------------
Period Ended February 28, February 29, February 28,
August 31, 1999 ------------------------------- ------------ ------------
(Unaudited) 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
share 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 income (loss) ................. (0.68%)+ (0.82%) (1.0%) (1.1%) (0.83%) (0.78%)
Portfolio turnover ........................... 27% 35% 29% 71% 79% 20%
</TABLE>
(footnotes on next page)
8
<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
share 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 income (loss) ................. (0.98%) (0.95%) (0.58%) 2.19%+
Portfolio turnover ........................... 36% 32% 36% 32%
</TABLE>
- ----------
* 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
9
<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 estimated subscription
price of $12.05 per share, the net proceeds of the Offer to the Fund assuming
all 3,804,940 shares offered in the primary subscription are sold are estimated
to be approximately $43,630,170, after deducting offering expenses payable by
the Fund estimated at approximately $500,000. If the Fund increases the number
of shares subject to subscription by up to 25%, or 951,235 shares, in order to
satisfy over-subscription requests, the additional net proceeds will be
approximately $11,032,542. 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. As discussed above, shares of closed-end investment
companies frequently trade at a discount to 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.
10
<PAGE>
<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 $7.5000 $6.2500 $7.29 $6.29 9.13% (7.68)% 55,674
May 31, 1997 7.3750 5.8750 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 4.8750 5.89 4.48 17.19 0.51 66,586
February 28, 1998 5.8125 4.5000 5.02 4.17 27.26 8.57 54,989
May 31, 1998 5.7500 5.0000 4.81 4.29 24.73 13.02 32,070
August 31, 1998 5.6875 3.8750 4.42 3.88 33.20 (0.13) 30,575
November 30, 1998 6.3750 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 5.70 21.07 (0.85) 76,003
August 31, 1999 12.3125 7.8750 12.63 8.16 6.26 (14.13) 102,820
</TABLE>
- ----------
*Source: Bloomberg Financial Markets
The Fund's NAV at the close of business on September 14, 1999 (the last
trading date on which the Fund publicly reported its NAV prior to the
announcement of the Offer) and on October 19, 1999 (the last trading date on
which the Fund publicly reported its NAV prior to the date of this Prospectus)
was $15.64 and $13.52 respectively. The last reported sales price of the Fund's
shares on the NYSE on those dates was $14.75 and $12.6875, 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. The
Fund could then be in a position to take advantage more fully of existing and
future investment opportunities, 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.
The Fund could also avoid 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, especially given recent regulatory changes that make it easier
for early-stage, high growth companies to participate in the Japanese capital
markets. 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. The Board
further believes 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 the dilutive effect of the offer 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.
11
<PAGE>
Terms of the Offer
The Fund is issuing to its shareholders of record as of the close of
business on October 25, 1999, non-transferable rights entitling the holders to
subscribe for an aggregate of 3,804,940 shares of the Fund's common stock
(4,756,175 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 October 25, 1999 and ends at 5:00 P.M., New York City time,
on November 19, 1999, unless the subscription period is extended. The rights are
evidenced by Subscription Certificates that will be mailed to record date
shareholders or their nominees, 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.
Only whole shares can be purchased. Accordingly, shares may be purchased
in the primary subscription only pursuant to the exercise of three 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 all 100 rights, that record date shareholder will only be able to
purchase 33 shares, with the one remaining right 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 951,235
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.
The Fund will not offer or sell any shares that are not subscribed for
pursuant to the primary subscription or the over-subscription privilege.
12
<PAGE>
Subscription Price
The subscription price for each share to be issued pursuant to the Offer
will be 95% 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 $11.00, and the
closing NAV per share on the expiration date is $10.00, the subscription price
will be $9.50 (95% of $10.00). 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 $9.00, and the closing NAV per share on the
expiration date is $11.00, the subscription price will be $8.55 (95% of $9.00).
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 $12.05 per share (based on approximately 95% of the last
reported sales price on October 19, 1999). The actual subscription price may be
more than the estimated subscription price.
The Fund announced the Offer on September 15, 1999. The Fund's NAV at the
close of business on September14, 1999 (the last trading date on which the Fund
publicly reported its NAV prior to the announcement) and on October 19, 1999
(the last trading date on which the Fund publicly reported its NAV prior to the
date of this Prospectus) was $15.64 and $13.52, respectively. The last reported
sales price of the Fund's shares on these dates was $14.75 and $12.6875,
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 the NYSE being officially notified
of the issuance of those shares.
Expiration of the Offer
The Offer will expire at 5:00 P.M., New York City time, on November 19,
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. Although an extension is unlikely, significant unforeseen events in the
Japanese or world financial markets or political arena having a material adverse
effect on the Japanese markets could result in an extension of the Offer. 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
$15,000, plus reimbursement for its out-of-pocket expenses related to the Offer
estimated to be approximately $20,000. 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 Corporate Investor
Communications, Inc. at (877) 460-9334 (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
(781) 575-4826 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 (781) 575-4816. 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 or
by the close of business on the third business day after the expiration date
following timely receipt of a Notice of Guaranteed Delivery.
13
<PAGE>
<TABLE>
<CAPTION>
By First Class Mail By Hand By Express Mail or Overnight Courier
- ------------------- ------- ------------------------------------
<S> <C> <C>
EquiServe Security Transfer and Reporting EquiServe
Attn: Corporate Actions Services, Inc. Attn: Corporate Actions
P.O. Box 9573 c/o EquiServe 40 Campanelli Drive
Boston, MA 02205-9573 100 William Street, Galleria Braintree, MA 02184
U.S.A. New York, NY 10038 U.S.A.
U.S.A.
</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, bank 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, and may exercise 300 rights for
the purchase of 100 shares, with the one remaining right expiring. However,
record date shareholders who receive fewer than three rights will be entitled to
subscribe for one share at the subscription price pursuant to the primary
subscription. Regardless, 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 at its telephone number and address listed below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072-2586
Toll Free: (877) 460-9334
Broker-dealers and banks, please call: (201) 896-5682
14
<PAGE>
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 $6,000, plus reimbursement for its out-of-pocket expenses
related to the Offer, estimated to be $5,000.
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 $12.05 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 subscription from a bank, a trust company or a NYSE
member 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 $12.05 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 are received by the Subscription Agent by the close of
business on the third business day after the expiration date
November 24, 1999, unless the Offer is extended.)
Within eight business days after the expiration date, (December 2, 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). The confirmation will indicate (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 (December 16, 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
15
<PAGE>
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 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 who 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 share-
16
<PAGE>
holder'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, any 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 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
PaineWebber Incorporated, a broker-dealer and member of the 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 3.75% of the aggregate
subscription price for each share issued pursuant to the Offer. The Dealer
Manager will reallow to certain broker-dealers, including the Dealer Manager,
solicitation fees equal to 2.50% of the subscription price per share for each
share issued pursuant to the Offer as a result of their soliciting efforts.
17
<PAGE>
In addition, the Fund has agreed to reimburse the Dealer Manager up to an
aggregate of $100,000 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 95% 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
$12.05 (which is 95% of the Fund's market price as of October 19, 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 $0.597 per
share or 4.4%. 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 investment primarily in
equity securities traded in the Japanese OTCmarket 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
18
<PAGE>
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 June 30, 1999, the Japanese economy grew at an annualized
rate of 3.4%.
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.
19
<PAGE>
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.
(YEN) per U.S. $1.00
-----------------------------------------
Year High(1) Low(1) Average(2)
- ---- ------- ------ ----------
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
Source:
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 to (YEN)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
20
<PAGE>
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
</TABLE>
Source: Nihon Keizai Shimbun
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 21.2% and at a premium above net
asset value as high as 42.4%. As of October 19, 1999, the Fund's shares were
trading at a 6.2% 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
"Management and Investment Advisory Arrangements--Compensation and 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.
21
<PAGE>
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:
The Fund's Portfolio of Investments by Industry
(as a percentage of net assets)
<TABLE>
<CAPTION>
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% 2.8%
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 0.4
Information and Software ............. 9.9 7.3 5.8 6.7
Machinery and Machine Tools .......... 5.9 5.4 7.3 6.9
Miscellaneous Manufacturing .......... 10.2 11.6 12.1 12.7
Non-Ferrous Metals ................... 0.0 0.0 0.0 0.5
Publishing ........................... 0.0 1.3 0.0 0.7
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
22
<PAGE>
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 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 an earlier stage of their
business cycle 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 negative 13.1% 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 9.0% 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. While the Fund is investing for
temporary defensive purposes, it may not meet its investment objective.
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
23
<PAGE>
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
24
<PAGE>
((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 through 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
25
<PAGE>
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 (o1
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 (o200
million) (o500 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.
26
<PAGE>
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 Exchange Tokyo Stock Exchange Japanese OTC
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 0.11 1 0.00 0
Construction ........... 2.10 114 1.91 36 1.44 56
Foods .................. 2.79 66 3.47 27 1.84 30
Textiles & Apparels .... 0.99 49 4.09 17 0.25 11
Pulp & Paper ........... 0.60 17 0.18 5 0.22 5
Chemicals .............. 4.66 102 1.75 28 6.33 48
Pharmaceutical ......... 4.33 34 1.60 6 0.59 8
Oil & Coal ............. 0.54 9 0.23 3 0.03 1
Rubber ................. 0.89 11 0.13 5 0.16 5
Glass & Ceramics ....... 0.86 24 0.87 14 0.84 18
Iron & Steel ........... 1.47 36 0.39 13 0.16 8
Non-Ferrous Metals ..... 0.99 24 0.53 10 0.12 7
Metal Products ......... 0.57 31 1.26 21 0.72 21
Machinery .............. 3.43 105 3.69 49 9.94 45
Electrical Appliances .. 16.70 138 7.20 50 6.62 71
Transportation Equipment 7.98 61 1.76 27 1.02 24
Precision Instruments .. 0.91 19 0.92 9 0.88 13
Other Products ......... 2.06 38 13.78 20 3.39 36
Electric/Gas ........... 3.42 14 0.40 3 0.02 1
Land Transportation .... 3.30 31 0.69 8 0.43 15
Marine Transportation .. 0.26 11 0.34 8 0.08 3
Air Transportation ..... 0.39 4 0.05 1 0.47 1
Warehouse .............. 0.18 12 0.57 13 0.60 6
Communications ......... 7.87 5 0.00 0 8.89 3
Wholesale .............. 3.85 83 5.74 46 11.48 139
Retail ................. 5.24 78 12.44 28 13.07 112
Bank ................... 13.32 97 0.21 2 0.07 1
Brokerage .............. 2.06 17 1.09 5 0.29 7
Insurance .............. 1.34 14 0.00 0 0.04 1
Other financial ........ 2.60 19 10.97 8 2.41 5
Real Estate ............ 0.87 23 2.47 7 1.41 12
Service ................ 3.23 43 21.16 49 25.62 140
------ ----- ------ --- ------ ---
Total ................ 100.00% 1,344 100.00% 519 100.00% 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.
27
<PAGE>
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 (o19.6
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 o50 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:
Most Actively Traded Japanese OTC Companies (1)
(in $)
<TABLE>
<CAPTION>
Average
Monthly Market Share-
1999 Market Prices Trading Capital- Holders'
(US$)(2) Volume ization Equity
---------------------------- (3) (4) (5)
Name Business High Low Close (000 shs.) (US$ mil.) (US$ mil.)
- ---- -------- ---- --- ----- --------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Bodysonic Movie maker $ 16.87 $ 1.11 $ 14.41 10,553 $ 727 $ 17.19
2 THK Bearing maker 31.70 10.60 30.43 5,637 3520 664.36
3 JAFCO Venture capital 77.13 22.97 70.69 2,637 3403 787.07
4 Trend Micro Software maker 218.68 54.25 218.68 2,320 4644 103.75
5 KIS Denki Home electronics retail 30.94 7.63 27.12 2,005 439 158.59
6 Amway Japan Direct mail sales 11.78 7.63 10.43 2,119 1502 537.03
7 Aruze Pachinko machine maker 118.66 20.00 88.15 2,015 7482 611.70
8 Oracle Corp. Japan System vender 133.92 60.39 115.27 2,777 9823 383.30
9 Yamada Denki Home electronics retail 63.40 20.68 59.33 1,651 1275 252.25
10 InterQ Internet provider 197.49 133.07 165.28 2,129 1007 3.31
11 Mandom Cosmetics maker 33.57 6.87 31.02 1,066 729 225.81
12 Innotech Semicon-related trading 32.80 4.83 29.58 1,037 527 163.88
13 Venture Link Franchise chain support 38.82 3.31 36.96 968 573 44.41
14 I-O Data Device PC memory supplier 40.18 15.26 33.65 1,071 499 159.10
15 Yoshinoya D & C Fast food chain 24.58 10.43 22.04 975 1460 516.50
16 United Arrows Clothing retail 171.22 105.95 160.20 1,401 1274 21.79
17 Avex Music producer 198.34 41.53 183.93 1,167 2188 184.52
18 Daiichikosho Karaoke equipment 34.75 9.15 34.58 710 648 564.03
19 Justsystem PC software developer 16.19 5.85 15.26 905 458 187.52
20 Aucnet Used car auctioneer 80.61 15.26 73.74 770 769 47.66
21 Goodwill Group Human resources provider 406.85 194.95 406.85 1,050 1660 6.22
22 H.I.S Airline ticket retail 36.87 17.71 31.36 688 532 180.01
23 Megachips Custom LSI maker 150.03 36.87 127.99 714 1483 55.30
24 Square Software maker 46.02 18.65 46.02 674 1503 293.74
25 Japan Business
Computer Computer wholesale 27.29 8.31 22.04 722 424 90.13
26 Hokuto Mushroom grower 58.06 20.09 47.72 677 837 144.35
27 Alpha Systems Software developer 94.93 49.58 62.30 839 544 24.75
28 Fujimi Polishing material maker 59.33 32.21 47.47 527 741 269.43
29 Gulliver
International Used cars retail 81.45 21.19 73.32 798 549 14.00
30 Joint Condominium developer 95.78 10.26 73.74 979 478 19.27
Average of 30 companies (7): 1,719 $ 1,723.3 $ 224.37
===== ========= =========
<CAPTION>
After
Tax Net Total Div'd P/E
Income Assets Yield Ratio
(5) (5) (6)
Name (US$ mil.) (US$ mil.) (%) (x)
- ---- ---------- ---------- --- ---
<S> <C> <C> <C> <C>
1 Bodysonic $ 3.89 $ 75.18 --% 186.8x
2 THK 34.04 1,647.61 0.42 --
3 JAFCO (69.85) 2,120.58 0.30 --
4 Trend Micro 8.93 147.96 0.04 520.3
5 KIS Denki 11.32 354.78 0.56 38.8
6 Amway Japan 108.31 934.30 8.13 13.9
7 Aruze 181.48 1,220.42 0.19 41.2
8 Oracle Corp. Japan 67.55 535.27 0.66 145.4
9 Yamada Denki 26.12 666.34 0.33 48.8
10 InterQ 0.83 9.97 -- 1212.2
11 Mandom 13.42 352.59 0.53 54.4
12 Innotech (25.41) 637.37 0.21 --
13 Venture Link (1.62) 112.66 0.23 --
14 I-O Data Device 10.93 276.92 0.45 45.7
15 Yoshinoya D & C 45.24 646.34 1.04 32.3
16 United Arrows 9.75 56.65 0.04 130.7
17 Avex 33.66 369.07 0.30 65.0
18 Daiichikosho 19.55 1,425.11 0.86 33.2
19 Justsystem (44.51) 314.99 -- --
20 Aucnet 0.65 97.19 0.19 1177.8
21 Goodwill Group (0.83) 51.07 0.02 --
22 H.I.S 11.01 409.58 0.42 48.3
23 Megachips 7.19 156.67 0.07 206.4
24 Square 35.18 487.95 0.76 42.7
25 Japan Business
Computer 11.95 288.60 0.38 35.5
26 Hokuto 15.88 229.09 0.44 52.7
27 Alpha Systems 4.16 86.42 0.24 130.8
28 Fujimi 22.98 337.36 0.45 32.2
29 Gulliver
International 4.68 58.07 0.06 117.4
30 Joint 5.67 205.26 0.29 84.4
Average of 30 companies(7) $ 18.41 $ 477.04 0.65% 187.4x
========= ========= ==== =====
</TABLE>
Notes:
1) These activity traded issues were chosen on the basis of actual
trading volume 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.
28
<PAGE>
Most Actively Traded Japanese OTC Companies (1)
(in (YEN))
<TABLE>
<CAPTION>
Average
Monthly Market
1999 Market Prices Trading Capital-
(YEN)(2) Volume ization
---------------------------- (3) (4)
Name Business High Low Close (000 shs.) (YEN mil.)
- ---- -------- ---- --- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 Bodysonic Movie maker (YEN)1,990 (YEN)131 (YEN)1,700 10,553 (YEN)85.8
2 THK Bearing maker 3,740 1,250 3,590 5,637 415.3
3 JAFCO Venture capital 9,100 2,710 8,340 2,637 401.5
4 Trend Micro Software maker 25,800 6,400 25,800 2,320 547.9
5 KIS Denki Home electronics retail 3,650 900 3,200 2,005 51.8
6 Amway Japan Direct mail sales 1,390 900 1,230 2,119 177.2
7 Aruze Pachinko machine maker 14,000 2,360 10,400 2,015 882.7
8 Oracle Corp. Japan System vender 15,800 7,125 13,600 2,777 1158.9
9 Yamada Denki Home electronics retail 7,480 2,440 7,000 1,651 150.5
10 InterQ Internet provider 23,300 15,700 19,500 2,129 118.8
11 Mandom Cosmetics maker 3,960 810 3,660 1,066 86.1
12 Innotech Semicon-related trading 3,870 570 3,490 1,037 62.1
13 Venture Link Franchise chain support 4,580 390 4,360 968 67.6
14 I-O Data Device PC memory supplier 4,740 1,800 3,970 1,071 58.9
15 Yoshinoya D & C Fast food chain 2,900 1,230 2,600 975 172.2
16 United Arrows Clothing retail 20,200 12,500 18,900 1,401 150.3
17 Avex Music producer 23,400 4,900 21,700 1,167 258.2
18 Daiichikosho Karaoke equipment 4,100 1,080 4,080 710 76.5
19 Justsystem PC software developer 1,910 690 1,800 905 54.0
20 Aucnet Used car auctioneer 9,510 1,800 8,700 770 90.7
21 Goodwill Group Human resources provider 48,000 23,000 48,000 1,050 195.8
22 H.I.S Airline ticket retail 4,350 2,090 3,700 688 62.7
23 Megachips Custom LSI maker 17,700 4,350 15,100 714 175.0
24 Square Software maker 5,430 2,200 5,430 674 177.4
25 Japan Business
Computer Computer wholesale 3,220 980 2,600 722 50.1
26 Hokuto Mushroom grower 6,850 2,370 5,630 677 98.8
27 Alpha Systems Software developer 11,200 5,850 7,350 839 64.2
28 Fujimi Polishing material maker 7,000 3,800 5,600 527 87.4
29 Gulliver
International Used cars retail 9,610 2,500 8,650 798 64.8
30 Joint Condominium developer 11300 1,210 8700 979 56.4
Average of 30 companies (7): 1,719 (YEN)203.3
===== =====
<CAPTION>
Share- After
Holders' Tax Net Total Div'd P/E
Equity Income Assets Yield Ratio
(5) (5) (5) (6)
Name (YEN mil.) (YEN mil.) (YEN mil.) (%) (x)
- ---- ------------ ---------- ---------- --- ---
<C> <C> <C> <C> <C> <C>
1 Bodysonic (YEN)2,028 (YEN)459 (YEN)8,870 --% 186.8x
2 THK 78,381 4,016 194,385 0.42 --
3 JAFCO 92,859 (8,241) 250,186 0.30 --
4 Trend Micro 12,240 1,053 17,456 0.04 520.0
5 KIS Denki 18,711 1,336 41,857 0.56 38.8
6 Amway Japan 63,359 12,778 110,229 8.13 13.9
7 Aruze 72,168 21,411 143,985 0.19 41.2
8 Oracle Corp. Japan 45,222 7,969 63,151 0.66 145.4
9 Yamada Denki 29,760 3,082 78,615 0.33 48.8
10 InterQ 391 98 1,176 -- 1213.2
11 Mandom 26,641 1,583 41,598 0.55 54.3
12 Innotech 19,334 (2,998) 75,197 0.21 --
13 Venture Link 5,239 (191) 13,292 0.23 --
14 I-O Data Device 18,771 1,290 32,671 0.45 45.7
15 Yoshinoya D & C 60,937 5,337 76,255 1.04 32.3
16 United Arrows 2,571 1,150 6,683 0.04 130.7
17 Avex 21,770 3,971 43,543 0.30 65.0
18 Daiichikosho 66,544 2,307 168,135 0.86 33.1
19 Justsystem 22,124 (5,251) 37,162 -- --
20 Aucnet 5,623 77 11,466 0.19 1183.1
21 Goodwill Group 734 (98) 6,025 0.02 --
22 H.I.S 21,237 1,299 48,322 0.42 48.3
23 Megachips 6,524 848 18,484 0.07 206.3
24 Square 34,655 4,151 57,568 0.76 42.7
25 Japan Business
Computer 10,633 1,410 34,049 0.38 35.5
26 Hokuto 17,031 1,874 27,028 0.44 52.7
27 Alpha Systems 5,325 491 11,722 0.24 130.8
28 Fujimi 31,787 2,711 39,802 0.45 32.2
29 Gulliver
International 1,652 552 6,851 0.06 117.3
30 Joint 2,273 609 24,216 0.29 84.3
Average of 30 companies (7): (YEN)26,471 (YEN)2,171 (YEN)56,282 0.65% 187.4x
====== ===== ====== ==== =====
</TABLE>
Notes:
1) These activity traded issues were chosen on the basis of actual
trading volume 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.
29
<PAGE>
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(1) Value(1) Market Capitalization(2) Value Capitalization(2)
- ---- ------------ ---------------------------- ------------------------ ----- -----------------
(Year End) (US$) (YEN)(Millions)(3) (US$) (YEN)(Billions)(3) (%) (%)
(Thousands) (Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1989 263 $1,234,014 (YEN)170,442 $ 85,230 (YEN)12,232 30.1% 60.4%
1990 342 3,474,620 503,403 87,326 11,825 58.3 84.0
1991 430 3,101,479 417,428 102,892 12,881 132.2 107.5
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
</TABLE>
Notes:
(1) Through July 31.
(2) Excluding The Bank of Japan.
(3) This table utilizes average yearly exchange rates as set forth in
"Risk Factors and Special Considerations-- Investment in Japan,"
except for the 1999 figures which utilize an exchange rate of o11.9
per U.S. dollar.
Source: Japan Securities Dealers Associations.
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.
30
<PAGE>
Compounded Annualized Return
(U.S. $)
Nikkei TSE
OTC Nikkei Second Section
Period Ending August 31, 1999 Average Average TOPIX Index
- ----------------------------- ------- ------- ----- -----
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)
Note: 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.
Correlation Coefficient (1)
<TABLE>
<CAPTION>
Annualized Nikkei TSE
Standard OTC Nikkei Second Section
Deviation(2) Average Average TOPIX Index
------------ ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Nikkei 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
</TABLE>
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.
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.
31
<PAGE>
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.
Quarterly Changes in Market Indices
(% changes; (YEN) basis)
Nikkei TSE
OTC Nikkei Second Section
Average Average TOPIX Index
------- ------- ----- -----
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.
Japanese OTC Market Index & NIKKEI Average Comparison
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.
[GRAPHIC OMITTED]
Source: Nomura Asset Management Co., Ltd.
32
<PAGE>
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 $1,235 million (Yen 170 billion) in 1989 to $5,540 million
(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. These 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.
33
<PAGE>
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
34
<PAGE>
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.
35
<PAGE>
The Fund is considered to be an exchange non-resident and foreign
investor.
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 o100
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.
36
<PAGE>
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 carry forward 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.
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 elec-
37
<PAGE>
tion, 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.
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.
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.
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.
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.
38
<PAGE>
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 and other foreign currency
transactions that are subject to the provisions of Code Section 1256. Such
forward foreign exchange and other foreign currency transactions 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 or
foreign currency options or futures 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 forward
foreign currency 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 foreign currency transactions.
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 foreign currency 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.
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.
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%.
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 and 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.
39
<PAGE>
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)(3)--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 a
Director of the Manager since 1999; Senior Manager of the Investment Advisor
from 1997 to 1998; Manager of 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 acts as manager.
(3) Elected as a Director effective June 1, 1999.
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 Fund has paid affiliated
directors' out of pocket expenses in connection with attendance at meetings of
the Board of Directors, such expenses aggregated $6,047 for the fiscal 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:
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<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total Compensation from
Compensation Benefits Accrued as Part of Fund Complex Paid to
From Fund for Fund Expense for its Directors During the
Its Fiscal Year Ended Fiscal Year Ended Calendar Year Ended
Name of Director February 28, 1999 February 28, 1999 December 31, 1998*
- ---------------- --------------------- --------------------------- -----------------
<S> <C> <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 --
</TABLE>
- ----------
*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.
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 $160 billion
in assets under management as of August 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
41
<PAGE>
$50 million, 1.00% of the Fund's average weekly net assets in excess of $50
million but not in excess of $100 million, 0.90% of the Fund's average weekly
net assets in excess of $100 million but not in excess of $175 million and, as
of October 13, 1999, 0.80% of the Fund's average weekly net assets in excess of
$175 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 0.50% of the Fund's average weekly net
assets not in excess of $50 million, 0.45% of the Fund's average weekly net
assets in excess of $50 million but not in excess of $100 million, 0.40% of the
Fund's average weekly net assets in excess of $100 million but not in excess of
$175 million and, as of October 13, 1999, 0.35% of the Fund's average weekly net
assets in excess of $175 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 $12.05 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 and the Investment Advisor would receive
additional annual fees of approximately $429,840 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),
42
<PAGE>
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 $4,546, or 3.1%, 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.
43
<PAGE>
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
44
<PAGE>
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.
45
<PAGE>
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 $0.10 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 Amount Held by Fund Amount Issued and 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 traded in the market above, at and below NAV since
the commencement of the Fund's operations, and the market price of $12.6875 per
share represents a discount from NAV of approximately 6.2% to the per share net
asset value of $13.52 on October 19, 1999. 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
46
<PAGE>
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 http://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 one of the
following three conditions exist. First, if such repurchase or tender offer
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 the transaction will not be authorized by the Board of
Directors. Second, if 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 the transaction will not be
authorized by the Board of Directors. Finally, if 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
transaction will not be authorized by the Board of Directors. 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.
47
<PAGE>
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. Rogers & Wells LLP
may rely on the opinion of Brown & Wood LLP, 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
48
<PAGE>
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 the
Nikkei 225 index or to performance data published or compiled 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.
49
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
50
<PAGE>
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 Americas
New York New York 10036
April 7, 1999
F-1
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
EQUITY SECURITIES
Automotive Equipment and Parts
FCC Co., Ltd. ................................... 65,000 $1,919,452 $ 712,449 1.1
Clutches
Nippon Cable Systems Inc. ....................... 50,000 251,858 354,538 0.5
Control cables
SPK Corporation ................................. 71,000 1,118,597 401,079 0.6
Replacement parts ---------- ---------- ---
Total Automotive Equipment and Parts ............ 3,289,907 1,468,066 2.2
---------- ---------- ---
Banks and Finance
Aeon Credit Service Co., Ltd. ................... 24,200 727,865 1,548,653 2.3
Credit cards
Aiful Corporation ............................... 25,000 1,714,558 1,688,378 2.5
Consumer loans
Shohkoh Fund & Co., Ltd. ........................ 3,000 763,104 1,259,643 1.9
Small to medium-size business financing ---------- ---------- ---
Total Banks and Finance ......................... 3,205,527 4,496,674 6.7
---------- ---------- ---
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
---------- ---------- ---
</TABLE>
See notes to financial statements
F-2
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
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-O 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
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
</TABLE>
See notes to financial statements
F-3
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
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
---------- ---------- ----
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
</TABLE>
See notes to financial statements
F-4
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
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
Matsumotokiyoshi Co., Ltd. .................................. 16,400 605,337 667,864 1.0
Drug store chain
Otsuka Kagu, Ltd. ........................................... 7,600 487,449 638,219 1.0
Furniture
Ryohin Keikaku Co., Ltd. .................................... 13,000 811,446 1,759,201 2.6
Clothes, sundry goods, and foods
Sunkus & Associates, Inc. ................................... 21,000 410,796 485,140 0.7
Convenience stores
Uoriki Co., Ltd. ............................................ 40,000 782,912 876,860 1.3
Fresh fish and sushi stores ---------- --------- ----
Total Retail ................................................ 6,552,006 6,807,352 10.2
---------- ---------- ----
Services
Arrk Corporation ............................................ 80,000 1,773,144 627,292 0.9
Product testing
Fujitsu Support and Service Inc. ............................ 10,000 508,061 742,802 1.1
Information services
Fujitsu System Construction, Ltd. ........................... 40,000 621,622 411,113 0.6
Constructs, maintains and manages information systems
Nichii Gakkan Company ....................................... 32,000 1,510,928 1,697,062 2.6
Hospital administrative services ---------- ---------- ----
Total Services .............................................. 4,413,755 3,478,269 5.2
---------- ---------- ----
Telecommunications
C Cube Corp. ................................................ 100,000 720,722 236,078 0.4
Telecommunications engineering
Hikari Tsushin Inc. ......................................... 22,000 693,222 2,615,404 3.9
Telecommunications equipment ---------- ---------- ----
Total Telecommunications .................................... 1,413,944 2,851,482 4.3
---------- ---------- ----
Textiles and Apparel
Nichimen Infinity Inc. ...................................... 51,300 1,034,040 743,949 1.1
Casual clothing
Nishimatsuya Chain Co., Ltd. ................................ 50,000 681,252 893,723 1.3
Clothing for children ---------- ---------- ----
Total Textiles and Apparel .................................. 1,715,292 1,637,672 2.4
---------- ---------- ----
Transportation
Japan Logistic Systems Corp. ................................ 61,000 591,154 154,294 0.2
Truck transporter
Sakai Moving Service Co., Ltd. .............................. 29,900 811,837 277,307 0.4
Mover of household goods
Yusen Air & Sea Service Co., Ltd. ........................... 28,000 479,491 247,881 0.4
International air cargo transporter ---------- ---------- ----
Total Transportation ........................................ 1,882,482 679,482 1.0
---------- ---------- ----
</TABLE>
See notes to financial statements
F-5
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*--Continued
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Wholesale
ArcLand Sakamoto Co., Ltd. .................................. 75,600 $ 947,942 $ 637,410 0.9
Home appliances
Hakuto Co., Ltd. ............................................ 63,600 895,880 1,442,469 2.2
Electric parts
Kondotec Inc. ............................................... 39,000 176,142 207,158 0.3
Construction material
Paltek Corp. ................................................ 33,000 720,054 781,839 1.2
Semiconductor trading
Toba, Inc. .................................................. 62,000 1,229,663 292,736 0.4
Trading company for control systems ----------- ----------- -----
Total Wholesale ............................................. 3,969,681 3,361,612 5.0
----------- ----------- -----
TOTAL INVESTMENTS IN EQUITY SECURITIES ...................... $71,553,752 $65,725,730 98.5
----------- ----------- -----
<CAPTION>
Principal
INVESTMENTS IN SHORT-TERM SECURITIES Amount
------
<S> <C> <C> <C> <C>
Time Deposit
State Street Bank and Trust Company, interest bearing call
account 4.50% due 3/1/99 ................................ $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 .................................... YEN 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
=========== =========== =====
</TABLE>
- ----------
* 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 (YEN)118.605 = $1.00
See notes to financial statements
F-6
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999
<TABLE>
<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
=============
</TABLE>
See notes to financial statements
F-7
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<S> <C> <C>
INCOME:
Dividend income (less $76,958 withholding taxes) ................................. $436,095
Interest income .................................................................. 68,020
--------
Total Income ............................................................... $ 504,115
------------
EXPENSES:
Management fee ................................................................... 556,245
Custodian fees ................................................................... 111,150
Shareholder reports .............................................................. 55,115
Auditing and tax reporting fees .................................................. 50,654
Legal fees ....................................................................... 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
============
</TABLE>
See notes to financial statements
F-8
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
February 28,
1999 1998
---- ----
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment loss ................................................. $ (423,589) $ (670,960)
Net realized loss on investments .................................... (3,800,322) (5,014,160)
Net realized loss on foreign exchange ............................... (2,557,217) (1,981,699)
Change in net unrealized appreciation (depreciation) on
investments and foreign exchange .................................. 18,329,707 (9,479,435)
------------ ------------
Increase (decrease) in net assets derived from investment activities 11,548,579 (17,146,254)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Net asset value of shares issued to shareholders on reinvestment
of dividends from net investment income (317 shares
in 1999 and 3,502 shares in 1998) ................................. 1,659 15,183
------------ ------------
Increase in net assets derived from capital share transactions ...... 1,659 15,183
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($0.005 per share in 1999 and $0.08 per
share in 1998) .................................................... (56,937) (910,716)
------------ ------------
Decrease in net assets derived from distributions to shareholders ... (56,937) (910,716)
------------ ------------
Net increase (decrease) in net assets ............................... 11,493,301 (18,041,787)
------------ ------------
NET ASSETS:
Beginning of year ................................................... 55,246,269 73,288,056
------------ ------------
End of year (including accumulated net investment losses of
$331,594 and $539,953, respectively) .............................. $ 66,739,570 $ 55,246,269
============ ============
</TABLE>
See notes to financial statements
F-9
<PAGE>
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 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 61st 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, loss-
F-10
<PAGE>
es 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
report ed amounts and disclosures in the financial statements. Actual results
could differ from these estimates.
(g) Concentration of Risk -- A significant portion of the Fund's net
assets consists of Japanese securities which involve certain considerations and
risks not typically associated with investments in the United States. In
addition to the smaller size, and greater volatility, there is often
substantially less publicly available information about Japanese issuers than
there is about U.S. issuers. Future economic and political developments in Japan
could adversely affect the value of securities in which the Fund is invested.
Further, the Fund may be exposed to currency devaluation and other exchange rate
fluctuations.
2. Management Agreement and Transactions With Affiliated Persons
Nomura Asset Management U.S.A. Inc. acts as the Manager of the Fund
pursuant to a management agreement. Under the agreement, the Manager provides
all office space, facilities and personnel necessary to perform its duties.
Pursuant to such management agreement, the Manager has retained its parent
company, Nomura Asset Management Co., Ltd. (the "Investment Adviser"), to act as
investment adviser for the Fund.
As compensation for its services to the Fund, the Manager receives a
monthly fee at the annual rate of 1.10% of the value of the Fund's average
weekly net assets not in excess of $50 million, 1.00% of the Fund's average
weekly net assets in excess of $50 million but not exceeding $100 million and
0.90% of the Fund's average weekly net assets in excess of $100 million. For
services performed under the Investment Advisory Agreement, the Investment
Adviser receives a monthly fee from the Manager at the annual rate of 0.50% of
the Fund's average weekly net assets not in excess of $50 million, 0.45% of the
Fund's average weekly net assets in excess of $50 million but not in excess of
$100 million and, 0.40% of the Fund's average weekly net assets in excess of
$100 million. Under the Management Agreement, the Fund paid or accrued fees to
the Manager of $556,245 for the year ended February 28, 1999. Under the
Investment Advisory Agreement, the Manager informed the Fund that the Investment
Adviser earned fees of $253,062 for the year ended February 28, 1999. At
February 28, 1999, the fee payable to the Manager, by the Fund, was $51,219.
Certain officers and/or directors of the Fund are officers and/or
directors of the Manager. The Nomura Securities Co., Ltd. (the Manager's
indirect parent) earned $14,734 in commissions on the execution of portfolio
security transactions for the year ended February 28, 1999. The Fund pays each
Director not affiliated with the Manager an annual fee of $5,000 plus $500 per
meeting attended, together with such Director's actual expenses related to
attendance at meetings. Such fees and expenses for unaffiliated Directors
aggregated $34,028 for the year ended February 28, 1999.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the year ended February 28, 1999 were
$18,196,080 and $17,474,198, respectively.
As of February 28, 1999, net unrealized depreciation on investments
exclusive of investments in foreign currency and short-term securities for
Federal income tax purposes was $5,828,022 of which $16,390,867 related to
appreciated securities and $22,218,889 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies
and short-term securities of $1,801,889, at February 28, 1999 for Federal income
tax purposes was $71,553,752. In accordance with U.S. Treasury regulations, the
Fund elected to defer $1,921,789 of net realized capital losses arising after
October 31, 1998. Such losses are treated for tax purposes as arising on March
1, 1999. The Fund has a capital loss carryforward as of February 28, 1999 of
$48,177,478 of which $3,388,715 expires in 2001, $10,818,209 expires in 2002,
$12,082,012 expires in 2004, $6,448,950 expires in 2005, $6,238,208 expires in
2006 and $9,201,384 expires in 2007.
F-11
<PAGE>
JAPAN OTC EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding
throughout the period.
<TABLE>
<CAPTION>
For the Year Ended
------------------------------------------------------------------
February 28, February 29, February 28,
----------------------------------- ------------ ------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........... $ 4.85 $ 6.44 $ 7.82 $ 8.59 $ 11.05
------- ------- ------- ------- -------
Net investment loss ........................ (0.04) (0.06) (0.09) (0.07) (0.09)
Net realized and unrealized gain
(loss) on investments and foreign currency 1.06 (1.45) (1.25) (0.70) (2.41)
------- ------- ------- ------- -------
Total from investment operations ........... 1.02 (1.51) (1.34) (0.77) (2.50)
Distributions to shareholders from:
Net investment income ...................... (0.01) (0.08) (0.04) -- --
------- ------- ------- ------- -------
Total distributions .......................... (0.01) (0.08) (0.04) 0.00 0.00
Increase in net asset value from capital
shares transaction* ........................ -- -- -- -- 0.04
------- ------- ------- ------- -------
Net asset value, end of year ................. $ 5.86 $ 4.85 $ 6.44 $ 7.82 $ 8.59
======= ======= ======= ======= =======
Market value, end of year .................... $ 6.250 $ 5.750 $ 6.375 $ 8.500 $ 8.625
Total investment return+ ..................... 8.8% (8.5%) (24.6%) (1.4%) (38.9%)
Net asset value total return++ ............... 20.9% (23.4%) (17.2%) (9.0%) (22.3%)
Ratio to average net assets/supplemental data:
Net assets, end of year (in 000) ........... $66,740 $55,246 $73,288 $88,966 $97,833
Operating expenses ......................... 1.80% 1.71% 1.70% 1.47% 1.42%
Net investment loss ........................ (0.82%) (1.0%) (1.1%) (0.83%) (0.78%)
Portfolio turnover ......................... 35% 29% 71% 79% 20%
</TABLE>
- ----------
+ Based on market value per share, adjusted for reinvestment of income
dividends and capital share transactions. Total return does not reflect
sales commissions.
++ Based on net asset value per share, adjusted for reinvestment of income
dividends and capital share transactions. Total return does not reflect
sales commissions.
* Increase due to second public offering, net of offering cost of $505,487
(see note 1).
F-12
<PAGE>
August 31, 1999 Unaudited Financial Statements
F-13
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
AUGUST 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
EQUITY SECURITIES
Automotive Equipment and Parts
FCC Co., Ltd................................................ 95,000 $ 2,249,271 $ 1,772,534 1.2
Clutches
Musashi Seimitsu Industry Co., Ltd.......................... 44,000 738,383 768,647 0.5
Automobile parts
Nippon Cable Systems Inc.................................... 50,000 251,858 664,014 0.4
Control cables
SPK Corporation............................................. 71,000 1,118,597 1,071,478 0.7
Replacement parts ------------- ----------- ---
Total Automotive Equipment and Parts........................ 4,358,109 4,276,673 2.8
------------- ----------- ---
Banks and Finance
Aeon Credit Service Co., Ltd................................ 14,200 427,685 1,513,056 1.0
Credit cards
Aiful Corporation........................................... 24,000 1,383,855 4,172,863 2.8
Consumer loans
Shohkoh Fund & Co., Ltd..................................... 3,000 763,104 2,175,882 1.5
Small to medium-size business financing ------------- ----------- ---
Total Banks and Finance..................................... 2,574,644 7,861,801 5.3
------------- ----------- ---
Chemicals
Arisawa Manufacturing Co., Ltd.............................. 44,000 484,594 1,142,909 0.8
Glassfibers and insulating resins
C. Uyemura & Co., Ltd....................................... 40,000 1,164,601 1,573,147 1.0
Chemicals
FP Corporation.............................................. 55,300 1,691,215 2,630,082 1.8
Polystyrene and other synthetic resin foodware
Matsumoto Yushi-Seiyaku Co., Ltd............................ 80,000 1,644,183 1,799,973 1.2
Analgesic anti-inflammatory agents
T & K Toka Co., Ltd......................................... 11,800 479,620 518,041 0.3
Ink for printing ------------- ----------- ---
Total Chemicals............................................. 5,464,213 7,664,152 5.1
------------- ----------- ---
Construction and Housing
Token Corporation........................................... 38,000 578,687 305,849 0.2
Condominium building and leasing ------------- ----------- ---
Electric
Citizen Electronics Co., Ltd................................ 34,900 902,410 2,777,061 1.9
Electronic parts
Funal Electric Co., Ltd..................................... 8,100 713,153 2,337,358 1.6
Electric parts
Mirai Industry Co., Ltd..................................... 96,000 1,670,098 1,545,342 1.0
Plastic molded electric materials ------------- ----------- ---
Total Electric.............................................. 3,285,661 6,659,761 4.5
------------- ----------- ---
Electronics
Aval Data Corporation....................................... 66,000 538,821 458,774 0.3
Computer peripheral equipment
</TABLE>
See notes to financial statements
F-14
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS--Continued
AUGUST 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Canare Electric Co., Ltd.................................... 24,600 $ 336,968 $ 366,744 0.2
Coaxial cables
Fuji Electric Industry Co., Ltd............................. 73,000 769,513 681,026 0.5
Electronic parts
Fukuda Denshi Co............................................ 40,000 1,015,850 749,989 0.5
Medical electronic equipment
Japan CBM Corp.............................................. 86,400 2,182,362 1,667,389 1.1
Electronic calculators and watches
Kuroda Electric Co., Ltd.................................... 24,000 1,382,213 1,753,876 1.2
Electric parts and machinery
Roland Corporation.......................................... 38,000 698,507 1,598,756 1.1
Electronic keyboard musical instruments
Tamron Co., Ltd............................................. 90,000 651,096 617,369 0.4
Lens
Yamaichi Electronics Co., Ltd............................... 62,000 1,475,659 1,757,900 1.2
Integrated circuit sockets ------------- ----------- ---
Total Electronics........................................... 9,050,989 9,651,823 6.5
------------- ----------- ---
Food and Manufacturing
Ariake Japan Co., Ltd....................................... 47,200 615,852 2,806,055 1.9
Natural seasonings
Hokuto Corporation.......................................... 45,000 1,087,895 2,317,190 1.5
Mushroom grower
Hurxley Corporation......................................... 30,000 603,626 1,975,580 1.3
Japanese lunch-boxes
Iwatsuka Confectionery Co., Ltd............................. 49,000 454,008 425,756 0.3
Rice crackers
Q' sai Co., Ltd............................................. 35,000 477,512 2,208,808 1.5
Frozen and processed food products
Yoshinoya D&C Co., Ltd...................................... 75 1,156,343 1,783,509 1.2
Fast food chain operator ------------- ----------- ---
Total Food and Manufacturing................................ 4,395,236 11,516,898 7.7
------------- ----------- ---
Gaming
Tecmo Ltd................................................... 36,500 553,088 671,011 0.4
Gaming ------------- ----------- ---
Information and Software
Bellsystem 24, Inc.......................................... 7,000 921,008 3,521,288 2.4
Telemarketing
Daitec Co., Ltd............................................. 27,500 609,872 638,862 0.4
Information processing
Data Communication System Co., Ltd.......................... 21,202 290,155 1,027,667 0.7
Software developer
Fuji Soft ABCInc............................................ 11,800 198,595 820,232 0.6
Computer systems
Oracle Corp. Japan.......................................... 13,000 1,592,595 1,617,048 1.1
Computer software
Yahoo Japan Corp............................................ 4 1,552,692 2,275,941 1.5
Internet software ------------- ----------- ---
Total Information and Software.............................. 5,164,917 9,901,038 6.7
------------- ----------- ---
</TABLE>
See notes to financial statements
F-15
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS--Continued
AUGUST 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Machinery and Machine Tools
Disco Corp.................................................. 25,500 $ 696,631 $ 2,588,833 1.7
Dicing saws for semiconductors
Kito Corporation............................................ 125,000 588,168 529,336 0.3
Cranes and chain blocks
Nippon Pillar Packing Co., Ltd.............................. 196,000 2,154,491 1,355,248 0.9
Industrial mechanical seals
Sansei Yusoki Co., Ltd...................................... 97,000 1,409,202 550,053 0.4
Stage mechanisms for theaters
Takasago Electric Industry Co., Ltd......................... 9,500 207,126 721,178 0.5
Pachinko slot machines
THK Co., Ltd................................................ 89,500 1,276,572 2,938,720 2.0
Linear motion systems for industrial machines
Yushin Precision Equipment Co., Ltd......................... 29,000 465,422 1,617,963 1.1
Injection molding related machinery ------------- ----------- ----
Total Machinery and Machine Tools........................... 6,797,612 10,301,331 6.9
------------- ----------- ----
Miscellaneous Manufacturing
Avex Inc.................................................... 11,000 433,677 2,183,198 1.5
Video products
Dainichi Co., Ltd........................................... 115,200 1,892,245 389,848 0.3
Kerosene stoves and oil-fan heaters
Daiseki Co., Ltd............................................ 88,400 884,076 1,932,373 1.3
Industrial waste treatment
Eidai Kako Co., Ltd......................................... 48,000 439,827 566,333 0.4
Synthetic resin processed products
Fancl Corp.................................................. 10,000 359,144 2,972,516 2.0
Cosmetics and toiletries
Fuji Seal, Inc.............................................. 14,000 578,567 1,907,898 1.3
Packing materials
Fujimi Inc.................................................. 42,900 1,990,548 2,197,284 1.5
Polishing materials for silicone wafers
G.L. Sciences, Inc.......................................... 45,000 901,575 1,625,737 1.1
Chromatographs
King Jim Co., Ltd........................................... 61,600 1,555,743 574,674 0.4
Office supplies
Kobayashi Pharmaceuticals Co., Ltd.......................... 12,000 754,329 1,514,611 1.0
Pharmaceuticals, fragrances and sanitary products
Milbon Co., Ltd............................................. 32,000 412,184 2,575,570 1.7
Hair-care products for beauty salons
Nippon Hi-Pack Co., Ltd..................................... 110,000 802,339 296,794 0.2
Corrugated cardboard products ------------- ----------- ----
Total Miscellaneous Manufacturing........................... 11,004,254 18,736,836 12.7
------------- ----------- ----
Non-Ferrous Metals
Tokyo Tungsten Co., Ltd..................................... 70,000 500,765 761,879 0.5
Smelter processor of tungsten ------------- ----------- ----
Publishing
Shoeisha Co., Ltd........................................... 38 797,114 1,028,765 0.7
Publishing company ------------- ----------- ----
</TABLE>
See notes to financial statements
F-16
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS--Continued
AUGUST 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Real Estate and Warehouse
Meiwa Estate Co., Ltd....................................... 26,000 $ 546,552 $ 1,096,264 0.7
Developer
Nippon Kanzai Co., Ltd...................................... 118,000 986,100 2,989,528 2.0
Comprehensive building maintenance
Sekiwa Real Estate, Ltd..................................... 96,000 987,615 583,893 0.4
Leasing subsidiary of Sekisui House, Ltd., homebuilders ------------- ----------- ----
Total Real Estate and Warehouse............................. 2,520,267 4,669,685 3.1
------------- ----------- ----
Restaurants
Joyfull Co., Ltd............................................ 113,000 1,343,375 2,222,070 1.5
Roadside restaurants
Watami Food Service Co., Ltd................................ 72,000 599,848 4,477,980 3.0
Restaurant chain ------------- ----------- ----
Total Restaurants........................................... 1,943,223 6,700,050 4.5
------------- ----------- ----
Retail
Himaraya Co., Ltd........................................... 94,700 1,751,845 1,125,989 0.7
Sporting goods
Kohnan Shoji Co., Ltd....................................... 45,000 984,030 1,010,427 0.7
Home center (DIY)
Matsumotokiyoshi Co., Ltd................................... 21,800 833,769 1,630,987 1.1
Drug store chain
Otsuka Kagu, Ltd............................................ 7,600 487,449 2,092,285 1.4
Furniture
Right On Co., Limited....................................... 33,000 891,906 1,901,495 1.3
Casual clothes
Ryohin Keikaku Co., Ltd..................................... 12,800 400,122 2,528,742 1.7
Ryohin Keikaku Co., Ltd. (New Shares)....................... 12,000 377,719 2,414,597 1.6
Clothes, sundry goods, and foods
Shichie Co., Ltd............................................ 36,000 1,206,668 1,152,422 0.8
Video rental
Sunkus & Associates, Inc.................................... 31,000 638,268 1,193,671 0.8
Convenience stores
United Arrows Limited....................................... 6,000 682,718 1,037,179 0.7
Clothing and accessories for men and women
Uoriki Co., Ltd............................................. 40,000 782,912 2,670,691 1.8
Fresh fish and sushi stores ------------- ----------- ----
Total Retail................................................ 9,037,406 18,758,485 12.6
------------- ----------- ----
Securities
Globally Corp............................................... 60,000 779,459 976,814 0.7
Commodity trading ------------- ----------- ----
Services
Arrk Corporation............................................ 60,000 1,278,330 1,838,387 1.2
Product testing
Fujitsu Support and Services, Inc........................... 8,000 407,909 2,070,700 1.4
Information services
Fujitsu System Construction, Ltd............................ 40,000 621,622 779,256 0.5
Constructs, maintains and manages information systems
</TABLE>
See notes to financial statements
F-17
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS--Continued
AUGUST 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Nichii Gakkan Company....................................... 21,100 $ 952,353 $ 3,265,304 2.2
Hospital administrative services ------------- ------------ ----
Total Services.............................................. 3,260,214 7,953,647 5.3
------------- ------------ ----
Telecommunications
C Cube Corp................................................. 100,000 720,722 393,287 0.3
Telecommunications engineering
Hikari Tsushin, Inc......................................... 10,100 278,689 5,339,370 3.6
Telecommunications equipment
Okinawa Cellular Telephone Co............................... 525 1,341,045 2,016,738 1.3
Mobile telecommunications ------------- ------------ ----
Total Telecommunications.................................... 2,340,456 7,749,395 5.2
------------- ------------ ----
Textiles and Apparel
Nichimen Infinity, Inc...................................... 63,300 1,252,868 1,100,014 0.7
Casual clothing
Nishimatsuya Chain Co., Ltd................................. 50,000 681,252 1,705,766 1.2
Clothing for children
World Co., Ltd.............................................. 20,000 970,554 2,332,282 1.6
Fashion apparel ------------- ------------ ----
Total Textiles and Apparel.................................. 2,904,674 5,138,062 3.5
------------- ------------ ----
Transportation
Japan Logistic Systems Corp................................. 61,000 591,154 251,063 0.2
Truck transporter
Sakai Moving Service Co., Ltd............................... 29,900 811,837 834,088 0.6
Mover of household goods
Yusen Air & Sea Service Co., Ltd............................ 28,000 479,491 832,304 0.5
International air cargo transporter ------------- ------------ ----
Total Transportation........................................ 1,882,482 1,917,455 1.3
------------- ------------ ----
Wholesale
ArcLand Sakamoto Co., Ltd................................... 100,600 1,184,269 1,453,770 1.0
Home appliances
Hakuto Co., Ltd............................................. 69,900 895,163 1,969,104 1.3
Electric parts
Kondotec Inc................................................ 48,000 227,453 298,532 0.2
Construction material
Paltek Corp................................................. 23,000 495,911 934,010 0.6
Semiconductor trading
Toba, Inc................................................... 62,000 1,229,663 742,855 0.5
Trading company for control systems ------------- ------------ ----
Total Wholesale............................................. 4,032,459 5,398,271 3.6
------------- ------------ ----
TOTAL INVESTMENTS IN EQUITY SECURITIES...................... $ 83,225,929 $148,599,681 99.8
------------- ------------ ----
</TABLE>
See notes to financial statements
F-18
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS--Continued
AUGUST 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
INVESTMENTS IN SHORT-TERM SECURITIES
Time Deposit
State Street Bank and Trust Company, interest
bearing call account 4.75% due 9/01/99.................... $ 745,410 $ 745,410 $ 745,410 0.5
------------- ------------- -----
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES.................. 745,410 745,410 0.5
------------- ------------- -----
INVESTMENT IN FOREIGN CURRENCY
Japanese Yen
State Street Bank and Trust Company, 0.25%-interest
bearing call account ..................................... (YEN)26,649,532 243,247 243,742 0.2
------------- ------------- -----
TOTAL INVESTMENT IN FOREIGN CURRENCY........................ 243,247 243,742 0.2
------------- ------------- -----
TOTAL INVESTMENTS........................................... 84,214,586 149,588,833 100.5
LIABILITIES IN EXCESS OF OTHER ASSETS, NET.................. (682,743) (682,504) (0.5)
------------- ------------- -----
NET ASSETS.................................................. $ 83,531,843 $ 148,906,329 100.0
============= ============= =====
</TABLE>
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of August 31, 1999.
Japanese Yen JPY (YEN)109.335 = $1.00
See notes to financial statements
F-19
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at market value (cost--$83,225,929) ....................... $ 148,599,681
Investments in short-term securities, at market value (cost--$745,410) ............... 745,410
Investments in foreign currency, at market value (cost--$243,247) .................... 243,742
Receivable for investments sold ...................................................... 2,891,431
Receivable for dividends and interest, net of withholding taxes ...................... 58,258
-------------
Total Assets .................................................................... 152,538,522
-------------
LIABILITIES:
Payable for investments purchased .................................................... 3,466,778
Accrued management fee ............................................................... 116,238
Other accrued expenses ............................................................... 49,177
-------------
Total Liabilities ............................................................... 3,632,193
-------------
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 ....... (38,790,025)
Unrealized net appreciation on investments and foreign exchange ...................... 65,374,487
Accumulated net investment loss ...................................................... (684,799)
-------------
Net Assets ...................................................................... $ 148,906,329
=============
Net asset value per share ............................................................ $ 13.08
=============
</TABLE>
See notes to financial statements
F-20
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 1999
(Unaudited)
<TABLE>
<S> <C> <C>
INCOME:
Dividend income (less $56,600 withholding taxes) ....................... $320,734
Interest income ........................................................ 17,181
Total Income ................................................... -------- $ 337,914
EXPENSES:
Management fee ......................................................... 513,007
Custodian fees ......................................................... 60,536
Shareholder reports .................................................... 27,784
Auditing and tax reporting fees ........................................ 25,944
Legal fees ............................................................. 15,088
Registration fees ...................................................... 12,144
Annual meeting expenses ................................................ 10,120
Directors' fees and expenses ........................................... 10,120
Transfer agency fees ................................................... 10,120
Insurance .............................................................. 1,288
Miscellaneous .......................................................... 4,968
Total Expenses ................................................ -------- 691,119
-----------
INVESTMENT LOSS--NET ................................................... (353,205)
-----------
REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized gain on investments and foreign currency transactions:
Net realized gain on investments ....................................... 11,739,713
Net realized loss on foreign exchange .................................. (422,750)
-----------
Net realized gain on investments and foreign exchange .................. 11,316,963
-----------
Change in net unrealized appreciation on translation of foreign currency
and other assets and liabilities denominated in foreign currency .... 7,245,665
Change in net unrealized appreciation on investments ................... 63,957,336
-----------
Net realized and unrealized gain on investments and foreign exchange ... 82,519,964
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................... $82,166,759
===========
</TABLE>
See notes to financial statements
F-21
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
August 31, 1999 Ended
(Unaudited) February 28, 1999
----------- -----------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment loss ............................................. $ (353,205) $ (423,589)
Net realized gain (loss) on investments ......................... 11,739,713 (3,800,322)
Net realized loss on foreign exchange ........................... (422,750) (2,557,217)
Change in net unrealized appreciation on investments
and foreign exchange .......................................... 71,203,001 18,329,707
------------- -------------
Increase in net assets derived from investment activities ....... 82,166,759 11,548,579
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS:
Net asset value of shares issued to shareholders on
reinvestment of dividends from net investment income
(0 and 317 shares, respectively) .............................. -- 1,659
------------- -------------
Increase in net assets derived from capital share transactions .. -- 1,659
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ........................................... -- (56,937)
------------- -------------
Decrease in net assets derived from distributions to shareholders -- (56,937)
------------- -------------
Net increase in net assets ...................................... 82,166,759 11,493,301
------------- -------------
NET ASSETS:
Beginning of period ............................................. 66,739,570 55,246,269
------------- -------------
End of period (including accumulated net investment losses of
$684,799 and $331,594, respectively) .......................... $ 148,906,329 $ 66,739,570
============= =============
</TABLE>
See notes to financial statements
F-22
<PAGE>
JAPAN OTC EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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 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 61st 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 (the "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 Yen rates at August 31, 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, loss-
F-23
<PAGE>
es 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. (the "Manager") 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
0.90% 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 0.50% of
the Fund's average weekly net assets not in excess of $50 million, 0.45% of the
Fund's average weekly net assets in excess of $50 million but not in excess of
$100 million and 0.40% 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 $513,007 for the six months ended August 31, 1998. Under the
Investment Advisory Agreement, the Manager informed the Fund that the Investment
Advisor earned fees of $238,319 for the six months ended August 31, 1999. At
August 31, 1999, the fee payable to the Manager, by the Fund, was $116,238.
Certain officers and/or directors of the Fund are officers and/or
directors of the Manager. The Nomura Securities Co., Ltd. ("Nomura Securities")
(the Manager's indirect parent) earned $18,956 in commissions on the execution
of portfolio security transactions for the six months ended August 31, 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 $10,120 for the six months ended August 31, 1999.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the six months ended August 31, 1999
were $28,040,450 and $27,658,680, respectively.
As of August 31, 1999, net unrealized appreciation on investments
exclusive of investments in foreign currency and short-term securities for
Federal income tax purposes was $65,373,752 of which $74,403,796 related to
appreciated securities and $9,030,044 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies
and short-term securities of $988,657, at August 31, 1999 for Federal income tax
purposes was $83,225,929. 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.
F-24
<PAGE>
JAPAN OTC EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding
throughout the period.
<TABLE>
<CAPTION>
For the Year Ended
For the Six ------------------------------------------------------------
Months Ended February 28, February 29, February 28,
August 31, 1999 ----------------------------- ------------ ------------
(Unaudited) 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 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) -- --
---------- ------- ------- ------- ------- -------
Total distributions .......................... 0.00 (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 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 000) ......... $ 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%
</TABLE>
- ----------
++ Based on market value per share, adjusted for reinvestment of income
dividends and capital share transactions. Total return does not reflect
sales commissions.
+++ Based on net asset value per share, adjusted for reinvestment of income
dividends and capital share transactions. Total return does not reflect
sales commissions.
* Increase due to second public offering, net of offering cost of $505,487
(see note 1).
+ Annualized
F-25
<PAGE>
Appendix A
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
A-1
<PAGE>
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 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.
A-2
<PAGE>
================================================================================
3,804,940 Shares of
Common Stock
Issuable Upon Exercise of Rights
to Subscribe for Such
Shares
JAPAN OTC EQUITY
FUND, INC.
-------------------
P R O S P E C T U S
-------------------
Dealer Manager
PaineWebber Incorporated
October ,1999
================================================================================
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Fund, or the Dealer Manager. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Fund since
the date hereof or that the information contained herein is correct as of any
time subsequent to its date. However, if any material change occurs while this
Prospectus is required by law to be delivered, this Prospectus will be amended
or supplemented accordingly. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any securities other than the
registered securities to which it relates. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy in any circumstances in
which such offer or solicitation is unlawful.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary ..................................................... 2
Fee Table .............................................................. 7
Financial Highlights ................................................... 8
The Fund ............................................................... 10
Use of Proceeds ........................................................ 10
Market and Net Asset Value Information ................................. 10
The Offer .............................................................. 11
Risk Factors and Special Considerations ................................ 18
Portfolio Composition .................................................. 22
Investment Objective and Policies ...................................... 22
The Japanese OTCMarket ................................................. 24
Japanese Foreign Exchange and
Foreign Trade Law .................................................. 35
Investment Restrictions ................................................ 36
Dividends and Distributions ............................................ 37
Taxes .................................................................. 37
Directors and Officers ................................................. 40
Management and Investment
Advisory Arrangements ............................................... 41
Portfolio Transactions ................................................. 42
Dividend Reinvestment Plan ............................................. 44
Net Asset Value ........................................................ 45
Capital Stock .......................................................... 46
Custodian, Tranfer Agent, Dividend Disbursing
Agent and Registrar ................................................. 48
Legal Opinions ......................................................... 48
Experts ................................................................ 48
Available Information .................................................. 49
Financial Statements ................................................... F-1
Hedging Foreign Currency Risks ......................................... A-1
================================================================================
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Financial Statements:
Independent Auditors' Report
Schedule of Investments as of February 28, 1999
Statement of Assets and Liabilities as of February 28, 1999
Statement of Operations for the year ended February 28, 1999
Statement of Changes in Net Assets, for the years ended February 28,
1999 and 1998
Notes to Financial Statements
Financial Highlights for the years ended February 28, 1999, 1998,
1997, Febraury 29, 1996, and February 28, 1995
Schedule of Investments as of August 31, 1999 (unaudited)
Statement of Assets and Liabilities as of August 31, 1999
(unaudited)
Statement of Operations for the six months ended August 31, 1999
(unaudited)
Statement of Changes in Net Assets for the six months ended August
31, 1999 (unaudited) and the year ended February 28, 1999
Notes to Financial Statements (unaudited)
Financial Highlights for the six months ended August 31, 1999
(unaudited) and for the years ended February 28, 1999, 1998, 1997,
Febraury 29, 1996, and February 28, 1995
(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 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 PaineWebber
Incorporated
(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*
(l) --Opinion and consent of Brown & Wood LLP, counsel to the Fund
(m) --Not applicable
(n)(1) --Consent of PricewaterhouseCoopers LLP, independent auditors for
the Fund
(n)(2) --Consent of Hamada & Matsumoto
(o) --Not applicable
(p) --Not applicable
(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, previously 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, previously filed as Exhibit
(b) to this Registration Statement.
* Previously Filed as an exhibit to the Registration Statement.
C-1
<PAGE>
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:
Registration fees ............................................. $ 16,575
Stock Exchange listing fee .................................... 17,500
Printing ...................................................... 40,000
Subscription Agent fees and expenses .......................... 35,000
Information Agent fees and expenses ........................... 11,000
Dealer Manager fees and expense reimbursement ................. 100,000
Legal fees and expenses ....................................... 175,000
Accounting fees and expenses .................................. 35,000
NASD fees ..................................................... 7,500
Miscellaneous ................................................. 62,425
--------
Total ................................................... $500,000
========
Item 27. Persons Controlled by or Under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities as of August 31, 1999:
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock ($0.10 par value per share) ...... 305
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.
C-2
<PAGE>
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 7 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 Senior Manager of Investment Advisor from 1997 t
and Director 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>
C-3
<PAGE>
(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, Profession,
Name Management 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>
C-4
<PAGE>
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.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its 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 21st day of October, 1999.
JAPAN OTC EQUITY FUND, INC.
(Registrant)
By: /s/ JOHN F. WALLACE
--------------------------------
(John F. Wallace, Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to its 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>
/S/ NOBUO KATAYAMA* Director and President
- ------------------------------------- (Principal Executive Officer)
(Nobuo Katayama)
/S/ JOHN F. WALLACE Director
- ------------------------------------- (Principal Financial and
(John F. Wallace) Accounting Officer) October 21, 1999
/S/ WILLIAM G. BARKER, JR.*
- -------------------------------------
(William G. Barker, Jr.) Director
/S/ GEORGE H. CHITTENDEN*
- -------------------------------------
(George H. Chittenden) Director
/S/ CHOR WENG TAN
- -------------------------------------
(Chor Weng Tan) Director October 21, 1999
/S/ ARTHUR R. TAYLOR
- -------------------------------------
(Arthur R. Taylor) Director October 21, 1999
*By: /S/ JOHN F. WALLACE
- -------------------------------------
(John F. Wallace, Attorney-in-Fact) October 21, 1999
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
(d)(3) --Form of Exercise Form.
(d)(4) --Form of Notice of Guaranteed Delivery.
(d)(5) --Form of Subscription Rights Agency Agreement.
(h) --Form of Dealer Manager Agreement between the Fund and PaineWebber
Incorporated
(1) --Opinion and consent of Brown & Wood LLP, counsel to the Fund
(n)(1) --Consent of PricewaterhouseCoopers LLP, independent auditors for
the Fund
(n)(2) --Consent of Hamada & Matsumoto
(r)(2) --Financial Data Schedule for the six months ended August 31, 1999.
EXHIBIT (d)(3)
THE OFFER EXPIRES AT 5:00 P.M., EASTERN TIME, ON NOVEMBER 19, 1999*
JAPAN OTC EQUITY FUND, INC.
TO SUBSCRIBE FOR SHARES OF COMMON STOCK
Subscription Certificate
Japan OTC Equity Fund, Inc. (the "Fund") issued to its record date shareholders
(the "Record Date Shareholders"), as of the close of business on October 25,
1999 (the "Record Date"), non-transferable rights ("Rights") on the basis of one
Right for every whole Share held on the Record Date, entitling the holders
thereof to subscribe for shares of common stock of the Fund ("Shares") at a rate
of one Share for every three Rights held. The terms and conditions of the rights
offer (the "Offer") are set forth in the Fund's Prospectus, dated October __,
1999 (the "Prospectus"), which is incorporated herein by reference. Capitalized
terms not defined herein have the meanings attributed to them in the Prospectus.
The owner of the Subscription Certificate is entitled to the number of Rights
shown on this Subscription Certificate and is entitled to subscribe for the
number of Shares shown on this Subscription Certificate. Record Date
Shareholders who have fully exercised their Rights pursuant to the Primary
Subscription are entitled to subscribe for additional Shares pursuant to the
Over-Subscription Privilege, subject to certain limitations and allotment, as
described in the Prospectus. If sufficient Shares remain after completion of the
Primary Subscription, all over-subscriptions will be honored in full. If
sufficient Shares are not available after completion of the Primary Subscription
to honor all over-subscriptions, the Fund may, at the discretion of the Board of
Directors, issue shares of Common Stock up to an additional 948,985 Shares in
order to cover such over-subscription requests. To the extent the Fund
determines not to issue additional Shares to honor all over-subscriptions, the
available Shares will be allocated among those who over-subscribe based on the
number of Rights originally issued to them by the Fund, so that the number of
Shares issued to shareholders who subscribe pursuant to the Over-Subscription
Privilege will generally be in proportion to the number of Shares owned by them
on the Record Date. The Fund will not offer or sell in connection with the Offer
any Shares which are not subscribed for pursuant to the Primary Subscription or
the Over-Subscription Privilege.
SAMPLE CALCULATION
FOR A RECORD DATE SHAREHOLDER WHO OWNS 500 SHARES
- --------------------------------------------------------------------------------
Primary Subscription Entitlement (1-for-3)
No. of Shares owned on the Record Date 500/1 = 500 Rights
(one Right for every Share)
No. of Rights issued on the Record Date 500/3 = 166 new Shares
(if the Rights are fully exercised in the Primary Subscription)
- --------------------------------------------------------------------------------
THE RIGHTS ARE NON-TRANSFERABLE
The Rights are non-transferable, and therefore may not be transferred or sold.
The Rights will not be admitted for trading on the New York Stock Exchange (the
"NYSE") or any other stock exchange. The shares provided to Record Date
Shareholders who exercise their Rights will be listed for trading on the NYSE
under the symbol "JOF".
ESTIMATED SUBSCRIPTION PRICE
The Estimated Subscription Price is $______ per Share.
FINAL SUBSCRIPTION PRICE
The Final Subscription Price per share will be 95% of the lower of: (1) the
average of the last reported sales price per Share on the NYSE on the Expiration
Date of the Offer and on the preceding four business days, (i.e., the average of
the closing prices on the NYSE on November 19, 18, 17, 16 and 15 unless the
Offer is extended; or (2) the last reported net asset value per Share on the
Expiration Date.
METHOD OF EXERCISE OF RIGHTS
IN ORDER TO EXERCISE YOUR RIGHTS, YOU MUST EITHER (i) COMPLETE AND SIGN THIS
SUBSCRIPTION CERTIFICATE ON THE BACK AND RETURN IT IN THE ENVELOPE PROVIDED
TOGETHER WITH PAYMENT OF AN AMOUNT EQUAL TO THE ESTIMATED SUBSCRIPTION PRICE
MULTIPLIED BY THE TOTAL NUMBER OF SHARES FOR WHICH YOU HAVE SUBSCRIBED
(INCLUDING PURSUANT TO THE OVER-SUBSCRIPTION PRIVILEGE), OR (ii) PRESENT A
PROPERLY COMPLETED NOTICE OF GUARANTEED DELIVERY, IN EITHER CASE TO THE
SUBSCRIPTION AGENT, STATE STREET BANK AND TRUST COMPANY, BOSTON EQUISERVE
DIVISION, BEFORE 5:00 P.M., EASTERN TIME, ON NOVEMBER 19, 1999, OR SUCH LATER
DATE AS MAY BE DETERMINED BY THE FUND ("EXPIRATION DATE").
Full payment of the Estimated Subscription Price per Share for all Shares
subscribed for pursuant to both the Primary Subscription and the
Over-Subscription Privilege must accompany this Subscription Certificate and
must be made payable in United States dollars by money order or check drawn on a
bank or branch located in the United States payable to Japan OTC Equity Fund,
Inc. No third-party checks will be accepted. Because uncertified personal checks
may take at least five business days to clear, we recommend you pay, or arrange
for payment, by means of certified or cashier's check or money order.
Alternatively, if a Notice of Guaranteed Delivery is used, a properly completed
and executed Subscription Certificate, and full payment, as described in such
Notice, must be received by the Subscription Agent no later than 5:00 P.M.,
Eastern Time, on the third business day after the Expiration Date, November 24,
1999, unless the Offer is extended by the Fund. For additional information, see
the Prospectus.
Certificates representing the Shares acquired pursuant to the Primary
Subscription will be mailed promptly after the expiration of the Offer and full
payment for the Shares subscribed for 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.
Because shareholders must only pay the Estimated Subscription Price per Share to
exercise their Rights pursuant to this Offer, and the Final Subscription Price
may be higher or lower than the
<PAGE>
Estimated Subscription Price (and because a shareholder may not receive all the
Shares for which it subscribes pursuant to the Over-Subscription Privilege),
shareholders may receive a refund or be required to pay an additioanl amount
equal to: the difference between the Estimated Subscription Price and the Final
Subscription Price, multiplied by the total number of Shares for which they have
subscribed (including pursuant to the Over-Subscription Privilege). Any excess
payment to be refunded by the Fund to a shareholder will be mailed by the
Subscription Agent to such shareholder as promptly as practicable. Any
additional amounts due from shareholders (in the event the Final Subscription
Price exceeds the Estimated Subscription Price) must be received within ten
business days after the Confirmation Date, December 16, 1999, unless the offer
is extended by the Fund.
*Unless the Offer is extended by the Fund
Account #
Control #
CUSIP # ___________
NUMBER OF PRIMARY SUBSCRIPTION RIGHTS:
NUMBER OF SHARES ENTITLED IN PRIMARY SUBSCRIPTION:
<PAGE>
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
- --------------------------------------------------------------------------------
SECTION 1: OFFERING INSTRUCTIONS (check the appropriate boxes)
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
|_| I apply for ALL of my entitlement of new Shares pursuant to the Primary
Subscription
__________________________ x $___________________ = $___________________
(no. of new Shares) (per share)*
|_| In addition, I apply for new Shares pursuant to the Over-Subscription
Privilege**
__________________________ x $___________________ = $___________________
(no. of additional Shares) (per share)*
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
I apply for ___________________ x $______________ = $______________________
(no. of new Shares) (per share)*
Amount of check enclosed $_______________________
* $_______ per share is an estimated price only. The Final Subscription
Price will be determined on the Expiration Date, and could be higher or
lower depending on any changes in the net asset value and market price on
the Shares.
** You can participate in the Over-Subscription Privilege only if you have
subscribed for your full entitlement of new shares pursuant to the Primary
Subscription.
Please complete all applicable information and return to:
IF YOU DO NOT WISH TO EXERCISE YOUR RIGHT TO SUBSCRIBE:
Please disregard this mailing.
- --------------------------------------------------------------------------------
SECTION 2: SUBSCRIPTION AUTHORIZATION:
I acknowledge that I have received the Prospectus for this Offer and I
hereby irrevocably subscribe for the number of Shares indicated above on the
terms and conditions specified in the Prospectus relating to the Primary
Subscription and the Over-Subscription Privilege. I understand and agree that I
will be obligated to pay an additional amount to the Fund if the Subscription
Price as determined on the Expiration Date is in excess of the $_______
Estimated Subscription Price per Share.
I hereby agree that if I fail to pay in full for the Shares for which I
have subscribed, the Fund may exercise any of the remedies set forth for in the
Prospectus.
Signature of Subscriber(s)
________________________________________________________________________________
(and address if different than that listed on this Subscription Certificate***)
________________________________________________________________________________
________________________________________________________________________________
Telephone number (including area code)
________________________________________________________________________________
*** If you wish to have your Shares and refund check (if any) delivered to an
address other than that listed on this Subscription Certificate, you must have
your signature guaranteed. Appropriate signature guarantors include: banks and
savings associations, credit unions, member firms of a national securities
exchange, municipal securities dealer and government securities dealers. Please
provide the delivery address above and note if it is a permanent change.
- --------------------------------------------------------------------------------
SECTION 3: DESIGNATION OF BROKER-DEALER
The following broker-dealer is hereby designated as having been instrumental in
the exercise of the Rights hereby exercised:
FIRM: _____________________________________________________________________
REPRESENTATIVE NAME: ______________________________________________________
REPRESENTATIVE NUMBER:_____________________________________________________
State Street Bank and Trust Company
Boston EquiServe Division
- --------------------------------------------------------------------------------
By First Class Mail
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9573
Boston, MA 02205-9573
U.S.A.
By Hand
Security Transfer and Reporting
Services, Inc.
c/o EquiServe
100 Williams Street Galleria
New York, NY 10038
U.S.A.
By Express Mail or Overnight Courier
State Street Bank & Trust Company
Corporate Reorganization
40 Campanelli Drive
Braintree, MA 02184
U.S.A.
- --------------------------------------------------------------------------------
DELIVERY OF THIS SUBSCRIPTION CERTIFICATE TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE DOES NOT CONSTITUTE VALID DELIVERY.
ANY QUESTIONS REGARDING THIS SUBSCRIPTION CERTIFICATE AND THE OFFER MAY BE
DIRECTED TO THE INFORMATION AGENT, CORPORATE INVESTOR COMMUNICATIONS, INC., TOLL
FREE AT (877) 460-9334.
<PAGE>
INSTRUCTIONS FOR COMPLETING THE SUBSCRIPTION CERTIFICATE
JAPAN OTC EQUITY FUND, INC.
The enclosed Subscription Certificate contains the number of Rights held
by the registered holder of such Rights (the "Rights Holder"). The Rights Holder
has been issued one (1) Right for every share of common stock ("Share") of Japan
OTC Equity Fund, Inc, (the "Fund") held by the Rights Holder on the record date.
The Rights Holder is entitled to acquire one (1) Share for every three (3)
Rights held (except that a Rights Holder who holds less than three (3) Rights is
entitled to acquire one (1) Share).
To subscribe for Shares, the Rights Holder must present to State Street
Bank and Trust Company, Boston EquiServe Division (the "Subscription Agent"),
prior to 5:00 P.M., Eastern Time, on the Expiration Date, either:
(1) a properly completed and executed Subscription Certificate and a money
order or check drawn on a bank or branch of a bank located in the United
States of America and payable to Japan OTC Equity Fund, Inc. for an amount
equal to the number of Shares subscribed for under the Primary
Subscription (and, if such Rights Holder is electing to exercise the
Over-Subscription Privilege, under the Over-Subscription Privilege)
multiplied by the Estimated Subscription Price; or
(2) a Notice of Guaranteed Delivery guaranteeing delivery of (i) a
properly completed and executed Subscription Certificate and (ii) a money
order or check drawn on a bank or branch of a bank located in the United
States of America and payable to Japan OTC Equity Fund, Inc. for an amount
equal to the number of Shares subscribed for under the Primary
Subscription (and, if such Rights Holder is electing to exercise the
Over-Subscription Privilege, under the Over-Subscription Privilege)
multiplied by the Estimated Subscription Price (which Subscription
Certificate and money order or check must then be delivered on or before
the third business day after the Expiration Date).
If the Rights Holder desires to subscribe for additional Shares
pursuant to the Over-Subscription Privilege, Section 1 of the Subscription
Certificate must be completed to indicate the maximum number of Shares for which
such privilege is being exercised. A Rights Holder may not receive the entire
number of Shares for which it subscribes pursuant to the Over-Subscription
Privilege.
On a date within eight business days following the Expiration Date
(the "Confirmation Date"), December 2, 1999, unless the Offer is extended by the
Fund, subscribers will be notified as to (i) the number of Shares purchased
under the Primary Subscription and, if applicable, the Over-Subscription
Privilege, and (ii) any additional amount payable by subscribers to the Fund or
any excess to be refunded by the Fund to such subscribers, in each case, based
on the Final Subscription Price as determined on the Expiration Date. The Rights
Holder should note that the amount payable for the Shares subscribed for
pursuant to the Subscription Certificate may be more than the Estimated
Subscription Price and that additional amounts in respect of the Subscription
Price may be payable following the Expiration Date. Any additional payment
required from subscribers must be received by the Subscription Agent within ten
business days after the Confirmation Date, December 16, 1999, unless the Offer
is extended by the Fund.
If the Rights Holder does not make timely payment of any amounts due
in respect of Shares subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege, the Subscription Agent and the Fund reserves the
right to (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 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.
Capitalized terms used but not defined in the Subscription
Certificate shall have the meanings assigned to them in the Prospectus, dated
October __, 1999, relating to the Offer.
Any questions regarding the Subscription Certificate and the Offer
may be directed to the Fund's Information Agent, Corporate Investor
Communications, Inc., toll free at (877) 460-9334.
EXHIBIT (d)(4)
FORM OF NOTICE OF GUARANTEED DELIVERY
FOR SHARES OF COMMON STOCK OF JAPAN OTC EQUITY FUND, INC.
SUBSCRIBED FOR PURSUANT TO THE PRIMARY
SUBSCRIPTION AND THE OVER-SUBSCRIPTION PRIVILEGE
------------------
THIS FORM IS TO BE USED ONLY BY NEW YORK STOCK EXCHANGE MEMBER FIRMS, BANKS, OR
TRUST COMPANIES, AS NOMINEE HOLDERS OF RIGHTS.
------------------
Japan OTC Equity Fund, Inc. (the "Fund") issued to its record date shareholders,
as of the close of business on October 25, 1999 (the "Record Date"),
non-transferable rights ("Rights") in the ratio of one Right for every whole
share held on the Record Date, generally entitling the holders thereof to
subscribe for one share ("Shares") of common stock of the Fund for every three
Rights held. The terms and conditions of the rights offer (the "Offer") are set
forth in the Fund's Prospectus, dated October __, 1999 (the "Prospectus"), which
is incorporated herein by reference. As set forth in the Prospectus under the
heading "The Offer - Payment for Shares," this form or one substantially
equivalent hereto may be used as a means of effecting the subscription and
payment for all Shares subscribed for pursuant to the Primary Subscription and
the Over-Subscription Privilege, as such terms are defined in the Prospectus.
This form may be delivered by hand or sent by facsimile transmission, overnight
courier or mail to the Subscription Agent and must be received prior to 5:00
p.m. Eastern time on November 19, 1999 (the "Expiration Date"), unless the Offer
is extended.
The Subscription Agent is:
State Street Bank and Trust Company
Boston EquiServe Division
By First Class Mail
EquiServe
Attn: Corporate Actions
P.O. Box 9573
Boston, MA 02205-9573
U.S.A
By Hand
Security Transfer and Reporting
Service, Inc.
c/o EquiServe
100 Williams Street, Galleria
New York, NY 10038
U.S.A.
By Express Mail or Overnight Courier
EquiServe
Attn: Corporate Actions
40 Campanelli Drive
Braintree, MA 02184
U.S.A.
By Facsimile
(781) 575-4826
Confirmed by telephone to:
(781) 575-4816
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS IN A
TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE
VALID DELIVERY.
The bank, trust company or New York Stock Exchange member firm that
completes this form must communicate the guarantee and the number of Shares
subscribed for (pursuant to both the Primary Subscription and the
Over-Subscription Privilege) to the Subscription Agent and must deliver this
Notice of Guaranteed Delivery to the Subscription Agent prior to 5:00 p.m.,
Eastern time, on the Expiration Date, November 19, 1999, unless the Offer is
extended. This Notice of Guaranteed Delivery guarantees delivery to the
Subscription Agent of (i) a properly completed and executed Subscription
Certificate and (ii) payment in full of the Estimated Subscription Price for all
subscribed Shares. The Subscription Certificate and full payment be delivered by
the close o0f business on the third business day (November 24, 1999) after the
Expiration date (November 19, 1999). Failure to deliver this Notice or to make
the delivery Guaranteed herein will result in a forfeiture of the Rights.
GUARANTEE
The Undersigned, a bank or trust company having an office or correspondent
in the United States, or a New York Stock Exchange member firm, hereby
guarantees delivery to the Subscription Agent of (a) by 5:00 p.m., Eastern time
on the third business day after the Expiration Date (i) a properly completed and
executed Subscription Certificate and (ii) payment of the full Estimated
Subscription Price for Shares subscribed for pursuant to the Primary
Subscription and, if applicable, the Over-Subscription Privilege, as such
subscription for Shares is indicated herein and in the Subscription Certificate
and (b) by no later than 5:00 p.m., Eastern time, on December 16, 1999, the
tenth business day after the Confirmation Date of December 2, 1999, unless the
Offer is extended, of any additional amount required to be paid if the
Subscription Price as determined on the Expiration Date is in excess of the
Estimated Subscription Price.
<PAGE>
JAPAN OTC EQUITY FUND, INC. Broker Assigned
Control #________
<TABLE>
<S> <C> <C> <C>
Primary Subscription Number of Rights to Number of Shares subscribed for Payment to be made in connection with
Be exercised pursuant to the Primary Subscription Shares subscribed for pursuant to the
for which you are guaranteeing Primary Subscription at the Estimated
delivery of Rights and payments. Subscription Price.
__________ Rights _____________Shares $_______________
Over-Subscription Number of Shares subscribed for Payment to be made in connection with
Pursuant to the Over-Subscription Shares subscribed for pursuant to the
Privilege for which you are Over-Subscription Privilege at the
guaranteeing payment. Estimated Subscription Price.
_____________Shares $_______________
Totals Total Number of Total Number of Shares requested Total Payment
Rights to be delivered
___________Rights _____________Shares $_______________
</TABLE>
Method of delivery (circle one)
A. Through Depository Trust Company ("DTC")*
B. Direct to State Street Bank and Trust Company, Boston EquiServe Division
as Subscription Agent. Please indicate below how the Rights to be
delivered should be registered.
------------------------
------------------------
------------------------
Please assign a unique control number for each guarantee submitted. This number
needs to be referenced on any direct delivery of Rights or any delivery through
DTC.
- ----------------------------------------- ----------------------------------
Name of Firm Authorized Signature
- ----------------------------------------- ----------------------------------
DTC Participant Number Title
- ----------------------------------------- ----------------------------------
Address Name (Please Type or Print)
- ----------------------------------------- ----------------------------------
Zip Code Phone Number
- -----------------------------------------
Name of Registered Holder (if applicable)
- ----------------------------------------- ----------------------------------
Contact Person Date
*If the Rights are to be delivered through DTC, call the Subscription Agent to
obtain a protect Identification Number, which needs to be communicated by you to
DTC.
<PAGE>
NOTICE OF GUARANTEED DELIVERY INSTRUCTIONS
A Notice of Guaranteed Delivery may be submitted if the Notice is received by
the Subscription Agent by 5:00 p.m., Eastern Time, on the Expiration Date.
Broker assigned control number:
In order to properly track incoming guarantees on the Expiration Date, we are
requiring that each guarantee submitted be assigned a unique control number.
Each person in the Reorganization Department of a securities broker, bank or
trust company should assign his or her own unique number (e.g. the sixth item
delivered by Paul in the Reorganization Department XYZ Securities, could have a
control number of XYZPaul 6). It is the individual firm's responsibility to
ensure that the control numbers are not duplicated, as the firm will be held
responsible for any losses incurred due to duplication.
Item 1. The Primary Subscription
Indicate the Rights exercised and Shares requested with the corresponding
dollar amount. Please note, by completing Item 1 you are exercising
Primary Subscription Rights. If the Right had previously been exercised
through DTC do not complete this portion.
Item 2. The Over-Subscription Privilege
Indicate the Shares requested and the corresponding dollar amount.
Item 3. Totals
Total the Rights and payment which the Subscription Agent will receive
from you on the designated dates.
Method of Delivery
Indicate how the Rights will be delivered to the Subscription Agent. If
Subscription Certificates are to be delivered directly to the Subscription
Agent, please provide the registration of such Certificates.
EXHIBIT (d)(5)
SUBSCRIPTION RIGHTS AGENCY AGREEMENT
This Subscription Rights Agency Agreement (the "Agreement") is made as of
October ____, 1999 between Japan OTC Equity Fund, Inc., a Maryland Corporation
("the Fund"), and State Street Bank and Trust Company, a Massachusetts trust
company, as subscription and distribution agent ("Agent").
WHEREAS, the Fund proposes to make a subscription offer by issuing certificates
or other evidences of subscription rights, in the form designated by the Fund
("Subscription Rights"), to shareholders of record ("Shareholders") of its
Common Stock as of a record date specified by the Fund (the "Record Date"),
pursuant to which each Shareholder will have certain rights (the "Rights") to
subscribe to shares of the Fund's Common Stock, par value $0.01 ("Common
Stock"), as described in and upon such terms as are set forth in the final
prospectus (the "Prospectus") for the Form N-2 Registration Statement that was
filed by the Fund with the Securities and Exchange Commission on September 15,
1999, as amended from time to time, (the "Registration Statement");
WHEREAS, the Fund wishes the Agent to perform certain acts on its behalf and the
Agent is willing to so act, in connection with the distribution of the
Subscription Rights and the issuance and exercise of the Rights to subscribe
therein set forth, all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein, the parties agree as follows:
1. Pursuant to resolution of its Board of Directors, The First Australia
Prime Income Fund, Inc. hereby appoints and authorizes the Agent to act on
its behalf in accordance with the provisions hereof, and the Agent hereby
accepts such appointment and agrees to so act.
2. (a) Each Subscription Right shall evidence the Rights of the Rights Holder
to purchase Common Stock upon the terms and conditions therein and herein
set forth.
(b) Upon the written advice of the Fund signed by its President, Vice
President, Treasurer, Secretary or Assistant Secretary, as to the Record
Date, the Agent shall, from a list of Shareholders as of the Record Date
to be prepared by the Agent in its capacity as Transfer Agent prepare and
record Subscription Rights in the names of the Shareholders, setting forth
the number of Rights to subscribe to the Fund's Common Stock calculated on
the basis of one Right for each whole share of Common Stock recorded on
the Fund's books in the name of each such Shareholder as of the Record
Date. Fractional Rights shall not be issued and entitlement to Rights
shall be rounded down. In the case of shares held of record by Cede & Co.
or any other depositary or nominee (a "Nominee Holder"), we will issue a
subscription certificate to the Depository on behalf of the underlying
shareowners (a "Subscription Certificate"). Each subscription certificate
shall be dated as of the Record Date and shall be executed manually or by
facsimile signature of a duly authorized Officer of the Fund. Upon the
written advice, signed as provided above, as to the effective date of the
Registration Statement, the Agent shall as promptly as practicable deliver
the Subscription Certificates, together with a copy of the Prospectus, to
all Record Date Shareholders.
3. (a) Each Subscription Right shall, its having been exercised by the holder
thereof in the manner set forth in the Prospectus, become irrevocable upon
a completed subscription certificate having been delivered to the Agent.
The Agent shall, in its capacity as Transfer Agent for the Fund maintain a
register of Subscription Rights and the holders of record thereof (each of
whom shall be deemed a "Shareholder" hereunder for purposes of determining
the rights of holders of Subscription Rights). Each Subscription Right
shall, subject to the provisions thereof, entitle the Shareholder in whose
name it is recorded to the following:
(1) The right (the "Basic Subscription Right") to purchase one-third of
one share of Common Stock for each whole Subscription Right (i.e., three
rights entitle the holder to subscribe for one share of Common Stock;
fractional shares will not be issued and entitlement to shares shall be
rounded down, except that a Record Date Shareholder holding fewer than
three shares will be entitled to subscribe for one share pursuant to the
Basic Subscription Right); and
<PAGE>
(2) The right (the "Over-Subscription Right") to purchase from the Fund
additional shares of Common Stock, subject to the availability of such
shares and to allotment of such shares as may be available among
Rightsholders who exercise Over-Subscription Rights on the basis specified
in the Prospectus; provided, however, that a Rightsholder who has not
exercised his Basic Subscription Rights with respect to the full number of
Rights that such Rightsholder owns as of the Expiration Date, if any,
shall not be entitled to any Over-Subscription Rights.
(b) A Rightsholder may exercise his Basic Subscription Rights and Over
subscription Rights by delivery to the Agent at its corporate office
specified in the Prospectus of (i) the Subscription Certificate with
respect thereto, duly executed by such Rightsholder in accordance with and
as provided by the terms and conditions of the Subscription Certificate,
together with (ii) the Estimated Subscription Price for each share of
Common Stock subscribed for by exercise of such Rights, in United States
dollars by money order or check drawn on a bank located in the United
States and in each case payable to the order of the Fund.
(c) Rights may be exercised at any time after the date of issuance of the
Subscription Certificates with respect thereto but no later than 5:00
p.m., New York City time, on such date as the Fund shall designate to the
Agent in writing (the "Expiration Date"). For the purpose of determining
the time of the exercise of any Rights, delivery of any material to the
Agent shall be deemed to occur when such materials are received at the
corporate office of the Agent specified in the Prospectus.
(d) Notwithstanding the provisions of Section 3(b) and 3(c) regarding
Delivery of an executed Subscription Certificate to the Agent prior to
5:00 p.m., New York City time, on the Expiration Date, if prior to such
time the Agent receives notice of guaranteed delivery by mail or otherwise
from a bank, trust company or a New York Stock Exchange member
guaranteeing delivery by facsimile or otherwise from a bank, trust company
or a New York Stock Exchange member guaranteeing delivery of (i) payment
of the aggregate estimated subscription price for the shares subscribed
for pursuant to the Basic Subscription Right and any additional shares
requested pursuant to the Over-Subscription Right, and (ii) a properly
completed and executed Subscription Certificate, then such exercise of
Basic Subscription Rights and Over-Subscription Rights shall be regarded
as timely, subject, however, to receipt of the duly completed and executed
Subscription Certificate and full payment for the shares by the Agent by
the close of business on the third business day after the Expiration Date.
(e) Within eight business days following the Expiration Date (the
"Confirmation Date"), the Agent shall send a confirmation to each
exercising Rightsholder (or, for shares of Common Stock on the Record Date
held by Cede & Co. or any other depository or nominee, directly to the
depository or nominee), showing (i) the number of shares acquired pursuant
to the Basic Subscription Rights, (ii) the number of shares, if any,
acquired pursuant to the Over-Subscription Rights, (iii) the per share and
total purchase price for the shares, and (iv) any additional amount
payable by such Rightsholder to the Fund or any excess to be refunded by
the Fund to such Rightsholder, in each case based on the Subscription
Price as determined on the Pricing Date. Any additional payment required
from a Rightsholder must be received by the Agent within ten business days
after the Confirmation Date. Any excess payment to be refunded by the Fund
to a Rightsholder, shall be mailed by the Agent to the Rightsholder as
promptly as possible, as provided in Section 6 below.
4. If, after allocation of shares of Common Stock to persons exercising Basic
Subscription Rights, there remain unexercised Rights, then the Agent shall
allot the shares issuable upon exercise of such unexercised Rights (the
"Remaining Shares") to persons exercising Over-Subscription Rights, in the
amounts of such over-subscriptions. If the number of shares for which
Over-Subscription Rights have been exercised is greater than the Remaining
Shares, the Agent shall allot the Remaining Shares to the persons
exercising Over-Subscription Rights pro rata based solely on the number of
shares held on the Record date.
<PAGE>
5. All proceeds from the exercise of Rights shall be held by the Agent in a
segregated, interest-bearing account in the name of the Fund. The Agent
shall advise the Fund immediately upon the completion of the allocation
set forth above as to the total number of shares subscribed and
distributable.
6. (a) The Agent shall mail to the Rightsholders within fifteen business days
after the Confirmation Date and after full payment for the Shares
subscribed for has cleared: (i) certificates representing those shares
purchased pursuant to exercise of Basic Subscription Rights and those
shares purchased pursuant to the exercise of Over-Subscription Rights or a
confirmation of an account credit to Dividend Reinvestment participants;
and (ii) in the case of each Rightsholder who subscribed and paid for
shares at an assumed purchase price greater than the actual per share
purchase price, a refund in the amount of the difference between the
assumed purchase price and the actual purchase price.
(b) The Agent shall deliver the proceeds of the exercise of Primary Rights
to the Fund one business day after the expiration of the guarantee period
and deliver the proceeds of the exercise of rights pursuant to the Over
Subscription Privilege two business days after the expiration of the
guarantee period.
7 (a) The Agent shall account promptly to the Fund with respect to Rights
exercised and concurrently account for all monies received and returned by
the Agent with respect to the purchase of shares of Common Stock upon the
exercise of Rights.
(b) The Agent will advise the Fund and Paine Webber Incorporated (the
"Dealer Manager") from day to day during the period of, and promptly after
the termination of, the Offer the total number of Rights exercised by each
Rightsholders during the immediately preceding day (indicating the total
number of Rights verified to be in proper form for exercise, rejected for
exercise and being processed) and the number of Rights exercised on
Subscription Certificates indicating the Dealer Manager or such soliciting
broker as the broker-dealer with respect to such exercise and such other
information as the Fund or the Dealer Manager may reasonably request.
(c) The Agent shall notify the Fund and the Dealer Manager no later than
5:00 p.m., New York City time, on the first business day following the
Expiration Date, of the number of Rights exercised, the total number of
Rights verified to be in proper form for exercise, rejected for exercise
and being processed, and such other information as the Fund or the Dealer
Manager may reasonably request.
(d) Upon request of the Fund after the Confirmation Date, the Agent shall
notify the Fund, and at the Fund's request the Dealer Manager of any Right
with respect of which the full amount due upon the exercise thereof has
not been received and the soliciting broker, if any, specified as the
broker-dealer with respect to such right.
8. In the event the Agent does not receive, within ten business days after
the Confirmation Date, any amount due from a Shareholder as specified in
Section 3(e), then it shall take such action with respect to such
Shareholder's Subscription Rights as may be instructed in writing by the
Fund, including, without limitation, (i) selling such subscribed and
unpaid-for shares to other Record Date Shareholders, (ii) applying 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 Basic Subscription Right and/or Over-Subscription Right,
and (iii) exercising any and all other rights or remedies to which the
Fund may be entitled.
9. No Subscription Right shall entitle a Shareholder to vote or receive
dividends or be deemed the holder of shares of Common Stock for any
purpose, nor shall anything contained in any Subscription Right be
construed to confer upon any Rightsholder any of the rights of a
shareholder of the Fund or any right to vote, give or withhold consent to
any action by the Fund (whether upon any recapitalization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meeting or other action affecting
shareholders or receive dividends or otherwise, until the Rights evidenced
thereby shall have been exercised and the shares of Common Stock
purchasable upon the exercise thereof shall have become deliverable as
provided in this Agreement and in the Prospectus.
10. (a) The Fund covenants that all shares of Common Stock issued on exercise
of Rights will be validly issued, fully paid, non assessable and free of
preemptive rights.
<PAGE>
(b) The Fund shall furnish to the Agent, upon request, evidence
satisfactory to the Agent to the effect that a registration statement
under the Securities Act of 1933, as amended (the "Act"), is then in
effect with respect to its shares of Common Stock issuable upon exercise
of the Rights set forth in the Subscription Rights. Upon written advice to
the Agent that the Securities and Exchange Commission shall have issued or
threatened to have issued any order preventing or suspending the use of
the Prospectus, or if for any reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Act, the Agent shall
cease acting hereunder until receipt of written instructions from the Fund
and such assurances as it may reasonably request that it may comply with
such instruction without violations of the Act.
11. (a) Any corporation into which the Agent may be merged or converted or
with which it may be consolidated, or any corporation resulting from and
merger, conversion or consolidation to which the Agent shall be a party,
or any corporation succeeding to the corporate trust business of the
Agent, shall be the successor to the Agent hereunder without the execution
or filing of any document by any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Agent. In
case at the time such successor to the Agent shall succeed to the agency
created by this Agreement, any of the Subscription Rights shall have been
countersigned but not delivered, any such successor to the Agent may adopt
the countersignature of the original Agent and deliver such Subscription
Rights so countersigned, and in case at that time any of the Subscription
Rights shall not have been countersigned, any successor to the Agent may
countersign such Subscription Rights either in the name of the predecessor
Agent or in the name of the successor Agent, and in all such cases such
Subscription Rights shall have the full force provided in the Subscription
Rights and in this Agreement.
(b) In case at any time the name of the Agent shall be changed and at such
time any of the Subscription Rights shall have been countersigned but not
delivered, the Agent may adopt the countersignature under its prior name
and deliver Subscription Rights so countersigned, and in case at that time
any of the Subscription Rights shall not have been countersigned, the
Agent may countersign such Subscription Rights either in its prior name or
in its changed name, and in all such cases such Subscription Rights shall
have the full force provided in the Subscription Rights and in this
Agreement.
12. The Fund agrees to pay to the Agent at the completion of the offering, on
demand of the Agent, reasonable compensation for all services rendered by
it hereunder and also its reasonable out-of-pocket expenses and other
disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder as set
forth in Schedule A (attached).
13. The Agent undertakes the duties and obligations imposed by this Agreement
upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement the
Agent shall deem it necessary or desirable that any fact or matter be
proved or established, prior to taking or suffering any action hereunder,
such fact or matter (unless other evidence in respect thereof is herein
specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board or
President or a Vice President or the Secretary or Assistant Secretary or
the Treasurer of the Fund delivered to the Agent, and such certificate
shall be full authorization to the Agent for any action taken or suffered
good faith by it under the provisions of this Agreement in reliance upon
such certificate.
(b) The Agent shall not be responsible for and the Fund shall indemnify
and hold the Agent harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liabilities arising
out of or attributable to all actions of the Agent or its agents or
subcontractors required to be taken pursuant to this Agreement, provided
that such actions are taken in good faith and without gross negligence or
willful misconduct.
(c) The Agent shall be liable hereunder only for its own gross negligence
or willful misconduct and for the negligence or misconduct of its agents
or subcontractors.
<PAGE>
(d) The Agent may consult with legal counsel of its selection (who may be
legal counsel to the Fund), and the opinions of such counsel shall be full
and complete authorization and protection to the Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(e) Nothing herein shall preclude the Agent from acting in any other
capacity for the Fund or for any other legal entity.
(f) The Agent is hereby authorized and directed to accept instructions
with respect to the performance of its duties hereunder from any officer
or assistant officer of the Fund and to apply to any such officer of the
Fund for advice or instructions in connection with its duties, and shall
be indemnified and not be liable for any action taken or suffered by it in
good faith in accordance with instructions of any officer or assistant
officer of the Fund.
(g) The Agent shall be indemnified and shall incur no liability for or in
respect of any action taken, suffered, or omitted by it in reliance upon
any Subscription Right or certificate for Common Stock, instrument of
assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or
document that it reasonably believes to be genuine and to be signed,
executed and, where necessary, verified or acknowledged, by the proper
person or persons.
14. The Agent may, without the consent or concurrence of the Shareholders in
whose names Subscription Rights are registered, by supplemental agreement
or otherwise, concur with the Fund in making any changes or corrections in
a Subscription Right that it shall have been advised by counsel (who may
be counsel for the Fund) is appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or clerical omission or
mistake or manifest error therein or herein contained, and which shall not
be inconsistent with the provisions of the Subscription Right or the
Prospectus except insofar as any such change may confer additional rights
upon the Shareholders.
15. A11 the covenants and provisions of the Agreement by or for the benefit of
the Fund or the Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
16. A11 capitalized terms used herein and not defined herein shall have the
meaning specified in the Prospectus.
17. The validity, interpretation and performance of this Agreement shall be
governed by the law of the Commonwealth of Massachusetts.
STATE STREET BANK AND TRUST COMPANY JAPAN OTC EQUITY FUND, INC.
By: By:
___________________________ ____________________________
Name:
Title
Dated: ______________________ Dated: ________________________
JAPAN OTC EQUITY FUND, INC.
____________ Shares of Common Stock Issuable Upon Exercise
of Non-Transferable Rights to Subscribe for
Such Shares of Common Stock
DEALER MANAGER AGREEMENT
New York, New York
October 25, 1999
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Japan OTC Equity Fund, Inc., a Maryland corporation (the "Company")
and Nomura Asset Management U.S.A. Inc. (the "Manager") each confirms its
agreement with and appointment of PaineWebber Incorporated to act as dealer
manager (the "Dealer Manager") in connection with the issuance by the Company to
the holders of record at the close of business on October 25, 1999 or such other
date as is established as the record date for such purpose (the "Holders") of
the shares of common stock, par value $.10 per share, of the Company (the
"Common Stock"), of non-transferable rights entitling such Holders to subscribe
for an aggregate of ____________shares (each a "Share" and, collectively, the
"Shares") of Common Stock (the "Offer"). Pursuant to the over-subscription
privilege in connection with the Offer (the "Over-Subscription Privilege"), the
Company may, at the discretion of the Board of Directors, including a majority
of the independent directors, increase the number of Shares subject to
subscription by up to 25%. Pursuant to the terms of the Offer, the Company is
issuing each Holder one non-transferable right (each a "Right" and,
collectively, the "Rights") for each whole share of Common Stock held by such
Holder on the record date set forth in the Prospectus (as defined herein) (the
"Record Date"). The Rights entitle Holders to acquire during the subscription
period set forth in the Prospectus (as defined herein) (the "Subscription
Period"), at the price set forth in the Prospectus (the "Subscription Price"),
one Share for each three Rights exercised on the terms and conditions set forth
in such Prospectus. No fractional Shares will be issued.
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, on Form N-2 (Nos. 333-87159 and
811-05992) and a related preliminary prospectus for the registration of the
Shares under the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations of the Commission thereunder (the "Securities Act
Rules and Regulations"), and has filed such amendments to such registration
statement on Form N-2, if any, and such amended preliminary prospectuses as may
have been required to the date hereof. The Company will prepare and file such
additional amendments thereto and such amended prospectuses as may hereafter be
required. The registration statement (as amended, if applicable) and the
prospectus constituting a part thereof, as from time to time amended or
supplemented pursuant to the Securities Act, are herein referred to as the
"Registration Statement" and such prospectus is referred to herein as the
"Prospectus", except that if any revised prospectus shall be provided to the
Dealer Manager by the Company for use in connection with the Offer which differs
from the Prospectus on file at the
<PAGE>
Commission at the time the Registration Statement becomes effective (whether
such revised prospectus is required to be filed by the Company pursuant to Rule
497(b) or Rule 497(h) of the Securities Act Rules and Regulations), the term
"Prospectus" shall refer to each such revised prospectus from and after the time
it is first provided to the Dealer Manager for such use. Any letters to
beneficial owners of the shares of Common Stock of the Company, forms used to
exercise rights, any letters from the Company to securities dealers, commercial
banks and other nominees and any newspaper announcements, press releases and
other offering materials and information that the Company may use, approve,
prepare or authorize in writing for use in connection with the Offer, are
collectively referred to hereinafter as the "Offering Materials."
1. Representations and Warranties.
(a) The Company and the Manager represent and warrant to, and agree
with, the Dealer Manager as of the date hereof and as of the date of the
commencement of the Offer (such later date being hereinafter referred to as the
"Representation Date") and as of the Expiration Date (as defined below) that:
(i) The Company meets the requirements for use of Form N-2
under the Securities Act, the Securities Act Rules and Regulations,
the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and the rules and regulations of the Commission under
the Investment Company Act, (the "Investment Company Act Rules and
Regulations"). At the time the Registration Statement becomes
effective, the Registration Statement will contain all statements
required to be stated therein in accordance with and will comply in
all material respects with the requirements of the Securities Act,
the Investment Company Act, the Securities Act Rules and Regulations
and the Investment Company Act Rules and Regulations (the Securities
Act Rules and Regulations and the Investment Company Act Rules and
Regulations will together hereinafter be referred to as the "Rules
and Regulations") and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
From the time the Registration Statement becomes effective through
the expiration date of the Offer set forth in the Prospectus (the
"Expiration Date"), the Prospectus (unless the term "Prospectus"
refers to a prospectus which has been provided to the Dealer Manager
by the Company for use in connection with the Offer which differs
from the Prospectus on file with the Commission at the time the
Registration Statement becomes effective, in which case at the time
such prospectus is first provided to the Dealer Manager for such
use) and the Offering Materials then authorized by the Company for
use will not include an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements in
or omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information relating to the
Dealer Manager furnished to the Company in writing by the Dealer
Manager expressly for use in the Registration Statement or
Prospectus.
(ii) The Company is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified, management
investment company, and no order of suspension or revocation of such
registration has been issued or proceedings therefor initiated or
threatened by the Commission, all required action has been taken
under the Securities Act, the Investment Company Act and any state
securities laws to make the public offering and consummate the
issuance of the Rights and the issuance and sale of the Shares by
the Company upon exercise of the Rights, and the provisions of the
2
<PAGE>
Company's articles of incorporation and bylaws comply as to form in
all material respects with the requirements of the Investment
Company Act and the Investment Company Act Rules and Regulations.
(iii) PricewaterhouseCoopers LLP, the accountants who audited
the financial statements of the Company set forth or incorporated by
reference in the Registration Statement and the Prospectus, are
independent public accountants as required by the Securities Act and
the Securities Act Rules and Regulations.
(iv) The financial statements of the Company set forth or
incorporated by reference in the Registration Statement and the
Prospectus fairly present in all material respects the financial
condition of the Company as of the dates indicated in conformity
with generally accepted accounting principles; and the information
set forth in the Prospectus under the headings "Fee Table" and
"Financial Highlights" each presents fairly in all material respects
the information stated therein.
(v) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland, has full power and authority (corporate and
other) to conduct its business as described in the Registration
Statement and the Prospectus and is duly qualified to do business in
each jurisdiction in which the conduct of its business requires such
qualification, except where the failure to be so qualified would not
result in a material adverse effect upon the business, properties,
financial position or results of operations of the Company. The
Company has no subsidiaries.
(vi) The Company's authorized capitalization is as set forth
in the Prospectus; the outstanding shares of Common Stock have been
duly authorized and validly issued and are fully paid and
non-assessable and conform in all material respects to the
description thereof in the Prospectus under the heading "Capital
Stock"; the Rights have been duly authorized by all requisite action
on the part of the Company for issuance pursuant to the Offer; the
Shares have been or, with respect to the Shares to be issued
pursuant to the Over-Subscription Privilege, will be duly authorized
by all requisite action on the part of the Company for issuance and
sale pursuant to the terms of the Offer and, when issued and
delivered by the Company pursuant to the terms of the Offer against
payment of the consideration set forth in the Prospectus will be
validly issued and fully paid and non-assessable; the Shares and the
Rights conform in all material respects to all statements relating
thereto contained in the Registration Statement and the Prospectus;
and the issuance of each of the Rights and the Shares is not subject
to any preemptive rights.
(vii) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the
Registration Statement and the Prospectus, (A) the Company has not
incurred any liabilities or obligations, direct or contingent, or
entered into any transactions, other than in the ordinary course of
business, that are material to the Company, (B) there has not been
any material change in the capital stock of the Company, or any
material adverse change, or to the Company's knowledge any
development involving a prospective material adverse change, in the
condition (financial or otherwise), business, prospects, net worth
or results of operations of the Company, (C) there has been no
dividend or distribution paid or declared in respect of the
Company's capital stock and (D) the Company has no outstanding
long-term debt.
(viii) Except as set forth in the Prospectus, there is not
pending or, to the knowledge of the Company or the Manager,
threatened, any action, suit or proceeding
3
<PAGE>
affecting the Company or to which the Company is a party before or
by any court or governmental agency or body, which might result in
any material adverse change in the condition (financial or
otherwise), business, prospects, net worth or results of operations
of the Company, or which might materially and adversely affect the
properties or assets thereof.
(ix) There are no contracts or other documents of the Company
that are required to be filed as exhibits to the Registration
Statement by the Securities Act or the Investment Company Act or by
the Rules and Regulations that have not been so filed or
incorporated by reference therein as permitted by the Rules and
Regulations.
(x) This Agreement, the Subscription Rights Agency Agreement
(the "Subscription Agency Agreement") between the Company and State
Street Bank and Trust Company (the "Subscription Agent"), the
Management Agreement between the Company and the Manager (the
"Management Agreement"), the Custodian Agreement between the Company
and State Street Bank and Trust Company (the "Custodian Agreement")
and the Registrar, Transfer Agency and Service Agreement between the
Company and State Street Bank and Trust Company (the "Transfer
Agency and Service Agreement") (collectively, all the foregoing are
the "Company Agreements") have been duly authorized, executed and
delivered by the Company; the Company Agreements are, assuming due
authorization, execution and delivery by the other parties thereto,
legal, valid, binding and enforceable obligations of the Company
subject, as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws of general applicability
relating to or affecting creditors' rights and to general principles
of equity (regardless of whether enforceability is considered in a
proceeding in equity or at law) and except as enforcement of rights
to indemnity and contribution hereunder may be limited by Federal or
state securities laws or principles of public policy, and the
performance of the Company's obligations under the Company
Agreements and the consummation of the transactions contemplated
therein or in the Registration Statement will not result in a
material breach or violation of any of the terms and provisions of,
constitute a default under, or result in the creation or imposition
of any lien, charge or encumbrance upon any properties or assets of
the Company pursuant to any material agreement, indenture, mortgage,
lease or other instrument to which the Company is a party or by
which it may be bound or to which any of the property or assets of
the Company is subject, nor will such action result in any violation
of the Company's charter or bylaws, or any order, law, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties; no consent,
approval, authorization, notification or order of, or filing with,
any court or governmental agency or body is required for the
consummation by the Company of the transactions contemplated by the
Company Agreements or the Registration Statement, except such as
have been obtained, or if the registration statement filed with
respect to the Shares is not effective under the Securities Act as
of the time of execution hereof, such as may be required (and shall
be obtained as provided in this Agreement) under the Investment
Company Act, the Securities Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and state securities laws.
(xi) Each of the Company Agreements complies as to form in all
material respects with all applicable provisions of the Investment
Company Act.
(xii) The Common Stock has been duly listed on the New York
Stock Exchange and prior to their issuance the Shares will have been
approved for listing, subject to official notice of issuance.
4
<PAGE>
(xiii) The Company owns or possesses or has obtained all
material governmental licenses, permits, consents, orders or
approvals and other authorizations necessary to lease or own, as the
case may be, and to operate its properties and to carry on its
business as contemplated in the Prospectus; and there are no
Japanese governmental licenses, permits, consents, orders, approvals
or other authorizations required to be obtained by the Fund in order
for it to own its properties or to carry on its business as
contemplated in the Prospectus other than as disclosed in the
Prospectus.
(xiv) The Company (A) has not taken, directly or indirectly,
any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the issuance of the Rights or the sale or
resale of the Shares, (B) has not since the filing of the
Registration Statement sold, bid for or purchased, or paid anyone
any compensation for soliciting purchases of, shares of Common Stock
of the Company and (C) will not, until the later of the expiration
of the Rights or the completion of the distribution (within the
meaning of Regulation M under the Exchange Act) of the Shares, sell,
bid for or purchase, pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities
of the Company (except for the solicitation of the exercises of
Rights pursuant to this Agreement); provided that any action in
connection with the Company's -------- ---- dividend reinvestment
plan will not be deemed to be within the terms of this Section
1(a)(xiv).
(xv) The Company has complied in all previous tax years, and
intends to direct the investment of the proceeds of the Offer
described in the Registration Statement and the Prospectus in such a
manner as to continue to comply with the requirements of Subchapter
M of the Internal Revenue Code of 1986, as amended ("Subchapter M of
the Code"), and is qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Code.
(xvi) The Prospectus and the Offering Materials complied and
comply with the requirements of the Securities Act, the Investment
Company Act and the Rules and Regulations.
(xvii) There are no material restrictions, limitations or
regulations with respect to the ability of the Company to invest its
assets as described in the Prospectus other than as described
therein.
(xviii) No taxes or charges of any kind are or will be payable
in or to Japan, or any political subdivision thereof, by the Dealer
Manager (except to the extent that the Dealer Manager may do
business in Japan) with respect to this Agreement or the purchase
and sale of the Shares hereunder.
(b) The Manager represents and warrants to, and agrees with, the
Dealer Manager as of the date hereof, as of the Representation Date and as
of the Expiration Date that:
(i) The Manager has been duly organized and is validly
existing as a corporation under the laws of the State of New York,
and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus, and is duly
licensed or qualified as a foreign corporation and in good standing
to do business in each other jurisdiction in which its ownership of
property or the conduct of its business requires such qualification
or license, except where the failure to be so qualified would not
have a material adverse effect on the Company or the Manager.
5
<PAGE>
(ii) The Manager is duly registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), and is not prohibited by the Advisers Act or the Investment
Company Act, or the rules and regulations under such Acts, from
acting under the Management Agreement and the Investment Advisory
Agreement for the Company as contemplated by the Prospectus.
(iii) Each of this Agreement, the Management Agreement and the
Investment Advisory Agreement has been duly authorized, executed and
delivered by the Manager; the Management Agreement and the
Investment Advisory Agreement are, assuming due authorization,
execution and delivery by the other parties thereto, legal, valid,
binding and enforceable obligations of the Manager, subject as to
enforcement to bankruptcy, insolvency, reorganization, moratorium
and other laws of general applicability relating to or affecting
creditors' rights, and to general principles of equity (regardless
of whether enforceability is considered in a proceeding in equity or
at law), and the performance by the Manager of its obligations under
such agreements and the consummation of the transactions therein
contemplated to be consummated by the Manager will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any material agreement or
instrument to which the Manager is a party or and by which it is
bound or to which any of the property of the Manager is subject, the
charter or bylaws of the Manager, or any order, rule or regulation
of any court or governmental agency or body, stock exchange or
securities association having jurisdiction over the Manager or any
of its properties or operations.
(iv) Except as set forth in the Prospectus, there is not
pending or, to the knowledge of the Manager, threatened, any action,
suit or proceeding to which the Manager is a party before or by any
court or governmental agency or body, which is likely to have a
material adverse effect upon the Company or upon the ability of the
Manager to perform its obligations under the Management Agreement
and the Investment Advisory Agreement.
(v) The Manager (i) has not taken, directly or indirectly, any
action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company to
facilitate the issuance of the Rights or the sale or resale of the
Shares, (ii) has not since the filing of the Registration Statement
sold, bid for or purchased, or paid anyone any compensation for
soliciting purchases of, shares of Common Stock of the Company and
(iii) will not, until the later of the expiration of the Rights or
the completion of the distribution (within the meaning of Regulation
M under the Exchange Act) of the Shares, sell, bid for or purchase,
pay or agree to pay any person any compensation for soliciting
another to purchase any other securities of the Company (except for
the solicitation of exercises of Rights pursuant to this Agreement);
provided that any action in connection with the Company's dividend
reinvestment plan will not be deemed to be within the terms of this
Section 1(b)(v).
(vi) The Manager owns, possesses or has obtained and currently
maintains all material governmental licenses, permits, consents,
orders, approvals and other authorizations ("Authorizations") as are
necessary for it to carry on its business as set forth in and
contemplated by the Prospectus except where the failure to obtain
such Authorizations would not have a material adverse effect on the
ability of the Manager to perform its obligations under the
Management Agreement or the Investment Advisory Agreement.
6
<PAGE>
(vii) The description of the Manager and its business in the
Registration Statement and the Prospectus complies with the
requirements of the Securities Act, the Investment Company Act and
the Rules and Regulations and does not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein
not misleading in light of the circumstances under which they were
made.
(viii) There are no material restrictions, limitations or
regulations with respect to the ability of the Company to invest its
assets as described in the Prospectus other than as may be described
therein.
(ix) The Shares have not been, and will not be, registered
under the Securities and Exchange Law of Japan; and accordingly the
Manager will not directly or indirectly offer or sell any Shares in
Japan or to, or for the benefit of, any resident of Japan, or
otherwise directly or indirectly reoffer or resell any Shares in
Japan or to, or for the benefit of, any resident of Japan (except in
compliance with the Securities and Exchange Law of Japan and all
other applicable laws and regulations of Japan).
(x) No consent, approval, authorization, notification or order
of, or filing with, any court or governmental agency or body is
required for the consummation by the Manager of the transactions
contemplated by this Agreement, the Management Agreement, the
Investment Advisory Agreement or any other Company Agreement to
which the Manager is a party, except where the failure to obtain
such consent, approval, authorization, notification, or order, or
make such filing would not have a material adverse effect on the
business, properties, financial position, or operations of the
Manager.
(xi) Nomura Asset Management Co., Ltd. (the "Investment
Adviser") has been duly organized and is validly existing as a
corporation under the laws of Japan, and has full corporate power
and authority to own its properties and conduct its business as
described in the Prospectus, and is duly licensed or qualified to do
business in each jurisdiction in which its ownership of property or
the conduct of its business requires such qualification or license,
except where the failure to be so qualified would not have a
material adverse effect on the Company or the Investment Adviser.
(xii) The Investment Adviser is duly registered as an
investment adviser under the Advisers Act, and is not prohibited by
the Advisers Act or the Investment Company Act, or the rules and
regulations under such Acts, from acting under the Investment
Advisory Agreement for the Company as contemplated by the
Prospectus.
(xiii) Each of this Agreement and the Investment Advisory
Agreement between the Manager and the Investment Adviser (the
"Investment Advisory Agreement") has been duly authorized, executed
and delivered by the Investment Adviser; the Investment Advisory
Agreement is, assuming due authorization, execution and delivery by
the other parties thereto, a legal, valid, binding and enforceable
obligation of the Investment Adviser, subject as to enforcement to
bankruptcy, insolvency, reorganization, moratorium and other laws of
general applicability relating to or affecting creditors' rights,
and to general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law),
and the performance by the Investment Adviser of its obligations
under such agreements and the consummation of the transactions
therein contemplated to be consummated by the Investment Adviser
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
material agreement or instrument to which the
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Investment Adviser is a party or and by which it is bound or to
which any of the property of the Investment Adviser is subject, the
constitutive documents of the Investment Adviser, or any order, rule
or regulation of any court or governmental agency or body, stock
exchange or securities association having jurisdiction over the
Investment Adviser or any of its properties or operations.
(xiv) Except as set forth in the Prospectus, there is not
pending or, to the knowledge of the Manager, threatened, any action,
suit or proceeding to which the Investment Adviser is a party before
or by any court or governmental agency or body, which is likely to
have a material adverse effect upon the Company or upon the ability
of the Investment Adviser to perform its obligations under the
Investment Advisory Agreement.
(xv) The Investment Adviser (i) has not taken, directly or
indirectly, any action designed to cause or to result in, or that
has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any security of
the Company to facilitate the issuance of the Rights or the sale or
resale of the Shares, (ii) has not since the filing of the
Registration Statement sold, bid for or purchased, or paid anyone
any compensation for soliciting purchases of, shares of Common Stock
of the Company and (iii) will not, until the later of the expiration
of the Rights or the completion of the distribution (within the
meaning of Regulation M under the Exchange Act) of the Shares, sell,
bid for or purchase, pay or agree to pay any person any compensation
for soliciting another to purchase any other securities of the
Company (except for the solicitation of exercises of Rights pursuant
to this Agreement); provided that any action in connection with the
Company's dividend reinvestment plan will not be deemed to be within
the terms of this Section 1(b)(v).
(xvi) The Investment Adviser owns, possesses or has obtained
and currently maintains all material Authorizations as are necessary
for it to carry on its business as set forth in and contemplated by
the Prospectus except where the failure to obtain such
Authorizations would not have a material adverse effect on the
ability of the Investment Adviser to perform its obligations under
the Investment Advisory Agreement.
(xvii) The description of the Investment Adviser and its
business in the Registration Statement and the Prospectus complies
with the requirements of the Securities Act, the Investment Company
Act and the Rules and Regulations and does not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading in light of the circumstances
under which they were made.
(xviii) No consent, approval, authorization, notification or
order of, or filing with, any court or governmental agency or body
is required for the consummation by the Investment Adviser of the
transactions contemplated by this Agreement, the Investment Advisory
Agreement or any other Company Agreement to which the Investment
Adviser is a party, except where the failure to obtain such consent,
approval, authorization, notification, or order, or make such filing
would not have a material adverse effect on the business,
properties, financial position, or operations of the Investment
Adviser.
(c) Any certificate required by this Agreement that is signed by any
officer of the Company, the Manager or the Investment Adviser and delivered to
the Dealer Manager or counsel for the Dealer Manager shall be deemed a
representation and warranty by the Company, the Manager or the Investment
Adviser, as the case may be, to the Dealer Manager, as to the matters covered
thereby.
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2. Agreement to Act as Dealer Manager.
(a) On the basis of the representations and warranties contained
herein, and subject to the terms and conditions of the Offer:
(i) The Company hereby appoints the Dealer Manager and other
soliciting dealers entering into a Soliciting Dealer Agreement, in
the form attached hereto as Exhibit A, with the Dealer Manager (the
"Soliciting Dealers"), to solicit, in accordance with the Securities
Act, the Investment Company Act and the Exchange Act, and their
customary practice, the exercise of the Rights, subject to the terms
and conditions of this Agreement, the procedures described in the
Registration Statement and, where applicable, the terms and
conditions of such Soliciting Dealer Agreement; and
(ii) The Company agrees to furnish, or cause to be furnished,
to the Dealer Manager lists, or copies of those lists, showing the
names and addresses of, and number of shares of Common Stock held
by, Holders as of the Record Date, and the Dealer Manager agrees to
use such information only in connection with the Offer, and not to
furnish the information to any other person except for securities
brokers and dealers that have been requested by the Dealer Manager
to solicit exercises of Rights.
(b) The Dealer Manager agrees to provide to the Company, in addition
to the services described in paragraph (a) of this Section 2, financial advisory
and marketing services in connection with the Offer. No advisory fee, other than
the fees provided for in Section 3 of this Agreement and the reimbursement of
the Dealer Manager's out-of-pocket expenses as described in Section 5 of this
Agreement, will be payable by the Company to the Dealer Manager in connection
with the financial advisory and marketing services provided by the Dealer
Manager pursuant to this Section 2(b).
(c) The Company and the Dealer Manager agree that the Dealer Manager
is an independent contractor with respect to the solicitation of the exercise of
Rights and the performance of financial advisory and marketing services to the
Company contemplated by this Agreement.
(d) The Dealer Manager agrees to perform those services with respect
to the Offer as are customarily performed by the Dealer Manager in connection
with offers of a like nature, including (but not limited to) using its
reasonable best efforts to solicit the exercise of Rights pursuant to the Offer
and in communicating with the Soliciting Dealers. In soliciting the exercise of
Rights, (i) the Dealer Manager shall not be deemed to be acting as the agent of
the Company other than pursuant to this Agreement or as the agent of any
Soliciting Dealer and (ii) no Soliciting Dealer shall be deemed to be acting as
the agent of the Dealer Manager. It is understood that the Dealer Manager is
being engaged hereunder solely to provide the services described above on behalf
of the Company and that the Dealer Manager is not acting as an agent or
fiduciary of the equity holders of the Company or any other third party in
connection with its engagement hereunder.
(e) In rendering the services contemplated by this Agreement,
neither the Dealer Manager nor any affiliate thereof will be subject to any
liability to the Company, the Manager or the Investment Adviser or any of their
affiliates, for any losses, claims, damages, liabilities or expenses arising
from any act or omission on the part of any securities broker or dealer (except
with respect to the Dealer Manager acting in such capacity) or any other person
and the Dealer Manager will not be liable for acts or omissions in performing
its obligations under this Agreement or otherwise in connection with the Offer,
except for any losses, claims, damages, liabilities and expenses that are
finally judicially determined to have resulted primarily from the willful
misfeasance, bad faith or gross negligence of the Dealer Manager or by reason of
the reckless disregard of the obligations and duties of the Dealer Manager under
this Agreement.
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3. Dealer Manager and Solicitation Fees. In full payment for the financial
advisory, marketing, and soliciting services rendered and to be rendered
hereunder by the Dealer Manager, the Company agrees to pay the Dealer Manager a
fee (the "Dealer Manager Fee") equal to 3.75% of the aggregate Subscription
Price per Share for each Share issued pursuant to the exercise of Rights and the
Over-Subscription Privilege. In full payment for the soliciting efforts to be
rendered, the Dealer Manager agrees to reallow soliciting fees (the "Soliciting
Fees") to Soliciting Dealers equal to 2.50% of the Subscription Price per Share
for each Share issued pursuant to the exercise of Rights and the
Over-Subscription Privilege. The Dealer Manager agrees to pay the Soliciting
Fees to the broker dealers designated on the applicable portion of the form used
by the Holder to exercise Rights and the Over-Subscription Privilege, and if no
broker-dealer is so designated pursuant to the terms of the Soliciting Dealer
Agreement, then the Dealer Manager shall retain such Soliciting Fees for Shares
issued pursuant to the exercise of Rights and Over-Subscription Privilege.
Payment to the Dealer Manager by the Company will be in the form of a wire
transfer of same day funds to an account or accounts identified by the Dealer
Manager. Such payment will be made on each date on which the Company issues
Shares after the Expiration Date. Payment to a Soliciting Dealer will be made by
check to an address identified by such broker-dealer. Such payments shall be
made on or before the tenth business day following each date on which the
Company issues Shares after the Expiration Date.
4. Covenants of the Company and the Manager.
(a) The Company covenants with the Dealer Manager as follows:
(i) The Company will use its best efforts to cause the
Registration Statement to become effective under the Securities Act,
and will advise the Dealer Manager promptly as to the time at which
the Registration Statement and any amendments thereto (including any
post-effective amendment) becomes so effective.
(ii) The Company will notify the Dealer Manager immediately,
and confirm the notice in writing, (A) of the effectiveness of the
Registration Statement and any amendment thereto (including any
post-effective amendment), (B) of the receipt of any comments from
the Commission, (C) of any request by the Commission for any
amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, (D) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose, (E) of the suspension of the
qualification of the Shares or the Rights for offering or sale in
any jurisdiction. The Company will make every reasonable effort to
prevent the issuance of any stop order described in subsection (D)
hereunder and, if any such stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(iii) The Company will give the Dealer Manager notice of its
intention to file any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus which
the Company proposes for use by the Dealer Manager in connection
with the Offer, which differs from the prospectus on file at the
Commission at the time the Registration Statement becomes effective,
whether such revised prospectus is required to be filed pursuant to
Rule 497(b) or Rule 497(h) of the Securities Act Rules and
Regulations), whether pursuant to the Investment Company Act, the
Securities Act, or otherwise, and will furnish the Dealer Manager
with copies of any such amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be,
and will not file any such amendment or supplement to which the
Dealer Manager or counsel for the Dealer Manager shall reasonably
object.
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(iv) The Company will, without charge, deliver to the Dealer
Manager, as soon as practicable, the number of copies (one of which
is manually executed) of the Registration Statement as originally
filed and of each amendment thereto as it may reasonably request, in
each case with the exhibits filed therewith.
(v) The Company will, without charge, furnish to the Dealer
Manager, from time to time during the period when the Prospectus is
required to be delivered under the Securities Act, such number of
copies of the Prospectus (as amended or supplemented) as the Dealer
Manager may reasonably request for the purposes contemplated by the
Securities Act or the Securities Act Rules and Regulations.
(vi) If any event shall occur as a result of which it is
necessary, in the reasonable opinion of counsel for the Dealer
Manager, to amend or supplement the Registration Statement or the
Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a
Holder, the Company will forthwith amend or supplement the
Prospectus by preparing and filing with the Commission (and
furnishing to the Dealer Manager a reasonable number of copies of)
an amendment or amendments of the Registration Statement or an
amendment or amendments of or a supplement or supplements to, the
Prospectus (in form and substance satisfactory to counsel for the
Dealer Manager), at the Company's expense, which will amend or
supplement the Registration Statement or the Prospectus so that the
Prospectus will not contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at
the time the Prospectus is delivered to a Holder, not misleading.
(vii) The Company will endeavor, in cooperation with the
Dealer Manager and its counsel, to assist such counsel to qualify
the Rights and the Shares for offering and sale under the applicable
securities laws of such states and other jurisdictions of the United
States as the Dealer Manager may designate and maintain such
qualifications in effect for the duration of the Offer; provided,
however, that the Company will not be obligated to file any general
consent to service of process, or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in
which it is not now so qualified. The Company will file such
statements and reports as may be required by the laws of each
jurisdiction in which the Rights and the Shares have been qualified
as above provided.
(viii) The Company will make generally available to its
security holders as soon as practicable, but no later than 60 days
after the close of the period covered thereby, an earnings statement
(in form complying with the provisions of Rule 158 of the Securities
Act Rules and Regulations) covering a twelve-month period beginning
not later than the first day of the Company's second fiscal quarter
following the "effective" date (as defined in said Rule 158) of the
Registration Statement.
(ix) For a period of 180 days from the date of this Agreement,
the Company will not, without the prior consent of the Dealer
Manager, directly or indirectly sell, offer to sell, enter into any
agreement to sell, or otherwise dispose of, any equity or equity
related securities of the Company or securities convertible into
such securities, other than the Shares and the Common Stock issued
in reinvestment of dividends or distributions.
(x) The Company will apply the net proceeds from the Offer as
set forth under "Use of Proceeds" in the Prospectus.
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<PAGE>
(xi) The Company will use its best efforts to cause the Shares
to be duly authorized for listing by the New York Stock Exchange
prior to the time the Shares are issued.
(xii) The Company will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M
of the Code.
(xiii) The Company will advise or cause the Subscription Agent
to advise the Dealer Manager and each Soliciting Dealer from day to
day during the period of, and promptly after the termination of, the
Offer, as to the names and addresses of all Holders exercising
Rights, the total number of Rights exercised by each Holder during
the immediately preceding day, indicating the total number of Rights
verified to be in proper form for exercise, rejected for exercise
and being processed and, for the Dealer Manager and each Soliciting
Dealer, the number of Rights exercised on exercise forms indicating
the Dealer Manager or such Soliciting Dealer, as the case may be, as
the broker-dealer with respect to such exercise, and as to such
other information as the Dealer Manager may reasonably request; and
will notify the Dealer Manager and each Soliciting Dealer, not later
than 5:00 P.M., New York City time, on the first business day
following the Expiration Date, of the total number of Rights
exercised and Shares related thereto, the total number of Rights
verified to be in proper form for exercise, rejected for exercise
and being processed and, for the Dealer Manager and each Soliciting
Dealer, the number of Rights exercised on exercise forms indicating
the Dealer Manager or such Soliciting Dealer, as the case may be, as
the broker-dealer with respect to such exercise, and as to such
other information as the Dealer Manager may reasonably request.
(b) The Company and the Manager will not take, directly or
indirectly, any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute the
stabilization or manipulation of the price of any security of the Company to
facilitate the issuance of the Rights or the sale or resale of the Shares;
provided that any action in connection with the Company's dividend reinvestment
plan will not be deemed to be within the meaning of this Section 4(b).
(c) The Company and the Manager agree that, except as required by
applicable law, any reference to the Dealer Manager in any Offering Materials or
any other document or communication prepared, approved or authorized by the
Company or the Manager in connection with the Offer is subject to the prior
approval of the Dealer Manager, provided that if such reference to the Dealer
Manager is required by applicable law, the Company or the Manager agree to
notify the Dealer Manager within a reasonable time prior to such use.
5. Payment of Expenses.
(a) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, including, but not limited to, expenses
relating to (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Shares and exercise forms relating to
the Rights, (iii) the fees and disbursements of the Company's counsel (including
the fees and disbursements of local counsel) and accountants, (iv) the
qualification of the Rights and the Shares under securities laws in accordance
with the provisions of Section 4(a)(vii) of this Agreement, including filing
fees and the preparation of the Blue Sky Letter by counsel to the Dealer Manager
(not to exceed $2,500), (v) the printing or other production and delivery to the
Dealer Manager of copies of the Registration Statement as originally filed and
of each amendment thereto and of the Prospectus and any amendments or
supplements thereto, (vi) the printing and other production and delivery of
copies of the Blue Sky Letter, (vii) the fees and expenses incurred with respect
to filing with the National Association of Securities Dealers, Inc., (viii) the
fees and expenses incurred in connection with the listing of the Shares on the
New York Stock Exchange, (ix) the printing or
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other production, mailing and delivery expenses incurred in connection with the
Prospectus and the Offering Materials, (x) the fees and expenses incurred with
respect to the Subscription Agent and the Information Agent, (xi) all fees, if
any, payable to the Dealer Manager and Soliciting Dealers as reimbursement for
their customary mailing and handling expenses in forwarding materials related to
the Offer to their customers and (xii) all other fees and expenses (excluding
the announcement, if any, of the Offer in The Wall Street Journal) incurred in
connection with or relating to the Offer.
(b) In addition to any fees that may be payable to the Dealer
Manager under this Agreement, the Company agrees to reimburse the Dealer Manager
upon request made from time to time for its reasonable expenses incurred in
connection with its activities under this Agreement, including the reasonable
fees and disbursements of its legal counsel (excluding Blue Sky fees and
expenses which are paid directly by the Company), in an amount up to $100,000.
(c) If this Agreement is terminated by the Dealer Manager in
accordance with the provisions of Section 6 or Section 9(a)(i), 9(a)(ii) or
9(a)(iii), the Company agrees to reimburse the Dealer Manager for all of its
reasonable out-of-pocket expenses incurred in connection with its performance
hereunder, including the reasonable fees and disbursements of counsel for the
Dealer Manager. In the event the transactions contemplated hereunder are not
consummated, the Company agrees to pay all of the costs and expenses set forth
in paragraphs (a) and (b) of this Section 5 which the Company would have paid if
such transactions had been consummated.
6. Conditions of Dealer Manager's Obligations. The obligations of the
Dealer Manager hereunder are subject to the accuracy of the representations and
warranties of the Company and the Manager contained herein, to the performance
by the Company and the Manager of their respective obligations hereunder, and to
the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., on the Representation Date, or at such later time and date as
may be approved by the Dealer Manager; the Prospectus and any amendment or
supplement thereto shall have been filed with the Commission in the manner and
within the time period required by Rule 497(b), (d) or (h), as the case may be,
under the Securities Act; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or, to the
knowledge of the Company, the Manager or the Dealer Manager, shall be
contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) On the Representation Date and the Expiration Date, the Dealer
Manager shall have received:
(1) The favorable opinion, dated the Representation Date and the
Expiration Date, of Brown & Wood LLP, counsel for the Company, the Manager
and the Investment Adviser, in form and substance satisfactory to counsel
for the Dealer Manager, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Maryland, the Manager has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of New York, and each has full corporate power and
authority to conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to do business
as a foreign corporation in each jurisdiction wherein it owns or
leases material properties or conducts material business, except
where the failure to be so qualified, considering all such cases in
the aggregate, does not involve a material
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adverse risk to the business, properties, financial position or
results of operations of the Company or the Manager;
(ii) the Company's authorized capitalization is as set forth
in the Prospectus under the heading "Capital Stock;" the outstanding
shares of Common Stock have been duly authorized and validly issued
and are fully paid and non-assessable and conform in all material
respects to the description thereof in the Prospectus under the
heading "Capital Stock"; the Rights have been duly authorized by all
requisite action on the part of the Company for issuance pursuant to
the Offer; the Shares have been or, with respect to the Shares to be
issued pursuant to the Over-Subscription Privilege, will be, duly
authorized by all requisite action on the part of the Company for
issuance and sale pursuant to the terms of the Offer and, when
issued and delivered by the Company pursuant to the terms of the
Offer against payment of the consideration set forth in the
Prospectus, will be validly issued and fully paid and
non-assessable; the Shares and the Rights conform in all material
respects to all statements relating thereto contained in the
Registration Statement and the Prospectus; and the issuance of each
of the Rights and the Shares is not subject to any preemptive rights
under the charter or bylaws of the Company or, to such counsel's
knowledge, otherwise. The outstanding Common Stock has been duly
listed on the New York Stock Exchange and the Shares have been duly
authorized for listing subject to official notice of issuance, on
the New York Stock Exchange;
(iii) to the best knowledge of such counsel, there is no
pending or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving
the Company of a character required to be disclosed in the
Registration Statement or the Prospectus which is not adequately
disclosed therein, and there is no contract or other document of a
character required to be described in the Registration Statement or
the Prospectus, or to be filed or incorporated by reference as an
exhibit which is not described or filed or incorporated by reference
as required; to the knowledge of such counsel, except as set forth
in the Prospectus, there is not pending or threatened, any action,
suit or proceeding to which the Manager is a party before or by any
court or governmental agency or body or any arbitrator, which might
result in any material adverse effect upon the Company or upon the
ability of the Manager to perform its obligations under the
Management Agreement;
(iv) the statements in the Prospectus under the heading
"Taxes", insofar as such statements describe or summarize United
States tax laws, treaties, doctrines or practices, provide an
accurate description thereof as of the date of the Prospectus;
(v) the Registration Statement has become effective under the
Securities Act; to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or
threatened; and the Registration Statement, the Prospectus and each
amendment thereof or supplement thereto (other than the financial
statements and other financial and statistical information contained
therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the applicable requirements of
the Securities Act and the Investment Company Act and the Rules and
Regulations;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and the Manager and, assuming due
authorization, execution and delivery by the other parties hereto,
is a legal, valid, binding and enforceable obligation of the Company
and the Manager, subject to the qualification that the
enforceability of the
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obligations of the Company and the Manager hereunder may be limited
by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors'
rights, and to general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law)
and subject to the qualification that the right to indemnity and
contribution hereunder may be limited by Federal or state laws; the
Subscription Agency Agreement, the Management Agreement, the
Custodian Agreement and the Transfer Agency and Service Agreement
have been duly authorized, executed and delivered by the Company and
the Manager, as the case may be, and comply in all material respects
with all applicable provisions of the Investment Company Act and the
Advisers Act, and assuming due authorization, execution and delivery
by the other parties thereto, are legal, valid, binding and
enforceable obligations, if any, of the Company and the Manager,
subject to the qualification that the enforceability of the
obligations, if any, of the Company and the Manager thereunder may
be limited by bankruptcy, insolvency, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights, and to general principles of equity (regardless
of whether enforceability is considered in a proceeding in equity or
at law);
(vii) the Investment Advisory Agreement complies in all
material respects with all applicable provisions of the Investment
Company Act and the Advisers Act, and assuming due authorization,
execution and delivery by the parties thereto, and assuming it is
enforceable under Japanese law, is a legal, valid, binding and
enforceable obligation of the Manager and the Investment Adviser,
subject to the qualification that the enforceability of the
obligations of the Manager and the Investment Adviser thereunder may
be limited by bankruptcy, insolvency, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights, and to general principles of equity (regardless
of whether enforceability is considered in a proceeding in equity or
at law);
(viii) no consent, approval, authorization or order of any
court or governmental agency or body is required under Maryland
corporate law, the laws of New York or Federal law or, to the best
of such counsel's knowledge, the laws of any other jurisdiction in
the United States, for the consummation by the Company of the
transactions contemplated in the Company Agreements, except (A) such
as have been obtained under the Securities Act, the Exchange Act,
the Investment Company Act, or from the New York Stock Exchange, (B)
such as may be required under the blue sky laws of any jurisdiction
in connection with the transactions contemplated hereby and (C) such
other approvals as have been obtained or the failure to have
obtained will not have a material adverse effect on the Company or
its ability to perform its obligations under the Company Agreements;
(ix) neither the issuance of the Rights, nor the issuance and
sale of the Shares by the Company, nor the consummation by the
Company and the Manager of any other of the transactions
contemplated in the Company Agreements or the Prospectus nor the
fulfillment by the Company and the Manager of the terms of the
Company Agreements will conflict with, result in a breach of, or
constitute a default under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of
the Company or the Manager pursuant to the charter or bylaws of the
Company or the Manager, to the knowledge of such counsel, the terms
of any material agreement, indenture, mortgage, lease or other
instrument to which the Company or the Manager is a party or bound
or to which any of the property or assets of the Company or the
Manager is subject, or any order of which such counsel has
knowledge, law, rule or regulation
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applicable to the Company or the Manager of any United States court,
regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over the Company or the Manager or
any of their properties;
(x) neither the issuance of the Rights, nor the issuance and
sale of the Shares by the Company, nor the consummation by the
Investment Adviser of any other of the transactions contemplated in
the Investment Advisory Agreement or the Prospectus nor the
fulfillment by the Investment Adviser of the terms of the Investment
Advisory Agreement will conflict with, result in a breach of, or
constitute a default under any order of which such counsel has
knowledge, law, rule or regulation applicable to the Investment
Adviser of any United States court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over the
Investment Adviser or any of its properties;
(xi) the Company is registered with the Commission under the
Investment Company Act as a closed-end, non-diversified management
investment company, all required action has been taken under the
Securities Act and the Investment Company Act to make the Offer and
consummate the issuance of the Rights and the issuance and sale of
the Shares by the Company upon exercise of the Rights, and the
provisions of the Company's charter and bylaws comply as to form in
all material respects with the requirements of the Investment
Company Act and the Investment Company Act Rules and Regulations;
(xii) each of the Manager and the Investment Adviser is duly
registered as an investment adviser under the Advisers Act and is
not prohibited by the Advisers Act or the Investment Company Act, or
the rules and regulations under such Acts, from acting as a manager
or an investment adviser, as the case may be, for the Company as
contemplated in the Prospectus, the Management Agreement and the
Investment Advisory Agreement;
(xiii) to the knowledge of such counsel, each of the Manager
and the Investment Adviser owns, possesses or has obtained and
currently maintains all material Authorizations under New York or
United States law as are necessary for the Manager and the
Investment Adviser to perform their obligations, if any, under the
Management Agreement and the Investment Advisory Agreement as set
forth in and contemplated by the Prospectus except where the failure
to obtain such Authorizations would not have a material adverse
effect on the Manager or the Investment Advisor; and
(xiv) the Offering Materials comply as to form in all material
respects with the requirements of the Securities Act, the Investment
Company Act and the Rules and Regulations; for the purpose of this
paragraph, Offering Materials shall be those items that the Fund has
certified to Brown & Wood LLP constitute Offering Materials, such as
to include the Prospectus wrapper, the warning letter to beneficial
owners of the shares of Common Stock of the Company, and press
releases that the Company may use, approve, prepare or authorize in
writing for use in connection with the Offer.
In rendering such opinion, Brown & Wood LLP may rely as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company, the Manager and the Investment Adviser and public officials.
Any required filing of the Prospectus or any supplement thereto
pursuant to Rule 497(b), (d) or (h) required to be made to the date hereof has
been made in the manner and within the time period required by Rule 497(b), (d)
or (h), as the case may be. Such counsel shall also have stated that, while
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they have not themselves checked the accuracy and completeness of or otherwise
verified, and are not passing upon and assume no responsibility for the accuracy
or completeness of, the statements contained in the Registration Statement or
the Prospectus, except to the limited extent stated in paragraphs (ii) and (iv)
above, in the course of their review and discussion of the contents of the
Registration Statement and Prospectus with certain officers and employees of the
Company and its independent accountants and others, no facts have come to their
attention which cause them to believe that the Registration Statement as of the
effective date thereof or the Prospectus, as of the effective date thereof and
as of the Representation Date and the Expiration Date, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements contained therein (and in the
case of the Prospectus, in the light of the circumstances under which they were
made) not misleading, or, if there has been any supplement to the Prospectus
made by the Company, that any such supplement, at the date of such supplement
and on the Representation Date and Expiration Date, contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements contained therein, in the light of the circumstances under
which they were made, not misleading (except that such counsel need express no
opinion or belief as to financial statements, schedules or other financial data
included therein or excluded therefrom).
(2) The favorable opinion, dated the Representation Date and the
Expiration Date, of Hamada & Matsumoto, Japanese counsel for the Company,
in form and substance satisfactory to counsel for the Dealer Manager, to
the effect that, under existing Japanese laws and regulations:
(i) the Investment Adviser has been duly organized and is
validly existing as a corporation under the laws of Japan, and has
full corporate power and authority to own its properties and conduct
its business as described in the Prospectus;
(ii) no consent, approval, authorization or order of any court
or governmental agency or body is required under the laws of Japan
for the issuance of the Rights, the issuance and sale of the Shares
by the Company or for the consummation by the Company of the
transactions contemplated in the Company Agreements based on the
representations and warranties contained herein;
(iii) such counsel does not know of any Japanese statutes,
regulations or legal or governmental proceedings materially
affecting the operation of the Company as contemplated in the
Prospectus and which would be material to an investor considering an
investment in the Company, except as are described in the
Prospectus;
(iv) the statements in the Prospectus, including, without
limitation, the statements under the headings "Taxes - Japanese
Taxes," "The Japanese OTC Market - Regulation of the Japanese OTC
Market," "Risk Factors and Special Considerations," "Japanese
Foreign Investment and Exchange Control Laws" and "Japanese Foreign
Exchange and Foreign Trade Law," insofar as such statements describe
or summarize Japanese laws, treaties, doctrines or practices,
provide an accurate description thereof as of the date of the
Prospectus;
(v) no taxes or charges of any kind are or will be payable in
or to Japan, or any political subdivision thereof, by the Dealer
Manager with respect to the Company Agreements or for the issuance
of the Rights and the issuance and sale of the Shares by the Company
assuming all such agreements are signed outside of Japan and such
issuance of Rights and the issuance and sale of the Shares are made
outside of Japan;
(vi) to the best knowledge of such counsel (without making any
investigation), there is no pending or threatened action, suit or
proceeding in Japan before
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any court or governmental agency, authority or body or any
arbitrator involving the Company, which questions the validity of
the Company Agreements.
(vii) the Investment Advisory Agreement has been duly
authorized, executed and delivered by the Investment Adviser;
(viii) neither the performance by the Investment Adviser of
its obligations under the Investment Advisory Agreement nor the
consummation of the transactions contemplated herein or therein nor
the fulfillment of the terms hereof or thereof will conflict with,
or result in a breach of, or constitute a default under, or result
in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Investment Adviser pursuant to
the constitutive documents of the Investment Adviser or, to the
knowledge of such counsel (based on such investigation as we have
deemed appropriate), the terms of any material agreement, indenture,
mortgage, lease or other instrument to which the Investment Adviser
is a party or is bound or to which any of its property or assets is
subject, which conflict, breach or default would have a material
adverse effect on the ability of the Investment Adviser to carry out
its obligations under such agreements, or any Japanese law, order of
which such counsel has knowledge, rule or regulation applicable to
the Investment Adviser of any Japanese court, regulatory body,
administrative agency, governmental body, stock exchange or
securities association having jurisdiction over the Investment
Adviser or its properties or operations; no consent, approval,
authorization or order of any court or governmental agency or body
is required under the laws of Japan in connection with the
execution, performance and delivery of the Investment Advisory
Agreement by the Investment Adviser; and
(ix) to the knowledge of such counsel (based on such
investigation as we have deemed appropriate), the Investment Adviser
owns, possesses or has obtained and currently maintains all material
Authorizations under Japanese law as are necessary for the
Investment Adviser to perform its obligation under the Investment
Advisory Agreement as set forth in and contemplated by the
Prospectus except where the failure to obtain such Authorizations
would not have a material adverse effect on the Investment Adviser.
In rendering such opinion, Hamada & Matsumoto may rely (A) as to matters
involving the application of laws of any jurisdiction other than Japan to the
extent such counsel deems proper and specified in such opinion, upon the opinion
of other counsel of good standing whom such counsel believes to be reliable and
who are satisfactory to counsel for the Dealer Manager and (B) as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company, the Manager and the Investment Adviser and public
officials.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, except to the limited extent stated in paragraph (iv) above, in the
course of their participation in the preparation of the contents of the
Registration Statement and Prospectus, no facts relating to Japanese laws,
treaties, legal doctrines or legal practices have come to their attention which
cause them to believe that the Registration Statement as of the effective date
thereof or the Prospectus, as of the effective date thereof and as of the
Representation Date and the Expiration Date, contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements contained therein, in the light of the circumstances under which they
were made, not misleading (except that such counsel need express no opinion or
belief as to financial statements, schedules or other financial data included
therein or excluded therefrom).
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(c) The Dealer Manager shall have received from Rogers & Wells LLP,
counsel for the Dealer Manager, such opinion or opinions, dated the
Representation Date and the Expiration Date, with respect to the offer, the
Registration Statement, the Prospectus and other related matters as the Dealer
Manager may reasonably require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(d) The Company shall have furnished to the Dealer Manager a
certificate of the Company, signed by the President or a Vice President of the
Company, dated the Representation Date and the Expiration Date, to the effect
that the signer of such certificate has carefully examined the Registration
Statement, the Prospectus, any supplement to the Prospectus and this Agreement
and that, to the best of his knowledge:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Representation Date or the Expiration Date, as the case may be,
with the same effect as if made on the Representation Date or the
Expiration Date and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Representation Date or the Expiration
Date, as the case may be; and
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened.
(iii) since the date of the most recent balance sheet included
or incorporated by reference in the Prospectus, there has been no
material adverse change in the condition (financial or other),
earnings, business, prospects, net worth or results of operations of
the Company (excluding fluctuations in the Company's net asset value
due to investment activities in the ordinary course of business),
except as set forth in or contemplated in the Prospectus.
(e) The Manager shall have furnished to the Dealer Manager a
certificate, signed by its Chairman or other senior officer, dated the
Representation Date and the Expiration Date, to the effect that the signer of
such certificate has read the Registration Statement, the Prospectus, any
supplement to the Prospectus and this Agreement and, to the best knowledge of
such signer, (i) the representations and warranties of the Manager in this
Agreement are true and correct in all material respects on and as of the
Representation Date or the Expiration Date, as the case may be, with the same
effect as if made on the Representation Date or the Expiration Date, (ii) the
Manager has complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the Representation Date or
the Expiration Date and (iii) as of the Representation Date or the Expiration
Date, as the case may be, the Registration Statement did not include any untrue
statement of a material fact and did not omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
and on such Representation Date or the Expiration Date, the Prospectus and any
Offering Materials did not include any untrue statement of a material fact and
did not omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and, since the date of the
Prospectus, no event has occurred which should have been set forth in a
supplement to, or amendment of, the Prospectus which has not been set forth in
such a supplement or amendment.
(f) The Investment Adviser shall have furnished to the Dealer
Manager a certificate, signed by its Chairman or other senior officer, dated the
Representation Date and the Expiration Date, to the effect that the signer of
such certificate has read the Registration Statement, the Prospectus, any
supplement to the Prospectus and this Agreement and, to the best knowledge of
such signer, (i) the representations and warranties of the Manager as they
relate to the Investment Adviser in this Agreement are true and correct in all
material respects on and as of the Representation Date or the Expiration Date,
as
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the case may be, with the same effect as if made on the Representation Date or
the Expiration Date, (ii) the Investment Adviser has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Representation Date or the Expiration Date and
(iii) as of the Representation Date or the Expiration Date, as the case may be,
the portions of the Prospectus relating to Japan, the Japanese OTC Market, the
description of the Investment Adviser and the statements under the heading
"Investment Objective and Policies" did not include any untrue statement of a
material fact and did not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and, since
the date of the Prospectus, no event has occurred which should have been set
forth in a supplement to, or amendment of, the Prospectus which has not been set
forth in such a supplement or amendment.
(g) PricewaterhouseCoopers LLP shall have furnished to the Dealer
Manager a letter, dated the Representation Date and the Expiration Date, in form
and substance satisfactory to the Dealer Manager, and stating in effect that:
(i) they are independent accountants with respect to the
Company within the meaning of the Securities Act and the applicable
Rules and Regulations;
(ii) in their opinion, the audited financial statements
examined by them and included or incorporated by reference in the
Registration Statement comply as to form in all material respects
with the applicable accounting requirements of the Securities Act
and the Investment Company Act and the respective Rules and
Regulations;
(iii) they have performed specified procedures, not
constituting an audit, including a reading of the latest available
interim financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company
responsible for financial or accounting matters and such other
inquiries and procedures as may be specified in such letter, and on
the basis of such inquiries and procedures nothing came to their
attention that caused them to believe that at the date of the latest
available financial statements read by such accountants, or at a
subsequent specified date not more than five days prior to the
Representation Date or the Expiration Date, as the case may be,
there was any change in the capital stock, net assets or absence of
long-term debt of the Company as compared with amounts shown on the
audited financial statements included or incorporated by reference
in the Prospectus, except as the Prospectus discloses has occurred
or may occur or as disclosed in their letter;
(iv) in addition to the procedures referred to in clause (iii)
above, they have performed other specified procedures, not
constituting an audit, with respect to certain amounts, percentages,
numerical data, financial information and financial statements
appearing in the Registration Statement, which have previously been
specified by the Dealer Manager and which shall be specified in such
letter, and have compared such items with, and have found such items
to be in agreement with, the accounting and financial records of the
Company.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not
have been (i) any change or decrease specified in the letter or letters
referred to in paragraph (f) of this Section 6, or (ii) any change, or any
development involving a prospective change, in or affecting the business
or properties of the Company, the effect of which, in any case referred to
in clause (i) or (ii) above, is, in the judgment of the Dealer Manager, so
material and adverse as to make it impractical or inadvisable to proceed
with the Offer as contemplated by the Registration Statement and the
Prospectus.
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(i) Prior to the Representation Date and the Expiration Date, the
Company shall have furnished to the Dealer Manager such further information,
certificates and documents as the Dealer Manager may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Dealer Manager and its counsel, this Agreement and all
obligations of the Dealer Manager hereunder may be canceled at, or at any time
prior to, the Representation Date by the Dealer Manager. Notice of such
cancellation shall be given to the Company in writing or by telephone or
telegraph confirmed in writing.
7. Indemnification and Contribution.
(a) Each of the Company and the Manager, jointly and severally, will
indemnify and hold harmless the Dealer Manager, the directors, officers,
employees and agents of the Dealer Manager and each person, if any, who controls
the Dealer Manager within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act from and against any and all losses, claims,
liabilities, expenses and damages (including, but not limited to, any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any and all amounts paid in settlement of, any action, suit or proceeding
between any of the indemnified parties and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or any claim asserted),
as and when incurred to which the Dealer Manager, or any such person, may become
subject under the Securities Act, the Exchange Act, the Investment Company Act,
the Advisers Act or other federal or state statutory law or regulation, at
common law or otherwise insofar as such losses, claims, liabilities, expenses or
damages arise out of or are based on (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, the
Prospectus or Offering Materials, or any amendment or supplement to the
Registration Statement, the Prospectus or Offering Materials, or in any
documents filed under the Exchange Act and deemed to be incorporated by
reference into the Registration Statement, the Prospectus, or in any application
or other document executed by or on behalf of the Company or based on written
information furnished by or on behalf of the Company filed with the Commission,
(ii) the omission or alleged omission to state in such document a material fact
required to be stated in it or necessary to make the statements in it not
misleading or (iii) any act or failure to act or any alleged act or failure to
act by the Dealer Manager in connection with, or relating in any manner to, the
Rights or the Shares or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, liability, expense or damage
arising out of or based upon matters covered by clause (i) or (ii) above
(provided that neither the Company nor the Manager shall be liable under this
clause (iii) to the extent it is finally judicially determined by a court of
competent jurisdiction that such loss, claim, liability, expense or damage
resulted directly from any such acts or failures to act undertaken or omitted to
be taken by such Dealer Manager through its bad faith, willful misconduct, gross
negligence or intentional failure to perform substantially the obligations and
duties of the Dealer Manager under this Agreement); provided that neither the
Company or the Manager will be liable to the extent that such loss, claim,
liability, expense or damage arises from the sale of the Shares in the public
offering to any person by the Dealer Manager and is based on an untrue statement
or omission or alleged untrue statement or omission made in reliance on and in
conformity with information relating to the Dealer Manager furnished in writing
to the Company by the Dealer Manager expressly for inclusion in the Registration
Statement or the Prospectus. Notwithstanding the foregoing, nothing in this
Section 7 shall be construed as to require the Company and the Manager to
indemnify the Dealer Manager solely for a violation by the Dealer Manager of any
applicable rules and regulations. This indemnity agreement will be in addition
to any liability that the Company or the Manager might otherwise have.
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(b) The Dealer Manager will indemnify and hold harmless the Company
and the Manager, each person, if any, who controls the Company or the Manager
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, each director of the Company and each officer of the Company who
signs the Registration Statement to the same extent as the foregoing indemnity
from the Company or the Manager to the Dealer Manager, but only insofar as
losses, claims, liabilities, expenses or damages arise out of or are based on
any untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to the Dealer Manager
furnished in writing to the Company by the Dealer Manager expressly for use in
the Registration Statement or Prospectus, such information being as set forth in
Section 7(h) hereof. This indemnity will be in addition to any liability that
the Dealer Manager might otherwise have; provided, however, that in no case
shall the Dealer Manager be liable or responsible for any amount in excess of
the fees and commissions received by the Dealer Manager.
(c) Any party that proposes to assert the right to be indemnified
under this Section 7 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission to so notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provision of this Section 7 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, disbursements and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on the advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction (in addition to local counsel) at any one time for
all such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. An indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld). No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding
relating to the matters contemplated by this Section 7 (whether or not any
indemnified party is a party thereto), unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising or that may arise out of such
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claim, action or proceeding. Notwithstanding any other provision of this Section
7(c), if at any time an indemnified party shall have requested an indemnifying
party to reimburse the indemnified party for fees, disbursements and other
charges of counsel, such indemnifying party agrees that it shall be liable for
any settlement effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
terms of such settlement at least 30 days prior to such settlement being entered
into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraph of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, the Manager or the Dealer
Manager, the Company, the Manager and the Dealer Manager will contribute to the
total losses, claims, liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the Company and
the Manager from persons other than the Dealer Manager, such as persons who
control the Company or the Manager within the meaning of the Securities Act or
the Exchange Act, officers of the Company who signed the Registration Statement
and directors of the Company, who may also be liable for contribution) to which
the Company, the Manager and the Dealer Manager may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and the Manager on the one hand and the Dealer Manager on the other.
The relative benefits received by the Company and the Manager (treated jointly
for this purpose as one person) on the one hand and the Dealer Manager on the
other hand shall be deemed to be in the same proportion as the total net
proceeds from the Offering (before deducting expenses) received by the Company
bear to the total fees received by the Dealer Manager, in each case as set forth
on the cover page of the Prospectus. If, but only if, the allocation provided by
the foregoing sentence is not permitted by applicable law, the allocation of
contribution shall be made in such proportion as is appropriate to reflect not
only such relative benefits referred to in the foregoing sentence but also the
relative fault of the Company and the Manager (treated jointly for this purpose
as one person) on the one hand and the Dealer Manager on the other hand with
respect to the statements or omissions which resulted in such loss, claim,
liability, expense or damage in respect thereof, as well as any other relevant
equitable considerations with respect to the Offering. Such relative fault of
the parties shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Manager or
the Dealer Manager, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Manager and the Dealer Manager agree that it would
not be just and equitable if contributions pursuant to this Section 7(d) were to
be determined by pro rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
liability, expense or damage, or action in respect thereof, referred to in this
Section 7(d) shall be deemed to include, for purposes of this Section 7(d) any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), the Dealer Manager shall
not be required to contribute any amount in excess of the fees received by it
and no person found guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section 7(d), any person who controls a party to this Agreement within
the meaning of the Securities Act will have the same rights to contribution as
that party, and each director of the Company and each officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against such party in
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respect of which a claim for contribution may be made under this Section 7(d),
will notify such party or parties from whom contribution may be sought, but the
omission so to notify will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 7(d). Except for a settlement entered into pursuant to the last
sentence of Section 7(c) hereof, no party will be liable for contribution with
respect to any action or claim settled without its written consent (which
consent shall not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company and the Manager
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any investigation made by or on behalf of the Dealer Manager,
(ii) acceptance of Shares and payment therefor or (iii) any termination of this
Agreement.
(f) Notwithstanding any other provisions in this Section 7, no party
shall be entitled to indemnification or contribution under this Agreement
against any loss, claim, liability, expense or damage arising by reason of such
person's willful misfeasance, bad faith or gross negligence in the performance
of its duties hereunder, or by reason of such person's reckless disregard of
such person's obligations and duties hereunder.
(g) The Company and the Manager agree to indemnify each Soliciting
Dealer and controlling persons to the same extent and subject to the same
conditions and to the same agreements, including with respect to contribution,
provided for in subsections 7(a), 7(b), 7(c), 7(d), 7(e) and 7(f).
(h) The Company and the Manager acknowledge that the statements
under the caption "THE OFFER--Distribution Arrangements" in the Prospectus
constitute the only information furnished in writing to the Company by the
Dealer Manager expressly for use in such document, and the Dealer Manager
confirms that such statements are correct in all material respects.
8. Representations, Warranties and Agreements to Survive Delivery. The
respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers, of the Manager and of the Dealer
Manager set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of Dealer
Manager, the Manager or the Company or any of the officers, directors or
controlling persons referred to in Section 7 hereof, and will survive delivery
of and payment for the Shares pursuant to the Offer; provided, however, that
following delivery and payment for the Shares, the remedies against the Manager
for breach of its representations and warranties shall, in the absence of
fraudulent misrepresentation by the Manager, be limited to those available
pursuant to Section 7 hereof. The provisions of Sections 5 and 7 hereof shall
survive the termination or cancellation of this Agreement.
9. Termination of Agreement.
(a) This Agreement shall be subject to termination in the absolute
discretion of the Dealer Manager, by notice given to the Company prior to the
expiration of the Offer, if prior to such time (i) financial, political,
economic, currency or banking conditions in the United States shall have
undergone any material change the effect of which on the financial markets makes
it, in the Dealer Manager's judgment, impracticable to proceed with the Offer,
(ii) there has occurred any outbreak or material escalation of hostilities or
other calamity or crisis the effect of which on the financial markets of the
United States is such as to make it, in the Dealer Manager's judgment,
impracticable to proceed with the Offer, (iii) trading in the shares of Common
Stock shall have been suspended by the Commission or the New York Stock
Exchange, (iv) trading in securities generally on the New York Stock Exchange
shall have been suspended or limited or (v) a banking moratorium shall have been
declared either by Federal, or New York State authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 5.
24
<PAGE>
10. Notices. All communications hereunder will be in writing and effective
only on receipt, and, if sent to the Dealer Manager, will be mailed, delivered
or telegraphed and confirmed to PaineWebber Incorporated, 1285 Avenue of the
Americas, New York, New York 10019; or if sent to the Company or the Manager,
will be mailed, delivered or telegraphed and confirmed to them at 180 Maiden
Lane, New York, New York 10038.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and will inure to the
benefit of the officers and directors and controlling persons referred to in
Section 7 hereof, and no other person will have any right or obligation
hereunder.
12. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York without reference to choice of
law principles thereof.
13. Consent to Jurisdiction; Waiver of Jury Trial. The Company and the
Manager hereby irrevocably submit to the jurisdiction of any state or federal
court sitting in the borough of Manhattan, State of New York in respect of any
action, proceeding or counterclaim and irrevocably agree that all claims and
defenses in respect of any such suit, action or proceeding may be heard and
determined in any such court. The Company, the Manager and the Dealer Manager
each hereby irrevocably waive any right they may have to a trial by jury in
respect of any claim based upon or arising out of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
25
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company,
the Manager and the Dealer Manager.
Very truly yours,
Japan OTC Equity Fund, Inc.
By:
------------------------------------
Name:
Title:
Nomura Asset Management U.S.A. Inc.
------------------------------------
Name:
Title:
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
PaineWebber Incorporated
as Dealer Manager
By:
-------------------------------
Name:
Title:
26
<PAGE>
R&W DRAFT
10/18/99
Exhibit A
JAPAN OTC EQUITY FUND, INC.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
NOVEMBER 19, 1999, UNLESS EXTENDED
To Securities Dealers and Brokers:
Japan OTC Equity Fund, Inc., a Maryland corporation (the "Fund"), is
issuing to its stockholders of record ("Holders") as of the close of business on
October 25, 1999 (the "Record Date") non-transferable rights ("Rights") to
subscribe for an aggregate of up to ____________ shares (the "Shares") of common
stock, par value $0.10 per share (the "Common Stock"), of the Fund upon the
terms and subject to the conditions set forth in the Fund's Prospectus (the
"Prospectus"), dated ____________, 1999 (the "Offer"). Each such Holder is being
issued one Right for each full share of Common Stock owned on the Record Date
(except that any Holder who owns fewer than three Rights will be able to
subscribe for one full Share pursuant to the primary subscription). Such Rights
entitle Holders to acquire during the Subscription Period (as hereinafter
defined) at the Subscription Price (as hereinafter defined), one Share for each
three Rights, on the terms and conditions set forth in such Prospectus. No
fractional shares will be issued. Any Holder who fully exercises all Rights
initially issued to such Holder (other than those Rights that cannot be
exercised because they represent the right to acquire less than one Share) will
be entitled to subscribe for, subject to allocation, additional Shares (the
"Over-Subscription Privilege") on the terms and conditions set forth in such
Prospectus. Pursuant to the Over-Subscription Privilege, the Fund may, at its
discretion, increase the number of Shares subject to subscription by up to 25%.
The Subscription Price will be 95% of the lower of (1) the average of the last
reported sales price per share on the New York Stock Exchange (the "NYSE") for
the five trading days ending with the day the offer expires and (2) the NAV as
of the close of trading on the NYSE on that day. The Subscription Period will
commence on October 25, 1999 and end at 5:00 p.m., New York City time on the
Expiration Date (the term "Expiration Date" means November 19, 1999 unless the
Fund shall, in its sole discretion, have extended the period for which the Offer
is open, in which event the term "Expiration Date" with respect to the Offer
will mean the latest time and date on which the Offer, as so extended by the
Fund, will expire).
For the duration of the Offer, the Fund has authorized and the
Dealer Manager has agreed to reallow a Solicitation Fee to any qualified broker
or dealer executing a Soliciting Dealer Agreement who solicits the exercise of
Rights and the Over-Subscription Privilege in connection with the Offer and who
complies with the procedures described below (a "Soliciting Dealer"). Upon
timely delivery to State Street Bank and Trust Company, the Fund's Subscription
Agent for the Offer, of payment for Shares purchased pursuant to the exercise of
Rights and the Over-Subscription Privilege and of properly completed and
executed documentation as set forth in this Soliciting Dealer Agreement, a
Soliciting Dealer will be entitled to receive the Solicitation Fee equal to
2.50% of the Subscription Price per Share so purchased; provided, however, that
no payment shall be due with respect to the issuance of any Shares
<PAGE>
until payment therefor is actually received. A qualified broker or dealer is a
broker or dealer which is a member of a registered national securities exchange
in the United States or the National Association of Securities Dealers, Inc.
("NASD") or any foreign broker or dealer not eligible for membership who agrees
to conform to the Rules of Fair Practice of the NASD, including Sections 2730,
2740, 2420 and 2750 thereof, in making solicitations in the United States to the
same extent as if it were a member thereof.
The Fund has authorized the payment of, and the Dealer Manager has
agreed to pay, the Solicitation Fees payable to the undersigned Soliciting
Dealer, and the Fund has agreed to indemnify such Soliciting Dealer on the terms
set forth in the Dealer Manager Agreement, dated October 25, 1999, among
PaineWebber Incorporated ("PaineWebber") as the dealer manager (the "Dealer
Manager"), the Fund and Nomura Asset Management U.S.A. Inc. (the "Dealer Manager
Agreement"). Solicitation and other activities by Soliciting Dealers may be
undertaken only in accordance with the applicable rules and regulations of the
Securities and Exchange Commission and only in those states and other
jurisdictions where such solicitations and other activities may lawfully be
undertaken and in accordance with the laws thereof. Compensation will not be
paid for solicitations in any state or other jurisdiction in which the opinion
of counsel to the Fund or counsel to the Dealer Manager, such compensation may
not lawfully be paid. No Soliciting Dealer shall be paid Solicitation Fees with
respect to Shares purchased pursuant to an exercise of Rights and the
Over-Subscription Privilege for its own account or for the account of any
affiliate of the Soliciting Dealer. No Soliciting Dealer or any other person is
authorized by the Fund or the Dealer Manager to give any information or make any
representations in connection with the Offer other than those contained in the
Prospectus and other authorized solicitation material furnished by the Fund
through the Dealer Manager. No Soliciting Dealer is authorized to act as agent
of the Fund or the Dealer Manager in any connection or transaction. In addition,
nothing herein contained shall constitute the Soliciting Dealers partners with
the Dealer Manager or with one another, or agents of the Dealer Manager or of
the Fund, or create any association between such parties, or shall render the
Dealer Manager or the Fund liable for the obligations of any Soliciting Dealer.
Except as provided above with respect to Solicitation Fees, the Dealer Manager
shall be under no liability to make any payment to any Soliciting Dealer, and
shall be subject to no other liabilities to any Soliciting Dealer, and no
obligations of any sort shall be implied.
In order for a Soliciting Dealer to receive Solicitation Fees, the
Subscription Agent must have received from such Soliciting Dealer no later than
5:00 p.m., New York City time, on the Expiration Date, either (i) a properly
completed and duly executed Subscription Certificate with respect to Shares
purchased pursuant to the exercise of Rights and the Over-Subscription Privilege
designating the Soliciting Dealer in the applicable portion thereof and full
payment for such Shares; or (ii) a Notice of Guaranteed Delivery guaranteeing
delivery to the Subscription Agent of a properly completed and duly executed
Soliciting Dealer Agreement and a Subscription Certificate designating the
Soliciting Dealer in the applicable portion hereof. In the case of a Notice of
Guaranteed Delivery, Solicitation Fees will only be paid after delivery in
accordance with such Notice of Guaranteed Delivery has been effected.
Solicitation Fees will be paid by the Dealer Manager to the Soliciting Dealer by
check to an address designated by the Soliciting Dealer below by the tenth
business day following each date on which the Fund issues Shares after the
Expiration Date with respect to which such Subscription Certificates were
received.
All questions as to the form, validity and eligibility (including
time of receipt) of this Soliciting Dealer Agreement will be determined by the
Dealer Manager, in its sole discretion, which determination shall be final and
binding. Unless waived, any irregularities in connection with a Soliciting
Dealer Agreement or delivery thereof must be cured within such time as the Fund
shall determine. None of the Fund, the Dealer Manager, the Subscription Agent,
the Information Agent for the Offer, Corporate Investor Communications, Inc. or
any other person will be under any duty to give notification of any defects or
irregularities in any Soliciting Dealer Agreement or incur any liability for
failure to give such notification.
<PAGE>
The acceptance of Solicitation Fees from the Dealer Manager by the
undersigned Soliciting Dealer shall constitute a representation by such
Soliciting Dealer to the Dealer Manager that: (i) it has received and reviewed
the Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise
of the Rights and the Over-Subscription Privilege, it has complied with the
applicable requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the applicable rules and regulations thereunder, any applicable
securities laws of any state or jurisdiction where such solicitations were made,
and the applicable rules and regulation of any self-regulatory organization or
registered national securities exchange; (iii) in soliciting purchases of Shares
pursuant to the exercise of the Rights and the Over-Subscription Privilege, it
has not published, circulated or used any soliciting materials other than the
Prospectus and any other authorized solicitation material furnished by the Fund
through the Dealer Manager; (iv) it has not purported to act as agent of the
Fund or the Dealer Manager in any connection or transaction relating to the
Offer; (v) the information contained in this Soliciting Dealer Agreement is, to
its best knowledge, true and complete; (vi) it is not affiliated with the Fund;
(vii) it will not accept Solicitation Fees paid by the Dealer Manager pursuant
to the terms hereof with respect to Shares purchased by the Soliciting Dealer
pursuant to an exercise of Rights and the Over-Subscription Privilege for its
own account; (viii) it will not remit, directly or indirectly, any part of
Solicitation Fees paid by the Fund pursuant to the terms hereof to any
beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has
agreed to the amount of the Solicitation Fees and the terms and conditions set
forth herein with respect to receiving such Solicitation Fees. By returning a
Soliciting Dealer Agreement and accepting Solicitation Fees, a Soliciting Dealer
will be deemed to have agreed to indemnify and hold harmless, to the fullest
extent permitted by law, the Fund, the Dealer Manager, the directors, officers,
employees and agents of the Fund and the Dealer Manager and each person, if any,
who controls the Fund and the Dealer Manager within the meaning of Section 15 of
the Act and Section 20 of the Exchange Act (the "Indemnified Persons") against
losses, claims, damages and liabilities, joint or several (including, but not
limited to, any and all investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or preceding or any claim asserted) to which the Indemnified Persons may
become subject to as a result of the breach of such Soliciting Dealer's
representations made herein and described above. In making the foregoing
representations, the Soliciting Dealer is reminded of the possible applicability
of the anti-manipulation rules under the Exchange Act if it has bought, sold,
dealt in or traded in any Shares for its own account since the commencement of
the Offer.
Upon expiration of the Offer, no Solicitation Fees will be payable
to Soliciting Dealers with respect to Shares purchased thereafter.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Dealer Manager Agreement or, if not defined
therein, in the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws of the
State of New York.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY PROCEEDINGS.
Please execute this Soliciting Dealer Agreement below accepting the
terms and conditions hereof and confirming that you are a member firm of the
NASD or a foreign broker or dealer not eligible for membership who has conformed
to the Rules of Fair Practice of the NASD, including Sections 2730, 2740, 2420
and 2750 thereof, in making solicitations of the type being undertaken pursuant
to the Offer in the United States to the same extent as if you were a member
thereof, and certifying that you have solicited the purchase of the Shares
pursuant to exercise of the Rights, all as described above, in accordance with
the terms and conditions set forth in this Soliciting Dealer Agreement. Please
forward two executed copies of this Soliciting Dealer Agreement to PaineWebber
Incorporated, Attn: Santhosh Chandra, 1285 Avenue of the Americas, New York, New
York 10019; Telephone No.: (212) 713-8578 and Facsimile No.: (212) 713-4205.
<PAGE>
A signed copy of this Soliciting Dealer Agreement will be promptly
returned to the Soliciting Dealer at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
PLEASE COMPLETE THE INFORMATION BELOW
- ------------------------------------ --------------------------------------
Printed Firm Name Address
- --------------------------------------------------------------------------------
Contact at Soliciting Dealer
- ------------------------------------ --------------------------------------
Authorized Signature Area Code and Telephone Number
- ------------------------------------ --------------------------------------
Name and Title Facsimile Number
Dated:
-------------------
Payment of the Solicitation Fee shall be mailed by check to the following
address:
- -----------------------------------
- -----------------------------------
- -----------------------------------
EXHIBIT (l)
[LETTERHEAD OF BROWN & WOOD LLP]
October 19, 1999
Japan OTC Equity Fund, Inc.
180 Maiden Lane
New York, New York 10038
Dear Sirs:
This opinion is furnished in connection with the registration by Japan OTC
Equity Fund, Inc., a Maryland corporation (the "Fund"), of up to 4,744,925
shares of its common stock, par value $0.10 per share (the "Shares"), under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to the
Fund's registration statement on Form N-2 (File No. 333-87519) under the
Securities Act (the "Registration Statement").
As counsel for the Fund, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, the By-laws of the Fund, and such other documents as we have deemed
relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement, will
be legally issued, fully paid and non-assessable shares of common stock of the
Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the prospectus constituting
a part thereof.
Very truly yours,
Consent of Independent Accountants
We hereby consent to the use and incorporation by reference in the Prospectus
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated April
7, 1999, relating to the financial statements and financial highlights appearing
in the February 28, 1999 Annual Report to Shareholders of the Japan OTC Equity
Fund, Inc. We also consent to the references to us under the headings "Financial
Highlights", "Experts" and "Financial Statements" in the Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
October 19, 1999
EXHIBIT (n)(2)
[Letterhead of Hamada & Matsumoto]
To: Japan OTC Equity Fund, Inc.
We hereby consent to the reference to our firm included in the
Registration Statement on Form N-2 (Securities Act File No. 333-87159), and the
prospectus constituting a part thereof, of Japan OTC Equity Fund, Inc. under the
captions "Taxes - Japanese Taxes" and "Legal Opinions".
Very truly yours,
HAMADA & MATSUMOTO
BY: /s/ Satoshi Nakamura
---------------------
Satoshi Nakamura
Tokyo, Japan
October 21,1999
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