JAPAN OTC EQUITY FUND, INC.
April 17, 2000
To Our Shareholders:
We present the Annual Report of the Japan OTC Equity Fund, Inc. (the
"Fund") for the fiscal year ended February 29, 2000. The Net Asset Value per
Share ("NAV") of the Fund increased by 179.7% for the year, reflecting the
overall strength of the Japanese OTC market. The closing market price of the
Fund on February 29, 2000 on the New York Stock Exchange was $11.00,
representing a discount of 32.9% to the NAV of $16.39. The net assets of the
Fund amounted to $259,766,472 on February 29, 2000.
The TOPIX, consisting of all companies listed on the Tokyo Stock Exchange
(the "TSE") First Section, increased by 65.7% and the Nikkei Average Index (a
price weighted index of 225 leading stocks on the TSE) increased by 49.9%, in
United States dollar terms, for the year ended February 29, 2000. The Nikkei
OTC Average Index (the "OTC Index"), a price-weighted index of the quotations
of the OTC registered stocks, and the Index of the Japan Securities Dealers
Association Quotation System (the "JASDAQ Index"), a capitalization-weighted
index of all OTC stocks, increased by 221.9% and 293.5%, respectively, in U.S.
dollar terms, during the same period. The Japanese yen appreciated by 7.9%
against the U.S. dollar during the year and played a positive role in the
dollar-based performance of the various indexes.
The Fund underperformed both the OTC Index and the JASDAQ Index by 42.2
percentage points and 113.8 percentage points, respectively, during the year
due to stock selection in the Consumption sector and underweighting in the
Information and Software sectors.
The NAV of the Fund increased by 6.3% for the quarter ended February 29,
2000. During the same period, the TOPIX, and the Nikkei Average Index
decreased by 3.0% and 0.4%, respectively, and the OTC Index and the JASDAQ
Index increased by 8.8% and 30.5%, respectively, in U.S. dollar terms.
For the quarter ended February 29, 2000, the Fund underperformed the OTC
Index and the JASDAQ Index by 2.5 percentage points and 24.2 percentage
points, respectively.
Rights Offering
The Fund completed its Rights Offering ("Offer") during November 1999,
which resulted in the issuance of an additional 4,458,565 Fund shares at
$11.99 per share. The net proceeds to the Fund amounted to approximately $51
million after offering fees and expenses of $2.6 million. The proceeds of the
Offer have allowed the Fund to take advantage of investment opportunities
Nomura Asset Management U.S.A. Inc., the Manager, considers attractive,
without being required to sell existing portfolio positions that the Fund
desires to retain.
The Portfolio
The Fund increased its equity exposure from 91.0% at November 30, 1999 to
100.0% at February 29, 2000. The Fund was diversified into 117 issues, of
which 81 issues were OTC stocks, comprising 76.3% of the total portfolio on
February 29, 2000.
During the last quarter, the Fund purchased eleven new issues: Doutor
Coffee Co., coffee; Drake Beam Morin-Japan, Inc., placement services
consultant firm; Goodwill Group Inc.; Japan Business Computer Co., Ltd.,
computers; Joint Corporation, condominiums; MegaChips Corp., circuits and
digital monitoring systems; Net One Systems Co., Ltd., computer network
systems for LAN, ATM; Nissho Electronics Corp., electronic parts distributor;
Square Co., Ltd., games software; Yamada Denki Co., Ltd., consumer electric;
and Tamagawa Electronics Co., Ltd., devices for wireless telecommunications.
Fourteen stocks were eliminated from the portfolio during the last quarter:
Aval Data Corporation, computer peripheral equipment; C Cube Corp.,
telecommunications engineering; Daido Steel Co., Ltd., steel; Fuji Machine
Manufacturing Co., Ltd., electronic components; Kobayashi Pharmaceutical Co.,
Ltd., pharmaceuticals, fragrances and sanitary products; Meitec Corporation,
software engineering; Meiwa Estate Co., Ltd., developer; Nishimatsuya Chain
Co., Ltd., clothing for children; Right On Co., Ltd., causal clothes; Sakai
Moving Service Co., Ltd., mover of household goods; Sansei Yusoki Co., Ltd.,
stage mechanisms for theaters; Tecmo Ltd., gaming equipment; Takasago Electric
Industry Co., Ltd., pachinko slot machines; and Token Corp., condominium
building and leasing.
Japanese Economy and Stock Market Outlook
The Japanese OTC stock market began a correction in December 1999, as the
Yen resumed its appreciation toward 100 Yen to one U.S. dollar. This came
despite the continued rally in U.S. stocks. However, the Japanese OTC stock
market finally began to track the U.S. rally after the Bank of Japan succeeded
in preventing the Yen/U.S. dollar rate from declining below the 100 Yen
threshold. The OTC Index recovered to the 2,300 level in late December.
Shortly after the New Year, a wave of profit taking began on the NASDAQ
market which spread to the Japanese OTC market. This correction had a
particularly strong impact on the technology issues, especially the internet
related stocks. The OTC Index briefly declined below the 2,100 level.
The Japanese OTC stock market enjoyed a strong rally in late January, amid
expectations of an influx of money from retail investors, through the launch
of some large domestic investment trust funds in the coming months. This
momentum was carried over into February, supported by buying interest from
newly launched investment trust funds and renewed momentum in the NASDAQ
market, The OTC Index closed just below the 2,700, level, appreciating by
17.5% during the quarter on a Yen basis. High priced Telecommunications and
Information Technology ("IT") stocks, such as Oracle Corp. Japan, Yahoo Corp.
Japan and OBIC Business Consultants, were major contributors to this gain.
Foreign investors and investment trust funds were major net buyers during the
period.
The domestic economy has not shown any clear signs of a strong recovery up
to the present time, and a further decline in Gross Domestic Product is
expected for the fourth quarter. Consumption figures recently released were
generally weak. Therefore, in the short-term, the Japanese economy will remain
dependent on public investment and exports.
However, in the second half of 2000, following the recovery of corporate
profits, private capital spending should recover and the unemployment rate
should decline. Afterwards, private domestic demand can be expected to rebound
and the economic recovery should enter a more sustainable phase.
Volatility in the Japanese OTC stock market may continue in the short-term.
A rather limited number of liquid growth stocks dominate the Japanese OTC
stock market capitalization, and they have a huge impact on its momentum. The
10 largest companies account for more than 50% of the entire Japanese OTC
stocks market capitalization as of February 29, 2000, and most of them are IT
related, with extremely high valuations. A correction among these stocks,
would be likely if there were a shock to investor sentiment caused by events
such as a decline in the U.S. stock market. The current high valuations are
difficult to rationalize on the basis of near-term earnings.
However, the Fund does not expect an event to have a sustained negative
impact on the small capitalization markets, and the Fund is still positive
about longer-term market prospects for the following reasons:
1. Corporate earnings have started to recover. Earnings of smaller
companies tend to recover faster than those of larger companies during
economic recoveries, since they are more sensitive to domestic demand. Indeed,
small capitalization stocks tend to outperform large capitalization stocks
during economic upturns.
2. Favorable supply and demand conditions are likely to continue over both
the short and long-term. In the short-term, the Fund expects the inflow of
retail money to the stock market to continue due to low interest rates,
principally through domestic investment trust funds. Furthermore, over the
coming two years approximately $1 trillion in postal savings funds will reach
maturity. As a result, a substantial amount of money may directly or
indirectly be allocated to the domestic equity market.
3. Ongoing structural changes in Japan will offer vast growth opportunities
for companies in some industries. The IT related industry is one example.
Quality emerging companies belonging to such industries will come to the small
capitalization market for listing. Although valuations seem demanding,
"winners" may eventually justify their current valuations by their
exceptionally high earnings growth.
4. Many small capitalization stocks, especially in cyclical sectors, are
still attractively valued, even following the strong market rally in 1999.
Once the economy enters a more sustainable phase, stocks of those companies
operating in mature industries, that are competitive in their own sectors, are
likely to participate in the rally and support the entire market.
The Fund will continue to seek companies with quality management, paying
close attention to valuations. At this moment, the Fund can still find growth
at a reasonable price in the technology driven sectors, which will benefit
from the expansion of mobile phones use, personal computers and digital audio
and visual equipment markets. The Fund also finds value in the Cyclical
sectors, which should benefit from the recovery of domestic demand, including
private capital expenditure. Meanwhile, the Fund will maintain some exposure
to the more highly valued IT related stocks to limit the risk of deviating too
far from the stock market.
Change in Control of Investment Advisor
The Nomura Securities Co., Ltd. has increased its ownership position in
Nomura Asset Management Co., Ltd. ("NAM"), the Fund's Investment Adviser from
4.9% to a majority ownership position (approximately 73.8% at March 31, 2000),
with the ultimate goal of acquiring 100% ownership. In addition, NAM has
increased its ownership of Nomura Asset Management U.S.A. Inc. ("NAM-U.S.A.")
from 88% to 100% by acquiring the remaining shares from Nomura Research
Institute Ltd. After the change, NAM and NAM-U.S.A. will continue to maintain
their management and business autonomy.
We appreciate your continuing support of your Fund.
Sincerely,
Nobuo Katayama
President
- ------------------------------------------------------------------------------
Nomura Asset Management Co., Ltd. ("NAM") provides investment
recommendations to Nomura Asset Management U.S.A. Inc. ("NAM-U.S.A."), the
Manager of the Fund. Mr. Nobuo Katayama, President of the Fund and President
of NAM-U.S.A., is primarily responsible for the day-to-day management of the
Fund's portfolio. Mr. Katayama has held such responsibilities for the Fund and
has served as President of NAM-U.S.A. since 1999.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
INTERNET WEBSITE
NAM-U.S.A. (the "Manager") has established an Internet website which
highlights the Manager's history, its investment philosophy and process and
products, which includes the Fund. The Internet web address is
www.nomura-asset.com. We invite you to view the Internet website.
- ------------------------------------------------------------------------------
<PAGE>
JAPAN OTC EQUITY FUND, INC
FUND HIGHLIGHTS-FEBRUARY 29,2000
<TABLE>
<CAPTION>
KEY STATISTICS:
<S> <C> <C>
Net Assets .................................................$259,766,472
Net Asset Value per Share .................................. $16.39
Closing NYSE Market Price .................................. $11.00
Percentage Change in Net Asset Value per Share*+ ........... 179.7%
Percentage Change in NYSE Market Price*+ ................... 76.0%
MARKET INDICES:
Percentage change in market indices:*
YEN U.S.$
---- ------
TOPIX ...................................................... 53.5% 65.7%
Nikkei Average ............................................. 38.9% 49.9%
JASDAQ ..................................................... 264.5% 293.5%
Nikkei OTC Average ......................................... 198.2% 221.9%
*From March 1, 1999 through February 29, 2000.
+reflects the percentage change in share price.
ASSET ALLOCATION:
Japanese Equities
OTC Stocks ............................................... 76.3%
TSE First and Second Section Stocks ...................... 23.7
Cash and Cash Equivalents .................................. 0.1
------
Total Investments .......................................... 100.1
------
Liabilities in Excess of Other Assets, Net ................. (0.1)
------
Net Assets ............................................... 100.0%
======
</TABLE>
INDUSTRY DIVERSIFICATION:
<TABLE>
<CAPTION>
% of % of
Net Assets Net Assets
--------- ----------
<S> <C>
Information and Software ....... 25.2 Wholesale .......................... 2.6
Services ....................... 11.8 Telecommunications ................. 2.2
Retail ......................... 9.0 Automotive Equipment and Parts...... 1.9
Electronics .................... 6.2 Textiles and Apparel ............... 1.9
Machinery and Machine Tools..... 5.9 Publishing ......................... 1.7
Miscellaneous Manufacturing..... 5.9 Real Estate and Warehouse .......... 1.3
Electric ....................... 5.4 Construction and Housing ........... 0.5
Chemicals and Pharmaceutical.... 5.1 Transportation ..................... 0.4
Food and Manufacturing ......... 4.7 Non-Ferrous Metals ................. 0.3
Banks and Finance .............. 3.9 Securities ......................... 0.3
Restaurants .................... 3.8
</TABLE>
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Security Value Net Assets
- -------- ----- ----------
Oracle Corp. Japan ........................ $33,181,962 12.8
Yahoo Japan Corp........................... 24,571,142 9.5
Fujitsu Support and Services, Inc.......... 8,853,802 3.4
Citizen Electronics Co., Ltd............... 7,487,828 2.9
Aiful Corporation ......................... 6,624,789 2.5
Bellsystem 24, Inc......................... 5,796,060 2.2
Watami Food Service Co., Ltd............... 5,562,178 2.2
THK Co., Ltd............................... 4,612,322 1.8
Disco Corp................................. 4,431,360 1.7
Shoeisha Co., Ltd.......................... 4,368,203 1.7
<PAGE>
JAPAN OTC EQUITY FUND, INC.
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Japan OTC Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Japan OTC
Equity Fund, Inc. (the "Fund") at February 29, 2000, the results of its
operations for the year then ended, the changes in its net 4-~sets 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 accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the America
New York New York 10036
April 10, 2000
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS*
FEBRUARY 29,2000
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
EQUITY SECURITIES
<S> <C> <C> <C> <C>
Automotive Equipment and Parts
Exedy Corp.......................... 132,400 $ 1,495,676 1,022,957 0.4
Automobile clutches
FCC Co., Ltd........................ 110,000 2,547,149 1,151,203 0.5
Motorcycle clutches
Musashi Seimitsu Industry Co., Ltd.. 56,000 902,116 580,971 0.2
Automobile parts
Nippon Cable Systems Inc. .......... 115,000 1,054,173 1,297,720 0.5
Control cables
SPK Corporation .................... 78,000 1,218,619 880,193 0.3
----------- ----------- ---
Replacement parts
Total Automotive Equipment and Parts 7,217,733 4,933,044 1.9
----------- ----------- ---
Banks and Finance
Aiful Corporation .................. 31,500 2,603,108 6,624,789 2.5
Consumer loans
Japan Securities Finance Co., Ltd... 227,000 1,303,546 1,330,373 0.5
Security financing
Sanyo Electric Credit Co., Ltd...... 55,400 2,365,164 2,268,735 0.9
----------- ----------- ---
Finance
Total Banks and Finance ............ 6,271,818 10,223,897 3.9
----------- ----------- ---
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS* - Continued
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Chemicals and Pharmaceuticals
Arisawa Manufacturing Co., Ltd........ 60,000 $ 827,045 $ 1,223,097 0.5
Glassfibers and insulating resins
C. Uyemura & Co., Ltd................. 65,000 1,831,589 1,105,565 0.4
Chemicals
Fanci Corp............................ 8,400 301,681 1,979,124 0.8
Cosmetics and toiletries
FP Corporation ....................... 56,300 1,999,168 2,279,974 0.9
Polystyrene and other synthetic
resin foodware
Kansai Paint Co., Ltd................. 150,000 350,019 333,075 0.1
Paint manufacturer
Konishi Co., Ltd...................... 91,300 1,114,601 874,074 0.3
Adhesives and construction sealants
Mandom Corporation ................... 20,000 568,607 323,975 0.1
Men's cosmetics
Matsumoto Yushi-Seiyaku Co., Ltd...... 95,000 1,939,446 1,573,463 0.6
Analgesic anti-inflammatory agents
Milbon Co., Ltd....................... 28,000 427,701 1,783,683 0.7
Hair-care products for beauty salons
T & K Toka Co., Ltd................... 38,500 1,528,178 1,313,874 0.5
Ink for printing
Tigers Polymer Corp................... 67,000 424,401 365,837 0.2
----------- ----------- ---
Rubber and resin hoses
Total Chemicals and Pharmaceuticals .. 11,312,436 13,155,741 5.1
----------- ----------- ---
Construction and Housing
Joint Corporation .................... 47,500 1,118,47 1,378,942 0.5
----------- ----------- ---
Condominiums
Electric
Citizen Electronics Co., Ltd.......... 37,400 1,633,337 7,487,828 2.9
Electric parts
Funai Electric Co., Ltd............... 4,100 369,404 2,947,627 1.1
Electric parts
Mirai Industry Co., Ltd............... 156,000 2,464,103 1,811,494 0.7
Plastic molded electric materials
Sumida Electric Co., Ltd.............. 35,000 1,413,947 1,672,203 0.7
----------- ----------- ---
Specialized coils
Total Electric ....................... 5,880,791 13,919,152 5.4
----------- ----------- ---
Electronics
Canare Electric Co., Ltd.............. 24,600 336,968 313,418 0.1
Coaxial cables
Cosel Co., Ltd........................ 69,000 1,886,116 1,984,256 0.8
Electrical machinery
Fuji Electric Industry Co., Ltd....... 93,000 993,449 617,828 0.2
Electronic parts
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS* - Continued
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Fukuda Denshi Co........................ 47,000 $1,164,956 $ 791,282 0.3
Medical electronic equipment
Japan CBM Corp.......................... 98,100 2,408,169 1,571,243 0.6
Electronic calculators and watches
Kuroda Electric Co., Ltd................ 40,600 1,716,511 1,607,226 0.6
Trader
Nissho Electronics Corp................ 74,000 2,274,041 3,481,640 1.4
Electronics parts distributor
Roland Corporation ..................... 46,000 910,132 874,915 0.3
Electronic keyboard for musical
instruments
Tamagawa Electronics Co., Ltd........... 96,000 2,665,532 2,184,101 0.9
Devices for wireless telecommunications
Tamron Co., Ltd......................... 105,000 759,558 788,324 0.3
Lens
Yamaichi Electronics Co., Ltd........... 74,000 1,808,829 1,919,279 0.7
---------- ---------- ---
Integrated circuit sockets
Total Electronics ...................... 16,924,261 16,133,512 6.2
---------- ---------- ---
Food and Manufacturing
Ariake Japan Co., Ltd................... 60,900 1,157,979 3,075,897 1.2
Natural seasonings
Hokuto Corporation ..................... 50,000 1,399,381 2,261,455 0.9
Mushroom grower
Hurxley Corp............................ 35,000 883,835 981,025 0.4
Japanese lunch-boxes
Iwatsuka Confectionery Co., Ltd......... 92,000 876,013 837,239 0.3
Rice crackers
Ozeki Co., Ltd.......................... 12,000 1,132,929 576,603 0.2
Supermarket chains
Q'sai Co., Ltd.......................... 41,000 882,729 1,906,630 0.7
Kale juice and frozen food
Ralse Co., Ltd.......................... 59,000 1,098,393 864,449 0.3
Supermarkets chain
Riken Vitamin Co., Ltd.................. 16,000 185,934 173,272 0.1
Vitamins
Yoshinoya D&C Co., Ltd.................. 89 1,469,237 1,498,385 0.6
---------- ---------- ---
Fast food chain operator
Total Food and Manufacturing ........... 9,086,430 12,174,955 4.7
---------- ---------- ---
Information and Software
Daitec Co., Ltd......................... 27,500 609,872 392,911 0.1
Information processing
Fuji Soft ABC Inc....................... 17,800 727,714 1,257,023 0.5
Computer systems
Obic Co., Ltd........................... 5,000 2,952,708 4,363,653 1.7
Computer system integration
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS* - Continued
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Oracle Corp. Japan ...................... 41,200 $ 8,938,305 $ 33,181,962 12.8
Software
Square Co., Ltd.......................... 8,000 1,384,580 1,507,030 0.6
Games Software
Yahoo Japan Corp......................... 18 9,313,336 24,571,142 9.5
----------- ----------- ----
Internet services
Total Information and Software .......... 23,926,515 65,273,721 25.2
----------- ----------- ----
Machinery and Machine Tools
Disco Corp............................... 19,400 1,372,252 4,431,360 1.7
Dicing saws for semiconductors
Kito Corporation ........................ 125,000 588,168 420,895 0.2
Cranes and chain blocks
Nippon Pillar Packing Co., Ltd........... 282,000 2,750,185 2,232,698 0.9
Industrial mechanical seals
THK Co., Ltd............................. 104,500 1,877,727 4,612,322 1.8
Linear motion systems for industrial
machines
UHT Corp................................. 50,000 871,300 891,841 0.3
Tools
Yushin Precision Equipment Co., Ltd...... 27,900 767,604 2,665,969 1.0
----------- ----------- ----
Injection molding related machinery
Total Machinery and Machine Tools ....... 8,227,236 5,255,085 5.9
----------- ----------- ----
Miscellaneous Manufacturing
Avex Inc................................. 14,040 303,433 3,297,742 1.3
Video products
Dainichi Co., Ltd........................ 43,000 726,623 105,265 0.0
Kerosene stoves and oil-fan heaters
Daiseki Co., Ltd......................... 113,740 1,236,467 2,090,866 0.8
Industrial waste treatment
Eidai Kako Co., Ltd...................... 84,000 816,763 657,415 0.3
Synthetic resin processed products
Fuji Seal, Inc........................... 35,000 1,033,150 2,076,716 0.8
Packing materials
Fujimi Inc............................... 52,500 2,433.495 2,078,309 0.8
Polishing materials for silicone wafers
King Jim Co., Ltd........................ 600 13,468 3,822 0.0
Office supplies
MegaChips Corp........................... 18,000 1,104,349 1,146,653 0.4
Circuits and digital monitoring systems
Nippon Hi-Pack Co., Ltd.................. 60,000 436,123 157,255 0.1
Corrugated cardboard products
Riso Kagaku Corporation ................. 27,000 1,134,843 786,277 0.3
Printing and copying machines
Taiyo Ink Manufacturing Co., Ltd......... 7,000 879,191 700,733 0.3
Resist ink for printed circuit boards
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS* - Continued
FEBRUARY 29,2000
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Tomy Co., Ltd....................... 30,000 $ 2,122,388 $ 2,154,070 0.8
----------- ----------- ----------- ---
Toys
Total Miscellaneous Manufacturing .. 12,240,293 15,255,123 5.9
----------- ----------- ---
Non-Ferrous Metals
Tokyo Tungsten Co., Ltd............. 84,000 645,837 803,422 0.3
----------- ----------- ---
Processed products
Publishing
Shoeisha Co., Ltd................... 25 656,087 4,368,203 1.7
----------- ----------- ---
Publishing company
Real Estate and Warehouse
Nippon Kanzai Co., Ltd.............. 103,000 1,103,681 2,624,562 1.0
Comprehensive building maintenance
Sekiwa Real Estate, Ltd............. 80,000 836,745 327,615 0.1
Leasing subsidiary of Sekisui
House, Ltd., homebuilder's
Yasuda Warehouse Co., Ltd........... 117,000 732,447 393,957 0.2
----------- ----------- ---
Warehouse operator
Total Real Estate and Warehouse .... 2,672,873 3,346,134 1.3
----------- ----------- ---
Restaurants
Joyfull Co., Ltd.................... 133,000 1,759,788 2,408,609 0.9
Roadside restaurants
Kourakuen Corporation .............. 45,000 773,142 511,899 0.2
Chinese style chain
Watami Food Service Co., Ltd........ 64,000 801,666 5,562,178 2.2
Restaurant chain
Yakinikuya Sakai Co., Ltd........... 47,000 1,955,157 1,287,437 0.5
----------- ----------- ---
Barbeque restaurant chain
Total Restaurants .................. 5,289,753 9,770,123 3.8
----------- ----------- ---
Retail
Doutor Coffee Co.................... 22,000 1,697,316 1,731,810 0.7
Coffee
Himaraya Co., Ltd................... 109,700 1,932,082 768,704 0.3
Sporting goods
Japan Business Computer Co., Ltd.... 31,000 1,688,625 1,876,052 0.7
Computers
Kohnan Shoji Co., Ltd............... 12,190 238,500 148,652 0.0
Home center (DIY)
Matsumotokiyoshi Co., Ltd........... 26,300 1,218,236 1,943,450 0.7
Drug retail chains
Otsuka Kagu, Ltd.................... 10,400 1,228,492 2,763,616 1.1
Furniture
Ryohin Keikaku Co., Ltd............. 26,000 1,466,777 4,105,201 1.6
Clothes, sundry goods, and foods
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS* -Continued
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Saizeriya Co., Ltd................................................ 40,700 $ 2,944,236 $ 2,659,380 1.0
Italian restaurant chain
Shichie Co., Ltd.................................................. 46,000 1,398,726 452,109 0.2
Video rental
Sunkus & Associates Inc........................................... 50,700 1,244,471 2,629,931 1.0
Convenience stores
Uoriki Co., Ltd................................................... 35,000 972,048 2,038,495 0.8
Fresh fish and sushi stores
USS Co., Ltd...................................................... 24,000 1,879,705 1,183,783 0.4
Automobile auction
Yamada Denki Co., Ltd............................................. 15,000 1,273,328 1,243,573 0.5
--------- --------- ---
Consumer electronic
Total Retail ..................................................... 19,182,542 23,544,756 9.0
---------- ---------- ---
Securities
Globally Corp..................................................... 73,000 1,014,261 863,630 0.3
--------- ------- ---
Commodity trading
Services
Arrk Corporation ................................................. 61,000 1,391,002 2,214,952 0.9
Product testing
Bellsystem 24, Inc................................................ 6,600 1,476,402 5,796,060 2.2
Telemarketing
Data Communication System Co., Ltd................................ 24,200 648,233 2,382,891 0.9
Software developer
Drake Beam Morin-Japan, Inc....................................... 2,100 574,828 783,546 0.3
Placement services consultant firm
Fujitsu Support and Services, Inc................................. 13,800 3,965,133 8,853,802 3.4
Information services
Fujitsu System Construction, Ltd.................................. 47,000 773,069 701,461 0.3
Constructs, maintains and manages information systems
Goodwill Group Inc................................................ 20 1,132,672 1,257,678 0.5
Constructs, consulting, security, healthcare and office supports
Net One Systems Co., Ltd.......................................... 97 2,140,045 3,513,309 1.3
Computer network systems for LAN, ATM
Nichii Gakkan Company ............................................ 3,800 114,520 563,680 0.2
Hospital administrative services
Okinawa Cellular Telephone Co..................................... 270 689,680 2,629,112 1.0
Cellular telephone service
Universal Homes Inc............................................... 75 2,018,432 1,992,992 0.8
--------- --------- ---
Plan, design, market and build houses
Total Services ................................................... 14,924,016 30,689,483 11.8
---------- ---------- ----
Telecommunications
Aiphone Co., Ltd.................................................. 18,000 275,168 309,596 0.1
Interphones
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS* - Continued
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Hikari Tsushin, Inc...................... 2,200 $ 55,902 $ 4,184,375 1.6
Telecommunications equipment
Nippon Antenna Co., Ltd.................. 85,000 1,470,104 1,160,304 0.5
--------- --------- ---
Communication related equipment
Total Telecommunications ................ 1,801,174 5,654,275 2.2
Textiles and Apparel
Nichimen Infinity Inc.................... 64,300 1,284,589 1,053,283 0.4
Casual clothing
United Arrows Limited ................... 18,000 1,484,907 1,261,319 0.5
Casual clothes
Workman Co., Ltd......................... 47,000 837,311 603,085 0.2
Uniforms
World Co., Ltd........................... 19,000 1,156,269 2,064,522 0.8
--------- --------- ---
Fashion apparel
Total Textiles and Apparel .............. 4,763,076 4,982,209 1.9
--------- --------- ---
Transportation
Japan Logistic Systems Corp.............. 61,000 591,154 165,983 0.1
Truck transporter
Yusen Air & Sea Service Co., Ltd......... 31,000 576,617 860,445 0.3
------- ------- ---
International air cargo transporter
Total Transportation .................... 1,167,771 1,026,428 0.4
--------- --------- ---
Wholesale
ArcLand Sakamoto Co., Ltd................ 110,600 1,363,176 1,258,133 0.5
Home appliances
Hakuto Co., Ltd.......................... 85,000 1,205,157 3,442,235 1.3
Electric parts
Kondotec Inc............................. 54,000 262,188 234,409 0.1
Construction material
Paltek Corp.............................. 26,600 569,712 689,903 0.2
Semiconductor trading
Shinwa Co., Ltd.......................... 61,000 769,423 515,712 0.2
Industrial machinery
Toba, Inc................................ 87,000 1,466,428 744,233 0.3
--------- ------- ---
Trading company for control systems
Total Wholesale ......................... 5,636,084 6,884,625 2.6
--------- --------- ---
TOTAL INVESTMENTS IN EQUITY SECURITIES .. 159,959,460 259,636,460 100.0
----------- ----------- -----
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS* -Continued
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
% of
Principal Market Net
Amount 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 5.5%, due 3/l/00 ............. $ 266,258 $ 266,258 $ 266,258 0.1
------------- ---------- ---
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES........... 266,258 266,258 0.1
------------- ---------- ---
INVESTMENT IN FOREIGN CURRENCY
State Street Bank and Trust Company, 0.25% interest
bearing call account .............................. JPY6,544,592 59,559 59,559 0.0
------------- ---------- ---
TOTAL INVESTMENT IN FOREIGN CURRENCY ................ 59,559 59,559 0.0
------------- ---------- ---
TOTAL INVESTMENTS ................................... 160,285,277 259,962,27 100.1
LIABILITIES IN EXCESS OF OTHER ASSETS, NET .......... (192,182) (195,805) (0.1)
------------- ---------- ---
NET ASSETS .......................................... $ 160,093,095 $ 259,766,472 100.0
============= ============= =====
</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 29, 2000.
Japanese Yen JPY Y109.885 = $1.00
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at market value (cost-$l59,959,460) ........... $ 259,636,460
Investments in short-term securities, at market value (cost-$266,258)..... 266,258
Investments in foreign currency, at market value (cost-$59,559) .......... 59,559
Receivable for investments sold .......................................... 165,319
Receivable for dividends and interest, net of withholding taxes .......... 107,022
Prepaid expenses ......................................................... 20,421
-------------
Total Assets .................................................... 260,255,039
-------------
LIABILITIES:
Payable for investments purchased ........................................ 136,009
Accrued management fee ................................................... 171,188
Other accrued expenses ................................................... 181,370
-------------
Total Liabilities ............................................... 488,567
-------------
NET ASSETS:
Capital stock (par value of 15,846,384 shares of capital stock
outstanding, authorized 100,000,000, par value $0.10 each) ............. 1,584,638
Paid-in capital .......................................................... 171,035,789
Accumulated net realized loss on investments and foreign currency
transactions .......................................................... (12,436,135)
Unrealized net appreciation on investments and foreign exchange .......... 99,673,377
Accumulated net investment loss .......................................... (91,197)
Net Assets ...................................................... $ 259,766,472
-------------
Net asset value per share ................................................ $ 16.39
=============
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 29,2000
<TABLE>
<CAPTION>
INCOME:
<S> <C> <C>
Dividend income (less $104,426 withholding taxes) .......................... $ 591,750
Interest income ............................................................ 129,574
-------------
Total Income ........................................................... $ 721,324
-------------
EXPENSES:
Management fee ............................................................. 1,491,104
Custodian fees ............................................................. 262,499
Legal fees ................................................................. 96,812
Directors' fees and expenses ............................................... 61,896
Auditing and tax reporting fees ............................................ 46,383
Shareholder reports ........................................................ 45,266
Registration fees .......................................................... 28,201
Annual meeting expenses .................................................... 23,024
Transfer agency fees ....................................................... 17,231
Insurance .................................................................. 2,273
Miscellaneous .............................................................. 12,853
-------------
Total Expenses ................................................ 2,087,542
------------
INVESTMENT LOSS-NET .................................................... (1,366,218)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY:
Realized gain on investments and foreign currency transactions:
Net realized gain on investments ....................................... 37,515,315
Net realized gain on foreign exchange .................................. 468,133
-------------
Net realized gain on investments and foreign exchange .................. 37,983,448
-------------
Change in net unrealized appreciation on translation of foreign currency
and other assets and liabilities denominated in foreign currency ....... 1,956,020
Change in net unrealized appreciation on investments ................... 103,545,870
-------------
Net realized and unrealized gain on investments and foreign exchange ... 143,485,338
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................... $ 142,119,120
=============
</TABLE>
See notes to financial statements
<PAGE>
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------
February 29, February 28,
1999 1999
------------ -------------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C>
Net investment loss .......................................... ($ 1,366,218) ($ 423,589)
Net realized gain (loss) on investments ...................... 37,515,315 (3,800,322)
Net realized gain (loss) on foreign exchange ................. 468,133 (2,557,217)
Change in net unrealized appreciation on
investments and foreign exchange ........................... 105,501,890 18,329,707
------------- -------------
Increase in net assets derived from investment activities .... 142,119,120 11,548,579
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS:
Net asset value of shares issued to shareholders on:
Rights offering (4,458,565 shares in 2000) ................. 50,907,782 --
Reinvestment of dividends from net investment income
(317 shares in 1999) ..................................... -- 1,659
------------- -------------
Increase in net assets derived from capital share transactions 50,907,782 1,659
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($0.005 per share in 1999) ............. -- (56,937)
------------- -------------
Decrease in net assets from distributions to shareholders .... -- (56,937
------------- -------------
Net increase in net assets ................................... 193,026,902 11,493,301
------------- -------------
NET ASSETS:
Beginning of year ............................................ 66,739,570 55,246,269
------------- -------------
End of year (including accumulated net investment losses of
$91,197 and $331,594, respectively) .......................... $ 259,766,472 $ 66,739,570
============= =============
</TABLE>
See notes to financial statements
<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. The Fund issued to its
shareholders of record as of the close of business on October 25, 1999
non-transferable Rights to subscribe for up to an aggregate of 3,804,940
shares of Common Stock of the Fund at a rate of one share of Common Stock for
three Rights held ("Primary Subscription"). The Fund had the ability to
increase the number of shares subscribed for in this offering by up to 25% of
the Primary Subscription, or an additional 951,235 shares, to honor record
date shareholder requests to purchase more shares. During November 1999, the
Fund issued a total of 4,458,565 shares of Common Stock on exercise of such
Rights at the subscription price of $11.99 per share, compared to a net asset
value per share of $16.20 and a market value per share of $12.6875.
Additionally, a sales load of 3.75% was charged to each share issued. Right
offering costs of approximately $546,000 and the sales load were charged
directly against the proceeds of the Rights Offering. 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 re ported sales price as of the close of
business on the day the securities are being valued or, if none is available,
at the mean of the bid and offer price at the close of business on such day
or, if none is available, the last reported sales price. Portfolio securities
which are traded on stock exchanges are valued at the last sales price on the
principal market on which securities are traded or lacking any sales, at the
last available bid price. Short-term debt securities which mature in 60 days
or less are valued at amortized cost if their original maturity at the date of
purchase was 60 days or less, or by amortizing their value on the 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
29, 2000 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 29,
2000, the Fund's accumulated net realized loss was increased by $312,595 and
paid in capital was decreased by $1,294,020, with an offsetting decrease in
accumulated net investment loss of $1,606,615. This adjustment was primarily
the result of the reclassification of foreign currency gains, losses and gains
from the sale of investments in passive foreign investment companies and
reclassification of the net operating loss.
(f) Use of Estimates in Financial Statement Preparation -- The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from these estimates.
(g) Concentration of Risk -- A significant portion of the Fund's net assets
consists of Japanese securities which involve certain considerations and risks
not typically associated with investments in the United States. In addition to
the smaller size, and greater volatility, there is often substantially less
publicly available information about Japanese issuers than there is about U.S.
issuers. Future economic and political developments in Japan could adversely
affect the value of securities in which the Fund is invested. Further, the
Fund may be exposed to currency devaluation and other exchange rate
fluctuations.
2. Management Agreement and Transactions With Affiliated Persons
Nomura Asset Management U.S.A. Inc. acts as the Manager of the Fund
pursuant to a management agreement. Under the agreement, the Manager provides
all office space, facilities and personnel necessary to perform its duties.
Pursuant to such management agreement, the Manager has retained its parent
company, Nomura Asset Management Co., Ltd. (the "Investment Adviser"), to act
as investment adviser for the Fund.
As compensation for its services to the Fund, the Manager receives a
monthly fee at the annual rate of 1. 10% of the value of the Fund's average
weekly net assets not in excess of $50 million, 1.00% of the Fund's average
weekly net assets in excess of $50 million but not exceeding $100 million and
.90% of the Fund's average weekly net assets in excess of $100 million.
Effective October 13, 1999, the Manager agreed to reduce the management fee
under its agreement with the Fund to .80% of the Fund's average weekly net
assets in excess of $175 million. For services performed under the Investment
Advisory Agreement, the Investment Adviser receives a monthly fee from the
Manager at the annual rate of .50% of the Fund's average weekly net assets not
in excess of $50 million, .45% of the Fund's average weekly net assets in
excess of $50 million but not in excess of $100 million and, .40% of the
Fund's average weekly net assets in excess of $100 million. Effective October
13, 1999 the Investment Advisor agreed to reduce the investment advisory fee
under its Agreement with the Manager to .35% of the Funds average weekly net
assets in excess of $175 million. Under the Management Agreement, the Fund
paid or accrued fees to the Manager of $1,491,104 for the year ended February
29, 2000.* Under the Investment Advisory Agreement, the Manager informed the
Fund that the Investment Adviser earned fees of $669,370 for the year ended
February 29, 2000. At February 29, 2000, the fee payable to the Manager, by
the Fund, was $171,188.
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 $94,259 in commissions on the execution of portfolio security
transactions for the year ended February 29, 2000. 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
$57,825 for the year ended February 29, 2000.
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 29, 2000
were $127,468,930 and $77,107,311, respectively.
As of February 29, 2000, net unrealized appreciation on investments
exclusive of investments in foreign currency and short-term securities for
Federal income tax purposes was $99,677,000 of which $118,519,272 related to
appreciated securities and $18,842,272 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies
and short-term securities of $325,817, at February 29, 2000 for Federal in
come tax purposes was $159,959,460. In accordance with U.S. Treasury
regulations, the Fund elected to defer $91,197 of net realized foreign
currency losses arising after October 31, 1999. Such losses are treated for
tax purposes as arising on March 1, 2000. The Fund has a capital loss carry
forward as of February 29, 2000 of approximately $12,436,000 of which
$3,235,000 expires in 2006 and $9,201,000 expires in 2007. For the year ending
February 29, 2000, the Fund utilized approximately $35,741,000 of capital loss
carryover.
<PAGE>
JAPAN OTC EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -Continued
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding
throughout the period.
<TABLE>
<CAPTION>
For the Year Ended
------------------------------------------------------------------------------
February 29, February 28, February 29,
------------ ---------------------------------- ------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........... $ 5.86 $ 4.85 $ 6.44 $ 7.82 $ 8.59
------------ ------------ ------------ ------------ ------------
Rights Offering costs* ....................... (0.16) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net investment loss ........................ (0. 11)@ (0.04) (0.06) (0.09) (0.07)
Net realized and unrealized gain
(loss) on investments and foreign currency 11.99 @ 1.06 (1.45) (1.25) (0.70)
------------ ------------ ------------ ------------ ------------
Total from investment operations ........... 11.88 @ 1.02 (1.51) (1.34) (0.77)
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
Decrease in net asset value due to shares
issued through Rights Offering* ............ (1.19) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net asset value, end of year ................. $ 16.39 $ 5.86 $ 4.85 $ 6.44 $ 7.82
============ ============ ============ ============ ============
Market value, end of year .................... $ 11.000 $ 6.250 $ 5.750 $ 6.375 $ 8.500
Total investment return+ ..................... 76.0% 8.8% (8.5%) (24.6%) (1.4%)
Net asset value total return++ ............... 179.7% 20.9% (23.4%) (17.2 (9.0%)
Ratio to average net assets/supplemental data:
Net assets, end of year (in 000) ........... $ 259,766 $ 66,740 $ 55,246 $ 73,288 $ 88,966
Operating expenses ......................... 1.33% 1.80% 1.71% 1.70% 1.47%
Net investment loss ........................ (0.88%) (0.82%) (1.0%) (1.1%) (0.83%)
Portfolio turnover ......................... 50% 35% 29% 71% 79%
</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.
*Decrease is due to Rights Offering (see note 1).
@Based on average shares outstanding.
<PAGE>
JAPAN OTC EQUITY FUND, INC.
Supplemental Shareholder Information (Unaudited)
The 1999 Annual Meeting of the Shareholders of the Fund was held at the
Fund's offices, 180 Maiden Lane, New York, New York on November 9, 1999. The
purpose of the meeting was to elect six Directors to serve for the ensuing
year; to consider and act upon a proposal to ratify the selection of
PricewaterhouseCoopers LLP as independent accountants of the Fund for its
fiscal year ending February 29, 2000; and to transact such other business as
may properly come before the Meeting or any adjournment thereof.
At the Meeting, the following persons were elected by the shareholders to
serve as Directors of the Fund: William G. Barker, Jr., George H. Chittenden,
Nobuo Katayama, Chor Weng Tan, Arthur R. Taylor, and John F. Wallace. The
shareholders ratified the selection of PricewaterhouseCoopers LLP, to serve as
the Fund's independent accountants for the fiscal year ending February 29,
2000. No other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
1. To elect the Fund's Board of Directors:
<TABLE>
<CAPTION>
% of % of
Shares Voted outstanding Shares Voted outstanding
For Shares Withhold Authority Shares
------------ ----------- ------------------ ------------
<S> <C> <C> <C> <C>
William G. Barker, Jr ... 7,547,475 66.3 167,873 1.5
George H. Chittenden .... 7,550,203 66.3 165,145 1.5
Nobuo Katayama .......... 7,557,969 66.4 157,379 1.4
Chor Weng Tan ........... 7,550,257 66.3 165,091 1.5
Arthur R. Taylor ........ 7,547,972 66.3 167,376 1.5
John F. Wallace .......... 7,551,132 66.3 164,216 1.5
</TABLE>
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants of the Fund:
<TABLE>
<CAPTION>
% of % of % of
Shares Voted outstanding Shares Voted outstanding Shares outstanding
For Shares Against Shares Abstained Shares
------------ ----------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
7,561,34 66.4 75,170 0.7 78,838 0.7
</TABLE>
<PAGE>
JAPAN OTC EQUITY FUND, INC.
REVIEW OF THE FUND'S MARKET PRICE COMPARED TO NET ASSET VALUE
Shares of closed-end investment companies, including funds focusing on a
single country, have at various times traded at both premiums and discounts to
their net asset value ("NAV"). Although the shares of the Fund frequently have
traded at such a premium, they also have traded at a discount from NAV.
Since the Fund was established, the Board of Directors on a quarterly basis
has reviewed the trading price of the Fund's shares. The purpose of such
review has been to determine whether a discount exists and, if so, whether it
would be in shareholders' overall best interests for the Fund to conduct share
repurchases, make an issuer tender offer for shares or consider another means
of possibly reducing the discount. For example, the Board of Directors has
also considered whether it would be in the best interests of the Fund to
convert to an open-end fund or to an interval fund, which is a form of
investment company that makes periodic share repurchases at prices based on
NAV.
To date, the Board of Directors has not authorized open-market share
repurchases or a tender offer for shares of the Fund. The Board of Directors
also has not felt that it would be in the best interests of the Fund or its
shareholders to convert to an open-end fund or to have interval fund status.
As a "country fund", emphasizing a particular segment of the market, the
Fund's NAV is more volatile than might be the case for a fund with a broader
investment focus. The Board of Directors believe that converting the Fund to
either an open-end or interval fund would subject the Fund to redemptions or
repurchases at times when liquidation of portfolio securities could
disadvantage remaining shareholders, and they believe that the recent
volatility of the financial markets in Japan supports their view.
Additionally, since an open-end fund has a limited ability to invest in
illiquid securities, such a conversion could hinder the Fund's ability to
pursue its investment objectives. The Board of Directors intend to continue to
review, on a quarterly basis, the trading market for the Fund's shares.
<PAGE>
JAPAN OTC EQUITY FUND, INC.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan (the "Plan") is available automatically for
any holder of Common Stock with shares registered in his/her own name who
wishes to purchase additional shares with income dividendS or capital gains
distributions received on shares owned, unless such shareholder elects to
receive all dividends and capital gain distributions in cash, paid by check
and mailed to the shareholder. If a shareholder holds shares in his/her own
name, communications regarding the Plan should be addressed to the Plan Agent,
State Street Bank and Trust Company, P.O. Box 8209, Boston, Massachusetts
022668209. Under the Plan, shareholders appoint the Plan Agent to reinvest
dividends and distributions in shares of the Fund. Such shares will be
acquired by the Plan Agent for shareholders either through open market
purchases if the Fund is trading at a discount or through the issuance of
authorized but unissued shares if the Fund is trading at net asset value or a
premium. If the market price of a share on the payable date of a dividend or
distribution is at or above the Fund's net asset value per share on such date,
the number of shares to be issued by the Fund to each shareholder receiving
shares in lieu of cash dividends or distributions will be determined by
dividing the amount of the cash dividends or distributions to which such
shareholder would be entitled by the greater of the net asset value per share
on such date or 95% of the market price of a share on such date. If the market
price of a share on such distribution date is below the net asset value per
share, the number of shares to be issued to such shareholders will be
determined by dividing such amount, less brokerage commission, by the per
share market price.
Purchases will be made by the Plan Agent from time to time on the New York
Stock Exchange (the "Exchange") or elsewhere to satisfy dividend and
distribution investment requirements under the Plan. Purchases will be
suspended on any day when the closing price (or the mean between the closing
bid and ask prices if there were no sales) of the shares on the Exchange on
the preceding trading day was higher than the net asset value per share. If on
the dividend payable date, purchases by the Fund are insufficient to satisfy
dividend or distribution investments and on the last trading day immediately
preceding the dividend payable date the closing price or the mean between the
closing bid and ask prices of the shares is lower than or the same as the net
asset value per share, the Plan Agent will continue to purchase shares until
all investments by shareholders have been completed or the closing price or
the mean between the bid and ask prices of the shares becomes higher than the
net asset value, in which case the Fund will issue the necessary additional
shares from authorized but unissued shares. If on the last trading day
immediately preceding the dividend payable date, the closing price or the mean
between the bid and ask prices of the shares is higher than the net asset
value per share and if the number of shares previously purchased on the
Exchange or elsewhere is insufficient to satisfy dividend investments, the
Fund will issue the necessary additional shares from authorized but unissued
shares. There will be no brokerage charges with respect to shares issued
directly by the Fund to satisfy the dividend investment requirements. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Fund's open market purchases of shares. In each case, the
cost per share of shares purchased for each shareholder's account will be the
average cost, including brokerage commissions, of any shares purchased in the
open market plus the cost of any shares issued by the Fund. For the fiscal
year ended February 29, 2000, the Fund did not purchase any new shares for
dividend reinvestment purposes. The Fund did not purchase any shares on the
open market for dividend reinvestment purposes.
Shareholders who elect to hold their shares in the name of a broker or
other nominee should contact such broker or other nominee to determine whether
they may participate in the Plan. To the extent such participation is
permitted, the Plan Agent will administer the Plan on the basis of the number
of shares certified from time to time by the broker as representing the total
amount registered in the shareholder's name and held for the account of
beneficial owners who are participating in such Plan. Shareholders that
participate in the Plan holding shares in a brokerage account may not be able
to transfer the shares to another broker and continue to participate in the
Plan. Shareholders who are participating in the Plan may withdraw from the
Plan at any time. There will be no penalty for withdrawal from the Plan, and
shareholders who have previously withdrawn from the Plan may rejoin it at any
time. Changes in participation in the Plan should be made by contacting the
Plan Agent if the shares are held in the shareholder's own name and must be in
writing and should include the shareholder's name and address as they appear
on the account registration. If the shares are held in the name of a broker or
other nominee, such person should be contacted regarding changes in
participation in the Plan. Upon withdrawal from the Plan, the Plan Agent will
deliver to the shareholder a certificate or certificates for the appropriate
number of full shares and a cash payment for any fractional shares. In lieu of
receiving a certificate, the shareholder may request the Plan Agent to sell
part or all of the shareholder's shares at the market price and remit the
proceeds to the shareholder, net of any brokerage commissions. A $2.50 fee
will be charged by the Plan Agent upon any cash withdrawal or termination. An
election to withdraw from the Plan will, until such election is changed, be
deemed to be an election by a shareholder to take all subsequent distributions
in cash. An election will be effective only for a dividend or distribution if
it is received by the Plan Agent not less than 10 days prior to such record
date.
The Plan Agent will maintain all shareholders' accounts in the Plan, and
furnish written confirmation of all transactions in such account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant may be held by the Plan Agent in non-certificated form
in the name of the participant, and each shareholder's proxy will include
those shares purchased or received pursuant to the Plan.
The automatic reinvestment of dividends will not relieve participants of
any income taxes that may be payable (or required to be withheld) on such
dividends. Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for Federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that the shareholders receiving cash dividends or distributions will
receive and should have a cost basis in the shares received equal to such
amount.
The Fund reserves the right to amend or terminate the Plan as applied to
any dividend paid subsequent to written notice of the change sent to
participants in the Plan at least 90 days before the record date for such
dividend. There is no service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable
by the participants. All correspondence concerning the Plan, including
requests for additional information about the Plan, should be directed to the
Plan Agent.
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SHAREHOLDERS ACCOUNT INFORMATION
Shareholders whose accounts are held in their own name may contact the Fund's
transfer agent, State Street Bank and Trust Company at (800) 426-5523 for
information concerning their accounts.
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<PAGE>
BOARD OF DIRECTORS
William G. Barker, Jr.
George H. Chittenden
Nobuo Katayama
Chor Weng Tan
Arthur R. Taylor
John F. Wallace
OFFICERS
Nobuo Katayama, President
Keisuke Haruguchi, Vice President
David G. Stoeffel, Vice President
John J. Boretti, Secretary and Treasurer
Terence P. Brennan, Assistant Secretary and
Assistant Treasurer
MANAGER
Nomura Asset Management U.S.A. Inc. JAPAN
180 Maiden Lane
New York, New York 10038-4936
Internet Address
www.nomura-asset.com
INVESTMENT ADVISER OTC EQUITY
Nomura Asset Management Co., Ltd. FUND, INC.
2-1-14 Nihonbashi, Chuo-ku,
Tokyo 103-8260, Japan
CUSTODIAN, DIVIDEND PAYING AGENT, TRANSFER
AGENT AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8209
Boston, Massachusetts 02266-8209
COUNSEL
Brown & Wood LLP
One World Trade Center
New York. New York 10048-0557
INDEPENDENT ACCOUNTANTS ANNUAL REPORT
PricewaterhouseCooperS LLP
1177 Avenue of the Americas FEBRUARY 29, 2000
New York, New York 10036-2798
JAPAN OTC EQUITY FUND, INC.
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4936
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This Report, including the Financial
Statements, is transmitted to the
Shareholders of Japan OTC Equity Fund,
Inc. for their information. This is not
a prospectus, circular or representation
intended for use in the purchase of
shares of the Fund or any securities
mentioned in the Report.
