<PAGE>
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1996
SECURITIES ACT FILE NO. 33-82462
INVESTMENT COMPANY ACT FILE NO. 811-8692
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [_]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 1 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
THE JAPAN SMALL COMPANY GROWTH FUND, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
C/O DAIWA SECURITIES TRUST COMPANY
ONE EVERTRUST PLAZA
JERSEY CITY, NEW JERSEY 07302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 933-3440
----------------
DANIEL F. BARRY
THE JAPAN SMALL COMPANY GROWTH FUND, INC.
C/O DAIWA SECURITIES TRUST COMPANY
ONE EVERTRUST PLAZA
JERSEY CITY, NEW JERSEY 07302
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
----------------
WITH COPIES TO:
LEONARD B. MACKEY, JR., ESQ. FRANK P. BRUNO, ESQ.
ROGERS & WELLS BROWN & WOOD
200 PARK AVENUE ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10166 NEW YORK, NEW YORK 10048
(212) 878-8000 (212) 839-5300
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [_]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 Par
Value................. 3,910,000 Shares(1) 12.00 $46,920,000 $16,179.31(3)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 510,000 shares subject to the Underwriters' over-allotment
option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) A registration fee of $23,793.10 was previously paid.
----------------
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 THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* Formerly The Japan Small Equity Fund, Inc.
<PAGE>
CROSS REFERENCE SHEET
PARTS A AND B OF PROSPECTUS*
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
- ---------------------------------- ----------------------
<S> <C>
1.Outside Front Cover.............. Front Cover Page
2.Inside Front and Outside Back
Cover Page..................... Front Cover Page; Inside Front Cover Page;
Outside Back Cover Page
3.Fee Table and Synopsis........... Prospectus Summary; Fee Table
4.Financial Highlights............. Not Applicable
5.Plan of Distribution............. Cover Page; Prospectus Summary;
Underwriting
6.Selling Shareholders............. Not Applicable
7.Use of Proceeds.................. Use of Proceeds
8.General Description of the Regis-
trant.......................... Cover Page; Prospectus Summary; The Fund;
Investment Restrictions; Investment
Objective and Policies; Risk Factors and
Special Considerations; Description of
Common Stock
9.Management....................... Management of the Fund; Portfolio
Transactions and Brokerage; Estimated
Expenses; Custodians; Dividend Paying
Agent, Transfer Agent and Registrar;
Description of Common Stock
10.Capital Stock, Long-Term Debt and
Other Securities............... Prospectus Summary; Description of Common
Stock; Dividends and Distributions;
Dividend Reinvestment and Cash Purchase
Plan; Underwriting; Taxation
11.Defaults and Arrears on Senior
Securities..................... Not Applicable
12.Legal Proceedings................ Not Applicable
13.Table of Contents of the
Statement of Additional
Information.................... Not Applicable
14.Cover Page....................... Not Applicable
15.Table of Contents................ Not Applicable
16.General Information and History.. The Fund
17.Investment Objective and Poli-
cies........................... Investment Objective and Policies;
Investment Restrictions
18.Management....................... Management of the Fund
19.Control Persons and Principal
Holders of Securities.......... Not Applicable
20.Investment Advisory and Other
Services....................... Management of the Fund; Custodians;
Dividend Paying Agent; Transfer Agent and
Registrar; Experts; Estimated Expenses
21.Brokerage Allocation and Other
Practices...................... Portfolio Transactions and Brokerage
22.Tax Status....................... Taxation
23.Financial Statements............. Report of Independent Accountants;
Statement of Assets and Liabilities
</TABLE>
- --------
* Pursuant to General Instructions to Form N-2, all information required to be
set forth in Part B: Statement of Additional Information has been included in
Part A: The Prospectus. Information required to be included in Part C is set
forth under the appropriate item, so numbered in Part C of this Registration
Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 31, 1996
PROSPECTUS
3,400,000 SHARES
THE JAPAN SMALL COMPANY GROWTH FUND, INC.
COMMON STOCK
-----------
The Japan Small Company Growth Fund, Inc. (the "Fund") is a newly
incorporated, non-diversified, closed-end management investment company. The
Fund's investment objective is long-term capital appreciation, which it seeks
to achieve by investing primarily in (i) equity securities of issuers
registered on the Japanese over-the-counter market (the "Japanese OTC market"),
(ii) equity securities of issuers having less than 60 million outstanding
shares (calculated as described herein under "The Fund") (the "Small-Sized
Equity Securities") listed on the Tokyo Stock Exchange, the Osaka Securities
Exchange and the Nagoya Stock Exchange (collectively, the "Main Japanese
Exchanges") or (iii) equity securities traded exclusively on regional exchanges
in Japan such as the Fukuoka, Hiroshima, Kyoto, Niigata and Sapporo Stock
Exchanges (collectively, the "Regional Exchanges"). See "Investment Objective
and Policies." There can be no assurance that the Fund's investment objective
will be achieved. INVESTMENT IN THE FUND INVOLVES SPECIAL CONSIDERATIONS AND
RISKS THAT ARE NOT TYPICALLY ASSOCIATED WITH INVESTING IN THE STOCK MARKETS OF
THE UNITED STATES, INCLUDING THE LOW LEVEL OF LIQUIDITY OF THE JAPANESE EQUITY
SECURITIES IN WHICH THE FUND WILL INVEST, CERTAIN RISKS ASSOCIATED WITH
INVESTING IN THE JAPANESE OTC MARKET, THE MAIN JAPANESE EXCHANGES AND THE
REGIONAL EXCHANGES, AND POLITICAL AND ECONOMIC CONSIDERATIONS. SEE "RISK
FACTORS AND SPECIAL CONSIDERATIONS." The address of the Fund is c/o Daiwa
Securities Trust Company, One Evertrust Plaza, Jersey City, New Jersey 07302
(telephone number (800) 933-3440).
The Fund's Investment Manager will be Daiwa International Capital Management
Corp. (the "Investment Manager"). The Fund's Investment Adviser will be Daiwa
International Capital Management Co., Ltd. (the "Investment Adviser"). The
Investment Manager and the Investment Adviser are affiliates of Daiwa
Securities Co. Ltd., Tokyo, Japan ("Daiwa").
Prior to this offering, there has been no public market for the Fund's Common
Stock. The Fund has applied to list the Shares on the New York Stock Exchange.
However, during an initial period which is not expected to exceed 29 days from
the date of this Prospectus, the Fund's shares will not be listed on any
securities exchange. During such period, the Underwriters do not intend to make
a market in the Fund's Shares. Consequently, it is anticipated that an
investment in the Fund will be illiquid during such period. The Underwriters
have advised the Fund that the public offering price per share will be $12.00,
except that the price will be reduced to $ per share for purchases in single
transactions of or more Shares, and to $ per share for purchases of 100
or more shares by the beneficial owners of shares of The Japan Equity Fund,
Inc. as of a record date of January 31, 1996. The minimum investment is 100
Shares (U.S.$1,200), except that there is no minimum investment for purchases
for Individual Retirement Accounts and other retirement plans. See
"Underwriting."
SHARES OF CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST FREQUENTLY TRADED
AT DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL OFFERING PRICES. THE RISKS
ASSOCIATED WITH THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES MAY BE
GREATER FOR INVESTORS EXPECTING TO SELL SHARES OF A CLOSED-END INVESTMENT
COMPANY SOON AFTER THE COMPLETION OF AN INITIAL PUBLIC OFFERING OF THE
COMPANY'S SHARES.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be read and
retained for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAXIMUM MAXIMUM PROCEEDS
PRICE TO PUBLIC(1) SALES LOAD(1)(2) TO THE FUND(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... U.S.$12.00 U.S.$ U.S.$
- --------------------------------------------------------------------------------
Total(4).................... U.S.$40,800,000 U.S.$ U.S.$
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Footnotes on following page)
The Shares are offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by them and subject to certain other
conditions. The Underwriters reserve the right to reject orders in whole or in
part. It is expected that delivery of the Shares will be made in New York, New
York, on or about , 1996.
-----------
DAIWA SECURITIES AMERICA INC.
-----------
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
----------------
Unless otherwise specified, references in this Prospectus to "U.S. $" or "$"
are to U.S. dollars and references to "yen" or "(Yen)" are to Japanese yen.
On January 29, 1996, the noon valuation of the Federal Reserve Bank of New
York for Japanese yen was $1.00 = (Yen)106.80. Unless otherwise indicated,
U.S. dollar equivalent information in Japanese yen for a period is based on
the average of the daily exchange rates for the days in the period, and U.S.
dollar information for the Japanese yen as of a specified date is based on the
exchange rate for such date. No representation is made that the Japanese yen
or U.S. dollar amounts in this Prospectus could have been or could be
converted into U.S. dollars or Japanese yen, as the case may be, at any
particular rate or at all. See "Risk Factors and Special Considerations--
Exchange Rate Fluctuations and Foreign Currency Considerations" for
information regarding historical rates of exchange between the Japanese yen
and the U.S. dollar.
(Notes from prior page)
(1) The "Maximum Price to Public" and the "Maximum Sales Load" per share will
be reduced to U.S.$ and U.S.$ , respectively, for purchases in single
transactions (as defined herein under "Underwriting") of or more
Shares, and to U.S.$ and U.S.$ , respectively, for purchases of 100
or more shares by the beneficial owners of shares of The Japan Equity
Fund, Inc. as of a record date of January 31, 1996. See "Underwriting."
(2) The Fund, the Investment Manager and the Investment Adviser have agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting organizational and offering expenses payable by the Fund,
estimated at U.S.$ , including an aggregate of U.S.$ to be paid to
the Underwriters in partial reimbursement of their expenses.
(4) The Fund has granted to the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to an aggregate of
510,000 additional shares of Common Stock, solely to cover over-
allotments. If such option is exercised in full, the total Maximum Price
to Public will be U.S.$ , the Maximum Sales Load will be U.S.$ and
the Proceeds to the Fund will be U.S.$ . See "Underwriting."
2
<PAGE>
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load (as a percentage of offering price)..... %(a)
----
Dividend Reinvestment and Cash Purchase Plan Fees.. None (b)
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS):
Management and Advisory Fees....................... %(c)
Other Expenses..................................... %
----
TOTAL ANNUAL EXPENSES................................ %
====
- --------
(a) Reduced to % for purchases in single transactions of or more
Shares and reduced to % for purchases of 100 or more Shares by the
beneficial owners of shares of The Japan Equity Fund, Inc. See the cover
page of this Prospectus and "Underwriting."
(b) The Fund and the Plan Agent impose no fee for participation in the Plan.
However, each participant in the Plan will pay a pro rata share of
brokerage commissions incurred in connection with open-market purchases of
Fund shares under the Plan and a $0.75 fee for such purchase.
(c) See "Management of the Fund."
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------- ---------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a $1,000
investment, assuming a 5% annual
return.......................... $ $ $ $
</TABLE>
The Example set forth above assumes payment by an investor of the sales load
shown in the table above, reinvestment of all dividends and distributions at
net asset value and an expense ratio of %. The tables above and the
assumption in the Example of a 5% annual return are required by Securities and
Exchange Commission (the "Commission") regulations applicable to all
investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE GREATER OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. In addition, while the Example assumes reinvestment of all dividends
and distributions at net asset value, participants in the Fund's Dividend
Reinvestment and Cash Purchase Plan may receive shares purchased or issued at
a price or value different from net asset value. See "Dividends and
Distributions; Dividend Reinvestment and Cash Purchase Plan."
The figures provided under "Other Expenses" are based upon estimated amounts
for the Fund's first fiscal year. See "Management of the Fund" for additional
information.
3
<PAGE>
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed information
included elsewhere in this Prospectus.
The Fund................. The Fund is a newly incorporated, non-
diversified, closed-end management investment
company designed for investors desiring to
invest a portion of their assets in (i) equity
securities of issuers registered on the
Japanese over-the- counter market (the
"Japanese OTC market"), (ii) equity securities
of issuers having less than 60 million
outstanding shares (calculated as described
under "The Fund") (the "Small-Sized Equity
Securities") listed on the Tokyo Stock
Exchange, the Osaka Securities Exchange and
the Nagoya Stock Exchange (collectively, the
"Main Japanese Exchanges") or (iii) equity
securities traded exclusively on regional
exchanges in Japan such as the Fukuoka,
Hiroshima, Kyoto, Niigata and Sapporo Stock
Exchanges (collectively, the "Regional
Exchanges"). Such equity securities of issuers
registered on the Japanese OTC market and
Small-Sized Equity Securities listed on the
Main Japanese Exchanges and equity securities
traded exclusively on the Regional Exchanges
are collectively referred to as "Japanese
Equities."
Investment Objective and The Fund's investment objective is long-term
Policies................ capital appreciation through investments
primarily in Japanese Equities. At all times,
following completion of its initial investment
period (which is not expected to exceed six
months), except during temporary defensive
periods, the Fund will maintain at least 65%
of its total assets in Japanese Equities. The
Fund anticipates that following the conclusion
of its initial investment period, it will
under normal circumstances invest at least 80%
of its total assets in Japanese Equities. The
Fund intends to invest at least 50% of its
investments in Japanese Equities in equity
securities of issuers registered on the
Japanese OTC market, with up to 50% of its
investments in Japanese Equities invested in
Small-Sized Equity Securities listed on the
Main Japanese Exchanges or equity securities
traded exclusively on the Regional Exchanges.
Because of the small number of equity
securities traded exclusively on the Regional
Exchanges, a substantially greater proportion
of assets will be invested in Small Sized
Equity Securities listed on the Main Japanese
Exchanges as compared to equity securities
traded exclusively on the Regional Exchanges.
The balance of the Fund's investments will be
in yen- and U.S. dollar- denominated debt
securities and foreign currency hedging
transactions, options and futures contracts.
The Investment Adviser believes that Japanese
Equities offer investment opportunities for
investors seeking long-term
4
<PAGE>
capital appreciation who are willing to assume
the risks associated with an investment in the
Fund. The Investment Adviser believes that
investments in these markets have potential
for long-term capital appreciation because
issuers registered on the Japanese OTC market
and issuers of Small Sized Equity Securities
traded on the Main Japanese Exchanges
represent the principal small-capitalization
growth companies that do not meet the rigorous
entry requirements of the first sections of
the major stock exchanges of Japan and offer
an opportunity to invest in Japan's emerging
growth markets and/or industries. The Regional
Exchanges also present an opportunity to
invest in growth companies which have a more
local base of operations.
Japanese Equity Markets.......
The Nikkei Average, a price weighted index of
225 selected stocks listed on the First
Section of the Tokyo Stock Exchange, peaked at
38,915.87 at the end of 1989, plunged 62.8%
from January 1990 to July 1995, then bottomed
out and rose 23.7% to 17,913.06 by September
29, 1995 (month-end basis). From its peak in
July 1990 to the bottom in November 1992, the
Nikkei OTC Average, a price-weighted index for
the Japanese OTC market which includes all
companies registered on the Japanese OTC
market except for The Bank of Japan, fell
73.5% and regained 32.7% by the end of
September 1995. From their peaks in July 1990
to their bottoms in June 1995 the comparable
percentage changes for the indices relating to
the following markets were: -63.8% and 25.2%
for the Small-Sized Equity Securities of the
First Section of the Tokyo Stock Exchange; -
67.8% and 29.9% for the Second Section of the
Tokyo Stock Exchange; -70.2% and +18.0% for
the Second Section of the Osaka Securities
Exchange; and -66.5% and +13.9% for the Second
Section of the Nagoya Stock Exchange.
The Offering..................
The Fund is offering 3,400,000 shares of Common
Stock, $.01 par value (the "Shares"), for sale
at an offering price of $12.00 per share,
except that the price will be reduced to $
per share for purchases in single transactions
(as defined herein under "Underwriting") of
or more Shares, and to $ per share
for purchases of 100 or more shares by the
beneficial owners of shares of The Japan
Equity Fund, Inc. as of a record date of
January 31, 1996. The Underwriters have also
been granted an option to purchase an
aggregate of 510,000 additional shares of the
Fund's Common Stock to cover over-allotments.
The minimum purchase is 100 Shares
(U.S.$1,200), except that there is no minimum
investment for purchases for Individual
Retirement Accounts and other retirement
plans. See "Underwriting."
5
<PAGE>
Listing.......................
Prior to this offering, there has been no
public market for the Fund's Shares. The Fund
has applied to list the Shares on the New York
Stock Exchange. However, during an initial
period which is not expected to exceed 29 days
from the date of this Prospectus, the Fund's
shares will not be listed on any securities
exchange. During such period, the Underwriters
do not intend to make a market in the Fund's
shares. Consequently, it is anticipated that
an investment in the Fund will be illiquid
during such period.
Investment Manager....... Daiwa International Capital Management Corp.
(the "Investment Manager"), a wholly-owned
subsidiary of Daiwa International Capital
Management Co., Ltd. ("DICAM"), will act as
the investment manager for the Fund pursuant
to an Investment Advisory and Management
Agreement (the "Investment Management
Agreement") by and among the Fund, the
Investment Manager and DICAM. The Investment
Manager is registered as an investment adviser
under the U.S. Investment Advisers Act of 1940
(the "Advisers Act"). See "Management of the
Fund."
Investment Adviser....... Pursuant to an Investment Advisory Agreement
(the "Investment Advisory Agreement") between
the Investment Manager and DICAM, DICAM will
act as investment adviser (the "Investment
Adviser") to the Fund. The Investment Adviser
was established in 1973 as an affiliate of
Daiwa Securities Co. Ltd. ("Daiwa"), a
Japanese securities company. With
approximately U.S.$22.4 billion under
management as of September 30, 1995, the
Investment Adviser is one of the leading
investment advisory organizations in Japan. As
of September 30, 1995, the DICAM group
companies, including the Investment Manager,
had approximately 44.4% of their assets under
management invested in Japanese debt and
equity securities. Neither the Investment
Manager, the Investment Adviser nor Daiwa is
affiliated with Daiwa Bank. The Investment
Adviser is registered as an investment adviser
under the Advisers Act. See "Management of the
Fund."
Management and Advisory Fees
and Estimated Expenses;
Administration...........
The Fund will pay to the Investment Manager a
fee, computed weekly and payable monthly in
U.S. dollars, at the annual rate of % of the
Fund's average weekly net assets up to $
million; % of such net assets in excess of $
million up to $ million; and % of such
net assets in excess of $ million. The
Investment Manager will pay the Investment
Adviser % of the fees the Investment Manager
receives from the Fund. These combined fees
are higher than that paid by most other U.S.
investment companies investing exclusively in
the securities of U.S.
6
<PAGE>
issuers, primarily because of the additional
time and expense required of the Investment
Manager and the Investment Adviser in
investing in Japanese Equities. This entails
additional time and expense because available
public information concerning Japanese
Equities is limited in comparison to that
available for U.S. companies and companies
traded on the First Section of the Tokyo Stock
Exchange. In addition, available research
concerning Japanese issuers generally is not
comparable to available research concerning
U.S. companies. See "Management of the Fund."
The Fund will be responsible for all of its
operating expenses. The Fund's annual normal
operating expenses, including advisory,
administration and custodial fees, are
estimated to be approximately $ , exclusive
of organizational expenses estimated to be
$ (which are to be amortized over five
years) and the expenses of this offering
estimated to be $ (which will be charged to
capital). See "Estimated Expenses."
Daiwa Securities Trust Company ("DST" or the
"Administrator"), will provide administrative
services to the Fund pursuant to an
Administration Agreement (the "Administration
Agreement") with the Fund. For its services,
the Fund will pay to the Administrator an
annual administration fee of 0.20% of the
average weekly net assets of the Fund, with a
minimum annual fee of $150,000. See
"Management of the Fund--The Administrator;
Administration Agreement."
Assuming the Fund has average weekly net assets
of $ million, the total annual fees payable
by the Fund to affiliates of Daiwa Securities
Co. Ltd. would be approximately $ ,
excluding any amounts received by Daiwa
Securities America, Inc. and its affiliates in
connection with the sale of Shares offered
hereby.
Custodians....................
Daiwa Securities Trust Company (the "U.S.
Custodian") will also act as custodian for the
Fund's assets held in the United States. The
U.S. Custodian will employ subcustodians for
the Fund's assets held outside the United
States. The U.S. Custodian will receive a fee,
calculated weekly and paid monthly in U.S.
dollars, at annual rates of 0.10% of the
Fund's average weekly net assets representing
U.S. assets and 0.05% of the Fund's average
weekly net assets representing non-U.S.
assets, including, in each case, any assets
maintained by the U.S. Custodian with any
securities depositary or sub-custodians. The
U.S. Custodian has appointed
(the "Japanese Custodian") to act as
sub-custodian for the Fund's assets held in
Japan. See "Custodians."
7
<PAGE>
Dividend Distributions and The Fund intends to distribute to shareholders
Reinvestment............ at least annually substantially all of its net
investment income and its net realized capital
gains, if any. Shareholders will receive
dividends in cash, except that shareholders
may elect to become participants in the Fund's
Dividend Reinvestment and Cash Purchase Plan
(the "Plan") and thereby have their dividends
or other distributions from the Fund
automatically reinvested in additional shares
of the Fund. Shareholders whose shares are
held in the name of a broker or nominee and
who wish to participate in the Plan should
contact such broker or nominee to confirm that
shareholders may participate in the Plan.
Shareholders who have distributions
automatically reinvested may also make
additional payments into the Plan to purchase
shares of the Fund on the open market. See
"Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan."
Investing in Japanese Equities involves certain
Risk Factors and Special risks and considerations not typically
Considerations.......... associated with investing in securities of
established U.S. companies, including:
(1) considerations related to the nature of
the markets for Japanese Equities,
including substantially greater price
volatility and lesser liquidity of
portfolio investments resulting from the
small and illiquid nature of the markets
in which Japanese Equities are traded and
the relatively small and developmental
nature of the companies in which the Fund
may invest;
(2) political and economic considerations
with respect to Japan, including the
possible imposition of, or changes in,
Japanese laws or government regulations
which create potential limitations and
restrictions applicable to investments by
the Fund in Japanese Equities;
(3) fluctuations in the rate of exchange
between currencies and costs associated
with currency conversion; and
Investing in Japanese Equities involves the
risk that it may be more difficult to obtain
and/or enforce a judgment in a Japanese court
than in a court in the United States.
The Fund may be subject to income or
withholding taxes imposed by the Japanese
government or other foreign governments. See
"Taxation--Japanese Taxes."
In addition, Japanese accounting, auditing,
financial and other reporting standards are,
in certain respects, more limited than U.S.
standards. See "Risk Factors and Special
Considerations."
8
<PAGE>
As described under "Listing" above, it is
anticipated that an investment in the Fund
will be illiquid for a period of up to 29 days
prior to listing of the Fund's shares on the
New York Stock Exchange. See "Underwriting. "
The Fund may engage in a variety of currency
hedging transactions. These transactions
involve certain special risks. See "Risk
Factors and Special Considerations,"
"Investment Objective and Policies" and
Appendix A to this Prospectus.
The Fund's Articles of Incorporation contain
certain anti-takeover provisions that may have
the effect of inhibiting the Fund's possible
conversion to open-end status and limiting the
ability of other persons to acquire control of
the Fund. In certain circumstances, these
provisions might also inhibit the ability of
shareholders to sell their shares at a premium
over prevailing market prices. See "Risk
Factors and Special Considerations--Additional
Considerations" and "Description of Common
Stock--Special Voting Provisions."
The Fund is classified as a "non-diversified"
investment company under the U.S. Investment
Company Act of 1940, as amended (the "1940
Act"), which means that the Fund is not
limited by the 1940 Act in the proportion of
its assets that may be invested in the
securities of a single issuer. As a non-
diversified investment company, the Fund may
invest a greater proportion of its assets in
the securities of a smaller number of issuers
and, as a result, may be subject to greater
risk of loss with respect to its portfolio
securities. However, the Fund intends to
comply with the diversification requirements
imposed by the U.S. Internal Revenue Code of
1986, as amended (the "Code"), for
qualification as a regulated investment
company. See "Investment Restrictions" and
"Taxation--U.S. Federal Income Taxes."
Investors should carefully consider their
ability to assume the foregoing risks before
making an investment in the Fund. An
investment in shares of the Fund may not be
appropriate for all investors and should not
be considered as a complete investment
program. See "Risk Factors and Special
Considerations."
Discount to Net Asset Value... Shares of closed-end investment companies
frequently trade at a discount from net asset
value. This characteristic of shares of a
closed-end fund is a risk separate and
distinct from the risk that a fund's net asset
value will decrease. The Fund cannot predict
whether its shares will trade at, above or
below net asset value. The risk of purchasing
shares of a closed-end investment company
which might trade at a discount from net asset
value is more pronounced for
9
<PAGE>
investors who purchase shares in the initial
public offering and who wish to sell their
shares in a relatively short period of time.
See "Risk Factors and Special Considerations--
Net Asset Value Discount; Non-
diversification."
The net asset value per share immediately
following the completion of the offering will
be $ , less the per share offering expenses
of this offering.
10
<PAGE>
THE FUND
The Fund, incorporated in Maryland on August 3, 1994, is a non-diversified,
closed-end management investment company registered under the 1940 Act. The
Fund's investment objective is long-term capital appreciation. The Fund seeks
to achieve its objective by investing primarily in (i) equity securities of
issuers registered on the Japanese over-the-counter market (the "Japanese OTC
market"), (ii) equity securities of issuers having less than 60 million
outstanding shares (assuming a par value per share of (Yen)50)* (the "Small-
Sized Equity Securities") listed on the Nagoya Stock Exchange, the Osaka
Securities Exchange and the Tokyo Stock Exchange (collectively, the "Main
Japanese Exchanges") or (iii) equity securities traded exclusively on regional
exchanges in Japan such as the Fukuoka, Hiroshima, Kyoto, Niigata, and Sapporo
Stock Exchanges (collectively, the "Regional Exchanges"). Such equity
securities of issuers registered on the Japanese OTC market and Small-Sized
Equity Securities listed on the Main Japanese Exchanges and equity securities
traded exclusively on the Regional Exchanges are collectively referred to as
"Japanese Equities." For purposes of investment by the Fund, "equity
securities" is defined as common stock, preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity interests in
trusts and partnerships and American, Global, European or other types of
Depositary Receipts bearing designations that are developed in the future. No
assurance can be given that the Fund's investment objective will be realized.
At all times, following completion of its Initial Investment Period (as
defined below under "Use of Proceeds"), except during temporary defensive
periods, the Fund will maintain at least 65% of its total assets in Japanese
Equities. The Fund anticipates that following the conclusion of its Initial
Investment Period, it will under normal circumstances invest at least 80% of
its total assets in Japanese Equities. The Fund intends to invest the balance
of its assets not invested in Japanese Equities in yen-denominated or U.S.
dollar- denominated debt securities and foreign currency hedging transactions,
options and futures contracts. See "Investment Objective and Policies." The
Fund is designed for United States and other investors seeking to participate
in investments in Japanese Equities and does not represent a complete
investment program.
INVESTMENT IN JAPANESE EQUITY MARKETS
The Investment Adviser believes that Japanese Equities offer investment
opportunities for investors seeking long-term capital appreciation who are
willing to assume the risks associated with an investment in the Fund. The
Investment Adviser believes that investments in these markets have potential
for long-term capital appreciation because issuers registered on the Japanese
OTC market and issuers of Small-Sized Equity Securities traded on the Main
Japanese Exchanges represent the principal small-capitalization growth
companies that do not meet the rigorous entry requirements of the first
sections of the major stock exchanges of Japan and offer an opportunity to
invest in Japan's emerging growth markets and/or industries. The Regional
Exchanges also present an opportunity to invest in growth companies which have
a more local base of operations.
There are eight stock exchanges in Japan: Tokyo, Osaka, Nagoya, Fukuoka,
Hiroshima, Kyoto, Niigata and Sapporo. The Tokyo Stock Exchange, the Osaka
Securities Exchange and the Nagoya Stock Exchange are divided into two
Sections--the First and Second Sections. The five Regional Exchanges are not
divided.
The investment universe of the Fund will include all equity securities of
issuers registered on the Japanese OTC market and all equity securities of
issuers with less than 60 million outstanding shares listed on any of the Main
Japanese Exchanges or equity securities traded exclusively on any of the
Regional Exchanges.
- --------
* For this purpose, the number of outstanding shares will be derived by
multiplying the actual number of outstanding shares by the par value of such
shares and dividing by (Yen)50. For example, an issuer with 4 million
outstanding shares with par value (Yen)5,000 per share shall be deemed to
have 400 million outstanding shares and such issuer's shares will not be
eligible for investment by the Fund.
11
<PAGE>
As of September 29, 1995, of the 1250 companies listed on the First Section
of the Tokyo Stock Exchange, 357 companies satisfy the criterion of having
less than 60 million outstanding shares. Among the 458 companies listed on the
Second Section of the Tokyo Stock Exchange, 434 companies satisfy this
criterion. As of the same date, 28 of 38 companies exclusively listed on the
First Section of the Osaka Securities Exchange and 191 of 195 companies
exclusively listed on the Second Section of the Osaka Securities Exchange,
meet the criterion. In addition, 11 of 16 companies exclusively listed on the
First Section of the Nagoya Stock Exchange and 98 of 99 companies exclusively
listed on the Second Section of the Nagoya Stock Exchange are eligible for
investment by the Fund.
The aggregate number of companies in which the Fund may invest was 1,829
(1,193 listed companies and 636 OTC registered companies) as of September 29,
1995.
The following table provides information relating to the Japanese equity
markets and the investment universe of the Fund.
FUND'S INVESTMENT UNIVERSE(1)
<TABLE>
<CAPTION>
NUMBER OF LISTED/ NUMBER OF COMPANIES NUMBER OF COMPANIES
REGISTERED EXCLUSIVELY LISTED WITH LESS THAN 60 MILLION
COMPANIES(2) ON CAPTIONED EXCHANGE(3) SHARES OUTSTANDING
----------------- ------------------------ -------------------------
<S> <C> <C> <C>
1. Listed Companies
Tokyo Stock Exchange
1st Section.......... 1,250 1,250 357
2nd Section.......... 458 458 434
Osaka Securities
Exchange
1st Section.......... 856 38 28
2nd Section.......... 360 195 191
Nagoya Stock Exchange
1st Section.......... 434 16 11
2nd Section.......... 133 19 98
Kyoto Stock Exchange.. 244 1 1
Hiroshima Stock
Exchange............. 204 13 12
Fukuoka Stock
Exchange............. 264 36 34
Niigata Stock
Exchange............. 201 10 10
Sapporo Stock
Exchange............. 194 18 17
----- ----- -----
Subtotal............. 2,134 1,193
===== =====
2. Registered Companies:
Over-the-Counter...... 636
-----
Subtotal............. 636
-----
Total September 29,
1995................ 5,234
=====
3. Investment Universe
Listed Companies...... 1,193
Registered Companies.. 636
-----
Total................ 1,829
=====
</TABLE>
- --------
Notes:
(1) As of September 29, 1995.
(2) The number of companies includes those which are listed across the
exchanges.
(3) For Tokyo Stock Exchange, the number includes those which are listed
across the exchanges.
12
<PAGE>
USE OF PROCEEDS
The aggregate net proceeds of the offering will be approximately $
(approximately $ if the Underwriters' over-allotment option is exercised in
full), after deduction of sales load and organizational and offering expenses.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies and investment restrictions described
herein. The Investment Adviser believes that, due to the relative illiquidity
of Japanese Equities, it may take up to six months after completion of the
offering made hereby (the "Initial Investment Period"), depending on market
conditions and the availability of appropriate securities, for the Fund to
invest at least 65% of its total assets in Japanese Equities in accordance
with its investment objective. See "Risk Factors and Special Considerations."
Pending such investment, it is anticipated that the proceeds will be invested
in yen-denominated or U.S. dollar-denominated debt securities. See "Investment
Objective and Policies."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in Japanese Equities involves certain risks and considerations not
typically associated with investing in securities of established U.S.
companies, including (1) considerations related to the nature of the markets
for Japanese Equities, including substantially greater price volatility and
lesser liquidity of portfolio investments resulting from the small and
illiquid nature of the Japanese Equities markets and the relatively small and
developmental nature of the companies in which the Fund may invest; (2)
political and economic considerations with respect to Japan, including the
possible imposition of, or changes in, Japanese laws or government regulations
which create potential limitations and restrictions on investments by the Fund
in Japanese Equities; and (3) fluctuations in the rate of exchange between
currencies and costs associated with currency conversion. In addition,
Japanese accounting, auditing, financial and other reporting standards are, in
certain respects, more limited than U.S. standards. In addition, investing in
Japanese Equities involves the risk that it may be more difficult to obtain
and/or enforce a judgment in a Japanese court than in a court in the United
States. Also, the Fund may be subject to income or withholding taxes imposed
by the Japanese government or other foreign governments. See "Taxation--
Japanese Taxes."
INVESTMENTS IN JAPANESE EQUITIES
The markets for Japanese Equities are small and illiquid in comparison with
the U.S. securities markets and the First Section of the Tokyo Stock Exchange.
Japanese equity securities, including securities traded on the Japanese OTC
market, Main Japanese Exchanges and Regional Exchanges have generally
exhibited a high price to earnings ratio relative to securities traded in the
U.S. securities markets. See "Markets for Japanese Equity Securities."
From the end of 1987 to the end of 1989, Japanese equity securities surged
across all markets. Although the First Section of the Tokyo Stock Exchange,
which is the major Japanese equity market, hit a historical high at the end of
1989, it fell during the next two and a half years, while the small equity
markets, i.e., the Japanese OTC market, the small-sized securities subsection
of the First Section of the Tokyo Stock Exchange (as measured by the small
companies sub-index of the TOPIX (defined below) (the "TOPIX Small-Sized
Index") and the Second Sections of the other Main Japanese Exchanges,
continued to rise and to break their historical price records through July
1990. From the end of 1987 to the end of 1989 (on a month-end basis), the
First Section of the Tokyo Stock Exchange (as measured by the Tokyo Stock
Exchange First Section Price Index (the "TOPIX"), a capitalization weighted
index of all stocks listed on the First Section of the Tokyo Stock Exchange)
increased 67.0%, the Japanese OTC market (as measured by the Nikkei OTC
Average, a price weighted index for the Japanese OTC market which includes all
companies registered on the Japanese OTC market except for The Bank of Japan)
increased 254.0%, and the Tokyo Stock Exchange Second Section Stock Price
Index (the "TSE Second Section Index"), a capitalization weighted index of all
stocks listed on
13
<PAGE>
the Second Section of the Tokyo Stock Exchange, the TOPIX Small-Sized Index,
and the stock price indices for the Second Sections of the Osaka Securities
Exchange and the Nagoya Stock Exchange (the "OSE Second Section Index" and the
"NSE Second Section Index," respectively), increased 82.7%, 128.1%, and
136.9%, respectively.
During the period from July 1990 to July 1995, the stock price indices
mentioned above decreased sharply in the range of 61.8% to 73.5% from their
historical peaks to their lowest points. The TOPIX decreased 61.8% and the
Nikkei OTC Average decreased 73.5%. The TSE Second Section Index decreased
67.8%, while the TOPIX Small-Sized Index, the OSE Second Section Index and the
NSE Second Section Index decreased 63.8%, 70.2% and 66.5%, respectively.
From their lowest points after 1990 to September 29, 1995, the Japanese
equity markets recovered modestly. The TOPIX increased 30.4% and the Nikkei
OTC Average increased 32.7%. The TSE Second Section Index increased 29.9%,
while the TOPIX Small-Sized Index, the OSE Second Section Index and the NSE
Second Section Index increased 30.4%, 18.0% and 13.9%, respectively.
These comparisons illustrate the relatively high volatility of the various
markets and not necessarily a correlation of trends and turning points on
respective indices. There can be no assurance that market corrections will not
occur again.
The combination of price volatility and the limited liquidity of Japanese
Equities may have an adverse effect on the investment performance of the Fund.
In periods of rapid price increases, the limited liquidity of Japanese
Equities may restrict the Fund's ability to adjust its portfolio quickly in
order to take full advantage of significant market increases and, conversely,
during periods of rapid price declines, such limited liquidity may restrict
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.
Accordingly, in periods of rising market prices, notwithstanding an increase
in the Fund's net asset value, the Fund may be unable to participate fully in
such price increases as it is unable to acquire its desired portfolio
positions quickly; conversely, the Fund's inability to dispose fully and
promptly of positions in declining markets may cause the net asset value to
decline as the value of the unsold positions decreases due to lower market
prices. This limited liquidity may also cause the Fund to invest on a long-
term basis as opposed to buying issues on a short-term basis and liquidating
positions in a short time frame.
The Fund's portfolio investments will be in companies in an earlier
developmental stage, will be less liquid and will exhibit greater price
volatility than investments in companies whose securities are traded on more
established markets such as the New York Stock Exchange and in more
established companies listed on the Tokyo Stock Exchange. Investments in
smaller, less seasoned companies may present greater potential for capital
appreciation. Investors should be aware, however, that these investments also
involve greater risks than are customarily associated with more established
companies. The securities of smaller companies may be subject to more abrupt
or erratic price movements than those of larger, more established companies.
In addition, these companies may have limited product lines, markets or
financial resources, or they may be dependent upon a limited management group.
While the capitalization of these smaller companies may vary substantially,
under the Japanese Commercial Code (Law No. 48, March 9, 1899), as amended,
Japanese corporations are required to have a minimum capitalization of only
(Yen)10 million (approximately $93,000). These companies in which the Fund
intends to invest have, however, satisfied the registration or listing
requirements of the markets in which their shares are traded. Investments in
larger companies present certain advantages in that such companies generally
have greater financial resources, more extensive research and development,
manufacturing, marketing and service capabilities, more stability and greater
depth of management and technical personnel.
14
<PAGE>
POLITICAL AND ECONOMIC FACTORS
Political Factors
Japan has a parliamentary form of government. Legislative power is vested in
the Diet which consists of the House of Representatives (the "Lower House")
and the House of Councilors (the "Upper House"). Members of the Lower House
are elected for terms of four years unless the Lower House is dissolved prior
to the expiration of their full, elected terms. On the other hand, members of
the Upper House have a six-year term and elections are held every three years
for half of the 252 total members. The major political parties represented in
the Diet are the Liberal Democratic Party (the "LDP"), currently the largest
party; the New Frontier Party (newly formed in December 1994 with the
combination of nine parties including Shinseito, Komeito, the Japan New Party
and the Democratic Socialist Party); the Social Democratic Party of Japan (the
"SDP"), formerly the Japan Socialist Party; Sakigake; and the Japan Communist
Party. The distribution of the Diet membership by party as of January 26, 1996
is as follows:
<TABLE>
<CAPTION>
The Lower House (511 seats
currently):
POLITICAL PARTY SEATS
--------------- -----
<S> <C>
LDP.................................... 207
The New Frontier Party................. 170
SDP.................................... 63
Sakigake............................... 23
The Japan Communist Party.............. 15
Others................................. 33
The Upper House (252 seats):
<CAPTION>
POLITICAL PARTY SEATS
--------------- -----
<S> <C>
LDP.................................... 111
The New Frontier Party................. 68
SDP.................................... 36
The Japan Communist Party.............. 14
Sakigake............................... 3
Others................................. 20
</TABLE>
Triggered by successive revelations of political scandals, one-party rule by
the LDP since 1955 was terminated on July 18, 1993 after 38 years. The
government is a coalition of the LDP, the SDP and Sakigake, led by Ryutaro
Hashimoto of the LDP. The conservative LDP lost the majority in the Lower
House election held in July 1993 due to the departure of reformists who
founded their own parties, such as Shinseito, the Japan New Party and
Sakigake. After that, major anti-LDP parties formed the coalition government
led by Morihiro Hosokawa of the Japan New Party. However, Prime Minister
Hosokawa resigned in April 1994 and was replaced by Tsutomu Hata of Shinseito.
The Hata coalition government was also short-lived as the political situation
became unstable in light of expected reform of the general election system. In
June 1994, the SDP departed from the coalition with Shinseito, and has since
joined with the LDP, its long-time rival.
The latest national election was the Upper House election held on July 23,
1995. In that election, the parties forming the coalition government, that is,
the LDP, the SDP and Sakigake, decreased their seats as a total, while the New
Frontier Party made advances. Out of 50 seats determined proportionally by
votes obtained by each party, the New Frontier Party won 18 seats compared to
15 seats by the LDP, although the New Frontier Party obtained fewer votes than
the LDP in the remaining 76 seats allotted to electoral districts.
Currently, although the political outlook is unclear, some major movements
have begun to emerge. For instance, the next Lower House election, expected to
be held at year end or after the fiscal 1996 budget is settled in the coming
spring, will be held under a new voting system that divides Japan into 300
single-seat districts which is expected to favor larger parties. Therefore,
the three major parties, the LDP, the New Frontier Party and the reformed SDP,
are expected to be the main forces in the next Lower House election.
15
<PAGE>
In the next general election, if the LDP party does not receive a majority of
the votes, a coalition formation would become necessary and the Manager and
the Investment Adviser believe that a jockeying in the current coalition
formation would occur among the existing parties. As a result, while the
Manager and the Investment Adviser believe a restructuring of the current
coalitions would be more stable than the current coalition, there is
uncertainty as to the future of Japan's political outlook and, therefore, its
overall effects on the economy and the market.
Economic Factors
The Japanese economy experienced its worst recession since World War II in
the 1990s. The average annual real GDP growth rate during the period from 1992
through 1994 was 0.5%, compared to 3.2% in the United States. While the
Economic Planning Agency (the "EPA") claims the recession ended in October
1993, the economy has been largely stagnant since then. In reaction to the
unprecedented expansion of business, fixed investment and double-digit growth
rates for three consecutive years up to fiscal year 1990, the economy entered
into a capital stock adjustment phase in fiscal year 1992. In addition, asset
deflation, both financial and in real estate, has exerted a continuous drag on
the economy since the recession at the turn of this decade. Asset deflation
has damaged balance sheets and confidence in all sectors, including collateral
values and, thus, new credit creation. The debt carried over from the 1980s,
as in most major industrialized nations, left both corporations and
individuals preferring to pay down debt rather than invest or spend. This
retrenchment in the business sector has also carried over into the labor
market, household incomes and consumer spending.
Inexpensive imported goods are penetrating the home market and intensifying
competition for domestic industries from offshore manufacturers. The ongoing
decline of output prices has more than offset strong yen-related drops in
input prices. The year-on-year GDP deflator has been negative for four
straight quarters, accelerating to negative 1.2% in the second quarter of
1995. In a normal economic cycle, the onset of a recession means a waning
demand and a corresponding drop in prices. Lower prices raise real income, and
the resulting stronger purchasing power in turn stimulates replacement demand.
As this fresh demand causes the economy to expand again, the supply-demand gap
begins to close, and prices begin rising. However, the current economic
condition in Japan is viewed differently from such normal cases. Falling
prices should help bring domestic prices more in line with those of other
countries and should force Japanese manufacturers and the inefficient
distribution system to streamline themselves. Such falling prices are regarded
as just one important factor that Japan needs in the long run for
restructuring. There is a fear, however, that real income may fall even faster
than prices. Cheaper goods may cut further into corporate earnings, forcing
falling wages and layoffs, hurting the buying power of consumers and thereby
causing a deflationary spiral.
On September 20, 1995, the Murayama government unveiled a (Yen)14.2 trillion
(US$142 billion) stimulus plan, following the Bank of Japan's discount rate
cut, the ninth this cycle, by half a percentage point to another record low of
0.5% on September 8, 1995. This package is the seventh and most dramatic
attempt since 1992 to boost growth in Japan through large fiscal measures. The
plan calls for direct government spending on public works of (Yen)4.7 trillion
and includes measures to support weak land prices and to revitalize Japan's
stagnating financial markets. The package, however, includes the same
combination of public spending, subsidies and weak deregulation measures
included in earlier stimulus packages which did not succeed in fueling strong
economic growth. In order to make a successful recovery, at the least, Japan's
economy will need to go through substantial restructuring during the next few
years, abolishing various counter-productive regulations and obsolete
practices.
Strains in the financial system have also been one of the major causes of
Japan's economic weakness. The non-performing loans of financial institutions
have hampered their ability to take on risks, thus obstructing the flow of
funds into capital outlays as well as equities. Japan's financial institutions
are estimated by the government to have at least (Yen)40 trillion (US$400
billion) in outstanding loans, including uncollectible loans estimated at
(Yen)10-15 trillion. While the banking system appears to be making some
progress in its attempt to
16
<PAGE>
deal with non-performing assets, the overall problems in the banking system
could make economic recovery more difficult to achieve and may lead to a
crisis in the banking system itself. The Manager and the Investment Adviser
believe that, due to the factors addressed above, Japan's full economic
recovery may take longer than they originally expected.
Japanese Government Regulation
In general, the acquisition of shares of a Japanese company listed on any
stock exchange in Japan or registered on the Japanese OTC market from a
resident of Japan (including a corporation) by a non-resident of Japan
(including a corporation) requires prior notification to the Japanese Ministry
of Finance (the "MOF") of the proposed transaction. If the acquisition is made
from or through a securities company designated by the MOF (as will generally
be the case with the Fund), such prior notification is not required, subject
to the quantity restrictions referred to below. The Foreign Exchange and
Foreign Trade Control Law of Japan (Law No. 228, December 1, 1949), as
amended, and cabinet orders and ministerial ordinances thereunder currently in
effect (the "Foreign Exchange Controls"), give the MOF the power, in certain
limited and exceptional circumstances, to require prior approval for any such
acquisition.
If a foreign investor intends to acquire shares of a Japanese corporation
and as a result of such acquisition the foreign investor would directly or
indirectly hold 10% or more of the total outstanding shares of that
corporation, such foreign investor must give prior notification to the MOF and
any other ministry with proper jurisdiction. Such ministries may make a
recommendation to modify or prohibit the proposed acquisition if they consider
that such acquisition falls under certain limited conditions specified in the
Foreign Exchange Controls. If the foreign investor does not accept the
recommendation, such ministries may issue an order modifying or prohibiting
the acquisition. The Fund will be considered a foreign investor for this
purpose.
The acquisition of shares by non-resident shareholders by way of dividends
paid in shares or stock splits, as well as the acquisition of shares of a
Japanese company that are listed on a Japanese stock exchange or registered on
the Japanese OTC market by non-residents upon exercise of warrants or
conversion of convertible bonds issued outside Japan, are not subject to any
of the foregoing prior notification requirements. Under the Foreign Exchange
Controls, dividends paid on shares held by non-residents of Japan and the
proceeds of any sales of shares within Japan may, in general, be converted
into any foreign currency and repatriated abroad. The Fund will be considered
a non-resident of Japan for this purpose.
There can be no assurance that under the Foreign Exchange Controls the MOF
will not require prior approval for an acquisition by the Fund of shares
registered on the Japanese OTC market, or of shares listed on the Main
Japanese Exchanges or traded exclusively on the Regional Exchanges or that the
MOF or any other ministries will not recommend to modify or prohibit the
direct or indirect acquisition by the Fund of greater than 10% of the shares
of a Japanese corporation.
EXCHANGE RATE FLUCTUATIONS AND FOREIGN CURRENCY CONSIDERATIONS
Under normal circumstances, following completion of the Fund's Initial
Investment Period, at least 80% of the Fund's assets will be invested in
Japanese Equities. In addition, a substantial amount of the remainder of the
Fund's investments may be in yen-denominated debt securities. Substantially
all income received by the Fund will be in yen. However, the Fund's net asset
value will be reported, and distributions from the Fund will be made, in U.S.
dollars. Therefore, the Fund's reported net asset value and distributions will
be adversely affected by depreciation of the yen relative to the U.S. dollar.
In addition, the Fund will compute its income on the date of its receipt by
the Fund at the foreign exchange rate in effect on that date, and if the value
of the yen falls relative to the U.S. dollar between recognition of income and
the date the Fund makes distributions, and, if the Fund has insufficient cash
in U.S. dollars to meet distribution requirements, the Fund may be required to
liquidate securities in order to make distributions. Such liquidations, if
required, may adversely affect the Fund. Certain provisions of the U.S.
Federal income tax laws may impede the Fund's ability to liquidate securities
held less than three months. There is no assurance that the Fund will be able
to
17
<PAGE>
liquidate securities in order to meet such distribution requirements. The Fund
is required to distribute 90% of its investment company taxable income to its
shareholders each year, as described under "Taxation--United States Taxes," in
order to maintain its qualification as a regulated investment company for U.S.
tax purposes. The Fund is permitted to borrow money to pay dividends required
to be distributed in order to maintain its tax qualification status. See
"Investment Objective and Policies."
If the Fund is unable to obtain funds necessary to meet its U.S.
distribution requirements of distributing 90% of its investment company
taxable income to its shareholders each year, the Fund will not qualify for
the dividends-paid deduction available to regulated investment companies under
U.S. law and will be subject to a corporate-level tax on its income for such
year. See "Taxation--United States Taxes."
The following table sets forth certain information as to yen per U.S. dollar
exchange rates for the years 1984 through 1994 and for the period from January
1, 1995 through September 29, 1995.
<TABLE>
<CAPTION>
(Yen) PER U.S.$1.00
-------------------------
HIGH(1) LOW(1) AVERAGE(2)
------- ------ ----------
<S> <C> <C> <C>
1984............................................... 220.00 251.70 237.52
1985............................................... 199.80 263.65 238.54
1986............................................... 152.55 203.30 168.52
1987............................................... 121.85 159.20 144.64
1988............................................... 120.45 136.80 128.15
1989............................................... 123.80 151.35 138.12
1990............................................... 124.05 160.35 144 .88
1991............................................... 125.10 142.00 134.50
1992............................................... 118.60 134.95 126.62
1993............................................... 100.40 125.95 111.18
1994............................................... 96.35 113.60 102.23
1995(3)............................................ 79.75 104.70 91.55
</TABLE>
- --------
Notes:
(1) High and low rates include intraday transactions.
(2) Average rates indicate average of the most actively traded rates for a
given day.
(3) Through September 29, 1995.
Source: Interbank rates in Tokyo as reported by The Bank of Japan.
NET ASSET VALUE DISCOUNT; NON-DIVERSIFICATION
The Fund is a newly organized company with no prior operating history. Prior
to this offering, there has been no public market for the Fund's shares.
Shares of closed-end investment companies frequently trade at a discount from
net asset value. This characteristic of shares of a closed-end fund is a risk
separate and distinct from the risk that a fund's net asset value will
decrease. The Fund cannot predict whether its own shares will trade at, below
or above net asset value. The risk of purchasing shares of a closed-end
investment company which might trade at a discount from net asset value is
more pronounced for investors who purchase shares in the initial public
offering and who wish to sell their shares in a relatively short period of
time.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Fund may invest a greater proportion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. The Fund,
however, intends to comply with the diversification requirements imposed by
the Code for qualification as a regulated investment company. See "Taxation--
U.S. Federal Income Taxes" and "Investment Restrictions."
18
<PAGE>
LISTING
Prior to this offering, there has been no public market for the Shares. The
Fund has applied to list the Shares on the New York Stock Exchange. However,
during an initial period which is not expected to exceed 29 days from the date
of this Prospectus, the Fund's Shares will not be listed on any securities
exchange. Additionally, during such period, the Underwriters do not intend to
make a market in the Fund's Shares, although a limited market may develop.
Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period.
ADDITIONAL CONSIDERATIONS
Certain considerations concerning the Fund's hedging transactions are
discussed below under "Investment Objective and Policies--Foreign Currency
Hedging Transactions, Options and Futures Contracts" and in Appendix A.
The Fund's Articles of Incorporation contain certain anti-takeover
provisions that may have the effect of inhibiting the Fund's possible
conversion to open-end status and limiting the ability of other persons to
acquire control of the Fund. In certain circumstances, these provisions might
also inhibit the ability of shareholders to sell their shares at a premium
over prevailing market prices. See "Description of Common Stock--Special
Voting Provisions."
Certain considerations concerning the Fund's ability to enter into
repurchase agreements and purchase securities on a when-issued or delayed
delivery basis are discussed below under "Investment Objective and Policies--
Temporary Investments."
Investment in shares of Common Stock of the Fund should not be considered a
complete investment program and may not be appropriate for all investors.
Investors should carefully consider their ability to assume these risks before
making an investment in the Fund.
19
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital appreciation. The
Fund seeks to achieve this objective by investing primarily in Japanese
Equities. The Fund's investment objective is a fundamental policy which may
not be changed without the approval of a majority of the Fund's outstanding
voting securities. As used herein, a "majority of the Fund's outstanding
voting securities" means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are represented, and
(ii) more than 50% of the outstanding shares. There is no assurance the Fund
will be able to achieve its investment objective.
The Fund intends to invest at least 50% of its investments in Japanese
Equities in equity securities of issuers registered on the Japanese OTC
market, with up to 50% of its investments in Japanese Equities invested in
Small-Sized Equity Securities listed on the Main Japanese Exchanges or equity
securities traded exclusively on the Regional Exchanges. At all times
following completion of its Initial Investment Period, except during temporary
defensive periods, the Fund will maintain at least 65% of its total assets in
Japanese Equities. Under normal circumstances, the Fund anticipates that it
will invest at least 80% of its total assets in Japanese Equities. For
purposes of the foregoing percentages, equity securities which, when purchased
by the Fund, were Japanese Equities will continue to be treated as Japanese
Equities as long as they are held by the Fund even if such securities cease to
be traded on the Japanese OTC market, cease to qualify as Small- Sized Equity
Securities or cease to qualify as equity securities traded exclusively on the
Regional Exchanges. As dividends paid on Japanese Equities are generally
small, dividend income will usually not be an important consideration of the
Investment Adviser in selecting portfolio securities.
Equity securities, for purposes of investment by the Fund, are defined as
common or preferred stocks (including convertible preferred stock), bonds,
notes or debentures convertible into common or preferred stock, stock purchase
warrants or rights, equity interests in trusts or partnerships or American,
Global, European or other types of Depositary Receipts bearing designations
that are developed in the future. Determinations as to eligibility will be
made by the Investment Manager based on publicly available information and
inquiries made to the companies. See "Risk Factors and Special Considerations"
for a discussion of the nature of information publicly available for non-U.S.
companies.
The Investment Adviser believes that the Japanese OTC market, the Main
Japanese Exchanges and the Regional Exchanges offer investment opportunities
for investors seeking long-term capital appreciation who are willing to assume
the risks associated with an investment in the Fund. The Investment Adviser
believes that investments in these markets have potential for long-term
capital appreciation because these are the principal markets for small-sized
growth companies, which have: (1) promising long-term growth prospects, (2)
the ability to respond more quickly to economic and industrial structural
changes, (3) involvement in new business fields with innovative products
(which big companies have not dealt with as a mainstay), have know- how and
high market share in niche industries, and are thus positioned to generate
high long-term corporate profit growth.
Under current market conditions, the Investment Adviser believes that a
substantial number of companies will be registering their shares for sale on
either the Japanese OTC market or one of the Main Japanese Exchanges. The Fund
believes that it will be able to take advantage of these new investment
opportunities. In addition, the Japanese government is encouraging, and land
prices and labor conditions in metropolitan areas are inducing, certain
industries to relocate to, and corporations to invest in, large cities in
regions other than the Nagoya, Osaka and Tokyo Metropolitan areas. If and when
this expansion occurs, the Investment Adviser believes that some of the new
companies in these regions will first offer their shares on the Japanese OTC
market, the Main Japanese Exchanges or the Regional Exchanges. The Investment
Adviser believes that companies registered on the Japanese OTC market, as well
as those Small-Sized Equity Securities listed on the Main Japanese Exchanges
and equity securities traded exclusively on the Regional Exchanges, are
generally in a more developmental stage than are those companies listed on the
first sections of Japan's major exchanges and may offer exposure to markets or
industries in which such major exchange-
20
<PAGE>
listed companies are less involved. Investments in smaller companies may
present greater potential for long- term capital appreciation; however, they
also involve greater risks than are usually associated with more established
companies.
The Fund intends to invest the balance of its assets not invested in
Japanese Equities in yen-denominated or U.S. dollar-denominated debt
securities and hedging transactions described below. These debt securities
consist of investment-grade debt securities of U.S. and Japanese issuers,
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). In the case of U.S. dollar-denominated
debt securities of U.S. corporate, government or agency issuers, such
securities will be rated in one of the four highest rating categories by at
least one nationally recognized statistical rating organization in the United
States. In the case of Japanese yen-denominated debt securities of Japanese
companies issued publicly in the domestic market or in an overseas market,
certain stringent issuance criteria are imposed upon the issuers. The issuer's
net worth, ratio of shareholders' equity to total capitalization, interest
coverage ratio and ratings, as well as other factors are taken into
consideration, depending upon the type of debt securities being issued. The
Investment Adviser believes that yen-denominated debt securities in which the
Fund will invest will be of comparable quality to U.S. investment-grade debt
securities. The debt securities that the Fund may invest in may include debt
securities rated in the lowest investment-grade category. Such securities may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity by issuers to
make principal and interest payments than is the case with higher grade debt
securities. The Fund has a policy to dispose of debt securities whose ratings
drop below investment grade.
OTHER INVESTMENT POLICIES
The Fund may invest indirectly in securities of Japanese issuers through
sponsored or unsponsored American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and other
types of Depositary Receipts bearing designations that are developed in the
future ("DRs," together with ADRs, GDRs and EDRs hereinafter collectively
referred to as "Depositary Receipts"). The Fund will notify its stockholders
prior to any investment in DRs. ADRs are Depositary Receipts typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation, and GDRs, EDRs and other types of
Depositary Receipts are typically issued by foreign banks or trust companies,
although they also may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are
designed for use in the U.S. securities markets and Depositary Receipts in
bearer form are designed for use in securities markets outside the United
States. Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted. In
addition, the issuers of the stock underlying unsponsored Depositary Receipts
are not obligated to disclose material information in the United States and,
therefore, there may not be a correlation between such information and the
market value of the Depositary Receipts. For purposes of the Fund's investment
policies, the Fund's investments in ADRs, GDRs, EDRs and other types of
Depositary Receipts will be deemed to be investments in the underlying
securities.
The Fund intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade for short-term gain. Accordingly, it
is anticipated that the annual portfolio turnover rate normally will not
exceed 75%, although, in any particular year, market conditions could result
in portfolio activity at a greater or lesser rate than anticipated. The
portfolio turnover rate for a year is calculated by dividing the lesser of
sales or purchases of portfolio securities during that year by the average
monthly value of the Fund's portfolio securities, excluding money market
instruments. The rate of portfolio turnover will not be a limiting factor when
the Fund deems it appropriate to purchase or sell securities for the Fund.
However, the U.S. federal tax requirement that the Fund derive less than 30%
of its gross income from the sale or disposition of
21
<PAGE>
securities held less than three months may limit the Fund's ability to dispose
of its securities in the short term. See "Taxation--U.S. Federal Income
Taxes."
TEMPORARY INVESTMENTS
During periods in which the Investment Adviser believes changes in economic,
financial, market or political conditions make it advisable, the Fund may for
temporary defensive purposes reduce its holdings in equity and other
securities and invest in certain short-term (not greater than twelve months to
maturity) and medium-term (not greater than seven years to maturity) debt
securities or hold cash. The short-term and medium-term debt securities in
which the Fund may invest consist of (a) obligations of the United States or
the Japanese government, their respective agencies or instrumentalities; (b)
bank deposits and bank obligations (including certificates of deposit, time
deposits and bankers' acceptances) of U.S. or Japanese banks denominated in
any currency; (c) floating rate securities and other instruments denominated
in any currency issued by international development agencies; (d) finance
company and corporate commercial paper and other short-term corporate debt
obligations of U.S. and Japanese corporations; and (e) repurchase agreements
with banks and broker-dealers with respect to such securities. The Fund
intends to invest for temporary defensive purposes only in short-term and
medium-term debt securities that the Investment Adviser believes to be of high
quality, i.e., subject to relatively low risk of loss of interest or
principal.
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed upon
price and date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. The Investment Adviser will monitor the
value of such securities daily to determine that the value equals or exceeds
the repurchase price including accrued interest. Repurchase agreements may
involve risks in the event of default or insolvency of the seller, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
The Fund expects to be fully invested in accordance with its investment
objective and policies within six months from the date of completion of the
offering made hereby. Pending such investment, the Fund's assets may be
invested entirely in the short-term and medium-term investments described
above.
LENDING OF PORTFOLIO SECURITIES
The Fund may from time to time lend securities (but not in excess of 33 1/3%
of its total assets) from its portfolio to brokers, dealers and financial
institutions and receive collateral in cash or securities believed by the
Investment Manager to be equivalent to securities rated investment grade by
Standard & Poor's Rating Group ("S&P") or Moody's Investors Services, Inc.
("Moody's") which, while the loan is outstanding, will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities, including any accrued interest or dividend receivable. Any
cash collateral received by the Fund will be invested in short-term, high
quality debt securities, the income from which will increase the return to the
Fund. The Fund will retain all rights of beneficial ownership as to the loaned
portfolio securities, including voting rights and rights to interest or other
distributions, and will have the right to regain record ownership of loaned
securities to exercise such beneficial rights. Such loans will be terminable
at any time. The Fund may pay finders', administrative and custodial fees to
persons unaffiliated with the Fund in connection with the arranging of such
loans. In the event of a default by the borrower, the Fund may suffer time
delays and incur costs or possible losses in connection with the disposition
of the collateral.
FOREIGN CURRENCY HEDGING TRANSACTIONS, OPTIONS AND FUTURES CONTRACTS
In order to hedge against foreign currency exchange rate risks, the Fund may
enter into forward foreign currency exchange contracts and foreign currency
futures contracts and may purchase and write (sell) put and call options on
foreign currency and on foreign currency futures contracts. The Fund may also
seek to hedge
22
<PAGE>
against interest rate fluctuations affecting portfolio securities by entering
into interest rate futures contracts and options thereon.
The Fund may seek to increase its return or hedge all or a portion of its
portfolio investments through transactions in options on securities. In
addition, the Fund may seek to hedge all or a portion of the investments held
by it, or which it intends to acquire, against adverse market fluctuations by
entering into stock index futures contracts and options thereon.
Under the regulations of the U.S. Commodity Futures Trading Commission
("CFTC"), the Fund will not be considered a "commodity pool," as defined under
such regulations, as a result of entering into the transactions in futures
contracts and related options described above, provided, among other things,
that: (i) such transactions are entered into solely for bona fide hedging
purposes, as defined under CFTC regulations or (ii) with respect to any Fund
transactions in futures contracts or related options which are not entered
into for bona fide hedging purposes, the aggregate initial margin and premiums
does not exceed 5% of its total assets (after taking into account any
unrealized profits and losses).
There currently are limited, if any, options and futures markets for
Japanese yen or Japanese securities and indexes and the nature of the
strategies adopted by the Investment Adviser and the extent to which those
strategies are used will depend on the development of those markets. The Fund
will only engage in transactions in options and futures which are traded on a
recognized securities or futures exchange, including non-U.S. exchanges to the
extent permitted by the CFTC. Moreover, when the Fund purchases a futures
contract or a call option thereon or writes a put option thereon, an amount of
cash or high quality, liquid securities will be deposited in a segregated
account with the Fund's custodian so that the amount so segregated, plus the
amount of initial and variation margin held in the account of its broker,
equals the market value of the futures contract, thereby assuring the
availability of adequate funds to meet the obligations arising from such
activities.
For a description of each of the instruments referred to above and an
explanation of certain of the associated risks, limitations on use and
possible strategies the Fund may utilize in connection therewith, see Appendix
A to this Prospectus.
23
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund that may not
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (as defined in "Investment Objective and
Policies"). If a percentage restriction on investment or use of assets set
forth below is adhered to at the time a transaction is effected, later changes
will not be considered a violation of the restriction. Also, if the Fund
receives from an issuer of securities held by the Fund subscription rights to
purchase securities of that issuer, and if the Fund exercises such
subscription rights at a time when the Fund's portfolio holdings of securities
of that issuer would otherwise exceed the limits set forth below, it will not
constitute a violation if, prior to receipt of securities upon exercise of
such rights, and after announcement of such rights, the Fund has sold at least
as many securities of the same class and value as it would receive on exercise
of such rights.
As a matter of fundamental policy:
1. The Fund will not invest more than 25% of its total assets in a
particular industry (including for this purpose any securities issued by a
government other than the U.S. government).
2. The Fund may not make any investment for the purpose of exercising
control or management.
3. The Fund may not buy or sell commodities or commodity contracts or
real estate or interests in real estate, except that it may purchase and
sell futures and option contracts on stock indices, interest rates and
foreign currencies, securities which are secured by real estate or
commodities, and securities of companies which invest or deal in real
estate or commodities.
4. The Fund may not make loans, except that the Fund may (i) buy and hold
debt instruments in accordance with its investment objective and policies,
(ii) enter into repurchase agreements to the extent permitted under
applicable law and (iii) lend portfolio securities.
5. The Fund may not act as an underwriter except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed
to be an underwriter under applicable securities laws.
6. The Fund may not issue senior securities or borrow money except in an
amount not in excess of 33 1/3% of the Fund's total assets (including the
amount borrowed).
As a matter of operating policy, which may be changed by the Fund's Board of
Directors without shareholder vote:
1. The Fund will not purchase securities on margin, except such short-
term credits as may be necessary for clearance of transactions and the
maintenance of margin with respect to futures contracts.
2. The Fund will not make short sales of securities or maintain a short
position (except that the Fund may maintain short positions in foreign
currency contracts, options and futures contracts).
3. The Fund will not issue senior securities, borrow money or pledge its
assets, except that the Fund may borrow from a lender (i) for temporary or
emergency purposes, (ii) for such short-term credits necessary for the
clearance or settlement of the transactions, (iii) to finance repurchases
of its shares (see "Description of Common Stock--Repurchase of Shares and
Conversion to Open-End Investment Company"), or (iv) to pay any dividends
required to be distributed in order for the Fund to maintain its
qualification as a regulated investment company under the Code or otherwise
to avoid taxation under the Code. Any such borrowing will be in amounts not
exceeding 33 1/3% (taken at the lower of cost or current value) of its
total assets (including the amount borrowed), and the Fund will not
purchase additional portfolio securities when its borrowings exceed 5% of
its total assets. The Fund may pledge its total assets to secure
borrowings.
Unlike fundamental policies, operating policies of the Fund may be changed
by the Directors of the Fund, without a vote of the Fund's shareholders, if
the Directors determine such action is warranted. The Fund will notify its
shareholders of any change in any of the operating policies set forth above.
Such notice
24
<PAGE>
will also include a discussion of the increased risks of investment in the
Fund, if any, associated with such a change.
Under the 1940 Act, the Fund may invest only up to 10% of its total assets
in the aggregate in shares of other investment companies and only up to 5% of
its total assets in any one investment company, provided the investment does
not represent more than 3% of the voting stock of the acquired investment
company at the time such shares are purchased. As a shareholder in any
investment company, the Fund will bear its ratable share of that investment
company's expenses, and would remain subject to payment of the Fund's
advisory, sub-advisory and administrative fees with respect to assets so
invested. See also "Taxation--U.S. Federal Income Taxes--Passive Foreign
Investment Companies."
As a result of legal restrictions or market practices, or both, the Fund, as
a U.S. entity, may be precluded from purchasing shares in public offerings by
certain Japanese issuers. Additionally, under the 1940 Act, unless exemptive
relief is obtained, the Fund may not purchase any security of which the
Investment Manager, the Investment Adviser or any of their affiliates is a
principal underwriter during the public offering of such security.
In addition to the foregoing restrictions, the Fund may be subject to
investment limitations and other restrictions imposed by Japanese authorities.
MARKETS FOR JAPANESE EQUITY SECURITIES
OVERVIEW OF JAPANESE SECURITIES MARKETS
The stock trading markets in Japan are divided into the exchange market and
the Japanese OTC market. The exchange market, which includes the First and
Second Sections of the Main Japanese Exchanges and the Regional Exchanges, is
highly systemized. Its chief characteristics are as follows: 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 has been
adopted such that buy and sell orders may converge on the market and trading
contracts are concluded based upon the principles of competitive bidding; in
order to simplify the settling of accounts, a system of clearing accounts has
been adopted; and to assure fairness in trading, each exchange reserves the
right to supervise trading by enacting appropriate regulations governing stock
trading and to provide punishment for any violations thereof.
The Japanese OTC market is less systematized than the exchange market. Its
characteristics include the following: although no single centralized
marketplace similar to an exchange exists, recently more than 99% of the
trades have been conducted through a central processing agent responsible for
matching buy and sell orders received from securities companies on behalf of
investors; prices are determined through the matching of buy and sell orders;
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 eight stock exchanges in Japan: the Fukuoka Stock Exchange, the
Hiroshima Stock Exchange, the Kyoto Stock Exchange, the Nagoya Stock Exchange
(the "NSE"), the Niigata Stock Exchange, the Osaka Securities Exchange (the
"OSE"), the Tokyo Stock Exchange (the "TSE") and the Sapporo Stock Exchange.
The largest and most prestigious of the exchanges is the Tokyo Stock Exchange,
which in September 1995 accounted for 71.9% of the value of transactions on
all Japanese stock exchanges. Consequently, the Tokyo Stock Exchange is widely
regarded as the central marketplace for all of Japan.
The Main Japanese Exchanges divide listed companies into First and Second
Sections. The First Section is for established companies (in existence for
five years or more) that meet the stringent listing criteria for such Section.
These listing criteria relate to the size and business condition of the
issuing company, the
25
<PAGE>
liquidity of its securities and other factors pertinent to investor
protection. As discussed in more detail below, the Second Section is for
smaller companies and newly listed issuers.
The following table provides information relating to the relative size of
the securities markets in Japan as of September 29, 1995:
<TABLE>
<CAPTION>
TOKYO
STOCK EXCHANGE
1ST SECTION OSAKA NAGOYA
JAPANESE ----------------- TOKYO STOCK SECURITIES STOCK
OTC (SMALL- EXCHANGE EXCHANGE EXCHANGE REGIONAL
MARKET 1ST TOTAL SIZED) 2ND SECTION 2ND SECTION 2ND SECTION EXCHANGES(1)
-------- --------- ------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
No. of Listed/Registered
Cos.(2)................ 636 1,250 357 458 360 133 78
Market Capitalization(3)
((Yen) trillion)...... 13.5 318.8 (11.3) 13.8 7.2 2.6 1.7
(U.S.$ billion)....... 137.8 3,247.6 (115.3) 140.9 73.1 26.1 17.2
Average Monthly Trading
Value(4)
((Yen) billion)....... 454.0 6,232.4 (N/A)(5) 381.3 93.9 22.5 4.0
(U.S.$ million)....... 4,624.4 63,482.3 (N/A)(5) 3,883.5 956.6 228.8 40.7
</TABLE>
- --------
Notes:
(1)Figures include only those companies whose securities are traded
exclusively on one of the Regional Exchanges.
(2,3,4)Includes all companies on each exchange except the Regional Exchanges.
(5) Average monthly trading value for the nine months ended September 29,
1995.
(6)N/A: not available.
HISTORICAL BACKGROUND AND DEVELOPMENT OF THE JAPANESE OTC MARKET
The Japanese OTC market is one of the smaller securities markets in Japan.
However, the Japanese OTC market has recently experienced sustained growth in
market capitalization and trading value. At December 31, 1990, the Japanese
OTC market comprised 342 registered companies with an aggregate market
capitalization of approximately $89.6 billion ((Yen)11.8 trillion). At
September 29, 1995, the Japanese OTC market comprised 636 registered companies
with an aggregate market capitalization of approximately $137.8 billion
((Yen)13.5 trillion). The average monthly trading value for 1990, as reported
by the Japan Securities Dealers Association (the "JSDA"), was approximately
$3.8 billion ((Yen)503 billion) and, for the nine months ended September 29,
1995, was approximately $4.6 billion ((Yen)454 billion). The Japanese OTC
market is supervised by the JSDA, a regulatory body comprised of registered
securities brokers in Japan. In the opinion of the Investment Adviser, the
continued growth of the Japanese OTC market is dependent upon the ability of
that market to attract investors and to register new or developing businesses
that ultimately prove to be successful.
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 that 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 so that at the conclusion of 1976 only 85
companies were registered for trading. In an effort to alter this trend, the
JSDA and certain Japanese securities companies established Nihon Tento Shoken
K.K. ("NTS") to coordinate the trading of over-the-counter shares. NTS is
owned equally by 187 securities firms that are members of the JSDA, including
Daiwa. The operations of NTS are supervised by the MOF, with the assistance of
the JSDA. The role of NTS is to act as matching agent between securities
companies wishing to trade in OTC shares. This role has grown to the extent
that by the end of 1994, over 99% of all Japanese OTC market trading was
handled through NTS. From 1977 through 1988, the number of registered
companies increased from 85 to 196, and, from 1989 to September 1995, the
Japanese OTC market grew significantly from 263 companies to 636 companies.
26
<PAGE>
The JSDA has played an active role in the development of the Japanese OTC
market. Since 1984, the JSDA has introduced structural changes in an effort to
enhance the effectiveness of the Japanese OTC market and its ability to
attract investors and issuers. The aims of these changes include the
facilitation of trading communications through the introduction of electronic
equipment, the imposition of requirements applicable to securities firms that
act as dealers in the Japanese OTC market and the elimination of restrictions
on additional public offerings by Japanese OTC market companies and changes in
the public offering process. In December 1992, the JSDA revised the pricing
mechanism utilized in connection with initial public offerings of issues
registering on the Japanese OTC market. The JSDA has continued to encourage
investor interest in the Japanese OTC market and the development of a larger,
more liquid market. On October 28, 1991, the JSDA introduced a real time,
screen-based dealing system to cover the market; any securities dealer
registered with the JSDA is able to access the OTC market through Japan
Securities Dealers Association Quotation system ("JASDAQ"). JASDAQ comprises
NTS's real time trading execution system and JSDA's real time information
transfer system. JASDAQ provides widespread instant access to different stock
quotations for OTC market companies. Real time stock price quotations are
available to securities firms through JASDAQ and licensed securities firms are
able to execute purchase and sale transactions through the system.
An important factor in the development of the Japanese OTC market is the
role of the MOF, which has adopted a policy of seeking to provide a wider
range of small companies with access to development capital. Since 1983, the
MOF (acting indirectly through specially appointed committees) and the JSDA
have relaxed the entry requirements for registration on the Japanese OTC
market.
A company wishing to have its shares traded in the Japanese OTC market is
required to have a minimum of 2 million shares outstanding, minimum pre-tax
profits of (Yen)10 ($0.10) per share and net assets of (Yen)200 million ($2.04
million). In 1995, JSDA created new registration standards for research and
development-oriented companies with significantly less restrictive
requirements ("Frontier Market"). Those companies are exempted from both
minimum outstanding shares and pre-tax profits requirements.
There was a 12% increase in the number of registered companies on the
Japanese OTC market during the nine months ended September 29, 1995. Whether
the 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.
HISTORICAL BACKGROUND AND DEVELOPMENT OF THE FIRST AND SECOND SECTIONS
Among the eight stock exchanges in Japan, the three stock exchanges in
Nagoya, Osaka and Tokyo are each divided into First and Second Sections. The
First and Second Section markets are not markets independent of each other,
and an authorized change in listing from the First to the Second Section or
vice versa is reviewed each year. If a Second Section listed company satisfies
certain requirements, its designation will be changed to a First Section
listed company. On the other hand, if a First Section listed company fails to
satisfy certain requirements, it will be redesignated as a Second Section
listed company or delisted entirely. The Tokyo Stock Exchange requires that
for issues of a company to be listed on its First Section, a company must have
at least 20 million listed shares and an average monthly trading volume of
200,000 shares or more. In 1994, there were four companies whose listings were
changed from the Second to the First Section of the Tokyo Stock Exchange. Any
newly listed shares of a company will generally be traded on the Second
Section of the relevant stock exchange. In 1994, there were no companies whose
shares were relisted from the Tokyo Stock Exchange's Second Section to the
First Section one year after the initial listing. It is necessary for a
company making an application for a new listing to satisfy the listing
requirements prescribed by the stock exchange to which such application is
made. When a company applies for listing on the Second Section of the Tokyo
Stock Exchange, it must demonstrate that it has at least 4 million shares
outstanding, that at least 30% of its total number of listed shares are
available for trading on that Section and that it has 800 or more
shareholders.
27
<PAGE>
Beginning in 1996, all the major exchanges in Japan will lower their listing
requirements. Under the new requirements, among other things, a company
engaging in a new type of business needs at least 2 million shares
outstanding, minimum pre-tax profits of (Yen)10 ($0.10) per share and 300
shareholders to obtain a listing. However, it is not clear whether such
developments will successfully attract issuers.
The Second Sections of the Main Japanese Exchanges were established in 1961,
with listing requirements that were significantly less stringent than those of
their respective First Sections. As a result, the number of newly listed
companies increased sharply in 1961. As among the Second Sections, the listing
requirements of the Osaka Securities Exchange and the Nagoya Stock Exchanges
are less rigorous than those of the Tokyo Stock Exchange.
The number of Second Section companies has been relatively constant because,
as frequently as companies seek new listings, established companies are
relisted on the First Section. The relisting of many Second Section companies
on the First Section reflects the potential of Second Section companies for
growth. The trading volume and the aggregate market value of listed shares on
the Second Sections continued to increase each year through 1990, except for
the Second Section of the Nagoya Stock Exchange. In 1991, however, the Second
Sections of the Tokyo Stock Exchange and Osaka Securities Exchange experienced
a decline in monthly trading values. After reaching a low point in 1992, all
Second Sections recovered their monthly trading value by September 1995. The
market capitalization of each Second Section peaked at the end of 1989, on a
year-end basis. After bottoming out in 1992, the market capitalization of each
Second Section recovered by September 1995. The small-sized stocks of the
First Section of the Tokyo Stock Exchange experienced a similar trend. See "--
Market Growth of the Japanese OTC Market and the Second Sections."
DIFFERENCES BETWEEN FIRST AND SECOND SECTIONS
The average price to earnings ratio for all companies listed on the Tokyo
Stock Exchange's First Section was 79.3 times at September 29, 1995, while the
average price to earnings ratio at that date for Second Section listed
companies was 69.7 times on the Tokyo Stock Exchange, 72.9 times on the Osaka
Securities Exchange, 32.6 times on the Nagoya Stock Exchange and 68.7 times on
the First Section of the Tokyo Stock Exchange for Small-Sized Equity
Securities.
The institutionalization of investors in the Second Sections has not
progressed as much as that of investors in the First Section. While the
trading share of institutional investors, including life and non-life
insurance companies, banks, other financial institutions, investment trusts,
business corporations and other corporations on the First Section of the Tokyo
Stock Exchange was 41.5% in 1994, institutional investors represented only
28.9% of the trading share on the Second Section. Conversely, the trading
share of individual investors on the Second Section was 49.2%, as compared
with 23.3% on the First Section in 1994.
HISTORICAL BACKGROUND AND DEVELOPMENT OF THE REGIONAL EXCHANGES
The Regional Exchanges have traditionally accommodated smaller companies
that have strong ties to their respective local markets. Generally, such
companies have chosen to list on the Regional Exchanges because their
operations are supported by a corresponding regional investor base. Listing
standards on the Regional Exchanges are less stringent than those of the
Second Sections. Like the OTC market and major exchanges, all of the five
Regional Exchanges will or plan to lower their listing standards as well as
establish less stringent listing requirements for research and development-
oriented companies in 1996. The Investment Adviser believes that equity
securities traded exclusively on the Regional Exchanges present an attractive
investment opportunity for the Fund because of the growth potential of
companies that have a strong presence in their local markets.
28
<PAGE>
SECTOR ANALYSIS: JAPANESE OTC MARKET AND THE SMALL-SIZED EQUITY SECURITIES
MARKETS
The Japanese OTC market and the Small-Sized Equity Securities markets
include a broad cross-section of companies involved in many different parts of
the economy. Of the companies traded on the Japanese OTC market and the Small-
Sized Equity Securities markets, a relatively large percentage are involved in
the service industry and other non-manufacturing industries (such as software,
leisure, commerce and real estate) which the Investment Adviser believes have
growth potential due to the trend in the Japanese economy away from a
manufacturing-oriented company toward service and high technology-oriented
industries, as well as an expansion in the retail industry. [The continuing
strength of domestic demand in the Japanese economy and the expansion of
investment into the development of other regions of Japan are likely to
stimulate the growth of the equity markets for these smaller, high growth
companies, presenting attractive investment opportunities for the Fund.] These
markets are expected to grow in both size (in terms of the number of
registered or listed companies) and in the types of industries in which these
companies are involved.
The Investment Adviser also believes that an important factor in the future
growth of the Japanese economy will be the ability of Japanese industry to
innovate and to develop in new, technologically advanced fields such as
semiconductors, telecommunications, factory automation and genetic
engineering, as well as service- and software-oriented fields such as finance
and computer programming. The Investment Adviser believes it is likely that
companies registered on the Japanese OTC market and, to a lesser extent,
Small-Sized Equity Securities listed on the Main Japanese Exchanges and traded
exclusively on the Regional Exchanges, will be involved in this process and
will provide investors with an opportunity to invest in Japan's growth
industries.
29
<PAGE>
The industry sector weightings of the Japanese OTC market and Small-Sized
Equity Securities listed on the stock exchanges indicated below as of
September 29, 1995 are set forth below:
<TABLE>
<CAPTION>
TSE
1ST SECTION TSE OSE NSE
JAPANESE OTC SMALL STOCKS 2ND SECTION 2ND SECTION 2ND SECTION
---------------- ---------------- ---------------- ---------------- ----------------
NO. OF NO. OF NO. OF NO. OF NO. OF
INDUSTRY SECTOR % COMPANIES % COMPANIES % COMPANIES % COMPANIES % COMPANIES
--------------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fishery/Agriculture/Forestry. 0.20 2 1.20 2 -- -- -- -- -- --
Mining....................... 0.00 0 0.00 0 0.06 1 0.12 1 0.39 1
Construction................. 5.00 49 9.18 35 3.38 27 3.35 16 2.94 6
Foods........................ 2.10 23 4.15 14 5.59 29 4.17 18 4.73 9
Textiles & Apparel........... 0.40 9 3.31 18 1.51 17 5.17 32 3.23 8
Pulp & Paper................. 0.30 3 0.74 3 0.37 5 0.82 5 2.12 3
Chemicals.................... 4.80 38 6.01 23 2.56 27 4.49 20 3.94 5
Pharmaceuticals.............. 1.60 5 3.60 8 0.37 4 1.09 4 0.77 1
Oil & Coal Products.......... 0.10 1 0.25 1 0.35 3 0.40 1 1.10 1
Rubber Products.............. 0.60 5 0.00 0 1.13 8 0.37 1 4.24 1
Glass & Chemical Products.... 1.70 14 1.56 9 1.16 13 1.60 12 1.56 5
Iron & Steel................. 1.10 8 2.08 9 1.09 14 1.83 7 0.72 2
Nonferrous Metals............ 0.40 5 1.15 5 0.81 10 1.67 11 0.46 2
Metal Products............... 1.30 14 5.42 17 1.87 15 2.72 18 3.30 5
Machinery.................... 9.10 43 9.33 32 10.46 48 9.33 50 6.39 15
Electric Appliances.......... 8.70 49 15.19 36 10.25 53 3.62 14 12.37 9
Transportation Equipment..... 1.60 16 2.05 8 3.02 26 2.13 8 2.34 5
Precision Instruments........ 0.80 8 2.09 8 1.13 11 0.53 2 1.10 1
Other Products............... 3.30 29 6.24 14 7.33 12 3.65 14 6.03 12
Electric Power & Gas......... 0.00 0 0.00 0 0.52 2 -- -- 0.47 1
Land Transportation.......... 0.08 11 0.43 3 1.37 8 0.49 3 1.78 3
Marine Transportation........ 0.30 4 0.38 4 0.58 9 0.27 3 -- --
Air Transportation........... 1.00 1 0.32 1 0.09 1 -- -- -- --
Warehousing & Harbor Trans.
Services.................... 0.50 4 0.16 2 0.82 11 1.18 9 2.30 3
Communications............... 0.00 0 0.00 0 7.18 1 13.66 1 -- --
Wholesale Trade.............. 23.30 100 7.46 29 9.33 41 10.45 43 14.70 7
Retail Trade................. 12.40 86 10.90 25 3.09 15 8.57 29 14.72 18
Banks........................ 0.20 1 0.00 0 0.38 2 -- -- 0.56 1
Securities................... 0.30 1 0.00 0 1.08 5 2.20 6 2.52 2
Insurance.................... 0.00 1 0.00 0 -- -- -- -- -- --
Other Finance................ 5.00 6 0.61 2 11.36 8 8.56 3 0.41 2
Real Estate.................. 1.10 11 1.78 5 1.30 5 1.48 9 0.42 1
Services..................... 11.00 88 4.34 13 10.47 27 6.08 20 4.41 4
------ --- ------ --- ------ --- ------ --- ------ ---
Total........................ 100.00 636 100.00 357 100.00 458 100.00 360 100.00 133
====== === ====== === ====== === ====== === ====== ===
</TABLE>
- --------
Notes:
(1) Weightings are based on market capitalization.
(2) Data on the Second Sections of the Tokyo Stock Exchange, Osaka Securities
Exchange and Nagoya Stock Exchange have been provided by each Stock
Exchange. Data on the Small-Sized Equity Securities on the First Section
of the Tokyo Stock Exchange and data for the Japanese OTC market have been
calculated by the Investment Adviser in accordance with the 33 industry
classifications established by the Exchange.
(3) The Bank of Japan is excluded for Sector weightings calculation, but
included for number of companies.
Sources: Japan Securities Dealers Association, the Tokyo Stock Exchange, Osaka
Securities Exchange and Nagoya Stock Exchange.
SMALL-SIZED EQUITY SECURITIES COMPANIES
As noted previously, as at September 29, 1995, 636 companies with an
aggregate market capitalization of approximately $137.8 billion ((Yen)13.5
trillion) were traded on the Japanese OTC market; 357 companies with an
aggregate market capitalization of approximately $150.8 billion ((Yen)14.8
trillion) were traded as Small-Sized Equity Securities listed on the First
Section of the Tokyo Stock Exchange; and 458 companies with an aggregate
market capitalization of approximately $140.9 billion ((Yen)13.8 trillion)
were traded on the Second Section of the Tokyo Stock Exchange. Set forth below
is information relating to the 20 most actively traded companies on the
Japanese OTC market, the First Section's Small-Sized Equity Securities on the
Tokyo Stock Exchange and the Second Section of the Tokyo Stock Exchange for
the nine-month period ending September 29, 1995.
30
<PAGE>
At September 29, 1995, the 20 most actively traded companies on the Japanese
OTC market comprised 16.1% of the aggregate market capitalization of the 636
companies traded on the Japanese OTC market as of such date.
MOST ACTIVELY TRADED COMPANIES ON THE JAPANESE OTC MARKET(1)
(IN (Yen))
<TABLE>
<CAPTION>
AVERAGE MARKET SHARE-
MONTHLY CAPITAL- TOTAL HOLDERS'
MARKET PRICE((Yen))(2) TRADING IZATION ASSETS EQUITY
----------------------- VOLUME(3) (4) (5) (5)
NAME BUSINESS HIGH LOW CLOSE ('000 SHARES) ((Yen) MIL.) ((Yen) MIL.) ((Yen) MIL.)
---- -------- ------- ------ --------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Venture Link.... Management Information 3,400 880 3,000 37,518 42,870 4,815 1,773
Shiraishi....... General Contractor 3,570 1,650 2,500 26,486 40,558 57,078 6,768
Softbank........ PC Software 23,900 6,357 23,900 25,918 761,249 92,723 47,450
Hakuto.......... Wholesaler of Elec. Parts 2,890 1,270 2,670 24,110 38,173 36,899 11,114
Nikkodo......... Karaoke Equipment 1,320 445 900 23,689 19,830 48,281 17,855
New Japan Radio. Semiconductor Mfg. 1,430 911 1,360 23,166 53,176 43,762 11,300
Memorex Telex... Computer Peripheral
Equipment 1,260 710 870 23,094 14,445 16,198 4,174
THK............. Systems Maker 2,900 1,440 2,710 22,354 318,517 190,121 84,318
Tokyo Denpa..... Quartz-Applied Products 5,470 2,850 5,250 17,895 34,923 12,260 3,603
Nittoku Eng. ... Coil Winding Machines 1,790 991 1,620 15,757 30,697 25,580 14,584
Tokai Aluminum.. Aluminum Foil 1,080 430 589 15,251 26,034 22,223 2,808
Showa Informa-
tion Sys. ..... Information Equipment 1,590 800 1,210 10,776 12,337 10,575 4,358
Japan Amway..... Home Care Products 4,000 2,600 3,860 10,656 577,553 118,621 75,679
IO-Data......... PC Peripheral Maker 6,950 2,892 6,950 10,648 93,758 27,362 13,919
Canon Chemicals. Toner Cartridges 1,860 1,350 1,640 10,353 32,062 36,674 10,866
Unidux.......... Elec. Parts & Equipment 1,370 820 1,220 10,000 10,607 7,811 3,467
I-Net Corp. .... Information Processing 1,610 1,000 1,560 9,933 7,753 3,997 1,507
Fuji Electron- Trading Company
ics............ specializing in
Semiconductors 2,590 1,700 2,300 9,892 26,241 10,853 8,299
Sawako.......... General Contractor 2,910 1,438 2,910 9,784 24,590 7,192 4,403
Iwabuchi........ Metal Fittings for use
in Wiring 1,470 865 905 9,680 11,448 11,351 5,222
AVERAGE OF 20 COMPANIES: 17,348 108,841 39,219 16,673
<CAPTION>
AFTER-TAX
NET
INCOME/
LOSS
(5)
NAME ((Yen) MIL.)
---- ------------
<S> <C>
Venture Link.... 277
Shiraishi....... 321
Softbank........ 2,049
Hakuto.......... 594
Nikkodo......... -225
New Japan Radio. 902
Memorex Telex...
148
THK............. -941
Tokyo Denpa..... 519
Nittoku Eng. ... -960
Tokai Aluminum.. -636
Showa Informa-
tion Sys. ..... -224
Japan Amway..... 22,424
IO-Data......... 1,981
Canon Chemicals. 1,137
Unidux.......... 157
I-Net Corp. .... 173
Fuji Electron-
ics............
383
Sawako.......... 578
Iwabuchi........
609
AVERAGE OF 20 COMPANIES: 1,463
</TABLE>
- --------
Notes:
(1) These actively traded issues were chosen on the basis of estimated trading
value for the nine-month period ended September 1995.
(2) High and low prices are adjusted for stock splits.
(3) Average of April through September, 1995.
(4) As of September 29, 1995.
(5) Latest actual figures.
31
<PAGE>
As of September 29, 1995, the 20 small-sized companies most actively traded
on the First Section of the TSE comprised 6.2% of the aggregate market
capitalization of the 357 companies traded on the First Section as at such
date.
MOST ACTIVELY TRADED SMALL-SIZED COMPANIES ON THE TOKYO STOCK EXCHANGE, FIRST
SECTION(1)
(IN (Yen))
<TABLE>
<CAPTION>
AVERAGE MARKET
MONTHLY CAPITAL- SHARE-
MARKET PRICE((Yen))(2) TRADING IZATION TOTAL HOLDERS'
------------------------ VOLUME(3) (4) ASSETS EQUITY (5)
NAME BUSINESS HIGH LOW CLOSE ('000 SHARES) ((Yen) MIL.) (5) ((Yen) MIL.) ((Yen) MIL.)
---- -------- ---- ------- --------------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tamura Elec.
Works.......... Telecomm. Equip. 1,590 778 1,390 2,048 70,326 51,038 8,998
Maruyama Mfg.... Agricultural Sprayer 794 395 599 2,029 30,688 34,188 12,391
Daido Steel
Sheet.......... Galvanized steel sheets 1,380 463 803 987 47,035 52,297 14,035
Kanematsu NNK... Plywood maker 1,840 410 1,660 648 68,877 20,081 5,455
Mitsumi......... Electric Parts 2,350 1,270 2,220 607 114,013 115,467 24,498
Chino........... Measuring Instruments 728 405 596 560 29,025 20,199 12,208
Mitsubishi
Shindoh........ Rolled copper products 657 373 595 538 33,906 51,338 13,228
Nippon Conlux... Coin mechanisms 1,060 476 1,030 321 45,079 33,520 28,543
Sumitomo
Precision...... Aircraft Parts 1,000 470 955 234 50,747 61,837 30,283
Saeki Kensetsu.. Dredging 740 384 660 209 33,660 45,971 5,588
Yuken Kogyo..... Hydraulic equipment 503 290 426 199 18,860 22,977 8,524
First Baking.... Bakery 697 446 637 192 30,607 32,508 18,271
KOA............. Fixed Resistors 1,630 970 1,570 188 65,981 31,103 19,419
Kanto Special
Steel Works.... Forged-steel rolls 555 225 520 183 27,456 24,712 7,888
Ihara Chemical.. Agrochem Raw Materials 783 550 662 173 34,655 33,356 19,191
Daiichj
Jitsugyo....... Trading house 562 330 490 160 28,142 60,912 15,239
Alpine.......... Car audio equipment 1,630 958 1,520 151 75,591 88,438 33,027
Shimura......... Special Nickel Processing 568 386 510 144 20,838 7,881 3,035
Uniden.......... Mobile Phone 2,020 1,100 1,770 137 86,813 160,310 72,361
Gajoen.......... Hotels & Restaurants 169 90 123 135 5,835 4,634 3,974
AVERAGE OF 20
COMPANIES: 492 45,907 47,638 17,808
<CAPTION>
AFTER-TAX
NET
INCOME/
LOSS
(5)
NAME ((Yen) MIL.)
---- ------------
<S> <C>
Tamura Elec.
Works.......... 1,761
Maruyama Mfg.... 383
Daido Steel
Sheet.......... -246
Kanematsu NNK... 225
Mitsumi......... 1,704
Chino........... 343
Mitsubishi
Shindoh........ 726
Nippon Conlux... -915
Sumitomo
Precision...... 231
Saeki Kensetsu.. 638
Yuken Kogyo..... -1,237
First Baking.... 154
KOA............. 1,758
Kanto Special
Steel Works.... -1,697
Ihara Chemical.. 294
Daiichj
Jitsugyo....... 393
Alpine.......... 1,373
Shimura......... 3
Uniden.......... 2,458
Gajoen.......... -1,785
AVERAGE OF 20
COMPANIES: 328
</TABLE>
- --------
Notes:
(1) These actively traded issues were chosen on the basis of estimated trading
value for the six-month period ended September 1995.
(2) High and low prices are adjusted for stock splits.
(3) Average of April through September 1995.
(4) As of September 29, 1995.
(5) Latest actual figures.
32
<PAGE>
At September 29, 1995, the 20 companies most actively traded on the Second
Section of the Tokyo Stock Exchange comprised 24.0% of the aggregate market
capitalization of the 458 companies traded on said Second Section as of such
date:
MOST ACTIVELY TRADED COMPANIES ON THE TOKYO STOCK EXCHANGE, SECOND SECTION(1)
(IN (Yen))
<TABLE>
<CAPTION>
AVERAGE MARKET SHARE- AFTER-TAX
MONTHLY CAPITAL- TOTAL HOLDERS' NET
MARKET PRICE((Yen))(2) TRADING IZATION ASSETS EQUITY INCOME/
------------------------ VOLUME(3) (4) (5) (5) LOSS (5)
NAME BUSINESS HIGH LOW CLOSE ('000 SHARES) ((Yen) MIL.) ((Yen) MIL.) ((Yen) MIL.) ((Yen) MIL.)
---- -------- ------- ------- --------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NTTData*........ Data Communication 2,640 1,210 2,310 5,852 508,200 718,180 49,943 7,207
Tajto*.......... Game Machine 329 112 220 941 62,920 83,046 61,097 1,153
Mamyaop......... Fishing Tackle 1,490 911 1,380 564 53,732 38,672 5,242 907
Sankyo.......... Pachinko machines 6,154 4,915 6,030 451 301,802 168,299 131,357 14,601
Sanyo Denki..... Precision Motors 972 515 905 254 58,027 49,996 32,755 722
Shinko Elec. Semiconductor
Ind. .......... Packages 4,450 1,310 4,290 204 168,996 97,470 25,487 204
Japan Telecom... Telephone Company 2,400 1,300 2,400 179 993,600 484,699 250,074 10,033
SEA-COM......... Shipowner 130 40 85 174 2,984 68,912 -13,599 -16,918
Sanwa Daiei
Elec. Cons. ... Telecom Engineering 1,250 470 1,070 164 22,553 21,236 2,717 257
Daiichj Housing
Loan........... Housing Loans 195 21 25 159 2,893 1,826,342 6,105 -6,538
Trader in Elec. Parts
Sanshin Elec. .. & Equip. 1,570 995 1,500 153 41,181 70,801 26,395 600
K.R.S........... Trucking Company 1,690 1,520 1,560 151 12,979 22,969 5,445 519
ACOM............ Consumer Loans 3,490 2,220 3,230 150 473,615 984,793 196,881 23,892
SRL............. Clinical Laboratory 2,860 1,110 2,760 147 100,508 65,305 42,148 1,693
Nakamichi....... Car Audio Equipment 950 601 911 129 24,574 22,969 15,191 57
Kirin Beverage.. Soft Drinks 1,530 1,130 1,530 126 83,201 127,674 42,542 3,301
Union Optical... Microscope Maker 1,450 715 864 122 21,082 2,990 -354 -930
Heiwa........... Pachinko Machines 3,100 1,830 2,780 120 340,161 191,176 153,841 14,156
The Sailor Pen.. Fountain Pens 670 421 531 120 18,918 20,163 9,527 13
Chugai Mining... Gold Refining 182 135 161 117 15,485 39,012 4,255 102
AVERAGE OF 20 COMPANIES: * MARKET PRICE = (Yen)1,000 514 165,371 255,235 52,352 2,752
</TABLE>
- --------
Notes:
(1) These actively traded issues were chosen on the basis of estimated trading
value for the six-month period ended September 1995.
(2) High and low prices are adjusted for stock splits.
(3) Average of April through September, 1995.
(4) As of September 29, 1995.
(5) Latest actual figures.
33
<PAGE>
MARKET GROWTH OF THE JAPANESE OTC MARKET AND THE SECOND SECTIONS
The Japanese OTC market has recently experienced significant growth in terms
of the number of registered companies. While the overall number of companies
listed on the Second Sections has been relatively stable, in recent years
there have been significant numbers of new listings on the Second Sections as
well as promotions to the First Sections. The change in the number of
registered or listed companies on the Japanese OTC market and the Second
Sections for the period from 1984 year-end through September 29, 1995 is shown
by the table set forth below:
NUMBER OF REGISTERED OR LISTED COMPANIES
(YEAR END)
<TABLE>
<CAPTION>
JAPANESE OTC MARKET TSE 2ND SECTION OSE 2ND SECTION NSE 2ND SECTION
------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
1984.... 116 412 252 95
1985.... 127 424 260 97
1986.... 140 424 268 94
1987.... 151 431 271 96
1988.... 196 441 279 101
1989.... 263 436 295 112
1990.... 342 436 296 112
1991.... 430 418 307 117
1992.... 436 422 307 119
1993.... 477 433 321 127
1994.... 568 454 344 129
1995(1). 636 458 360 133
</TABLE>
- --------
Note:
(1) As at September 29, 1995.
Sources: Japan Securities Dealers Association and the Tokyo Stock, Osaka
Securities and Nagoya Stock Exchanges.
The Japanese OTC market and the Second Sections have grown in terms of both
monthly trading value and aggregate market capitalization through 1990, except
for the Second Section of the Nagoya Stock Exchange. In 1991, however, the
Second Sections of the Tokyo Stock Exchange, Osaka Securities Exchange and the
New Second Exchange of the Osaka Securities Exchange experienced a decline in
monthly trading values. After reaching a low point in 1992, all Second
Sections recovered their monthly trading values to September 1995. The Small-
Sized Equity Securities of the First Section of the Tokyo Stock Exchange
experienced a similar trend as the other Second Sections. The growth of the
Japanese OTC market and other sections on which small equities are listed,
from January 1, 1984 through to September 1995, is illustrated by the table
set forth below:
AVERAGE MONTHLY TRADING VALUE
((Yen) MILLIONS)
<TABLE>
<CAPTION>
JAPANESE OTC MARKET TSE 2ND SECTION OSE 2ND SECTION NSE 2ND SECTION
------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
1984.... 14,129 369,451 143,282 22,056
1985.... 15,560 271,478 88,657 11,832
1986.... 37,706 327,785 102,151 17,132
1987.... 31,346 430,153 110,068 16,571
1988.... 56,920 482,146 125,988 29,413
1989.... 170,442 565,736 218,855 64,107
1990.... 503,403 863,017 339,493 40,224
1991.... 417,428 315,758 150,166 51,357
1992.... 90,210 102,426 49,084 9,469
1993.... 238,606 266,945 108,789 27,597
1994.... 447,626 403,195 139,094 26,666
1995(1). 453,996 381,259 93,915 22,461
</TABLE>
- --------
Note:
(1) For the nine months ended September 29, 1995.
Sources: Japan Securities Dealers Association and the Tokyo Stock, Osaka
Securities and Nagoya Stock Exchanges.
34
<PAGE>
YEAR-END MARKET CAPITALIZATION
((Yen) BILLIONS)
<TABLE>
<CAPTION>
JAPANESE OTC TSE 1ST SECTION
MARKET (SMALL-SIZED) TSE 2ND SECTION OSE 2ND SECTION NSE 2ND SECTION
------------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1984.................... 1,020 8,388 6,969 3,384 1,218
1985.................... 1,503 9,587 7,430 3,705 1,433
1986.................... 2,056 11,941 8,415 4,244 1,390
1987.................... 2,352 15,155 11,229 5,535 2,024
1988.................... 4,068 17,370 13,953 7,145 2,871
1989.................... 12,231 27,158 20,243 11,276 4,433
1990.................... 11,824 19,485 14,076 8,067 3,286
1991.................... 12,880 19,138 11,986 7,545 2,910
1992.................... 7,934 13,945 8,478 4,799 1,994
1993.................... 11,228 14,677 10,794 5,820 2,397
1994.................... 14,558 14,240 16,252 8,362 2,668
1995(1)................. 13,532 11,320 13,834 7,181 2,565
</TABLE>
- --------
Note:
(1) As of September 1995.
Sources: Japan Securities Dealers Association and the Tokyo Stock, Osaka
Securities and Nagoya Stock Exchanges.
MARKET PERFORMANCE OF THE JAPANESE OTC MARKET AND THE SECOND SECTIONS
There are two indices for the Japanese OTC market: the Nikkei OTC Average
and the JASDAQ Index. The Nikkei OTC Average is published twice daily by Nihon
Keizai Shimbun, Inc. (The Japan Economic Journal) 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 prices used are the average of the day's lowest and highest trade price or
(i) if no trade is effected on such day, the average of the lowest and highest
bids, (ii) if either offers or bids are not made, the stop limit offer or stop
limit bid, or (iii) if neither offers nor bids are made, the previous day's
closing price. The Tokyo Stock Exchange, Osaka Securities Exchange and Nagoya
Stock Exchange each publish an index for stocks listed on their respective
Second Sections. 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; the TOPIX Small-Sized Index;
and the Tokyo Stock Exchange Second Section Price Index (the "TSE Second
Section Index"), a capitalization-weighted index of all stocks listed on the
Second Section of the Tokyo Stock Exchange. The indices for the Second
Sections of the Osaka Securities and Nagoya Stock Exchanges are also
capitalization-weighted indices of all stocks listed thereon. 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, this index is not yet a useful tool for
long-term performance comparisons, although it provides some useful
information concerning relevant market activity.
35
<PAGE>
Set forth below is further information concerning the performance of the
Japanese OTC market, the Small-Sized Equity Securities of the First Section of
the Tokyo Stock Exchange, the First and Second Sections of the Tokyo Stock
Exchange and the Second Sections of the Osaka Securities and Nagoya Stock
Exchanges as measured by the representative indices. The information is
presented on a quarterly basis for the seven-year period ended December 31,
1994, supplemented by information for the first, second and third quarters of
1995.
QUARTERLY CHANGES IN MARKET INDICES(1)
(% CHANGES)
<TABLE>
<CAPTION>
TOPIX
SMALL- TSE 2ND OSE 2ND NSE 2ND
NIKKEI OTC SIZED SECTION SECTION SECTION NIKKEI
AVERAGE INDEX INDEX INDEX INDEX AVERAGE TOPIX
---------- ------ ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
19881Q.............. 19.5 17.6 24.2 20.5 23.8 21.8 24.5
2Q............... 4.7 8.2 4.0 14.4 8.4 5.7 1.6
3Q............... -6.8 -10.7 -9.6 -13.8 -4.8 0.6 -1.5
4Q............... 1.6 1.7 0.7 2.3 1.8 8.0 9.6
19891Q.............. 5.5 7 .0 1.9 4.7 6.0 8.9 4.8
2Q............... 5.9 9.0 5.0 9.8 5.7 0.3 -0.8
3Q............... 20.2 23.6 19.6 35.4 22.7 8.2 10.3
4Q............... 47.4 7.4 10.1 6.7 8.6 9.2 6.6
19901Q.............. 14.9 -7.7 -3.1 -4.3 -3.7 -23.0 -22.7
2Q............... 31.3 8.2 10.0 11.0 19.8 6.5 5.2
3Q............... -38.8 -34.2 -29.2 -26.3 -29.2 -34.3 -33.0
4Q............... -9.4 1.2 -8.8 -7.4 -5.4 13.7 10.4
19911Q.............. 31.5 17.5 19.5 12.1 19.3 10.2 13.7
2Q............... 10.3 -3.5 -0.1 0.8 0.5 -11.4 -7.7
3Q............... -14.1 -7.7 -10.8 -12.3 -11.6 2.7 0.7
4Q............... -28.2 -11.1 -15.6 -11.7 -11.9 -3.9 -6.4
19921Q.............. -10.5 -13.6 -13.8 -13.4 -11.8 -15.8 -17.3
2Q............... -15.9 -8.3 -11.1 -14.2 -12.2 -17.5 -12.9
3Q............... -11.9 -6.3 -7.7 -7.7 -8.0 9.1 6.0
4Q............... -4.9 1.6 0.3 -3.6 -5.1 -2.7 -0.2
19931Q.............. 13.1 9.7 8.2 9.6 10.0 9.8 9.5
2Q............... 10.3 16.8 19.4 21.8 15.2 5.4 10.4
3Q............... 11.4 3.8 0.9 -2.2 2.1 2.6 2.9
4Q............... -15.2 -16.7 -17.4 -15.8 -15.9 -13.4 -11.5
19941Q.............. 19.9 13.6 17.8 10.0 11.5 9.7 8.6
2Q............... 11.0 6.8 13.7 17.1 10.8 8.0 7.0
3Q............... -4.7 -8.7 -10.2 -9.4 -6.6 -5.2 -5.8
4Q............... -3.3 -4.1 -4.8 -3.3 -6.4 0.8 -1.1
19951Q.............. -23.4 -18.5 -19.5 -20.3 -17.3 -18.2 -16.1
2Q............... -8.3 -13.4 -12.6 -15.1 -11.2 -10.1 -8.5
3Q............... 17.0 22.2 24.7 14.2 12.5 23.4 20.2
</TABLE>
- --------
Note:
(1) The TOPIX, TOPIX Small-Sized Index, TSE Second Section Index and the Osaka
and Nagoya Second Section Indices are market- capitalization-weighted
indices, while the Nikkei OTC Average and Nikkei Average are price-
weighted indices.
LIQUIDITY OF THE JAPANESE OTC MARKET AND THE SMALL-SIZED EQUITY SECURITIES
MARKETS
The liquidity of the Japanese OTC market and the Small-Sized Equity
Securities markets 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.
36
<PAGE>
The average monthly trading value in the Japanese OTC market increased
approximately sixteen times in the three years ended December 31, 1990 to
(Yen)503 billion or $3.8 billion. The increasing number of new companies
registering on the Japanese OTC market and growing institutional investor
interest in the market have contributed to the growth in trading value.
Following the correction of OTC stock prices in 1992, trading value decreased
significantly; however, it has been [recovering] through the third quarter of
1995. The year- end basis market capitalization of the Japanese OTC market,
peaking in 1991, decreased significantly to 1992, but has been [recovering]
through the end of the third quarter of 1995. On a longer term comparison,
average monthly trading value has increased from (Yen)14.1 billion or $59.5
million in 1984 to (Yen)454 billion or $4.6 billion in 1995 (through September
29). 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 3.8% in 1984 to 119.0% in 1995 (through
September 29). 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 Investment Adviser
expects the market liquidity to improve further as the number of OTC
registered companies continues to increase.
Liquidity, as measured by average monthly trading value, has generally
increased on the Second Sections. In particular, average monthly trading value
on the Tokyo Stock Exchange increased two times, that of the Osaka Securities
Exchange increased more than three times and that of the Nagoya Stock Exchange
more than doubled during the three-year period ended December 1990. The
average monthly trading value of each Second Section decreased sharply in
1992, then recovered significantly through the third quarter of 1995. The
Investment Adviser believes that there will be further gains in market
liquidity as investors seek investment opportunities beyond First Section
stocks.
In terms of individual issues, chosen on the basis of the median monthly
trading value for the six-month period ended September 29, 1995, the 20 most
actively traded issues on the Japanese OTC market amounted to an estimated
(Yen)2.2 trillion or $22.4 billion, 16.1% of the market capitalization as of
September 29, 1995. In terms of individual issues, chosen on the basis of the
median monthly trading value for the six-month period ended September 29,
1995, the 20 most actively traded Small-Sized Equity Securities listed on the
First Section of the Tokyo Stock Exchange amounted to an estimated (Yen)918
billion or $9.35 billion, 8.1% of the market capitalization as at September
29, 1995.
In terms of individual issues, chosen on the basis of the median monthly
trading value for the six-month period ended September 29, 1995, the 20 most
actively traded issues on the Second Section of the Tokyo Stock Exchange
amounted to an estimated (Yen)3.3 trillion or $33.7 billion, 23.9% of the
market capitalization as of September 29, 1995.
37
<PAGE>
SECTOR ANALYSIS: THE REGIONAL EXCHANGES
The Regional Exchanges generally list the securities of companies that
concurrently list such securities on other exchanges. Currently, there are
only 78 companies whose equity securities are traded exclusively on one of the
Regional Exchanges. Moreover, as compared with the Japanese OTC market or the
Second Sections, the number of new listings on the Regional Exchanges has been
substantially [lower]. Set forth below are the number of companies listed on
the Regional Exchanges and the number of new listings as of the years ended
1987 through 1994 and as of September 29, 1995.
NUMBER OF COMPANIES LISTED AND
NEW LISTINGS ON THE REGIONAL EXCHANGES(1)
<TABLE>
<CAPTION>
KYOTO HIROSHIMA FUKUOKA NIIGATA SAPPORO
------------------- -------------------- ------------------- -------------------- --------------------
NO. OF NO. OF NO. OF NO. OF NO. OF
COMPANIES NEW COMPANIES NEW COMPANIES NEW COMPANIES NEW COMPANIES NEW
YEAR LISTED LISTINGS LISTED LISTINGS LISTED LISTINGS LISTED LISTINGS LISTED LISTINGS
- ---- --------- --------- ---------- --------- ---------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987............ 231 (1) 1 (0) 190 (7) 5 (2) 240 (15) 7 (2) 196 (8) 2 (1) 189 (13) 1 (0)
1988............ 233 (1) 2 (0) 191 (7) 1 (1) 242 (17) 2 (2) 197 (9) 1 (1) 189 (13) 0 (0)
1989............ 235 (1) 3 (0) 193 (9) 4 (2) 242 (17) 0 (0) 199 (9) 3 (0) 191 (14) 3 (2)
1990............ 236 (1) 1 (0) 196 (11) 4 (3) 250 (27) 10 (10) 198 (9) 0 (0) 190 (14) 0 (0)
1991............ 238 (1) 2 (0) 198 (10) 0 (0) 252 (27) 2 (2) 199 (10) 1 (1) 191 (15) 1 (1)
1992............ 238 (1) 1 (0) 198 (10) 0 (0) 252 (25) 1 (0) 198 (10) 0 (0) 192 (16) 1 (1)
1993............ 237 (1) 1 (0) 198 (10) 0 (0) 252 (27) 3 (3) 197 (0) 1 (0) 191 (17) 1 (1)
1994............ 240 (1) 3 (0) 203 (13) 6 (1) 262 (32) 10 (7) 200 (10) 3 (1) 193 (17) 2 (0)
1995(2)......... 244 (1) 4 (0) 204 (13) 1 (1) 264 (36) 4 (4) 201 (10) 1 (0) 194 (18) 1 (1)
</TABLE>
- --------
Notes:
(1) Numbers in parentheses indicate the number of companies listed solely on
each stock exchange.
(2) Through September 29, 1995.
Sources: The Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo Stock Exchanges.
Despite the relative lack of new listings on the Regional Exchanges, the
Investment Adviser believes that some of the more promising regional companies
may elect to make an initial public offering on the Regional Exchanges rather
than on either the Japanese OTC market or one of the Second Sections of the
Main Japanese Exchanges, especially those regional companies that do not have
a nationwide market for their products or services.
The average monthly trading value and market capitalization of the equity
securities traded exclusively on the Regional Exchanges for the years 1987
through 1994 and the period from January 1, 1995 through September 29, 1995
and as of the end of such years and period were as follows:
MONTHLY TRADING VALUE(1)
((Yen) MILLION)
<TABLE>
<CAPTION>
YEAR KYOTO HIROSHIMA FUKUOKA NIIGATA SAPPORO
---- ----- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1987................................. 3.4 2,418 2,239 742 1,311
1988................................. 4.6 1,374 2,971 1,665 1,174
1989................................. 10.5 3,861 2,060 2,353 2,050
1990................................. 37.4 4,677 17,831 4,091 2,576
1991................................. 38.1 2,021 6,011 1,318 2,641
1992................................. 18.6 1,119 1,660 794 794
1993................................. 175.9 1,206 4,742 1,283 2,021
1994................................. 23.2 8,611 13,699 2,904 5,025
1995(2).............................. 29.8 4,953 10,009 898 4,089
</TABLE>
- --------
Notes:
(1) Figures indicate companies listed solely on the relevant stock exchange.
(2) Through September 29, 1995.
Sources: The Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo Stock Exchanges.
38
<PAGE>
MARKET CAPITALIZATION
((Yen) MILLION)
<TABLE>
<CAPTION>
YEAR KYOTO HIROSHIMA FUKUOKA NIIGATA SAPPORO
---- ------ --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1987................................ 7,936 164,531 211,027 109,509 226,631
1988................................ 11,200 209,716 285,431 143,246 276,983
1989................................ 16,960 372,216 388,028 253,250 314,746
1990................................ 16,845 357,179 727,261 240,375 258,222
1991................................ 18,099 226,892 597,077 235,233 257,163
1992................................ 18,816 258,730 424,584 185,164 236,296
1993................................ 18,816 267,581 556,643 209,991 280,108
1994................................ 17,920 434,223 821,178 218,070 317,748
1995(2)............................. 17,024 404,007 776,608 222,002 264,486
</TABLE>
- --------
Notes:
(1) Figures indicate companies listed solely on the relevant stock exchange.
(2) As at September 29, 1995.
Sources: The Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo Stock Exchanges.
REGULATION OF THE JAPANESE EQUITIES MARKETS
The principal securities law in Japan is the Securities and Exchange Law
(Law No. 25 of April 13, 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
requirement that they file annual reports, semi-annual reports and
extraordinary reports with the MOF, which reports are made available for
public inspection. In addition, registered OTC corporations must also file
copies of such reports with the JSDA for public inspection.
The eight stock exchanges in Japan are licensed by the MOF pursuant to the
Securities and Exchange Law. Each stock exchange is required to have a
constitution, regulations governing the sale and purchase of securities and
standing rules for exchange contracts for the purchase and sale of securities
on the exchange. In addition, each stock exchange has detailed rules and
regulations covering a variety of matters, including rules and standards for
listing and delisting of securities. Companies seeking to list their
securities on an exchange are subject to a suitability review by that
exchange.
The insider trading provisions, including criminal sanctions, of the
Securities and Exchange Law, which became effective on April 1, 1989, used to
be applicable only to securities issued by a Japanese corporation and listed
on a Japanese stock exchange and to unlisted securities issued by a Japanese
corporation that has securities listed on a Japanese stock exchange. As of
April 1993, these provisions are applicable not only to First Section, Second
Section and Regional Exchange securities, but also to registered OTC
securities. In addition, provisions that prohibit directors, statutory
auditors and principal shareholders from effecting short swing transactions,
which correspond to Section 16(b) of the U.S. Securities Exchange Act of 1934,
are applicable to First Section, Second Section and Regional Exchange
corporations as well as registered OTC corporations. 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 only
applicable to persons associated with listed corporations, including First
Section, Second Section and Regional Exchange corporations, and with
registered OTC corporations.
The so-called "five percent rule" of the Securities and Exchange Law is
applicable to registered OTC securities and listed First Section, Second
Section and Regional Exchange securities. When any person has become, solely
or jointly, the holder of more than five percent of the aggregate issued
capital stock of a
39
<PAGE>
company whose securities are registered on the Japanese OTC market or listed
on any Japanese stock exchange, a report concerning such holding must be filed
with the MOF 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 holding.
For this purpose, securities issuable to such a person upon conversion of
convertible securities or exercise of warrants are taken in to account in
determining both the number of securities held by such person and the issuer's
total issued share capital. Copies of each such report must also be furnished
to the issuer of such securities and the JSDA (in the case of securities
registered on the Japanese OTC market) or all Japanese stock exchanges on
which the securities are listed (in the case of securities listed on such
exchanges).
The takeover bid rules (the "TOB rules") under the Securities and Exchange
Law are applicable to registered OTC securities and listed First Section,
Second Section and Regional Exchange securities. All purchases of such
securities made outside the Japanese OTC market or any Japanese stock exchange
must comply with the procedures provided in the TOB rules unless expressly
exempted therefrom. Exempt transactions include those in which the bidder
acquires not more than five percent of the aggregate outstanding securities of
the target company.
The loss compensation (sonshitsu-hoten) incidents involving preferential
treatment of certain customers by certain Japanese securities companies, which
came to light in 1991, had several consequences for the securities industry in
Japan. First, several of the leading securities companies were found by the
MOF to have violated a ministerial directive it had previously issued.
Following completion of the MOF's investigation into this matter, such firms
accepted administrative guidance from the MOF advising that the companies
should suspend certain aspects of their businesses for several days. Several
of these companies were also subject to fines by the TSE. In addition, as
described below, the incidents gave impetus to a series of amendments to the
Securities and Exchange Law, which took effect in 1992 and 1993, including
those providing for more comprehensive reforms of the Japanese financial
system.
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 "Surveillance
Commission") was established in July 1992 as an independent agency to the MOF
to ensure fairness of securities transactions. The Surveillance Commission is
comprised of three commissioners appointed to a term of three years by the MOF
with the Diet's consent and is supported by a staff of nearly ninety persons.
The Surveillance Commission's activities are Supplemented by the local Finance
Bureaus of the MOF, with staff assignments of more than one hundred persons.
The Surveillance Commission's authority to investigate cases involving
allegations of illegal conduct, such as insider trading and market
manipulation of the Japanese 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 of the MOF are delegated to the Surveillance
Commission. The Surveillance Commission is empowered to refer a criminal case
to the public prosecutor's office, but the Surveillance Commission has no
power to issue an administrative sanction, the exercise of such power being
reserved to the MOF upon the advice of the Surveillance Commission.
The regulations of unfair transactions in securities markets under the
Securities and Exchange Law were amended in 1992 to cover the Japanese 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, are also applicable to registered over-the-counter companies. Likewise,
the
40
<PAGE>
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.
The JSDA is a self-regulatory organization registered with and under the
supervision of the MOF pursuant to the Securities and Exchange Law. Its
purpose is to insure fair securities transactions and to provide for the
protection of investors. All Japanese securities companies, as well as foreign
securities companies engaging in the securities business in Japan under a
license from the MOF, are required to be members of the JSDA. Other financial
institutions which have obtained MOF approvals for securities business
operations under the amended Securities and Exchange Law may become special
members of the JSDA. As of September 20, 1995, the JSDA had 282 regular
members, of which 52 were foreign securities firms, and 245 special members.
The JSDA is the organization in Japan primarily responsible for the
supervision of the Japanese OTC market, but does not regulate the Second
Sections of the Regional Sections. The JSDA has adopted Rules of Fair Practice
(the "Rules of Fair Practice"), which prescribe requirements applicable to
transactions by its members in Japanese OTC market transactions. These
requirements include, among other things, prohibitions against undertaking an
order at the market price (rather than at a specified price) from customers
and against margin transactions on the Japanese OTC market. The Rules of Fair
Practice also provide for the publication of quotations of OTC securities, and
set forth the requirements governing eligibility for registration on the
Japanese OTC market. They also impose disclosure requirements for its members
who act as sponsors with respect to registered OTC issuers. The JSDA 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 preventive 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 Japanese OTC market in the event of a
failure to observe 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
transactions.
41
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS OF THE FUND
The Directors and officers of the Fund are listed below together with their
respective positions and a brief statement of their principal occupations
during the past five years and, in the case of Directors, their positions with
certain international organizations and publicly held companies.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND AGE DURING PAST FIVE YEARS
---------------- ------------------ --- ----------------------
<S> <C> <C> <C>
Justine Tomcheck*....... Director and Chairman 31 Vice President, Daiwa Securities
Financial Square America Inc. since January 1996;
32 Old Slip Assistant Vice President, Daiwa
New York, NY 10005 Securities America Inc., from June
1990 to January 1996.
Daniel F. Barry*........ Director and President 49 Senior Vice President, Daiwa
One Evertrust Plaza Securities Trust Company since June
Jersey City, NJ 07302 1993; Vice President of Mutual Fund
Administration, Daiwa Securities Trust
Company from June 1990 to June 1993;
First Vice President and Director of
Mutual Fund Reporting, Mitchell
Hutchins Asset Management, Inc. from
1986 to 1990.
Edward J. Grace*........ Director 49 Vice President of Daiwa Securities
One Evertrust Plaza Trust Company, since December 1992;
Jersey City, New Jersey Assistant Treasurer of the Fund, from
07302 July 1992 to September 1994; Assistant
Vice President, Daiwa Securities Trust
Company, from December 1989 to
December 1992.
John J. O'Keefe*........ Treasurer and Secretary 36 Assistant Vice President, Daiwa
One Evertrust Plaza Securities Trust Company since January
Jersey City, NJ 07302 1994; Senior Accountant, Daiwa
Securities Trust Company from July
1990 to January 1994; Account
Executive, Fahnestock & Co. Inc. 1986
to 1990.
</TABLE>
- --------
* Interested person of the Fund (as defined in the 1940 Act).
Additional Directors, including non-interested Directors, will be named
before the offering is commenced.
Set forth below is a chart showing the aggregate compensation to be paid by
the Fund to each of its non-interested Directors for the fiscal year ending
December 31, 1996, as well as the total compensation paid to each Director of
the Fund by the Fund and by other investment companies advised by the
Investment Manager or Investment Adviser (collectively, the "Fund Complex")
for their services as Directors or Trustees of such investment companies for
the calendar year ending December 31, 1995.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FUND COMPLEX
NAME OF COMPENSATION ACCRUED AS PART OF PAID TO
DIRECTOR(1) FROM THE FUND FUND EXPENSES DIRECTORS
- ----------- ------------- ------------------- -------------
<S> <C> <C> <C>
</TABLE>
- --------
(1) The Directors serve on the boards of other investment companies in the
Fund Complex as follows:
42
<PAGE>
As of the date of this Prospectus, none of the Directors or officers of the
Fund own any shares of Common Stock of the Fund.
The officers of the Fund, together with the Investment Manager and the
Investment Adviser, conduct and supervise the Fund's daily business
operations. The Directors review and supervise the actions of the officers,
the Investment Manager and the Investment Adviser, and decide general policy.
The Fund pays to each of its Directors who is not an officer or employee of
the Investment Manager, the Investment Adviser or their respective affiliates,
in addition to certain out-of-pocket expenses, an annual fee of $5,000 plus
$750 for each meeting of the Board of Directors and $600 for each audit
committee attended in person or by telephone.
The Fund's Board of Directors has an audit committee that is responsible for
reviewing financial and accounting matters. The members of the audit committee
are Messrs. and .
The Board of Directors is divided into three classes, each class having a
term of three years. Each year the term of one class will expire. See
"Description of Common Stock."
While the Fund is a Maryland corporation, Mr. and are not residents
of the United States, and substantially all of their respective assets may be
located outside of the United States. As a result, it may be difficult for
investors to effect service upon either Mr. or within the
United States, or to enforce judgments of courts of the United States
predicated upon civil liabilities under the federal securities laws of the
United States. The Fund has been advised that there is substantial doubt as to
the enforeceabilty in Japan and of such civil remedies and criminal
penalties as are afforded by the federal securities laws of the United States.
The Articles of Incorporation of the Fund contain a provision permitted
under the Maryland General Corporation Law (the "MGCL") which by its terms
eliminates the personal liability of the Fund's directors and officers to the
Fund or its stockholders for monetary damages for breach of fiduciary duty as
a director or officer, subject to certain qualifications described below. The
Articles of Incorporation and the By-Laws of the Fund provide that the Fund
will indemnify directors, officers, employees or agents of the Fund to the
full extent permitted by the MGCL. Under Maryland law, a corporation may
indemnify any director or officer made party to any proceeding by reason of
service in that capacity unless it is established that (1) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (A) was committed in bad faith or (B) was the result of active
and deliberate dishonesty; (2) the director or officer actually received an
improper personal benefit in money, property or services; or (3) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. The Articles of Incorporation
further provide that to the fullest extent permitted by the MGCL, and subject
to the requirements of the 1940 Act, no director or officer will be liable to
the Fund or its shareholders for money damages. Under Maryland law, a
corporation may restrict or limit the liability of directors or officers to
the corporation or its stockholders for money damages, except to the extent
that (1) it is proved that the person actually received an improper benefit or
profit in money, property, or services, or (2) a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a
finding in the proceeding that the person's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. Nothing in the Articles of Incorporation
or the By-Laws of the Fund protects or indemnifies a director, officer,
employee or agent against any liability to which he would otherwise be subject
by reason of acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, or protects or indemnifies a
director or officer of the Fund against any liability to the Fund or its
stockholders to which he 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.
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THE INVESTMENT MANAGER
Daiwa International Capital Management Corp. will act as the investment
manager of the Fund. The Investment Manager, a Delaware corporation with its
principal place of business located at 380 Madison Avenue, New York, New York
10017, is registered as an investment adviser under the Investment Advisers
Act and is a wholly-owned subsidiary of DICAM, a Japanese investment advisory
firm and the Investment Adviser, which is also registered under the Investment
Advisers Act. The Investment Manager provides investment advisory services,
primarily to pension funds, with respect to securities traded principally in
the United States and Japan.
INVESTMENT MANAGEMENT AGREEMENT
Under the Investment Advisory and Management Agreement (the "Investment
Management Agreement"), by and among the Fund, the Investment Manager and the
Investment Adviser, the Investment Manager will provide certain management
services to the Fund, subject to the oversight and supervision of the Board of
Directors of the Fund.
For services under the Investment Management Agreement, the Investment
Manager will receive a fee, computed weekly and payable monthly, at the annual
rates of % of the Fund's average weekly net assets up to $ million; % of
such net assets in excess of $ million up to $ million; and % of such
net assets in excess of $ million. The Fund's advisory fees are higher than
advisory fees paid by most other U.S. investment companies investing
exclusively in the securities of U.S. issuers, primarily because of the
additional time and expense required of the Investment Manager and the
Investment Adviser in investing in Japanese Equities. This entails additional
time and expense because available public information concerning Japanese
Equities is limited in comparison to that available for U.S. companies and
companies traded on the First Section of the Tokyo Stock Exchange. In
addition, available research concerning Japanese Equities is not comparable to
available research concerning U.S. companies.
The Investment Management Agreement will initially be effective for a period
of two years and will continue in effect from year to year thereafter provided
such continuance is specifically approved at least annually by (i) a vote of a
majority of those members of the Board of Directors who are not "interested
persons" of the Investment Manager, the Investment Adviser or the Fund, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by a majority vote of either the Fund's Board of Directors or the Fund's
outstanding voting securities. The Investment Management Agreement may be
terminated at any time without payment of penalty by the Fund or by the
Investment Manager or the Investment Advisor upon 60 day's written notice. The
Investment Management Agreement will automatically terminate in the event of
its assignment, as defined under the 1940 Act.
The Investment Management Agreement provides that the Investment Manager
will not be liable for any omission, error of judgment or mistake of law, or
for any loss suffered by the Fund in connection with matters to which the
Investment Management Agreement relates, except for a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the
Investment Manager or the Investment Adviser in the performance of their
respective duties, or from reckless disregard by them of their respective
obligations and duties under the Investment Management Agreement. Under the
Investment Management Agreement, the Fund will indemnify and hold harmless the
Investment Manager and the Investment Adviser for any losses, costs and
expenses incurred or suffered by the Investment Manager or the Investment
Adviser arising from an action, proceeding or claims which may be brought
against the Investment Manager or the Investment Adviser in connection with
the performance or non-performance in good faith of their respective functions
under the Investment Management Agreement, except losses, costs and expenses
resulting from willful misfeasance, bad faith or gross negligence in the
performance of the Investment Manager's or the Investment Adviser's duties or
from reckless disregard on the part of the Investment Manager or the
Investment Adviser of their respective obligations and duties under the
Investment Management Agreement.
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THE INVESTMENT ADVISER
In accordance with the terms of the Investment Advisory Agreement between
the Investment Manager and DICAM, DICAM, an affiliate of Daiwa Securities Co.
Ltd., will act as the Fund's investment adviser and will manage the investment
and reinvestment of the Fund's assets subject to the supervision of the Fund's
Board of Directors. The Investment Adviser's principal address in Japan is 2-
1, Kyobashi 1-chome, Chuo-ku, Tokyo 104. In addition to its ownership of the
Investment Manager, the Investment Adviser also maintains sole ownership of
investment advisory subsidiaries in London, Hong Kong and Singapore to provide
investment advisory services to a global clientele.
With approximately U.S. $22.4 billion under management as of September 30,
1995, the Investment Adviser, one of the leading investment advisory
organizations in Japan, was established in 1973 as an investment advisory
affiliate of Daiwa. As of September 30, 1995, the DICAM group of companies,
including the Investment Manager, had approximately 44.4% of their assets
under management invested in Japanese debt and equity securities. DICAM is a
specialist in its local market, Japan, as well as other Pacific Basin markets.
With 95% of its shares owned by Daiwa and its related group companies, DICAM
has access to the research facilities of Daiwa Institute of Research, an
affiliate of Daiwa, as well as Daiwa's worldwide network. The Investment
Adviser's clients include investment trusts, mutual companies, institutional
investors and pension funds both in Japan and overseas (including the United
States).
The Fund's portfolio will be managed on a day-to-day basis by Mr. Keizo
Iguchi. Mr. Iguchi joined the Investment Adviser in July 1984. He is currently
a chief portfolio manager of the Investment Adviser and focuses on the
Japanese small equity markets. Prior to joining the Investment Adviser, Mr
Iguchi was an industry analyst at the Daiwa Institute of Research. He has also
worked as a trainee at MITI. Mr. Iguchi holds a bachelor's degree in politics
and economics from Waseda University.
INVESTMENT ADVISORY AGREEMENT
Under the terms of the Investment Advisory Agreement, the Investment Adviser
will make all investment decisions, prepare and make available research and
statistical data, and supervise the purchase and sale of securities on behalf
of the Fund, including the selection of brokers and dealers to carry out the
transactions, all in accordance with the Fund's investment objective and
policies, under the direction and control of the Fund's Board of Directors.
The Investment Adviser also will be responsible for maintaining records and
furnishing or causing to be furnished all required records or other
information of the Fund to the extent such records, reports and other
information are not maintained or furnished by the Fund's administrators,
custodians or other agents. The Investment Adviser will pay the salaries and
expenses of the Fund's officers and employees, as well as the fees and
expenses of the Fund's Directors, who are directors, officers or employees of
the Investment Adviser or any of its affiliates, except that the Fund will
bear travel expenses or an appropriate fraction thereof of officers and
directors of the Fund whom also are directors, officers or employees of the
Investment Adviser to the extent that such expenses relate to attendance at
meetings of the Fund's Board of Directors or any committee thereof.
The Fund will pay all of its other expenses, including, among others,
organization expenses (but not the overhead or employee costs of the
Investment Manager or the Investment Adviser); legal fees and expenses of
counsel to the Fund; auditing and accounting expenses; taxes and governmental
fees; listing fees; dues and expenses incurred in connection with membership
in investment company organizations; fees and expenses of the Fund's
custodian, subcustodians, transfer agents and registrars; fees and expenses
with respect to administration, except as may be provided otherwise pursuant
to administration agreements; expenses for portfolio pricing services by a
pricing agent, if any; expenses of preparing share certificates and other
expenses in connection with the issuance, offering and underwriting of shares
issued by the Fund; expenses relating to investor and public relations;
expenses of registering or qualifying securities of the Fund for public sale;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; brokerage commissions and other costs of
acquiring or disposing of any portfolio holding of the Fund;
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expenses of preparation and distribution of reports, notices and dividends to
stockholders; expenses of the dividend reinvestment and cash purchase plan
(except for brokerage expenses paid by participants in such plan); cost of
stationery; any litigation expenses; and costs of stockholders' and other
meetings.
For services under the Investment Advisory Agreement, the Investment Adviser
will receive from the Investment Manager 60% of the fees paid by the Fund to
the Investment Manager.
Under the Investment Advisory Agreement, the Investment Adviser is permitted
to provide investment advisory services to other clients, including clients
who may invest in Japanese Equities and, in providing such services, the
Investment Adviser may use information furnished by others. Conversely,
information furnished by others to the Investment Adviser in the course of
providing services to clients other than the Fund may be useful to the
Investment Adviser in providing services to the Fund. When the Investment
Adviser determines to buy or sell the same security that the Investment
Adviser or one or more of its affiliates has selected for one or more of its
other clients or for clients of its affiliates, the orders for all such
security transactions are placed for execution by methods determined by the
Investment Adviser to be impartial and fair. There may be circumstances when
purchases or sales of portfolio securities for one or more clients have an
adverse effect on other clients.
The Investment Advisory Agreement will initially be effective for a period
of two years and will continue in effect from year to year thereafter provided
such continuance is specifically approved at least annually by (i) a vote of a
majority of those members of the Board of Directors who are not "interested
persons" of the Investment Adviser or the Fund, cast in person at a meeting
called for the purpose of voting on such approval, and (ii) by a majority vote
of either the Fund's Board of Directors or the Fund's outstanding voting
securities. The Investment Advisory Agreement may be terminated at any time
without payment of penalty by the Investment Manager or by the Investment
Adviser upon 60 days' written notice. The Investment Advisory Agreement will
automatically terminate in the event of its assignment, as defined under the
1940 Act.
The Investment Advisory Agreement provides that the Investment Adviser will
not be liable for any omission, error of judgment or mistake of law, or for
any loss suffered by the Investment Manager or the Fund in connection with
matters to which the Investment Advisory Agreement relates, except for a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of the Investment Adviser in the performance of its duties, or from its
reckless disregard of its obligations and duties under the Investment Advisory
Agreement. Under the Investment Advisory Agreement, the Fund will indemnify
and hold harmless the Investment Adviser for any losses, costs and expenses
incurred or suffered by the Investment Adviser arising from an action,
proceeding or claims which may be brought against the Investment Adviser in
connection with the performance or non-performance in good faith of its
functions under the Investment Advisory Agreement, except losses, costs and
expenses resulting from willful misfeasance, bad faith or gross negligence in
the performance of the Investment Adviser's duties or from reckless disregard
on the part of the Investment Adviser of its obligations and duties under the
Investment Advisory Agreement.
THE ADMINISTRATOR; ADMINISTRATION AGREEMENT
Under an Administration Agreement dated as of the date hereof (the
"Administration Agreement"), Daiwa Securities Trust Company acts as the Fund's
corporate administrator. The services provided by the Administrator under the
Administration Agreement are subject to the supervision of the directors and
officers of the Fund. DST's address is One Evertrust Plaza, Jersey City, New
Jersey 07302. DST is an affiliate of the Investment Manager, the Investment
Adviser and Daiwa Securities America Inc.
Under the terms of the Administration Agreement, DST conducts the Fund's
relationships with its shareholders, including general shareholder inquiries
relating to the Fund; is responsible for, arranges and monitors compliance
with regulatory requirements and New York Stock Exchange listing requirements;
and oversees and monitors the performance of third-party service providers,
including, but not limited to, custodians, transfer agents, auditors and
printers. The Administrator provides office facilities, equipment and
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personnel necessary for the proper operation of the Fund, together with
clerical and bookkeeping services which are not being furnished by the Fund's
Investment Adviser, Investment Manager, custodians or transfer and dividend-
paying agent. The Administrator also arranges for the calculation and
publication of the Fund's net asset value in accordance with the Fund's policy
as adopted from time to time by the Board of Directors; establishes the Fund's
operating expense budgets and processes the payment of actual operating
expenses incurred; calculates the amount of dividends and distributions to be
declared by the Board of Directors and paid to the Fund's shareholders;
provides the Board of Directors with financial analyses and reports necessary
for the Board to fulfill its fiduciary responsibilities; maintains and keeps
possession of the books and records of the Fund required under the 1940 Act
(other than those being maintained by the Fund's Investment Adviser,
Investment Manager, custodians and transfer and dividend-paying agent, as to
which DST oversees such maintenance); arranges for the preparation of the
Fund's U.S. federal, state and local income tax returns, as well as financial
information for the Fund's proxy statements and semi-annual and annual reports
to shareholders; and prepares the Fund's reports to the Commission.
The Fund pays a fee to the Administrator computed weekly and payable
monthly, at the annual rate of 0.20% of the Fund's average weekly net assets,
with a minimum annual fee of U.S.$150,000.
ESTIMATED EXPENSES
On the basis of the anticipated size of the Fund immediately following the
receipt of the net proceeds from this offering, the Investment Adviser
estimates that the Fund's normal annual operating expenses, including
advisory, administrative and custody fees, exclusive of amortization of
organization expenses, will be approximately $ . While this estimate has
been made in good faith on the basis of information made available to the
Investment Adviser, there can be no assurance, given the nature of the Fund as
one of a few investment companies investing primarily in Japanese equity
securities, that actual operating expenses will not be substantially more or
less than such estimate.
The Fund's annual operating expenses will be higher than normal annual
operating expenses of most closed-end investment companies of comparable size
investing in the United States and reflect the specialized nature of the Fund,
the extent of the advisory effort involved, and the costs of communication and
other costs associated with investing in Japan rather than in the United
States.
Costs incurred by the Fund in connection with its initial registration and
public offering of shares, estimated at $ , will be charged to capital upon
commencement of operations; costs incurred in connection with the Fund's
organization, estimated at $ , will be amortized on a straight-line basis
over five years starting with the commencement of the Fund's operations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser will place orders for securities to be purchased by
the Fund. The primary objective of the Investment Adviser in choosing brokers
for the purchase and sale of securities for the Fund's portfolio will be to
obtain the most favorable net results taking into account such factors as
price, commission, size of order, difficulty of execution, and the degree of
skill required of the broker-dealer. The capability and financial condition of
the broker may also be criteria for the choice of that broker. The placing and
execution of orders for the Fund also will be subject to restrictions under
U.S. securities laws, including certain prohibitions against trading among the
Fund and its affiliates (including the Investment Manager, the Investment
Adviser or their affiliates). See "Underwriting." The Fund may utilize
affiliates of the Investment Manager and the Investment Adviser in connection
with the purchase or sale of securities in accordance with rules or exemptive
orders adopted by the Commission when the Investment Adviser believes that the
charge for the transaction does not exceed usual and customary levels. In
addition, the Fund may purchase securities in a placement for which affiliates
of the Investment Manager and the Investment Adviser have acted as agent
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to or for issuers, consistent with applicable rules adopted by the Commission
or regulatory authorization, if necessary. The Fund will not purchase
securities from or sell securities to any affiliate of the Investment Manager
and the Investment Adviser acting as principal.
The Investment Adviser on behalf of the Fund may place brokerage
transactions through brokers, including affiliates of the Investment Adviser
or the Investment Manager, who provide it with investment research services,
including market and statistical information and quotations for the Fund's
portfolio valuation purposes. The terms "investment research" and "market and
statistical information and quotations" include advice as to the value of
securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities and potential buyers or sellers
of securities, as well as the furnishing of analyses and reports concerning
issuers, industries, securities, economic factors and trends, and portfolio
strategy, each and all as consistent with those services mentioned in Section
28(e) of the Securities Exchange Act of 1934.
Research provided to the Investment Adviser in advising the Fund will be in
addition to and not in lieu of the services required to be performed by such
Investment Adviser itself, and the Investment Adviser's fees will not be
reduced as a result of the receipt of such supplemental information. It is the
opinion of the management of the Fund that such information is only
supplementary to the Investment Adviser's own research efforts, since the
information must still be analyzed, weighed and reviewed by the Investment
Adviser's staff. Such information may be useful to the Investment Adviser in
providing services to clients other than the Fund, and not all such
information is necessarily used by the Investment Adviser in connection with
the Fund. Conversely, information provided to the Investment Adviser by
brokers and dealers through whom other clients of the Investment Adviser
effect securities transactions may prove useful to the Investment Adviser in
providing services to the Fund.
The Fund's Board of Directors will review at least annually the commissions
allocated by the Investment Adviser on behalf of the Fund to determine if such
allocations were reasonable in relation to the benefits inuring to the Fund.
NET ASSET VALUE
Net asset value per share is determined on Friday of each week based on
valuations made as of 5:00 p.m., Tokyo time, on such day. If any Friday is not
a business day (defined to be a day on which any of the stock exchanges in
Japan is open for trading) in Japan, the Fund intends to determine its net
asset value based upon information available and valuations made 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. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars.
Securities traded on the Main Japanese Exchanges and the Regional Exchanges
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, lacking any
such sales, at the last available bid price. Securities traded in the Japanese
OTC 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. Other investments 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
of the Fund. Such valuations and procedures will be reviewed periodically by
the Board of Directors.
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DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund intends to distribute to shareholders, at least annually,
substantially all of its investment company taxable income, including
dividends and interest, and expects to distribute its net realized capital
gains, if any, annually. Dividends and distributions will be paid in cash,
except that, pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), a shareholder may elect to have all distributions automatically
reinvested by State Street Bank and Trust Company, the plan agent (the "Plan
Agent"), in Fund shares. Shareholders who do not participate in the Plan will
receive all distributions in cash paid by check in U.S. Dollars mailed
directly to the shareholder by State Street Bank and Trust Company, as paying
agent. Shareholders who wish to have distributions automatically reinvested
should notify the Plan Agent at: The Japan Small Company Growth Fund, Inc.,
c/o State Street Bank and Trust Company, P.O. Box 8200, Boston, Massachusetts
02266-8200.
The Plan Agent will serve as agent for the shareholders in administering the
Plan. If the Directors of the Fund declare an income dividend or a capital
gains distribution payable either in the Fund's Common Stock 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 valued
and will be acquired by the Plan Agent for the participant's account, as
described below. If the market price per share on the valuation date equals or
exceeds net asset value per share on that date, the Fund will issue new shares
to participants at net asset value or, if the net asset value is less than 95%
of the market price on the valuation date, then at 95% of the market price. If
net asset value exceeds the market price of Fund shares at such time,
participants in the Plan will be deemed to have elected to receive shares of
stock from the Fund, valued at market price on the valuation date. The
valuation date will be the dividend or distribution payment date or, if that
date is not a business day or a New York Stock Exchange trading day, the next
preceding business day which is a trading day. If the Fund should declare an
income dividend or capital gains distribution payable only in cash, the Plan
Agent will, as agent for the participants, buy Fund shares in the open market,
on the New York Stock Exchange or elsewhere, with the cash in respect of such
dividend or distribution for the participants' accounts on, or shortly after,
the payment date.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, annually, in any amount from $100 to $3,000, for investment
in the Fund's Common Stock. The Plan Agent will use all funds received from
participants (as well as any dividends and capital gain distributions received
in cash) to purchase Fund shares in the open market on or about February 15 of
each year. Any voluntary cash payments received more than 30 days prior to
such date will be returned by the Plan Agent, and interest will not be paid on
any uninvested cash payments. To avoid unnecessary cash accumulations, and
also to allow ample time for receipt and processing by the Plan Agent, it is
suggested that participants send in voluntary cash payments to be received by
the Plan Agent approximately ten days before February 15. A participant may
withdraw a voluntary cash payment by written notice, if the notice is received
by the Plan Agent not less than two business days before such payment is to be
invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will 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 pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the registered shareholder as representing the total amount
registered in the shareholder's name and held for the account of beneficial
owners who are participating in the Plan. Shareholders whose shares are held
in the name of a broker or nominee should contact such broker or nominee to
confirm that the broker or nominee will participate in the Plan on the
shareholders' behalf.
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There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of the
reinvestment of dividends and distributions will be paid by the Fund. However,
each participant's account will be charged a pro rata share of brokerage
commissions incurred with respect to all of the Plan Agent's open market
purchases, including those made in connection with the reinvestment of
dividends or capital gains distributions payable only in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $0.75 for each such purchase for a participant, plus a pro rata share
of the brokerage commissions. Brokerage charges for purchasing small amounts
of stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions, because the Plan Agent will
be purchasing stock for all participants in blocks and prorating the lower
commission which may be attainable.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends or
distributions. See "Taxation--U.S. Federal Income Taxes."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the change sent to all shareholders at least 30
days before the record date for such dividend or distribution. The Plan also
may be amended or terminated by the Plan Agent by at least 30 days' written
notice to all shareholders. All correspondence concerning the Plan should be
directed to the Plan Agent at: The Japan Small Company Growth Fund, Inc., c/o
State Street Bank and Trust Company, P.O. Box 8200, Boston, Massachusetts
02666-8200.
TAXATION
U.S. FEDERAL INCOME TAXES
The Fund intends to qualify as a regulated investment company under the
Code. To so qualify, the Fund must, among other things: (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures contracts or forward contracts) derived with
respect to the Fund's business of investing in stocks, securities or
currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of the following assets held for less than three months: (i)
stock or securities, (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies), or (iii) foreign
currencies (or options, futures or forward contracts on foreign currencies)
which are not directly related to the Fund's principal business of investing
in stocks or securities (or options and futures with respect to stocks or
securities); and (c) diversify its holdings so that, at the end of each
calendar quarter, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. government securities, securities of
other regulated investment companies, and other securities, with such other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's total assets is invested in the securities (other than
U.S. government securities or securities of other regulated investment
companies) of any one issuer or of any two or more issuers that the Fund
controls and that are determined to be engaged in the same business or similar
or related businesses. The Fund expects that all of its gains from the sale or
other disposition of foreign currencies will be derived with respect to its
business of investing in stocks, securities or currencies. Legislation
currently pending before the U.S. Congress would repeal the requirement that a
regulated investment company must derive less than 30% of its gross income
from the sale or other disposition of assets described in (b) above, that are
held for less than three months. However, it cannot be predicted whether this
legislation will become law and, if so enacted, what form it will eventually
take.
As a regulated investment company, in any year in which the Fund distributes
to its shareholders at least 90% of its investment company taxable income, the
Fund will be subject to tax only on its investment company
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taxable income and capital gains that it does not distribute to its
shareholders. Investment company taxable income includes dividends, interest
and net short-term capital gains in excess of net long-term capital losses,
but does not include net long-term capital gains in excess of net short-term
capital losses. The Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. If the Fund fails
to satisfy the 90% distribution requirement or fails to qualify as a regulated
investment company in any taxable year, it will be subject to tax in such year
on all of its taxable income, whether or not the Fund makes any distributions
to its shareholders. Dividend distributions of investment company taxable
income are taxable to a U.S. shareholder as ordinary income to the extent of
the Fund's current and accumulated earnings and profits, whether paid in cash
or in shares. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, thereafter, will
constitute capital gains to such holder (assuming the shares are held as
capital assets). Since the Fund will not invest in the stock of domestic
corporations, the corporate shareholders of the Fund will not be entitled to
the deduction for dividends received by corporations.
As a regulated investment company, the Fund also will not be subject to U.S.
federal income tax on its net long-term capital gains in excess of net short-
term capital losses and capital loss carryovers from the prior eight years, if
any, that it distributes to its shareholders. If the Fund retains for
reinvestment or otherwise an amount of such net long-term capital gains, it
will be subject to a tax of 35% of the amount retained. The Board of Directors
of the Fund will determine at least once a year whether to distribute any net
long-term capital gains in excess of net short-term capital losses and capital
loss carryovers from prior years. The Fund expects to designate amounts
retained as undistributed capital gains in a notice to its shareholders who,
if subject to U.S. federal income taxation on long-term capital gains, (a)
will be required to include in income for U.S. federal income tax purposes, as
long-term capital gains, their proportionate shares of the undistributed
amount, and (b) will be entitled to credit against their U.S. federal income
tax liabilities their proportionate shares of the tax paid by the Fund on the
undistributed amount and to claim refunds to the extent that their credits
exceed their liabilities. For U.S. federal income tax purposes, the basis of
shares owned by a shareholder of the Fund will be increased by an amount equal
to 65% of the amount of undistributed capital gains included in the
shareholder's income. Distributions of net long-term capital gains, if any, by
the Fund are taxable to its shareholders as long-term capital gains regardless
of how long the shareholder has held the Fund's shares, and are not eligible
for the dividends received deduction. Under the Code, net long-term capital
gains will be taxed at a rate no greater than 28% for individuals and 35% for
corporations. Shareholders will be notified annually as to the U.S. federal
income tax status of their dividends and distributions.
Shareholders receiving dividends or distributions in the form of additional
shares pursuant to the Plan should be treated for U.S. 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.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, the distribution will be taxable even
though it, in effect, represents a return of invested capital. Investors
considering buying shares just prior to a distribution should be aware that,
although the price of shares purchased at that time may reflect the amount of
the forthcoming distribution, those who purchase just prior to the record date
for a distribution will receive a distribution which will be taxable to them.
The amount of capital gains realized and distributed (which from an investment
standpoint may represent a partial return of capital rather than income) in
any given year will be the result of investment performance, among other
factors, and can be expected to vary from year to year.
If the Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends are included in
the Fund's gross income not as of the date received but as of the later of (a)
the date such stock became ex-dividend with respect to such dividends (i.e.,
the date on which
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a buyer of the stock would not be entitled to receive the declared, but
unpaid, dividends) or (b) the date the Fund acquired such stock, either of
which date may be earlier than the date the dividend is received. Accordingly,
in order to satisfy its income distribution requirements, the Fund may be
required to pay dividends based on anticipated earnings, and shareholders may
receive dividends in an earlier year than would otherwise be the case.
Under the Code,the Fund may be subject to a 4% excise tax on a portion of
its undistributed income. To avoid the tax, the Fund must distribute annually
at least 98% of its adjusted taxable ordinary income (not taking into account
any net capital gains) for the calendar year and at least 98% of its capital
gain net income for the 12-month period ending, as a general rule, on October
31 of the calendar year. For this purpose, any income or gain retained by the
Fund that is subject to corporate income tax will be treated as having been
distributed at year end. In addition, the minimum amounts that must be
distributed in any year to avoid the excise tax will be increased or decreased
to reflect any under-distribution or over-distribution, as the case may be, in
the previous year. For a distribution to qualify under the foregoing
provision, the distribution generally must be declared and paid during the
year. Any dividend declared by the Fund in October, November or December of
any year and payable to shareholders of record on a specified date in such a
month shall be deemed to have been paid by the Fund and received by each
shareholder on December 31 of such year, provided that such dividend is
actually paid by the Fund during January of the following year. Accordingly,
such distributions will be taxable to shareholders in the year the
distributions are declared and become payable, rather than the year in which
the distributions are received by the shareholders.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund, defer Fund losses, and affect
the determination of whether capital gains and losses are characterized as
long-term or short-term capital gains or losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders.
These provisions also may require the Fund to mark-to-market certain types of
the positions in its portfolio (i.e., treat them as if they were sold for fair
market value at the end of the taxable year) which may cause the Fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the 90% and 98% distribution requirements for
avoiding income and excise taxes. The Fund will monitor its transactions, make
the appropriate tax elections, and make the appropriate entries in its books
and records when it acquires any foreign currency, option, futures contract,
forward contract, or hedged investment in order to mitigate the effect of
these rules, prevent disqualification of the Fund as a regulated investment
company and minimize the imposition of income and excise taxes.
For backup withholding purposes, the Fund may be required to withhold 31% of
reportable payments (which may include dividends, capital gain distributions,
and redemptions) to certain shareholders. A shareholder, however, may
generally avoid becoming subject to this requirement by filing an appropriate
form certifying under penalties of perjury that such shareholder's taxpayer
identification number is correct and that the shareholder is not subject to
backup withholding, or is exempt from backup withholding. Corporate
shareholders and certain other shareholders are exempt from backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from payments made to a shareholder may be
credited against such shareholder's federal income tax liability.
Upon the sale or exchange of shares, a shareholder will realize a taxable
gain or loss depending upon such shareholder's basis in the shares. Such gain
or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands, and will be long-term if the shareholder's
holding period for the shares is more than 12 months and otherwise will be
short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvestment of dividends and capital gains distributions in the Fund)
within a period of 61 days beginning 30 days before and ending 30 days after
the disposition of the shares. In such case, the basis of the shares
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acquired will be adjusted to reflect the disallowed loss. Any loss realized by
a shareholder on the sale of Fund shares held by the shareholder for 6 months
or less will be treated for federal income tax purposes as a long- term
capital loss to the extent of any distributions of long-term capital gains
received by the shareholder with respect to such shares.
A repurchase by the Fund of shares generally will be treated as a sale of
the shares resulting in the realization of taxable gain or loss, as described
above, by a shareholder provided that after the repurchase the shareholder
does not own, either directly or by attribution under Section 318 of the Code,
any shares. If after a repurchase a shareholder continues to own, directly or
by attribution, any shares, it is possible that any amounts received in the
repurchase by such shareholder will be taxable as a dividend to such
shareholder, and there is a risk that shareholders who do not have any of
their shares repurchased would be treated as having received a dividend
distribution as a result of their proportionate increase in the ownership of
the Fund.
If the Fund purchases shares in certain foreign passive investment entities
described in the Code as passive foreign investment companies ("PFICs"), the
Fund will be subject to U.S. federal income tax at ordinary income rates on a
portion of any "excess distribution" (the Fund's ratable share of
distributions in any year that exceed 125% of the average annual distribution
received by the Fund in the three preceding years or during the Fund's holding
period, if shorter, and any gain from the disposition of such PFIC shares)
even if such income is distributed as a taxable dividend by the Fund to its
shareholders. Additional charges in the nature of interest may be imposed on
the Fund in respect of deferred taxes arising from such "excess
distributions." If the Fund were to invest in a PFIC and elect to treat the
PFIC as a "qualified electing fund" under the Code (and if the PFIC were to
comply with certain reporting requirements), in lieu of the foregoing
requirements the Fund would be required to include in income each year its pro
rata share of the PFIC's ordinary earnings and net realized capital gains,
whether or not such amounts were actually distributed to the Fund. The Fund
does not intend, however, to invest in PFICs.
On March 31, 1992, the U.S. Internal Revenue Service released proposed
regulations providing that a regulated investment company holding stock of
certain PFICs may elect to mark to market each year the PFIC stock and to
recognize any gain (but not any loss) accrued on such stock. The gain so
recognized will generally be treated as ordinary income to the regulated
investment company, and the basis in the PFIC stock will be increased by the
amount of the gain so recognized. These regulations would be effective for
taxable years ending after promulgation of the regulations as final
regulations. The IRS subsequently issued a notice indicating that final
regulations will provide that regulated investment companies may elect the
mark-to-market election for tax years ending after March 31, 1992 and before
April 1, 1993. Whether and to what extent the notice will apply to taxable
years of the Fund is unclear.
Foreign Tax Credits
As set forth under "Japanese Taxes" below, the Fund will be subject to
Japanese withholding taxes on interest and dividends received from Japanese
corporations at rates of 10% and 15%, respectively. If the Fund qualifies as a
regulated investment company, if certain distribution requirements are
satisfied and if more than 50% of the value of the Fund's assets at the close
of any taxable year consists of stocks or securities of Japanese and other
foreign corporations, which is anticipated, the Fund may elect, for U.S.
federal income tax purposes, to treat such Japanese withholding and any other
foreign taxes that can be treated as income taxes under U.S. income tax
principles as paid by its shareholders. The Fund intends to make this election
in any year in which it qualifies to do so. As a consequence, each shareholder
will be required to include in income an amount equal to the shareholder's
allocable share of such Japanese or other foreign withholding taxes paid by
the Fund and, subject to certain limitations, may be entitled to credit such
amount against U.S. federal income tax liability, if any, or to deduct its
share from its U.S. taxable income, if any. In general, a shareholder may
elect each year whether to claim a deduction or a credit for such foreign
taxes paid. However, no deductions for foreign taxes may be claimed by certain
foreign shareholders and by non-corporate shareholders who do not itemize
deductions.
The amount of Japanese withholding and other foreign taxes that may be
credited against a shareholder's U.S. federal income tax liability will
generally be limited to an amount equal to the shareholder's U.S. federal
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income tax rate multiplied by its foreign source taxable income. For this
purpose, although the capital gains, if any, that the Fund distributes,
whether as dividends or capital gain distributions, would ordinarily be
treated as United States source income under the Code, an election to treat
such gains as foreign source income should be available. In addition, this
limitation must be applied separately to certain categories of foreign income,
one of which is foreign source "passive income." For this purpose, foreign
source "passive income" includes dividends, interest, capital gains and
certain foreign currency gains. As a consequence, certain shareholders may not
be able to claim a foreign tax credit for the full amount of their
proportionate shares of foreign taxes paid by the Fund, although taxes which
cannot be claimed in the year they are paid as a result of this limitation may
be carried back or carried forward. Shareholders that are exempt from U.S.
federal income tax under Section 501(a) of the Code, such as pension plans,
generally will derive no benefit from the Fund's election described above.
However, such shareholders should not be disadvantaged either, because the
amount of additional income they are deemed to receive equal to the allocable
share of such Japanese or other foreign tax paid by the Fund generally will
not be subject to U.S. federal income tax. Each shareholder will be notified
within 60 days after the close of the Fund's taxable year whether, pursuant to
the election described above, the foreign taxes paid by the Fund to Japan or
another country will be treated as paid by its shareholders for that year and,
if so, such notification will designate (i) such shareholder's portion of the
foreign taxes paid to such country and (ii) the portion of the Fund's
dividends and distributions that represents income derived from sources within
such country.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a foreign
investor, depends in part, on whether the shareholder's income from the Fund
is "effectively connected" with a United States trade or business carried on
by the shareholder.
If the foreign investor is not a resident alien and the income from the Fund
is not effectively connected with a United States trade or business carried on
by the foreign investor, distributions of net investment income and net
realized short-term capital gains will be subject to a 30% (or lower treaty
rate) United States withholding tax. Furthermore, foreign investors may be
subject to an increased United States tax on their income resulting from the
Fund's election (described above) to "pass-through" amounts of foreign taxes
paid by the Fund, but may not be able to claim a credit or deduction with
respect to the foreign taxes treated as having been paid by them.
Distributions of net realized long-term capital gains, amounts retained by the
Fund which are designated as undistributed capital gains, and gains realized
upon the sale of shares of the Fund will not be subject to United States tax
when paid, or deemed paid, to a foreign investor, unless the investor is a
nonresident alien individual who is physically present in the United States
for more than 182 days during the taxable year and, in the case of gain
realized upon the sale of Fund shares, unless (i) such gain is attributable to
an office or fixed place of business in the United States or (ii) such
nonresident alien individual has a tax home in the United States and such gain
is not attributable to an office or fixed place of business located outside
the United States. This rule applies in only exceptional cases, however,
because, in general, an individual present in the United States more than 182
days in a calendar year is treated as a resident for U.S. federal income tax
purposes. However, a determination by the Fund not to distribute long-term
capital gains may reduce a foreign investor's overall return from an
investment in the Fund, since the Fund will incur a United States federal tax
liability with respect to retained long-term capital gains, thereby reducing
the amount of cash held by the Fund that is available for distribution, while
the foreign investor may not be able to claim a credit or deduction with
respect to such taxes. However, if the Fund designates the retained amounts as
undistributed capital gains, as discussed above, foreign stockholders who are
not subject to U.S. federal income tax on net capital gains can obtain a
refund of their proportionate shares of the taxes paid by the Fund by filing a
U.S. federal income tax return. In the case of a foreign investor who is a
nonresident alien individual, the Fund may be required to withhold U.S.
federal income tax at a rate of 31%, unless the foreign investor files an
appropriate form certifying under penalty of perjury as to his nonresident
alien status.
If a foreign investor is a resident alien or if dividends or distributions
from the Fund are effectively connected with a United States trade or business
carried on by the foreign investor, dividends of net investment income,
distributions of net short-term and long-term capital gains, amounts retained
by the Fund
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that are designated as undistributed capital gains and any gains realized upon
the sale of shares of the Fund will be subject to United States income tax at
the rates applicable to United States citizens or domestic corporations. If
the income from the Fund is effectively connected with a United States trade
or business carried on by a foreign investor that is a corporation, then such
foreign investor also may be subject to the 30% branch profits tax.
The tax consequences to a foreign shareholder entitled to claim the benefits
of any applicable tax treaty may be different from those described in this
section. Shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is or is not effectively connected with a
United States trade or business carried on by them, (b) whether they may claim
the benefits of an applicable tax treaty and (c) any other tax consequences to
them of an investment in the Fund.
Notices
Shareholders will be notified annually by the Fund as to the United States
federal income tax status of the dividends, distributions and deemed
distributions made by the Fund to its shareholders. Furthermore, shareholders
will be sent, if appropriate, various written notices after the close of the
Fund's taxable year regarding the United States federal income tax status of
certain dividends, distributions and deemed distributions that were paid (or
that were treated as having been paid) by the Fund to its shareholders during
the preceding taxable year.
JAPANESE TAXES
In the opinion of 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 and securities
transaction taxes payable in the event of sales of portfolio securities in
Japan. In the opinion of such counsel, under the tax convention between the
United States and Japan (the "Convention") as currently in force, Japanese
withholding tax at the 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 Japanese withholding tax at the rate of 10%. A shareholder
of the Fund will not, merely because of the ownership of Fund shares, be
subject to individual income taxes imposed by Japan.
OTHER TAXES
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation. Prospective investors
are advised to consult their own tax advisers with respect to the particular
tax consequences to them of an investment in the Fund.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR
GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE OF TAX
CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT SUCH SHAREHOLDER'S OWN
TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH SHAREHOLDER
OF PARTICIPATION IN THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS.
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DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund is 200,000,000 shares of Common
Stock, $0.01 par value. Shares of the Fund, when issued, will be fully paid
and nonassessable and will have no conversion, preemptive or other
subscription rights. Holders of Common Stock are entitled to one vote per
share on all matters to be voted upon by shareholders and are not able to
cumulate their votes in the election of Directors. Thus, holders of more than
50% of the shares voting for the election of directors have the power to elect
100% of the directors. All shares are equal as to assets, earnings and the
receipt of dividends, if any, as may be declared by the Board of Directors out
of funds available therefor. In the event of liquidation, dissolution or
winding up of the Fund, each share of Common Stock is entitled to receive its
proportion of the Fund's assets remaining after payment of all debts and
expenses and any preferential liquidating distributions to holders of any
preferred stock issued by the Fund. The Fund's Board of Directors has the
authority to classify and reclassify any authorized but unissued shares of
capital stock and to establish the rights and preferences of such unclassified
shares.
The Fund does not presently intend to offer additional shares of Common
Stock except that additional shares may be issued under the Plan. Other
offerings of the Fund's shares will require approval of the Fund's Board of
Directors and may require shareholder approval. Any such additional offerings
would also be subject to the requirements of the 1940 Act, including the
requirement that shares may not be sold at a price below the then current net
asset value (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing shareholders or with the consent of a
majority of the Fund's shares.
REPURCHASE OF SHARES AND CONVERSION TO OPEN-END INVESTMENT COMPANY
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
of Common Stock may trade at a discount, 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 of the Fund will
consider making such repurchases or tender offers on a quarterly basis. Any
such repurchases or tender offers would have to comply with the provisions of
the MGCL with respect to distributions by a Maryland corporation to its
stockholders. There is no assurance that the Directors of the Fund will
approve such repurchase 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 Fund anticipates that the market price of its shares will vary 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 will, among other things, be determined by 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. Nevertheless, the fact that the Fund's Common Stock may be
subject to tender offers at net asset value from time to time may reduce the
spread between market price and net asset value that might otherwise exist. In
the opinion of the Investment Manager, sellers may be less inclined to accept
a significant discount if they have a reasonable expectation of being able to
recover net asset value in conjunction with a periodic tender offer.
Although the Board of Directors believes that tender offers and repurchases
of shares of Common Stock generally would have a favorable effect on the
market price of the Fund's Common Stock the repurchase of shares of Common
Stock by the Fund will decrease the total assets of the Fund and, therefore,
have the effect of increasing the Fund's expense ratio. Because of the nature
of the Fund's investment objective and policies and the Fund's portfolio, the
Investment Manager does not anticipate that tender offers and repurchases
should have
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a materially adverse effect on the Fund's investment performance and does not
anticipate any material difficulty in disposing of sufficient portfolio
securities in order to consummate tender offers and repurchases.
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 repurchase of shares will be made by the Fund during a tender
offer. Each offer will be made and stockholders notified in accordance with
the requirements of the U.S. Securities Exchange Act of 1934 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 stockholder wishing to accept the offer will be required to
tender all (but not less than all) of the shares owned by such stockholder (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. It is the
position of the staff of the Commission that such service charge may not be
deducted from the consideration paid for the tendered shares. During the
period of a tender offer, the Fund's stockholders 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.
A shareholder who sells all of his shares of Common Stock (including shares
attributed to him for U.S. federal income tax purposes under Section 318 of
the Code) pursuant to a tender offer or open-market repurchase by the Fund
will realize a taxable gain or loss, treated as described in "Taxation--U.S.
Federal Income Taxes." A shareholder who sells less than all of his shares of
Common Stock (including shares so attributed) may be treated as receiving a
dividend from the Fund in the amount of some or all of the proceeds of sale;
in that event, the amount of proceeds not treated as a dividend would be a
return of capital, reducing the stockholder's basis in his shares of Common
Stock (including the shares sold pursuant to the tender offer or repurchase)
and a gain (treated as a capital gain for a stockholder owning the shares as a
capital asset) to the extent of any amount in excess of such basis. Also, in
the case of open-market repurchases, it is possible that shareholders who do
not have their shares of Common Stock repurchased would be treated as having
received a dividend distribution as a result of their proportionate increase
in the ownership of the Fund.
In the event that the Fund would have to liquidate certain investments to
finance such repurchases or tenders of shares, and the portfolio securities to
be liquidated have been held less than three months, such sales may jeopardize
the Fund's status as a regulated investment company under the Code because of
the limitation imposed thereunder that not more than 30% of the Fund's gross
income may be derived from the sale of securities held for less than three
months.
It is the Board of Directors' present policy (which may be changed by them)
not to authorize share repurchases or accept tenders if (i) such transactions,
if consummated, would (a) result in delisting of the Fund's Shares from the
New York Stock Exchange (the New York Stock Exchange's stated policy is to
consider delisting if the aggregate market value of a company's outstanding
shares is less than $5,000,000, the number of publicly held shares falls below
600,000 or the number of round-lot holders falls below 1,200), or (b) cause
the Fund to fail to qualify as a regulated investment company under the Code;
(ii) 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 stockholders; or (iii) there is, in the
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judgment of the Directors of the Fund, 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 New York Stock Exchange or any
foreign exchange on which portfolio securities of the Fund are traded, or
other national securities exchange(s) or the NASDAQ National Market System,
(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 New York State, (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; or (iv) in the judgment of the
Directors of the Fund, effecting any such transaction would constitute a
breach of their fiduciary duty owed to the Fund or its stockholders. The
Directors may modify these conditions in light of experience.
In addition, if Fund shares are trading at a discount from net asset value,
the Board of Directors of the Fund may also consider whether to submit to
stockholders a proposal that the Fund be converted to an open- end investment
company. Any such proposal would generally require the favorable votes of
three-fourths of the Fund's outstanding shares then entitled to vote and of
the directors as specified under "--Special Voting Provisions." Stockholders
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 of the
Fund, may, however, determine that the Fund should not take any action to
convert the Fund to an open-end investment company. In light of the position
of the Commissions' staff that illiquid securities may not exceed 15% of total
assets of a registered open-end investment company, any attempt to convert the
Fund to such a company would have to take into account the percentage of
illiquid securities in the Fund's portfolio at the time, and other factors.
The Fund cannot predict whether on this basis it would be able to effect any
such conversion or whether, if relief from the Commission's position was
required, it could be obtained.
Any decision by the Board of Directors of the Fund to authorize a tender
offer or share repurchase will depend on the Fund's ability to do so in
accordance with the applicable provisions of the MGCL and to obtain financing
for the transaction at a level which the Directors of the Fund believe will
have a significant beneficial effect on the remaining Fund stockholders.
Although the Fund has no current intention to incur debt in order to finance
share repurchases, it is permitted to borrow to finance such repurchases. If
the Fund does borrow to finance share repurchases, this would have the effect
of leveraging the Fund.
If the Fund must liquidate portfolio securities in order to purchase shares
of Common Stock tendered, the Fund may realize gains and losses. Such gains
may be realized on securities held for less than three months. Because the
Fund, as a regulated investment company under the Code, may not derive 30% or
more of its gross income from the sale or disposition of stocks and securities
held less than three months, such gains would reduce the ability of the Fund
to sell other securities held for less than three months that the Fund may
wish to sell in the ordinary course of its portfolio management, which may
adversely affect the Fund's yield. See "Taxation--U.S. Federal Income Taxes."
The portfolio turnover rate of the Fund may or may not be affected by the
Fund's repurchases of Shares pursuant to a tender offer.
SPECIAL VOTING PROVISIONS
The Fund's Articles of Incorporation and By-laws include provisions that
could limit the ability of others to acquire control of the Fund, to modify
the structure of the Fund or to cause it to engage in certain transactions.
These provisions, described below, also could have the effect of depriving
shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging third parties from seeking to obtain
control of the Fund in a tender offer or similar transaction. In the opinion
of the Fund, however, these provisions offer several possible advantages. They
potentially require persons seeking control
58
<PAGE>
of the Fund to negotiate with its management regarding the price to be paid
for the shares required to obtain such control, they promote continuity and
stability and they enhance the Fund's ability to pursue long-term strategies
that are consistent with its investment objective.
The Directors of the Fund are divided into three classes, each having a term
of three years, with the term of one class expiring each year. In addition, a
Director of the Fund may be removed from office only with cause and only by a
majority of the Fund's shareholders, and the affirmative vote of 75% or more
of the Fund's outstanding shares entitled to vote thereon is required to
amend, alter or repeal the provisions in the Fund's Articles of Incorporation
relating to removal of Directors of the Fund. See "Management of the Fund--
Directors and Officers of the Fund." These provisions could delay the
replacement of a majority of the Directors and have the effect of making
changes in the Board of Directors more difficult than if such provisions were
not in place.
The affirmative vote of the holders of 75% or more of the outstanding shares
entitled to vote thereon and voting together as a single class is required to
(i) convert the Fund from a closed-end to an open-end investment company, (ii)
merge or consolidate with any other entity or enter into a statutory share
exchange in which the Fund is not the successor corporation, (iii) dissolve or
liquidate the Fund, (iv) sell all or substantially all of its assets, (v)
cease to be an investment company registered under the 1940 Act, or (vi) issue
to any person securities in exchange for property worth $1,000,000 or more,
exclusive of sales of securities in connection with a public offering,
issuance of securities pursuant to a dividend reinvestment plan or other stock
dividend or issuance of securities upon the exercise of any stock subscription
rights. However, if such action has been approved or authorized by the
affirmative vote of at least 70% of the entire Board of Directors, the
affirmative vote of only a majority of the outstanding shares would be
required for approval, except in the case of the issuance of securities, in
which no shareholder vote would be required unless otherwise required by
applicable law. The affirmative vote of the holders of 75% or more of the
outstanding shares entitled to vote thereon is required to amend, alter or
repeal the foregoing provisions of the Fund's Articles of Incorporation. The
principal purpose of the above provisions is to increase the Fund's ability to
resist takeover attempts and attempts to change the fundamental nature of the
business of the Fund that are not supported by either the Board of Directors
or a large majority of the shareholders. These provisions make it more
difficult to liquidate, take over or open-end the Fund and thereby are
intended to discourage investors from purchasing its shares with the hope of
making a quick profit by forcing the Fund to change its structure. These
provisions, however, would apply to all actions proposed by anyone, including
management, and would make changes in the Fund's structure accomplished
through a transaction covered by the provisions more difficult to achieve. The
foregoing provisions also could impede or prevent transactions in which
holders of shares of Common Stock might obtain prices for their shares in
excess of the current market prices at which the Fund's shares were then
trading. Although 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, the Fund believes the conversion of the Fund from a
closed-end to an open-end investment company to eliminate the discount may not
be desired by shareholders, who purchased their Common Stock in preference to
stock of the many mutual funds available.
The Fund intends to hold annual meetings as required by the rules of the New
York Stock Exchange. Under Maryland law and the Fund's By-laws, the Fund will
call a special meeting of its stockholders upon the written request of
shareholders entitled to cast at least 25% of all the votes at such meeting.
Such request for such a special meeting must state the purpose of the meeting
and the matters proposed to be acted on at it. The secretary of the Fund shall
(i) inform the shareholders who make the request of the reasonably estimated
cost of preparing and mailing a notice of the meeting, and (ii) on payment of
these costs to the Fund notify each shareholder entitled to notice of the
meeting. Notwithstanding the above, under Maryland law and the Fund's By-laws,
unless requested by stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at
any special meeting of the stockholders held during the preceding 12 months.
59
<PAGE>
UNDERWRITING
The Underwriters named below, acting through Daiwa Securities America Inc.
as their representative (the "Representative"), have severally agreed, subject
to the terms and conditions of an underwriting agreement (the "Underwriting
Agreement"), to purchase from the Fund the number of Shares set forth below
opposite their respective names. The Underwriters are committed to purchase
all of such Shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Daiwa Securities America Inc. ..................................
---------
Total......................................................... 3,400,000
=========
</TABLE>
The Representative has advised the Fund that they propose initially to offer
the Shares to the public at the public offering price set forth on the cover
page of this Prospectus except that the price will be reduced to $ per
share for purchases in single transactions of or more Shares, and
$ per share for purchases of 100 or more shares by the beneficial owners of
shares of The Japan Equity Fund, Inc. as of a record date of January 31, 1996.
The Representative reserves the right to set a different record date. For this
purpose, a shareholder will be treated as a beneficial owner with respect to
particular shares as of a specified record date if the shareholder is the
holder of record of these shares as of that date or if the shares are held by
a record holder on that date on behalf of that shareholder. The minimum
investment is 100 Shares (U.S.$1,200), except that there is no minimum
investment for purchases for Individual Retirement Accounts and other
retirement plans. In addition, the Representative has advised the Fund that
they propose to offer the Shares to certain dealers at such price less a
concession not in excess of $ per share ($ per share for purchases in
single transactions of or more Shares and $ per share for purchases of
100 or more shares by the beneficial owners of shares of The Japan Equity
Fund, Inc. as of a record date of January 31, 1996). The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers ($ per share for purchases in single
transactions of or more Shares and $ per share for purchases of 100 or
more shares by the beneficial owners of shares of The Japan Equity Fund, Inc.
as of a record date of January 31, 1996). The sales load is equal to % of the
initial public offering price ( % in the case of purchases in single
transactions of or more Shares and % for purchases of 100 or more
Shares by the beneficial owners of shares of The Japan Equity Fund, Inc. as of
a record date of January 31, 1996.) After the initial public offering, the
public offering price, concession and allowance may be changed. Investors
purchasing Shares from the Underwriters in the initial public offering must
pay for such Shares on or before , 1996.
The term "single transaction," as used in this Prospectus, refers to a
single purchase by an individual or to concurrent purchases, which in the
aggregate are at least equal to the prescribed amounts, by an individual, his
parents, spouse, siblings and children purchasing shares for his or their own
account and to single transactions by a trustee or other fiduciary purchasing
shares for one or more trust estates, one or more fiduciary accounts and/or
his own account. The term "single transaction" also includes purchases by any
"company," as that term is defined in the 1940 Act, its directors, senior
executive officers and controlling shareholders; provided, however, that it
does not include purchases by any such company which has not been in existence
for at least six months or which has no purpose other than the purchase of
shares of the Fund or
60
<PAGE>
shares of other registered investment companies at a discount; and provided
further, that it does not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit card
holders of a company, policyholders of an insurance company or noninvestment
advisory customers of a bank.
Prior to this offering, there has been no public market for the shares. The
Fund has applied to list the Shares on the New York Stock Exchange. However,
during an initial period which is not expected to exceed 29 days from the date
of this Prospectus, the Fund's Shares will not be listed on any securities
exchange. Additionally, during such period, the Underwriters do not intend to
make a market in the Fund's Shares although a limited market may develop.
Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period. In order to meet the requirements for listing,
the Underwriters have undertaken to sell lots of 100 or more Shares to a
minimum of 2,000 beneficial holders, as prescribed by the New York Stock
Exchange.
The Underwriters have been granted an option, exercisable for 45 days from
the date of this Prospectus, by the Fund, to purchase up to an aggregate of
510,000 additional Shares at the same price per share as the initial 3,400,000
Shares to be purchased by the Underwriters, solely to cover over-allotments.
In the event the Underwriters exercise their option, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase the number
of additional Shares proportionate to its initial commitment.
The Fund, the Investment Manager and the Investment Adviser have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act.
The Investment Manager, the Investment Adviser, the Administrator and the
U.S. Custodian (as defined below) are affiliates of Daiwa Securities America
Inc. and will receive compensation for their services to the Fund. Certain
directors and officers of the Fund are also affiliated with Daiwa Securities
America Inc. See "Management of the Fund."
The Fund anticipates that certain of the Underwriters may, from time to
time, act as brokers or dealers in connection with the execution of portfolio
transactions after they have ceased to be Underwriters and, subject to certain
restrictions, may from time to time act as brokers or dealers while they are
Underwriters.
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company (the "Transfer Agent") will act as the
Fund's dividend paying agent, transfer agent and the registrar for the Fund's
Common Stock. The principal business address of the Transfer Agent is 2
Heritage Drive, North Quincy, Massachusetts 02171.
CUSTODIANS
DST will act as custodian (the "U.S. Custodian") with respect to the Fund's
non-Japanese securities and non-yen denominated assets pursuant to a Custodial
Services Agreement (the "Custodial Services Agreement") between the Fund and
the U.S. Custodian. The U.S. Custodian's principal business address is One
Evertrust Plaza, Jersey City, New Jersey 07302. The U.S. Custodian has
appointed , a Japanese bank, to act as sub-custodian (the "Japanese
Custodian") of the U.S. Custodian for the Japanese securities and cash of the
Fund pursuant to the Japanese Custody Contract between the U.S. Custodian and
the Japanese Custody Contract between the U.S. Custodian and the Japanese
Custodian. The Japanese Custodian's principal business address is 3-2,
Marunouchi 1-chome, Chiyoda-ku, Tokyo, Japan. Under the Custodial Services
Agreement, DST will receive a fee, calculated weekly and paid monthly in U.S.
dollars, at annual rates of 0.10% of the Fund's average weekly net assets
representing U.S. assets and 0.05% of the Fund's average weekly net assets
representing non-U.S. assets, including, in each case, any assets maintained
by DST with any securities depositary or sub-custodians. In addition, DST will
be reimbursed by the Fund for any out-of-pocket expenses incurred by DST in
connection with the performance of its duties under the Custodial Services
Agreement. The out-of-pocket expenses of DST will include the annual fees,
asset-based or transaction-based, and out-of-pocket expenses of the Japanese
Custodian.
61
<PAGE>
EXPERTS
The statement of assets and liabilities of the Fund has been included in
this Prospectus in reliance upon the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. The principal business address of Price Waterhouse
LLP is 1177 Avenue of the Americas, New York, New York 10036.
OFFICIAL DOCUMENTS
All of the documents, except Japanese company annual reports, referred to
herein as the source of statistical information are public official documents
of Japan, its ministries or the stock exchanges in Japan.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Fund by
Rogers & Wells, New York, New York and by its special Maryland counsel, Piper
& Marbury L.L.P., Baltimore, Maryland. Certain legal matters will be passed
upon for the Underwriters by Brown & Wood, New York, New York. Certain matters
concerning Japanese law will be passed upon for the Fund by Hamada &
Matsumoto, Tokyo, Japan.
It is likely that foreign persons, such as the Investment Adviser, the
Japanese Custodian and foreign directors of the Fund will not have assets in
the United States that could be attached in connection with any U.S. action,
suit or proceeding. The Fund has been advised by Japanese counsel that
judgments rendered by a non-Japanese court are enforceable by the courts of
Japan without re-examination or relitigation of the matters adjudicated upon,
provided that (i) the jurisdiction of such court is not denied under Japanese
laws, (ii) the defendant either has been properly served by summons (other
than by way of public notice) regarding the action or has appeared in such
action, (iii) reciprocity exists with respect to the enforcement of a final
judgment of a Japanese court by the non-Japanese court, and (iv) the judgment
of the non-Japanese court to be executed in Japan is not contrary to Japanese
public policy.
The books and records of the Fund required under U.S. law will be maintained
at the Fund's principal office in the United States and will be subject to
inspection by the Commission.
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Shares offered hereby. Further information
concerning the Shares and the Fund may be found in the Registration Statement,
of which this Prospectus constitutes a part. The Registration Statement may be
inspected without charge at the Commission's office in Washington, D.C., and
copies of all or any part thereof may be obtained from such office after
payment of the fees prescribed by the Commission.
62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of
Directors of The Japan Small Company Growth Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of The Japan
Small Company Growth Fund, Inc. (the "Fund") at , 1996, in conformity
with generally accepted accounting principles. This financial statement is the
responsibility of the fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our audit
of this financial statement in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
, 1996.
63
<PAGE>
THE JAPAN SMALL COMPANY GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
, 1996
ASSETS
<TABLE>
<S> <C>
Assets:
Cash.................................................................... $
Deferred organizational expenses (Note 1)...............................
----
Total Assets.......................................................... $
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Organizational expenses payable......................................... $
Total Liabilities.....................................................
----
Commitments and Contingencies (Notes 1 and 2).............................
----
Net Assets:
Common Stock, $.01 par value, authorized 200,000,000 shares; shares
issued and outstanding.................................................
Paid-in Surplus.........................................................
----
Net Assets................................................................ $
Net Asset Value per share................................................. $
====
</TABLE>
NOTE 1. ORGANIZATION:
The Japan Small Company Growth Fund, Inc. (the "Fund") was organized in
Maryland on August 3, 1994, as a closed-end investment company. The Fund has
had no operations other than the issuance of shares of its common stock on
, 1996 to Daiwa Securities America Inc. ("DSA"). Organizational costs
estimated at $ will be deferred and amortized on a straight-line basis over
a 5-year period from the date the Fund commences operations. Offering costs
estimated at $ will be paid from the proceeds of the offering and will be
charged to capital upon the receipt of such proceeds by the Fund.
NOTE 2. AGREEMENTS WITH AFFILIATES:
The Fund intends to enter into an Investment Advisory and Management
Agreement with Daiwa International Capital Management Co., Ltd. (the
"Investment Adviser") and Daiwa International Capital Management Corp. (the
"Investment Manager") who will be responsible for providing investment
management services to the Fund and will in turn enter into an Investment
Advisory Agreement with the Investment Adviser.
The Fund will pay to the Investment Manager a fee, calculated weekly and
payable monthly, in U.S. dollars at an annual rate of % of the Fund's average
weekly net assets up to $ million; % of such net assets in excess of $
million up to $ million; and % of such net assets in excess of $
million, of which % will be paid by the Investment Manager to the Investment
Adviser.
DSA will act as underwriter for the Fund pursuant to an underwriting
agreement. DSA will receive compensation in the form of underwriting
discounts. See "Underwriting." The Investment Adviser, the Investment Manager
and DST (defined below) are affiliates of DSA, a member of the underwriting
syndicate for the Fund's proposed offering of shares.
64
<PAGE>
Daiwa Securities Trust Company ("DST") will provide administrative services
to the Fund pursuant to an Administration Agreement (the "Administration
Agreement"). Under the Administration Agreement, the Fund will pay to DST a
fee, calculated weekly and paid monthly in U.S. dollars, at an annual rate of
0.20% of the average weekly net assets of the Fund with a minimum annual fee
of $150,000.
DST will also act as custodian with respect to the Fund's assets and will
appoint a sub-custodian for the Fund's assets held outside the United States.
The Fund will pay to DST a fee, calculated weekly and paid monthly in U.S.
dollars, at annual rates of 0.10% of the Fund's average weekly net assets
representing U.S. assets and 0.05% of the Fund's average weekly net assets
representing non-U.S. assets. In addition, DST will be reimbursed by the Fund
for any out-of-pocket expenses incurred by DST in connection with the
performance of its duties as custodian. The out-of-pocket expenses of DST will
include annual fees, asset- based or transaction-based, and out-of-pocket
expenses of the Japanese sub-custodian.
65
<PAGE>
APPENDIX A
DESCRIPTION OF VARIOUS FOREIGN CURRENCY HEDGES
AND STOCK OPTIONS AND FUTURES CONTRACTS
FOREIGN CURRENCY HEDGING TRANSACTIONS
Foreign Currency Forward Contract. A foreign currency forward contract
involves an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks).
Foreign Currency Futures Contract. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a
foreign currency at a future date at a price set at the time of the contract.
Foreign currency futures contracts traded in the United States are traded on
regulated exchanges. Parties to a futures contract must make initial "margin"
deposits to secure performance of the contract, which generally range from 2%
to 5% of the contract price. There also are requirements to make "variation"
margin deposits as the value of the futures contract fluctuates. The Fund may
not enter into foreign currency futures contracts if the aggregate amount of
initial margin deposits on the Fund's futures positions, including stock index
futures contracts (which are discussed below), would exceed 5% of the value of
the Fund's total assets. The Fund also will be required to segregate assets to
cover its futures contracts obligations.
At the maturity of a forward or futures contract, the Fund may either accept
or make delivery of the currency specified in the contract or, prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract. Closing purchase transactions with respect
to futures contracts are effected on an exchange. The Fund will only enter
into such a forward or futures contract if it is expected that there will be a
liquid market in which to close out such contract. There can, however, be no
assurance that such a liquid market will exist in which to close a forward or
futures contract, in which case the Fund may suffer a loss.
Currency Hedging Strategies. The Fund may enter into forward foreign
currency exchange contracts and foreign currency futures contracts in several
circumstances. For example, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, or when the
Fund anticipates the receipt in a foreign currency of dividends or interest
payments on such a security which it holds, the Fund may desire to "lock in"
the dollar price of the security or the dollar equivalent of such dividend or
interest payment, as the case may be. In addition, when the Investment Manager
believes that the currency of a particular foreign country may suffer a
substantial decline against the dollar, it may enter into a forward or futures
contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency.
The Fund does not intend to enter into such forward or futures contracts to
protect the value of its portfolio securities on a regular basis, and will not
do so if, as a result, the Fund will have more than 20% of the value of its
total assets committed to the performance of such contracts. The Fund also
will not enter into such forward or futures contracts or maintain a net
exposure to such contracts where the performance of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. Further, the Fund generally will not enter into a forward or futures
contract with a term of greater than one year.
The Fund may attempt to accomplish objectives similar to those described
above with respect to forward and futures contracts for currency by means of
purchasing put or call options on foreign currencies on exchanges. A put
option gives the Fund the right to sell a currency at the exercise price until
the expiration of
A-1
<PAGE>
the option. A call option gives the Fund the right to purchase a currency at
the exercise price until the expiration of the option.
While the Fund may enter into forward, futures and options contracts to
reduce currency exchange rate risks, changes in currency prices may result in
a poorer overall performance for the Fund that if it had not engaged in any
such transaction. Moreover, there may be an imperfect correlation between the
Fund's portfolio holdings of securities denominated in a particular currency
and forward, futures or options contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge
or expose the Fund to risk of foreign exchange loss.
Certain provisions of the Code may limit the extent to which the Fund may
enter into forward or futures contracts or engage in options transactions.
These transactions may also affect the character and timing of income and the
amount of gain or loss recognized by the Fund and its shareholders for U.S.
federal income tax purposes. See "Taxation--U.S. Federal Income Taxes."
OPTIONS AND INDEX FUTURES CONTRACTS
Options on Securities. The Fund may write (i.e., sell) covered call options
which give the purchaser the right to buy the underlying security covered by
the option from the Fund at the stated exercise price. A "covered" call option
means that so long as the Fund is obligated as the writer of the option, it
will own (i) the underlying securities subject to the option, or (ii)
securities convertible or exchangeable without the payment of any
consideration into the securities subject to the option. As a matter of
operating policy, the value of the underlying securities on which options will
be written at any one time will not exceed 5% of the total assets of the Fund.
In addition, as a matter of operating policy, the Fund will neither purchase
or write put options on securities nor purchase call options on securities
(except in connection with closing purchase transactions).
The Fund will receive a premium from writing call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund will
limit its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as writer of the option continues. Thus, in some periods the
Fund will receive less total return and in other periods greater total return
from writing covered call options than it would have received from its
underlying securities had it not written call options.
Index Futures. The Fund may purchase and sell indexed financial futures
contracts. An index futures contract is an agreement to take or make delivery
of an amount of cash equal to the difference between the value of the index at
the beginning and at the end of the contract period. Successful use of index
futures will be subject to the Investment Manager's ability to predict
correctly movements in the direction of the relevant debt market. No assurance
can be given that the Investment Manager's judgment in this respect will be
correct.
The Fund may sell indexed financial futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
equity securities in its portfolio that might otherwise result. When the Fund
is not fully invested in common stocks and anticipates a significant market
advance, it may purchase index futures in order to gain rapid market exposure
that may in part or entirely offset increases in the cost of common stocks
that it intends to purchase. In a substantial majority of these transactions,
the Fund will purchase such securities upon termination of the futures
position but, under unusual market conditions, a futures position may be
terminated without the corresponding purchase of debt securities.
A-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE INVESTMENT MANAGER, THE INVESTMENT ADVISER OR
BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SHARES IN ANY JURISDICTION WHERE, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE FUND, THE IN-
VESTMENT MANAGER OR THE INVESTMENT ADVISER SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................................................. 3
Prospectus Summary........................................................ 4
The Fund.................................................................. 11
Investment in Japanese Equity Markets..................................... 11
Use of Proceeds........................................................... 13
Risk Factors and Special Considerations................................... 13
Investment Objective and Policies......................................... 20
Investment Restrictions................................................... 24
Markets for Japanese Equity Securities.................................... 25
Management of the Fund.................................................... 42
Estimated Expenses........................................................ 47
Portfolio Transactions and Brokerage...................................... 47
Net Asset Value........................................................... 48
Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan. 49
Taxation.................................................................. 50
Description of Common Stock............................................... 56
Underwriting.............................................................. 60
Dividend Paying Agent, Transfer Agent and Registrar....................... 61
Custodians................................................................ 61
Experts................................................................... 62
Official Documents........................................................ 62
Legal Matters............................................................. 62
Additional Information.................................................... 62
Report of Independent Accountants......................................... 63
Statement of Assets and Liabilities....................................... 64
Appendix A--Description of Various Foreign Currency Hedges and Stock
Options and Futures Contracts............................................ A-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS DIS-
TRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,400,000 SHARES
THE JAPAN SMALL
COMPANY GROWTH
FUND, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
DAIWA SECURITIES AMERICA INC.
, 1996
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PART C--OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
-- Report of Independent Accountants
-- Statement of Assets and Liabilities dated , 1996
(2) Exhibits
(a) -- (1) -- Articles of Incorporation*
(2) -- Articles of Amendment**
(b) -- By-Laws*
(c) -- Not applicable
(d)(1) -- Portion of the Articles of Incorporation, as amended, and By-
Laws of the Registrant defining the rights of holders of shares
of Common Stock of the Registrant+
(2) -- Specimen certificate for Common Stock, par value $.01 per
share***
(e) -- Dividend Reinvestment and Cash Purchase Plan***
(f) -- Not applicable
(g)(1) -- Form of Investment Advisory Agreement***
(2) -- Form of Investment Advisory and Management Agreement***
(h)(1) -- Form of Underwriting Agreement***
(2) -- Form of Master Agreement Among U.S. Underwriters***
(3) -- Form of Master Selected Dealer Agreement***
(i) -- Not applicable
(j)(1) -- Form of Japanese Custodian Contract***
(2) -- Form of Custodial Services Agreement***
(k)(1) -- Form of Transfer Agency and Service Agreement***
(2) -- Form of Administration Agreement***
(l)(1) -- Opinion and Consent of Rogers & Wells***
(2) -- Opinion and Consent of Piper & Marbury L.L.P.***
(m) -- Not applicable
(n)(1) -- Consent of Independent Accountants***
(2) -- Opinion and Consent of Hamada & Matsumoto***
(o) -- Not applicable
(p) -- Form of Investment Letter***
(q) -- Not applicable
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*Previously filed.
**Filed herewith.
*** To be filed by amendment.
+ Reference is made to Article Four of the Registrant's Articles of
Incorporation, as amended, in Exhibit (a) and Article I and Article IV of
the Registrant's By-Laws in Exhibit (b).
ITEM 25. MARKETING ARRANGEMENTS
See Exhibits (h)(1)-(3) to this Registration Statement.
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ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
<TABLE>
<S> <C>
U.S. Securities and Exchange Commission Registration fees........ $23,793
New York Stock Exchange listing fee.............................. *
Printing (other than stock certificates)......................... *
Engraving and printing stock certificates........................ *
Fees and expenses of qualification under state securities laws
(including fees of counsel)..................................... *
Auditing and accounting fees..................................... *
Legal fees and expenses.......................................... *
Underwriters' expense allowance.................................. *
NASD fee......................................................... 7,400
Miscellaneous.................................................... *
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Total.......................................................... *
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* To be completed by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of the effective date of the Registration Statement:
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<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
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<S> <C>
Common Stock, $.01 par value............................... One
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ITEM 29. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
Article SEVENTH of the Fund's Articles of Incorporation, Article VII of the
Fund's By-laws, the Investment Advisory Agreement, the Investment Management
Agreement, the Underwriting Agreement, the Administration Agreement and the
Custodial Services Agreement provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Fund, 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 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 in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Fund will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER AND INVESTMENT
ADVISER
The description of the business of Daiwa International Capital Management
Corp. and Daiwa International Capital Management Co., Ltd. are set forth under
the caption "Management of the Fund" in the Prospectus forming part of this
Registration Statement.
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The information as to the directors and officers of each of Daiwa
International Capital Management Corp. and Daiwa International Capital
Management Co., Ltd. are set forth in their Form ADVs filed with the
Securities and Exchange Commission on June 28, 1995 and August 31, 1995,
respectively (File Nos. 801- 15948 and 801-14682, respectively) and as amended
through the date hereof is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Japan Small Company Growth Fund, Inc.
c/o Daiwa Securities Trust Company
One Evertrust Plaza
Jersey City, New Jersey 07302
(with respect to the Fund's Articles of Incorporation and By-Laws)
Daiwa International Capital Management Corp.
380 Madison Avenue
New York, New York 10017
(with respect to its services as Investment Manager)
Daiwa International Capital Management Co., Ltd.
2-1 Kyobashi 1-Chome
Chuo- Ku, Tokyo 104
(with respect to its service as Investment Adviser)
Daiwa Securities Trust Company
One Evertrust Plaza
Jersey City, New Jersey 07302
(with respect to its services as Administrator)
Daiwa Securities Trust Company
One Evertrust Plaza
Jersey City, New Jersey 07302
(with respect to its services as Custodian for the Fund's U.S. assets)
(with respect to its services as Sub-Custodian for the Fund's assets
located in Japan)
State Street Bank and Trust Company
2 Heritage Drive
North Quincy, Massachusetts 02171
(with respect to its services as Transfer Agent)
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) The Fund undertakes to suspend offering its shares until it amends its
prospectus contained herein if (i) subsequent to the effective date of its
Registration Statement, the net asset value per share declines more than 10
percent from its net asset value per share as of the effective date of this
Registration Statement or (ii) the net asset value increases to an amount
greater than its net proceeds as stated in the Prospectus.
(b) The Fund hereby undertakes that:
(1) For purposes of determining any liability under the 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
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form of prospectus filed by the Fund under Rule 497(h) under the Act shall
be deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the 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.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY CAUSED
THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THE 30TH DAY OF JANUARY, 1996.
The Japan Small Company Growth Fund,
Inc.
/s/ Daniel F. Barry
By:__________________________________
Daniel F. Barry
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Daniel F. Barry and Justine Tomcheck, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all Amendments (including pre-
effective and post-effective amendments) to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
Director and
/s/ Justine Tomcheck Chairman of the January 30,
- ------------------------------------- Board 1996
JUSTINE TOMCHECK
Director and
/s/ Daniel F. Barry President January 30,
- ------------------------------------- (Principal 1996
Executive Officer)
DANIEL F. BARRY
Director
/s/ Edward J. Grace January 30,
1996
- -------------------------------------
EDWARD J. GRACE
/s/ John J. O'Keefe Treasurer and January 30,
- ------------------------------------- Secretary 1996
JOHN J. O'KEEFE (Principal
Financial and
Accounting Officer)
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EXHIBIT INDEX
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<CAPTION>
EXHIBIT PAGE
NUMBER NO.
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<C> <S> <C>
(a) -- (1) -- Articles of Incorporation*
-- (2) -- Articles of Amendment**
(b) -- By-Laws*
(c) -- Not applicable
(d) -- (1) -- Portion of the Articles of Incorporation, as amended,
and By-Laws of the Registrant defining the rights of holders
of shares of Common Stock of the Registrant+
-- (2) -- Specimen certificate for Common Stock, par value $.01
per share***
(e) -- Dividend Reinvestment and Cash Purchase Plan***
(f) -- Not applicable
(g) -- (1) -- Form of Investment Advisory Agreement***
-- (2) -- Form of Investment Advisory and Management
Agreement***
(h) -- (1) -- Form of Underwriting Agreement***
-- (2) -- Form of Master Agreement Among U.S. Underwriters***
-- (3) -- Form of Master Selected Dealer Agreement***
(i) -- Not applicable
(j) -- (1) -- Form of Japanese Custodian Contract***
-- (2) -- Form of Custodial Services Agreement***
(k) -- (1) -- Form of Transfer Agency and Service Agreement***
-- (2) -- Form of Administration Agreement***
(l) -- (1) -- Opinion and Consent of Rogers & Wells***
-- (2) -- Opinion and Consent of Piper & Marbury L.L.P.***
(m) -- Not applicable
(n) -- (1) -- Consent of Independent Accountants ***
-- (2) -- Opinion and Consent of Hamada & Matsumoto***
(o) -- Not applicable
(p) -- Form of Investment Letter***
(q) -- Not applicable
</TABLE>
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*Previously filed.
**Filed herewith.
***To be filed by amendment.
+ Reference is made to Article Four of the Registrant's Articles of
Incorporation, as amended, in Exhibit (a) and Article I and Article IV of
the Registrant's By-Laws in Exhibit (b).
<PAGE>
EXHIBIT 99.(a)(2)
ARTICLES OF AMENDMENT
The Japan Small Equity Fund, Inc., a Maryland corporation (the
"Corporation"), having its principal office c/o The Corporation Trust Company
Incorporated, 32 South Street, Baltimore, Maryland 21202, hereby certifies to
the State Department of Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended so that Article
I will now read as follows:
ARTICLE I
NAME
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The name of the corporation is THE JAPAN SMALL COMPANY GROWTH FUND, INC.
(the "Corporation").
SECOND: The amendment does not increase the authorized stock of the
Corporation.
THIRD: The foregoing amendment to the Charter of the Corporation has
been approved by a majority of the entire Board of Directors of the Corporation
and no stock entitled to be voted on the matter is outstanding or subscribed for
as of the date hereof.
IN WITNESS WHEREOF, the Corporation has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Secretary on September 28, 1994.
WITNESS: THE JAPAN SMALL EQUITY FUND, INC.
/s/ John J. O'Keefe By:/s/ Justine Tomcheck
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John J. O'Keefe Justine Tomcheck
Secretary President
THE UNDERSIGNED, the President of THE JAPAN SMALL EQUITY FUND, INC.,
who executed on behalf of the Corporation the foregoing Articles of Amendment of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles of Amendment to be the
corporate act of said Corporation and hereby certifies that to the best of her
knowledge, information, and belief the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
/s/ Justine Tomcheck
-----------------------------
Justine Tomcheck
President
