As filed with the Securities and Exchange Commission on November 8, 2005
Securities Act File No. 333-128763
Investment Company Act File No. 811-05992
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
POST-EFFECTIVE AMENDMENT NO. AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 11
-------------------------------------
Japan Smaller Capitalization Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
Two World Financial Center, Building B
New York, New York 10281
(Address of Principal Executive Offices)
-------------------------------------
(800) 833-0018
(Registrant's Telephone Number, including Area Code)
-------------------------------------
Mr. Hiroshi Terasaki
Japan Smaller Capitalization Fund, Inc.
Two World Financial Center, Building B
New York, New York 10281
(Name and Address of Agent for Service)
-------------------------------------
Copies to:
Sidley Austin Brown & Wood LLP Clifford Chance US LLP
787 Seventh Avenue 31 West 52nd Street
New York, New York 10019 New York, New York 10019
Attention: John A. MacKinnon, Esq. Attention: Leonard B. Mackey, Jr., Esq.
-------------------------------------
Approximate date of proposed public
offering: As soon as practicable
after the effective date of this
Registration Statement.
-------------------------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), other than securities offered only
in connection with dividend or interest reinvestment plans, check the
following box. | |
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. | |
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===================================================================================================================
Proposed Proposed
Title of Amount Maximum Maximum Amount of
Securities Being Offering Price Aggregate Registration
Being Registered Registered (1) Per Unit (1) Offering Price (1) Fee (1)
-------------------------------- ------------------ --------------- --------------------- -------------------
Common Stock ($.10 par value) $61,728 $61,728 $16.20 $118.00(2)
===================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
Based on the average of the high and low prices reported on the New York
Stock Exchange on September 27, 2005 (i.e., a specified date within 5
business days prior to the date of filing this registration statement).
(2) 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 the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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.
PRELIMINARY PROSPECTUS Subject to Completion November 8, 2005
-------------------------------------------------------------------------------------------------------------------
[LOGO]
Japan Smaller Capitalization Fund, Inc.
[_________] Shares of Common Stock
Issuable Upon Exercise of Rights to Subscribe for Such Shares
-------------------------------------------------------------------------------
Japan Smaller Capitalization Fund, Inc., a Maryland corporation (the "Fund"),
is issuing transferable rights ("Rights") to its stockholders of record as of
the close of business on [__________] (the "Record Date") entitling the
holders of these Rights to subscribe (the "Offer") for an aggregate of
[_________] shares of common stock, par value $0.10 per share (the "Common
Stock"). Stockholders of record will receive one Right for each outstanding
Fund share owned on the Record Date. The Rights entitle the holders to
purchase one new share of Common Stock for every [ ] Rights held, and
stockholders of record who fully exercise their Rights will be entitled to
subscribe, subject to certain limitations and subject to allotment, for
additional shares of Common Stock covered by any unexercised Rights. The
Fund's outstanding Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "JOF." The Rights are transferable and will be
listed for trading on the NYSE under the symbol "JOF.RT" during the course of
the Offer. See "The Offer" for a complete discussion of the terms of the
Offer. [The subscription price per share will be [__]% of the average of the
last reported sale prices of a share of the Fund's Common Stock on the NYSE on
the date on which the Offer expires and the four preceding trading days.]
The Offer will expire at 5:00 p.m., New York City time, on [__________],
unless extended as described herein (the "Expiration Date").
The net asset value per share ("NAV") of the Fund's Common Stock at the close
of business on [__________] (the last trading date prior to the date of this
prospectus on which we determined net asset value) was $[____] and the last
reported sale price of a share on the NYSE on that date was $[____].
The Fund is a non-diversified, closed-end management investment company whose
primary investment objective is to provide stockholders with long-term capital
appreciation primarily through investments in smaller capitalization companies
in Japan. See "Investment Objective and Policies" and "Investment
Restrictions" in this prospectus.
Investment in the Fund's Common Stock involves certain risks that are not
typically associated with investments in securities of U.S. issuers. See "Risk
Factors and Special Considerations." If the subscription price per share for
the Offer is less than the Fund's NAV, you would experience immediate dilution
of NAV as a result of the Offer. See "Prospectus Summary--Risk Factors and
Special Considerations at a Glance--As a result of this Offer, you may incur
immediate economic dilution, and, if you do not exercise all of your Rights,
you will incur voting dilution."
Neither the U.S. Securities and Exchange Commission (the "SEC") nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
Per share Total(4)
-----------------------------------------------------------------------------------------------
Estimated subscription price(1) $ $
-----------------------------------------------------------------------------------------------
Estimated sales load(1)(2) $ $
-----------------------------------------------------------------------------------------------
Proceeds, before expenses, to the Fund(1)(3) $ $
-----------------------------------------------------------------------------------------------
(footnotes continued on inside front cover)
UBS Investment Bank
i
(continued from previous page)
This prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. Stockholders may obtain additional information about the
Fund from the Fund's reports filed with the SEC. You may obtain a copy of the
Fund's reports filed with the SEC by contacting the Information Agent, The
Altman Group, Inc., at the toll-free telephone number below. You may also
request other information about the Fund or make stockholder inquiries by
calling the Fund toll-free at (800) 833-0018. In addition, the reports filed
with the SEC, including material incorporated by reference into this
prospectus, are available at the SEC's website at www.sec.gov. The reports are
not available on the Fund's website because the Fund believes that making the
reports available on the Fund's website will not be cost effective.
For information regarding the Offer, please contact the Information Agent, The
Altman Group, Inc. at 1(800) 814-0439.
(notes from previous page)
(1) Estimated on the basis of [__]% of the last reported sales price per
share at the close of trading on [__________]. See "The
Offer--Subscription Price."
(2) In connection with the Offer, UBS Securities LLC, the dealer manager for
the Offer (the "Dealer Manager"), will receive a fee from the Fund for
its financial advisory, marketing and soliciting services equal to 3.75%
of the subscription price per share for each share issued pursuant to
the Offer. The Dealer Manager will reallow a part of its fees to other
broker-dealers that have assisted in soliciting the exercise of Rights.
The Fund has also agreed to pay the Dealer Manager up to $100,000 as a
partial reimbursement for its expenses incurred in connection with the
Offer. The Fund and Nomura Asset Management U.S.A. Inc. (the "Manager")
have also agreed to indemnify the Dealer Manager against certain
liabilities under the Securities Act of 1933, as amended (the "1933
Act").
(3) Before deduction of offering expenses incurred by the Fund, estimated at
$[_______], including an aggregate of up to $100,000 to be paid to the
Dealer Manager as partial reimbursement for its expenses.
(4) Assumes all Rights are exercised at the estimated subscription price.
----------------------
As used in this prospectus, unless otherwise specified, "dollar," "$", "US$"
or "U.S. Dollar" refers to the United States Dollar and "yen" or "(Y)" refers
to the Japanese yen. No representation is made that the yen or dollar amounts
shown in this prospectus could have been or could be converted into dollars or
yen as the case may be, at any particular rate at all.
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with the Offer made by this prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Fund, the Manager, Nomura Asset Management Co. Ltd.
(the "Investment Adviser") or the Dealer Manager. This prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any
security other than the shares of Common Stock offered by this prospectus, nor
does it constitute an offer to sell or a solicitation of any offer to buy the
shares of Common Stock by anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any such person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, creates
any implication that information contained herein is correct as of any time
subsequent to the date hereof. However, if any material change occurs while
this prospectus is required by law to be delivered, the prospectus will be
amended or supplemented accordingly.
ii
TABLE OF CONTENTS
-----------------
Page
Prospectus Summary...........................................................1
Fund Expenses...............................................................11
The Offer...................................................................13
The Fund....................................................................24
Investment Objective and Policies...........................................26
Investment Restrictions.....................................................29
Risk Factors and Special Considerations.....................................30
Portfolio Composition.......................................................38
Management of the Fund......................................................46
Code of Ethics..............................................................51
Management and Investment Advisory Arrangements.............................51
Legal Proceedings...........................................................55
Proxy Voting Policy.........................................................55
Portfolio Transactions and Brokerage........................................56
Portfolio Turnover..........................................................58
Net Asset Value of Common Stock.............................................58
Dividends and Capital Gain Distributions; Dividend Reinvestment Plan........58
Taxation....................................................................61
Capital Stock...............................................................67
Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar..........69
Experts.....................................................................69
Distribution Arrangements...................................................69
Legal Matters...............................................................69
Financial Statements........................................................69
iii
-------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere or incorporated by reference in
this prospectus. It may not contain all of the information that is important
to each stockholder. Accordingly, to understand the Offer fully, stockholders
are encouraged to read the entire document carefully. Unless otherwise
indicated, the information in this prospectus assumes that the Rights issued
are all exercised.
THE OFFER AT A GLANCE
Purpose of the Offer
The Board of Directors of the Fund ("Board of Directors") has determined that
the Offer is in the best interests of the Fund and its existing stockholders
because it represents an opportunity to increase the assets of the Fund
available for investment, thereby enabling the Fund to take advantage more
fully of existing and future investment opportunities that may be or may
become available, consistent with the Fund's investment objective of long-term
capital appreciation, through investment primarily in smaller capitalization
companies in Japan.
An increase in the assets of the Fund available for investment would enable
the Fund to be in a better position to take advantage of attractive investment
opportunities arising in the Japanese securities markets. Due to a combination
of positive economic and securities market developments, the Board of
Directors and the Manager believe that now is an opportune time to raise
assets for the Fund to invest in smaller capitalization companies in Japan.
The Board of Directors and Nomura Asset Management U.S.A. Inc., the Fund's
manager ("Manager"), also believe that an increase in the size of the Fund may
result in a modest reduction in the Fund's expense ratio. There can be no
assurance that the Offer will be successful or that, by increasing the size of
the Fund, the Fund's expense ratio will be lowered. See "The Offer--Purpose of
the Offer."
The Offer
The Fund is issuing to stockholders of record on [__________] (the "Record
Date") one transferable Right for each share of Fund Common Stock held. Each
stockholder on the Record Date that continues to hold Rights and each other
holder of the Rights is entitled to subscribe for one Share for every [ ]
Rights held (1 for [ ]). The Fund will not issue fractional shares of its
Common Stock upon the exercise of Rights; accordingly, Rights may be exercised
only in multiples of [ ].
The Rights will expire at, and therefore cannot be exercised after, 5:00 p.m.,
New York City time, on _____, 2005, unless the Offer is extended by the Fund
(the "Expiration Date"). The Rights are transferable and application will be
made to list them for trading on the NYSE under the symbol "JOF. RT." See "The
Offer."
In this prospectus, we use the terms "Shares" to refer to any outstanding
shares of Common Stock and shares of Common Stock to be issued pursuant to the
exercise of the Rights, "Stockholders" to refer to any person that holds
Shares, "Record Date Stockholders" to refer to those stockholders that held
their Shares on the Record Date and "Existing Rights Holders" to refer to
those persons (i) that are Record Date Stockholders to whom the Rights were
issued initially to the extent that a Record Date Stockholder continues to
hold Rights and (ii) any subsequent transferees of the Rights that continue to
hold the Rights.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Subscription Price
The subscription price per share (the "Subscription Price") will be [[ ]% of
the average of the last reported sale prices of a share of the Fund's Common
Stock on the NYSE on the Expiration Date and the four preceding business
days.] See "The Offer--Subscription Price."
Over-Subscription Privilege
Record Date Stockholders who fully exercise all Rights issued to them (other
than those Rights to acquire less than one Share, which cannot be exercised)
are entitled to subscribe for additional Shares which were not subscribed for
by other Record Date Stockholders. If sufficient Shares are available, all
Record Date Stockholders' over-subscription requests will be honored in full.
If these requests for Shares exceed the Shares available, the available Shares
will be allocated pro-rata among Record Date Stockholders who over-subscribe
based on the number of Rights originally issued to them by the Fund. See "The
Offer--Over-Subscription Privilege."
Sale of Rights
The Rights are transferable until the expiration date of the Offer. The Fund
has applied to list the Rights for trading on the NYSE under the symbol
"JOF.RT" during the course of the Offer. The Fund and the Dealer Manager will
use their best efforts to ensure that an adequate trading market for the
Rights will exist. No assurance can be given that a market for the Rights will
develop. Trading in the Rights on the NYSE is expected to be conducted until
the close of trading on the NYSE on the last business day prior to the
Expiration Date. See "The Offer--Sale of Rights."
Use of Proceeds
The net proceeds of the Offer, assuming all Shares offered hereby are sold,
are estimated to be approximately $[ ], after deducting offering expenses and
fees paid to the Dealer Manager estimated to be $[ ]. The Manager and the
Investment Adviser anticipate that investment of the net proceeds of the Offer
in accordance with the Fund's investment objective and policies will take
approximately thirty days after completion of the Offer. However, the
investment of the net proceeds may take up to three months from completion of
the Offer, depending on market conditions and the availability of appropriate
securities. Pending such investment, it is anticipated that the net proceeds
will be invested in yen-denominated or U.S. dollar-denominated fixed-income
securities and other permitted investments. See "Use of Proceeds."
How to Obtain Subscription Information
o Contact your broker-dealer, trust company, bank or other nominee, or
o Contact the Information Agent toll-free at 1(800) 814-0439.
How to Subscribe
o Deliver a completed subscription certificate ("Subscription
Certificate") and payment to the Subscription Agent by the Expiration
Date, or
o If your shares are held in an account with your broker-dealer, trust
company, bank or other nominee, have your broker-dealer, trust company,
bank or other nominee deliver a notice of
-------------------------------------------------------------------------------
2
-------------------------------------------------------------------------------
guaranteed delivery ("Notice of Guaranteed Delivery") to the Subscription
Agent by the Expiration Date.
Subscription Agent
The Subscription Agent for the Offer is:
Computershares Shareholder Services, Inc.
161 Bay State Drive
Braintree, MA 02184
Restrictions on Foreign Stockholders
The Fund will not mail Subscription Certificates to Record Date Stockholders
whose record addresses are outside the United States (for these purposes, the
United States includes its territories and possessions and the District of
Columbia). The Subscription Agent will hold the Rights to which those
Subscription Certificates relate for such Stockholders' accounts until
instructions are received to exercise the rights, subject to applicable law.
If no instructions have been received by 5:00 p.m., New York City time, on
[________], 2005, three business days prior to the Expiration Date (or, if the
subscription period is extended, on or before three business days prior to the
extended Expiration Date), the Subscription Agent will transfer the Rights of
these Stockholders to the Dealer Manager, which will either purchase the
Rights or use its best efforts to sell the Rights. The net proceeds, if any,
from the sale of those Rights by or to the Dealer Manager will be remitted to
these Stockholders. See "The Offer--Foreign Stockholders."
Distribution Arrangements
UBS Securities LLC will act as Dealer Manager for the Offer. Under the terms
and subject to the conditions contained in a Dealer Manager Agreement between
the Fund, the Manager and the Dealer Manager, the Dealer Manager will provide
financial advisory services and marketing assistance in connection with the
Offer and will solicit the exercise of Rights and participation in the
over-subscription privilege by Record Date Stockholders. The Offer is not
contingent upon any number of Rights being exercised. The Fund has agreed to
pay the Dealer Manager a fee for financial advisory, marketing and soliciting
services equal to 3.75% of the Subscription Price per Share for Shares issued
pursuant to the exercise of Rights and the over-subscription privilege. The
Dealer Manager will reallow a part of its fees to other broker-dealers that
have assisted in soliciting the exercise of Rights. The Fund has also agreed
to pay the Dealer Manager up to $100,000 as a partial reimbursement for its
expenses incurred in connection with the Offer. The Fund and the Manager have
also agreed to indemnify the Dealer Manager against certain liabilities under
the Securities Act of 1933, as amended (the "1933 Act"). See "The
Offer--Distribution Arrangements."
IMPORTANT DATES TO REMEMBER
Record Date [______________]
Subscription Period [______________]--
[______________]*
Expiration Date [______________]*
Deadline for Subscription Certificates and Payment for Shares+ [______________]*
Deadline for Notice of Guaranteed Delivery+ [______________]*
-------------------------------------------------------------------------------
3
-------------------------------------------------------------------------------
Deadline for Payment Pursuant to Notice of Guaranteed Delivery [______________]*
Confirmation Mailed to Exercising Rights Holders [______________]*
Final Payment for Shares** [______________]*
----------
* Unless the Offer is extended.
+ A person exercising Rights must deliver either (i) a Subscription
Certificate and payment for Shares or (ii) a Notice of Guaranteed Delivery
by the Expiration Date, unless the Offer is extended.
** Additional amount due (in the event the Subscription Price exceeds the
estimated Subscription Price).
THE FUND AT A GLANCE
The Fund
The Fund is a non-diversified, closed-end management investment company
organized as a Maryland corporation. As of [________], 2005, the Fund's net
asset value per share ("NAV") was $[______]. See "The Fund."
NYSE Listed
As of [_____], 2005, the Fund had 15,846,384 Shares of Common Stock
outstanding. The Fund's Common Stock is traded on the NYSE under the symbol
"JOF." As of [_____], 2005, the last reported sales price of a Share of the
Fund was $[_____]. The Rights are transferable and the Fund will apply to list
the Rights for trading on the NYSE under the symbol "JOF.RT" during the course
of the Offer. See "The Fund--Description of Common Stock."
Investment Objective
The Fund's investment objective is to provide stockholders with long-term
capital appreciation primarily through investments in smaller capitalization
companies in Japan (as determined in accordance with the Fund's investment
policies). No assurance can be given that the Fund's investment objective will
be achieved. See "Investment Objective and Policies."
Investment Policies
The Fund will, under normal market conditions, invest at least 80% of its
total assets in smaller capitalization Japanese equity securities traded on
the Tokyo, Osaka, Nagoya and JASDAQ Stock Exchanges and Mothers, Hercules and
Centrex markets, and included or traded on other indices or markets, as
applicable, determined by the Manager to be appropriate indices or markets for
smaller capitalization companies in Japan ("Smaller Capitalization
Companies"). This investment policy is a fundamental policy which may only be
changed by a stockholder vote.
Currently, the Manager considers Smaller Capitalization Companies to be those
companies whose equity securities are included, at the time of purchase, in
the RUSSELL/NOMURA Small Cap(TM) Index (the "RN Small Cap Index") and certain
other companies that are not represented in the RN Small Cap Index. The RN
Small Cap Index measures the performance of small companies in Japan and
currently consists of approximately 1,300 of the equity securities of the
smallest companies included in the RUSSELL/NOMURA Total Market(TM) Index (the
"RN Total Index"), representing the bottom 15% of the total market
capitalization of the RN Total Index. The RN Total Index is currently
comprised of approximately 1,700 of the largest Japanese equity securities as
determined by total market capitalization
-------------------------------------------------------------------------------
4
-------------------------------------------------------------------------------
(in terms of adjusted market capitalization) and measures the performance of
the broad Japanese equity market. The bottom 2% of total Japanese equity
market (in terms of adjusted market capitalization) are not included in the RN
Total Index and therefore are not included in the RN Small Cap Index. However,
because the companies who belong to such bottom 2% have small market
capitalizations, the Manager considers these companies to be Smaller
Capitalization Companies. See "Investment Objective and Policies" and "Risk
Factors and Special Considerations--Risks Relating to the Fund's Operations."
included in the RN Small Cap Index. See "Investment Objective and Policies"
and "Risk Factors and Special Considerations--Risks Relating to the Fund's
Operations."
The Fund is a non-diversified fund for purposes of the Investment Company Act
of 1940, as amended (the "1940 Act"). See " Investment Restrictions."
Manager and Investment Adviser
Nomura Asset Management U.S.A. Inc. acts as the Fund's Manager and its parent,
Nomura Asset Management Co., Ltd. (the "Investment Adviser"), acts as the
Fund's investment adviser pursuant to a contract with the Manager. The Manager
and the Investment Adviser (including its predecessor) have served in these
capacities since the Fund commenced operations in 1990. The Manager and the
Investment Adviser are affiliated with Nomura Securities Co., Ltd., the
largest securities company in Japan. The Manager and the Investment Adviser,
together with their affiliates, had approximately $154 billion in assets under
management as of September 30, 2005. See "Management and Investment Advisory
Arrangements."
Compensation of the Manager and the Investment Adviser
As compensation for its services to the Fund pursuant to the Management
Agreement, the Manager receives a monthly fee at the annual rate of 1.10% of
the value of the Fund's average weekly net assets (i.e., the average weekly
value of the total assets of the Fund minus the sum of accrued liabilities of
the Fund) not in excess of $50 million, 1.00% of the Fund's average weekly net
assets in excess of $50 million but not in excess of $100 million, 0.90% of
the Fund's average weekly net assets in excess of $100 million but not in
excess of $175 million and 0.80% of the Fund's average weekly net assets in
excess of $175 million.
For services performed under the Investment Advisory Agreement, the Investment
Adviser receives a monthly fee from the Manager at the annual rate of 0.50% of
the Fund's average weekly net assets not in excess of $50 million, 0.45% of
the Fund's average weekly net assets in excess of $50 million but not in
excess of $100 million, 0.40% of the Fund's average weekly net assets in
excess of $100 million but not in excess of $175 million and 0.35% of the
Fund's average weekly net assets in excess of $175 million.
The Manager and the Investment Adviser will benefit from the Offer because
their fees are based on the net assets of the Fund. See "Management and
Investment Advisory Arrangements--Compensation and Expenses."
Custodian
Brown Brothers Harriman & Co. acts as the Fund's custodian.
Transfer Agent, Dividend-Paying Agent and Registrar
EquiServe Trust Company, N.A. acts as the Fund's dividend-paying agent and as
transfer and service agent and registrar for the Fund's Common Stock and
Dividend Reinvestment Plan.
-------------------------------------------------------------------------------
5
-------------------------------------------------------------------------------
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS WELL AS THE OTHER
INFORMATION IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT IN THE FUND UNDER
THIS OFFER.
AS A RESULT OF THIS OFFER, YOU MAY INCUR IMMEDIATE ECONOMIC DILUTION AND, IF
YOU DO NOT EXERCISE ALL OF YOUR RIGHTS, YOU WILL INCUR VOTING DILUTION.
To the extent that the number of shares outstanding after the Offer increases
proportionately more than the increase in the size of the Fund's net assets,
you will, at the completion of the Offer, experience immediate dilution of
NAV. In addition, if the Subscription Price for the Offer is less than the
Fund's NAV, you would experience additional immediate dilution of NAV as a
result of the Offer. If the Subscription Price is substantially less than the
current NAV at the expiration of the Offer, such dilution could be
substantial. In addition, whether or not you exercise your Rights, you will
experience a dilution of NAV because you will indirectly bear the expenses of
this Offer, which include, among other items, SEC registration fees, printing
expenses and the fees assessed by service providers (including the cost of the
Fund's counsel and independent registered public accounting firm). This
dilution of NAV will disproportionately affect Stockholders who do not
exercise their Rights. We cannot state precisely the amount of any decrease
because we do not know at this time how many shares will be subscribed for or
what the NAV and Subscription Price will be at the pricing date. For example,
assuming (i) a NAV of $[__] (the Fund's approximate NAV on [__], 2005), (ii) a
subscription price of $[__] (which is [__]% of the Fund's market price on
[__], 2005) and (iii) that all Rights are exercised at the estimated
subscription price, the Fund's NAV (after payment of estimated expenses) would
be reduced by approximately $[__] per share. As of [__], 2005, the Fund's NAV
was $[__].
In addition to the economic dilution described above, if you do not exercise
all of your Rights, you will incur voting dilution as a result of this Offer.
This voting dilution will occur because you will own a smaller proportionate
interest in the Fund after the Offer than you owned prior to the Offer.
The fact that the Rights are transferable may reduce the effects of economic
dilution as a result of the Offer. Rights Holders can transfer or sell their
Rights. The cash received from the sale of Rights is partial compensation for
any such possible dilution. There can be no assurance, however, that a market
for the Rights will develop or that the Rights will have any value in that
market.
See "Risk Factors and Special Considerations--Risks Relating to the Offer--You
may incur immediate economic dilution, and if you do not exercise all of your
Rights, you will incur voting dilution."
YOU MAY LOSE MONEY BY INVESTING IN THE FUND.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the U.S. Federal Deposit Insurance Corporation or any other
governmental agency.
Among the principal risks of investing in the Fund is market risk, which is
the risk that the value of your investment may fluctuate as stock markets in
Japan fluctuate.
As an investment company that primarily holds common stocks, the Fund's
portfolio is subject to the possibility that common stock prices will decline
over short or even extended periods. The Fund may remain substantially
invested during periods when stock prices generally rise and also during
periods when they generally decline. Risks are inherent in investments in
equities, and Fund stockholders should be able to tolerate significant
fluctuations in the value of their investment in the Fund.
-------------------------------------------------------------------------------
6
-------------------------------------------------------------------------------
See "Risk Factors and Special Considerations--Risks Relating to the Offer--You
may lose money by investing in the Fund."
INVESTING IN JAPAN INVOLVES CERTAIN RISKS AND SPECIAL CONSIDERATIONS NOT
TYPICALLY ASSOCIATED WITH INVESTING IN U.S. COMPANIES.
Investing in Japanese securities involves certain risks and special
considerations not typically associated with, or different from considerations
associated with, investing in the securities of established U.S. companies,
including:
o abrupt or unexpected changes to the government;
o different corporate disclosure, regulatory and governance
standards;
o potential difficulty in enforcing judgments;
o currency exchange rate fluctuations, which may increase the cost
associated with conversion of investment principal and income from
one currency to another; and
o different laws regarding the custody of foreign securities.
These risks are described in more detail under "Risk Factors and Special
Considerations--Risks Relating to the Fund's Operations--Political factors in
Japan may adversely affect the Fund's performance;" "--The Japanese economy is
affected by different factors than the U.S. economy;" "--Japan has different
corporate disclosure, governance and regulatory requirements than you may be
familiar with in the United States;" "--The Fund may have difficulty enforcing
foreign judgments against Japanese companies or their management;" "--Foreign
currency fluctuations could adversely affect the Fund's performance;" "--If
the Fund repatriates investments during exchange rate fluctuations, it may
have an adverse impact on the Fund's performance;" "--Investments in small
capitalization Japanese companies may expose the Fund to greater investment
risk;" "--The Fund's ability to hedge against foreign currency risks may
adversely affect the Fund's net asset value;" and "--Japan has different laws
regarding the custody of foreign securities than you may be familiar with in
the United States."
THE FOCUS OF THE FUND'S INVESTMENTS IN SPECIFIC ECONOMIC SECTORS AND RELATED
INDUSTRIES MAY EXPOSE IT TO GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO
SECURITIES.
From time to time, the Fund may invest a greater proportion of its assets in
the securities of companies that are part of specific sectors and related
industries of the Japanese economy. For example, at August 31, 2005, the Fund
maintained 29.8% of its total assets in the securities of Japanese companies
in the automotive equitment and parts, machinery and machine tools and
miscellaneous manufacturing sectors. The Fund is therefore subject to greater
risk of loss with respect to its portfolio securities as a result of its focus
on such sectors and related industries. See "Risk Factors and Special
Considerations--Risks Relating to the Fund's Operations--The focus of the
Fund's investments in specific economic sectors and related industries may
expose it to greater risk of loss with respect to its portfolio securities."
INVESTMENTS IN SMALL CAPITALIZATION JAPANESE COMPANIES MAY EXPOSE THE FUND TO
GREATER INVESTMENT RISK.
The Fund invests a substantial portion of its assets in the securities of
Japanese Smaller Capitalization Companies. Investments in the securities of
these companies may present greater opportunities for
-------------------------------------------------------------------------------
7
-------------------------------------------------------------------------------
growth, but also involve greater risks than are customarily associated with
investments in securities of more established and larger capitalized
companies. The securities of Smaller Capitalization Companies have fewer
market makers and wider price spreads, which may in turn result in more abrupt
and erratic market price movements and make the Fund's investments more
vulnerable to adverse general market or economic developments than would
investments only in large, more established Japanese companies. It is more
difficult to obtain information about smaller capitalization companies because
they tend to be less well known and have shorter operating histories and
because they tend not to have significant ownership by large investors or be
followed by many securities analysts. See "Risk Factors and Special
Considerations--Investments in small capitalization Japanese companies may
expose the Fund to greater investment risk."
THERE ARE NO FIXED LIMITATIONS REGARDING PORTFOLIO TURNOVER.
Frequency of portfolio turnover is not a limiting factor if the Fund considers
it advantageous to purchase or sell securities. The Fund anticipates that its
annual portfolio turnover rate will not exceed 100%. For the fiscal year ended
February 28, 2005, the Fund's portfolio turnover rate was 86%. A high rate of
portfolio turnover involves correspondingly greater aggregate payments for
brokerage commissions, which expenses must be borne by the Fund and its
stockholders. In addition, a high rate of portfolio turnover may result in
certain tax consequences, such as increased capital gain dividends and/or
ordinary income dividends. See "Risk Factors and Special Considerations--Risks
Relating to the Fund's Operations--There are no fixed limitations regarding
portfolio turnover."
THE FUND'S ABILITY TO HEDGE AGAINST FOREIGN CURRENCY RISKS MAY ADVERSELY
AFFECT THE FUND'S NET ASSET VALUE.
The Fund may engage in a variety of foreign currency exchange transactions.
Hedging involves special risks, including possible default by the other party
to the transaction, illiquidity and, to the extent the Manager's and the
Investment Adviser's view as to certain market movements is incorrect, the
risks that the use of hedging could result in losses greater than if they had
not been used. The Fund has not previously entered into transactions to hedge
against foreign currency risks. However, if the Fund does enter into any such
transactions, the Fund, will deposit in a segregated account with its
custodian, liquid securities or cash or cash equivalents or other assets
permitted to be so segregated by the SEC in an amount equal to or greater than
the market value of the liabilities under any such foreign currency hedging
agreements. There can be no assurance that the Fund will employ a foreign
currency hedge at any given time, nor can there be any assurance that the Fund
will be able to do this hedging successfully. See "Investment Objective and
Policies--Other Investment Policies--Hedging Foreign Currency Risks;" and
"Risk Factors and Special Considerations--Risks Relating to the Fund's
Operations--The Fund's ability to hedge against financial risks may adversely
affect the Fund's net asset value."
IF THE FUND FAILS TO QUALIFY AS A REGULATED INVESTMENT COMPANY, THE FUND WILL
BE TAXED AS A CORPORATION.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the U.S. Internal Revenue Code of 1986, as amended (the "Code"),
the Fund will be taxed in the same manner as an ordinary corporation and
distributions to its Stockholders will not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to
qualify, the Fund's distributions, to the extent derived from the Fund's
current or accumulated earnings and profits, will constitute dividends
(eligible for the corporate dividends-received deduction) which are taxable to
Stockholders as ordinary income, even though those distributions might
otherwise (at least in part) have been treated in the Stockholders' hands as
long-term capital gains. See "Taxation--U.S. Tax Status;" and "Risk Factors
and Special
-------------------------------------------------------------------------------
8
-------------------------------------------------------------------------------
Considerations--Risks Relating to the Fund's Operations--If the Fund fails to
qualify as a regulated investment company the Fund will be taxed as a
corporation."
THE FUND'S SHARES HAVE TRADED AND MAY IN THE FUTURE TRADE AT A DISCOUNT TO NET
ASSET VALUE.
Although the Fund's shares of Common Stock have recently traded on the NYSE at
a premium to their NAV, the Fund's shares have in the past traded at a
discount to their NAV. There can also be no assurance that the Fund's shares
will trade at a premium in the future or that the present premium is
sustainable. The Fund's shares have traded at discounts of as much as 29.4% in
the past five years. See "Risk Factors and Special Considerations--Risks
Relating to the Fund's Operations--The Fund's shares have traded and may trade
in the future at a discount to net asset value."
THE FUND'S STATUS AS A "NON-DIVERSIFIED" INVESTMENT COMPANY MAY EXPOSE IT TO
GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES.
The Fund is classified as a "non-diversified" management investment company
under the 1940 Act, which means that the Fund is not limited by the 1940 Act
as to 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 obligations of a smaller number of
issuers and, as a result, will be subject to greater risk with respect to its
portfolio securities. As a result, the Fund may be more susceptible to any
single economic, political or regulatory occurrence than would be the case if
it had elected to diversify its holdings sufficiently to be classified as a
"diversified" management investment company. See "Taxation--U.S. tax status;"
and "Risk Factors and Special Considerations--Risks Relating to the Fund's
Operations--The Fund's status as a "non-diversified" investment company may
expose it to greater risk of loss with respect to its portfolio securities."
CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND PROVISIONS IN
THE FUND'S CHARTER AND BYLAWS MAY HAVE THE EFFECT OF DEPRIVING YOU OF AN
OPPORTUNITY TO SELL YOUR SHARES AT A PREMIUM.
The Fund's Charter and Bylaws and the Maryland General Corporation Law (the
"MGCL") include provisions that could limit the ability of other persons to
acquire control of the Fund, to convert the Fund to an open-end investment
company or to change the composition of the Fund's Board of Directors. The
Fund has adopted measures that may make it difficult for another person or
entity to obtain control of the Fund.
Additionally, Charter provisions include various supermajority vote
requirements (which require the vote of 75 percent of outstanding shares in
certain circumstances) to approve extraordinary corporate actions such as a
merger or consolidation, the sale of all or substantially all of the Fund's
assets, the liquidation or dissolution of the Fund and certain Charter
amendments.
The foregoing provisions may be regarded as "anti-takeover" provisions and may
have the effect of depriving Stockholders of an opportunity to sell their
shares at a premium over prevailing market prices. See "Capital Stock--Certain
Provisions of Maryland General Corporation Law and the Charter and Bylaw;" and
"Risk Factors and Special Considerations--Risks Relating to the Fund's
Operations-- Certain provisions of the Maryland General Corporation Law and
provisions in the Fund's Charter and Bylaws may have the effect of depriving
you of an opportunity to sell your Shares at a premium."
-------------------------------------------------------------------------------
9
-------------------------------------------------------------------------------
THE OPERATING EXPENSES OF THE FUND MAY BE HIGHER THAN INVESTMENT COMPANIES
THAT INVEST PRIMARILY IN THE SECURITIES OF U.S. COMPANIES.
The Fund's estimated annual operating expenses may be higher than those of
most other investment companies that invest predominately in the securities of
U.S. companies. In addition, brokerage commissions, custodial fees and other
fees are generally higher for investments in foreign securities markets. As a
result of these higher expected operating expenses, the Fund needs to generate
higher relative returns to provide investors with an equivalent economic
return. See "Fund Expenses" and "Risk Factors and Special
Considerations--Risks Relating to the Fund's Operations--The operating
expenses of the Fund are higher than investment companies that invest
primarily in the securities of U.S. companies."
-------------------------------------------------------------------------------
10
-------------------------------------------------------------------------------
FUND EXPENSES
Stockholder transaction expenses
Sales load (as a percentage of the subscription price)(1)................................... %
Dividend Reinvestment Plan fees............................................................. None
(as a percentage of net assets
attributable to the common
stock)(2)
---------------------------------------------------------------------------------------------------------------
Annual expenses
Management fee....................................................................... ___%
Other expenses ...................................................................... ___%
Total annual expenses(3) ............................................................ ___%
(1) The Fund has agreed to pay the Dealer Manager for its financial
advisory, marketing and soliciting services a fee equal to 3.75% of the
aggregate subscription price for the Shares issued pursuant to the Offer
and to reimburse the Dealer Manager in part for its out-of-pocket
expenses up to $100,000. In addition, the Fund has agreed to pay a fee
to each of the Subscription Agent and the Information Agent estimated to
be $[_________] and $[____], respectively, plus reimbursement for their
out-of-pocket expenses related to the Offer. Total offering expenses are
estimated to be $[_____], which assumes that the Offer is fully
subscribed. These fees will be borne by the Fund and indirectly by all
of the Fund's Stockholders, including those who do not exercise their
Rights. See "Distribution Arrangements."
(2) Fees payable under the Management Agreement are calculated on the basis
of the Fund's average weekly net assets. See "Management and Investment
Advisory Arrangements". "Other expenses" have been estimated by
annualizing actual expenses through the second fiscal quarter.
(3) [The indicated [___]% expense ratio assumes that the Offer is fully
subscribed, yielding estimated net proceeds of approximately $[_____]
(assuming a subscription price of $[____] as of [_____________]), and
that, as a result, based on the Fund's net assets of $[_______] on
[__________], the net assets attributable to Stockholders would be
$[_______] upon completion of the Offer.] It also assumes that net
assets attributable to Stockholders will not increase or decrease due to
currency fluctuations.
The above table is intended to assist the Fund's investors in understanding
the various costs and expenses associated with investing in the Fund through
the exercise of Rights.
Hypothetical example
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------
$ $ $ $
This hypothetical example assumes that all dividends and other distributions
are reinvested at NAV and that the percentage amounts listed under "Annual
expenses" above remain the same in the years shown. The above tables and the
assumption in the hypothetical example of a 5% annual return are required by
regulation of the SEC applicable to all investment companies; the assumed 5%
annual return is not a prediction of, and does not represent, the projected or
actual performance of the Fund's Shares. This hypothetical example reflects
all recurring and non-recurring fees, including payment of the [___]% sales
load and other expenses incurred in connection with the Offer. Each year's
figure includes all expenses of the Offer. For more complete descriptions of
certain of the Fund's costs and expenses, see "Management of the Fund" and
"Management and Investment Advisory Arrangements."
The hypothetical example should not be considered a representation of future
expenses or rate of return and actual Fund expenses may be greater or less
than those shown.
-------------------------------------------------------------------------------
11
Financial Highlights
The following information, insofar as it relates to the year ended February
28, 2005, has been audited by [___________], the independent registered public
accounting firm for the Fund, whose report thereon was unqualified. Prior to
that time, the information was audited by a different independent registered
public accounting firm for the Fund, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto incorporated by reference in this prospectus. See "Financial
Statements."
For the Six For the Year Ended
Months Ended ---------------------------------------------------------------------------
August 31, February February February
2005 28, 29, February 28, 29,
------------ -------- -------- ------------------------------- --------
(unaudited) 2005 2004 2003 2002 2001 2000
Per share operating performance+
Net asset value, beginning of period $11.59 $9.40 $5.74 $5.86 $7.59 $16.39 $5.86
------------ -------- -------- -------- -------- --------- --------
Net investment loss*........... (0.01) (0.06) (0.03) (0.05) (0.06) (0.09) (0.11)
Net realized and unrealized gain
(loss) on investments and foreign
currency....................... 0.75 2.25 3.69 (0.07) (1.59) (7.89) 11.99
------------ -------- -------- -------- -------- --------- --------
Total from investment operations. 0.74 2.19 3.66 (0.12) (1.65) (7.98) 11.88
Distributions to Stockholders from:
Net realized capital gains..... -- -- -- -- (0.08) (0.82)
Net investment income ......... -- -- -- -- -- -- --
------------ -------- -------- -------- -------- --------- --------
Total distributions.............. 0.00 0.00 0.00 (0.00) (0.08) (0.82) 0.00
Net asset value, end of period+.. $12.33 $11.59 $9.40 $5.74 $5.86 $7.59 $16.39
============ ======== ======== ======== ======== ========= ========
Per share market value, end of
period........................... $13.50 $12.20 $10.79 $6.38 $5.53 $6.89 $11.000
Total Investment Return+......... 10.7% 13.1% 69.1% 15.4% (18.6%) (31.1%) 76.0%
Ratio To Average Net Assets/
Supplemental Data:
Net assets, end of period (in
000s) $195,335 $183,717 $149,012 $90,930 $92,815 $120,275 $259,766
Ratio of operating expenses.... 1.48% 1.54% 1.47% 1.63% 1.58% 1.33% 1.33%
Ratio of net investment loss... (0.16%) (0.57%) (0.41%) (0.75%) (0.84%) (0.76%) (0.88%)
Portfolio turnover rate........ 41% 86% 28% 28% 38% 78% 50%
For the Year Ended
--------------------------------------------------
February
February 28, 29,
------------------------------- --------
1999 1998 1997 1996
Per share operating performance
Net asset value, beginning of period $4.85 $6.44 $7.82 $8.59
-------- -------- -------- --------
Net investment loss*........... (0.04) (0.06) (0.09) (0.07)
Net realized and unrealized gain
(loss)
on investments and foreign
currency......................... 1.06 (1.45) (1.25) (0.70)
-------- -------- -------- --------
Total from investment operations. 1.02 (1.51) (1.34) (0.77)
Distributions to Stockholders from:
Net realized capital gains.....
Net investment income ......... (0.01) (0.08) (0.04) --
-------- -------- -------- --------
Total distributions.............. (0.01) (0.08) (0.04) 0.00
Net asset value, end of period... $5.86 $4.85 $6.44 $7.82
======== ======== ======== ========
Per share market value, end of
period........................... $6.250 $5.750 $6.375 $8.500
Total Investment Return+......... 8.8% (8.5)% (24.6%) (1.4%)
Ratio To Average Net Assets/
Supplemental Data:
Net assets, end of period (in
000s) $66,740 $55,246 $73,288 $88,966
Ratio of operating expenses.... 1.80% 1.71% 1.70% 1.47%
Ratio of net investment loss... (0.82%) (1.00%) (1.10%) (0.83%)
Portfolio turnover rate........ 35% 29% 71% 79%
+ Based on market value per share, adjusted for reinvestment of income
dividends and long term capital gain distributions, and capital share
transactions. Total return does not reflect sales commissions.
* Based on average shares outstanding.
Note: Contained above is operating performance for a Share of Common Stock
outstanding, total investment return, ratios to average net assets of
Stockholders and other supplemental data for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements and market value data
for the Fund's Shares.
12
THE OFFER
Purpose of the Offer
The Board of Directors of the Fund has determined that the Offer is in the
best interests of the Fund and its existing Stockholders because it represents
an opportunity to increase the assets of the Fund available for investment,
thereby enabling the Fund to take advantage more fully of existing and future
investment opportunities that may be or may become available, consistent with
the Fund's investment objective of long-term capital appreciation through
investment primarily in Smaller Capitalization Companies.
An increase in the assets of the Fund available for investment would enable
the Fund to be in a better position to take advantage of attractive investment
opportunities arising in the Japanese securities market. Due to a combination
of positive economic and securities market developments, the Board of
Directors and the Manager believe that now is an opportune time to raise Fund
assets for investment in Smaller Capitalization Companies. There is no
assurance that the investment of the proceeds of the Offer will be successful
or provide favorable returns.
In reaching its decision, the Board of Directors considered, among other
matters, (i) advice by the Manager and Investment Adviser that additional
assets would permit the Fund to take advantage of available investment
opportunities without having to sell portfolio securities that the Manager
believes should be held, (ii) the belief of the Manager and Investment Adviser
that current market opportunities are attractive in Smaller Capitalization
Companies and (iii) increasing the size of the Fund through the Offer may
result in certain economies of scale which could in turn lower the Fund's
expenses as a percentage of net assets. The Board of Directors and the
Managers also believe that an increase in the size of the Fund may result in a
modest reduction in the Fund's expense ratio. Furthermore, the Board of
Directors and the Manager believe that any resulting reduced expense ratio
would be of long-term benefit to the Fund and its Stockholders, and that a
well-subscribed rights offering could increase liquidity on the NYSE where
shares of the Fund's Common Stock are traded. There can be no assurance that
the Offer will be successful or that by increasing the size of the Fund, its
expense ratio will be lowered.
The Offer provides existing Stockholders the opportunity to purchase
additional Shares at a price below market price. The distribution to Record
Date Stockholders of transferable Rights, which may themselves have intrinsic
value, also will afford non-participating Record Date Stockholders the
potential of receiving cash payment upon the sale of the Rights, receipt of
which may be viewed as partial compensation for the economic dilution of their
interests. The Board of Directors also considered the impact of the Offer on
the Fund's NAV. For a discussion of the potential impact of the Offer on
current Stockholders, such as dilution, see "Risk Factors and Special
Considerations."
Structure of the Offer
The Board of Directors retained UBS Securities LLC, the Dealer Manager for the
Offer, to provide the Fund with financial advisory, marketing and soliciting
services relating to the Offer, including advice with respect to the
structure, timing and terms of the Offer. In determining the structure of the
Offer, the Board of Directors considered, among other things, using a fixed
pricing versus variable pricing mechanism, the benefits and drawbacks of
conducting a non-transferable versus a transferable rights offering, the
effect on the Fund and its existing Stockholders if the Offer is not fully
subscribed and the experience of the Dealer Manager in conducting rights
offerings.
ALTHOUGH THE FUND HAS NO PRESENT INTENTION TO DO SO, THE FUND MAY, IN THE
FUTURE AND IN ITS DISCRETION, CHOOSE TO MAKE ADDITIONAL RIGHTS OFFERINGS FROM
TIME TO TIME FOR A NUMBER OF SHARES AND ON TERMS WHICH MAY OR MAY
13
NOT BE SIMILAR TO THE OFFER. ANY SUCH FUTURE RIGHTS OFFERING WILL BE MADE IN
ACCORDANCE WITH THE 1940 ACT.
Terms of the Offer
The Fund is issuing to Record Date Stockholders transferable Rights to
subscribe for an aggregate of [__________] Shares. Each Record Date
Stockholder is being issued one transferable Right for each whole Share owned
on the Record Date. The Rights entitle each Record Date Stockholder to acquire
shares at the subscription price one Share for every [ ] Rights held (1-for-[
]). Rights may be exercised at any time during the subscription period, which
commences on [__________]], the Record Date, and ends at 5:00 p.m., New York
City time, on [__________], the Expiration Date, unless extended by the Fund.
The Rights will be listed for trading on the NYSE under the symbol "JOF.RT"
during the course of the Offer. Trading in the Rights on the NYSE is expected
to be conducted until the close of trading on the NYSE on the last business
day prior to the Expiration Date. See "The Offer--Sale of Rights." The Shares,
once issued, will be listed on the NYSE under the symbol "JOF." The Rights
will be evidenced by Subscription Certificates which will be mailed to Record
Date Stockholders, except as discussed below under "--Foreign Stockholders."
The Fund will not issue fractional Shares upon the exercise of Rights;
accordingly, Rights may be exercised only in multiples of
[-------].
The Rights are transferable. Rights Holders who are not Record Date
Stockholders may purchase Shares as described above (the "Primary
Subscription"), but are not entitled to subscribe for Shares pursuant to the
Over-Subscription Privilege (as defined below). Record Date Stockholders and
Rights Holders who purchase Shares in the Primary Subscription and Record Date
Stockholders who purchase Shares pursuant to the Over-Subscription Privilege
are hereinafter referred to as "Exercising Rights Holders."
Shares not subscribed for during the Primary Subscription will be offered, by
means of the Over-Subscription Privilege, to Record Date Stockholders who
fully exercise the Rights issued to them pursuant to the Offer (other than
those Rights to acquire less than one Share, which cannot be exercised) and
who wish to acquire more than the number of Shares they are entitled to
purchase pursuant to the exercise of their Rights, subject to certain
limitations and subject to allotment. Investors who are not Record Date
Stockholders are not entitled to subscribe for any Shares pursuant to the
Over-Subscription Privilege. See "--Over-Subscription Privilege" below.
For purposes of determining the number of Shares a Record Date Stockholder may
acquire pursuant to the Offer, broker-dealers, trust companies, banks or
others whose Shares are held of record by Cede & Co. ("Cede") or by any other
depository or nominee will be deemed to be the holders of the Rights that are
issued to Cede or the other depository or nominee on their behalf.
There is no minimum number of Rights which must be exercised in order for the
Offer to close.
SUBSCRIPTION PRICE
The subscription price for the Shares to be issued pursuant to the Offer will
be [[__]% of the average of the last reported sale prices of a Share on the
NYSE on the Expiration Date and the preceding four trading days]
("Subscription Price"). [For example, if the average of the last reported sale
prices of a Share on the NYSE on the Expiration Date and the preceding four
trading days is $[____] and the relevant average sale price on the NYSE is
$[____], the Subscription Price would be $[____] per Share ([__]% of market
14
price). Since the Expiration Date will be [__________] (unless the Fund
extends the subscription period), Rights Holders will not know the
Subscription Price at the time of exercise and will be required initially to
pay for both the Shares subscribed for pursuant to the Primary Subscription
and, if eligible, any additional Shares subscribed for pursuant to the
Over-Subscription Privilege at the estimated Subscription Price of $[____] per
Share.] See "--Payment for Shares" below. Rights Holders who exercise their
Rights will have no right to rescind a purchase after receipt of their
completed Subscription Certificates together with payment for Shares by the
Subscription Agent (as defined below). The Fund does not have the right to
withdraw the Rights or cancel the Offer after the Rights have been
distributed.
The Fund announced the terms of the Offer after the close of trading on the
NYSE on [__________]. The NAV at the close of business on [__________] (the
last trading date on which the Fund publicly reported its NAV prior to the
announcement) and on [__________] (the last trading date on which the Fund
publicly reported its NAV prior to the date of this prospectus) was $[____]
and $[____], respectively, and the last reported sale price of a Share on the
NYSE on those dates was $[____] and $[____], respectively.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Rights Holders ("Excess Shares") will be offered,
by means of the over-subscription privilege (the "Over-Subscription
Privilege"), to the Record Date Stockholders who have fully exercised the
Rights issued to them and who wish to acquire more than the number of Shares
they are entitled to purchase pursuant to the Primary Subscription. Record
Date Stockholders should indicate on the Subscription Certificate, which they
submit with respect to the exercise of the Rights issued to them, how many
Excess Shares they are willing to acquire pursuant to the Over-Subscription
Privilege. If sufficient Excess Shares remain, all Record Date Stockholders'
over-subscription requests will be honored in full. If requests from Record
Date Stockholders for Shares pursuant to the Over-Subscription Privilege
exceed the Excess Shares available, the available Excess Shares will be
allocated pro-rata among Record Date Stockholders who oversubscribe based on
the number of Rights originally issued to such Record Date Stockholders. The
percentage of remaining Shares each over-subscribing Record Date Stockholder
may acquire will be rounded down to result in delivery of whole Shares. The
allocation process may involve a series of allocations to assure that the
total number of Shares available for over-subscriptions is distributed on a
pro-rata basis.
Banks, broker-dealers, trustees and other nominee holders of rights will be
required to certify to the Subscription Agent, before any Over-Subscription
Privilege may be exercised with respect to any particular beneficial owner, as
to the aggregate number of Rights exercised pursuant to the Primary
Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certification Forms will be
distributed to banks, brokers, trustees and other nominee holders of rights
with the Subscription Certificates.
The Fund will not offer or sell any Shares that are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on [__________], the
Expiration Date, unless extended by the Fund.
announcement, the Fund will not, unless otherwise required by law, have any
obligation to publish, advertise or otherwise communicate any such
announcement other than by making a release to the Dow Jones News Service or
such other means of announcement as the Fund deems appropriate.
15
Any extension of the Offer will be followed as promptly as practicable by
announcement thereof, and in no event later than 9:00 a.m., New York City
time, on the next business day following the previously scheduled Expiration
Date. Without limiting the manner in which the Fund may choose to make such
SUBSCRIPTION AGENT
Computershare Shareholder Services, Inc. is the subscription agent (the
"Subscription Agent"). The Subscription Agent will receive for its
administrative, processing, invoicing and other services a fee estimated to be
approximately $[_________], plus reimbursement for all out-of-pocket expenses
related to the Offer.
Completed Subscription Certificates must be sent together with proper payment
of the Subscription Price for all Shares subscribed for in the Primary
Subscription and the Over-Subscription Privilege (for Record Date
Stockholders) to Computershare by one of the methods described below.
Alternatively, Notices of Guaranteed Delivery may be sent by facsimile to
(781) 380-3388 to be received by the Subscription Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date. Facsimiles should be confirmed by
telephone at (781) 843-1833 ext. 200. The Fund will accept only properly
completed and executed Subscription Certificates actually received at any of
the addresses listed below, prior to 5:00 p.m., New York City time, on the
Expiration Date or by the close of business on the third business day after the
Expiration Date following timely receipt of a Notice of Guaranteed Delivery. See
"--Payment for Shares" below.
Subscription Certificate
Delivery Method Address/Number
-------------------------------------------------------- ---------------------------------------------------
By Notice of Guaranteed Delivery........................ Contact your broker-dealer, trust company, bank, or
other nominee to notify the Fund of your intent to
exercise the Rights.
By First Class Mail Only
(No Overnight /Express Mail)....................... Japan Smaller Capitalization Fund, Inc.
c/o Computershare Shareholder Services, Inc.
Attention: Corporate Actions
P.O. Box 859208
Braintree, MA 02185-9208
By Hand to New York Delivery Window..................... Japan Smaller Capitalization Fund, Inc.
c/o Computershare Shareholder Services, Inc.
Attention: Corporate Actions
17 Battery Place, 11th Floor
New York, New York 10004
By Express Mail or Overnight Courier.................... Japan Smaller Capitalization Fund, Inc.
c/o Computershare Shareholder Services, Inc.
Attention: Corporate Actions
161 Bay State Drive
Braintree, MA 02184
Delivery to an address other than one of the addresses listed above will not
constitute valid delivery.
16
INFORMATION AGENT
Any questions or requests for assistance concerning the method of subscribing
for Shares or for additional copies of this prospectus or Subscription
Certificates or Notices of Guaranteed Delivery may be directed to the
Information Agent at its telephone number and address listed below:
The Altman Group, Inc.
1200 Wall Street West, 3rd FL
Lyndhurst, New Jersey 07071
1(800) 814-0439
Stockholders may also contact their brokers or nominees for information with
respect to the Offer. The Information Agent will receive a fee estimated to be
$[______], plus reimbursement for its out-of-pocket expenses related to the
Offer.
SALE OF RIGHTS
The Rights are Transferable Until the Last Business Day Prior to the
Expiration Date
The Fund will apply to list the Rights for trading on the NYSE under the
symbol "JOF.RT" during the course of the Offer, subject to notice of issuance.
Trading in the Rights on the NYSE is expected to be conducted until the close
of trading on the NYSE on the last business day prior to the Expiration Date.
The Fund and the Dealer Manager will use their best efforts to ensure that an
adequate trading market for the Rights will exist, although no assurance can
be given that a market for the Rights will develop. Trading in the Rights on
the NYSE is expected to be conducted on a "when-issued" basis beginning on or
about [__________], until and including on or about [___________]. Thereafter,
the Rights are expected to trade on a "regular-way" basis until the last
business day prior to the Expiration Date (or if the Offer is extended, until
the last business day prior to the extended Expiration Date). Rights Holders
are encouraged to contact their broker, bank, trustee or other nominees for
more information about trading of the Rights.
Sales Through the Subscription Agent and Dealer Manager
Record Date Stockholders who do not wish to exercise any or all of their
Rights may instruct the Subscription Agent to sell any Rights they do not
intend to exercise themselves through or to the Dealer Manager. Subscription
Certificates evidencing the Rights to be sold through or to the Dealer Manager
must be received by the Subscription Agent on or before [_____________] (or if
the Offer is extended, until two business days prior to the Expiration Date).
Upon the timely receipt by the Subscription Agent of appropriate instructions
to sell Rights, the Subscription Agent will ask the Dealer Manager either to
purchase or to use its best efforts to complete the sale and the Subscription
Agent will remit the proceeds of the sale to the selling Record Date
Stockholders. If the Rights can be sold, sales of such Rights will be deemed
to have been effected at the weighted-average price received by the Dealer
Manager on the day such Rights are sold. The sale price of any Rights sold to
the Dealer Manager will be based upon the then current market price for the
Rights. The Dealer Manager will also attempt to sell all Rights which remain
unclaimed as a result of Subscription Certificates being returned by the
postal authorities to the Subscription Agent as undeliverable as of the fourth
business day prior to the Expiration Date. The Subscription Agent will hold
the proceeds from those sales for the benefit of such non-claiming Record
Date Stockholders until such proceeds are either claimed or revert to the
state. There can be no assurance that the Dealer Manager will purchase or be
able to complete the sale of any such Rights, and neither the Fund nor the
Dealer Manager has guaranteed any minimum sales price for the Rights. If a
Record Date Stockholder does not utilize the services of the Subscription
Agent and chooses to use another broker-
17
dealer or other financial institution to sell Rights, then the other
broker-dealer or financial institution may charge a fee to sell the Rights.
Other Transfers
The Rights evidenced by a Subscription Certificate may be transferred in whole
by endorsing the Subscription Certificate for transfer in accordance with the
accompanying instructions. A portion of the Rights evidenced by a single
Subscription Certificate (but not fractional Rights) may be transferred by
delivering to the Subscription Agent a Subscription Certificate properly
endorsed for transfer, with instructions to register such portion of the
Rights evidenced thereby in the name of the transferee and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights.
In such event, a new Subscription Certificate evidencing the balance of the
Rights, if any, will be issued to the Record Date Stockholder or, if the
Record Date Stockholder so instructs, to an additional transferee. The
signature on the Subscription Certificate must correspond to the name as set
forth upon the face of the Subscription Certificate in every particular,
without alteration or enlargement, or any change. A signature guarantee must
be provided by an eligible financial institution as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended ("1934 Act"), subject to
the standards and procedures adopted by the Fund.
Record Date Stockholders wishing to transfer all or a portion of their Rights
should allow at least five business days prior to the Expiration Date for (i)
the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund, the Subscription Agent nor the Dealer
Manager shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior
to the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred or charged in
connection with the purchase, sale or exercise of Rights will be for the
account of the transferor of the Rights, and none of those commissions, fees
or expenses will be paid by the Fund, the Manager, the Subscription Agent or
the Dealer Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the
Over-Subscription Privilege) may be effected through, the facilities of the
Depository Trust Company ("DTC"). Rights exercised through DTC are referred to
as "DTC Exercised Rights." Record Date Stockholders of DTC Exercised Rights
may exercise the Over-Subscription Privilege in respect of such DTC Exercised
Rights by properly executing and delivering to the Subscription Agent, at or
prior to 5:00 p.m., New York City time, on the Expiration Date, a Nominee
Holder Over-Subscription Certificate or a substantially similar form
satisfactory to the Subscription Agent, together with payment of the
Subscription Price for the number of Shares for which the Over-Subscription
Privilege is to be exercised.
18
METHODS FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "--Foreign Stockholders," will be mailed to Record Date
Stockholders or, if a Record Date Stockholder's Shares are held by Cede or any
other depository or nominee on their behalf, to Cede or such depository or
nominee. Rights may be exercised by completing and signing the Subscription
Certificate that accompanies this prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
Shares at the Subscription Price by the Expiration Date.
Rights may also be exercised by contacting your broker, Trustee or other
nominee, who can arrange, on your behalf, (1) to deliver a Notice of
Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration
Date and (2) to guarantee delivery of payment and delivery of a properly
completed and executed Subscription Certificate pursuant to a Notice of
Guaranteed Delivery by the close of business on the third Business day after
the Expiration Date. A fee may be charged for this service. Completed
Subscription Certificates and related payments must be received by the
Subscription Agent prior to 5:00 p.m., New York City time, on or before the
Expiration Date (unless payment is effected by means of a Notice of Guaranteed
Delivery as described below under "--Payment for Shares") at the offices of
the Subscription Agent at the address set forth above. Fractional Shares will
not be issued upon the exercise of Rights.
Exercising Rights Holders
Exercising Rights Holders who are holders of record may choose either option
set forth under "-- Payment for Shares" below. If time is of the essence, the
Manager, in its sole discretion, will permit delivery of the Subscription
Certificate and payment after the Expiration Date.
Record Date Stockholders Whose Shares are Held by a Nominee
Record Date Stockholders whose Shares are held by a nominee, such as a bank,
broker or trustee, must contact that nominee to exercise their Rights. In that
case, the nominee will complete the Subscription Certificate on behalf of the
Record Date Stockholder and arrange for proper payment by one of the methods
set forth under "--Payment for Shares" below.
Nominees
Nominees, such as brokers, trustees or depositories for securities, who hold
Shares for the account of others should notify the respective beneficial
owners of the Shares as soon as possible to ascertain the beneficial owners'
intentions and to obtain instructions with respect to the Rights. If the
beneficial owner so instructs, the nominee should complete the Subscription
Certificate and submit it to the Subscription Agent with the proper payment as
described under "--Payment for Shares" below.
All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
subscription forms and the Subscription Price will be determined by the Fund,
which determinations will be final and binding. No alternative, conditional or
contingent subscriptions will be accepted. The Fund reserves the right to
reject any or all subscriptions not properly submitted or the acceptance of
which would, in the opinion of the Fund's counsel, be unlawful.
19
FOREIGN STOCKHOLDERS
Subscription Certificates will not be mailed to Record Date Stockholders whose
record addresses are outside the United States (for these purposes, the United
States includes its territories and possessions and the District of Columbia)
(the "Foreign Stockholders"). Foreign Stockholders will receive written notice
of the Offer. The Subscription Agent will hold the Rights to which those
Subscription Certificates relate for these Stockholders' accounts until
instructions are received to exercise the Rights, subject to applicable law.
If no instructions have been received by 5:00 p.m., New York City time, on
[_______________], three business days prior to the Expiration Date (or, if
the subscription period is extended, on or before three business days prior to
the extended Expiration Date), the Subscription Agent will transfer the Rights
of these Stockholders to the Dealer Manager, which will either purchase the
Rights or use its best efforts to sell them. The net proceeds, if any, from
sale of those Rights will be remitted to these Stockholders.
PAYMENT FOR SHARES
Exercising Rights Holders may choose between the following methods of payment:
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment for the Shares acquired in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege (for Record Date Stockholders) to the
Subscription Agent based on the estimated Subscription Price of $[____]
per Share ([__]% of $[____], the last reported sale price of a Share on
the NYSE on [__________]). To be accepted, the payment, together with a
properly completed and executed Subscription Certificate, must be
received by the Subscription Agent at one of the Subscription Agent's
offices set forth above, prior to 5:00 p.m., New York City time, on the
Expiration Date.
(2) An Exercising Rights Holder may have a bank, trust company or NYSE
member send a Notice of Guaranteed Delivery by facsimile or otherwise
guaranteeing delivery of (i) payment of the full Subscription Price for
the Shares subscribed for in the Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege (for
Record Date Stockholders) and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice
of Guaranteed Delivery unless a properly completed and executed
Subscription Certificate and full payment for the Shares is received by
the Subscription Agent by the close of business on [________________]
(or, if the Offer is extended, on the third business day after the
Expiration Date).
All payments by an Exercising Rights Holder must be in U.S. dollars by money
order or check drawn on a bank or branch located in the United States and
payable to Computershare Shareholder Services, Inc. or to the Fund. The
Subscription Agent will deposit all funds received by it prior to the final
payment date into a segregated interest-bearing account (which interest will
accrue to the benefit of the Fund) pending proration and distribution of the
Shares.
The method of delivery of Subscription Certificates and payment of the
Subscription Price to the Fund will be at the election and risk of the
Exercising Rights Holders, but if sent by mail, it is recommended that such
Certificates and payments be sent by registered mail, properly insured, with
return receipt requested, and that a sufficient number of days be allowed to
ensure delivery to the Subscription Agent and clearance of payment prior to
5:00 p.m., New York City time, on the Expiration Date or the date guaranteed
payments are due under a Notice of Guaranteed Delivery (as applicable).
Because uncertified personal checks may take at least five business days to
clear,
20
you are strongly urged to pay, or arrange for payment, by means of certified
or cashier's check or money order.
On a date within eight business days following the Expiration Date
("Confirmation Date"), the Subscription Agent will send to each Exercising
Rights Holder (or, if Shares are held by Cede or any other depository or
nominee, to Cede or such other depository or nominee) a confirmation showing
(i) the number of Shares purchased pursuant to the Primary Subscription; (ii)
the number of Shares, if any, acquired pursuant to the Over-Subscription
Privilege (for Record Date Stockholders); (iii) the per Share and total
purchase price for the Shares; and (iv) any additional amount payable to the
Fund by the Exercising Rights Holder or any excess to be refunded by the Fund
to the Exercising Rights Holder, in each case based on the Subscription Price
as determined on the Expiration Date. If any Exercising Rights Holder, if
eligible, exercises his right to acquire Shares pursuant to the
Over-Subscription Privilege, any excess payment which would otherwise be
refunded to him will be applied by the Fund toward payment for Shares acquired
pursuant to the exercise of the Over-Subscription Privilege. Any additional
payment required from an Exercising Rights Holder must be received by the
Subscription Agent within ten business days after the Confirmation Date. Any
excess payment to be refunded by the Fund to an Exercising Rights Holder will
be mailed by the Subscription Agent to the Rights Holder as promptly as
practicable.
Whichever of the two methods described above is used, issuance of the Shares
purchased is subject to collection of checks and actual receipt of payment. If
an Exercising Rights Holder who subscribes for Shares pursuant to the Primary
Subscription or Over-Subscription Privilege (for Record Date Stockholders)
does not make payment of any amounts due by the Expiration Date or the date
guaranteed payments are due under a Notice of Guaranteed Delivery, the
Subscription Agent reserves the right to take any or all of the following
actions: (i) notify all other Record Date Stockholders to determine who will
subscribe for such subscribed and unpaid for Shares; (ii) apply any payment
actually received by it from the Exercising Rights Holder toward the purchase
of the greatest whole number of Shares which could be acquired by such
Exercising Rights Holder upon exercise of the Primary Subscription and/or the
Over-Subscription Privilege; and/or (iii) exercise any and all other rights or
remedies to which it may be entitled, including, without limitation, the right
to set off against payments actually received by it with respect to such
subscribed for Shares.
All questions concerning the timeliness, validity, form and eligibility of any
exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund
determines in its sole discretion. The Subscription Agent will not be under
any duty to give notification of any defect or irregularity in connection with
the submission of Subscription Certificates or incur any liability for failure
to give such notification.
Exercising Rights Holders will have no right to rescind their subscription
after receipt of their payment for Shares by the Subscription Agent, except as
provided below under "--Notice of NAV Decline."
NOTICE OF NAV DECLINE
The Fund, as required by the SEC's registration form, will suspend the Offer
until it amends this prospectus if, subsequent to the effective date of this
prospectus, the Fund's NAV declines more than 10% from its NAV as of that
date. Accordingly, the Expiration Date would be extended and the Fund
21
would notify Record Date Stockholders of the decline and permit Exercising
Rights Holders to cancel their exercise of Rights.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Shares acquired in the Primary Subscription will be
mailed promptly after the expiration of the Offer once full payment for such
shares has been received and cleared. Certificates representing Shares
acquired pursuant to the Over-Subscription Privilege will be mailed as soon as
practicable after full payment for such Shares has been received and cleared
and all allocations have been completed. Participants in the Fund's Dividend
Reinvestment Plan will have any Shares acquired in the Primary Subscription
and pursuant to the Over-Subscription Privilege credited to their accounts
under the Dividend Reinvestment Plan. Participants in the Fund's Dividend
Reinvestment Plan wishing to exercise Rights issued with respect to the Shares
held in their accounts under the Dividend Reinvestment Plan must exercise such
Rights in accordance with the procedures set forth above. Record Date
Stockholders whose shares are held of record by Cede & Co. FAST Automated
Securities Transfer Service ("Cede & Co. FAST") or by any other depository or
nominee on their behalf or their broker-dealer's behalf will have any Shares
acquired in the Primary Subscription credited to the account of Cede & Co.
FAST or such other depository or nominee. Shares acquired pursuant to the
Over-Subscription Privilege will be certificated, and certificates
representing such Shares will be sent directly to Cede & Co. FAST or such
other depository or nominee. Share Certificates will not be issued for Shares
credited to Dividend Reinvestment Plan accounts.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
For U.S. Federal income tax purposes, neither the receipt nor the exercise of
the Rights by Record Date Stockholders will result in taxable income to such
Stockholders. If the Rights expire without exercise, no basis will be
allocated to such Rights, and the stockholder will not recognize any gain or
loss for U.S. Federal income tax purposes on such expiration.
A Record Date Stockholder's basis in a Right will be zero (and his basis in
his Shares will remain unchanged) unless either (i) the fair market value of
the Right on the date of distribution is 15% or more of the fair market value
of the Shares with respect to which the Right was distributed (which the Fund
does not expect to be the case) or (ii) the Record Date Stockholder elects, in
his or her Federal income tax return for the taxable year in which the Right
is received, to allocate part of the basis of the Shares to the Right. If
either of clauses (i) and (ii) is applicable, then if the Right is exercised,
the Record Date Stockholder will allocate his or her basis in the Shares with
respect to which the Right was distributed between the Shares and the Right in
proportion to the fair market values of each on the date of distribution.
The holding period of a Right received by a Record Date Stockholder includes
the holding period of the Shares with regard to which the Right is issued. If
the Right is exercised, the holding period of the Shares acquired begins on
the date the Right is exercised.
If a Right is sold, a gain or loss will be realized by the Rights Holder in an
amount equal to the difference between the basis of the Right sold and the
amount realized on its disposition.
A Record Date Stockholder's basis for determining gain or loss upon the sale
of a Share acquired upon the exercise of a Right will be equal to the sum of
the Record Date Stockholder's basis in the Right, if any, and the Subscription
Price. A Record Date Stockholder's gain or loss recognized upon a sale of a
Share acquired upon the exercise of a Right will depend on his basis in the
Share and the proceeds of the sale, will be capital gain or loss (assuming the
Share was held as a capital asset at the time of sale) and
22
will be long-term capital gain or loss if the Share is held for more than one
year. However, any loss recognized upon a sale of Shares held for six (6)
months or less will be treated as a long-term capital loss to the extent of
any capital gain distributions previously received by the Stockholder with
respect to such shares. Additionally, tax rules may disallow a loss to the
extent that the Stockholder purchases additional Stock (including by
reinvestment of distributions) within 30 days before or after the sale date.
The foregoing is a general summary of the material U.S. Federal income tax
consequences of the Offer under the provisions of the Code and Treasury
regulations in effect as of the date of the prospectus that are generally
applicable to Record Date Stockholders who are United States persons within
the meaning of the Code, and does not address any foreign, state or local tax
consequences. The Code and Treasury regulations are subject to change or
differing interpretations by legislative or administrative action, which may
be retroactive. Exercising Rights Holders should consult their tax advisors
regarding specific questions as to foreign, Federal, state or local taxes. For
a summary of certain tax consequences that may result to the Fund and its
Stockholders, see "Taxation."
ERISA CONSIDERATIONS
Stockholders who are employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") (including corporate savings
and 401(k) plans), Keogh or H.R. 10 plans of self-employed individuals and
individual retirement accounts (collectively, "Retirement Plans") should be
aware that additional contributions of cash to a Retirement Plan (other than
rollover contributions or trustee-to-trustee transfers from other Retirement
Plans) in order to exercise Rights would be treated as contributions to the
Retirement Plan and, when taken together with contributions previously made,
may result in, among other things, excise taxes for excess or nondeductible
contributions. In the case of Retirement Plans qualified under Section 401(a)
of the Code and certain other Retirement Plans, additional cash contributions
could cause the maximum contribution limitations of Section 415 of the Code or
other qualification rules to be violated. It may also be a reportable
distribution and there may be other adverse tax and ERISA consequences if
Rights are sold or transferred by a Retirement Plan.
Retirement Plans and other tax exempt entities, including governmental plans,
should also be aware that if they borrow in order to finance their exercise of
Rights, they may become subject to the tax on unrelated business taxable
income ("UBTI") under Section 511 of the Code. If any portion of an Individual
Retirement Account ("IRA") is used as security for a loan, the portion so used
is also treated as distributed to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the Code
contain prohibited transaction rules that may impact the exercise of Rights. A
Retirement Plan that exercises Rights will be deemed to represent and warrant
that such exercise will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Code. Due to the complexity of
these rules and the penalties for noncompliance, Retirement Plans should
consult with their counsel and other advisers regarding the consequences of
their exercise of Rights under ERISA and the Code.
DISTRIBUTION ARRANGEMENTS
UBS Securities LLC, a broker-dealer and member of the NASD, will act as Dealer
Manager for the Offer. Under the terms and subject to the conditions contained
in the Dealer Management Agreement, the Dealer Manager will provide financial
advisory and marketing services in connection with the Offer and will solicit
the exercise of Rights and participation in the Over-Subscription Privilege.
The Offer is not contingent upon any number of Rights being exercised. The
Fund has agreed to pay the Dealer Manager a fee for its financial advisory,
marketing and soliciting services equal to 3.75% of the aggregate Subscription
Price for Shares issued pursuant to the Offer.
23
The Dealer Manager will reallow to broker-dealers included in the selling
group to be formed and managed by the Dealer Manager selling fees equal to
2.50% of the Subscription Price for each Share issued pursuant to the Offer as
a result of their selling efforts. In addition, the Dealer Manager will
reallow to other broker-dealers that have executed and delivered a Soliciting
Dealer Agreement and have solicited the exercise of Rights, solicitation fees
equal to 0.50% of the Subscription Price for each Share issued pursuant to the
exercise of Rights as a result of their soliciting efforts, subject to a
maximum fee based on the number of Shares held by each broker-dealer through
DTC on the Record Date. Fees will be paid to the broker-dealer designated on
the applicable portion of the Subscription Certificates or, in the absence of
such designation, to the Dealer Manager.
In addition, the Fund has agreed to pay the Dealer Manager an amount up to
$100,000 as a partial reimbursement of its expenses incurred in connection
with the Offer. The Fund and the Manager have agreed to indemnify the Dealer
Manager or contribute to losses arising out of certain liabilities, including
liabilities under the 1933 Act. The Dealer Manager Agreement also provides
that the Dealer Manager will not be subject to any liability to the Fund in
rendering the services contemplated by the Dealer Manager Agreement except for
any act of bad faith, willful misconduct or gross negligence of the Dealer
Manager or reckless disregard by the Dealer Manager of its obligations and
duties under the Dealer Manager Agreement.
Prior to the expiration of the Offer, the Dealer Manager may independently
offer for sale Shares, including Shares acquired through purchasing and
exercising the Rights, at prices it sets which may be different from the
market price for such Shares or from the price to be received upon the
exercise of Rights. The Dealer Manager may realize profits or losses in
addition to and independent of any fees described in this prospectus.
CERTAIN EFFECTS OF THIS OFFER
The Fund's Manager and Investment Adviser will benefit from the Offer because
the management and investment advisory fees are based on the Fund's net
assets. For a description of these fees, see "Management and Investment
Advisory Arrangements." It is not possible to state precisely the amount of
additional compensation the Manager will receive as a result of the Offer
because it is not known how many Shares will be subscribed for and because the
proceeds of the Offer will be invested in additional portfolio securities,
which will fluctuate in value. However, assuming (i) all Rights are exercised,
(ii) the Fund's average monthly total net assets remain between $[_____] and
$[____] and (iii) the Subscription Price is $[____] per Share, and after
giving effect to the Dealer Manager fee and other expenses related to the
Offer, the Manager would receive additional annualized management fees of
$[_____]. One of the Fund's Directors who voted to authorize the Offer is an
interested person of the Manager and the Investment Adviser. The other
Directors who approved the Offer are not affiliated with the Manager or the
Investment Adviser.
USE OF PROCEEDS
The net proceeds of the Offer, assuming all Shares offered hereby are sold,
are estimated to be approximately $[ ], after deducting offering expenses
estimated to be $[ ]. The Manager and the Investment Adviser anticipate that
investment of the net proceeds of the Offer in accordance with the Fund's
investment objective and policies will take approximately thirty (30) days
after completion of the offering. However, the investment of the net proceeds
may take up to three months from completion of the offering, depending on
market conditions and the availability of appropriate securities. See "The
Offer--Purpose of the Offer," "Investment Objective and Policies" and
"Investment Restrictions." Pending such investment, it is anticipated that the
proceeds will be invested in yen-denominated or U.S.
24
dollar-denominated fixed-income securities and other permitted investments.
See "Investment Objective and Policies." These temporary investments will not
be consistent with the Fund's investment objective.
THE FUND
The Fund was incorporated under the laws of the State of Maryland on January
25, 1990 and is registered with the SEC under the 1940 Act, as an investment
company. The Fund commenced operations on March 21, 1990. The Fund's principal
office is located at Two World Financial Center, Building B, New York, NY
10281. As of November 1, 2005, the Fund had net assets of approximately $217
million. The Manager and Investment Adviser are registered with the SEC under
the Investment Advisers Act of 1940, as amended.
The Fund is a non-diversified, closed-end management investment company.
Closed-end investment companies differ from open-end management investment
companies (commonly referred to as "mutual funds") because closed-end
investment companies have a fixed capital base and do not redeem shares at
NAV. Many closed-end funds trade on the NYSE. Mutual funds issue securities
redeemable at NAV at any time at the option of the stockholder and typically
engage in a continuous offering of their shares. For these reasons, mutual
funds are subject to periodic asset in-flows and out-flows that can complicate
portfolio management. Closed-end investment companies do not face the prospect
of having to liquidate portfolio holdings to satisfy redemptions at the option
of stockholders or to maintain cash positions to meet the possibility of
redemptions and can therefore remain fully invested.
The Fund's investment objective is to provide stockholders with long-term
capital appreciation primarily through investments in Smaller Capitalization
Companies. No assurance can be given that the Fund's investment objective will
be achieved.
DESCRIPTION OF COMMON STOCK
The Fund is authorized to issue 100,000,000 shares of Common Stock. All shares
of Common Stock have equal voting, dividend, distribution and liquidation
rights. The Shares outstanding are, and the Shares issuable upon the exercise
of the Rights, when issued and paid for pursuant to the terms of the Offer,
will be, fully paid and non-assessable. Shares are not redeemable and have no
preemptive rights, conversion rights, cumulative voting rights or appraisal
rights.
The number of Shares outstanding as of November 1, 2005 was 15,846,384. The
number of Shares adjusted to give effect to the Offer, assuming that all
Rights are exercised and the applicable Shares issued, would be [_________].
The Fund's Shares are publicly held and are listed and traded on the NYSE. The
following table sets forth for the quarters indicated the highest and lowest
daily intraday prices on the NYSE per Share, the highest and lowest closing
NAV and the highest and lowest registered premium or discount from NAV. The
table also sets forth the number of Shares traded on the NYSE during the
respective quarter.
NAV per NYSE Market Premium/
Share (1) Price (2) (Discount)(3)
----------------- ----------------------- -----------------------
NYSE
During Quarter Ended High Low High Low Low High Volume(2)
------------------------------------------------------------------------------------------------------------------------
February 28, 2003.......... $6.03 $5.45 $6.85 $5.92 17.40% 2.41% 2,938,800
May 31, 2003............... $8.30 $5.32 $7.65 $5.98 23.78% 4.75% 2,502,800
August 31, 2003............ $7.68 $6.21 $9.40 $7.30 33.14% 12.94% 4,140,000
25
November 30, 2003.......... $9.51 $7.76 $11.55 $9.10 23.53% 6.81% 5,480,000
February 29, 2004.......... $9.53 $8.55 $10.90 $9.76 20.71% 9.00% 4,226,200
May 31 29, 2004............ $11.58 $9.44 $14.55 $10.50 28.84% 4.54% 9,300,000
August 31, 2004............ $11.45 $10.19 $13.35 $11.24 23.49% 7.77% 3,185,900
November 30, 2004.......... $10.83 $9.90 $12.59 $10.86 16.99% 4.04% 2,812,100
February 28, 2005.......... $11.59 $10.27 $12.67 $11.35 17.37% 0.00% 3,432,300
May 31, 2005............... $11.80 $11.14 $12.40 $10.11 6.08% (11.18)% 3,253,800
August 31, 2005............ $12.45 $11.12 $14.03 $10.47 12.69% (8.88)% 4,194,500
---------------------------
(1) Source: Bloomberg L.P. Represents the highest and lowest NAV for the
respective quarter based on the NAV calculated at the end of the
business day.
(2) Source: NYSE
(3) Source: Bloomberg L.P. Represents the high/low premium or discount from
NAV of the Shares for the respective quarter based on the Share price at
the end of the business day.
At the close of business on [__________], the NAV was $[____] and the last
reported sale price of a Share on the NYSE was $[____], representing a [____]%
[discount/premium] from such NAV.
26
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital appreciation, which
it seeks to achieve through investments in Japanese smaller capitalization
companies.
The Fund's investment objective and its policy to invest, under normal market
conditions, at least 80% of its total assets in smaller capitalization
Japanese equity securities traded on the Tokyo, Osaka, Nagoya and JASDAQ Stock
Exchanges and Mothers, Hercules and Centrex markets and included or traded on
other indices or markets, as applicable, determined by the Manager to be
appropriate indices or markets for smaller capitalization companies in Japan
("Smaller Capitalization Companies"). Neither the Fund's investment objective
nor its investment policy may be changed without the approval of the holders
of a majority of the outstanding Shares. A majority vote, as defined by the
1940 Act, means the affirmative vote of the lesser of (i) 67% of the Shares
represented at a meeting at which more than 50% of the outstanding Shares are
represented or (ii) more than 50% of the outstanding Shares)
Portfolio Structure
Under normal market conditions, at least 80% of the Fund's total assets are
invested in equity securities of Smaller Capitalization Companies. Currently,
the Manager considers Smaller Capitalization Companies to be those companies
whose equity securities are included, at the time of purchase, in the RN Small
Cap Index and certain other companies that are not represented in the RN Small
Cap Index. The RN Small Cap Index measures the performance of small companies
(in terms of adjusted market capitalization) and currently consists of
approximately 1,300 of the equity securities of the smallest companies
included in the RN Total Index, representing the bottom 15% of the total
market capitalization of the RN Total Index. The RN Total Index is currently
comprised of approximately 1,700 of the largest Japanese equity securities as
determined by total market capitalization (in terms of adjusted market
capitalization) and measures the performance of the broad Japanese equity
market. The bottom 2% of total Japanese equity market (in terms of adjusted
market capitalization) are not included in the RN Total Index and therefore
are not included in the RN Small Cap Index. However, because the companies who
belong to such bottom 2% have small market capitalizations, the Manager
considers these companies to be Smaller Capitalization Companies. Currently,
the largest of the Smaller Capitalization Companies in RN Total Index has an
approximate market capitalization of 241 billion yen (approximately US$2,084
million).
The Fund may invest its assets in a broad spectrum of industries. The Fund
seeks to identify and invest in companies it believes offer potential for
long-term capital appreciation. In evaluating prospective investments, the
Investment Adviser utilizes internal financial, economic and credit analysis
resources as well as information obtained from other sources. In selecting
industries and companies for investment, the Investment Adviser considers
overall growth prospects, financial conditions, competitive position,
technology, research and development, productivity, labor costs and sources,
profit margins, return on investment, structural changes in local economies,
capital resources, the degree of government regulation or deregulation,
management and other factors. There can be no assurance that the Fund will
realize its investment objective.
There are risks associated with investments in securities of Smaller
Capitalization Companies that are not customarily associated with investments
in securities of more established and larger capitalized companies. Although
the opportunities for growth may be greater with these companies, they also
27
involve greater risks. For example, they are more susceptible to abrupt and
erratic price movements and adverse general market and economic developments,
and it may be more difficult to obtain information about these companies
because they tend to be less well known and followed by fewer securities
analysts. See "Risk Factors and Special Considerations--Investments in
Japanese small capitalization companies may expose the Fund to greater
investment risk."
Securities of Smaller Capitalization companies are traded in a number of
separate markets in Japan that have been developed in response to increased
attention to this section of the securities market. At the time the Fund
commenced operations in 1990, securities of emerging Japanese companies were
traded primarily on the Japanese over-the-counter market and securities of
these companies were not generally eligible for listing on major securities
exchanges. See "Portfolio Transactions and Brokerage" for information
concerning the primary markets where equity securities of Smaller
Capitalization Companies are currently traded.
The Fund invests the balance of its assets not invested in Smaller
Capitalization Companies in yen-denominated or U.S. dollar-denominated
fixed-income securities. These fixed-income securities include non-convertible
preferred stock, debt securities, obligations issued or guaranteed by the U.S.
or Japanese government or their agencies or instrumentalities and money market
instruments (such as short term obligations issued or guaranteed by the U.S.
or Japanese government, commercial paper and time deposits, certificates of
deposit and bankers' acceptances of U.S. or Japanese banks).
Other Investment Policies
The Fund has adopted certain other policies as set forth below:
o Repurchase Agreements. Repurchase agreements are contracts
pursuant to which the seller of a security agrees at the time of
sale to repurchase the security at an agreed upon date and price
in a specified currency, thereby determining the yield during the
term of the agreement. When the Fund enters into a repurchase
agreement, the seller is required to maintain the value of the
securities subject to the repurchase agreement, marked to market
daily, at not less than their repurchase price. This results in a
fixed rate of return for the Fund that is insulated from market
fluctuation during such period although the rate of return may be
affected by currency fluctuations. Repurchase agreement may
involve risks in the event of insolvency or other default by the
seller, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities. In the event of a
default under a repurchase agreement, the rate of return to the
Fund would be dependent upon intervening fluctuations of the
market value of such security and the accrued interest in the
security. In such an event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to
perform.
o Borrowings. The Fund is authorized to borrow money in amounts of
up to 10% of the value of its total assets at the time of such
borrowings. Borrowings by the Fund create an opportunity for
greater return, however, at the same time, increase exposure to
capital risk. In addition, borrowed funds are subject to interest
costs that may offset or exceed the return earned on the borrowed
funds.
o Hedging Foreign Currency Risks. The Fund is authorized to deal in
forward foreign exchange between the U.S. dollar and the yen as a
hedge against possible variations in the foreign exchange rate
between these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price at the time of the
contract. The Fund's dealings in forward foreign exchange are
limited to hedging involving either
28
specific transactions or portfolio positions. The Fund does not
intend to utilize hedging techniques to a significant extent.
The Fund is also authorized to purchase or sell listed or OTC
foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S.
dollar-denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased
by the Fund.
Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline, and it
precludes the opportunity for gain if the value of the hedged
currency should rise. Moreover, it may not be possible for the
Fund to hedge against a devaluation that is so generally
anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation it anticipates. The cost
to the Fund of engaging in foreign currency transactions varies
with such factors as the currency involved, the length of the
contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange are usually conducted on
a principal basis, no fees or commissions are involved.
Although certain risks are involved in options and futures
transactions, the Fund believes that, because it is authorized to
engage in options and futures transactions only for currency
hedging purposes, the options and futures portfolio strategies of
the Fund do not subject the Fund to certain risks frequently
associated with speculation in options and futures transactions.
As of the date of this prospectus, the Fund has not engaged in any
options and futures transactions. However, if the Fund does enter
into such transaction, the Fund, will deposit in a segregated
account with its custodian, liquid securities or cash or cash
equivalents or other assets permitted to be so segregated by the
SEC in an amount equal to or greater than the market value of the
liabilities under any such foreign currency hedging agreements.
29
INVESTMENT RESTRICTIONS
The Fund has elected to be classified as a non-diversified, closed-end
management investment company and will invest its assets only in a manner
consistent with this classification under applicable law.
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities (which for this purpose and under the
1940 Act means the lesser of (i) 67% of the Shares represented at a meeting at
which more than 50% of the outstanding Shares are represented or (ii) more
than 50% of the outstanding Shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of
closed-end investment companies where no underwriter's or dealer's
commission or profit, other than customary broker's commission, is
involved and only if immediately thereafter not more than 10% of
the Fund's total assets would be invested in such securities.
3. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real
estate or interests therein or issued by companies which invest in
real estate or interests therein and the Fund may deal in forward
foreign exchange and the Fund may purchase and sell financial and
currency options, futures contracts and related options.
4. Issue senior securities or borrow amounts in excess of 10% of its
total assets taken at value.
5. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the 1933 Act in selling
portfolio securities.
6. Make loans to other persons, except that the Fund may purchase
debt securities and enter into repurchase agreements in accordance
with its investment objective and policies.
7. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities (the deposit or
payment by the Fund of initial or variation margin in connection
with futures contracts and options transactions is not considered
the purchase of a security on margin).
8. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except to the
extent described herein.
9. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single
industry.
An additional investment restriction adopted by the Fund, which may be changed
by the Board of Directors, provides that the Fund may not mortgage, pledge,
hypothecate or in any manner transfer, as security for indebtedness, any
securities owned or held by the Fund except as may be necessary in connection
with borrowings mentioned in (4) above or except as may be necessary in
connection with futures and options transactions.
30
If a percentage restriction on investment policies or the investment or use of
assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
RISK FACTORS AND SPECIAL CONSIDERATIONS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND THE OTHER INFORMATION IN
THIS PROSPECTUS BEFORE YOU DECIDE TO PARTICIPATE IN THIS OFFER. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING THE FUND.
ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO ADVERSELY AFFECT AND IMPAIR THE
FUND. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE FUND'S OPERATIONS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD LIKELY SUFFER, WHICH IN
TURN COULD MATERIALLY ADVERSELY AFFECT YOUR INVESTMENT IN THE FUND.
RISKS RELATING TO THE OFFER
AS A RESULT OF THIS OFFER, YOU MAY INCUR IMMEDIATE ECONOMIC DILUTION AND, IF
YOU DO NOT EXERCISE ALL OF YOUR RIGHTS, YOU WILL INCUR VOTING DILUTION.
To the extent that the number of shares outstanding after the Offer will have
increased proportionately more than the increase in the size of the Fund's net
assets, you will, at the completion of the Offer, experience immediate
dilution of NAV. In addition, if the Subscription Price for the Offer is less
than the Fund's NAV, you would experience additional immediate dilution of NAV
as a result of the Offer. If the Subscription Price is substantially less than
the current NAV at the expiration of the Offer, such dilution could be
substantial. In addition, whether or not you exercise your Rights, you will
experience a dilution of NAV because you will indirectly bear the expenses of
this Offer, which include, among other items, SEC registration fees, printing
expenses and the fees assessed by service providers (including the cost of the
Fund's counsel and independent registered public accounting firm). This
dilution of NAV will disproportionately affect Stockholders who do not
exercise their Rights. We cannot state precisely the amount of any decrease
because we do not know at this time how many shares will be subscribed for or
what the NAV and Subscription Price will be at the pricing date. For example,
assuming (i) a NAV of $[__] (the Fund's approximate NAV on [__], 2005), (ii) a
subscription price of $[__] (which is [__]% of the Fund's market price on
[__], 2005) and (iii) that all Rights are exercised at the estimated
Subscription Price, the Fund's NAV (after payment of estimated expenses) would
be reduced by approximately $[__] per share. As of [__], 2005, the Fund's NAV
was $[__].
In addition to the economic dilution described above, if you do not exercise
all of your Rights, you will incur voting dilution as a result of this Offer.
This voting dilution will occur because you will own a smaller proportionate
interest in the Fund after the Offer than you owned prior to the Offer.
The fact that the Rights are transferable may reduce the effects of dilution
as a result of the Offer. Rights Holders can transfer or sell their Rights.
The cash received from the sale of Rights is partial compensation for any
possible dilution. There can be no assurances, however, that a market for the
Rights will develop or that the Rights will have any value in that market.
YOU MAY LOSE MONEY BY INVESTING IN THE FUND.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the U.S. Federal Deposit Insurance Corporation or any other
governmental agency.
31
Among the principal risks of investing in the Fund is market risk, which is
the risk that the value of your investment may fluctuate as stock markets in
Japan fluctuate.
As an investment company that primarily holds common stock, the Fund's
portfolio is subject to the possibility that common stock prices will decline
over short or even extended periods. The Fund may remain substantially
invested during periods when stock prices generally rise and also during
periods when they generally decline. Moreover, as a holder of common stock,
the Fund's rights to the assets of the companies in which it invests will be
subordinated to such companies' holders of preferred stock and debt in the
event of a bankruptcy, liquidation or similar proceeding. Accordingly, if such
an event were to occur to a company in which the Fund invests, the Fund would
be entitled to such a company's assets only after such company's preferred
stockholders and debt holders have been paid. Risks are inherent in
investments in equities, and Fund stockholders should be able to tolerate
significant fluctuations in the value of their investment in the Fund.
RISKS RELATING TO THE FUND'S OPERATIONS
POLITICAL FACTORS IN JAPAN MAY ADVERSELY AFFECT THE FUND'S PERFORMANCE.
Japan has a parliamentary form of government. The legislative power is vested
in the Japanese Diet, which consists of a House of Representatives and a House
of Councillors. The major political parties represented in the Diet are
Liberal Democratic Party (LDP), Democratic Party of Japan (DPJ), Clean
Government Party (Komeito), New Japan (CNP), Japan Communist Party (JCP) and
Social Democratic Party (SDP). Japan was governed nationally by conservative
political parties for more than 50 years, and since the LDP formed a governing
coalition with the Liberal Party in January 1999, a ruling coalition of the
LDP and one or more parties maintains its majority in the Diet. On April 24,
2001, Junichiro Koizumi of the LDP won a victory on April 24, 2001 in the
Lower House elections, and was elected as Japan's 87th Prime Minister on April
26, 2001. He was re-elected as LDP President on September 20, 2003, securing a
second three-year term as Prime Minister. On September 27, 2004, Koizumi
carried out a major cabinet reorganization, dubbing his new ministerial lineup
"Reform Implementation Cabinet." On August 8, 2005, Koizumi called a general
election to the Lower House, approximately about two years before the end of
the term taken from the 2003 elections, after bills to privatize Japan Post
were voted down in the Upper House. The elections were held on September 11,
2005 and concluded in a landslide victory for Koizumi's LDP. Together with its
partner, Komeito, the governing coalition now commands two-thirds majority in
the Lower House, empowering the government to pass legislative bills without
requiring the consent of the Upper House and permitting it to approve
amendments to the Constitution, which are then submitted to the Upper House
and a national referendum. There can be no assurance that the Japanese
government will not be subject to abrupt or unexpected changes in the future
that may have an adverse impact on Smaller Capitalization Companies. Recent
and future developments in the domestic political environment in Japan may
lead to changes in policy that might adversely affect the Fund.
THE JAPANESE ECONOMY IS AFFECTED BY DIFFERENT FACTORS THAN THE U.S. ECONOMY.
The Japanese economy grew substantially from the early 1960s through 1990.
This growth averaged 10% in real GDP terms during the years 1960 through 1970,
an average of 5% during the years 1970 through 1980 and an average of 4%
during the years 1980 through 1990. During the 1990s, growth slowed down
considerably and Japan entered into a prolonged recession and the growth rate
slowed to an average of 1.7%. The so-called "lost decade" recession was due to
the sudden end to the speculative bubble economy of the late 1980s and early
1990s. Since the year 2000, Japan's economic growth rate has remained
relatively low.
32
To a certain extent, Japanese economic growth depends on the U.S. and Chinese
economies. Slowdowns in these two countries will necessarily have a negative
impact on Japan. Exposure to China, in terms of both imports and exports, has
been increasing in recent years.
The rising oil price is also a concern, and a sustained high price level will
have an impact on the Japanese economy. Rising costs could impede the growth
rate of industrial activity.
Deflation has been the most negative factor holding back the Japanese economy
since the bursting of the bubble economy. CPI growth has been negative for
several years. If CPI growth remains below zero, then the Japanese economic
growth rate cannot be expected to accelerate.
Looking at Japanese industries, the automobile and electrical industries had
been the main driving forces for the Japanese economy up to the 1990s. The
electrical industry has recently lost some of its share in the global market.
In addition, Korean companies and Taiwanese companies are gaining market share
in the semiconductor and liquid crystal areas. The automobile industry is
maintaining a strong performance, and this large industry influences many
Japanese companies.
JAPAN HAS DIFFERENT CORPORATE DISCLOSURE, GOVERNANCE AND REGULATORY
REQUIREMENTS THAN YOU MAY BE FAMILIAR WITH IN THE UNITED STATES.
Investing in Japanese securities involves certain risks and special
considerations not usually associated with investing in securities of U.S.
companies, including risks related to the nature of the markets for Japanese
securities, including risks that the Japanese equities markets may be affected
by market developments in different ways than U.S. securities markets and may
be more volatile than U.S. securities markets. Moreover, as issuers of the
Fund's portfolio securities generally will not be subject to the reporting
requirements of the SEC, there may be less publicly available information
about the issuers of these securities than about reporting U.S. companies.
Issuers in Japan are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those
applicable to U.S. issuers. In particular, the assets and profits appearing on
the financial statements of a Japanese issuer may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles.
Legal principles relating to corporate affairs and the validity of corporate
procedures, directors' fiduciary duties and liabilities and stockholders'
rights for issuers in Japan may differ from those that may apply in the United
States Shareholders' rights under Japanese law may not be as extensive as
those that exist under the laws of the United States. The Fund may therefore
have more difficulty asserting its rights as a stockholder of a Japanese
company in which it invests than it would as a stockholder of a comparable
U.S. company.
THE FUND MAY HAVE DIFFICULTY ENFORCING FOREIGN JUDGMENTS AGAINST JAPANESE
COMPANIES OR THEIR MANAGEMENT.
It may be difficult for the Fund to obtain a judgment in a court outside the
United States with respect to any claim that the Fund may have against any
such issuer or its directors and officers. As a result, even if the Fund
initiates a suit against the issuer in a U.S. court, it may be difficult for
the Fund to effect service of process in Japan. Moreover, if the Fund obtains
a judgment in a U.S. court, it may be difficult to enforce such judgment in
Japan.
33
FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT THE FUND'S PERFORMANCE.
The Fund's assets will be invested principally in securities of Japanese
issuers and substantially all of the income received by the Fund will be in
Japanese yen. However, the Fund will compute and distribute its income in U.S.
dollars. Currency exchange rate fluctuations can decrease or eliminate income
available for distribution. For example, if the value of the Japanese yen
falls relative to the U.S. dollar between the earning of the income and the
time at which the Fund converts the Japanese yen to U.S. dollars, the Fund may
be required to liquidate securities in order to make distributions if the Fund
has insufficient cash in U.S. dollars to meet distribution requirements.
The following table sets forth certain information as to yen per U.S. dollar
exchange rates for the years 1994 through 2004 and for the period from January
1, 2005 through August 31, 2005.
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
Yen per U.S.
$1.00
----------------
High(1) 109.08 101.83 106.93 115.63 113.57 101.46 101.35 113.81 110.68 103.97 79.75 96.35
Low(1) 113.41 114.80 121.48 135.04 132.08 114.98 124.75 147.64 131.60 116.18 104.70 113.60
Average(2) 111.60 108.17 115.94 125.14 121.58 107.78 113.94 130.90 121.00 108.79 94.06 102.23
Source: Nomura Asset Management Co., Ltd.
1) High and low rates include intraday transaction.
2) Average rates indicate average of the most actively traded rates at the
end of each month.
3) For 2005, the rates are for the month of September 2005.
On September 30, 2005, the most actively traded interbank rate on the Tokyo
foreign exchange market, as reported by The Bank of Japan, was $1.00 = yen
113.15. The recent relative strength of the yen to the U.S. dollar may
adversely affect the economy of Japan and, in particular, the export sector
thereof.
IF THE FUND REPATRIATES INVESTMENTS DURING EXCHANGE RATE FLUCTUATIONS, IT MAY
HAVE AN ADVERSE IMPACT ON THE FUND'S PERFORMANCE.
Since the Fund will invest primarily in securities denominated or quoted in
Japanese yen, changes in the U.S. dollar-Japanese yen exchange rate will
affect the dollar value of securities in the Fund's portfolio and the
unrealized appreciation or depreciation of investments.
Furthermore, the Fund may incur costs in connection with conversions between
U.S. dollars and Japanese yen. Foreign exchange dealers realize a profit based
on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either at the
spot rate prevailing in the foreign currency exchange market or through
entering into forward, futures or options contracts to purchase or sell
foreign currencies, if available.
THE FOCUS OF THE FUND'S INVESTMENTS IN SPECIFIC ECONOMIC SECTORS AND RELATED
INDUSTRIES MAY EXPOSE IT TO GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO
SECURITIES.
From time to time, the Fund may invest a greater proportion of its assets in
the securities of companies that are part of specific sectors and related
industries of the Japanese economy. For example, at August 31, 2005, the Fund
maintained 29.8% of its total assets in the securities of Japanese companies
in the
34
automotive equitment and parts, machinery and machine tools and miscellaneous
manufacturing sectors. The Fund is therefore subject to greater risk of loss
with respect to its portfolio securities as a result of its focus on such
sectors and related industries.
INVESTMENTS IN SMALL CAPITALIZATION JAPANESE COMPANIES MAY EXPOSE THE FUND TO
GREATER INVESTMENT RISK.
The Fund invests a substantial portion of its assets in the securities of
smaller capitalization Japanese companies. Investments in the securities of
these companies may present greater opportunities for growth, but also involve
greater risks than are customarily associated with investments in securities
of more established and larger capitalized companies. The securities of
Smaller Capitalization Companies have fewer market makers and wider price
spreads, which may in turn result in more abrupt and erratic market price
movements and make the Fund's investments more vulnerable to adverse general
market or economic developments than would investments only in large, more
established Japanese companies. It is more difficult to obtain information
about smaller capitalization companies because they tend to be less well known
and have shorter operating histories and because they tend not to have
significant ownership by large investors or be followed by many securities
analysts. Additionally, these companies may have limited product lines,
markets or financial resources, or they may be dependent upon a limited
management group that may lack depth and experience. Investments in larger and
more established 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.
THERE ARE NO FIXED LIMITATIONS REGARDING PORTFOLIO TURNOVER.
Frequency of portfolio turnover is not a limiting factor if the Fund considers
it advantageous to purchase or sell securities. The Fund anticipates that its
annual portfolio turnover rate will not exceed 100%. For the fiscal year
ended February 28, 2005, the Fund's portfolio turnover rate was 86%. A high
rate of portfolio turnover involves correspondingly greater aggregate payments
for brokerage commissions than a lower rate, which expenses must be borne by
the Fund and its stockholders, while a lower rate of portfolio turnover
involves correspondingly lower aggregate payments and stockholder expenses. In
addition, a high rate of portfolio turnover may result in certain tax
consequences, such as increased capital gain dividends and/or ordinary income
dividends.
THE FUND'S ABILITY TO HEDGE AGAINST FOREIGN CURRENCY RISKS MAY ADVERSELY
AFFECT THE FUND'S NET ASSET VALUE.
The Fund may engage in a variety of foreign currency exchange transactions.
Hedging involves special risks, including possible default by the other party
to the transaction, illiquidity and, to the extent the Manager's and the
Investment Adviser's view as to certain market movements is incorrect, the
risks that the use of hedging could result in losses greater than if they had
not been used. The Fund has not previously entered into transactions to hedge
against foreign currency risks. However, if the Fund does enter into any such
transactions, the Fund, will deposit in a segregated account with its
custodian, liquid securities or cash or cash equivalents or other assets
permitted to be so segregated by the SEC in an amount equal to or greater than
the market value of the liabilities under any such foreign currency hedging
agreements. There can be no assurance that the Fund will employ a foreign
currency hedge at any given time, nor can there be any assurance that the Fund
will be able to do this hedging successfully. See "Investment Objective and
Policies--Other Investment Policies--Hedging Foreign Currency Risks."
35
IF THE FUND FAILS TO QUALIFY AS A REGULATED INVESTMENT COMPANY, THE FUND WILL
BE TAXED AS A CORPORATION.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code the Fund will be taxed in the same manner as an
ordinary corporation and distributions to its Stockholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, will constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to Stockholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the Stockholders'
hands as long-term capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it will be required to pay out its earnings
and profits accumulated in that year in order to qualify again as a regulated
investment company and may in certain circumstances be required to pay tax on
unrealized gains.
THE FUND'S SHARES HAVE TRADED AND MAY IN THE FUTURE TRADE AT A DISCOUNT TO NET
ASSET VALUE.
Although the Fund's shares of Common Stock have recently traded on the NYSE at
a premium to their NAV, the Fund's shares have in the past traded at a
discount to their NAV. There can also be no assurance that the Fund's shares
will trade at a premium in the future or that the present premium is
sustainable. The Fund's shares have traded at discounts of as much as 29.4% in
the past five years.
In addition, you should note that shares of closed-end investment companies
frequently trade at a discount from NAV. This characteristic is a risk
separate and distinct from the risk that the Fund's NAV will decrease as a
result of its investment activities. The Fund cannot predict whether its
shares will trade at, above or below NAV. The risk that shares of a closed-end
fund might trade at a discount is more significant for investors who wish to
sell their shares in a relatively short period of time. For those investors,
realization of gain or loss on their investment is likely to be more dependent
upon the existence of a premium or discount than upon portfolio performance.
JAPAN HAS DIFFERENT LAWS REGARDING THE CUSTODY OF JAPANESE SECURITIES THAN YOU
MAY BE FAMILIAR WITH IN THE UNITED STATES.
The Fund may hold its foreign securities and cash in foreign banks and
securities depositories. There may be less regulatory oversight over their
operations than in the case of U.S. financial institutions. Also, certain
Japanese laws may put limits on the Fund's ability to recover its assets if a
foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt.
THE FUND'S STATUS AS A "NON-DIVERSIFIED" INVESTMENT COMPANY MAY EXPOSE IT TO
GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES.
The Fund is classified as a "non-diversified" management investment company
under the 1940 Act, which means that the Fund is not limited by the 1940 Act
as to 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 obligations of a smaller number of
issuers and, as a result, will be subject to greater risk with respect to its
portfolio securities. Although, with respect to 50% of its assets, the Fund
must diversify its holdings in order to be treated as a regulated investment
company under the provisions of the Code, the Fund may be more susceptible to
any single economic, political or regulatory occurrence than would be the case
if it had elected to diversify its holdings sufficiently to be classified as a
"diversified" management investment company under the 1940 Act. See
"Taxation--U.S. Tax Status."
36
CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND PROVISIONS IN
THE FUND'S CHARTER AND BYLAWS MAY HAVE THE EFFECT OF DEPRIVING YOU OF AN
OPPORTUNITY TO SELL YOUR SHARES AT A PREMIUM.
The Fund's Charter and Bylaws and the MGCL include provisions that could limit
the ability of other persons to acquire control of the Fund, to convert the
Fund to an open-end investment company or to change the composition of the
Fund's Board of Directors. The Fund has also adopted measures that may make it
difficult for another person or entity to obtain control of the Fund.
The Fund's Charter and Bylaws include provisions that classify the Board of
Directors into three classes. The Directors of each class are elected to serve
for three years and until their successors are duly elected and qualify.
Additionally, the Charter provides that a Director elected by the Stockholders
may be removed (but only for cause) by a vote of the holders of at least 75
percent of the outstanding Shares entitled to vote in the election of such
Director.
Under the Charter, the Board of Directors is authorized to classify and
reclassify any unissued shares of stock into other classes or series of stock,
including preferred stock, and authorize the issuance of shares of stock
without obtaining stockholder approval.
Through a provision in the Charter, the Fund is subject to the Maryland
Business Combination Act (the "Business Combination Act"). Subject to various
limitations, the Business Combination Act prohibits certain business
combinations between the Fund and an "interested stockholder" (defined
generally as any person who beneficially owns ten percent or more of the
voting power of the Fund's shares or an affiliate or associate of the Fund
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of our then outstanding voting
shares, or an affiliate thereof) for five years after the most recent date on
which the Stockholder becomes an interested stockholder, and thereafter
imposes special stockholder voting requirements on these combinations.
Additionally, Charter provisions include various supermajority vote
requirements (which require the vote of 75 percent of outstanding shares in
certain circumstances) to approve extraordinary corporate actions such as a
merger or consolidation, the sale of all or substantially all of the Fund's
assets, the liquidation or dissolution of the Fund and certain Charter
amendments.
The foregoing provisions may be regarded as "anti-takeover" provisions and may
have the effect of depriving Stockholders of an opportunity to sell their
shares at a premium over prevailing market prices. See "Capital Stock--Certain
Provisions of Maryland General Corporation Law and the Charter and Bylaws."
THE OPERATING EXPENSES OF THE FUND MAY BE HIGHER THAN INVESTMENT COMPANIES
THAT INVEST PRIMARILY IN THE SECURITIES OF U.S. COMPANIES.
The Fund's estimated annual operating expenses may be higher than those of
most other investment companies that invest predominately in the securities of
U.S. companies. In addition, brokerage commissions, custodial fees and other
fees are generally higher for investments in foreign securities markets. The
management fees and operating expenses, however, are believed by the Manager
to be comparable to expenses of other management investment companies that
invest primarily in the securities of issuers in Japan with investment
objectives similar to the investment objective of the Fund. As a result of
these higher expected operating expenses, the Fund needs to generate higher
relative returns to provide investors with an equivalent economic return. See
"Fund Expenses."
37
FUTURE MARKET DISRUPTIONS RESULTING FROM TERRORIST ATTACKS IN THE UNITED
STATES AND ELSEWHERE OR U.S. MILITARY ACTION ABROAD COULD NEGATIVELY AND
ADVERSELY AFFECT THE MARKET FOR THE FUND'S COMMON STOCK.
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, some of the U.S. securities markets were
closed for a four-day period. These terrorist attacks and related events have
led to increased short-term market volatility. Moreover, the ongoing U.S.
military and related action in Iraq and other events in the Middle East could
have significant adverse effects on U.S. and world economies and markets. The
Fund does not know how long the securities markets will continue to be
affected by these and other geopolitical events and cannot predict the effects
of military action or similar events in the future on the U.S. economy and
securities markets. A similar disruption of the U.S. or world financial
markets could affect interest rates, secondary trading, ratings, credit risk,
inflation and other factors relating to the Fund's Common Stock.
38
PORTFOLIO COMPOSITION
The following sets forth certain information with respect to the composition
of the Fund's investment portfolio as of August 31, 2005:
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS
AUGUST 31, 2005
(Unaudited)
% of Net
EQUITY SECURITIES Shares Cost Market Value Assets
---------- -------------- ------------- ---------
Automotive Equipment and Parts
F.C.C. Co., Ltd............................... 47,000 $ 1,809,003 $ 1,827,342 0.9
Clutches and facings
Musashi Seimitsu Industry Co., Ltd............ 137,700 1,559,126 3,403,527 1.7
Ball joints, camshafts and gears
Nipon Piston Ring Co., Ltd.................... 326,000 626,479 852,826 0.5
Internal combustion engine parts
Nissin Kogyo Co., Ltd. ....................... 29,200 644,363 1,116,846 0.6
Brake systems
Nittan Valve Co., Ltd. ....................... 381,000 2,524,774 3,127,599 1.6
Engine valves
Sanoh Industrial Co., Ltd..................... 254,400 1,784,177 1,851,976 1.0
Tubes, wires and electrical products
Unipres Corporation........................... 219,300 1,840,380 2,023,760 1.0
-------------- -------------- ---
Press processed automobile parts
Total Automotive Equipment and Parts.......... 10,788,302 14,203,876 7.3
-------------- -------------- ---
Banks and Finance
The Bank of Fukuoka, Ltd...................... 303,000 1,632,072 1,921,510 1.0
Deposits, loans and exchange transactions
IBJ Leasing Company, Limited.................. 85,500 1,457,738 1,916,625 1.0
Leases general machinery, aircrafts and computer
Kansai Urban Banking Corporation.............. 685,000 1,220,065 1,903,207 0.9
General banking services
Sanyo Shinpan Finance Co., Ltd................ 44,000 2,433,536 3,099,905 1.6
-------------- -------------- ---
Consumer Financing
Total Banks and Finance....................... 6,743,411 8,841,247 4.5
-------------- -------------- ---
Chemicals and Pharmaceuticals
Arisawa Manufacturing Co., Ltd................ 90 3,402 1,908 0.0
Glassfibers and insulating resins
Asahi Denka Co., Ltd.......................... 178,000 1,875,962 1,979,829 1.0
Resin, insulators and processed fat/oil products
C. Uyemura & Co., Ltd......................... 19,000 265,973 702,720 0.4
Chemicals
Hisamistu Pharmaceutical Co., Ltd............. 107,500 1,958,519 2,826,778 1.4
Pharmaceutical products
Kanto Denka Kogyo Co., Ltd.................... 46,000 157,108 155,194 0.1
High-pressured gases
Koatsu Gas KogyoCo., Ltd...................... 192,000 966,841 978,576 0.5
Natural gas supplier
See notes to financial statements
39
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS -- Continued
AUGUST 31, 2005
(Unaudited)
% of Net
EQUITY SECURITIES Shares Cost Market Value Assets
------ ---- ------------ ------
Shizuokagas Co., Ltd.......................... 418,000 $ 1,242,332 $ 2,511,281 1.3
-------------- -------------- ---
Natural gas supplier
Total Chemicals and Pharmaceuticals........... 6,470,137 9,156,286 4.7
-------------- -------------- ---
Electric
Mirai Industry Co., Ltd....................... 246,500 2,331,742 2,568,287 1.3
-------------- -------------- ---
Plastic molded electric materials
Total Electric................................ 2,331,742 2,568,287 1.3
-------------- -------------- ---
Electronics
Alpine Electronics Inc........................ 70,000 984,550 1,098,733 0.6
Automobile audio and video products
Chiyoda Integre Co., Ltd...................... 38,620 761,792 778,636 0.5
Electronic components
Cosel Co., Ltd................................ 60,900 1,570,427 1,768,959 0.9
Electrical machinery
Dainippon Screen Mfg. Co., Ltd................ 349,000 1,659,738 2,436,751 1.2
Electronic components
Elpida Memory, Inc.+.......................... 35,000 1,069,787 994,542 0.5
Electronic components
Fukuda Denshi Co.............................. 16,300 385,199 582,274 0.3
Medical electronic equipment
Iriso Electronics Co., Ltd.................... 46,520 1,036,411 1,109,490 0.6
Electronic connectors
Kuroda Electric Co., Ltd...................... 80,400 688,481 1,461,423 0.7
Materials and components
Meiko Electronics Co., Ltd.................... 116,300 3,178,148 4,280,402 2.2
Printed circuit boards
Nitto Kogyo Corporation....................... 62,000 783,899 788,598 0.4
Power switchboards
Shinko Electric Industries Co., Ltd........... 42,800 1,120,124 2,366,731 1.2
-------------- -------------- ---
Semiconductor packages
Total Electronics............................. 13,238,556 17,666,539 9.1
-------------- -------------- ---
Food Marketing
Arcs Co., Ltd................................. 28 145 365 0.0
Supermarket chain
Ariake Japan Co., Ltd......................... 50,083 1,021,687 1,276,302 0.7
Natural seasonings
J-Oil Mills, Inc.,............................ 63,000 273,259 280,177 0.1
Cooking Oil
Nippon Flour Mills Co., Ltd. 166,000 744,002 697,812 0.4
Flour and grain
See notes to financial statements
40
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS -- Continued
AUGUST 31, 2005
(Unaudited)
% of Net
Shares Cost Market Value Assets
--------- -------------- -------------- ---------
Ozeki Co., Ltd................................ 90,800 $ 2,831,843 $ 2,371,260 1.2
Supermarket chain
Plenus Co., Ltd............................... 80,960 2,274,633 2,819,048 1.4
Japanese lunch-boxes
Sansei Foods Co., Ltd......................... 76,800 1,631,040 1,925,975 1.0
Candy products
Showa Sangyo Co., Ltd......................... 101,000 283,512 285,174 0.2
Flour
Warabeya Nichiyo Co., Ltd..................... 67,700 1,380,917 1,031,423 0.5
-------------- -------------- ---
Japanese lunch-boxes
Total Food Manufacturing...................... 10,441,038 10,687,536 5.5
-------------- -------------- ---
Information and Software
Argo Graphics Inc............................. 55,000 717,576 1,463,624 0.8
Computer aided design software
Jastec Co., Ltd............................... 21,100 386,315 384,484 0.2
Application software
Kyowa Expo Corporation........................ 222,000 1,879,239 2,018,637 0.9
Designs, constructs, maintains communication
and electric facilities
Sorun Corporation............................. 253,500 1,655,994 1,692,210 0.9
Computer software development
Sumisho Computer Systems Corporation.......... 14 319 290 0.0
Computer software development
Tecmo, Ltd.................................... 119,100 1,280,616 1,288,177 0.7
-------------- -------------- ---
Computer game software
Total Information and Software ............... 5,920,059 6,847,422 3.5
-------------- -------------- ---
Iron and Steel
Nakayama Steel Works Ltd...................... 180,000 752,611 896,306 0.5
Wire rods, steel bars, and C-shaped steel
products
Neturen Co., Ltd.............................. 47,000 359,948 356,141 0.2
Metal processors
Sanyo Special Steel Co., Ltd.................. 369,000 1,002,042 1,780,840 0.9
Specialty steel products
Yodagawa Steel Works, Ltd..................... 329,000 1,868,368 1,958,775 1.0
-------------- -------------- ---
Surface-treated steel sheets and plates
Total Iron and Steel ......................... 3,982,969 4,992,062 2.6
-------------- -------------- ---
Machinery and Machine Tools
Hitachi Construction Machinery Co., Ltd....... 262,600 3,327,283 4,015,218 2.1
Construction Machinery
See notes to financial statements
41
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS -- Continued
AUGUST 31, 2005
(Unaudited)
Market % of Net
Shares Cost Value Assets
------ ------- -------- ---------
Makino Milling Machine Co., Ltd............... 375,000 $ 2,198,738 $ 2,736,683 1.4
Industrial machinery
Nachi-Fujikoshi Corp.......................... 750,000 2,163,291 3,010,690 1.5
Machine tools
NS Tool Co., Ltd.............................. 3,700 189,778 193,586 0.1
Industrial cutting tools
NSK Ltd....................................... 370,000 1,905,953 1,995,941 1.0
Metal processors
Shibaura Mechatronics Corporation............. 165,000 1,471,583 1,385,729 0.7
Semiconductor machinery
Shimadzu Corporation.......................... 265,000 1,435,772 1,668,576 0.9
Precision tools and equipment
Sintokogio, Ltd............................... 226,000 1,826,584 1,924,532 1.0
Engineering equipment
Tsubaki Nakashima Co., Ltd.................... 141,500 1,755,612 1,982,315 1.0
Bearing balls, blowers and precision ball screws
Yamazen Corporation........................... 444,000 1,363,157 2,170,836 1.1
Machinery and tools ---------- ---------- --------
Total Machinery and Machine Tools ............ 17,637,751 21,084,106 10.8
---------- ---------- --------
Miscellaneous Manufacturing
Bunka Shutter Co., Ltd........................ 169,000 920,496 1,045,817 0.5
Light and heavy weight shutters
Daikoku Denki Co., Ltd........................ 43,000 1,179,552 1,241,261 0.6
Leisure and recreational products
Dainichi Co., Ltd............................. 27,000 203,564 238,934 0.1
Oil heating equipment
Dowa Mining Co., Ltd.......................... 562,000 3,555,607 4,010,121 2.1
Various metal-related products
Hamamatsu Photonics K.K....................... 45,000 945,971 972,216 0.5
Election tubes, semiconductors, and image
processors
JSP Corporation............................... 67,200 718,162 681,972 0.4
Polystyrene products
Kansai Paint Co., Ltd......................... 212,000 1,299,777 1,340,598 0.7
Wide range of paints
Kitagawa Industries Co., Ltd.................. 17,700 255,371 275,427 0.1
Metal products and fasteners
Mani, Inc..................................... 66,300 1,160,436 3,325,317 1.7
Medical goods and equipment
Nichias Corporation........................... 420,000 1,887,724 1,905,733 1.0
Building and construction materials
42
See notes to financial statements
43
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS -- Continued
AUGUST 31, 2005
(Unaudited)
Market % of Net
Shares Cost Value Assets
-------- ------------ ------------ --------
Nichiha Corporation........................... 64,600 $ 790,477 $ 981,922 0.5
Ceramic exterior walls and fiber boards
Nippon Kodoshi Corp........................... 188,000 2,839,396 1,433,043 0.7
Paper for electric insulation
SK Kaken Co., Ltd............................. 49,500 1,188,490 1,719,138 0.9
Paints
Topcon Corporation............................ 60,000 981,275 1,377,475 0.7
Medical instruments
Ushio Inc. ................................... 118,000 2,095,910 2,320,509 1.2
Lamps and optical equipment
Total Miscellaneous Manufacturing............. 20,022,208 22,869,483 11.7
Oil and Gas
Cosmo Oil Company, Ltd........................ 435,000 1,375,075 2,154,301 1.1
Domestic crude oil refiner
Teikoku Oil Co., Ltd.......................... 252,000 1,890,462 2,114,113 1.1
Oil and natural gas
Total Oil and Gas............................. 3,265,537 4,268,414 2.2
Real Estate and Warehouse
Daibiru Corporation........................... 315,000 2,263,529 2,304,497 1.2
Leases office buildings, apartments and hotels
Leopalace21 Corporation....................... 118,500 1,843,194 2,207,411 1.1
Property manager
Recrm Research Co., Ltd....................... 1,529 2,099,657 2,565,459 1.3
Building management
Ryowa Life Create Co., Ltd.................... 122,500 949,246 917,189 0.5
Real estate management
Sanko Soflan Company Inc...................... 138,000 931,642 970,998 0.5
Designs and constructs housing
Tosei Corporation............................. 1,937 1,440,964 1,485,228 0.7
Residential properties and leases office
facilities
Total Real Estate and Warehouse............... 9,528,232 10,450,782 5.3
Restaurants
Saint Marc Co., Ltd. ......................... 48,300 1,630,894 2,108,809 1.1
Restaurants and bakery shop chain
Total Restaurants............................. 1,630,894 2,108,809 1.1
Retail
Arc Land Sakamoto Co., Ltd. .................. 36,000 551,975 589,094 0.3
Operates home centers
44
See notes to financial statements
45
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS -- Continued
AUGUST 31, 2005
(Unaudited)
% of Net
Shares Cost Market Value Assets
------------ ------------ ------------- --------
Joshin Denki Co., Ltd......................... 410,000 $ 1,682,696 $ 2,063,777 1.1
Household appliances and computers
Komeri Co., Ltd............................... 34,800 931,446 1,117,568 0.6
Building products
Meganesuper Co., Ltd.......................... 193,760 2,749,736 2,625,299 1.3
Eye glasses chain
Ricoh Elemex Corporation...................... 4,000 28,250 32,980 0.0
Precison equipment
Ryohin Keikaku Co., Ltd....................... 52,500 2,679,180 3,049,930 1.6
Knitwears, food and household items
Seijo Corporation............................. 84,500 1,359,040 2,317,261 1.2
Chain drug store
Shimachu Co., Ltd. ........................... 59,000 1,464,575 1,490,235 0.7
Furniture and home goods
Village Vanguard Co., Ltd. +.................. 229 1,751,520 2,933,381 1.5
Books, cd's, videos and office supplies ---------- ---------- ------
Total Retail.................................. 13,198,418 16,219,525 8.3
---------- ---------- ------
Services
Alps Logistics Co., Ltd....................... 93,300 715,946 1,780,069 0.9
Transportation
Daiwa Logistics Co., Ltd...................... 31,000 234,815 278,526 0.1
Transports housing materials and building steel
frames
Funai Consulting Co., Ltd..................... 61,500 748,463 829,394 0.4
Management and financial consulting
Hitachi Transport System, Ltd................. 106,000 807,735 939,948 0.5
Freight truck and marine transportation
Maeda Road Construction Co., Ltd.............. 105,000 749,474 766,271 0.4
Constructs highways, runways, and harbor facilities
Obayashi Corporation.......................... 322,000 1,622,900 1,983,907 1.0
General contractor
Space Co., Ltd................................ 58,100 736,768 696,016 0.3
Interior design and display work
Sumikin Bussan Corp........................... 860,000 2,202,289 3,428,984 1.8
General trading firm
Tohokushinsha Film Corporation................ 79,800 1,254,729 2,076,794 1.1
Produces tv programs, movies and commercial films
Vic Tokai Corporation......................... 40,600 336,098 410,194 0.2
Information and telecommunication
Yusen Air & Sea Service Co., Ltd.............. 46,500 1,612,589 1,539,443 0.8
Domestic and international air freight forwarding ---------- ---------- ------
Total Services................................ 11,021,806 14,729,546 7.5
---------- ---------- ------
See notes to financial statements
46
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS -- Continued
AUGUST 31, 2005
(Unaudited)
% of Net
Shares Cost Market Value Assets
------------ -------------- --------------- ---------
Telecommunications
Daimei Telecom Engineering Corp............... 226,000 $ 1,890,566 $ 2,403,626 1.2
Telecommunication wire installations
Jupiter Telecommunications Co., Ltd.+......... 1,498 1,195,631 1,256,723 0.7
Cable television broadcasting -------------- -------------- ---------
Total Telecommunications...................... 3,086,197 3,660,349 1.9
-------------- -------------- ---------
Textiles and Apparel
Seiren Co., Ltd............................... 80,000 740,560 899,914 0.4
Dyeing processor of filament fibers
Workman Co., Ltd.............................. 71,900 1,333,163 1,945,785 1.0
Uniforms -------------- -------------- ---------
Total Textiles and Apparel.................... 2,073,723 2,845,699 1.4
-------------- -------------- ---------
Transportation
Keisei Electric Railway Co., Ltd.............. 332,000 1,614,165 1,716,080 0.9
Passenger rail and business transportation -------------- -------------- ---------
Total Transportation.......................... 1,164,165 1,716,080 0.9
-------------- -------------- ---------
Wholesale
Hitachi High-Technologies Corporation......... 133,100 2,064,939 2,152,797 1.1
Computers and electrical devices
Kondotec, Inc................................. 205,500 1,400,365 1,716,594 0.8
Construction materials
Meiko Shokai Co., Ltd......................... 37,300 580,251 585,468 0.3
Office equipment
Rentrak Japan Co., Ltd........................ 271,000 2,377,521 2,280,844 1.2
Videocassettes and DVDs
Ryoden Trading Co., Ltd....................... 125,000 873,137 875,017 0.5
Electronic components
Ryosan Co., Ltd............................... 76,700 1,882,691 1,920,008 1.0
Electronic parts
Shinko Shoji Co., Ltd......................... 128,000 1,105,366 1,255,117 0.6
Electronic parts
Takachiho Electric Co., Ltd................... 84,800 1,028,372 1,124,496 0.6
Electronic parts, optical materials and
equipment
Takihyo Co., Ltd.............................. 263,000 1,531,834 1,425,854 0.7
Apparel, accessories and interior products
Tomen Electronics Corporation................. 38,900 995,046 1,040,445 0.5
Semiconductors and electronic equipment
Toshin Denki Co., Ltd......................... 24,400 318,608 574,480 0.3
Lighting equipment and electrical engineering
materials
See notes to financial statements
47
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS -- Continued
AUGUST 31, 2005
(Unaudited)
% of Net
Shares Cost Market Value Assets
------------ -------------- --------------- ---------
Yuasa Trading Co., Ltd. +................................. 1,709,000 $ 2,922,481 $ 3,299,139 1.7
Industrial machinery -------------- --------------- ---------
Total Wholesale........................................... 17,080,611 18,250,259 9.3
-------------- --------------- ---------
TOTAL INVESTMENTS IN EQUITY SECURITIES.................... 160,075,756 193,166,307 98.9
-------------- --------------- ---------
INVESTMENTS IN FOREIGN CURRENCY Principal
--------
Amount
Hong Kong Shanghai Bank-Tokyo
Non-interest bearing account......................... JPY188,634,935 1,705,717 1,701,637 0.9
-------------- --------------- ---------
TOTAL INVESTMENTS IN FOREIGN CURRENCY..................... 1,705,717 1,701,637 0.9
-------------- --------------- ---------
TOTAL INVESTMENTS......................................... $ 161,781,473 194,867,944 99.8
-------------- --------------- ---------
OTHER ASSETS LESS LIABILITIES, NET........................ 466,859 0.2
--------------- ---------
NET ASSETS................................................ $ 195,334,803 100.0
=============== =========
+ Non-income producing security.
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of August 31, 2005.
Japanese Yen......JPY (Y) 110.86 = $1.00
See notes to financial statements
48
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Under the Fund's Bylaws and the MGCL, the business and affairs of the Fund
shall be managed under the direction of its Board of Directors. Investment
decisions for the Fund are made by the Manager (or by the Investment Adviser
as its delegate), subject to any direction it may receive from the Fund's
Board of Directors, which periodically reviews the Fund's investment
performance.
The Fund's Bylaws provide that the Directors are divided into three classes,
as nearly equal in number as possible. Each Director serves for three years
and until his or her successor is duly elected and qualifies. Each year, the
term of one class expires. The officers of the Fund serve at the pleasure of
the Board of Directors.
Maryland law permits the Fund to include in its Charter a provision limiting
the liability of the Fund's Directors and officers to the Fund and the
Stockholders for money damages, except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment and which is
material to the cause of action. The Fund's Charter contains a provision which
eliminates Directors' and officers' liability to the fullest extent permitted
by Maryland law.
The Fund's Charter provides that the Fund shall indemnify each Director and
officer to the full extent permitted by the Maryland law and subject to the
requirements of the Investment Company Act. The Fund's Bylaws obligate the
Fund, to the maximum extent permitted by Maryland law and subject to the
requirements of the Investment Company Act, to indemnify and pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
individual who is a present or former Director or officer of the Fund and who
is made or threatened to be made a party to the proceeding by reason of his or
her service in that capacity or (b) any individual who, while a Director or
officer of the Fund and at the request of the Fund, serves or has served as a
director, officer, partner or trustee of another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise and who is made or threatened to be made a party to the
proceeding by reason of his or her service in that capacity.
Neither the Charter nor the Bylaws of the Fund protects or indemnifies a
Director or officer against any liability to which he or she 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 or her office.
The names of the Directors and officers of the Fund, their addresses, ages and
principal occupations during the past five years are provided in the tables
below. A director who is deemed an "interested person" (as that term is
defined in Section 2(a)(19) of the 1940 Act) of the Fund is included in the
table titled "Interested Director." Directors who are not interested persons,
as described above, of the Fund are included in the table titled "Independent
Directors."
49
INTERESTED DIRECTOR
Number of
Term of Funds in
Office and Fund Other
Position(s) Length of Principal Complex** Directorships
Name, Address Held With Time Occupation(s) Overseen by Held by
and Age the Fund Served During Past Five Years Director Director
------------------------ ----------------- --------------- ---------------------- ---------------- --------------
Hiroshi Terasaki (50)*, President and President and Managing Director and 2 registered None
Two World Financial Class II Director Director since Chief Executive investment
Center, Building B, New June 2005 Officer, Nomura Asset companies
York, New York 10281 Management U.K. consisting of 2
Limited from
2003 to
portfolios
2005; General
Manager, Fixed
Income
Investment
Department of
the Investment
Adviser from
2000 to 2003.
* Mr. Terasaki is a Director and the President of the Fund for which the
Manager acts as manager and for which the Investment Adviser acts as
investment adviser. Mr. Terasaki is an "interested person," as defined
in the 1940 Act, of the Fund based on his positions as President of the
Fund, and as President and Director of the Manager.
** In addition to the Fund, the "Fund Complex" includes Korea Equity Fund,
Inc.
INDEPENDENT DIRECTORS
Number of
Term of Funds in
Office and Fund Other
Position(s) Length of Principal Complex* Directorships
Name, Address Held With Time Occupation(s) Overseen by Held by
and Age the Fund Served During Past Five Years Director Director
------------------------ ----------------- --------------- ---------------------- ---------------- --------------
William G. Barker, Jr. Class I Director Director since Retired. 2 registered None
(72) 1993 investment
111 Parsonage Road, companies
Greenwich, Connecticut consisting of 2
06830 portfolios
William K. Grollman (63) Class III Director since President and 2 registered SmartPros Ltd.
SmartPros Ltd. Director January 2004 co-founder since 1981 investment
12 Skyline Drive and director of companies
Hawthorne, New York SmartPros Ltd. consisting of 2
10532 (continuing education portfolios
for the
professions)
which is listed
on American
Stock Exchange;
former Partner
and National
Director of BDO
Seidman
accounting
firm.
Chor Weng Tan (69) Class II Director Director since Retired since 2004; 2 registered None
76 Echo Bay Drive 1990 Managing Director for investment
New Rochelle, New York Education, the companies
10805 American Society of consisting of 2
Mechanical Engineers portfolios
from 1991 to 2004.
50
Arthur R. Taylor (70) Class III Director since Retired since 2002; 2 registered None
3731 Devonshire Street, Director 1990 President of investment
Allentown, Muhlenberg College companies
Pennsylvania 18103 from 1992 to 2002. consisting of 2
portfolios
John F. Wallace (77) Class I Director Director since Retired since 2000; 2 registered None
17 Rhoda Street 1990 Vice President of the investment
West Hempstead, Fund from 1997 to companies
New York 11552 2000 and Secretary consisting of 2
and Treasurer of the portfolios
Fund from 1990 to
1997; Senior Vice
President of the
Manager from 1981 to
2000, Secretary from
1976 to 2000,
Treasurer from 1984
to 2000 and Director
from 1986 to 2000.
* In addition to the Fund, the "Fund Complex" includes Korea Equity Fund, Inc.
OFFICERS WHO ARE NOT DIRECTORS
Term of
Office** and
Position(s) Length of
Name, Address* Held With Time Principal Occupation(s)
and Age the Fund Served During Past Five Years
--------------------------- --------------------- ------------------------- -------------------------------------
Kenneth L. Munt (59) Vice President Vice President since 2001 Senior Vice President and Secretary
of the Manager since 1999.
Keiko Tani (42) Vice President Vice President since 2005 Senior Vice President and General
Counsel of the Manager since 2005;
Leader, Legal Team, Product
Documentation & Legal Department of
the Investment Adviser from 2003 to
2005, General Manager of Legal
Department from 1999 to 2003.
Rita Chopra-Brathwaite (36) Treasurer Treasurer since 2002 Vice President of the Manager since
2001, Assistant Vice President from
1999 to 2000.
Neil Daniele (45) Secretary Secretary since 2002 Senior Vice President of the Manager
since 2002; Vice President and
Compliance Officer of Munich Re
Capital Management Corp. (asset
management firm) from 2001 to 2002;
Vice President of AIG Global
Investment Group, Inc. (asset
management firm) from 2000 to 2001;
Compliance Officer of AIG Global
Investment Corp. from 1996 to 2000.
* The address of each officer listed above is Two World Financial Center,
Building B, New York, New York 10281
** Elected annually by and serves at the pleasure of the Board of
Directors.
51
OWNERSHIP OF SECURITIES
As of the Record Date, the Fund's Directors and executive officers, as a
group, owned less than 1% of the Fund's outstanding Shares. The information as
to ownership of securities which appears below is based on statements
furnished to the Fund by its Directors and executive officers.
As of November 8, 2005, the dollar range of equity securities owned
beneficially by each Director in the Fund and in all registered investment
companies overseen by the Director within the same family of investment
companies as the Fund was as follows:
Aggregate Dollar Range of Equity
Securities in All Registered
Investment Companies Overseen by
Dollar Range of Equity Securities in Director in Family of Investment
Name of Director the Fund Companies
---------------------------------- ------------------------------------- ---------------------------------
William G. Barker, Jr. None None
William K. Grollman None None
Chor Weng Tan None $10,001-$50,000
Arthur R. Taylor None None
Hiroshi Terasaki None None
John F. Wallace None $10,001-$50,000
As of November 8, 2005, the Directors and officers of the Fund as a group
(eleven persons) owned an aggregate of less than 1% of the outstanding shares
of the Fund. At such date, all of the officers of the Fund as a group (five
persons) owned an aggregate of less than 1% of the outstanding shares of
Nomura Holdings, Inc., the parent company of each of the Manager and the
Investment Adviser.
COMMITTEES OF THE BOARD OF DIRECTORS
Current Committees and Members
The Fund has a standing Audit Committee and a Nominating Committee. The Audit
Committee and Nominating Committee are composed entirely of Directors who are
not "interested persons" of the Fund or the Fund's Manager within the meaning
of the 1940 Act and who are "independent" as defined in the NYSE listing
standards.
Audit Committee
The Audit Committee is responsible for the selection and engagement of the
Fund's independent public accountants (subject to ratification by the Board of
Directors), pre-approves and reviews both the audit and non-audit work of the
Fund's independent public accountants, and reviews compliance of the Fund with
regulations of the SEC and the Internal Revenue Service, and other related
matters.
The Board of Directors has adopted a Charter for its Audit Committee. The
Audit Committee has received the written disclosures and the letter required
by Independence Standards Board Standard No. 1 from [___________] ("[__]"),
the Fund's independent registered public accounting firm, and has discussed
with [__] its independence. The Audit Committee has also reviewed and
discussed the audited financial statements with Fund management and [__], and
discussed certain matters with [__] required to be discussed by Statements on
Auditing Standards
52
Nos. 61 and 90. Based on the foregoing, the Audit Committee recommended to the
Board of Directors that the Fund's audited financial statements be included in
the Fund's Annual Report to Stockholders for the fiscal year ended February
28, 2005. The members of the Fund's Audit Committee are Messrs. William G.
Barker, Jr., William K. Grollman, Chor Weng Tan, Arthur R. Taylor and John F.
Wallace. The Audit Committee Charter is available upon request to the Fund at
Two World Financial Center, Building B, New York, New York 10281 (or by
calling (800) 833-0018).
Nominating Committee; Consideration of Potential Director Nominees
The Nominating Committee makes recommendations to the Board of Directors
regarding nominations for membership on the Board of Directors. It evaluates
candidates' qualifications for Board of Directors membership and, with respect
to nominees for positions as independent directors, their independence from
the Fund's Manager and other principal service providers. The Committee
periodically reviews Director compensation and will recommend any appropriate
changes to the Board of Directors as a group. This Committee also reviews and
may make recommendations to the Board of Directors relating to those issues
that pertain to the effectiveness of the Board of Directors in carrying out
its responsibilities in governing the Fund and overseeing the management of
the Fund. The members of the Fund's Nominating Committee are Messrs. William
G. Barker, Jr., William K. Grollman, Chor Weng Tan, Arthur R. Taylor and John
F. Wallace.
The Nominating Committee will consider potential independent director
candidates recommended by Stockholders provided that the proposed candidates
satisfy the criteria for independent directors adopted by the Nominating
Committee and any applicable regulatory requirements; are not "interested
persons" of the Fund or the Fund's Manager within the meaning of the 1940 Act;
and are "independent" as defined in the NYSE listing standards.
The Board of Directors has adopted a charter for the Nominating Committee
which is available upon request to the Fund at Two World Financial Center,
Building B, New York, New York 10281 (or by calling (800) 833-0018).
No nominee recommendations have been received from Stockholders. The
Nominating Committee may modify its policies and procedures for director
nominees and recommendations from time to time in response to changes in the
Fund's needs and circumstances, and as applicable legal or listing standards
change.
Board of Directors and Committee Meetings in Fiscal 2005
During the Fund's fiscal year ended February 28, 2005, the Board of Directors
held four regular meetings, two special meetings, two Audit Committee meetings
and one Nominating Committee meeting. Each Director then in office attended
75% or more of the aggregate number of regular and special meetings of the
Board of Directors and those Committees of which each Director is a member.
COMPENSATION OF OFFICERS
The Fund does not pay its officers for the services they provide to the Fund,
except for those expenses incurred in connection with Board of Directors or
Stockholders meetings which are reimbursed by the Fund under the Fund's
reimbursement policy. Instead, the officers who are also officers or employees
of the Manager are compensated by the Manager.
53
COMPENSATION OF DIRECTORS
The Manager pays all compensation of all Directors of the Fund who are
affiliated with the Manager or any of its affiliates. The Fund pays to each
Director not affiliated with the Manager or any of its affiliates an annual
fee of $10,000 plus $1,000 per Board of Directors or committee meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. Mr. Barker, who has been designated by the
Directors not affiliated with the Fund to serve as Lead Director, is paid an
additional $5,000, effective June 2005. Such fees and expenses aggregated
$86,500 for the fiscal year ended February 28, 2005.
The following table sets forth the aggregate compensation (not including
expense reimbursements) paid by the Fund to each Director (other than Mr.
Yasushi Suzuki, who received no director fees or other compensation for
services as a Director of the Fund) during the fiscal year ended February 28,
2005, as well as the total compensation paid by the Fund to each Director.
Pension or Retirement Aggregate Compensation From
Aggregate Compensation Benefits Accrued As Part Fund Complex Paid to
From Fund for its Fiscal of Fund Expenses for its Directors During the
Year Ended February 28, Fiscal Year Ended Calendar Year Ended
Name of Director 2005 February 28, 2005 December 31, 2004*
---------------------------- ------------------------ ------------------------ ----------------------------
William G. Barker, Jr. $17,500 None $30,500
William K. Grollman 17,500 None 29,500
Yasushi Suzuki** -- None --
Chor Weng Tan 17,500 None 30,500
Arthur R. Taylor 16,500 None 29,000
John F. Wallace 17,500 None 30,500
-----------------
* In addition to the Fund, the "Fund Complex" includes Korea Equity Fund,
Inc. Because the funds in the Fund Complex do not share a common fiscal
year, the information relating to compensation from the Fund Complex
paid to the Directors is provided as of December 31, 2004.
** Mr. Suzuki resigned as a Director effective June 20, 2005.
CODE OF ETHICS
The Fund and the Manager have adopted a joint code of ethics in accordance
with Rule 17j-1 under the 1940 Act. The Investment Adviser has adopted a
separate code of ethics in accordance with Rule 17j-1 under the 1940 Act. The
Fund's Dealer Manager has also adopted a code of ethics in accordance with
Rule 17j-1 under the 1940 Act. Subject to certain conditions and restrictions,
these codes of ethics permit personnel who are subject to them to invest in
securities, including securities that may be purchased or held by the Fund.
Each of these codes of ethics may be reviewed and copied at the Public
Reference Room of the SEC in Washington, D.C. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. These codes of ethics are also available on the EDGAR Database
on the SEC's Internet site at www.sec.gov. Copies of these codes of ethics may
be obtained, after paying a duplicating fee, by electronic request to
publicinfo@sec.gov, or by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102. The Fund's code of ethics is available upon
request to the Fund at Two World Financial Center, Building B, New York, New
York 10281 (or by calling (800) 833-0018).
54
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS
The Manager
The Manager acts as the management company for the Fund. The Manager, a New
York corporation with its office located at Two World Financial Center,
Building B, New York, New York 10281, is a subsidiary of the Investment
Adviser. The Manager also provides global investment advisory services,
primarily with respect to Japanese securities and other Pacific Basin
securities, for North American institutional clients. The Manager also acts as
one of the investment advisers to 11 other investment companies (one of which
is registered as an investment company under the 1940 Act).
Under its management agreement with the Fund (the "Management Agreement"), the
Manager agrees to provide, or arrange for the provision of, investment
advisory and management services to the Fund, subject to the oversight and
supervision of the Board of Directors of the Fund. In addition to the
management of the Fund's portfolio in accordance with the Fund's investment
objective and policies and the responsibility for making decisions to buy,
sell or hold particular securities, the Manager is obligated to perform, or
arrange for the performance of the administrative and management services
necessary for the operation of the Fund. The Manager is also obligated to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties thereunder.
The Investment Adviser
In accordance with the terms of the Management Agreement, the Manager has
retained the Investment Adviser to act as the investment adviser for the Fund.
Pursuant to the investment advisory agreement between the Manager and the
Investment Adviser (the "Investment Advisory Agreement"), the Investment
Adviser has agreed to (i) furnish the Fund with economic research, securities
analysis and investment recommendations, (ii) review and render investment
advice with respect to the Fund, (iii) make decisions to buy, sell or hold
particular securities, (iv) execute portfolio transactions, and (v) pursuant
to investment discretion delegated to the Investment Adviser by the Manager,
exercise investment discretion, including stock selection and order placement
responsibility, with respect to the Fund's portfolio. The Manager has a
significant compliance role with respect to, and is responsible for reviewing
all transactions effected by, the Investment Adviser. The Investment Adviser,
a Japanese corporation with its principal office located at 1-12-1,
Nihombashi, Chuo-ku, Tokyo 103-8260, Japan, provides investment advisory
services for Japanese and international clients. The Investment Adviser,
together with its affiliates, had approximately $154 billion in assets under
management as of September 30, 2005. The Investment Adviser is owned 100% by
Nomura Holdings, Inc. Nomura Securities Co., Ltd., also owned by Nomura
Holdings, Inc. is the largest securities company in Japan.
Mr. Takeshi Ebihara, Senior Portfolio Manager of the Fund, works in the Japan
Equity Small/Mid Cap team for Institutional Clients of the Investment Adviser
and is primarily responsible for the day-to-day management of the portfolio of
the Fund. Mr. Ebihara has held such responsibilities for the Fund since April
2004. In addition to the Fund, he manages 14 accounts investing in small
capitalization securities which total approximately 59.11 billion yen as of
August 31, 2005 ($[_______] at such date). Mr. Ebihara served as an analyst in
the Corporate Research Department of the Investment Adviser from 2003 to April
2004, and as a Portfolio Manager for Japanese pension funds in the Japan
Equity Investment Department of the Investment Adviser from 1997 to 2003. For
a discussion of Mr. Ebihara's compensation, see "Management and Investment
Advisory Arrangements--Portfolio Manager Compensation."
55
Compensation and Expenses
As compensation for its services to the Fund, the Manager receives a monthly
fee at the annual rate of 1.10% of the value of the Fund's average weekly net
assets (i.e., the average weekly value of the total assets of the Fund minus
the sum of accrued liabilities of the Fund) not in excess of $50 million,
1.00% of the Fund's average weekly net assets in excess of $50 million but not
in excess of $100 million, 0.90% of the Fund's average weekly net assets in
excess of $100 million but not in excess of $175 million and 0.80% of the
Fund's average weekly net assets in excess of $175 million. This fee is higher
than that paid by most management investment companies, but is comparable to
fees paid by many U.S. investment companies that invest primarily in a single
foreign country.
For services performed under the Investment Advisory Agreement, the Investment
Adviser receives a monthly fee from the Manager at the annual rate of 0.50% of
the Fund's average weekly net assets not in excess of $50 million, 0.45% of
the Fund's average weekly net assets in excess of $50 million but not in
excess of $100 million, 0.40% of the Fund's average weekly net assets in
excess of $100 million but not in excess of $175 million and 0.35% of the
Fund's average weekly net assets in excess of $175 million.
For purposes of this calculation, average weekly net assets are determined at
the end of each month on the basis of the average net assets of the Fund for
each week during the month. The assets for each weekly period are determined
by averaging the net assets at the last business day of a week with the net
assets at the last business day of the prior week.
For the fiscal years ended February 28, 2005, February 29, 2004 and February
28, 2003, the Fund paid or accrued on behalf of the Manager aggregate
management fees of $1,680,234, $1,233,249 and $1,081,500, respectively. The
Manager informed the Fund that during the same fiscal years, the Manager paid
aggregate advisory fees of $753,257, $556,341 and $488,881, respectively, to
the Investment Adviser.
The Board of Directors of the Fund most recently approved the continuance of
the Management and Investment Advisory Agreements on August 10, 2005. A
discussion regarding the basis for such approval will be contained in the
Fund's semi-annual report for the period ending August 31, 2005.
The Manager and the Investment Adviser will benefit from the Offer because
their fees are based on the average of the net assets of the Fund at the end
of each month included in the applicable performance period. It is not
possible to state precisely the amount of additional compensation the Manager
and the Investment Adviser will receive as a result of the Offer because it is
not known how many shares will be subscribed for and because the proceeds of
the Offer will be invested in additional portfolio securities which will
fluctuate in value. However, based on the estimated proceeds from the Offer,
assuming all the Rights are exercised in full at the estimated Subscription
Price of $[___] per share, and after payment of the Dealer Manager fees and
estimate of expenses, the Manager would receive additional annual fees of
approximately $[___] as a result of the increase in assets under management
over the Fund's current assets under management.
The Management Agreement obligates the Manager to provide, or arrange for the
provision of, investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund, as well as the
fees of all Directors of the Fund who are affiliated persons of the Manager or
any of its affiliates. The Fund pays all other expenses incurred in its
operation, including, among other things, taxes; expenses for legal, tax and
auditing services; listing fees; costs of printing proxies, stock
certificates, stockholder reports and prospectuses; charges of the custodian,
sub-custodians and transfer agent; SEC fees; expenses of registering the
shares under Federal, state or foreign laws; fees and expenses of unaffiliated
Directors; accounting and pricing costs (including the weekly calculation of
56
NAV); insurance; interest; brokerage costs; litigation and other extraordinary
or non-recurring expenses; and other expenses properly payable by the Fund.
Duration and Termination
Unless earlier terminated as described below, the Management Agreement and the
Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Fund and (b) by a majority of the Directors
who are not parties to such contracts or interested persons (as defined in the
1940 Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the stockholders of the Fund.
Enforceability
The Fund has been advised that there is substantial doubt as to the
enforceability in the courts of Japan of judgments against the Investment
Adviser predicated upon the civil liability provisions of the Federal
securities laws of the United States. The Investment Adviser is advised by
U.S. counsel with respect to the Federal securities laws of the United States.
Relationship of a Director to the Manager
Mr. Hiroshi Terasaki, a Director and President of the Fund, also serves as the
President and Director of the Manager.
Portfolio Manager Compensation
Other Accounts Managed by the Portfolio Manager. As of August 31, 2005, Mr.
Ebihara, the Fund's portfolio manager (the "Portfolio Manager"), was primarily
responsible for the day-to-day portfolio management for the Fund, for three
other pooled investment vehicles that are not registered investment companies
under the 1940 Act (with total assets of 3.88 billion yen) and for 11 other
accounts (with total assets of 55.23 billion yen). None of the investment
advisory fees with respect to these accounts is based on the performance of
the account.
Securities Ownership of Portfolio Manager. As of August 31, 2005, Mr. Ebihara
did not own beneficially any securities issued by the Fund.
Portfolio Manager Compensation Structure. The Portfolio Manager receives a
combination of base compensation and discretionary compensation consisting of
a cash bonus. The methodology used to determine the Portfolio Manager's
compensation is applied across all accounts managed by the Portfolio Manager.
Base Salary Compensation. Generally, the Portfolio Manager receives fixed
salary compensation based on his duties and performance. The amount of base
salary is reviewed annually after completion of the formal performance
appraisal process. In order to appraise the Portfolio Manager's performance,
certain measures are used, such as a review of his specialties and expertise,
a review of his capabilities to achieve assigned duties and a review of his
management and communication skills.
Discretionary Compensation. In addition to base compensation, the Portfolio
Manager may receive discretionary compensation in the form of a cash bonus.
The bonus, which is paid semi-annually, is based on both quantitative and
qualitative scores. The quantitative score is determined prior to payment
based on the performance of the Portfolio Manager's accounts, measured on a
57
pre-tax basis for rolling three-year periods against the RN Small Cap Index. The
quantitative scoring for purposes of the bonus comprises 60 percent of the
performance appraisal measurement. The qualitative score is determined by
analyzing the quality of the Portfolio Manager's contribution to the
Investment Adviser. While the bonus can range up to 100 percent or more of
base salary, the Investment Adviser has indicated that cash bonuses typically
represent approximately 20 to 40 percent of its portfolio managers' aggregate
cash compensation.
Potential Material Conflicts of Interest. Real, potential or apparent
conflicts of interest may arise where a portfolio manager has day-to-day
responsibilities with respect to more than one account. These conflicts
include the following: (i) the process for allocation of investments among
multiple accounts for which a particular investment may be appropriate, (ii)
allocation of a portfolio manager's time and attention among relevant accounts
and (iii) circumstances where the Investment Adviser has an incentive fee
arrangement or other interest with respect to one account that does not exist
with respect to other accounts.
LEGAL PROCEEDINGS
The Fund is not currently a party to any material legal proceedings.
PROXY VOTING POLICY
Summary of Proxy Voting Policies and Procedures of the Fund
The Fund's proxy voting policies and procedures seek to assure that proxies
received by the Fund are voted in the best interests of the Fund's
Stockholders. Because the investment philosophy of the Manager is generally
consistent with the investment objective of the Fund and the economic
interests of its Stockholders, investment decisions for the Fund should
generally be consistent with its Manager's philosophy. In proxy voting
decisions, as in other investment decisions, the Manager exercises proxy
voting decisions solely in the best interest of the Fund's Stockholders.
Accordingly, the Fund's proxy voting policies and procedures delegate all
responsibility for proxy voting to the Manager, provided that the Board of
Directors has the opportunity to periodically review and approve the Manager's
proxy voting policies and any material amendments. In addressing potential
conflicts of interest, the Fund's procedures provide that the Manager follow
an alternative voting procedure instead of voting in its sole discretion. The
proxies may be voted in accordance with the recommendations made by third
party proxy voting service vendors only when the business generates more than
1% of the total revenue of the Manager, and when the proposal to be voted on
may provide an undue enrichment to a director, officer, or another affiliate
of such business. However, the Fund allows the Manager to resolve conflicts of
interest in any reasonable manner consistent with the alternative voting
procedures described in its proxy voting policy.
The Fund shall annually file Form N-PX disclosing its proxy voting record for
the most recent twelve-month period. A description of the Fund's proxy voting
record for the most recent twelve-month period ended June 30 is available
without charge on the SEC's website at www.sec.gov. The Fund's proxy voting
policies and procedures are available upon request to the Fund at Two World
Financial Center, Building B, New York, New York, 10281 (or by calling (800)
833-0018).
58
Summary of the Manager's Proxy Voting Policies and Procedures
The Manager's proxy voting policies and procedures reflect the substantial
differences between proxy voting at stockholders' meetings held in the United
States and proxy voting in Japan. The Manager seeks to vote proxies in the
best interests of the Fund and its Stockholders in accordance with the
Manager's fiduciary duties and Rule 206(4)-6 of the Investment Advisers Act of
1940.
The Manager will vote the shares of stock owned by the Fund in the best
interests of the Fund and its Stockholders. The Manager is responsible for
identifying the cases when it may be faced with a potential conflict of
interest in voting shares of the Fund's investments in the best interest of
the Fund and its Stockholders. If a potential conflict of interest exists, the
Manager can only exercise its voting authority after careful investigation and
research of the issues involved. The Manager can consult with third party
proxy voting service vendors and could, in exceptional cases, make the
determination that not voting the securities is in the best interest of the
Fund. In attempting to eliminate a potential material conflict of interest,
the Manager may vote in accordance with its policies and procedures if a
routine matter is involved; vote as recommended by an independent third party
which has no knowledge of the nature of the material conflict of interest or
does not itself have a material conflict of interest; or notify the Board of
Directors of the material conflict of interest and seek a waiver of the
conflict.
In accordance with its policies and procedures, the Manager will generally
support existing management on votes on the financial statements of the issuer
and the election of the board of directors; vote for the acceptance of the
accounts unless there are grounds to suspect that the accounts as presented or
audit procedures used do not present an accurate picture of company results
and support routine issues such as the appointment of independent auditors,
allocation of income and the declaration of dividends. Where matters are of an
extraordinary nature, or an extraordinary or special meeting is called,
further investigation and consultation may be necessary to analyze all
relevant information to reach a decision as to how to vote and such matters
will be voted on a case by case basis.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best net results for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and the facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive dealer spreads or
commission rates, the Fund does not necessarily pay the lowest spread or
commission available.
The Fund has no obligation to deal with any broker or dealer in execution of
transactions in portfolio securities. The Fund expects that, consistent with
its policy of obtaining best net results and subject to the requirements of
the 1940 Act, a portion of its portfolio transactions conducted on an agency
basis may be conducted through Nomura Securities Co., Ltd. ("Nomura
Securities"). In addition, subject to obtaining best net results, securities
companies which provide supplemental investment research to the Manager and
Investment Adviser, may receive orders for transactions by the Fund.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Manager under the Management Agreement, and
the expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information. It is possible that certain of the
supplementary investment research so received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary
of the
59
research or services received as a result of portfolio transactions effected
for such other accounts or investment companies.
Transactions with Affiliates
Because of the affiliation of Nomura Securities with the Fund, the Fund is
prohibited from engaging in certain transactions involving Nomura Securities
or its affiliates absent an exemptive order under the 1940 Act. Without such
an order, the Fund is prohibited from engaging in portfolio transactions with
Nomura Securities or its affiliates acting as principal. In addition, the Fund
is subject to limitations in purchasing securities in offerings in which
Nomura Securities or any of its affiliates participates as an underwriter and
may only affect such transactions in accordance with Rule 10f-3 adopted under
the 1940 Act. [Since underwritten offerings of publicly-traded Japanese common
stocks are currently made at discounts (typically up to 10%) from current
market prices, the Fund's inability to purchase in such offerings would
prevent the Fund from taking advantage of such discounted prices.]
Nomura Securities or any of its affiliates may serve as the Fund's broker in
transactions conducted on an exchange and in over-the-counter transactions
conducted on an agency basis. Costs associated with transactions in foreign
securities are generally higher than with transactions in U.S. securities,
although, as noted above, the Fund will endeavor to achieve the best net
results in effecting such transactions.
For the fiscal year ended February 28, 2005, the Fund paid total brokerage
commissions of $76,188 and the Fund paid no brokerage commissions to Nomura
Securities or its affiliates. For the fiscal year ended February 29, 2004, the
Fund paid total brokerage commissions of $91,097, of which $448, or 0.5%, was
paid to Nomura Securities and its affiliates for effecting 0.19% of the
aggregate amount of transactions on which the Fund paid brokerage commissions.
For the fiscal year ended February 28, 2003, the Fund paid total brokerage
commissions of $382,585, of which $3,588, or 4.7%, was paid to Nomura
Securities and its affiliates for effecting 0.2% of the aggregate amount of
transactions on which the Fund paid brokerage commissions.
Exchanges on Which the Fund Purchases Securities
Under normal market conditions, at least 80% of the Fund's total assets are
invested in equity securities of Smaller Capitalization Companies traded on
the Tokyo, Osaka, Nagoya and JASDAQ Stock Exchanges and Mothers, Hercules and
Centrex markets and included or traded on other indices or markets, as
applicable, determined by the Manager to be appropriate indices or markets for
Smaller Capitalization Companies. The following briefly summarizes each of the
markets that lists the securities of Smaller Capitalization Companies:
o Tokyo Stock Exchange. Tokyo Stock Exchange, established in 1878,
is the largest stock exchange in Japan. Currently, there are
approximately 2,300 companies listed on the Tokyo Stock Exchange
with an aggregate market capitalization of 332,133.153 billion yen
($3,321 trillion). Approximately 17%% of the companies listed on
the Tokyo Stock Exchange are Smaller Capitalization Companies
covered by the RN Small Cap Index.
o Osaka Stock Exchange. Osaka Stock Exchange is the second largest
stock exchange in Japan. There are approximately 950 companies
listed on the Osaka Stock Exchange, with an aggregate market
capitalization of 28.800 billion yen.
o Nagoya Stock Exchange. Nagoya Stock Exchange is one of the three
largest stock exchanges in Japan. There are approximately 375
companies listed on the Nagoya Stock Exchange, with an aggregate
market capitalization of 16.200 billion yen.
60
o JASDAQ Stock Exchange. JASDAQ Stock Exchange was created in
December 2004 and is the successor of Jasdaq Market Inc. JASDAQ
Stock Exchange is the largest over-the-counter market in Japan and
does not require that companies be profitable for any
predetermined length of time prior to listing on the exchange.
o Mothers. Mothers (market of the high-growth and emerging stocks)
is a market established by the Tokyo Stock Exchange that provides
venture companies access to capital markets at an early state of
their development and provides investors with more diversified
investment products. Japanese and non-Japanese companies may seek
a listing on Mothers.
o Hercules. Hercules is the successor market to the NASDAQ Japan
Market, and the New Market Section of the Osaka Stock Exchange.
o Centrex. Centrex is the growth company market section of the
Nagoya Stock Exchange (the "NSE"). The goal of Centrex is to
provide venture companies that wish to eventually list their
shares on the larger sections of the NSE with a marketplace to
raise funds in a flexible manner. Because Centrex does not have
restrictive listing requirements based on company size or history,
companies are able to list their shares on Centrex at their
earliest stage of growth.
PORTFOLIO TURNOVER
The Manager will effect portfolio transactions without regard to holding
period, if, in its judgment, such transactions are advisable in light of a
change in circumstance in general market, economic or financial conditions. As
a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. Accordingly, while the Fund anticipates that
its annual turnover rate should not exceed 100% under normal conditions, it is
impossible to predict portfolio turnover rates. The portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. High
portfolio turnover involves correspondingly greater transaction costs in the
form of dealer spreads and brokerage commissions, which are borne directly by
the Fund. In addition, a high rate of portfolio turnover may result in certain
tax consequences, such as increased capital gain dividends and/or ordinary
income dividends.
The rate of portfolio turnover in the fiscal years ended February 28, 2005,
February 29, 2004 and February 28, 2003, were 86%, 28% and 28%, respectively.
NET ASSET VALUE OF COMMON STOCK
The Shares are listed on the NYSE. The NAV is generally determined each day
during which the NYSE is open for trading ("Valuation Date"). The NAV is
calculated by dividing the value of net assets of the Fund (including interest
and dividends accrued but not yet received minus all liabilities including
accrued expenses) by the total number of Shares outstanding. For purposes of
calculating NAV, yen is translated into dollars at the exchange rate provided
by the custodian.
Portfolio securities traded in the over-the-counter market are valued at the
last reported sales price as of the close of business on the Valuation Date
or, if none is available, at the mean of the bid and offer prices at the close
of business on such day or, if none is available, the last reported sales
price. Portfolio securities which are traded on stock exchanges are valued at
the last sales price on the principal market on
61
which securities are traded or lacking any sales, at the last available bid
price. Short-term debt securities which mature in 60 days or less are valued
at amortized cost if their original maturity at the date of purchase was 60
days of less, or by amortizing their value on the 61st day prior to maturity
if their term to maturity at the date of purchase exceeded 60 days. Securities
and other assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
Dividends and Distributions
The Fund intends to distribute, at least annually, substantially all its net
investment income and its net capital gains, if any. However, as of February
28, 2005, the Fund had a capital loss carryforward which will offset net
capital gains realized by the Fund after that date until the capital loss
carryforward has been completely offset or has expired. As a result, gains
realized by the Fund from the sale or other disposition of portfolio
securities and from certain transactions in futures and options will not give
rise to net capital gains until the capital loss carry forward has been
eliminated. The Fund does not intend to distribute amounts realized from such
transactions until its capital loss carryforward has been eliminated. Details
concerning the capital loss carryforward are contained in the notes to
financial statements that are incorporated in this prospectus.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan (the "Plan") is available automatically for any
holder of Common Stock with shares registered in his/her own name who wishes
to purchase additional shares with income dividends or capital gains
distributions received on shares owned, unless such Stockholder elects to
receive all dividends an capital gain distributions in cash, paid by check and
mailed to the Stockholder. If a Stockholder holds shares in his/her own name,
communications regarding the Plan should be addressed to the plan agent,
EquiServe Trust Company, N.A. (the "Plan Agent"). Under the Plan, Stockholders
appoint the Plan Agent to reinvest dividends and distributions in shares of
the Fund. Such shares will be acquired by the Plan Agent for Stockholders
either through open market purchases if the Fund is trading at a discount or
through the issuance of authorized but unissued shares if the Fund is trading
at NAV or a premium. If the market price of a share on the payable date of a
dividend or distribution is at or above the Fund's NAV on such date, the
number of shares to be issued by the Fund to each Stockholder receiving shares
in lieu of cash dividends or distributions will be determined by dividing the
amount of the cash dividends or distributions to which such Stockholder would
be entitled by the greater of the NAV on such date or 95% of the market price
of a share on such date. If the market price of a share on such distribution
date is below the NAV, the number of shares to be issued to such Stockholders
will be determined by dividing such amount, less brokerage commission, by the
per share market price.
Purchases will be made by the Plan Agent from time to time on the NYSE or
elsewhere to satisfy dividend and distribution investment requirements under
the Plan. Purchases will be suspended on any day when the closing price (or
mean between the closing bid and ask prices there were no sales) of the shares
on the NYSE on the preceding trading day was higher than the NAV. If on the
dividend payable date, purchases by the Fund are insufficient to satisfy
dividend or distribution investments and on the last trading day immediately
preceding the dividend payable date the closing price or the mean between the
closing bid and ask prices of the shares is lower than or the same as the NAV,
the Plan Agent will continue to purchase shares until all investments by
Stockholders have been completed or the closing price or the mean between
62
the bid and ask prices of the shares becomes higher than the NAV, in which
case the Fund will issue the necessary additional shares from authorized but
unissued shares. If on the last trading day immediately preceding the dividend
payable date, the closing price or the mean between the bid and ask prices of
the shares is higher than the NAV and if the number of shares previously
purchased on the NYSE or elsewhere is insufficient to satisfy dividend
investments, the Fund will issue the necessary additional shares from
authorized but unissued shares. There will be no brokerage charges with
respect to shares issued directly by the Fund to satisfy the dividend
investment requirements. However, each participant will pay a pro rata share
of brokerage commissions incurred with respect to the Fund's open market
purchases of shares. In each case, the cost per share of shares purchased for
each Stockholder's account will be the average cost, including brokerage
commissions, of any shares purchased in the open market plus the cost of any
shares issued by the Fund. For the fiscal year ended February 28, 2005, the
Fund did not issue any new shares for dividend reinvestment purposes.
Stockholders who elect to hold their shares in the name of a broker or other
nominee should contact such broker or other nominee should contact such broker
or other nominee to determine whether they may participate in the Plan. To the
extent such participation is permitted, the Plan Agent will administer the
Plan on the basis of the number of shares certified from time to time by the
broker as representing the total amount registered in the Stockholder's name
and held for the account of beneficial owners who are participating in such
Plan. Stockholders that participate in the Plan holding shares in a brokerage
account may not be able to transfer the shares to another broker and continue
to participate in the Plan. Shareholders who are participating in the Plan may
withdraw from the Plan at any time. There will be no penalty for withdrawal
from the Plan, and Stockholders who have previously withdrawn from the Plan
may rejoin it at any time. Changes in participation in the Plan should be made
by contacting the Plan Agent if the shares are held in the Stockholder's own
name and must be in writing and should include the Stockholder's name and
address as they appear on the account registration. If the shares are held in
the name of a broker or other nominee, such person should be contacted
regarding changes in participation in the Plan. Upon withdrawal from the Plan,
the Plan Agent will deliver to the Stockholder a certificate or certificates
for the appropriate number of full shares and a cash payment for any
fractional shares. In lieu of receiving a certificate, the Stockholder may
request the Plan Agent to sell part or all of the Stockholder shares at the
market price and remit the proceeds to the Stockholder, net of any brokerage
commissions. A $2.50 fee will be charged by Plan Agent upon any cash
withdrawal or termination. An election to withdraw from the Plan will, until
such election is changed, be deemed to an election by a Stockholder to take
all subsequent distributions in cash. An election will be effective only for a
dividend or distribution is received by the Plan Agent not less than 10 days
prior to such record date.
The Plan Agent will maintain all Stockholders' accounts in the Plan, and
furnish written confirmation of all transactions in such account, including
information needed by Stockholders tax records. Shares in the account of each
Plan participant may be held by the Plan Agent in certificated form in the
name of the participant, and each Stockholder's proxy will include those
shares purchased or received pursuant to the Plan.
The automatic reinvestment of dividends will not relieve participants of any
income taxes that may be payable (or required to be withheld) on such
dividends. Stockholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for Federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that the Stockholders receiving cash dividends or distributions will
receive and should have a cost basis in the shares received equal to such
amount.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend paid subsequent to written notice of the change sent to participants
in the Plan at least 90 days before the record date for such dividend. There
is no service charge to participants in the Plan; however, the Fund reserves
the right to amend the Plan to include a service change payable by
participants. All correspondence concerning the Plan, including requests for
additional information about the Plan, should be directed to the Plan Agent.
63
All correspondence concerning the Plan should be directed to the Plan Agent at
EquiServe Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021.
JAPANESE FOREIGN EXCHANGE AND FOREIGN TRADE LAW
General
The Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders and
ministerial ordinances thereunder (collectively, the "Foreign Exchange Law")
govern certain aspects relating to the transfer of the shares and acquisition
and holding of the shares by "exchange non-residents" and by "foreign
investors" (both as hereinafter defined).
"Exchange non-residents" are defined as individuals who are not resident in
Japan and corporations whose principal offices are located outside Japan.
Generally, branches and other offices located within Japan of non-resident
corporations are regarded as exchange residents of Japan and branches and
other offices of Japanese corporations located outside Japan are regarded as
exchange non-residents of Japan.
"Foreign investors" are defined to be (i) individuals not resident in Japan,
(ii) corporations which are organized under the laws of foreign countries or
whose principal offices are located outside Japan and (iii) corporations not
less than 50 percent of the voting rights of which are held by (i) and/or
(ii), or a majority of the officers (or officers having the power of
representation) of which are non-resident individuals.
The Fund is considered to be an exchange non-resident and foreign investor.
Acquisition of Shares
In general, the acquisition of shares of a Japanese company listed on a
Japanese stock exchange in Japan ("listed shares") by an exchange non-resident
from an exchange resident of Japan is not subject to the prior filing
requirement, provided that the Foreign Exchange Law gives the Minister of
Finance the power in certain very exceptional circumstances to require prior
approval for any such acquisition. An exchange resident who transferred listed
shares to an exchange non-resident for value exceeding 100 million yen is
generally required to file a report concerning the transfer of securities with
the Minister of Finance within 20 days of the date of such transfer.
If a foreign investor acquires listed shares and as a result of such
acquisition, aggregated with their existing holdings, if any, such foreign
investor and certain related parties hold 10% or more of the issued shares of
the relevant company, the foreign investor must file a report of such
acquisition with the Minister of Finance and any other competent Minister
within 15 days from and including the date of such acquisition. In certain
exceptional cases, however, a prior notification of such acquisition must be
filed with the Minister of Finance and any other competent Minister, who may
modify or prohibit the proposed acquisition.
Dividends and Proceeds of Sales
Under the Foreign Exchange Law, dividends paid on, and the proceeds of sales
in Japan of, shares held by exchange non-residents may, in general, be
converted into any foreign currency and repatriated abroad. The acquisition of
shares by exchange non-residents by way of stock splits is not subject to any
notification or reporting requirements.
64
TAXATION
The following is intended to be a general summary of certain tax consequences
that may result to the Fund and its Stockholders. It is not intended as a
complete discussion of all such tax consequences, nor does it purport to deal
with all categories of investors. Investors are therefore advised to consult
with their tax advisers before making an investment in the Fund. The summary
is based on the laws in effect on the date of this prospectus, which are
subject to change. For a description of the Federal income tax consequences of
the Offer, see "The Offer--Federal Income Tax Consequences of the Offer."
U.S. TAX CONSIDERATIONS
The Fund has elected to be treated and intends to continue to qualify annually
to be treated as a regulated investment company under the Code. To qualify as
a regulated investment company, the Fund must, among other things, (a) derive
in each taxable year at least 90% of its gross income from (i) dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in stocks, securities or
currencies and (ii) net income from an interest in a qualified publicly traded
partnerships as defined in the Code; (b) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's total assets is represented by cash, U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and 10% of the outstanding voting securities of such
issuer and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies or, of any two or more
issuers that the Fund controls and that are determined to be engaged in the
same or similar or related business or the securities of one or more qualified
publicly traded partnerships as defined in the Code); and (c) distribute at
least 90% of its investment company taxable income (which includes, among
other items for this purpose, dividends, interest and net short-term capital
gains in excess of net long-term capital losses) each taxable year. For
purposes of the diversification requirements descried above, the outstanding
voting securities of any issuer includes the equity securities of a "qualified
publicly traded partnership".
As a regulated investment company, the Fund generally will not be subject to
U.S. Federal income tax on its investment company taxable income and net
capital gains (net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years, if
any) that it distributes to Stockholders. The Fund intends to distribute to
its Stockholders, at least annually, substantially all of its investment
company taxable income, as computed for U.S. Federal income tax purposes. To
the extent the Fund retains its net capital gains for investment, it will be
subject under current tax rates to a Federal income tax at a maximum effective
rate of 35% on the amount retained. See "--Distributions" below.
Amounts not distributed on a timely basis in accordance with a calendar-year
distribution requirement are subject to a nondeductible 4% federal excise tax
payable by the Fund. To avoid the tax, the Fund must distribute, or be deemed
to have distributed, during each calendar-year at least an amount equal to the
sum of (1) 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) 98% of its capital gains in excess
of its capital losses (adjusted for certain ordinary losses) for the
twelve-month period ending on October 31 of the calendar year and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. To prevent application of the excise tax, the Fund
currently intends to make its distributions in accordance with the
calendar-year distribution requirement. Compliance with the calendar year
distribution requirement may limit the extent to which the Fund will be able
to retain its net capital gains for investment.
65
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by the Fund in October, November or December of that year to
Stockholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions will be taxable to
Stockholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund will be taxed in the same manner as an
ordinary corporation and distributions to its Stockholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, will constitute
dividends (eligible for the corporate dividends-received deduction or
treatment as qualified dividend income, as applicable) which are taxable to
Stockholders as ordinary income, even though those distributions might
otherwise (at least in part) have been treated in the Stockholders' hands as
long-term capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it will be required to pay out its earnings
and profits accumulated in that year in order to qualify again as a regulated
investment company and may in certain circumstances be required to pay tax on
unrealized gains.
The Fund may invest in shares of foreign corporations which may be classified
under the Code as passive foreign investments companies ("PFICs"). In general,
a foreign corporation is classified as a PFIC if at least one-half of its
assets constitute investment-type assets or 75% or more of its gross income is
investment-type income. If the Fund receives an "excess distribution" with
respect to PFIC stock, the Fund itself may be subject to a tax on a portion of
the excess distribution, whether or not the corresponding income is
distributed by the Fund to Stockholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as
if the tax had been payable in such prior taxable years. Certain distributions
from a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions
might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election was made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, another
election may be available that would involve marking to market the Fund's PFIC
shares at the end of each taxable year (and on certain other dates prescribed
in the Code), with the result that unrealized gains are treated as though they
were realized. If this election were made, tax at the Fund level under the
PFIC rules would generally be eliminated, but the Fund could, in limited
circumstances, incur nondeductible interest charges and any mark to market
gains would be treated as ordinary income.
Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Stockholders, and which will be taxed to Stockholders as
ordinary income or long-term income capital gain, may be increased or
decreased substantially as compared to a fund that did not invest in PFIC
shares.
66
The Fund has received a private letter ruling from the Internal Revenue
Service that provides that the Fund will not recognize gain or loss on the
distribution of stocks or securities to Stockholders in connection with
repurchase offers made by the Fund.
Distributions
Dividends paid out of the Fund's investment company taxable income (which
includes any net short-term capital gains) will be taxable to a U.S.
Stockholder as ordinary income to the extent attributable to the Fund's
current and accumulated earnings and profits. Distributions of net capital
gains (net long-term capital gains in excess of the sum of net short-term
capital losses and any capital loss carryovers from prior years), if any,
designated by the Fund as capital gain dividends, are taxable as long-term
capital gains, regardless of how long the Stockholder has held the Fund's
Shares.
Dividends paid by the Fund will not qualify for the deduction for dividends
received by corporations because the Fund's income is not expected to consist
of dividends paid by U.S. corporations. The tax rate on certain dividend
income and long-term capital gain applicable to non-corporate Stockholders has
been reduced for taxable years ending in or prior to 2008. Distributions
comprised of dividends from domestic corporations and certain foreign
corporations (generally, corporations incorporated in a possession of the
United States, some corporations eligible for treaty benefits under a treaty
with the United States and corporations whose stock is readily tradable on an
established securities market in the United States) are treated as "qualified
dividend income" eligible for taxation at a maximum tax rate of 15% in the
hands of non-corporate Stockholders. However, a "qualified foreign
corporation" does not include a foreign corporation which for the taxable year
of the corporation in which such dividends were paid, or the preceding taxable
year, is a "passive foreign investment company," as defined under the Code. A
certain portion of the Fund's dividends when paid by to non-corporate
Stockholders may be eligible for treatment as qualified dividend income. In
order for dividends paid by the Fund to be qualified dividend income, the Fund
must meet holding period and certain other requirements with respect to the
dividend-paying stocks in its portfolio and the non-corporate Stockholder must
meet a holding period and certain other requirements with respect to the
Fund's shares.
In the event the Fund retains any net capital gains, it may designate such
retained amounts as undistributed capital gains in a notice to its
Stockholders. In the event such a designation is made, Stockholders subject to
U.S. tax would include in income, as long-term capital gains, their
proportionate share of such undistributed amounts, but would be allowed a
credit or refund, as the case may be, for their proportionate share of the 35%
tax paid by the Fund. If the designation is made, for U.S. Federal income tax
purposes, the tax basis of Shares owned by a Stockholder would be increased by
an amount equal to 65% of the amount of undistributed capital gains included
in the Stockholder's income.
Investment company taxable income will be increased or decreased by the amount
of foreign currency gains or losses realized by the Fund in connection with
the disposition of yen-denominated debt securities as well as changes in
yen/dollar exchange rates between the time the Fund accrues a receivable
(typically, dividends, interest and payments for securities sold) or payable
(typically, expenses and payments for securities purchased) and the time such
receivable or payable is satisfied. The Fund cannot predict the impact of such
transactions on company taxable investment income. The Fund believes that any
foreign currency gains will generally be treated as qualifying income under
current federal income tax law for purposes of the gross income requirement
described above. However, the Code expressly provides the U.S. Treasury with
authority to issue regulations that would exclude foreign currency gains from
qualifying income if such gains are not directly related to a regulated
investment company's business of investing in stock or securities (or options
or futures with respect to stocks or securities). While to date the U.S.
Treasury has not exercised this regulatory authority, there can be no
assurance that it will not issue regulations in the future (possibly with
retroactive application) that would treat some or all of the
67
Fund's foreign currency gains as non-qualifying income for purposes of the
gross income requirement described above.
Sales of Shares
Upon the sale or other disposition of Shares of the Fund, a Stockholder
generally will realize a taxable gain or loss in an amount equal to the
difference between the proceeds of the sale or other dispositions and the
Stockholder's adjusted tax basis in the Shares. Such gain or loss will be a
capital gain or loss if the Shares are capital assets in the Stockholder's
hands and generally will be long-term or short-term depending upon the
Stockholder's holding period for the Shares. Any loss realized on a sale or
exchange will be disallowed to the extent the Shares disposed of are replaced
(including replacement through the Dividend Reinvestment Plan) within a period
of 61 days, beginning 30 days before and ending 30 days after the Shares are
disposed of. In such a case, the basis of the Shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a Stockholder on a
disposition of Fund Shares held by the Stockholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received or treated as having received by the
Stockholder with respect to such shares. In addition, the ability to otherwise
deduct capital losses may be limited under the Code.
Foreign Taxes
Japanese taxes may be withheld from payments received by the Fund and may
apply to the extent the Fund receives income from certain sources. Application
of such taxes will reduce amounts available for distribution to Shareholders.
If more than 50% in value of the Fund's total assets at the close of any
taxable year consists of stocks or securities of foreign corporations, the
Fund may elect to treat any Japanese or other income and similar taxes paid by
it as paid by its Stockholders. The Fund anticipates that it will qualify
annually to make the election. The Fund will notify Stockholders in writing
each year if it makes the election and of the amount of Japanese or other
foreign taxes, if any, that would be treated as paid by the Stockholders. If
the Fund makes the election, the source (for U.S. federal income tax purposes)
of the Fund's income will flow through to Stockholders and Stockholders will
be required to include their proportionate share of the amount of foreign
income and similar taxes paid by the Fund in income even though they do not
actually receive such amounts.
Generally, Stockholders itemizing their deductions will be entitled to deduct
the amount of Japanese or other foreign taxes withheld from distributions to
them and, if the Fund so elects, their proportionate share of the amount of
Japanese or other foreign income and similar taxes paid by the Fund, if any.
Alternatively, Stockholders who satisfy certain holding period requirements
may be eligible to claim a foreign tax credit for such amounts. However, under
certain provisions of the Code, Stockholders may not be able to claim a credit
for the full amount of Japanese or other foreign taxes withheld from
distributions or for the full amount of their proportionate share of Japanese
or other income and similar taxes paid by the Fund. This is because,
generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the Stockholder's U.S. Federal income tax attributable to his
foreign source taxable income. Under the Code, the Fund's distributions are
not treated as foreign source income. However, if the Fund elects to treat any
Japanese or other foreign income and similar taxes paid by it as paid by its
Stockholders, the source of the Fund's income will instead flow through to its
Stockholders and such income may, at least in part, be foreign source income.
Accordingly, the Fund will make such an election whether or not it pays any
Japanese or other foreign taxes. In addition, Stockholders will not be
eligible to claim a foreign tax credit with respect to foreign income taxes
paid by the Fund unless certain holding period requirements are satisfied. The
U.S. Internal Revenue Service has issued a private ruling to the
68
Fund to the effect that making such an election will serve to pass through to
Stockholders the source of the Fund's income even if the Fund pays no foreign
taxes.
Non-U.S. Stockholders may not be able to credit or deduct the foreign taxes,
but they may be deemed to have additional income from the Fund, equal to their
share of the foreign taxes, that is subject to the U.S. withholding tax.
Gains, if any, from the sale of securities by the Fund generally will be
treated as derived from U.S. sources and certain currency fluctuation gains,
if any, from foreign currency-denominated debt securities, receivables and
payables, will be treated as ordinary income derived from U.S. sources. In
addition, the foreign tax credit is available only to the extent of the U.S.
tax that would otherwise be payable on foreign source income. Thus, even if
the source of the Fund's income passes through to Stockholders, Stockholders
may be unable to claim a credit for the full amount of the Japanese or other
foreign taxes withheld from distributions or for the full amount of their
proportionate share, if any, of the Japanese or other foreign taxes paid by
the Fund.
The foregoing is only a general description of the foreign tax credit. Because
application of the credit depends on the particular circumstances of each
Stockholder, Stockholders are advised to consult their own tax advisers.
Backup Withholding
The Fund may be required to withhold for U.S. Federal income taxes 28% of all
taxable distributions payable to Stockholders who fail to provide the Fund
with their certified U.S. taxpayer identification number (or certificate
regarding foreign status) or to Stockholders otherwise subject to U.S. backup
withholding. Similarly, proceeds from the sale or other disposition of Shares
of the Fund in the United States may be subject to backup withholding if the
Stockholder fails to provide a certified U.S. taxpayer identification number
(or certificate regarding foreign status) and make other certifications in
connection with the transaction, or if the Stockholder is otherwise subject to
U.S. backup withholding. Corporate Stockholders and other Stockholders
specified in the Code are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
refunded or against the Stockholder's U.S. Federal income tax liability,
provided that the required information is furnished to the Internal Revenue
Service.
FOREIGN STOCKHOLDERS
U.S. taxation of a Stockholder who, as to the United States, is a non-resident
alien individual, a foreign trust or estate, a foreign corporation or foreign
partnership ("Foreign Stockholder") depends on whether the income from the
Fund is "effectively connected" with a U.S. trade or business carried on by
such Stockholder. Ordinarily, income from the Fund will not be treated as so
"effectively connected."
Income Not Effectively Connected
If the income from the Fund is not "effectively connected" with a U.S. trade
or business carried on by the Foreign Stockholder, distributions of investment
company taxable income generally will be subject to a U.S. tax of 30% (or
lower treaty rate), which tax generally will be withheld from such
distributions. Foreign Stockholders may be subject to U.S. tax at the rate of
30% (or lower treaty rate) of the income resulting from the Fund's election to
treat any foreign taxes paid by it as paid by its Stockholders, but may not be
able to claim a credit or deduction for the foreign taxes treated as having
been paid by them.
Capital gain dividends and amounts retained by the Fund which are designated
as undistributed capital gains will not be subject to U.S. tax at the rate of
30% (or lower treaty rate) unless the Foreign
69
Stockholder is a non-resident alien individual and is physically present in
the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this rule applies only in exceptional
cases because any individual present in the United States for more than 182
days during a calendar year is generally treated as a resident for U.S.
federal income tax purposes, subject to U.S. federal income tax on his
worldwide income at the graduated rates applicable to U.S. citizens, rather
than the 30% U.S. withholding tax. In the case of a Foreign Stockholder who is
a non-resident alien individual, the Fund may be required to withhold U.S.
federal income tax at a rate of 28% of a capital gain dividend. See "--Backup
Withholding" above. If a Foreign Stockholder is a non-resident alien
individual, any gain he realizes upon the sale of his Fund Shares in the
United States will ordinarily be exempt from U.S. tax unless (1) he is
physically present in the United States for more than 182 days during the
taxable year or is otherwise considered to be a resident alien of the United
States or (2) backup withholding applies. See "--Backup withholding" above.
Under the provisions of the American Jobs Creation Act of 2004 (the "2004 Tax
Act"), dividends derived by a RIC from short-term capital gains and qualifying
net interest income (including income from original issue discount and market
discount) and paid to stockholders who are nonresident aliens and foreign
entities, if and to the extent properly designated as "interest-related
dividends" or "short-term capital gain dividends," will not be subject to U.S.
withholding tax. It is uncertain, however, what portion, if any, of the Fund's
distributions will be designated as short-term capital gains exempt from
withholding in the hands of nonresident and foreign stockholders, and it is
not expected that the Fund will be able to designate any payments as
qualifying net interest income. These provisions generally would apply to
distributions with respect to taxable years of the Fund beginning after
December 31, 2004 and before January 1, 2008. Nonresident stockholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax, of any two or more issuers that the Fund controls and
that are determined to be engaged in the same or similar or related business
or the securities of one or more.
Income Effectively Connected
If the income from the Fund is "effectively connected" with a U.S. trade or
business carried on by a Foreign Stockholder, then distributions of investment
company taxable income and net capital gains, amounts retained by the Fund
which are designated as undistributed capital gains and any gains realized
upon the sale of Shares of the Fund, will be subject to U.S. federal income
tax at the graduated rates applicable to U.S. citizens, residents and domestic
corporations. Such Stockholders may also be subject to the branch profits tax
imposed under the Code.
The tax consequences to a Foreign Stockholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign Stockholders are advised to consult their own tax adviser with respect
to the particular tax consequences to them of an investment in the Fund.
OTHER TAX CONSIDERATIONS
Distributions from the Fund and sales or other dispositions of Shares of the
Fund may be subject to additional state, local and foreign taxes depending on
each Stockholder's particular situation. Stockholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in the Fund.
CAPITAL STOCK
The following summary of the terms of the stock of the Fund does not purport
to be complete and is subject to and qualified in its entirety by reference to
the MGCL and the Fund's Charter and Bylaws.
70
General
Set forth below is information with respect to the Fund's outstanding
securities as of August 31, 2005:
Number of Shares Held by Number of Shares Issues
Title of Class Number of Shares Authorized the Fund or for its Account and Outstanding
-------------------------- ------------------------------- --------------------------- ------------------------
Common Stock 100,000,000 None 15,846,384
COMMON STOCK
The Fund's Charter authorizes the issuance of up to 100,000,000 Shares of
stock, par value $.10 per share, all of which shares have been classified as
Common Stock. On November 1, 2005, there were 15,846,384 outstanding Shares of
Common Stock, all of which are fully paid and non-assessable. All Shares of
Common Stock have equal rights as to dividends, assets and voting and have no
conversion, preemptive or other subscription rights. In the event of
liquidation, each Share of Common Stock is entitled to its proportion of the
Fund's assets after the payment of debts and expenses. Stockholders are
entitled to one vote per Share and do not have cumulative voting rights. The
Funds' Charter authorizes the Board of Directors to classify and reclassify
unissued shares of stock into other classes and series of stock. The Fund
holds regular annual meetings of Stockholders in accordance with the laws of
Maryland and the rules of the NYSE.
The Shares commenced trading on the NYSE on March 21, 1990. For the quarter
ended August 31, 2005, the highest trading price was $14.03 and the lowest
trading price was $10.47. During the same period, the NAV ranged from a low
of $11.37 to a high of $12.45. Total trading volume on the NYSE during the
period was 4,194,500 shares. On [_____________], the closing price on the
NYSE was $[_____] and the NAV was $[_____].
BENEFICIAL OWNERSHIP
As of November 1, 2005, the following persons were known to the Fund to be the
beneficial owners of 5% or more of the outstanding Shares:
Percent of the Fund's
Name and Address of Owner Amount and Nature of Reported Common Stock
Dudley & Shanley, LLC Beneficial Ownership Beneficially Owned
------------------------------------------ ------------------------------ -----------------------------
130 Maple Avenue 899,000 shares -
Red Bank, New Jersey 07701 beneficial ownership 5.7%
Van Den Berg Management Inc.
805 Las Cimas Parlway
Suite 430 1,473,297 shares -
Austin, Texas 78746 beneficial ownership 9.3%
Van Den Berg Management Inc. has reported beneficial ownership of
approximately 9.3% of the Fund's Common Stock as of January 5, 2005. Van Den
Berg Management Inc. is located at 805 Las Cimas Parkway Suite 430, Austin,
Texas 78746. Dudley & Shanley, LLC ("Dudley") has reported beneficial
ownership of approximately 5.7% of the Fund's Common Stock as of August 29,
2005. Dudley is located at 130 Maple Avenue, Red Bank, New Jersey 07701. To
the knowledge of the management of the Fund, Van Den Berg Management Inc. and
Dudley are the only beneficial owners of more than 5% of the Fund's
outstanding shares.
71
NO PREEMPTIVE RIGHTS
No holder of Shares has any preemptive right to acquire from the Fund any
capital stock of the Fund whether now or hereafter authorized.
REPURCHASE OF SHARES AND CONVERSION TO AN OPEN-END INVESTMENT COMPANY
The Fund's shares have traded over time at both a discount and premium in
relation to NAV. However, shares of closed-end investment companies frequently
trade at a discount from NAV. In recognition of the possibility that the
Fund's shares may trade at a discount in the future, the Fund may from time to
time take action to attempt to reduce or eliminate a market value discount
from NAV, either by repurchasing Fund shares in the open market when it can do
so at prices below the current NAV, or by making a tender offer for shares of
the Fund. The Board of Directors considers making such repurchases or tender
offers on a quarterly basis. The Fund has not previously repurchased shares in
the open market or made a tender offer for its shares. There is no assurance
that the Directors will approve such repurchases and/or tender offers in the
future.
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 NAV. The
market price of the shares of the Fund varies from NAV from time to time. When
the Fund repurchases its shares in the market at a price below their NAV, the
NAV of those shares that remain outstanding will be increased, but this does
not necessarily mean that the market price of those outstanding shares will be
affected either positively or negatively. The market price of the Fund's
shares is determined by, among other things, the relative demand for and
supply of such shares in the market, the Fund's investment performance, the
Fund's dividends and yield, and investor perception of the Fund's overall
attractiveness as an investment as compared with other investment
alternatives.
In addition, if Fund shares are trading at a discount from NAV, the Board of
Directors 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 require the favorable votes of the Fund's outstanding shares then
entitled to vote and of the Directors as specified below. 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 may, however,
determine that the Fund should not take any action to convert the Fund to an
open-end investment company or that, due to the characteristics of the Fund's
portfolio securities, it may be inappropriate to convert the Fund to an
open-end investment company.
CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND THE CHARTER AND
BYLAWS
The Fund's Charter and Bylaws include provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving stockholders 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.
Reclassification and Issuance of Stock
The Fund's Charter authorizes the Board of Directors to classify and
reclassify any unissued shares of stock into other classes or series of stock,
without the approval of the holders of Common Stock. Prior to issuance of
shares of each class or series, the Board of Directors is required by Maryland
law to set the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each class or series.
Thus, the Board of Directors could authorize the issuance of shares of
preferred stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control that
might involve a premium price for the holders of Common Stock or otherwise be
in their best interest. Any issuance of preferred stock must comply with the
requirements of the 1940 Act.
Classified Board of Directors; Vote to Elect Directors
The Board of Directors is divided into three classes of Directors serving
staggered terms. Directors of each class are elected to serve for three-year
terms and until their successors are duly elected and qualify
72
and, each year, one class of Directors will be elected by the Stockholders. A
classified board may render a change in control of the Fund or removal of the
Fund's incumbent management more difficult. The Fund believes, however, that
the longer time required to elect a majority of a classified Board of
Directors will help to ensure the continuity and stability of the Fund's
objectives. The Bylaws provide that a majority of the votes entitled to be
cast in the election of Directors shall be required to elect a Director.
Number of Directors; Vacancies; Removal
The Fund's Charter provides that the Fund elects to be subject to various
provisions of Subtitle 8 of Title 3 of the MGCL regarding the number of
Directors constituting the Board of Directors and the filling of vacancies on
the Board of Directors. Accordingly, the number of Directors may be fixed only
by the Board of Directors. Additionally, except as may be provided by the
Board of Directors in setting the terms of any class or series of preferred
stock, if any, any and all vacancies on the Board of Directors may be filled
only by the affirmative vote of a majority of the remaining Directors in
office, even if the remaining Directors do not constitute a quorum, and any
Director elected to fill a vacancy will serve for the remainder of the full
term of the directorship in which the vacancy occurred and until a successor
is elected and qualifies, subject to any applicable requirements of the 1940
Act.
The Fund's Charter provides that a Director elected by the Stockholders may be
removed only by the affirmative vote of at least 75 percent of the shares of
stock entitled to vote in the election to fill that directorship. Because the
Board of Directors is classified, a Director may be removed only for cause.
Action by Stockholders
Under the MGCL and the Charter, stockholder action can be taken only at an
annual or special meeting of Stockholders by unanimous written consent in lieu
of a meeting. These provisions, combined with the requirements of the Bylaws
regarding the calling of a Stockholder-requested special meeting of
Stockholders discussed below, may have the effect of delaying consideration of
a Stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
The Fund's Bylaws provide that with respect to an annual meeting of
Stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by Stockholders may be made only
(1) pursuant to the Fund's notice of the meeting, (2) by the Board of
Directors or (3) by a Stockholder who is entitled to vote at the meeting and
who has complied with the advance notice procedures of the Bylaws. With
respect to special meetings of Stockholders, only the business specified in
the Fund's notice of the meeting may be brought before the meeting.
Nominations of persons for election to the Board of Directors at a special
meeting may be made only (1) pursuant to the Fund's notice of the meeting, (2)
by the Board of Directors or (3) provided that the Board of Directors has
determined that Directors will be elected at the meeting, by a Stockholder who
is entitled to vote at the meeting and who has complied with the advance
notice provisions of the Bylaws.
Calling of Special Meeting of Stockholders
The Bylaws provide that the Chairman of the Board of Directors, the President
or the Board of Directors may call a special meeting of Stockholders. The
Charter provides that the Fund elects to be subject to various provisions of
Subtitle 8 of Title 3 of the MGCL regarding Stockholder-requested special
meetings. Accordingly, subject to the satisfaction of certain procedural and
informational requirements specified in the Fund's Bylaws, a
Stockholder-requested special meeting will be called by
73
the Fund's Secretary only upon the written request of Stockholders entitled to
cast not less than a majority of all the votes entitled to be cast at such
meeting.
Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend
its charter, merge, sell all or substantially all of its assets, engage in a
share exchange or engage in similar transactions outside the ordinary course
of business, unless approved by the affirmative vote of stockholders entitled
to cast at least two-thirds of the votes entitled to be cast on the matter.
However, a Maryland corporation may provide in its charter for approval of
these matters by a greater or lesser percentage, but not less than a majority
of all of the votes entitled to be cast on the matter. The Fund's Charter
generally provides for approval of Charter amendments by Stockholders entitled
to cast at least a majority of the votes entitled to be cast on the matter.
The Fund's Charter also provides that a Charter amendment to make the Common
Stock a redeemable security and a proposal to approve a merger or
consolidation of the Fund, the sale of all or substantially all of the Fund's
assets or the liquidation or dissolution of the Fund requires the approval of
the Stockholders entitled to cast at least 75 percent of the votes entitled to
be cast on such matter. However, if such amendment or proposal is approved by
at least two-thirds of the total number of Directors, such amendment or
proposal may be approved by the holders of a majority of the votes entitled to
be cast on such a matter. Approval of other Charter amendments simply require
the affirmative vote of 75 percent of all the votes entitled to be cast on the
matter.
The Fund's Bylaws provide that the Board of Directors has exclusive power to
adopt, alter or repeal any provision of our Bylaws and to make new Bylaws.
The Maryland Business Combination Act
The Fund's Charter provides that the Fund is subject to the provisions of the
Maryland Business Combination Act (the "Business Combination Act"). Under the
Business Combination Act, "business combinations" between a Maryland
corporation and an interested stockholder or an affiliate of an interested
stockholder are prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. An interested stockholder is defined
as:
o any person who beneficially owns ten percent or more of the voting
power of the corporation's shares; or
o an affiliate or associate of the corporation who, at any time within
the two-year period prior to the date in question, was the beneficial owner of
ten percent or more of the voting power of the then outstanding voting stock
of the corporation.
A person is not an interested stockholder under the statute if the board of
directors approved in advance the transaction by which he otherwise would have
become an interested stockholder. However, in approving a transaction, the
board of directors may provide that its approval is subject to compliance, at
or after the time of approval, with any terms and conditions determined by the
board.
After the five-year prohibition, any business combination between the Maryland
corporation and an interested stockholder generally must be recommended by the
board of directors of the corporation and approved by the affirmative vote of
at least:
74
o 80% of the votes entitled to be cast by holders of outstanding shares
of voting stock of the corporation; and
o two-thirds of the votes entitled to be cast by holders of voting stock
of the corporation other than shares held by the interested stockholder with
whom or with whose affiliate the business combination is to be effected or
held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation's
common stockholders receive a minimum price, as defined under Maryland law,
for their shares in the form of cash or other consideration in the same form
as previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors before the time that
the interested stockholder becomes an interested stockholder.
The Business Combination Act may discourage others from trying to acquire
control of the Fund and increase the difficulty of consummating any offer.
The full text of these provisions can be found in the Fund's Charter and
Bylaws, on file with the SEC, but is also available upon request to the Fund
at Two World Financial Center, Building B, New York, New York 10281 (or by
calling (800) 833-0018). These provisions could have the effect of depriving
Stockholders 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 in a tender offer or similar transaction. The Board of
Directors believes that the provisions of the Fund's Charter and Bylaws
described above provide the advantage of greater assurance of continuity of
Board of Directors and management composition and policies and has determined
that the foregoing provisions are in the best interests of the Fund's
Stockholders
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109-3661, acts as the Fund's custodian.
EquiServe Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021,
acts as the Fund's dividend-paying agent and as transfer and service agent and
registrar for the Fund's Common Stock and Dividend Reinvestment Plan.
EXPERTS
The financial statements of the Fund incorporated by reference in this
prospectus, insofar as they relate to the year ended February 28, 2005, has
been audited by [___________], the independent registered public accounting
firm of the Fund. Prior to that time, the information was audited by a
different independent registered public accounting firm for the Fund, whose
reports thereon were unqualified. The principal place of business of
[___________] is located at [_________________________________________]. The
audit services they provide include examination of the financial statements of
the Fund, services relating to filings by the Fund with the SEC, and
consultation on matters related to the preparation and filing of tax returns.
75
DISTRIBUTION ARRANGEMENTS
UBS Securities LLC will act as Dealer Manager for the Offer. Under the terms
and subject to the conditions contained in the Dealer Manager Agreement dated
[__________] among the Fund, the Manager and the Dealer Manager, the Dealer
Manager will provide financial advisory and marketing services in connection
with the Offer and will solicit the exercise of Rights and participation in
the Over-Subscription Privilege. The Offer is not contingent upon any number
of Rights being exercised. The Fund has agreed to pay the Dealer Manager a fee
for its financial advisory, marketing and soliciting services equal to 3.75%
of the aggregate Subscription Price for Shares issued pursuant to the Offer.
The Dealer Manager fee will be borne by the Fund and indirectly by all of the
Fund's Stockholders, including those who do not exercise their Rights.
The Dealer Manager will reallow to broker-dealers included in the selling
group to be formed and managed by the Dealer Manager selling fees equal to
2.50% of the Subscription Price for each Share issued pursuant to the Offer as
a result of their selling efforts. In addition, the Dealer Manager will
reallow to other broker-dealers that have executed and delivered a Soliciting
Dealer Agreement and have solicited the exercise of Rights, solicitation fees
equal to 0.50% of the Subscription Price for each Share issued pursuant to the
exercise of Rights as a result of their soliciting efforts, subject to a
maximum fee based upon the number of Shares held by each broker-dealer through
DTC on the Record Date. Fees will be paid to the broker-dealer designated on
the applicable portion of the Subscription Certificates or, in the absence of
such designation, to the Dealer Manager.
In addition, the Fund will pay the Dealer Manager an amount up to $100,000 as
a partial reimbursement for its expenses incurred in connection with the
Offer. The Fund and the Manager have agreed to indemnify the Dealer Manager or
contribute to losses arising out of certain liabilities including liabilities
under the 1933 Act. The Dealer Manager Agreement also provides that the Dealer
Manager will not be subject to any liability to the Fund or the Manager in
rendering the services contemplated by such Agreement except for any act of
bad faith, willful misconduct or gross negligence of the Dealer Manager or
reckless disregard by the Dealer Manager of its obligations and duties under
such Agreement.
Prior to the expiration of the Offer, the Dealer Manager may independently
offer for sale Shares, including Shares acquired through purchasing and
exercising the Rights, at prices it sets. The Dealer Manager may realize
profits or losses independent of any fees described in this prospectus.
In the ordinary course of their businesses, the Dealer Manager and its
affiliates may engage in investment banking or financial transactions with the
Fund, the Manager and their affiliates.
The Fund will bear the expenses of the Offer, which will be paid from the
proceeds of the Offer. These expenses include, but are not limited to, the
expense of preparation and printing of the prospectus for the Offer, the
expense of counsel and auditors in connection with the Offer and the
out-of-pocket expenses incurred by the officers of the Fund and others in
connection with the Offer.
The principal business address of UBS Securities LLC is 299 Park Avenue, New
York, New York 10171-0026.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for the Fund by
Sidley Austin Brown & Wood LLP, New York, New York, and certain legal matters
relating to the Offer will be passed on for the Dealer Manager by Clifford
Chance US LLP, New York, New York. Sidley Austin Brown & Wood LLP and Clifford
Chance US LLP will rely as to certain matters of Maryland law on the opinion
of Venable LLP,
76
Baltimore, Maryland. Matters of Japanese law will be passed upon for the Fund
and the Dealer Manager by Mori Hamada & Matsumoto, Tokyo, Japan.
77
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended February 28, 2005,
together with the report of [___________] thereon, are incorporated in this
prospectus by reference to the Fund's 2005 Annual Report and the Fund's
financial statement for the six months ended August 31, 2005 are incorporated
in this prospectus by reference to the Fund's Semi-Annual Report. A copy of
the Fund's 2005 Annual Report or Semi-Annual Report is available at the SEC's
website at www.sec.gov. Copies may also be obtained free of charge upon
written or oral request from the Fund's Information Agent, The Altman Group,
Inc., at 1(800) 814-0439 or at 1200 Wall Street West, 3rd FL, Lyndhurst, New
Jersey 07071.
78
[LOGO]
Managed by
Nomura Asset Management U.S.A. Inc.
PART C
OTHER INFORMATION
ITEM 25. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Schedule of Investments as of February 28, 2005*
Statement of Assets and Liabilities as of February 28, 2005*
Statement of Operations for the fiscal year ended February 28, 2005*
Statements of Changes in Net Assets for the fiscal years ended February
28, 2005 and 2004*
Notes to Financial Statements*
Financial Highlights for a share of Common Stock outstanding during each
of the fiscal years ended February 28, 2005, 2004, 2003, 2002 and
2001*
Schedule of Investments as of August 31, 2005**
Unaudited Statement of Assets and Liabilities as of August 31, 2005**
Unaudited Statement of Operations for the six months ended August 31,
2005**
Statement of Changes in Net Assets for the six months ended August 31,
2005 (unaudited) **
Notes to Financial Statements (Unaudited)**
Financial Highlights for a share of common stock outstanding, during the
six months ended August 31, 2005 (unaudited)**
* Incorporated by reference to the Registrant's Annual Report to
Shareholders for the fiscal year ended February 28, 2005 filed with
the Securities and Exchange Commission (the "Commission") on May 9,
2005 pursuant to Rule 30b2-1 under the Investment Company Act ("1940
Act").
** Incorporated by reference to the Registrant's Semi-Annual Report to
Shareholders for the six months ended August 31, 2005 filed with the
the Commission on November 3, 2005 pursuant to Rule 30b2-1 under the
1940 Act.
2. Exhibits
a) 1) Articles of Incorporation, dated January 11, 1990 (a)
2) Amendment to Articles of Incorporation
b) Amended and Restated Bylaws of the Fund
c) Not Applicable
d) 1) Portions of the Articles of Incorporation and Bylaws of the
Fund defining the rights of holders of shares of Common Stock of
the Fund (b)
2) Form of specimen certificate for shares of Common Stock of the
Fund (a)
3) Form of Exercise Form (c)
4) Form of Subscription Certificate (c)
5) Form of Notice of Guaranteed Delivery and Form of Beneficial Owner
Certification Form (c)
6) Form of Subscription Agent Agreement between Registrant and
Computershare (c)
7) Form of Information Agent Agreement between Registrant and The
Altman Group, Inc. (c)
e) Dividend Reinvestment Plan (a)
f) Not Applicable
g) 1) Management Agreement between Registrant and Nomura Asset
Management U.S.A. Inc.
2) Investment Advisory Agreement between Nomura Asset Management
U.S.A. Inc. and Nomura Asset Management Co., Ltd.
h) Form of Dealer Manager Agreement among the Registrant, the Manager and
UBS Securities LLC (c)
i) Not applicable
j) Custodian Contract between the Fund and Brown Brothers Harriman & Co.
k) 1) Accounting Agency Agreement between the Fund and Brown Brothers
Harriman & Co.
2) Registrar, Transfer Agency and Service Agreement between the Fund
and EquiServe Trust Company, N.A.
l) 1) Opinion and consent of Sidley Austin Brown & Wood LLP, counsel
to the Fund (c)
2) Opinion and consent of Venable LLP, special Maryland counsel to
the Fund (c)
3) Consent of Mori Hamada & Matsumoto, special Japanese counsel to
the Fund (c)
m) Not applicable
n) Consent of [___________], independent registered public accounting firm
for the Fund with respect to the financial statements for the year ended
February 28, 2005 (c)
o) Not applicable
p) Not applicable
q) Not applicable
r) 1) Code of Ethics of Registrant and the Manager adopted pursuant
to Rule 17j-1 of the Investment Company Act of 1940
2) Code of Ethics of the Investment Adviser adopted pursuant to Rule
17j-1 of the Investment Company Act of 1940
---------------
(a) Filed or refiled on September 15, 1999 as an exhibit to the Registrant's
Registration Statement on Form N-2 (File No. 333-87159).
(b) Reference is made to Article V, Article VI (Sections 3 and 6), Article
VII, Article VIII, Article X, Article XII, Article XIII, Article XIV and
Article XV of the Fund's Articles of Incorporation, filed as Exhibit (a)
to this Registration Statement; and Article II, Article III (sections 3,
4 and 14), Article VI, Article VII, Article XII, and Article XIII of the
Registrant's Amended and Restated By-Laws, filed as Exhibit (b) to this
Registration Statement.
(c) To be filed by amendment.
2
ITEM 26. MARKETING ARRANGEMENTS
Not Applicable
3
ITEM 27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Registration fees $10,000
NYSE listing fee $21,000
Printing and Postage (including subscription certificates) $55,000
Fees and expenses of qualifications under state securities laws (including fees of counsel) $50,000
Legal fees and expenses $300,000
Accounting fees and expenses $30,000
NASD fees $8,000
Dealer Manager's fees and reimbursement of expenses $100,000
Subscription Agent fee and expenses $35,000
Information Agent fees and expenses $10,000
Miscellaneous $31,000
Total $650,000
ITEM 28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 29. NUMBER OF HOLDERS OF SECURITIES
TITLE OF CLASS NUMBER OF RECORD HOLDERS AT ________
Common Stock, par value $0.10 per share [_____]
ITEM 30. INDEMNIFICATION
Reference is made to Article VI of the Fund's Articles of Incorporation,
Article VI of Fund's Bylaws, Section 2-418 of the Maryland General Corporation
Law, the Management Agreement filed as Exhibit (g)(1), the Investment Advisory
Agreement filed as Exhibit (g)(2) and the Dealer Manager Agreement filed as
Exhibit (h).
Maryland law permits the Fund to include in its charter (the "Charter") a
provision limiting the liability of the Fund's Directors and officers to the
Fund and the stockholders for money damages, except for liability resulting
from (a) actual receipt of an improper benefit or profit in money, property or
services or (b) active and deliberate dishonesty established by a final
judgment and which is material to the cause of action. The Charter of the Fund
contains such a provision which eliminates Directors' and officers' liability
to the fullest extent permitted by Maryland law.
Article VI of the Charter of the Fund provides that each officer and director
of the Fund shall be indemnified by the Fund to the full extent permitted
under the General Laws of the State of Maryland, subject to the provisions of
the Investment Company Act of 1940 (the "1940 Act"). Article VI of the Fund's
Bylaws obligate the Fund to the maximum extent permitted by Maryland law and
subject to the requirements of the 1940 Act, to indemnify and pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
individual who is a present or former Director or officer of the Fund and who
is made or threatened to be made a party to the proceeding by reason of his or
her service in that capacity or (b) any individual who, while a Director or
officer of the Fund and at the request of the Fund, serves or has served as a
director, officer, partner or trustee of another corporation, real estate
investment
4
trust, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made or threatened to be made a party to the proceeding
by reason of his or her service in that capacity. The Fund may, with the
approval of its Board of Directors or any duly authorized committee thereof,
provide such indemnification and advance for expenses to a person who served a
predecessor of the Fund in any of the capacities described above and to any
employee or agent of the Fund or a predecessor of the Fund. The Fund has been
advised that such indemnity shall not protect any such person against any
liability to the Fund or any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office, the decision by the Fund to indemnify such person
must be based upon the reasonable determination of independent counsel for
non-party independent directors, after review of the facts, that such officer
or director is not guilty of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office.
Maryland law requires a corporation (unless its charter provides otherwise,
which the Fund's Charter does not) to indemnify a director or officer who has
been successful in the defense of any proceeding to which he is made a party
by reason of his service in that capacity. Maryland law permits a corporation
to indemnify its present and former directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may
be made a party by reason of their service in those or other capacities unless
it is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission
was unlawful. However, under Maryland law, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, Maryland law permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his or her
good faith belief that he or she has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or her
or on his or her behalf to repay the amount paid or reimbursed by the
corporation if it is ultimately determined that the standard of conduct was
not met.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the 1940 Act may be concerned, such payments will be made only on
the following conditions: (i) the advances must be limited to amounts used, or
to be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount to
which it is ultimately determined that he is entitled to receive from the Fund
by reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayments may be obtained by the Fund without delay or
litigation, which bond, insurance or other form of security must be provided
by the recipient of the advance, or (b) a majority of a quorum of the Fund's
disinterested, non-party Directors, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily available
facts, that the recipient of the advance ultimately will be found entitled to
indemnification.
The Fund may purchase insurance on behalf of an officer or director protecting
such person, to the full extent permitted under the Maryland law, from
liability arising from his or her activities as officer or director of the
Fund. The Fund, however, may not purchase insurance on behalf
5
of any officer or director of the Fund that protects or purports to protect
such person from liability to the Fund or to its stockholders to which such
officer or director would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Reference is made to Article V of the Management Agreement filed as Exhibit
(g)(1) herewith relating to limitation of liability of the Manager, and to
Article IV of the Investment Advisory Agreement filed as Exhibit (g)(2)
herewith for provisions relating to limitation of liability of the Investment
Adviser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "1933 Act") may be permitted to directors, officers and controlling
persons of the Fund and the principal underwriter pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Fund of expenses incurred or paid by a director, officer,
or controlling person of the Fund and the principal underwriter in connection
with the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by the controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Pursuant to the management and advisory arrangements described in the
prospectus constituting Part A of this Registration Statement, the Fund's
Manager, Nomura Asset Management U.S.A. Inc., is responsible for providing the
Fund with advisory services. The Manager has entered into an Investment
Advisory Agreement with Nomura Asset Management Co., Ltd. (the "Investment
Adviser").
(a) The Manager provides investment advisory services to United States and
foreign clients. The Manager also acts as an investment adviser to Korea
Equity Fund, Inc. (registered closed-end investment company). The principal
address of the Manager is Two World Financial Center, Building B, New York,
New York 10281.
Set forth below is a list of each executive officer and director of the
Manager, indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
[March 1, 2003] for his own account or in the capacity of director, officer,
partner or trustee.
Other Substantial Business, Profession,
The Name Position With Management Vocation or Employment
------------------------------ -------------------------- ---------------------------------------------------
Hiroshi Terasaki.............. President and Director President and Director of the Fund since 2005.
Kiyoharu Ikeda................ Treasurer, Director and _____
Senior Vice President
Marti G. Sbrahmanyam.......... Director Charles E. Merrill Professor of Finance, Economics
and International Business, New York University
since 1991.
Kenneth L. Munt............... Senior Vice President and Vice President of the Fund since 2001.
Secretary
Keiko Tani.................... Senior Vice President and Vice President of the Fund since 2005.
General Counsel
Rita Chopra-Brathwaite........ Vice President Treasurer of the Fund since 2002.
Neil Daniele.................. Senior Vice President Secretary of the Fund since 2002.
6
Chief Compliance Officer
(b) The Investment Adviser provides investment advisory services to Japanese
and international clients. The Investment Adviser is an investment adviser to
Korea Equity Fund Inc. (a U.S. registered closed-end investment company). The
principal address of the Investment Adviser is 1-12-1, Nihombashi, Chuo-ku,
Tokyo 103-8260, Japan.
Set forth below is a list of the principal officers and directors of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since [March 1, 2003] for his own account or in the capacity of director,
officer, partner or trustee.
Position With Other Substantial Business, Profession,
Name The Investment Adviser Vocation or Employment
------------------------------ ------------------------------- -------------------------------------------------
Toshio Ando Chairman and Director Outside Director, Saitama Development Co., Ltd.
Takumi Shibata President and CEO, Director Senior Managing Director and Head of Asset
Management, Nomura Holdings, Inc.
Chairman, Nomura BlackRock Asset Management Co.,
Ltd.
Outside Director, Nomura Trust & Banking Co.,
Ltd.
Akihiko Nakamura Outside Director Senior Managing Director and Head of Global IT
Operation, Nomura Holdings, Inc.
Senior Managing Director, Nomura Securities Co.,
Ltd.
Tetsu Ozaki Outside Director Senior Managing Director, Head of Corporate
Planning and Global Public Communication, Nomura
Holdings, Inc.
Senior Managing Director, Nomura Securities Co.,
Ltd.
Yukio Suzuki Outside Director Director, Nomura Holdings, Inc.
Takamichi Arata Outside Director Auditor, Nomura BlackRock Asset Management Co.,
Ltd.
Daisuke Suzuki Outside Director
Kamezo Nakai Executive Vice President
Senior Managing Director, Nomura Holdings, Inc.
Takahide Mizuno Executive Vice President Senior Managing Director, Nomura Holdings, Inc.
Outside Director, Nomura Asset Management
Delaware Inc.
Outside Director, FQN Management LLC
Atsushi Yoshikawa Executive Vice President Senior Managing Director, Nomura Holdings, Inc.
Outside Director, Nomura Asset Management
Delaware Inc.
Outside Director, FQN Management LLC
Shigeru Fujinuma Executive Managing Director Outside Director, Nomura Asset Management Hong
Kong Limited
Outside Director, Nomura Asset Management
Singapore Limited
Eiichiro Tabuchi Senior Managing Director
Kazuhiro Okada Senior Managing Director
Tatsuro Kochi Senior Managing Director
Kouichi Goto Senior Managing Officer
Yukio Shirokawa Senior Managing Officer
Takao Omori Senior Managing Officer
Tamon Watanabe Senior Managing Officer
Mitsugu Toyota Senior Managing Officer
7
ITEM 32. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31 (a) of the 1940 Act, as amended, and the rules promulgated thereunder are
maintained at the offices of the Fund (Two World Financial Center, Building B,
New York, New York 10281), and Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109-3661, the Fund's custodian and EquiServe Trust
Company, N.A., 150 Royall Street, Canton, Massachusetts 02021, the Fund's
transfer agent.
ITEM 33. MANAGEMENT SERVICES
Not applicable.
ITEM 34. UNDERTAKINGS
(1) The Registrant undertakes to suspend offering of its shares until
it amends its prospectus if (1) subsequent to the effective date
of its Registration Statement, the NAV of its shares declines more
than 10 percent from its NAV as of the effective date of the
Registration Statement or (2) the NAV increases to an amount
greater than its net proceeds as stated in the prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Registrant undertakes that:
(a) for the purpose of determining any liability under the 1933
Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed
by the Registrant under Rule 497(h) under the 1933 Act shall
be deemed to be part of this registration statement as of
the time it was declared effective.
(b) for the purposes of determining any liability under the 1933
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 the securities at that time shall be deemed
to be the initial bona fide offering thereof.
(6) Not applicable.
8
Signatures
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, and State of New York, on the 8th day of
November 2005.
Japan Smaller Capitalization Fund, Inc.
By: /s/ Keiko Tani
---------------------------------------
(Keiko Tani,
Vice President)
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
Director and President November 8, 2005
/s/ Hiroshi Teraski* (Principal Executive Officer)
-----------------------------------------------
(Hiroshi Terasaki)
Treasurer November 8, 2005
/s/ Rita Chopra-Brathwaite (Principal Financial Officer)
-----------------------------------------------
(Rita Chopra-Brathwaite )
/s/ William G. Barker, Jr.* Director November 8, 2005
-----------------------------------------------
(William G. Barker, Jr.)
/s/ William K. Grollman* Director November 8, 2005
-----------------------------------------------
(William K. Grollman)
/s/ Chor Weng Tan* Director November 8, 2005
-----------------------------------------------
(Chor Weng Tan)
/s/ Arthur R. Taylor* Director November 8, 2005
-----------------------------------------------
(Arthur R. Taylor)
/s/ John F. Wallace* Director November 8, 2005
-----------------------------------------------
(John F. Wallace)
/s/ Rita Chopra-Brathwaite November 8, 2005
-----------------------------------------------
*By Rita Chopra-Brathwaite, as attorney-in-fact of each person so indicated.