JAPAN
Smaller Capitalization
Fund, Inc.
ANNUAL REPORT
FEBRUARY 28, 2002
JAPAN SMALLER CAPITALIZATION FUND, INC.
April 18, 2002
To Our Shareholders:
We present the Annual Report of the Japan Smaller Capitalization Fund,
Inc. (formerly Japan OTC Equity Fund, Inc.) (the "Fund") for the fiscal year
ended February 28, 2002 (see reason for name change immediately following the
President's letter). The Net Asset Value per share ("NAV") of the Fund
decreased by 21.7% for the year, reflecting the overall weakness in the
Japanese OTC stock market. The change in NAV represents the change in share
price and the reinvestment of a $0.08 per share long-term capital gain
distribution paid on December 14, 2001. The closing market price of the Fund
on February 28, 2002, on the New York Stock Exchange was $5.53 representing
a discount of 5.6% to the NAV of $5.86. The net assets of the Fund amounted to
$92,815,469 on February 28, 2002.
The TOPIX, consisting of all companies listed on the Tokyo Stock Exchange
(the "TSE") First Section, decreased by 31.6% and the Nikkei Average Index (a
price weighted index of 225 leading stocks on the TSE) decreased by 31.1%, in
United States dollar terms, for the year ended February 28, 2002. The Nikkei
OTC Average Index (the "OTC Index"), a price-weighted index of the quotations
of the OTC registered stocks, and the Index of the Japan Securities Dealers
Association Quotation System (the "JASDAQ Index"), a capitalization-weighted
index of all OTC stocks, decreased by 31.4% and 34.8%, respectively,
in U.S. dollar terms, during the same period. The Japanese yen ("Yen")
depreciated by 19.3% against the U.S. dollar during the year and played a
negative role in the dollar-based performance of the various indices.
The Fund outperformed both the OTC Index and the JASDAQ Index by 9.7
percentage points and 13.1 percentage points, respectively, during the year.
The negative results, mainly from the overweight position in the Electronics
sector, were more than offset by the positive results from stock selection,
especially in the Consumption and Infrastructure sectors, such as United
Arrows Limited and Eneserve Corporation.
The NAV of the Fund declined by 11.7% for the quarter ended February 28,
2002. During the same period, the TOPIX and the Nikkei Average Index decreased
by 15.0% and 12.9%, respectively, and the OTC Index and the JASDAQ Index also
decreased by 16.3% and 15.3%, respectively, in U.S. dollar terms. For the
quarter ended February 28, 2002, the Fund
outperformed the OTC Index and the JASDAQ Index by 4.6 percentage points
and 3.6 percentage points, respectively. Positive results from the
overweight position in technology stocks in the Electronics and Machinery
sectors, such as UMC Japan and THK Co., Ltd. more than offset the negative
impact of the underweight position in the Information/Systems sector.
The Portfolio
The Fund increased its equity exposure from 98.9% at November 30, 2001 to
99.3% at February 28, 2002. The Fund was diversified into 95 issues, of which
69 issues were OTC stocks, 19 were other smaller capitalization stocks and 7
were TSE First Section stocks, comprising 70.1%, 19.2% and 10.0% respectively,
of net assets on February 28, 2002.
Japanese Economy and Stock Market
Outlook
The OTC Index declined by 18.1% in local currency terms during the year
ended February 28, 2002.
In addition to signs of economic retrenchment, growing disillusionment
with policy inertia from the ruling Liberal Democratic Party compounded the
market's depressed sentiment until mid-March 2001. However, the Japanese OTC
stock market regained upward momentum in the latter half of March, after the
Bank of Japan ("BOJ") effectively returned to a zero interest rate policy
with a form of quantitative easing with an implicit inflation target that will
remain in place at least until the Consumer Price Index has stabilized. In late
April and early May, the Japanese OTC stock market extended the recovery in
anticipation of structural reforms based on the policies outlined by the new
Prime Minister Junichiro Koizumi and his cabinet. The OTC Index recovered to
1400 in early May.
However, cautious sentiment later returned due to the delay in clarifying
the new government's intended policy measures. Continuing deterioration in
domestic fundamentals, initially highlighted by the BOJ Tankan survey in July,
and a series of poor industrial production figures weighed heavily on the
market. A constant stream of profit warnings from technology companies
worldwide also forced the OTC Index down. Furthermore, global stock markets
suffered precipitous declines in the wake of the terrorist attacks on the
World Trade Center and the Pentagon in September, 2001. The OTC Index
approached 1000 immediately after the attacks, recording a new low for the
year.
Toward the end of calendar year 2001, the Japanese OTC stock market
experienced a rebound, benefiting from an improvement in global sentiment amid
further U.S. interest rate reductions, hopes of a recovery in the U.S. economy
in 2002 based on encouraging retail sales figures, and rapid progress in the
military campaign in Afghanistan. The Yen's depreciation also offered some
support. The OTC Index recovered to nearly 1200 in early November, 2001.
However, the rebound quickly ended amid disappointing domestic news.
Continued deterioration in economic fundamentals undermined the recovery while
the delayed implementation of Prime Minister Koizumi's structural reforms
weighed on the OTC Index. Moreover, Japanese equities became increasingly
sensitive to credit risk after the downgrading of Japan's sovereign
domestic debt rating by Standard & Poor's in late November. In December,
the default following the collapse of energy trading giant Enron Corp., and
the bankruptcy of Aoki Construction, a mid-sized Japanese contractor,
overshadowed the Japanese OTC stock market. The OTC Index continued to trade
between 1100 and 1200 towards the end of February, 2002.
Outlook and Future Strategy
We have a cautiously optimistic view for the Japanese OTC stock market,
despite the weak domestic macroeconomic figures, including consumer-related
statistics. The recently announced anti-deflation policy package did not
contain any concrete measures to encourage market participants. This was no
surprise, since we had not expected the Koizumi cabinet to produce any
decisive policy action. The slow progress of the Prime Minister's reform
program, combined with the deflationary economic conditions, will likely
prevent the market from achieving a substainable recovery. However, we still
expect the market to focus on some of the positive cyclical aspects of the
economy in the short and medium term. Due to an improvement in inventory
conditions and a U.S. economic recovery, we expect to see the cyclical
turnaround among manufacturing industries, including export-oriented
industries, to continue over the next quarters. Recent statistics,
particularly from the U.S., suggest that the Japanese economy is bottoming
out, which supports our view that a cyclical recovery is imminent. The Yen's
depreciation trend will also aid the recovery in corporate earnings.
Difficult supply and demand conditions that have overshadowed the market
for some time should be alleviated somewhat in the short-term. Activity
relating to the unwinding of cross-shareholdings will tend to settle down
through the latter part of March. In addition, tighter trading regulations
governing short selling are expected to have a positive near-term market impact.
Furthermore, the domestic public pension fund is expected to allocate
money to the equity market in mid-March. Therefore, given these domestic
factors and improved stability in the global stock markets, we expect the
Japanese OTC stock market to trade with a firm bias in the near term.
One of the current focal points of our small capitalization stock
selection looks at the ability of companies to withstand deflationary
pressure. For example, we can still find a number of companies within the
Consumption sector that have sufficient operational and cost competitiveness
and have been gaining market share despite the severe competitive and
deflationary conditions. Additionally, we are maintaining the portfolio's
sensitivity to a cyclical turnaround with overweight positions in some
Technology sector stocks. The deflationary trend in the domestic market will
also justify the overweight position in this sector.
We appreciate your continuing support of your Fund.
Sincerely,
Kazuhiko Hama
President
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REASON FOR NAME CHANGE
The Securities and Exchange Commission adopted Rule 35d-1 (the "Rule")
under the Investment Company Act of 1940 to address the use of certain broad
categories of investment company names. The Rule requires a registered
investment company ("RIC") with a name suggesting that the RIC focus on a
particular type of investment or invests in a particular country, invest at
least 80% of its assets in the type of investments suggested by its name,
"under normal circumstances."
Accordingly, on February 19, 2002, the Fund's Board of Directors approved
a new name for the Fund-Japan Smaller Capitalization Fund, Inc. The New York
Stock Exchange ticker symbol remains "JOF". The name change did not require
shareholder approval.
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NEW NON-FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICY
The Fund's Board of Directors approved a new non-fundamental investment
objective and policy, whereby the Fund will, under normal circumstances,
invest at least 80% of its total assets in smaller capitalization Japanese
equity securities traded in the Japanese OTC market, Second Section of the
Tokyo, Osaka and Nagoya Stock Exchanges, JASDAQ, Mothers, NASDAQ Japan, and
other Japanese equity securities included in the indices determined by Nomura
Asset Management U.S.A. Inc. ("NAM-U.S.A.") to be appropriate indices for
smaller capitalization companies in Japan ("Smaller Capitalization
Companies"). The new non-fundamental investment objective and policy did not
require shareholder approval. The Fund's fundamental investment policy of
investing at least 65% of its total assets in equity securities traded in the
Japanese OTC stock market was not changed.
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NEW MANAGEMENT AND INVESTMENT ADVISORY AGREEMENTS
A new Management Agreement between the Fund and NAM-U.S.A., and a new
Investment Advisory Agreement between NAM-U.S.A. and Nomura Asset Management
Co., Ltd.("NAM") were approved by shareholders at their 2001 Annual Meeting
held November 13, 2001. The new contracts allow NAM-U.S.A. to delegate
security selection and order placement to NAM.
Mr. Masao Kurita of NAM is primarily responsible for day-to-day
management of the portfolio of the Fund. Mr. Kurita has held such
responsibilities for the Fund since November, 2001. Mr. Kurita was a Portfolio
Manager-Japanese Equities with NAM from 1997 to 1999 and Senior Portfolio
Manager-Japanese Equities with NAM from 1999 to present.
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INTERNET WEBSITE
NAM-U.S.A. has established an Internet website which highlights history,
investment philosophy and process and products, which includes the Fund. The
Internet web address is www.nomura-asset.com. We invite you to view the
Internet website.
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JAPAN SMALLER CAPITALIZATION FUND, INC.
FUND HIGHLIGHTS-FEBRUARY 28, 2002
KEY STATISTICS
Net Assets ...........................................$92,815,469
Net Asset Value per Share ............................ $5.86
Closing NYSE Market Price ............................ $5.53
Percentage Change in Net Asset Value per Share*+ ..... (21.7%)
Percentage Change in NYSE Market Price*+ ............. (18.6%)
MARKET INDICES
Percentage change in market indices:*
YEN U.S. $
--- -----
TOPIX ................................................ (18.3%) (31.6%)
Nikkei Average ....................................... (17.8%) (31.1%)
JASDAQ ............................................... (22.2%) (34.8%)
Nikkei OTC Average ................................... (18.1%) (31.4%)
*From March 1, 2001 through February 28, 2002.
+Reflects the percentage change in share price and reinvestment of long-
term capital gain distribution.
ASSET ALLOCATION
Japanese Equities
OTC Stocks ......................................... 70.1%
Other Smaller Capitalization Stocks ................ 19.2
TSE First Section Stocks ........................... 10.0
Cash and Cash Equivalents ............................ 0.5
------
Total Investments .................................... 99.8
Other Assets in Excess of Liabilities ................ 0.2
------
Net Assets ......................................... 100.0%
======
INDUSTRY DIVERSIFICATION % of % of
Net Assets Net Assets
---------- ----------
Retail ............................ 19.2 Machinery and Machine Tools ................. 3.7
Information and Software .......... 12.9 Electric .................................... 3.6
Chemicals and Pharmaceuticals ..... 10.4 Real Estate and Warehouse ................... 3.2
Miscellaneous Manufacturing ....... 8.2 Banks and Finance ........................... 3.2
Electronics ....................... 8.1 Restaurants ................................. 3.0
Services .......................... 7.7 Textiles and Apparel ........................ 2.3
Food Manufacturing ................ 7.2 Automotive Equipment and Parts .............. 1.9
Wholesale ......................... 4.1 Telecommunications .......................... 0.6
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Security Value Net Assets
-------- -------- ----------
UMC Japan....................................................................... $3,311,691 3.6
Chiyoda Co., Ltd. .............................................................. 3,100,302 3.3
Cawachi Limited ................................................................ 2,824,911 3.0
Plenus Co., Ltd. ............................................................... 2,739,505 3.0
Yahoo Japan Corp. .............................................................. 2,477,779 2.7
T & K Toka Co., Ltd. ........................................................... 2,265,756 2.4
Kuroda Electric Co., Ltd. ...................................................... 2,172,021 2.3
Sanyo Electric Credit Co., Ltd. ................................................ 2,112,198 2.3
Toys R Us-Japan, Ltd. .......................................................... 2,109,967 2.3
USS Co., Ltd. .................................................................. 1,898,578 2.0
JAPAN SMALLER CAPITALIZATION FUND, INC.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Japan Smaller Capitalization Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of the Japan Smaller
Capitalization Fund, Inc. (formerly known as Japan OTC Equity Fund, Inc.) (the
"Fund") at February 28, 2002, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 2002 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York New York
April 9, 2002
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SCHEDULE OF INVESTMENTS*
FEBRUARY 28, 2002
% of
Market Net
Shares Cost Value Assets
------ ---- ------- -------
EQUITY SECURITIES
Automotive Equipment and Parts
Exedy Corporation ................................ 132,400 $ 1,495,676 $627,441 0.7
Automobile clutches
Nippon Cable Systems Inc.......................... 115,000 1,054,173 849,659 0.9
Control cables
SPK Corporation .................................. 45,600 590,497 323,296 0.3
----------- ---------- -----
Replacement parts
Total Automotive Equipment and Parts ............. 3,140,346 1,800,396 1.9
----------- ---------- -----
Banks and Finance
Aiful Corporation ................................ 17,050 1,440,881 849,987 0.9
Consumer loans
Sanyo Electric Credit Co., Ltd. .................. 106,400 3,582,788 2,112,198 2.3
----------- ---------- -----
Finance
Total Banks and Finance .......................... 5,023,669 2,962,185 3.2
----------- ---------- -----
Chemicals and Pharmaceuticals
Arisawa Manufacturing Co., Ltd. .................. 32,600 579,231 559,573 0.6
Glassfibers and insulating resins
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 2002
% of
Market Net
Shares Cost Value Assets
------ ---- ------- -------
C. Uyemura & Co., Ltd. ........................... 99,000 $ 2,078,276 $ 1,292,959 1.4
Chemicals
FP Corporation ................................... 22,500 956,479 621,292 0.7
Polystyrene and other synthetic resin foodware
Konishi Co., Ltd. ................................ 127,800 1,423,557 1,049,144 1.1
Adhesives and construction sealants
Mandom Corporation ............................... 78,000 1,090,432 1,018,113 1.1
Cosmetic products
Matsumoto Yushi-Seiyaku Co., Ltd. ................ 86,000 1,607,793 1,091,086 1.2
Analgesic anti-inflammatory agents
Milbon Co., Ltd. ................................. 72,500 1,808,628 1,271,503 1.4
Hair-care products for beauty salons
Shizuokagas Co., Ltd. ............................ 164,000 487,656 484,675 0.5
Natural gas supplier
T & K Toka Co., Ltd. ............................. 126,500 3,521,332 2,265,756 2.4
-------------- ------------ -----
Ink for printing
Total Chemicals and Pharmaceuticals .............. 13,553,384 9,654,101 10.4
-------------- ------------ -----
Electric
Citizen Electronics Co., Ltd. .................... 21,700 1,267,964 1,253,465 1.4
Electric parts
Eneserve Corporation ............................. 45,500 1,129,756 1,412,590 1.5
Electric generation system for supermarkets
Mirai Industry Co., Ltd. ......................... 116,000 1,777,000 683,906 0.7
-------------- ------------ -----
Plastic molded electric materials
Total Electric ................................... 4,174,720 3,349,961 3.6
-------------- ------------ -----
Electronics
Chiyoda Integre Co., Ltd. ........................ 59,900 843,825 474,301 0.5
Electronic components
Cosel Co., Ltd. .................................. 59,000 1,698,071 893,839 1.0
Electrical machinery
Digital Electronics Corp. ........................ 40,800 1,034,227 414,105 0.5
Electronic components
Fuji Electric Industry Co., Ltd. ................. 93,000 993,449 343,558 0.4
Electronic parts
Fukuda Denshi Co. ................................ 39,000 961,762 849,883 0.9
Medical electronic equipment
Japan CBM Corp. .................................. 60,100 1,134,621 484,406 0.5
Electronic calculators and watches
Kuroda Electric Co., Ltd. ........................ 160,000 2,929,198 2,172,021 2.3
Trader
Miyota Co., Ltd. ................................. 63,000 995,776 305,608 0.3
Watches, quartz oscillators and electronic image
equipment
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 2002
% of
Market Net
Shares Cost Value Assets
------ ---- ------- -------
Nagano Keiki Co., Ltd. ........................... 54,890 $ 1,006,320 $ 618,560 O.7
Measuring instruments
Nissho Electronics Corp. ......................... 43,000 1,430,395 500,616 0.5
Electronics parts distributor
Roland Corporation ............................... 46,000 910,132 458,644 0.5
-------------- ------------ -----
Electronic keyboard for musical instruments
Total Electronics ................................ 13,937,776 7,515,541 8.1
-------------- ------------ -----
Food Manufacturing
Ariake Japan Co., Ltd. ........................... 32,300 739,366 954,573 1.0
Natural seasonings
Iwatsuka Confectionary Co., Ltd. ................. 71,800 692,781 535,841 0.6
Rice crackers
Kakiyasu Honten Co., Ltd. ........................ 44,000 468,144 328,370 0.4
Processed meat products, fresh meats, and side
dishes
Origin Toshu Co., Ltd. ........................... 30,500 588,392 680,585 0.7
Delicatessen items and lunch boxes
Ozeki Co., Ltd. .................................. 12,000 1,132,929 234,636 0.2
Supermarket chain
Plenus Co., Ltd. ................................. 96,600 2,806,886 2,739,505 3.0
Japanese lunch-boxes
Rals Co., Ltd. ................................... 114,000 1,606,660 535,990 0.6
Supermarket chain
Yaizu Suisankagaku Industry Co., Ltd. ............ 57,800 841,395 651,784 0.7
-------------- ------------ -----
Natural seasonings and dehydrated processed
food materials
Total Food Manufacturing ......................... 8,876,553 6,661,284 7.2
-------------- ------------ -----
Information and Software
Argo Graphics Inc. ............................... 36,000 896,182 752,267 0.8
Computer aided design software
CAC Corp. ........................................ 89,000 1,846,372 1,118,519 1.2
Information technology services
Celartem Technology Inc.+ ....................... 31 368,928 691,742 0.7
Software development
Fuji Soft ABC Inc. ............................... 13,300 836,138 396,037 0.4
Computer systems development
Fujitsu Broad Solution & Consulting Inc. ......... 44,500 1,794,921 361,991 0.4
Business application software
Konami Computer Entertainment Tokyo, Inc. ........ 121,600 1,556,516 1,506,444 1.6
Video games software
UMC Japan . ...................................... 355 3,167,571 3,311,691 3.6
Semiconductor memory chips
Real Vision Inc.+ ................................ 196 734,202 886,421 1.0
Professional video technology
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 2002
% of
Market Net
Shares Cost Value Assets
------ ---- ------- -------
Trend Micro Inc.+ ................................ 19,500 $ 1,488,482 $ 433,673 0.5
Computer software, anti-virus server
Yahoo Japan Corp.+ ............................... 63 11,237,066 2,477,779 2.7
-------------- ------------ -----
Internet services
Total Information and Software ................... 23,926,378 11,936,564 12.9
-------------- ------------ -----
Machinery and Machine Tools
Disco Corp. ...................................... 15,500 1,151,460 838,651 0.9
Dicing saws for semiconductors
Suruga Seiki Co., Ltd. ........................... 20,000 540,974 137,319 0.2
Industrial mechanical equipment
THK Co., Ltd. .................................... 78,700 3,419,652 1,480,085 1.6
Linear motion systems for industrial machines
Yushin Precision Equipment Co., Ltd. ............. 41,600 2,017,235 968,633 1.0
-------------- ------------ -----
Injection molding related machinery
Total Machinery and Machine Tools ................ 7,129,321 3,424,688 3.7
-------------- ------------ -----
Miscellaneous Manufacturing
Central Glass Co., Ltd. .......................... 336,000 1,759,202 1,652,480 1.8
Glass products
Eidai Kako Co., Ltd. ............................. 144,000 1,085,863 413,747 0.4
Synthetic resin processed products
Fuji Seal, Inc. .................................. 19,700 542,645 646,890 0.7
Packing materials
Fujimi Inc. ...................................... 64,700 1,951,160 1,062,279 1.1
Polishing materials for silicone wafers
Hoden Seimitsu Kako Kenkyusho Co., Ltd. .......... 62,000 1,015,688 289,190 0.3
Aluminum extruding molds
Nichiha Corporation . ............................ 194,600 1,739,791 1,716,610 1.9
Ceramic exterior walls and fiberboards
Nippon Kodoshi Corp. ............................. 167,000 2,688,750 909,810 1.0
Paper and electric insulation
Tomy Co., Ltd. ................................... 83,100 2,721,673 896,769 1.0
----------- ---------- -----
Toys
Total Miscellaneous Manufacturing ................ 13,504,772 7,587,775 8.2
-------------- ------------ -----
Real Estate and Warehouse
Nippon Kanzai Co., Ltd. .......................... 87,800 1,303,227 1,092,299 1.2
Comprehensive building maintenance
Recrm Research Co., Ltd.+ ........................ 1,050 1,302,300 1,786,633 1.9
Building management
Riberesute Corporation ........................... 80 104,726 83,585 0.1
-------------- ------------ -----
Sells residential and commercial buildings
Total Real Estate and Warehouse .................. 2,710,253 2,962,517 3.2
-------------- ------------ -----
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 2002
% of
Market Net
Shares Cost Value Assets
------ ---- ------- -------
Restaurants
Saint Marc Co., Ltd. ............................. 48,700 $ 1,377,590 $ 1,192,104 1.3
Restaurants and bakery shop chain
Saizeriya Co., Ltd. .............................. 25,400 1,021,560 834,061 0.9
Italian restaurant chain
Watami Food Service Co., Ltd. .................... 48,900 1,406,221 797,392 0.8
-------------- ------------ -----
Restaurant chain
Total Restaurants ................................ 3,805,371 2,823,557 3.0
-------------- ------------ -----
Retail
Cawachi Limited .................................. 54,700 3,052,774 2,824,911 3.0
Drug store chain
Chiyoda Co., Ltd. ................................ 477,500 3,209,151 3,100,302 3.3
Specialty store chain
Himaraya Co., Ltd. ............................... 200 2,504 381 0.0
Sporting goods
Kyoto Kimono Yuzen Co., Ltd. ..................... 577 2,014,182 1,356,431 1.5
Japanese traditional kimonos
Nissen Co., Ltd. ................................. 77,000 513,135 549,938 0.6
Mail-order business
Otsuka Kagu, Ltd. ................................ 46,800 3,224,588 1,274,824 1.4
Furniture
Prime Network Inc. ............................... 198 902,782 1,322,512 1.4
TV shopping business
Toys R Us-Japan, Ltd. ............................ 131,500 3,750,692 2,109,967 2.3
Toy chain stores
Uoriki Co., Ltd. ................................. 139,000 3,013,993 1,773,872 1.9
Fresh fish and sushi stores
USS Co., Ltd. .................................... 60,000 1,428,555 1,898,578 2.0
Automobile auction
Yamada Denki Co., Ltd. ........................... 27,100 2,053,113 1,638,196 1.8
-------------- ------------ -----
Consumer electronics
Total Retail ..................................... 23,165,469 17,849,912 19.2
-------------- ------------ -----
Services
Arrk Corporation ................................. 11,000 376,840 394,045 0.4
Product testing
Bellsystem 24, Inc. .............................. 3,100 1,015,540 1,002,911 1.1
Telemarketing
Central Sports Co., Ltd. ......................... 66,100 768,084 411,907 0.5
Health and fitness clubs
EPS Co., Ltd. .................................... 15 227,236 316,803 0.3
Clinical testing services
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 2002
% of
Market Net
Shares Cost Value Assets
------ ---- ------- -------
Future System Consulting Corporation ............. 192 $ 1,081,561 $ 716,445 0.8
Information system and consulting services
Sodexho Japan Co., Ltd. .......................... 157,000 3,331,323 738,162 0.8
Nursing home caterer
N.I.C. Corporation ............................... 49,200 910,109 411,239 0.4
Human resources
Toei Animation Co., Ltd. ......................... 12,000 634,388 616,142 0.7
Animated cartoon movies production
Tow Co., Ltd. .................................... 214,500 1,653,845 1,744,879 1.9
Entertainment
Weathernews Inc. ................................. 83,000 1,120,731 755,080 0.8
-------------- ------------ -----
Custom weather forecasting services
Total Services ................................... 11,119,657 7,107,613 7.7
-------------- ------------ -----
Telecommunications
Nippon Antenna Co., Ltd. ......................... 57,000 945,374 344,565 0.4
Communication related equipment
Yozan Inc.+ ...................................... 279 1,138,532 249,860 0.2
-------------- ------------ -----
Mobile telecommunication equipment
Total Telecommunications ......................... 2,083,906 594,425 0.6
-------------- ------------ -----
Textiles and Apparel
United Arrows Limited ............................ 53,800 972,762 1,312,930 1.4
Casual clothes
World Co., Ltd. .................................. 35,700 1,114,038 799,284 0.9
-------------- ------------ -----
Fashion apparel
Total Textiles and Apparel ....................... 2,086,800 2,112,214 2.3
-------------- ------------ -----
Wholesale
ArcLand Sakamoto Co., Ltd. ....................... 110,600 1,363,176 1,097,787 1.2
Home appliances
C Two-Network Co., Ltd. .......................... 22,000 844,123 569,723 0.6
Processed foods
Hakudo Co., Ltd. ................................. 91,000 418,420 414,269 0.4
Metal products
Hakuto Co., Ltd. ................................. 112,800 1,945,846 1,077,533 1.2
Electric parts
Shinwa Co., Ltd. ................................. 49,910 528,111 372,849 0.4
Industrial machinery
Toba, Inc. ....................................... 67,000 1,015,392 297,511 0.3
-------------- ------------ -----
Trading company for control systems
Total Wholesale .................................. 6,115,068 3,829,672 4.1
-------------- ------------ -----
TOTAL INVESTMENTS IN EQUITY SECURITIES ........... 144,353,443 92,172,405 99.3
-------------- ------------ -----
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
SCHEDULE OF INVESTMENTS*-Continued
FEBRUARY 28, 2002
% of
Principal Market Net
Amount Cost Value Assets
------ ---- ------- -------
INVESTMENTS IN SHORT-TERM SECURITIES
State Street Bank and Trust Company, interest
bearing call account 1.50% due 3/01/02 ....... $204,093 $ 204,093 $ 204,093 0.2
-------------- ------------ -----
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES ..... 204,093 204,093 0.2
-------------- ------------ -----
INVESTMENTS IN FOREIGN CURRENCY
State Street Bank and Trust Company, 0.25% interest
bearing call account ........................JPY 32,521,849 242,709 242,709 0.3
-------------- ------------ -----
TOTAL INVESTMENTS IN FOREIGN CURRENCY ......... 242,709 242,709 0.3
-------------- ------------ -----
TOTAL INVESTMENTS . ........................... 144,800,245 92,619,207 99.8
-------------- ------------ -----
OTHER ASSET IN EXCESS OF LIABILITIES .......... (141,074) 196,262 0.2
-------------- ------------ -----
NET ASSETS .................................... $144,659,171 $ 92,815,469 100.0
============== ============ ======
FORWARD FOREIGN CURRENCY CONTRACT
---------------------------------
Cost Delivery Maturity Unrealized
(Local Currency) Value Date Appreciation
-------------- --------- -------- ------------
U.S. Dollars-Long Contract . ..................JPY654,073,000 $ 5,300,000 03/11/02 $415,947
Japanese Yen-Long Contract . ..................JPY654,073,000 (4,962,429) 03/11/02 (78,376)
-------------- -------------- -----------
$ 337,571 $337,571
============== ===========
-------------------
* The description following each investment is unaudited and not covered by the
Report of Independent Accountants.
+ Non-income producing security.
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of February 28, 2002.
Japanese Yen JPY (Y) 133.995 = $1.00
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 2002
ASSETS:
Investments in securities, at market value (cost-$144,353,443) .................... $92,172,405
Investments in short-term securities, at market value (cost-$204,093) ............. 204,093
Investments in foreign currency, at market value (cost-$242,709) .................. 242,709
Receivable for investments sold ................................................... 250,650
Receivable for dividends and interest, net of withholding taxes ................... 100,105
Unrealized appreciation on foreign forward currency contracts ..................... 337,571
-----------
Total Assets ............................................................ 93,307,533
-----------
LIABILITIES:
Payable for investments purchased ................................................. 280,342
Accrued management fee ............................................................ 67,786
Other accrued expenses ............................................................ 143,936
-----------
Total Liabilities . ..................................................... 492,064
-----------
NET ASSETS:
Capital stock (par value of 15,846,384 shares of capital stock
outstanding, authorized 100,000,000, par value $0.10 each) ...................... 1,584,638
Paid-in capital . ................................................................. 168,353,585
Accumulated net realized loss on investments and foreign currency transactions .... (25,209,288)
Unrealized net depreciation on investments and foreign exchange ................... (51,843,701)
Accumulated net investment loss ................................................... (69,765)
-----------
Net Assets .............................................................. $92,815,469
-----------
Net asset value per share ............................................................ $5.86
===========
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 2002
INCOME:
Dividend income (less $141,390 withholding taxes) ................................... $801,208
Interest income...................................................................... 12,631
--------
Total Income ................................................................ $ 813,839
----------
EXPENSES:
Management fee ...................................................................... 1,137,918
Custodian fees ...................................................................... 208,086
Legal fees .......................................................................... 139,825
Shareholder reports ................................................................. 65,895
Auditing and tax reporting fees ..................................................... 56,465
Directors' fees and expenses ........................................................ 37,150
Registration fees ................................................................... 29,200
Transfer agency fees ................................................................ 20,075
Annual meeting expenses ............................................................. 17,695
Miscellaneous ....................................................................... 9,855
Insurance ........................................................................... 4,190
----------
Total Expenses .............................................................. 1,726,354
---------
INVESTMENT LOSS-NET ................................................................. (912,515)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized loss on investments and foreign currency transactions:
Net realized loss on investments ................................................... (14,623,705)
Net realized loss on foreign exchange . ............................................. (7,707,669)
------------
Net realized loss on investments and foreign exchange . ............................. (22,331,374)
Change in net unrealized depreciation on translation of foreign currency
and other assets and liabilities denominated in foreign currency . ............... (9,854,474)
Change in net unrealized depreciation on investments . .............................. 6,906,721
------------
Net realized and unrealized loss on investments and foreign exchange . .............. (25,279,127)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . .............................. ($26,191,642)
==============
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended
February 28, 2002 February 28, 2001
----------------- -----------------
FROM INVESTMENT ACTIVITIES:
Net investment loss ...................................... ($912,515) ($1,397,744)
Net realized gain/(loss) on investments .................. (14,623,705) 23,031,899
Net realized gain/(loss) on foreign exchange ............. (7,707,669) 437,488
Change in net unrealized depreciation on investments
and foreign exchange .................................... (2,947,753) (148,569,325)
------------ --------------
Decrease in net assets derived from investment activities. (26,191,642) (126,497,682)
------------ --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Long Term Capital Gains ($0.08 and $0.82 per share,
respectively)............................................ (1,267,704) (12,993,975)
------------ --------------
Decrease in net assets derived from distributions to
shareholders ............................................ (1,267,704) (12,993,975)
------------ --------------
Net decrease in net assets ............................... (27,459,346) (139,491,657)
------------ --------------
NET ASSETS:
Beginning of period ...................................... 120,274,815 259,766,472
------------ --------------
End of period (including accumulated net investment
losses of $69,765 and $62,906, respectively) ............ $ 92,815,469 $120,274,815
============= ===============
See notes to financial statements
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Japan Smaller Capitalization Fund, Inc. (formerly the Japan OTC Equity
Fund, Inc.) (the "Fund") is registered under the Investment Company Act of
1940 as a non-diversified, closed-end management investment company. The Fund
was incorporated in Maryland on January 25, 1990 and investment operations
commenced on March 21, 1990. The Fund issued to its shareholders of record as
of the close of business on October 25, 1999 non-transferable Rights to
subscribe for up to an aggregate of 3,804,940 shares of Common Stock of the
Fund at a rate of one share of Common Stock for three Rights held ("Primary
Subscription"). The Fund had the ability to increase the number of shares
subscribed for in this offering by up to 25% of the Primary Subscription, or
an additional 951,235 shares, to honor record date shareholder requests to
purchase more shares. During November 1999, the Fund issued a total of
4,458,565 shares of Common Stock on exercise of such Rights at the
subscription price of $11.99 per share, compared to a net asset value per
share of $16.20 and a market value per share of $12.6875. Additionally, a
sales load of 3.75% was charged to each share issued. Right offering costs of
approximately $546,000 and the sales load were charged directly against the
proceeds of the Rights Offering. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of Securities-Investments traded in the over-the-counter
market are valued at the last reported sales price as of the the close of
business on the day the securities are being valued or, if none is available,
at the mean of the bid and offer price at the close of business on such day
or, if none is available, the last reported sales price. Portfolio securities
which are traded on stock exchanges are valued at the last sales price on the
principal market on which securities are traded or lacking any sales, at the
last available bid price. Short-term debt securities which mature in 60 days
or less are valued at amortized cost if their original maturity at the date of
purchase was 60 days or less, or by amortizing their value on the 61st day
prior to maturity if their term to maturity at the date of purchase exceeded
60 days. Securities and other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
(b) Foreign Currency Transactions - Transactions denominated in Japanese
yen are recorded in the Fund's records at the current prevailing rate at the
time of the transaction. Asset and liability accounts that are denominated in
yen are adjusted to reflect the current exchange rate at the end of the
period. Transaction gains or losses resulting from changes in the exchange
rate during the reporting period or upon settlement of foreign currency
transactions are included in operations for the current period.
The net assets of the Fund are presented at the exchange rate and market
values at the end of the period. The Fund isolates that portion of the change
in unrealized appreciation (depreciation) included in the statement of
operations arising as a result of changes in Japanese yen rates at February
28, 2002 on investments and other assets and liabilities. Net realized foreign
exchange gains or losses includes gains or losses arising from sales of
portfolio securities, sales and maturities of short-term securities, currency
gains or losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid.
(c) Financial Instruments with Off Balance Sheet Risk-At February 28,
2002, the Fund had outstanding two forward foreign currency exchange contracts
("forward contract") in order to hedge against changes in the Japanese
exchange rate. A forward
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS-Continued
foreign currency contract is a commitment to purchase or sell foreign
currency at a future date at a negotiated forward rate. The gain or loss
arising from the difference between the original contracts and closing of such
contracts is included in realized gain or loss on foreign exchange.
Fluctuations in the value of forward foreign currency contracts are recorded
for financial reporting purposes as unrealized gain or loss by the Fund. The
forward contract involves elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the
risk of an unfavorable change in the foreign exchange rate underlying the
forward contract. Risks may arise as a result of the potential inability of
the counterparty to meet the terms of the contract.
(d) Security Transactions, Investment Income and Distributions to
Shareholders - Security transactions are accounted for on the trade date.
Dividend income and distributions are recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Realized gains and losses on
the sale of investments are calculated on the identified cost basis.
Distributions from net investment income and net realized gains are
determined in accordance with Federal income tax regulations, which may differ
from generally accepted accounting principles. To the extent these "book/tax"
differences are permanent in nature (i.e., that they result from other than
timing of recognition - "temporary"), such accounts are reclassified within
the capital accounts based on their Federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions
which exceed net realized gains for financial reporting purposes, but not
for tax purposes, are reported as distributions in excess of net realized
gains.
(e) Income Taxes - A provision for United States income taxes has not
been made since it is the intention of the Fund to qualify as a regulated
investment company under the Internal Revenue Code and to distribute within
the allowable time limit all taxable income to its shareholders.
Under Japanese tax laws, a withholding tax is imposed on dividends at a
rate of 20% and on interest at a rate of 15% and such withholding taxes are
reflected as a reduction of the related revenue. There is no withholding tax
on realized gains.
(f) Capital Account Reclassification - For the year ended February 28,
2002, the Fund's accumulated net realized loss was decreased by $205,936 and
paid in capital was decreased by $1,111,592, with an offsetting decrease in
accumulated net investment loss of $905,656. This adjustment was primarily the
result of the reclassification of foreign currency gains and the net operating
loss.
(g) Use of Estimates in Financial Statement Preparation - The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from these estimates.
(h) Concentration of Risk - A significant portion of the Fund's net
assets consists of Japanese securities which involve certain considerations
and risks not typically associated with investments in the United States. In
addition to the smaller size, and greater volatility, there is often
substantially less publicly available information about Japanese issuers
than there is about U.S. issuers. Future economic and political developments
in Japan could adversely affect the value of securities in which the Fund is
invested. Further, the Fund may be exposed to currency devaluation and
other exchange rate fluctuations.
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS-Continued
2. Management Agreement and
Transactions With Affiliated Persons
Nomura Asset Management U.S.A. Inc. (the "Manager") acts as the Manager
of the Fund pursuant to a management agreement. Under the agreement, the
Manager provides all office space, facilities and personnel necessary to
perform its duties. Pursuant to such management agreement, the Manager has
retained its parent company, Nomura Asset Management Co., Ltd. (the
"Investment Adviser"), to act as investment adviser for the Fund.
As compensation for its services to the Fund, the Manager receives a
monthly fee at the annual rate of 1.10% of the value of the Fund's average
weekly net assets not in excess of $50 million, 1.00% of the Fund's average
weekly net assets in excess of $50 million but not exceeding $100 million,
..90% of the Fund's average weekly net assets in excess of $100 million but
not exceeding $175 million, and .80% of the Fund's average weekly net assets
in excess of $175 million. For services performed under the Investment
Advisory Agreement, the Investment Adviser receives a monthly fee from the
Manager at the annual rate of .50% of the Fund's average weekly net assets not
in excess of $50 million, .45% of the Fund's average weekly net assets in
excess of $50 million but not in excess of $100 million, .40% of the Fund's
average weekly net assets in excess of $100 million but not exceeding $175
million, and .35% of the Fund's average weekly net assets in excess of $175
million. Under the Management Agreement, the Fund accrued fees to the Manager
of $1,137,918 for the year ended February 28, 2002. Under the Investment
Advisory Agreement, the Manager informed the Fund that the Investment Adviser
earned fees of $513,623 for the year ended February 28, 2002. At February 28,
2002, the fee payable to the Manager, by the Fund, was $67,786.
Certain officers and/or directors of the Fund are officers and/or
directors of the Manager. The Nomura Securities Co., Ltd. (the Manager's
affiliate) and its affiliates earned $11,515 in commissions on the execution
of portfolio security transactions for the year ended February 28, 2002. The
Fund pays each Director not affiliated with the Manager an annual fee of
$5,000 plus $500 per meeting attended, together with such Director's actual
expenses related to attendance at meetings. Such fees and expenses for
unaffiliated Directors aggregated $37,150 for the year ended February 28,
2002.
3. Purchases and Sales of Investments
Purchases and sales of investments, exclusive of investments in foreign
currencies and short-term securities, for the year ended February 28,
2002 were $40,724,919 and $41,267,574, respectively.
As of February 28, 2002, net unrealized depreciation on investments
exclusive of investments in foreign currency and short-term securities for
Federal income tax purposes was $52,996,182 of which $2,538,035 related to
appreciated securities and $55,534,217 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currencies
and short-term securities of $446,802, at February 28, 2002 for Federal
income tax purposes was $145,168,587. In accordance with U.S. Treasury
regulations, the Fund elected to defer $69,765 of net realized foreign currency
losses and $1,372,594 of net realized capital losses arising after
October 31, 2001. Such losses are treated for tax purposes as arising on March
1, 2002. The Fund has a capital loss carryforward as of February 28, 2002 of
approximately $22,683,799 which expires February 28, 2010.
JAPAN SMALLER CAPITALIZATION FUND, INC.
NOTES TO FINANCIAL STATEMENTS-Continued
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding
throughout the period.
For the Year Ended
------------------------------------------------------------------------------
February 28, February 29, February 28,
--------------- ------------ -------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net asset value, beginning of year .............. $7.59 $16.39 $5.86 $4.85 $6.44
------ ------- ------ ------ -----
Rights Offering costs* .......................... - - (0.16) - -
------ ------- ------ ------ -----
Net investment loss ........................... (0.06) (0.09) (0.11)@ (0.04) (0.06)
Net realized and unrealized gain (loss)
on investments and foreign currency ......... (1.59) (7.89) 11.99@ 1.06 (1.45)
------ ------- ------ ------ -----
Total from investment operations .............. (1.65) (7.98) 11.88@ 1.02 (1.51)
Distributions to shareholders from:
Net realized capital gains .................... (0.08) (0.82) - - -
Net investment income . ....................... - - - (0.01) (0.08)
------ ------- ------ ------ -----
Total distributions ............................. (0.08) (0.82) 0.00 (0.01) (0.08)
Decrease in net asset value due to shares
issued through Rights Offering* ............... - - (1.19) - -
------ ------- ------ ------ -----
Net asset value, end of period .................. $5.86 $7.59 $16.39 $5.86 $4.85
====== ======= ======== ======= ======
Market value, end of period ..................... $5.53 $6.89 $11.00 $6.25 $5.75
Total investment return+ ........................ (18.6%) (31.1%) 76.0% 8.8% (8.5%)
Net asset value total return++................... (21.7%) (49.1%) 179.7% 20.9% (23.4%)
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000) ............ $92,815 $120,275 $259,766 $66,740 $55,246
Operating expenses ............................ 1.58% 1.33% 1.33% 1.80% 1.71%
Net investment loss ........................... (0.84%) (0.76%) (0.88%) (0.82%) (1.0%)
Portfolio turnover ............................ 38% 78% 50% 35% 29%
+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 net asset 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.
*Decrease is due to Rights Offering (see note 1).
@Based on average shares outstanding.
-------------------------------------------------------------------------------
Distributions
The Board of Directors of the Fund voted to pay to shareholders of
record, the following distribution per share derived from capital gains
realized from sales of portfolio securities:
Long-Term
Pay Date Record Date Dividends Capital Gains
--------- ----------- --------- --------------
December 14, 2001 December 7, 2001 - $0.08
The Fund hereby designates 100% of the long-term capital gain dividend
distributed during the fiscal year as 20% rate capital gain dividend.
The Fund has notified shareholders in January, 2002 of amounts for use in
preparing 2001 income tax returns.
------------------------------------------------------------------------------
JAPAN SMALLER CAPITALIZATION FUND, INC.
Supplemental Shareholder Information (Unaudited)
The 2001 Annual Meeting of the Shareholders of the Fund was held at the
Fund's offices, 180 Maiden Lane, New York, New York on November 13, 2001. The
purpose of the meeting was to elect five Directors to serve for the ensuing
year; to consider and act upon a proposal to approve a new Management
Agreement between the Fund and Nomura Asset Management U.S.A. Inc.
("NAM-U.S.A."); to consider and act upon a proposal to approve a new
Investment Advisory Agreement between NAM-U.S.A. and Nomura Asset Management
Co., Ltd. ("NAM"); and to transact such other business as may properly come
before the Meeting or any adjournment thereof.
At the Meeting, the following persons were elected by the shareholders to
serve as Directors of the Fund: William G. Barker, Jr., Kazuhiko Hama, Chor
Weng Tan, Arthur R. Taylor, and John F. Wallace. The shareholders approved a
new Management Agreement between the Fund and NAM-U.S.A. and a new Investment
Agreement between NAM-U.S.A. and NAM. No other business was transacted at the
meeting.
The results of the voting at the Annual Meeting are as follows:
1. To elect the Fund's Board of Directors:
% of % of
Shares Voted outstanding Shares Voted outstanding
For Shares Withhold Authority Shares
------------- ------------- ------------------- ------------
William G. Barker, Jr. ............... 11,984,603 75.6 303,574 1.9
Kazuhiko Hama ........................ 11,996,173 75.7 292,004 1.8
Chor Weng Tan ........................ 12,009,791 75.8 278,386 1.7
Arthur R. Taylor ..................... 11,990,562 75.7 297,615 1.8
John F Wallace ....................... 11,999,282 75.7 288,895 1.8
2. To approve a new Management Agreement between the Fund and NAM-U.S.A.:
% of % of % of
Shares Voted outstanding Shares Voted outstanding Shares outstanding
For Shares Against Shares Abstained Shares
-------------- ------------- ------------- ------------- ------------ ------------
12,002,482 75.7 198,744 1.3 86,951 0.5
3. To approve a new Investment Advisory Agreement between NAM-U.S.A. and NAM:
% of % of % of
Shares Voted outstanding Shares Voted outstanding Shares outstanding
For Shares Against Shares Abstained Shares
-------------- ------------- ------------- ------------- ------------ ------------
12,001,160 75.7 200,303 1.3 86,714 0.5
JAPAN SMALLER CAPITALIZATION FUND, INC.
REVIEW OF THE FUND'S MARKET PRICE COMPARED TO NET ASSET VALUE
Shares of closed-end investment companies, including funds focusing on a
single country, have at various times traded at both premiums and discounts to
their net asset value ("NAV"). Although the shares of the Fund have traded
at such a premium, they also have traded at a discount from NAV
Since the Fund was established, the Board of Directors on a quarterly
basis has reviewed the trading price of the Fund's shares. The purpose of
such review has been to determine whether a discount exists and, if so,
whether it would be in shareholders' overall best interests for the Fund to
conduct share repurchases, make an issuer tender offer for shares or consider
another means of possibly reducing the discount. For example, the Board of
Directors has also considered whether it would be in the best interests of the
Fund to convert to an open-end fund or to an interval fund, which is a form of
investment company that makes periodic share repurchases at prices based on
NAV.
To date, the Board of Directors has not authorized open-market share
repurchases or a tender offer for shares of the Fund. The Board of Directors
also has not felt that it would be in the best interests of the Fund or its
shareholders to convert to an open-end fund or an interval fund. As a "country
fund", emphasizing a smaller capitalization segment of the market, the Fund's
NAV is more volatile than might be the case for a fund with a broader
investment focus. The Board of Directors believe that converting the Fund to
either an open-end or interval fund would subject the Fund to redemptions or
repurchases at times when liquidation of portfolio securities could
disadvantage remaining shareholders, and they believe that the recent
volatility of the financial markets in Japan supports their view.
Additionally, since an open-end fund has a limited ability to invest in
illiquid securities, such a conversion could hinder the Fund's ability to
pursue its investment objectives. The Board of Directors intend to continue to
review, on a quarterly basis, the trading market for the Fund's shares.
JAPAN SMALLER CAPITALIZATION FUND, INC.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan (the "Plan") is available automatically
for any holder of Common Stock with shares registered in his/her own name who
wishes to purchase additional shares with income dividends or capital gains
distributions received on shares owned, unless such shareholder elects to
receive all dividends and capital gain distributions in cash, paid by check and
mailed to the shareholder. If a shareholder holds shares in his/her own name,
communications regarding the Plan should be addressed to the Plan Agent,
Equiserve Inc., 150 Royall Street, Canton, Massachusetts 02021. Under the
Plan, shareholders appoint the Plan Agent to reinvest dividends and
distributions in shares of the Fund. Such shares will be acquired by the Plan
Agent for shareholders either through open market purchases if the Fund is
trading at a discount or through the issuance of authorized but unissued
shares if the Fund is trading at net asset value or a premium. If the market
price of a share on the payable date of a dividend or distribution is at or
above the Fund's net asset value per share on such date, the number of shares
to be issued by the Fund to each shareholder receiving shares in lieu of cash
dividends or distributions will be determined by dividing the amount of the
cash dividends or distributions to which such shareholder would be entitled
by the greater of the net asset value per share on such date or 95% of the
market price of a share on such date. If the market price of a share on such
distribution date is below the net asset value per share, the number of
shares to be issued to such shareholders will be determined by dividing such
amount, less brokerage commission, by the per share market price.
Purchases will be made by the Plan Agent from time to time on the New
York Stock Exchange (the "Exchange") or elsewhere to satisfy dividend and
distribution investment requirements under the Plan. Purchases will be
suspended on any day when the closing price (or the mean between the closing
bid and ask prices if there were no sales) of the shares on the Exchange on
the preceding trading day was higher than the net asset value per share. If on
the dividend payable date, purchases by the Fund are insufficient to satisfy
dividend or distribution investments and on the last trading day immediately
preceding the dividend payable date the closing price or the mean between
the closing bid and ask prices of the shares is lower than or the same as the
net asset value per share, the Plan Agent will continue to purchase shares
until all investments by shareholders have been completed or the closing
price or the mean between the bid and ask prices of the shares becomes higher
than the net asset value, in which case the Fund will issue the necessary
additional shares from authorized but unissued shares. If on the last trading
day immediately preceding the dividend payable date, the closing price or the
mean between the bid and ask prices of the shares is higher than the net asset
value per share and if the number of shares previously purchased on the
Exchange or elsewhere is insufficient to satisfy dividend investments, the
Fund will issue the necessary additional shares from authorized but unissued
shares. There will be no brokerage charges with respect to shares issued
directly by the Fund to satisfy the dividend investment requirements. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Fund's open market purchases of shares. In each case, the
cost per share of shares purchased for each shareholder's account will be the
average cost, including brokerage commissions, of any shares purchased in the
open market plus the cost of any shares issued by the Fund. For the fiscal
year ended February 28, 2002, the Fund did not issue any new shares for
dividend reinvestment purposes. The Fund purchased 2,344 shares ($12,752) on
the open market for dividend reinvestment purposes.
Shareholders who elect to hold their shares in the name of a broker or
other nominee should contact such broker or other nominee to determine whether
they may participate in the Plan. To the extent such participation is
permitted, the Plan Agent will adminis-
ter the Plan on the basis of the number of shares certified from time
to time by the broker as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who are
participating in such Plan. Shareholders that participate in the Plan
holding shares in a brokerage account may not be able to transfer the shares
to another broker and continue to participate in the Plan. Shareholders
who are participating in the Plan may withdraw from the Plan at any time.
There will be no penalty for withdrawal from the Plan, and shareholders who
have previously withdrawn from the Plan may rejoin it at any time. Changes in
participation in the Plan should be made by contacting the Plan Agent if the
shares are held in the shareholder's own name and must be in writing and
should include the shareholder's name and address as they appear on the
account registration. If the shares are held in the name of a broker or
other nominee, such person should be contacted regarding changes in
participation in the Plan. Upon withdrawal from the Plan, the Plan Agent will
deliver to the shareholder a certificate or certificates for the appropriate
number of full shares and a cash payment for any fractional shares. In lieu of
receiving a certificate, the shareholder may request the Plan Agent to sell
part or all of the shareholder's shares at the market price and remit the
proceeds to the shareholder, net of any brokerage commissions. A $2.50 fee
will be charged by the Plan Agent upon any cash withdrawal or termination. An
election to withdraw from the Plan will, until such election is changed, be
deemed to be an election by a shareholder to take all subsequent distributions
in cash. An election will be effective only for a dividend or distribution if
it is received by the Plan Agent not less than 10 days prior to such record
date.
The Plan Agent will maintain all shareholders' accounts in the Plan,
and furnish written confirmation of all transactions in such account,
including information needed by shareholders for tax records. Shares in the
account of each Plan participant may be held by the Plan Agent in
non-certificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased or received pursuant to the Plan.
The automatic reinvestment of dividends will not relieve participants
of any income taxes that may be payable (or required to be withheld) on such
dividends. Shareholders receiving dividends or distributions in the form
of additional shares pursuant to the Plan should be treated for Federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that the shareholders receiving cash dividends or distributions will
receive and should have a cost basis in the shares received equal to such
amount.
The Fund reserves the right to amend or terminate the Plan as applied to
any dividend paid subsequent to written notice of the change sent to
participants in the Plan at least 90 days before the record date for such
dividend. There is no service charge to participants in the Plan; however,
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants. All correspondence concerning the Plan,
including requests for additional information about the Plan, should be
directed to the Plan Agent.
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SHAREHOLDERS ACCOUNT INFORMATION
Shareholders whose accounts are held in their own name may contact the
Fund's transfer agent, Equiserve, Inc. at (800) 426-5523 for information
concerning their accounts.
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BOARD OF DIRECTORS
William G. Barker, Jr.
Kazuhiko Hama
Chor Weng Tan
Arthur R. Taylor
John F Wallace
OFFICERS
Kazuhiko Hama, President
Keisuke Haruguchi, Vice President
Kenneth L. Munt, Vice President
David G. Stoeffel, Vice President
John J. Boretti, Secretary and Treasurer
Rita Chopra-Brathwaite, Assistant Treasurer
MANAGER
Nomura Asset Management U.S.A. Inc.
180 Maiden Lane
New York, New York 10038-4936
Internet Address
www.nomura-asset.com
INVESTMENT ADVISOR
Nomura Asset Management Co., Ltd.
1-14-2-Chome Nihonbashi, Chuo-ku,
Tokyo 103-8260, Japan
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
Equiserve Inc.
150 Royall Street
Canton, Massachusetts 02021
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8209
Boston, Massachusetts 02266-8209
COUNSEL
Sidley Austin Brown & Wood LLP
875 Third Avenue
New York, New York 10022
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036-2798
JAPAN SMALLER CAPITALIZATION FUND, INC.
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4936
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This Report, including the Financial Statements, is transmitted to the
Shareholders of Japan Smaller Capitalization Fund, Inc. for their
information. This is not a prospectus, circular or representation
intended for use in the purchase of shares of the Fund or any
securities mentioned in the Report.