As filed with the U.S. Securities and Exchange Commission on October 6, 1997
Securities Act File No. 333- ----
Investment Company Act File No. 811- ----
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
Registration Statement Under The Securities Act Of 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. __ |_|
and/or
Registration Statement Under The Investment Company Act Of 1940 |X|
Amendment No. |_|
---
(Check appropriate box or boxes)
Templeton Russia/Eurasia Fund
(Exact Name of Registrant as Specified in Charter)
500 East Broward Blvd.
Fort Lauderdale, Florida 33394
(Address of Principal Executive Offices)
Registrant's Telephone number, including Area Code: (954) 527-7500
Barbara J. Green
Templeton Worldwide, Inc.
500 East Broward Boulevard
Ft. Lauderdale, Florida 33394
(Name and Address of Agent for Service)
With copies to:
Allan S. Mostoff, Esq. Thomas A. DeCapo, Esq.
Dechert Price & Rhoads Skadden, Arps, Slate, Meagher & Flom
1500 K Street, N.W. One Beacon Street
Washington, D.C. 20005 Boston, MA 02108
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this registration statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum Amount of
Amount Being Offering Price Aggregate Registration
Registered (1) Per Share(2) Offering Price(2) Fee
Title of Securities Being Registered
Shares of Beneficial Interest, $.01 3,450,000 Shares $20 $69,000,000 $20,909.09
Par Value
<FN>
(1) Includes 450,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
</FN>
</TABLE>
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 the 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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
<TABLE>
<CAPTION>
TEMPLETON RUSSI/EURASIA FUND
CROSS-REFERENCE SHEET
Pursuant to Rule 481(a)
<S> <C>
Item Number, Form N-2 Caption in Prospectus
1. Outside Front Cover Outside Front Cover
2. Inside Front and Outside Back Cover Page Inside Front and Outside Back Cover Page
3. Fee Table and Synopsis Fund Expenses; Prospectus Summary
4. Financial Highlights Not Applicable
5. Plan of Distribution Outside Front Cover; Underwriting
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of Registrant The Fund; Investment Objective and Policies;
Additional Investment Practices; Investment
Restrictions; Risk Factors and Special
Considerations; Description of Shares
9. Management Management of the Fund; Trustees and Officers;
Custodian and Transfer and Dividend Paying Agent
10. Capital Stock, Long-Term Debt, and Other Securities Description of Shares; Dividends and
Distributions; Dividend Reinvestment Plan;
Taxation
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of Additional Information Not Applicable
14. Cover Page of Statement of Additional Information Not Applicable
15. Table of Contents Not Applicable
16. General Information and History Not Applicable
17. Investment Objective and Policies Investment Objective and Policies; Investment
Rationale; Additional Investment Practices; Risk
Factors and Special Considerations
18. Management Trustees and Officers
19. Control Persons and Principal Holders of Securities Not Applicable
20. Investment Advisory and Other Services Management of the Fund
21. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
22. Tax Status Taxation
23. Financial Statements Statement of Assets and Liabilities
</TABLE>
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus; one to be
used in connection with a United States offering (the "U.S. Prospectus") and one
to be used in a concurrent offering outside the United States (the
"International Prospectus"). The two prospectuses are the same except for the
front and back cover pages. The form of U.S. Prospectus is included herein and
is followed by the front and back cover pages to be used in the International
Prospectus.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solication or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED _______________.
PROSPECTUS
_______________ Shares of Beneficial Interest
TEMPLETON RUSSIA/EURASIA FUND
Templeton Russia/Eurasia Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's investment
objective is long-term capital appreciation. To achieve its objective, the Fund
intends to invest primarily in equity securities of Russia/Eurasia Companies.
The term "Russia/Eurasia Company" means a legal entity (i) that is organized
under the laws of, or with a principal office and domicile in, the
Russia/Eurasia Region, or (ii) for which the principal equity securities trading
market is in the Russia/Eurasia Region, or (iii) that derives at least 50% of
its revenues or profits from goods produced or sold, investments made, or
services performed, in the Russia/Eurasia Region, or (iv) that has at least 50%
of its assets situated in the Russia/Eurasia Region. Under normal market
conditions, the Fund will invest at least 65% of its total assets in equity
securities of Russia/Eurasia Companies. The Fund may invest up to 35% of total
assets in debt securities issued by Russia/Eurasia Companies or issued or
guaranteed by Russia/Eurasia Region governmental entities which in the
Investment Manager's view offer the potential for capital appreciation.
As used in this Prospectus, the term "Russia/Eurasia Region" means Russia,
the Commonwealth of Independent States ("CIS"), including countries in Central
and Eastern Europe, and countries in Central Asia. Russia/Eurasia Region
countries include Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia,
Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Latvia,
Lithuania, Former Yugoslav Republic of Macedonia, Moldova, Montenegro, Poland,
Romania, Russia, Serbia, Slovakia, Slovenia, Turkmenistan, Ukraine, and
Uzbekistan, as well as any other countries in the Russia/Eurasia Region that may
be approved for investment by the Board of Trustees in the future. Appropriate
foreign sub-custody and securities registration arrangements are not now and may
not in the future be available to the Fund in many Russia/Eurasia Region
countries. As a result, the Fund expects initially to limit its investments to
the following countries: Russia, Poland, Hungary, Czech Republic, Romania,
Slovakia, and Slovenia. If appropriate foreign sub-custody arrangements become
available in the future, the Investment Manager may invest in any Russia/Eurasia
Region country, subject to the availability of suitable investments. The
Investment Manager is free to make investments without limit in any of the
Russia/Eurasia Region countries.
Investments in Russia/Eurasia Companies involve a high degree of risk and
special considerations not typically associated with investments in more
established economies or securities markets, such as political, economic and
legal uncertainties, and currency fluctuations. Additionally, the securities
markets in the Russia/Eurasia Region are emerging markets characterized by a
relatively small number of equity issues and relatively low trading volume,
resulting in substantially less liquidity and greater price volatility. The
methods of settlement, clearing, and registration of securities transactions in
Russia/Eurasia Region countries present significant risks to investors. A
substantial number of the securities in which the Fund will invest will be
illiquid and may have small market capitalizations. Investment in the Fund
should be considered highly speculative and there can be no assurance that the
Fund will achieve its investment objective. See "Risk Factors and Special
Considerations."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Maximum Maximum Proceeds to
Price to Public Sales Load(1) the Fund(2)
Per Share.... $20.00 $1.20 $18.80
Total(3) .... $------- $---- $-------
(Footnotes on following page)
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York, New York on or about __________________, 1997.
Smith Barney Inc.
The date of this Prospectus is __________, 1997
<PAGE>
Prior to this offering, there has been no public market for the Fund's
Shares. During an initial period which is not expected to exceed three months
from the date of this Prospectus, the Fund's Shares will not be listed on any
securities exchange. During that period, neither the Underwriters nor any other
person intends to make a market in the Fund's Shares. Consequently, it is
anticipated that an investment in the Fund will be illiquid during that period.
The Fund intends to apply for listing on the New York Stock Exchange under the
symbol REF so that trading on such Exchange will begin no later than three
months from the date of this Prospectus if the listing is granted. Shares of
closed-end investment companies that invest primarily in securities of issuers
in foreign countries or geographic regions have in the past frequently traded at
discounts from their net asset values and initial offering prices, and the
Fund's shares also may trade at a discount. This risk is characteristic of all
closed-end investment companies but may be greater for investors expecting to
sell shares of a closed-end investment company soon after the completion of an
initial public offering of the company's shares.
Templeton Asset Management Ltd. will serve as Investment Manager to the
Fund.
This Prospectus sets forth concisely information about the Fund that a
prospective investor should know before purchasing Shares. Investors are advised
to read this Prospectus and retain it for future reference.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S SHARES
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
(Footnotes from previous page)
(1) The Fund and the Investment Manager have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Fund, estimated to be
approximately [$________], which includes [$________] to be paid to the
Underwriters in partial reimbursement of their expenses. (3) The
Underwriters have been granted an option, exercisable within 45 days of the
date of this Prospectus, to purchase up to [__________] additional Shares
to cover over-allotments, if any. If all Shares are purchased, the total
Maximum Price to Public, Maximum Sales Load and Proceeds to the Fund will
be [$________],[$________] and [$________], respectively. See
"Underwriting." -------------------------------------
The address of the Fund is 500 East Broward Blvd., Fort Lauderdale, Florida
33394. The Fund's telephone number is ______________.
The information set forth in this Prospectus, including the Appendices,
regarding the economies of certain Russia/Eurasia Region countries has been
extracted and summarized from various state and private publications and other
sources. None of the Fund, its Board of Trustees, the Investment Manager, or any
Underwriter makes any representations as to the accuracy of such information.
In this Prospectus, unless otherwise specified, all references to "U.S.
Dollars," "U.S. $," "dollars" and "$" are to United States dollars and to
"Rubles" and "Rbs." are to Russian Rubles. On ____________, 1997, the price on
the Moscow Interbank Currency Exchange for Rubles against the U.S. Dollar was
Rbs. _____ = U.S. $ _____ as reported in the New York Times on _______________,
1997.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
The Fund The Fund is a newly organized, non-diversified, closed-end
management investment company that seeks long-term capital
appreciation by investing primarily in the equity securities
of Russia/Eurasia Companies. The term "Russia/Eurasia
Company" means a legal entity (i) that is organized under
the laws of, or with a principal office and domicile in, the
Russia/Eurasia Region, or (ii) for which the principal
equity securities trading market is in the Russia/Eurasia
Region, or (iii) that derives at least 50% of its revenues
or profits from goods produced or sold, investments made, or
services performed, in the Russia/Eurasia Region or (iv)
that has at least 50% of its assets situated in the
Russia/Eurasia Region. As used in this Prospectus, the term
"Russia/Eurasia Region" means Russia, the Commonwealth of
Independent States ("CIS"), including countries in Central
and Eastern Europe, and countries in Central Asia.
Russia/Eurasia Region countries include Albania, Armenia,
Azerbaijan, Belarus, Bulgaria, Croatia, Czech Republic,
Estonia, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Latvia,
Lithuania, Former Yugoslav Republic of Macedonia, Moldova,
Montenegro, Poland, Romania, Russia, Serbia, Slovakia,
Slovenia, Turkmenistan, Ukraine, and Uzbekistan, as well as
any other countries in the Russia/Eurasia Region that may be
approved for investment by the Board of Trustees in the
future.
The Offering The Fund is offering _____________ shares of beneficial
interest ("Shares"), par value [_____] per Share, at an
offering price of $20.00 per Share. The Shares are being
offered by underwriters (the "Underwriters") represented by
Smith Barney Inc. ("Smith Barney"). In addition, the
Underwriters have been granted an option exercisable for 45
days from the date of this Prospectus, to purchase up to
____________ additional Shares to cover over-allotments, if
any. See "Underwriting."
Investment Objective
and Policies The Fund's investment objective is long-term capital
appreciation. To achieve its objective, the Fund intends to
invest primarily in equity securities of Russia/Eurasia
Companies. As used herein, "equity securities" means common
and preferred stock (including convertible preferred stock);
bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity
interests in trusts, partnerships, joint ventures or similar
enterprises; certain structured investments; and American,
European, or Global Depositary Receipts. Under normal market
conditions, the Fund will invest at least 65% of its total
assets in equity securities of Russia/Eurasia Region
issuers, which will include equity securities of
Russia/Eurasia Companies and may include debt securities
issued by Russia/Eurasia Companies or issued or guaranteed
by Russia/Eurasia Region governmental entities which offer
the potential for capital appreciation.
Under normal market conditions, assets of the Fund not
invested in equity securities of Russia/Eurasia Companies
will be invested in (i) debt securities issued by
Russia/Eurasia Companies or issued or guaranteed by
Russia/Eurasia Region governmental entities, as well as debt
securities of corporate and governmental issuers outside the
Russia/Eurasia Region, (ii) equity securities of issuers
outside the Russia/Eurasia Region that the Investment
Manager believes will experience growth in revenue from
participation in the development of the economies in the
Russia/Eurasia Region, and (iii) short-term and medium-term
debt securities of the type described below under
"Investment Objective and Policies - Temporary Investments."
Appropriate foreign sub-custody and securities registration
arrangements are not now and may not in the future be
available to the Fund in many Russia/Eurasia Region
countries. As a result, the Fund expects initially to limit
its investments to the following countries: Russia, Poland,
Hungary, Czech Republic, Romania, Slovakia, and Slovenia.
The following chart shows countries in which foreign
sub-custody arrangements are currently available and
countries in which arrangements are not currently available:
Currently Available: Not Currently Available:
Czech Republic Albania
Hungary Armenia
Poland Azerbaijan
Romania Belarus
Russia Bulgaria
Slovakia Croatia
Slovenia Estonia
Georgia
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Former Yugoslavia Slovenia
Republic of Macedonia
Moldova
Montenegro
Serbia
Turkmenistan
Ukraine
Uzbekistan
If appropriate foreign sub-custody and securities
registration arrangements become available in the future,
the Investment Manager may invest in any Russia/Eurasia
Region country, subject to the availability of suitable
investments. The Investment Manager is free to make
investments without limit in any of the Russia/Eurasia
Region countries.
In selecting investments for the Fund's portfolio, the
Investment Manager may invest the Fund's assets in various
multi-industry sectors of the economy of Russia/Eurasia
Region countries. The multi-industry sectors in which the
Fund initially intends to invest include electricity,
telecommunications, oil and gas (production and
exploration), financial services, non-ferrous metallurgy,
ferrous metallurgy, transportation, retail trading, and
consumer materials sectors. See Appendix . Because the Fund
may invest its assets in multi-industry sectors, the Fund
may be affected more by any single economic, political, or
regulatory development than an investment company which
invests in a wider variety of industries.
The Fund may invest up to 50% of its total assets in
unlisted securities, including direct investments. The Fund
will invest in direct investments that the Fund's investment
manager, Templeton Asset Management Limited (the "Investment
Manager"), believes may be disposed of eventually, either
through listing or sale of the securities to the issuer or
another investor. The term "direct investment," as used
herein, means private investments in non-publicly traded
equity or debt securities of Russia/Eurasia Companies. The
Fund's direct investments will involve certain high risks
for invested capital. See "Risk Factors and Special
Considerations - Unlisted Securities and Direct
Investments."
Included among the issuers of securities in which the Fund
may invest are entities organized and operated solely for
the purpose of restructuring the investment characteristics
of various securities. This type of restructuring involves
the deposit with or purchase by an entity, such as a
corporation or trust, of specified debt or equity securities
and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or
representing interests in, the underlying securities.
Structured Investments may be used to provide exposure to
equity or debt securities the Fund otherwise may be unable
to acquire, or the cash flows on the underlying instruments
may be apportioned among the newly issued Structured
Investments to create securities with different investment
characteristics such as varying maturities, payment
priorities or interest rate provisions.
No assurance can be given that the Fund's investment
objective will be achieved. See "Investment Objective and
Policies."
Risk Factors and Special
Considerations Investing in Russia/Eurasia Companies involves significant
risks and special considerations not typically associated
with investing in the United States securities markets, and
should be considered highly speculative. Such risks include:
(a) the risk of nationalization or expropriation of assets
or confiscatory taxation, which may involve the risk of
total loss;
(b) greater social, economic and political uncertainty
(including regional conflict and the risk of war);
(c) the risk that the Fund may be unable to establish
appropriate custody and securities registration
arrangements in certain Russia/Eurasia Region
countries, thereby potentially limiting the range of
countries in which the Fund may invest;
(d) delays in settling portfolio transactions and risk of
loss arising out of the system of share registration
and custody used in certain Russia/Eurasia Region
countries;
(e) risks in connection with the maintenance of Fund
portfolio securities and cash with foreign
subcustodians and securities depositories;
(f) the risk that it may be impossible or more difficult
than in other countries to obtain and/or enforce a
judgment in Russia/Eurasia Region countries;
(g) pervasiveness of public corruption and crime in the
economic systems of Russia/Eurasia Region countries;
(h) greater price volatility, substantially less liquidity
and significantly smaller market capitalization of
securities markets in which the Fund will invest;
(i) currency exchange rate volatility and the lack of
available currency hedging instruments;
(j) risks involved with the use of derivative instruments,
which may include: forward foreign currency exchange
contracts, currency futures contracts and options
thereon, put and call options on securities, indices
and foreign currencies, stock index futures contracts
and options thereon and interest rate futures contracts
and options thereon;
(k) higher rates of inflation (including the risk of social
unrest in certain Russia/Eurasia Region countries
associated with periods of hyperinflation);
(l) the risk that, by possibly investing significantly in
certain multi-industry sectors, the Fund may be
affected more by any single economic, political, or
regulatory development relating to a specific sector;
(m) controls on foreign investment and local practices
disfavoring foreign investors and limitations on
repatriation of invested capital, profits and
dividends, and on the Fund's ability to exchange local
currencies for U.S. dollars;
(n) the risk that the governments of certain Russia/Eurasia
Region countries or other executive or legislative
bodies may decide not to continue to support the
economic reform programs implemented in such countries,
particularly in Russia, in recent years and could
instead follow radically different political and/or
economic policies to the detriment of investors,
including non-market-oriented policies such as the
support of certain industries at the expense of other
sectors or investors or a return to the completely
centrally planned economies that existed until recently
in many Russia/Eurasia Region countries;
(o) the financial condition of Russia/Eurasia Companies,
including large amounts of inter-company debt and the
fact that Russia/Eurasia Companies may be smaller, less
seasoned and newly organized companies;
(p) the risk that dividends will be withheld at the source;
(q) dependency on exports and the corresponding importance
of international trade;
(r) the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability
of material information about issuers in many
Russia/Eurasia Region countries;
(s) the risk that the tax systems of certain Russia/Eurasia
Region countries, particularly in Russia, will not be
reformed to prevent inconsistent, retroactive and/or
exorbitant taxation;
(t) the fact that statistical information regarding the
economy of Russia/Eurasia Region countries may be
inaccurate or not comparable to statistical information
regarding the U.S. or other economies;
(u) less extensive regulation of the securities markets
than is the case in more developed countries;
(v) the risks associated with the difficulties that may
occur in pricing the Fund's portfolio securities;
(w) possible difficulty in identifying a purchaser of
securities held by the Fund due to the underdeveloped
nature of the securities markets; and
(x) the risk of lawsuits arising from restrictive
regulations and practices with respect to foreign
investment in particular industries.
Settlement, Registration, and Custody Risks. Because of the
recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications
systems, settlement, clearing and registration of securities
transactions in Russia and a number of other Russia/Eurasia
Region countries are subject to significant risks. In
certain Russia/Eurasia Region countries, including Russia,
ownership of shares (except where shares are held through
depositories that meet the requirements of the U.S.
Investment Company Act of 1940 (the "1940 Act")) is defined
according to entries in the company's share register and
normally evidenced by extracts from the register or by
formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars
located throughout Russia and the other Russia/Eurasia
Region countries using similar systems to maintain
shareholder records. These registrars are not necessarily
subject to effective state supervision and it is possible
for the Fund to lose its registration through fraud,
negligence or even mere oversight. While the Fund will
endeavor to ensure that its interest continues to be
appropriately recorded either itself or through a custodian
or other agent inspecting the share register and by
obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability
and it is possible that subsequent illegal amendment or
other fraudulent acts may deprive the Fund of its ownership
rights or improperly dilute its interests. In addition,
while applicable regulations impose liability on registrars
for losses resulting from their errors, it may be difficult
for the Fund to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss
of share registration. An issuer's management may be able to
exert considerable influence over who can purchase and sell
the company's shares by illegally instructing the registrar
to refuse to record transactions in the share register. This
practice may prevent the Fund from investing in the
securities of certain Russia/Eurasia Companies deemed
suitable by the Investment Manager. Further, this also could
cause a delay in the sale of Russia/Eurasia Company
securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on
the investment. See "Risk Factors and Special Considerations
- Settlement and Custody Risk."
Absence of Developed Legal Structures. Stock corporations
are a relatively new concept in many Russia/Eurasia Region
countries. Certain Russia/Eurasia Region countries do not at
present have a developed body of securities laws or laws
governing corporations or joint stock companies. Most of the
company and securities laws and regulations of certain
Russia/Eurasia Region countries are in their preliminary
stages of development. Laws regarding fiduciary duties of
officers and directors, and the protection of investors,
including foreign investors, are in the early stages of
development and existing laws in certain countries do not
cover all contingencies or are not generally enforced.
Market Characteristics. There is little historical data on
securities markets in Russia/Eurasia Region countries
because they are relatively new and a substantial proportion
of securities transactions in the Russia/Eurasia Region are
privately negotiated outside of stock exchanges. The Fund's
holdings of equity securities of Russia/Eurasia Companies
are expected to represent a relatively significant portion
of the total float of such securities available for public
trading and, therefore, the size of the Fund's holdings in
specific securities relative to the trading volume in those
securities could adversely affect the prices at which the
securities are bought or sold and could lengthen the time
period during which buying and selling programs are
effected. Anticipation of the offering in the Russia/Eurasia
Region securities markets may increase the prices that would
otherwise be paid by the Fund for certain securities and
lengthen the time period required to fully invest the
proceeds of the offering in Russia/Eurasia Region
securities. See "Risk Factors and Special Considerations -
Market Characteristics."
Political and Economic Risks. Russia/Eurasia Region
countries may be subject to a greater degree of economic,
political and social instability than is the case in the
United States and Western European countries. Such
instability may result from, among other things, the
following: (i) authoritarian governments or military
involvement in political and economic decision-making,
including changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii)
internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial
disaffection.
Direct Investments. The Fund may invest up to 50% of its
total assets in direct investments that the Investment
Manager expects will provide for eventual disposition either
through listing or sale of the securities to the issuer or
another investor. Direct investments will consist of (1) the
private purchase of an equity interest in an enterprise in
the form of shares of common stock or an equity interest in
trusts, partnerships, joint ventures or similar enterprises;
and (2) the private purchase of debt securities from, or the
making of a loan to, an enterprise. Such investments involve
a high degree of business and financial risk. In making
direct investments, the Fund intends to avoid being subject
to unlimited liability with respect to the investments, but
it is not certain the Fund will be able to do so. Due to the
absence of a public trading market for the Fund's direct
investments, they will be illiquid. Although these
investments may, in some cases, be resold in privately
negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Fund
or less than what may be considered the fair value of such
securities and in some cases it may not be possible to
identify a buyer. If such securities are required to be
registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. In addition, the Fund
may be unable to dispose of its direct investments at
then-current market prices and may have to dispose of such
securities over extended periods of time. Because of the
absence of any trading market for these investments, the
Fund may take longer to liquidate these positions than it
would for listed securities. In addition, securities in
Russia/Eurasia Region countries, and particularly those that
are not publicly traded, are not subject to the disclosure
and other investor protection requirements that are
generally accepted as necessary in countries with developed
securities laws.
Hedging Transactions and Use of Derivative Instruments. The
Fund also is permitted to engage in foreign currency hedging
transactions and to enter into options and futures
transactions with respect to securities and indices, some or
all of which are commonly known as derivatives, and which
may involve the risk of loss in the event of adverse
movements in the value of the underlying instruments.
However, certain of these strategies cannot at the present
time be used to a significant extent by the Fund in the
markets in which the Fund will principally invest. See
"Additional Investment Practices" and Appendix ___ to this
Prospectus.
Debt Securities - High Yield, High Risk Securities. The Fund
may invest up to 35% of its total assets in debt securities
that are rated in any category by recognized statistical
rating organizations or that are unrated when consistent
with the Fund's investment objective and policies.
Lower-rated debt securities (which are commonly referred to
as "junk bonds") generally involve greater volatility of
price and risk of loss of principal and income than higher
rated securities. Unrated debt securities in which the Fund
may invest generally involve risks equivalent to those of
lower-rated debt securities.
Operating Expenses. The operating expense ratio of the Fund
can be expected to be higher than that of investment
companies investing in more established securities markets
since the expenses of the Fund, including management and
custodian fees, will generally be higher than the expenses
of such other funds. See "Fund Expenses."
Non-Diversification. The Fund is classified as a
"non-diversified" investment company under the 1940 Act,
which means that the Fund is not limited by the 1940 Act in
the proportion of its assets that may be invested in the
securities of a single issuer. As a non-diversified
investment company, the Fund may invest a greater portion of
its assets in the securities of a smaller number of issuers
and, as a result, will be subject to greater risk of loss
with respect to its portfolio securities. However, the Fund
intends to comply with the diversification requirements
imposed by the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated
investment company. In addition, the Board of Trustees has
adopted a non-fundamental policy under which the Fund will
not invest more than 10% of its assets in the securities of
any one issuer (the Fund will treat governmental issuers of
Russia/Eurasia Region countries and their corporate
instrumentalities as separate issuers). See "Risk Factors
and Special Considerations - Net Asset Value Discount;
Non-Diversification" and "Taxation - U.S Federal Income
Taxes."
Anti-Takeover Provisions. The Fund's Agreement and
Declaration of Trust contains certain anti-takeover
provisions that may have the effect of inhibiting the Fund's
possible conversion to open-end status and limiting the
ability of other persons to acquire control of the Fund. In
certain circumstances, these provisions may also inhibit the
ability of shareholders to sell their Shares at a premium
over prevailing market prices. The Fund's Board of Trustees
has determined that these provisions are in the best
interests of shareholders generally. See "Description of
Shares."
Listing Delay. Shares of the Fund are not expected to be
listed on the NYSE, or any other exchange, for a period of
up to three months from the date of this Prospectus.
Consequently, during that period, there will be no market
for the Fund's Shares, and Shares of the Fund should be
considered illiquid. It is unlikely that any actions will be
taken following the listing of the Fund's Shares on the NYSE
to stabilize the trading price of the Shares, which could
result in the Shares trading at a lower price than that
which would have resulted had stabilization taken place.
Net Asset Value Discount. Shares of closed-end investment
companies frequently trade at a discount from net asset
value, and the Fund's Shares also may trade at a discount.
This characteristic is a risk separate and distinct from the
risk that the Fund's net asset value will decrease as a
result of its investment activities and may be greater for
investors expecting to sell their Shares in a relatively
short period following completion of the Offering or after
purchasing their Shares.
Investors should carefully consider their ability to assume
the foregoing risks before making an investment in the Fund.
An investment in Shares of the Fund
should be considered highly speculative. The Fund is
intended for long-term investors and should not be
considered a vehicle for trading purposes. An investment in
Shares of the Fund should not be considered a complete
investment program and would not be an appropriate
investment for all investors. See "Risk Factors and Special
Considerations."
Investment Manager Templeton Asset Management Ltd. (the "Investment Manager")
will serve as investment manager of the Fund. The Investment
Manager is wholly owned by Franklin Resources, Inc.
("Resources"), a publicly owned company engaged in the
financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources. Together, the
Investment Manager and its affiliates manage over
$________________ billion in assets. The Templeton
organization has been investing globally since 1940. The
Investment Manager and its affiliates have offices in
Argentina, Australia, Bahamas, Canada, France, Germany, Hong
Kong, India, Italy, Japan, Korea, Luxembourg, Poland,
Russia, Singapore, South Africa, Taiwan, United Kingdom, the
United States, and Vietnam.
Dr. J. Mark Mobius, Managing Director of the Investment
Manager, will be the Fund's principal portfolio manager. The
Investment Manager also serves as investment manager to
Templeton Russia Fund, Inc. and Templeton Vietnam
Opportunities Fund, Inc., two closed-end management
investment companies registered under the 1940 Act. In
addition, an affiliate of the Investment Manager serves as
investment manager to seven other U.S. investment companies
(or series thereof) and [ ] other non-U.S. public and
private funds that invest primarily in equity securities of
issuers in emerging markets, with assets totaling
$__________ billion as of _______________, 1997. The seven
other U.S. investment companies (or series thereof), which
are registered under the 1940 Act, are Templeton Emerging
Markets Fund, Inc., Templeton China World Fund, Inc.,
Templeton Emerging Markets Appreciation Fund, Inc., and
Templeton Dragon Fund, Inc., closed-end management
investment companies, and Templeton Developing Markets
Trust, the Emerging Markets Series of Templeton
Institutional Funds, Inc., and the Templeton Developing
Markets Fund series of Templeton Variable Products Series
Fund, open-end management investment companies. Dr. Mobius
has lived in Asia, principally in Hong Kong, for over 30
years, focusing on investment in equity securities in
emerging market countries. In acting as principal portfolio
manager for the Fund, Dr. Mobius will be supported by
investment analysts in the Investment Manager's regional
offices. Currently, these include offices in Moscow, Poland,
and Singapore. The Investment Manager expects these offices
to provide it with a valuable resource for research and
securities analysis with regard to securities of
Russia/Eurasia Companies. In the event that any of the
portfolio managers of the Fund dies, resigns or otherwise
becomes unable to act on behalf of the Investment Manager,
the Investment Manager believes that it has adequate
resources and personnel to manage the Fund in accordance
with its investment objective and policies.
For its services, the Fund will pay the Investment Manager a
monthly fee, payable in arrears in U.S. dollars, at the
annual rate of 1.35% of the Fund's average weekly net
assets. This fee is higher than that paid by most other U.S.
investment companies, because of the additional time and
expense that will be required of the Investment Manager in
pursuing the Fund's policy of investing in Russia/Eurasia
Companies. It is expected, however, that the Fund's
investment management fee will be comparable to those of
other U.S. closed-end investment companies of comparable
size that invest primarily in securities of emerging market
issuers.
Administrator Franklin Templeton Services, Inc. (the "Administrator"), an
indirect wholly owned subsidiary of Franklin, will provide
certain administrative services and facilities for the Fund.
For its services, the Administrator will receive a monthly
fee, payable in arrears in U.S. dollars, at an annual rate
of 0.15% of the Fund's average weekly net assets.
Closed-End Format The Fund is designed for long-term investment and not as a
short-term trading vehicle. The Fund has been organized as a
closed-end investment company because the Investment Manager
and the Board of Trustees believe that a stable pool of
assets is required to achieve the Fund's investment
objective. The Investment Manager intends to purchase
securities perceived to have the potential to benefit over
the long term from the growth and opening of Russia/Eurasia
Region markets. Many of these securities cannot be readily
sold and will be illiquid. Given these factors, the
Investment Manager does not believe that the Fund could be
successfully operated as an open-end fund or as an interval
fund that offers a periodic right to redeem shares.
Realizing the benefits from the Fund's investment program is
a long-term process. Accordingly, an investment in the Fund
is not suitable for investors who do not have a long-term
investment outlook. Investors should plan to hold shares of
the Fund for a period of at least [five] years.
Listing Prior to this offering, there has been no public market for
the Fund's Shares. During an initial period which is not
expected to exceed three months from the date of this
Prospectus, the Fund's Shares will not be listed for trading
on any securities exchange. During that period, neither the
Underwriters nor any other person intends to make a market
in the Fund's Shares. Consequently, it is anticipated that
an investment in the Fund will be illiquid during that
period. The Fund intends to apply for listing of its Shares
on the New York Stock Exchange under the symbol "REF" so
that trading on that Exchange will begin no later than three
months from the date of this Prospectus if the listing is
granted.
The Fund expects that it will meet the New York Stock
Exchange standards for listing. In the event the Fund's
Shares are not approved for listing on the New York Stock
Exchange at the end of the three-month period, the Fund
intends to apply either to have the Fund's Shares listed on
the American Stock Exchange or traded on the NASDAQ National
Market System. See "Underwriting."
Dividend Policy The Fund intends to distribute to shareholders, at least
annually, substantially all of its net realized capital
gains and net investment income. The Fund has established a
dividend reinvestment plan pursuant to which all dividends
and distributions from the Fund will be automatically
reinvested in additional Shares of the Fund unless a
shareholder elects to receive cash. See "Dividends and
Distributions; Dividend Reinvestment Plan."
Custodian and Transfer
and Dividend Paying
Agent The Chase Manhattan Bank will act as custodian for the Fund
and may employ subcustodians outside the U.S. in accordance
with regulations of the Securities and Exchange Commission.
ChaseMellon Shareholder Services will act as transfer and
dividend paying agent and registrar for the Fund.
Appropriate foreign sub-custody arrangements are not now and
may not in the future be available to the Fund in many
Russia/Eurasia Region countries. This will affect the
ability of the Fund to make investments in those countries
and may preclude those investments altogether. See "Risk
Factors and Special Considerations" and "Custodian and
Transfer and Dividend Paying Agent."
<PAGE>
FUND EXPENSES
The following tables are intended to assist Fund investors in understanding
the various costs and expenses associated with investing in the Fund.
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) .............. 6.0
Dividend Reinvestment Plan Fees.............................. None*
Annual Expenses (as a percentage of net assets)**
Management Fees ............................................. 1.35%
Administrative Fees ......................................... 0.15%
Other Expenses (audit, legal, transfer agent and custodian). [0.75%]
Total Annual Expenses................................. [2.25%]
* The Fund and the Plan Agent impose no fee for participation in the
Dividend Reinvestment Plan (the "Plan"). However, a $5.00 fee is imposed for
withdrawal from participation in the Plan. In addition, each participant in the
Plan will pay a pro rata share of brokerage commissions incurred in connection
with open-market purchases of Fund Shares under the Plan.
** See "Management of the Fund" for additional information. "Other
Expenses" have been estimated for the current fiscal year.
Example
An investor would pay the following expenses on a $1,000 investment in the
Fund, assuming a 5% annual return:
One Year Three Years Five Years Ten Years
[$----] [$----] [$----] [$----]
The purpose of the above table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The above Example does not reflect offering costs in connection
with the public offering, estimated to be approximately [$__________], which
will be charged against the proceeds of the offering. The Example assumes that
all dividends and other distributions are reinvested at net asset value and that
the percentage amounts listed under Annual Expenses remain the same in the years
shown. The above table and the assumption in the Example of a 5% annual return
are required by regulations of the Securities and Exchange Commission (the
"Commission") applicable to all investment companies. The assumed 5% annual
return and annual expenses should not be considered a representation of actual
or expected Fund performance or expenses, both of which may be greater or lesser
than those shown. In addition, while the example assumes reinvestment of all
dividends and distributions at net asset value, participants in the Fund's
Dividend Reinvestment Plan may receive Shares issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan." For more complete descriptions of certain of the Fund's
costs and expenses, see "Management of the Fund."
<PAGE>
THE FUND
Templeton Russia/Eurasia Fund (the "Fund"), organized as a Delaware
business trust on ________________, 1997, is a newly organized, non-diversified,
closed-end management investment company registered under the U.S. Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund's investment
objective is long-term capital appreciation. To achieve its objective, the Fund
intends to invest primarily in equity securities of Russia/Eurasia Companies. As
used in this Prospectus, the term "Russia/Eurasia Region" means Russia, the
Commonwealth of Independent States ("CIS"), and Central and Eastern Europe.
Russia/Eurasia Region countries include Albania, Armenia, Azerbaijan, Belarus,
Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan,
Kyrgyzstan, Latvia, Lithuania, Former Yugoslav Republic of Macedonia, Moldova,
Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkmenistan,
Ukraine, and Uzbekistan, as well as any other countries in the Russia/Eurasia
Region that may be approved for investment by the Board of Trustees in the
future.
Appropriate foreign sub-custody arrangements are not now and may not in the
future be available to the Fund in many Russia/Eurasia Region countries. As a
result, the Fund expects initially to limit its investments to the following
countries: Russia, Poland, Hungary, Czech Republic, Romania, Slovakia, and
Slovenia. If appropriate foreign sub-custody arrangements become available in
the future, the Investment Manager may invest without limit in any
Russia/Eurasia Region country, subject to the availability of suitable
investments. The Fund expects that sub-custody arrangements may become available
in the following countries within the foreseeable future: Bulgaria, Croatia,
Estonia, Kazakhstan, Latvia, Lithuania, and Ukraine. With respect to the
remainder of the Russia/Eurasia Region countries, there is no assurance that
appropriate sub-custody arrangements ever will become available. The term
"Russia/Eurasia Company" means a company (i ) that is organized under the laws
of, or with a principal office and domicile in, the Russia/Eurasia Region, or
(ii) for which the principal equity securities trading market is in the
Russia/Eurasia Region, or (iii) that derives at least 50% of its revenue or
profits from goods produced or sold, investments made, or services performed in
the Russia/Eurasia Region, or (iv) that has at least 50% of its assets situated
in the Russia/Eurasia Region.
The address of the Fund is 500 East Broward Blvd., Fort Lauderdale, Florida
33394. The Fund's telephone number is _______________.
USE OF PROCEEDS
The net proceeds of the Offering, after deduction of the sales load and
expenses payable by the Fund, are estimated to be $_______________ (assuming no
exercise of the Underwriters' over-allotment option), and will be invested in
accordance with the policies set forth under "Investment Objective and
Policies." The Fund intends to invest primarily in equity securities of
Russia/Eurasia Companies and up to 50% in debt securities issued by
Russia/Eurasia Companies or issued or guaranteed by Russia/Eurasia Region
governmental entities. See "Investment Objective and Policies." The Investment
Manager anticipates that investment of the net proceeds of the offering in
accordance with the Fund's investment objective and policies will take
approximately [_________], but in no event more than two years from the initial
public offering, depending upon market conditions and the availability of
appropriate securities.
During the Fund's initial investment period, to the extent not invested as
described above, the Fund's assets may be invested as described under
"Investment Objective and Policies--Temporary Investments."
INVESTMENT RATIONALE
The Fund's investment objective and policies reflect the Investment
Manager's opinion that attractive investment opportunities may result from the
continuing process of economic reform in Russia/Eurasia Region countries. Since
the break-up of the former Soviet Union in 1991, the Russia/Eurasia Region has
undergone fundamental economic and political change. In many Russia/Eurasia
Region countries, this has involved the start of a transition from a centralized
planned economy to a market-based economic system. Access to these markets
offers investors the chance to invest during this process of economic
rebuilding, and the Investment Manager believes that these developments may give
rise to attractive investment opportunities. There can be no assurance that the
Fund's investments will be successful.
Investment in Russia/Eurasia Region Countries
A. General
The Investment Manager believes that the economic and political
developments in Russia in recent years should make the economies of the
Russia/Eurasia Region particularly attractive for investment. A complete list of
the countries in which the Fund may invest is set out on page 4 of this
Prospectus. These countries include Russia, the other CIS countries, including
countries in Central and Eastern Europe, and countries in Central Asia. In the
Investment Manager's sole discretion, the Fund may invest without limit in any
Russia/Eurasia Region country, provided that the appropriate sub-custodian and
securities registration arrangements have been established before any investment
is made by the Fund in a particular country. There is no assurance that such
arrangements will be put into place in time to take advantage of investment
opportunities deemed attractive by the Investment Manager. The Fund may invest,
however, in certain securities that permit the restructuring of the investment
characteristics of other securities and that can enable the Fund to invest in
securities it otherwise would be unable to purchase because of difficulties in
establishing sub-custodian and securities registration arrangements. See
"Investment Objective and Policies --Structured Investments."
Most of the Russia/Eurasia Region countries have had centrally planned
economies which largely were influenced by socialist or communist ideologies.
The hallmarks of a centrally-planned economy are nationalized industries, and
fixed prices. Since the early 1990s, many Russia Eurasia Region countries have
implemented radical political and economic reforms aimed at adopting certain
free-market mechanisms. With varying degrees of success, these reforms have had
the effect of creating fledgling private economies based primarily on the
privatization of formerly state-owned enterprises and on the introduction of
substantial foreign investment.
The transition to a market-oriented economy has presented certain problems
for most of the Russia/Eurasia Region counrties. In the period following the
adoption of the economic reforms discussed above, many countries experienced
high rates of inflation, increased unemployment, and a significant decline in
living standards. In addition, many of these countries that previously were
limited to conducting external trade with Russia or other Warsaw Pact nations
are now in direct competition with exporters from around the world. These
factors have had the cumulative effect of severely reducing the Gross Domestic
Products of many Russia/Eurasia Region countries at certain stages of the reform
process.
In certain of the more developed Russia/Eurasia Region countries, the
reform measures discussed above recently have started to have a positive impact
on the economic and social stability in those countries. For instance, some
economies in this Region have been growing in real terms over the last several
years. Privatization programs in many Russia/Eurasia Region countries are in
place and, as a result, there is a substantial restructuring of established
industries as their economies adapt to free-market principles. In addition, many
Russia/Eurasia Region countries have succeeded in attracting substantial foreign
investment through the development of local securities markets. It should be
noted, however, that the private sectors in most Russia/Eurasia Region countries
are not as developed as those in Western Europe.
The Investment Manager believes that current conditions in most
Russia/Eurasia Region Countries will result in substantial economic activity,
offering the potential for long-term capital appreciation from investment in the
securities of issuers from these countries. The strategic location of these
countries should benefit the economies of many Russia/Eurasia Region countries
by enabling them to take advantage of the modern technology and capital
available in markets around the world. In addition, many of the Russia/Eurasia
Region countries (i) have rich natural resource deposits; (ii) are promoting
investment in infrastructure improvement projects, and (iii) are expanding their
telecommunications capacities.
B. Investment in Russia
During the Fund's initial period of operations, it is likely that the Fund
will invest significantly in Russia, where the economy has exhibited several
signs of emerging from its post-Soviet Era recession. In particular, the Russian
economy recently has benefited from: a substantial decline in inflation;
noticeable growth in the Gross Domestic Product ("GDP"); a rapid expansion of
the market capitalization of publicly traded Russian companies; a doubling of
the number of publicly listed companies; and improving political stability. In
April 1997, the annual rate of increase in consumer prices declined for the 20th
consecutive month to 15.3%, a decline from 68.4% in April 1996, while the annual
rate of increase of industrial input prices fell to 18.2% from 69.8% twelve
months earlier. Industrial production also has shown indications of improving,
particularly the production of non-ferrous metallurgy, which experienced a 6%
rise in production in the first quarter of 1997. Additionally, automobile
production for the first quarter of 1997 increased by 11% compared to the same
period in 1996. Certain sectors continue to underperform, however, such as
construction materials, paper and cellulose, and the food industry. Other
industries have remained relatively unchanged from the first quarter of 1996,
such as crude oil production.
The Russian economy benefited from a $2.5 billion inflow of direct foreign
investment in 1996, an increase of $500 million from 1995. Based largely on the
expanding Russian bond market (GKO) and the rise in interest in foreign currency
bonds, net portfolio investment rose from a deficit of $1.4 billion in 1995 to a
surplus of $7.3 billion in 1996. In addition, there appear to be continued
foreign investment opportunities in the future as the Russian government,
certain municipalities, and a number of leading Russian companies have announced
intentions to launch foreign bond issues. There is no assurance that the inflow
of direct foreign investment will continue in the future.
Russia nonetheless continues to experience certain economic problems,
particularly with unemployment and reduced industrial production. The expected
high cost of industrial restructuring and continued demands from the military
and agricultural lobbies could adversely impact government finances.
Unemployment in Russia rose to 9.7% by the end of April 1997 and underemployment
remains commonplace, with a total of 5.5 million workers in medium- and
large-scale enterprises reported to be on part-time work or compulsory leave. A
1996 survey of Russian companies, however, indicated that a majority of
employers did not expect to reduce their work force further and most were
considering hiring new staff.
Russia has a sizable, literate, and skilled labor force, with comparatively
low wage rates, and significant natural resources. In addition, while production
in several sectors fell in 1996, the Investment Manager believes that this
reduction does not accurately reflect an overall economic contraction, as
evidenced by increased production in other sectors of the economy.
The political landscape in Russia also has shown signs of stabilizing.
Following a prolonged convalescence from heart surgery and after recovering from
pneumonia in January 1997, President Boris Yeltsin has pushed ahead with
introducing necessary, although unpopular, economic reforms. In his annual
address to the combined houses of parliament in March 1997, President Yeltsin
outlined the following goals as priorities to achieve by the end of his current
term in the year 2000: (1) introducing a far-reaching reorganization of central,
regional, and local government, aimed at making the state more effective in
implementing reforms; (2) reforming the tax-system with the introduction of a
new simplified and equitable tax code; (3) reforming pensions with the
introduction of provisions for private pensions; (4) reforming housing services
and utilities to benefit the poor through direct subsidies; (5) breaking up
monopolies including gas, electricity and the railways, and introducing more
effective state regulation of the market; (6) furthering the fight against
corruption and crime, especially in high government offices and in the financial
sector; (8) reforming the military; (9) preventing North Atlantic Treaty
Organization ("NATO") expansion from undermining Russian security; and (10)
promoting the closer integration of the CIS states.
Privatization Program. In October 1992, Russia launched the largest mass
privatization program ever. Nearly 150 million privatization vouchers were
distributed at a nominal cost to approximately 144 million eligible Russians.
The vouchers carried a face value of Rbs. 10,000, which was the equivalent of
approximately $32. The vouchers were freely transferable bearer securities that
could be used to bid for the equity shares of the 15,000 medium and large
companies that were being privatized, exchanged for shares in voucher investment
funds, which were established to provide diversification and ongoing investment
management, or sold for cash in the newly developed secondary market. Voucher
prices fluctuated from less than $5 in 1993 to $24 in June 1994.
Beginning after the conclusion of the voucher privatization program in
_____, the Russian government initiated a series of cash sales of share blocks
of both partially privatized and state-owned enterprises. The cash auctions were
intended not only to attract foreign investment and foreign expertise into the
Russian economy, but also to raise revenue for the budget. Due to problems
experienced with the cash auctions, the Russian government turned instead to
investment tenders. The process was criticized for a lack of transparency, and
as being overly formalistic, both of which impeded the tender process. Frequent
lack of cooperation from enterprise managers as well as from regional and local
government administrations have also been noted as impediments to the
privatization effort.
In mid-1995, in another attempt to raise revenue for the budget, the
Russian government instituted a loans-for-shares program in which the government
offered large stakes in strategic Russian companies as collateral for
hard-currency loans, and in certain cases payment of the company's tax arrears.
Under this program the government paid interest at the 3-month London Inter-Bank
Offer Rate ("LIBOR") plus 3 percentage points from the date of the contract
until year-end 1995. In exchange, the winner would hold the shares in trust
until September 1, 1996. After that date, the bank would have the right to sell
the shares, unless the government repaid the loan prior to the sale date.
In 1997, the Russian government initiated another round of privatization.
The government intends to focus on the case-by-case sale of certain large
enterprises both to attract foreign investors and to raise budget revenue. Four
large privitization projects were scheduled for 1997, including the Russian
telecommunications giant Svyazinvest, although foreign investors will not be
permitted to bid, and 50% of the state insurance company, Rossgosstrakh, 2% of
the state electric company, United Energy Systems, and up to 24% of the oil
company Rosneft. The government announced its intention to specify rules and
implementation procedures for the case-by-case sales and to make information on
and participation in new sales publicly available to both domestic and foreign
investors. See Appendix ____, "Securities Markets of Russia".
Securities Markets. The first stock market was opened in Moscow in 1992,
but by 1996 the number of operating stock exchanges had expanded to 100. By the
end of 1996, however, the Russian Trading System ("RTS") emerged as the largest
domestic marketplace for Russian equities. As of December 1996, the RTS carried
information on 86 traded issues. Average daily value traded on the RTS totaled
$4.4 million in January 1996, peaked at $21 million in October of the same year
and leveled off at $9.8 million in December.
The Russian stock market yielded an annual return of 155.9% in dollar terms
for 1996, with market capitalization reaching approximately $30 billion by
year-end.
A securities commission, later renamed the Federal Commission on Securities
and the Stock Market (the "FCSM") was formed in November 1994. In January 1996,
Russia adopted a new law regarding Joint Stock Companies, which establishes the
basic rules for shareholders' rights and corporate governance in Russia. In
April of the same year, President Yeltsin signed a new Securities Markets Law
which regulates the issue and circulation of certain types of securities, the
formation and activity of professional participants in the securities market,
decisions to issue securities, prospectus information and registration, offers
and types of securities, disclosure requirements, insider trading, advertising
rules, regulation and licensing, the powers of the FCSM and powers and
requirements of self regulatory organizations, and imposes liability for breach
of regulations. The FCSM has also adopted new regulations pertaining to the
licensing of broker-dealers, and as of March 1997, had reportedly referred over
900 companies to the appropriate Russian ministries for prosecution for
transacting securities business without a license. Licensing requirements for
unit investment funds, the Russian equivalent to mutual funds, have been in
place since July 1995. In April 1996, the FCSM granted the first licenses for
the Russian equivalent of investment managers. See Appendix ____, "Securities
Markets of Russia."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital appreciation. To
achieve its objective, the Fund intends to invest primarily in equity securities
of Russia/Eurasia Companies. As used in this Prospectus, "equity securities"
means common or preferred stock (including convertible preferred stock); bonds,
notes or debentures convertible into common or preferred stock; stock purchase
warrants or rights; equity interests in trusts, partnerships, joint ventures or
similar enterprises; certain structured investments; and American, European, or
Global Depositary Receipts. Under normal market conditions, the Fund will invest
at least 65% of its total assets in equity securities of Russia/Eurasia Region
issuers. Up to 35% of the Fund's assets may be invested in debt securities of
Russia/Eurasia Companies or issued and guaranteed by Russia/Eurasia Region
governmental entities, or in other debt or equity securities which are
consistent with the Fund's investment objective. The Fund's investment objective
of long-term capital appreciation, its policy of investing at least 65% of its
total assets in securities of Russia/Eurasia Companies under normal market
conditions, and the investment restrictions set forth below under "Fundamental
Investment Restrictions" are fundamental and may not be changed without the
approval of a majority of the Fund's outstanding voting securities. Unless
otherwise specified, all other investment policies and practices described in
this Prospectus, including the list of Russia/Eurasia Region countries in which
the Fund may invest, are not fundamental, meaning that the Board of Trustees may
change them without the approval of shareholders. As used in this Prospectus, a
"majority of the Fund's outstanding voting securities" means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented, or (ii) more than 50% of the outstanding
shares. There is no assurance the Fund will be able to achieve its investment
objective.
The Fund intends to invest in equity and debt securities of Russia/Eurasia
Region issuers as appropriate opportunities arise. The amount invested in any
one Russia/Eurasia Region country will vary depending on relative market
conditions and the availability of suitable investments. The Fund anticipates
that, initially, its investments will be made primarily in Russia, Poland,
Hungary, Czech Republic, Romania, Slovakia, and Slovenia. As opportunities
develop and appropriate sub-custody arrangements become available, investments
may be made without limit in any of the remaining Russia/Eurasia Region
countries.
In selecting investments for the Fund's portfolio, the Investment Manager
may invest the Fund's assets in various multi-industry sectors of the economy of
Russia/Eurasia Region countries. The multi-industry sectors in which the Fund
initially intends to invest include the electricity, telecommunications, oil and
gas (production and exploration), financial services, non-ferrous metalurgy,
ferrous metalurgy, transportation, retail trading, and consumer materials
sectors. The sectors are more fully described in Appendix ___. The Investment
Manager may invest part or all of the Fund's assets in securities outside of the
represented sectors and may increase, decrease, or entirely eliminate the Fund's
holdings within a specific sector in response to changes or anticipated changes
in the general economy or within a specific sector.
Because the Fund may invest its assets in multi-industry sectors, the Fund
may be affected more by any single economic, political or regulatory development
than an investment company which invests in a wider variety of investments. To
reduce the risk of decline in the Fund's net asset value due to adverse
developments, the Fund may not purchase a security if, as a result, (1) 25% or
more of the Fund's total assets would be invested in the securities of companies
having their principal business activities in any one industry (this policy is
fundamental), or (2) more than 10% of the Fund's total assets would be invested
in the securities of any one issuer.
<PAGE>
The Fund may invest up to 50% of its total assets in unlisted securities,
including direct investments. The Fund will invest in direct investments that
the Investment Manager believes may be disposed of eventually, either through
listing or sale of the securities to the issuer or another investor. As used in
this Prospectus, the term "direct investments" means private investments in
non-publicly traded equity or debt securities of Russia/Eurasia Companies. The
Fund's direct investments will involve certain high risks for invested capital.
See "Risk Factors and Special Consideration-- Unlisted Securities and Direct
Investments."
Under normal market conditions, assets of the Fund not invested in equity
securities of Russia/Eurasia Region countries will be invested in (i) debt
securities issued by Russia/Eurasia Companies or issued or guaranteed by a
Russia/Eurasia Region government or governmental entity, as well as debt
securities or corporate and governmental issuers outside the Russia/Eurasia
Region, (ii) equity securities of issuers outside the Russia/Eurasia Region
which the Investment Manager believes will experience growth in revenue from
participation in the development of the economy of the Russia/Eurasia Region,
and (iii) short-term and medium-term debt securities of the type described below
under "Investment Objective and Policies--Temporary Investments." Under normal
circumstances, the Fund will limit its investment in debt securities to no more
than 50% of its total assets. It is likely that many of the debt securities in
which the Fund will invest will be unrated and, whether or not rated, the debt
securities may have speculative characteristics. Currently, the market in debt
securities of Russia/Eurasia Companies, and the Russia/Eurasia Region state
entities, is comparatively limited, except with respect to Vnesheconombank bonds
and certain securities issued by the Russian Ministry of Finance.
The Investment Manager's approach to selecting investments emphasizes
fundamental company-by-company analysis (rather than broader analyses of
specific industries or sectors of the economy). Although the Investment Manager
will consider historical value measures, such as price/earnings ratios,
operating profit margins and liquidation values, the primary factor in selecting
securities for investment by the Fund will be the company's current price
relative to its long-term earnings potential, or real book value, whichever is
appropriate. In addition, the Investment Manager will consider overall growth
prospects, competitive positions in export markets, technologies, research and
development, productivity, labor costs, raw material costs and sources, profit
margins, returns on investment, capital resources, state regulation, management
and other factors in comparison to other companies around the world which the
Investment Manager believes are comparable. Selection methods are subject to
change from time to time based on the Investment Manager's research and changes
in the securities markets.
The Fund's investments will include investments in companies which, while
falling within the definition of Russia/Eurasia Companies, as stated above, also
have characteristics and business relationships common to companies in countries
other than Russia/Eurasia Region countries. As a result, the value of the
securities of those companies may reflect economic market forces applicable to
other countries, as well as to Russia/Eurasia Region countries. For example, the
Fund may invest in companies organized and located in countries other than
Russia/Eurasia Region countries, including companies having their entire
production facilities outside of the Russia/Eurasia Region, when their
securities meet one or more elements of the Fund's definition of Russia/Eurasia
Company.
Depositary Receipts
The Fund is permitted to invest in securities indirectly through sponsored
or unsponsored American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs"), Global Depositary Receipts ("GDRS") and other types of
Depositary Receipts (which, together with ADRs, EDRs, and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"), to the extent Depositary
Receipts may be available. ADRs are Depositary Receipts typically issued by a
U.S. bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. GDRs, EDRs, and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. banks or trust companies, and they evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary Receipts may
be issued pursuant to sponsored or unsponsored programs. In sponsored programs,
the issuer has made arrangements to have its securities traded in the form of
Depositary Receipts. In unsponsored programs, the issuer may not be directly
involved in the creation of the program. Although regulatory requirements with
respect to sponsored and unsponsored programs are generally similar, in some
cases it may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program. Accordingly, there may be
less information available regarding issuers of securities underlying
unsponsored programs and there may not be a correlation between that information
and the value of the Depositary Receipts. Depositary Receipts also involve the
risks of other investments in foreign securities. In addition, the Investment
Manager may not be able to vote depositary receipts held by the Fund in some
circumstances. For purposes of the Fund's investment policies, an investment in
Depositary Receipts will be deemed to be an investment in the underlying
securities.
Structured Investments
Included among the issuers of securities in which the Fund may invest are
entities organized and operated solely for the purpose of restructuring the
investment characteristics of various securities. These entities are typically
organized by investment banking firms which receive fees in connection with
establishing each entity and arranging for the placement of its securities. This
type of restructuring may involve the deposit with or purchase by an entity,
such as a corporation or trust, of specified debt or equity securities and the
issuance by that entity of one or more classes of securities ("Structured
Investments") backed by, or representing interests in, the underlying
securities. The Structured Investment may be used to provide exposure to equity
or debt securities the Fund otherwise may be unable to hold, due to custody or
other restrictions, or the cash flows on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics including varying maturities, payment
priorities or interest rate provisions. The extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
the Fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to or sometimes greater than that of
the underlying instruments. For purposes of the Fund's investment policies, an
investment in a Structured Investment will be deemed an investment in the
underlying instrument.
The Fund may invest in a class of Structured Investments that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments. Although the Fund's
purchase or subordinated Structured Investments may have a similar economic
effect to that of borrowing against the underlying securities, the purchase may
not be deemed to be leverage for the purposes of the limitations placed on the
extent of the Fund's assets that may be used for borrowing activities. See
"Additional Investment Practices-Borrowing."
Warrants
Warrants are securities permitting, but not obligating, the holder to
subscribe for other equity securities. Warrants do not carry with them the right
to receive dividends or exercise voting rights with respect to the securities
that they entitle their holder to purchase, and they do not represent any rights
in the assets of the issuer. As a result, warrants may be considered more
speculative than other types of equity investments.
Direct Investments
The Fund may invest up to 50% of its total assets in direct investments.
Direct investments will consist of (1) the private purchase of an equity
interest in an enterprise in the form of shares of common stock or an equity
interest in trusts, partnerships, joint ventures or similar enterprises; and (2)
the private purchase of debt securities from, or the making of a loan to, an
enterprise. Purchases of direct investments may be, but are not required to be,
made from (i) an enterprise; (ii) a governmental entity in connection with
privatization of an enterprise; or (iii) an investor in an enterprise. In making
its direct investments, the Fund intends to avoid being subject to unlimited
liability with respect to the investments, but it is not certain the Fund will
be able to do so. There can be no assurance that the Fund's direct investments
will become publicly traded, or that the Fund will be able otherwise to sell any
direct investment to the issuer or another investor. In addition, the extent to
which the Fund may make direct investments may be limited by considerations
relating to its status as a regulated investment company under the Code. By
nature, direct investments must be privately negotiated, and they require
extensive due diligence by the Investment Manager. Therefore, the costs of
investing in direct investments will likely be substantially greater than that
of most other investments.
Due to the absence of a trading market for the Fund's direct investments,
they will be less liquid than publicly traded securities. These (and other
securities for which market prices are not readily available) will be valued at
fair value, as determined in good faith by or under the direction of the Fund's
Board of Trustees. Although these investments may, in some cases, be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by the Fund or less than what may be considered
their fair value. In addition, the Fund may be unable to dispose of its direct
investments at then-current market prices and may have to dispose of them over
extended periods of time. Further, securities in Russia/Eurasia Region
countries, and particularly those that are not publicly traded, are not subject
to the disclosure and other investor protection requirements that are generally
accepted as necessary in countries with developed securities laws. If the Fund's
direct investments are required to be registered under the securities laws of
one or more jurisdictions before being resold, the Fund may be required to bear
the expenses of registration.
Temporary Investments
During periods in which the Investment Manager believes changes in
economic, financial or political conditions make it advisable, the Fund may, for
temporary defensive purposes, reduce its holdings in equity securities and
invest without limit in certain short-term (less than twelve months to maturity)
and medium-term (not greater than five years to maturity) debt securities or
hold cash. The short-term and medium-term debt securities in which the Fund may
invest consist of (a) obligations of the U.S. or Russia/Eurasia Region
governments, and their respective agencies or instrumentalities; (b) bank
deposits and bank obligations (including certificates of deposit, time deposits
and bankers' acceptances) of U.S. or foreign banks denominated in any currency;
(c) floating rate securities and other instruments denominated in any currency
issued by various governments or international development agencies; (d) finance
company and corporate commercial paper and other short-term corporate debt
obligations of U.S. or Russia/Eurasia Region corporations; and (e) repurchase
agreements with banks and broker-dealers with respect to such securities. The
Fund intends to invest for temporary defensive purposes only in short-term and
medium-term debt securities rated, at the time of investment, A or higher by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P") or, if unrated by either rating agency, of equivalent credit quality to
securities so rated as determined by the Investment Manager. For purposes of the
Fund's investment restriction prohibiting the investment of 25% or more of the
total value of its assets in a particular industry, a foreign government (but
not the United States government) may be deemed to be an "industry," and
therefore investments in the obligations or any one foreign government may not
equal or exceed 25% of the Fund's assets. In addition, supranational
organizations are deemed to comprise an industry, and therefore investments in
the obligations of those organizations may not, in the aggregate, equal or
exceed 25% of the Fund's assets. See "Investment Restrictions."
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed price
and date. The Investment Manager will monitor the value of the securities
purchased by the Fund on a daily basis to determine that the value equals or
exceeds the repurchase price including accrued interest. Repurchase agreements
may involve risks in the event of default or insolvency of the seller, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Portfolio Turnover Rate
The Fund intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade for short-term gain. Accordingly, it
is anticipated that the Fund's annual portfolio turnover rate normally will not
exceed [75%] although in any particular year, market conditions could
necessitate portfolio activity at a greater or lesser rate than anticipated. The
portfolio turnover rate for a year is calculated by dividing the lesser of sales
or purchases of portfolio securities during that year by the average monthly
value of the Fund's portfolio securities, excluding money market instruments.
The rate of portfolio turnover will not be a limiting factor when the Fund deems
it appropriate to purchase or sell securities for the Fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a newly organized closed-end investment company with no prior
operating history. It is designed for long-term investment, and investors should
not consider it a trading vehicle. An investment in the Fund's shares of
beneficial interest ("Shares") should be considered highly speculative and not
appropriate for all investors, and is not intended to constitute a complete
investment program. Shares of closed-end funds frequently trade at a discount
from net asset value. This characteristic of a closed-end fund is a risk
separate and distinct from the risk that a fund's net asset value will decrease.
The Fund cannot predict whether its Shares will trade at, below or above net
asset value. This risk may be more pronounced for investors who purchase Shares
in the initial public offering and who then determine to sell their Shares
relatively soon thereafter.
Investors should recognize that investing in securities of Russia/Eurasia
Companies involves significant risks and special considerations, including those
set forth below, which are not typically associated with investing in United
States securities markets. The specific nature of those risks may vary according
to the country in which investments are made. The Fund is authorized to engage
in certain transactions involving derivative instruments which may involve
special risks. See "Hedging Transactions and Use of Derivative Instruments" and
"Debt Securities - High Yield, High Risk Securities" below.
Political and Economic Factors
Since the breakup of the Soviet Union in 1991, Russia, the other former
Soviet republics, and certain countries in Central and Eastern Europe formerly
under Soviet control have experienced dramatic political change. The political
systems in Russia/Eurasia Region countries are emerging from a long history of
extensive state involvement in economic affairs. In general, these countries are
undergoing a rapid transition from a centrally controlled command system to a
market-oriented, democratic model. The Fund may be affected unfavorably by
political or diplomatic developments, social instability, changes in government
policies, taxation and interest rates, currency repatriation restrictions, and
other political and economic developments in the law or regulations of
Russia/Eurasia Region countries and, in particular, the risks of expropriation,
nationalization and confiscation of assets and changes in legislation relating
to foreign ownership.
Many of the countries in which the Fund intends to invest have had
centrally-planned, socialist economies since shortly after World War II. The
governments of these countries currently are implementing or considering reforms
directed at political and economic liberalization, including efforts to
decentralize the economic decision-making process and move towards a more
market-oriented economy. In some instances, there has been resistance to these
reform efforts and political parties in certain countries have advocated for the
return to a centrally planned economy. Consequently, there can be no assurance
that these reforms will continue or, if continued, will achieve these goals.
Despite the implementation of privatization programs by many Russia/Eurasia
Region countries, the governments of many Russia/Eurasia Region countries have
exercised and continue to exercise a significant influence over many aspects of
the local economy. New governments and new policies may have an unpredictable
impact on the economies of many Russia/Eurasia Region countries. Future actions
by the government of a Russia/Eurasia Region country could have a significant
effect on its local economy, which could affect private sector companies, market
conditions and prices and yields of securities in the Fund's portfolio.
In addition, upon the accession to power of Communist regimes, the
governments of a number of Russia/Eurasia Region countries expropriated a large
amount of private property. The claims of many property owners against those
governments have never been settled and any future settlements could have an
adverse effect on the value of certain investments in the Fund's portfolio.
There also can be no assurance that the Fund's investments in these countries
would not be expropriated, nationalized or otherwise confiscated. In the event
of the settlement of any claims or expropriation, nationalization or other
confiscation, the Fund could lose its entire investment in the country involved.
In addition, any change in the leadership or policies of Russia/Eurasia Region
countries could halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and adversely affect existing investment
opportunities.
The Fund initially intends to invest a substantial portion of its assets in
companies located in Russia. In so doing, the Fund, at least during the initial
period of operations, will be particularly susceptible to the political and
economic problems of Russia. While Russia's political system appears stable with
the return of President Boris Yeltsin from his extended period of recuperation
following heart surgery, there is no assurance that he will remain in office for
the remainder of his current term or that his successors would continue ongoing
efforts to reform Russia's economy. Moreover, despite progress in implementing
reforms designed to enhance privatization and streamline the government
bureaucracy, Russian authorities still face a series of problems that, if not
addressed and corrected, could hamper the economic reforms implemented over the
past several years. President Yeltsin has announced, for example, that the need
to reduce arrears on wages and benefits is a top priority of the administration.
Underlying this problem is the precarious state of government finances which
stems partly from the fact that the 1997 budget approved by parliament
overestimated in its projections for revenue. To address this problem, the
Russian government is implementing a program aimed at decreasing public spending
and increasing tax revenue by targeting the significant percentage of businesses
that did not pay taxes in 1996. The proposed spending cuts will affect military
orders and coal subsidies, and will result in a reduction of money allocated to
agriculture, health, and cultural programs.
Absence of Developed Legal Structures
In the years since the fall of Communism, many of the Russia/Eurasia Region
countries have been developing a body of securities and tax laws and laws
governing corporations and other business entities. Legal structures governing
private and foreign investment and private property, where they have been
implemented, are new. Laws may not exist to cover all business and commercial
relationships or to protect investors, particularly minority shareholders,
adequately and, furthermore, the administration of laws and regulations by
government agencies may be subject to considerable discretion. There is a low
level of monitoring and regulation of securities markets in the Russia/Eurasia
Region countries generally and of the activities of investors in those markets,
and there has been no or very limited enforcement to date of existing
regulations. In addition, even in circumstances where adequate laws exist, it
may not be possible to obtain swift and equitable enforcement of the law.
Market Characteristics
The securities markets of Russia/Eurasia Region countries are substantially
smaller, less liquid and significantly more volatile than the securities markets
in the United States. In addition, there is little historical data on these
securities markets because they are of recent origin. A substantial proportion
of securities transactions in Russia/Eurasia Region countries are privately
negotiated outside of stock exchanges and over-the-counter markets. A limited
number of issuers represent a disproportionately large percentage of market
capitalization and trading value.
The Fund's holdings of equity securities of Russia/Eurasia Companies are
expected to represent a relatively significant portion of the total float of the
securities of those companies available for public trading. Thus, the large size
of the Fund's holdings in specific securities relative to the trading volume in
those securities could adversely affect the prices at which the securities are
bought or sold and could lengthen the time period during which buying and
selling programs are effected. Anticipation of an offering in the Russia/Eurasia
Region securities markets may increase the prices that would otherwise be paid
by the Fund for certain securities and lengthen the time period required to
fully invest the proceeds of the offering in Russia/Eurasia Region securities.
See "Use of Proceeds."
Investment in Multi-Industry Sectors
In considering investment opportunities for the Fund, the Investment
Manager may invest significantly in certain multi-industry sectors. Each sector
consists of several separate industries. The Fund expects that initially assets
might be invested in any of a number of business sectors, including the
following: electricity, telecommunications, oil and gas, and mining and
machinery. Because of the Fund's ability to invest a large percentage of its
assets in one or several multi-industry sectors, the Fund may be affected more
by any single economic, political, or regulatory development than would a fund
that invests its assets in a greater number of industrial sectors. See Appendix
__.
Settlement and Custody Risk
At present, custody arrangements complying with the requirements of the
Commission are already available in Russia, Poland, Hungary, Romania, Czech
Republic, Slovakia, and Slovenia. The Fund expects that steps will be taken to
permit the establishment of appropriate custody arrangements in a number of
additional Russia/Eurasia Region countries, although there can be no assurance
as to when or if those arrangements will be in place. Because the Fund will not
invest in a market unless adequate custodial arrangements are available, the
range of Russia/Eurasia Region countries in which the Fund may currently invest
is limited. In addition, the governments of certain Russia/Eurasia Region
countries may require that a governmental or quasi-governmental authority act as
custodian of the Fund's assets invested in those countries. These authorities
may not be qualified to act as foreign custodians under the 1940 Act and, as a
result, the Fund would not be able to invest directly in these countries in the
absence of exemptive relief from the Commission. Furthermore, the risk of loss
through government confiscation may be increased if the Fund's assets are held
in custody in that manner.
Because the securities markets in Russia/Eurasia Region countries have only
recently formed, and banking and telecommunications systems remain relatively
underdeveloped, settlement, clearing and registration of securities transactions
are subject to significant risks not normally associated with investment in the
United States and other more developed markets. In certain markets, including
Russia, ownership of shares is defined according to entries in the issuer's
share register and normally evidenced by extracts from the register or in
certain limited cases by formal shares certificates. However, in the absence of
a central registration system, these services are carried out by the issuers
themselves or by a separate registrar. These registrars are not necessarily
subject to effective state supervision and it is possible the Fund could lose
its share registration through fraud, negligence or even mere oversight. In
those jurisdictions, the Fund will endeavor to appropriately record its
interests, either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
audits. However, these extracts have no legal enforceability and it remains
possible that a subsequent illegal amendment or other fraudulent act may deprive
the Fund of its ownership rights.
In addition, while applicable regulations may impose liability on
registrars for losses resulting from their errors, it may be difficult for the
Fund to enforce any rights it may have against the registrar or the issuer of
the securities in the event of a loss of share registration. An issuer's
management may be able to exert considerable influence over who can purchase and
sell the issuer's shares by illegally instructing the registrar to refuse to
record transactions on the share register. This practice may prevent the Fund
from investing in securities of certain Russia/Eurasia Region country issuers
otherwise deemed attractive by the Investment Manager. Further, this also could
cause a delay in the sale of portfolio securities by the Fund if a potential
purchaser is deemed unsuitable, which may expose the Fund to potential loss on
the investment. Moreover, no guarantee can be given that all entitlements
attaching to securities acquired by the Fund, including those relating to
dividends, can be realized in view of the risk that payments of dividends or
other distributions by bank wire or by check sent through the mail could be
delayed or lost. In addition, there is the risk of loss in connection with the
insolvency of an issuer's bank or transfer agent.
[In light of the risks described above, the Board of Trustees of the Fund
has approved certain procedures concerning the Fund's investments in certain
Russia/Eurasia Companies. Among these procedures is a requirement that the Fund
will not invest in the securities of a Russia/Eurasia Company unless that
issuer's registrar has entered into a contract with the Fund's sub-custodian
containing certain protective conditions, including, among other things, the
sub-custodian's right to conduct regular share confirmations on behalf of the
Fund. This requirement will likely have the effect of precluding investments in
certain Russia/Eurasia Companies that the Fund would otherwise make. In
accordance with procedures adopted by the Fund, certain sub-custodians have
undertaken to provide certain information on a periodic basis to the Board of
Trustees concerning the share registration and custody arrangements.]
Foreign Sub-custodians and Securities Depositories
The Fund's portfolio of securities and cash, when invested in foreign
countries, will be held by its sub-custodian. The Fund maintains custody of its
assets in a manner consistent with Commission requirements governing custody of
fund assets, as those rules are interpreted by the Commission staff. Certain
banks in foreign countries may not be eligible subcustodians for the Fund under
Commission rules, in which event the Fund may be precluded from purchasing
securities in which it would otherwise invest, and other banks that are eligible
foreign subcustodians may be recently organized or otherwise lack extensive
operating experience.
Foreign Currency, Exchange Rates, and Related Risks
Part or all of the Fund's assets may be invested in securities denominated
in the currencies of Russia/Eurasia Region countries. The value of the assets of
the Fund and its income, as measured in U.S. dollars, may suffer significant
declines due to disruptions in the markets for Russia/Eurasia Region currencies,
or be otherwise adversely affected by exchange control regulations.
Additionally, changes in foreign currency exchange rates will affect the value
of securities in the Fund's portfolio and the unrealized appreciation or
depreciation of investments. Further, the Fund may incur costs in connection
with conversions between various currencies. 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 to resell that currency to the dealer. The Fund
anticipates that in general the foreign currencies received by it with respect
to most of its Russia/Eurasia Region investments will be freely convertible into
U.S. dollars on foreign exchange markets and that in most cases the U.S. dollars
received will be fully repatriable out of the various Russia/Eurasia Region
countries in which the Fund invests. However, there can be no assurance that
Russia/Eurasia Region countries will not impose restrictions in the future on
the movement of U.S. dollars or these foreign currencies across local borders or
the convertibility of the foreign currencies into U.S. dollars. If restrictions
are imposed, they may interfere with the conversion of foreign currencies to
U.S. dollars and therefore with the payment of any distributions that the Fund
may make to its shareholders. Moreover, the currencies of certain Russia/Eurasia
Region countries currently are not freely convertible into other currencies and
are not internationally traded.
Currency devaluations may occur without warning and are beyond the control
of the Investment Manager. The Fund may attempt to mitigate the risks associated
with currency fluctuations at times by entering into forward, futures or options
contracts to purchase or sell the foreign currency if those opportunities are
available on terms acceptable to the Fund. Additional information concerning
movement in foreign exchange rates can be found in Appendix .. under "Currency
and Foreign Exchange Information."
Inflation
The economies of many Russia/Eurasia Region countries have been
characterized by high rates of inflation in recent years, even though the rates
of inflation in certain economies have been declining in 1997. In Russia, for
instance, where the annual rate of inflation has been declining for more than a
year, the annualized inflation rate in _________, 1997 was _______%. There can
be no assurance, however, that inflation rates will not increase.
High inflation rates create downward pressure on business and industry
activity by, among other things, acting as an impediment to further investment
in private production. Emerging market economies are particularly susceptible to
such inflationary pressure. Further increases in the rate of inflation in the
countries of the Russia/Eurasia Region, therefore, could decrease anticipated
investment returns for the Fund.
Investment and Repatriation Restrictions
Some Russia/Eurasia Region countries prohibit certain kinds of investment
or impose substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as the Fund. For
example, certain countries require governmental approval prior to investment by
foreign persons, or limit the amount of foreign investment by foreign persons in
a particular company, or limit the investment by foreign persons to only a
specific class of securities of a company that may have less advantageous terms
than securities of the company available for purchase by nationals. Moreover,
certain national policies of certain Russia/Eurasia Region countries may
restrict investment opportunities in issuers or industries deemed sensitive to
national interests. Some countries require governmental registration or approval
for the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is a deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as the application to
the Fund of any restrictions on investments or by withholding taxes imposed by
Russia/Eurasia Region countries on interest or dividends paid on securities held
by the Fund or gains from the disposition of such securities. If for any reason
the Fund was unable, through borrowing or otherwise, to distribute an amount
equal to substantially all of its investment company taxable income (as defined
for U.S. tax purposes) within applicable time periods, the Fund would cease to
qualify for the favorable tax treatment afforded to regulated investment
companies under the U.S. Internal Revenue Code of 1986, as amended, (the "Code")
or, even if it did so qualify, it might become liable for income and excise
taxes on undistributed income. In addition, the ability of the Fund to obtain
timely and accurate information relating to its investments is a significant
factor in complying with the requirements applicable to regulated investment
companies and in making tax-related computations. Thus, if the Fund were unable
to obtain accurate information on a timely basis, it might be unable to qualify
as a regulated investment company or its tax computations might be subject to
revision (which could result in the imposition of taxes, interest and
penalties). See "Taxation."
Investment in Russia/Eurasia Region countries may require the procurement
of a substantial number of regulatory consents, certificates and approvals,
including: licenses for the Fund and Investment Manager to operate in
Russia/Eurasia Region countries; consents to make investments in particular
companies or types of industries; certificates from tax authorities; licenses
for the appropriate custodian; certificates required by banks; approvals from a
country's ministry of finance, and state anti-monopoly committee or other
governmental entity; and consents required by local legislation. Although it is
unlikely that all of these documents will have been obtained by the closing of
this offering, the Investment Manager believes it will obtain sufficient
licenses, consents and approvals necessary for the operation of the Fund as
described herein. The inability to obtain a particular license, consent or
approval could adversely impact the Fund's operations.
Tax System
[TO BE PROVIDED]
Reporting Standards
Russia/Eurasia Region issuers 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 financial statements of a Russia/Eurasia Region issuer may not
reflect its financial position or results of operations in the way they would be
reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. There is substantially less publicly
available information about Russia/Eurasia Region issuers than there is about
U.S. issuers, and the information that is available may not be conceptually
comparable to, or prepared on the same basis as, that available in more
developed capital markets. This factor may make it difficult to assess the
financial status of particular companies.
Participation in Privatization
The purchase of securities of recently privatized companies involves
special risks. Many recently privatized companies have gone through an internal
reorganization of management in an attempt to improve their competitive position
in the private sector. However, certain reorganizations could result in a
management team that does not function as well as the enterprise's prior
management and may have a negative effect on the enterprise. Moreover, the loss
of government support and protection in connection with privatization and sudden
subjection to market competition from which an enterprise was previously
protected, could have a negative effect on the enterprise. Further, unreliable
reporting standards, as discussed above, make the valuation of recently
privatized companies difficult. The Investment Manager will seek to assess the
long-term earnings potential and/or fair market value of recently privatized
companies in light of historical value measures such as price/earnings ratios,
operating profit margins and liquidation values. However, there can be no
assurance that accurate data in support of these assessments will be available.
Errors in valuing recently privatized companies, whether or not the result of
inaccurate or unavailable data, could result in the Fund overpaying for an
interest in the companies.
In Russia, the transformation of medium- and large-scale state enterprises
into open joint stock companies (i.e., corporatization) and their subsequent
privatization has been carried out by the Russian State Property Committee and
Federal Property Fund and their local organs at an unprecedented rate. In doing
this, much of the responsibility for preparation of enterprises for
privatization and compliance with much of the privatization legislation was
delegated to individuals at the enterprise concerned rather than being strictly
controlled by state authorities. This enhances the risk that there may be
illegalities in the privatization that may lead to full or partial invalidity of
the privatization of an enterprise or the imposition of sanctions on that
enterprise or individuals within its administration. Alternatively, an
enterprise may not have valid or full title to all of the assets shown on its
balance sheet and may be subject to obligations arising from a period prior to
its privatization. As an investor, the Fund may consequently lose all or a part
of its investments in privatized enterprises.
In other Russia/Eurasia Region countries, the rate of privatization has
slowed in recent years. The inability of Russia/Eurasia Region countries to
continue the privatization of state-controlled enterprises at a consistent rate
could limit the investment options of the Fund in those markets.
The privatization process has also resulted in certain disputes between
management and shareholders, particularly foreign shareholders, of recently
privatized companies. For example, management of certain companies have resisted
recognizing purchases of equity interests by foreign investors. In addition,
incidents have been reported where foreign shareholders' ownership interest have
been diluted by management through the issuance of new securities to limited
groups of existing shareholders.
Difficulties in Protecting and Enforcing Rights
Courts in Russia/Eurasia Region countries lack experience in commercial
dispute resolution and many of the procedural remedies for enforcement and
protection of legal rights typically found in Western jurisdictions are not
available in Russia/Eurasia Region countries. There remains uncertainty as to
the extent to which local parties and entities, including state authorities in
Russia/Eurasia Region countries, will recognize the contractual and other rights
of the parties with which they deal. Accordingly, there will be difficulty and
uncertainty in the Fund's ability to protect and enforce its rights against
governmental and private entities. There is also no assurance that the courts in
Russia/Eurasia Region countries will recognize or acknowledge that the Fund has
acquired title to any property or securities in which the Fund invests, or that
the Fund is the owner of any property or security held in the name of a nominee
which has acquired the property or security on behalf of the Fund, because there
may not exist at present in Russia/Eurasia Region countries a reliable system or
legal framework regarding the registration of titles. There can be no assurance
that this difficulty in protecting and enforcing rights in Russia/Eurasia Region
countries will not have a material adverse effect on the Fund and its
operations. Difficulties are likely to be encountered in enforcing judgments of
foreign courts within Russia/Eurasia Region countries or of courts in
Russia/Eurasia Region countries in other jurisdictions due to the limited number
of countries which have signed treaties for mutual recognition of court
judgments with Russia/Eurasia Region countries. In addition, legislation in
Russia/Eurasia Region countries is in a state of development and is subject to
frequent amendment.
Environmental Risks
The lack of environmental controls in many Russia/Eurasia Region countries
has led to widespread pollution of the air, ground and water resources. Also
contributing to environmental pollution are industrial infrastructure problems,
particularly oil and gas pipeline leaks. In addition, there are concerns related
to the availability of equipment and funding for the disposal of nuclear waste.
In Russia, environmental legislation envisages the possibility of stringent
sanctions on companies that commit serious or persistent breaches, including
closure of the enterprise concerned. The extent of the cost, if any, for the
abatement of environmental hazards by an issuer will not be determinable at the
time the Fund is considering an investment.
Corruption and Crime
Corruption and crime continue to plague the Russian economy with increasing
frequency, while legal and judicial reforms aimed at curtailing the crime rate
have had little positive impact. Many businesses, particularly in the large
cities, are subject to the influence of criminal elements, although there is not
a single group or confederation of criminals that can be characterized as
"organized" crime, as that term is understood in Western Europe and North
America. Foreign entities conducting business in Russia have identified public
corruption as a growing problem, both in terms of its frequency and the size of
the bribes sought. In March 1997, President Yeltsin announced that the continued
fight against corruption and crime, particularly those in high government office
and in the financial sector, was one of the primary objectives of his
administration. Symbolic of this objective was President Yeltsin's plan to root
out public corruption by having state officials disclose their assets and their
families' assets. The social and economic difficulties resulting from the
problem of corruption and crime in Russia can adversely affect the value of the
Fund's investments.
Unlisted Securities and Direct Investments
Unlisted securities and direct investments will involve a high degree of
business and financial risk that can result in substantial losses. Because of
the absence of any public trading market for these investments, the Fund may
take longer to liquidate these positions than would be the case for publicly
traded securities and the prices on these sales could be less than those
originally paid by the Fund or less than their value as determined by the Fund
pursuant to procedures approved by the Board of Trustees. Under certain
circumstances, this lack of liquidity may impede the Fund's ability to achieve
its investment objective of long-term capital appreciation. Further, issuers
whose securities are not publicly traded may not be subject to disclosure and
other investor protection requirements applicable to publicly traded securities.
Certain of the Fund's direct investments may include investments in smaller,
less-seasoned companies, which may involve greater risks. These companies may
have limited product lines, markets or financial resources, or they may be
dependent on a limited management group.
Illiquid Securities
The securities of Russia/Eurasia Companies are mostly traded
over-the-counter and, despite the large number of stock exchanges, there is
still no organized public market for most of these securities. This will
increase the difficulty of valuing the Fund's investments and therefore, until
the market develops further, many of the Fund's investments will be illiquid. No
established secondary markets may exist for many of the securities in which the
Fund will invest. Reduced secondary market liquidity may have an adverse effect
on market price and the Fund's ability to dispose of particular instruments when
otherwise determined by the Investment Manager to be in the interest of the
Fund. Reduced secondary market liquidity for securities may also make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing its portfolio and calculating its net asset value. Market quotations are
generally available on many emerging country securities only from a limited
number of dealers and may not necessarily represent firm bids of those dealers
or prices for actual sales.
Listing Delay
Shares of the Fund are not expected to be listed for trading on the New
York Stock Exchange, or any other exchange, for a period of up to three months
from the date of this Prospectus. Consequently, during that period there will be
no market for the Fund's Shares, and Shares of the Fund should be considered
illiquid.
Operating Expenses
The operating expense ratio of the Fund can be expected to be higher than
that of investment companies investing in more established securities markets
because the expenses of the Fund, including management and custodian fees, will
generally be higher than the expenses of such other funds. See "Fund Expenses."
Net Asset Value Discount; Non-Diversification
The Fund is a newly organized closed-end investment company with no prior
operating history. Prior to the Offering, there has been no public market for
the Fund's Shares. Shares of closed-end investment companies that invest
primarily in foreign countries frequently trade at a discount from net asset
value and the initial public offering price. This characteristic of shares of a
closed-end fund is a risk separate and distinct from the risk that a fund's net
asset value will decrease. The risk of purchasing shares of a closed-end
investment company that might trade at a discount from net asset value is more
pronounced for investors who purchase shares in the initial public offering and
who determine to sell their shares in a relatively short period of time
thereafter. For those investors, realization of a gain or loss on their
investment is likely to be more dependent upon the existence of a premium or
discount than upon portfolio performance.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. The Fund, however, intends to comply with the diversification
requirements imposed by the Code for qualification as a regulated investment
company. See "Taxation." This intention should not be regarded as assurance that
the diversification requirements will, in fact, be met. In addition, the Board
of Trustees has adopted a non-fundamental policy under which the Fund does not
intend to invest more than 10% of its assets in the securities of any one
issuer. See "Taxation--U.S. Federal Income Taxes" and "Investment Restrictions."
Debt Securities--High Yield, High Risk Securities
The Fund may invest in debt securities of Russia/Eurasia Companies which
may be unrated or low-rated. It is likely that many of the debt securities in
which the Fund will invest will be unrated, and whether or not rated, the debt
securities may have speculative characteristics. The market value of debt
securities generally varies in response to changes in interest rates and the
financial conditions of the issuer. During periods of rising interest rates, the
value of debt securities generally declines. These changes in market value will
be reflected in the Fund's net asset value.
The Fund may invest in debt securities rated lower than BBB by S&P and Baa
by Moody's. Low-rated debt securities may involve greater risks of loss of
income and principal than higher-rated securities, are speculative in nature,
and are commonly known as "high yield" securities or "junk bonds." The unrated
debt securities in which the Fund may invest will generally involve risks
equivalent to those of low-rated debt securities. Although high risk, low-rated
debt securities and comparable unrated debt securities may offer higher yields
than do higher rated securities, they generally involve greater volatility of
price and risk of principal and income. Securities having the lowest rating for
non-subordinated debt instruments assigned by S&P and Moody's (i.e., rated CCC
by S&P or C by Moody's) are considered to have extremely poor prospects of ever
attaining any real investment standing; to be unlikely to have the capacity to
pay interest or repay principal when due in the event of adverse business,
financial or economic conditions; and/or to be in default or not current in the
payment of interest or principal. In addition, the markets in which unrated and
low-rated debt securities are traded are more limited than those in which
higher-rated securities are traded. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of unrated or low-rated debt securities, especially in a thinly traded
market. Analysis of the creditworthiness of issuers of unrated or low-rated debt
securities may be more complex than for issuers of higher-rated securities, and
the ability of the Fund to achieve its investment objective may, to the extent
of investment in unrated or low-rated debt securities, be more dependent upon
creditworthiness analysis than would be the case if the Fund were investing in
higher-rated securities.
Low-rated debt securities and comparable unrated debt securities may be
more susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The prices of low-rated and unrated
debt securities have been found to be less sensitive to interest rate changes
than higher-rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in
low-rated or unrated debt securities prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low-rated or unrated
debt securities defaults, the Fund may incur additional expenses in seeking
recovery.
The Fund may also invest in Structured Investments which involve certain
risks. See "Investment Objective and Policies." In addition to the credit risk
of the issuer of the underlying security and the normal risks of price changes
in response to underlying interest rates, the value of a Structured Investment
may decrease as a result of changes in the price of the underlying instrument.
Further, in the case of certain Structured Investments, the coupon and/or
dividend may be reduced to zero, and any further declines in the value of the
underlying instrument may then reduce the redemption amount payable on maturity.
Finally, the price of Structured Investments may be more volatile than the price
of the underlying instrument. The Fund is permitted to invest in classes of
Structured Investments which are subordinated to the right of payment of another
class, which typically present greater risks than unsubordinated Structured
Investments. Structured Investments are typically sold in private placement
transactions and currently have no active trading market.
Use of Derivative Instruments and Hedging Transactions
The Fund is authorized to engage in certain transactions involving the use
of derivative instruments, including forward foreign currency exchange
contracts, currency futures contracts and options thereon, put and call options
on securities, indices and foreign currencies, interest rate futures and options
thereon, stock index futures contracts and options thereon, and other
equity-linked derivatives, including equity-linked swaps and other contractual
arrangements with brokers and other financial intermediaries in which the value
of the Fund's contractual interest will be linked with or based on the value of
equity securities or equity securities indices.
The Fund may seek to protect the value of some or all of its portfolio
holdings against currency risks by engaging in hedging transactions. The Fund is
authorized to enter into forward currency exchange contracts and currency
futures contracts and options on such futures contracts, as well as to purchase
put or call options on foreign currencies, in U.S. or foreign markets, to the
extent available. In order to hedge against adverse market shifts, the Fund is
permitted to purchase put and call options on stocks, write covered call options
on stocks and enter into stock index futures contracts and related options. The
Fund also is authorized to hedge against interest rate fluctuations affecting
portfolio securities by entering into interest rate futures contracts and
options thereon. For a description of the Fund's hedging strategies, see
"Additional Investment Practices" and Appendix ... to this Prospectus.
Currently, these hedging transactions are unavailable in many of the markets in
which the Fund may invest; therefore, there can be no assurance that instruments
suitable for hedging currency or market or interest rate shifts will be
available at the time when the Fund wishes to use them.
Borrowing
The Fund may borrow for temporary purposes and in connection with
repurchases of its Shares or tender offers or to pay dividends or distributions
required for tax purposes. See "Additional Investment Practices--Borrowing."
Money borrowed will be subject to interest and other costs, which may include
commitment fees and/or the cost of maintaining minimum balances.
ADDITIONAL INVESTMENT PRACTICES
The Fund is authorized to use the various investment strategies described
below, some or all of which may be classified as derivatives, to hedge various
market risks (such as interest rates, currency exchange rates and broad or
specific market movements) and to enhance total return, which may be deemed a
form of speculation. Subject to the requirements of the 1940 Act, the Fund may
hedge up to 100% of its assets when deemed appropriate by the Investment
Manager. The Fund is also authorized to use investment strategies to manage the
effective maturity or duration of debt securities or instruments held by the
Fund, or to enhance the Fund's income or gain. Although these strategies are
regularly used by some investment companies and other institutional investors in
various markets, most of these strategies are currently unavailable in
Russia/Eurasia Region countries and may not become available in the future.
Techniques and instruments may change over time, however, as new instruments and
strategies are developed or regulatory changes occur.
Forward Foreign Currency Contracts and Options on Foreign Currencies
The Fund will normally conduct foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into forward contracts to purchase
or sell foreign currencies. The Fund will generally not enter into forward
contracts with terms of greater than one year. A forward contract is an
obligation to purchase or sell a specific currency for an agreed price at a
future date which is individually negotiated and privately traded by currency
traders and their customers.
The Fund will generally enter into forward contracts only under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock" in
the U.S. dollar price of the security in relation to another currency by
entering into a forward contract to buy the amount of foreign currency needed to
settle the transaction. Second, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The second investment
practice is generally referred to as "cross-hedging." Cross-hedging involving
the use of currencies of Russia/Eurasia Region countries may involve special
risks. Many of these currencies may have a limited trading history and/or are
particularly volatile, making any anticipation of movement difficult and
increasing the risk of loss. See "Risk Factors and Special
Consideration--Foreign Currency and Exchange Rates." The Fund's forward
transactions may call for the delivery of one foreign currency in exchange for
another foreign currency and may at times not involve currencies in which its
portfolio securities are then denominated. The Fund has no specific limitation
on the percentage of assets it may commit to forward contracts, subject to its
stated investment objective and policies, except that the Fund will not enter
into a forward contract if the amount of assets set aside to cover the contract
would impede portfolio management. Although forward contracts will be used
primarily to protect the Fund from adverse currency movements, they also involve
the risk of loss in the event that anticipated currency movements are not
accurately predicted.
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the U.S. dollar value of
foreign currency-denominated portfolio securities and against increases in the
U.S. dollar cost of such securities to be acquired. As in the case of other
kinds of options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs. The Fund may purchase or write options that are
traded on U.S. and foreign exchanges or over-the-counter from banks, securities
dealers, or other financial institutions.
Futures Contracts
For hedging purposes only, the Fund may buy and sell financial futures
contracts, index futures contracts, foreign currency futures contracts and
options on any of the foregoing. A financial futures contract is an agreement
between two parties to buy or sell a specified debt security at a set price on a
future date. An index futures contract is an agreement to take or make delivery
of an amount of cash based on the difference between the value of the index at
the beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when the Fund enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act. See Appendix ___ to this Prospectus.
Options on Securities or Indices
The Fund may write (i.e., sell) covered put and call options and purchase
put and call options on securities or securities indices that are traded on
United States and foreign exchanges or in the over-the-counter markets. An
option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option. The Fund may write a call or put option only if the option is
"covered." This means that as long as the Fund is obligated as the writer of a
call option, it will own the underlying securities subject to the call, or hold
a call at the same exercise price, for the same exercise period, and on the same
securities as the written call. A put is covered if the Fund maintains liquid
assets with a value equal to the exercise price in a segregated account, or
holds a put on the same underlying securities at an equal or greater exercise
price.
Loans of Portfolio Securities
The Fund may lend to broker-dealers portfolio securities with an aggregate
market value of up to one-third of its total assets. The loans must be secured
by collateral (consisting of any combination of cash, U.S. Government securities
and irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to 102% of the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to retain any voting rights with respect to the securities.
When-Issued and Delayed Delivery Securities
The Fund may purchase equity and debt securities on a when-issued or
delayed delivery basis. Securities purchased on a when-issued or delayed
delivery basis are purchased for delivery beyond the normal settlement date at a
stated price and yield. No income accrues to the purchaser of a security on a
when-issued or delayed delivery basis prior to delivery. The securities are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. The Fund will only make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date to attempt to "lock" in gains or avoid losses, or if otherwise
deemed advisable by the Investment Manager.
Purchasing a security on a when-issued or delayed delivery basis can
involve a risk that the market price at the time of delivery may be lower than
the agreed-upon purchase price, and therefore there could be an unrealized loss
at the time of delivery. In addition, while an issuer of when-issued securities
has made a commitment to issue the securities as of a specified future date,
there can be no assurance that the securities will be issued and that the trade
will settle. In the event settlement does not occur, any appreciation in the
value of the when-issued security would be lost, including the amount of any
appreciation "locked" in by the sale of an appreciated security prior to
settlement. The Fund will establish a segregated account in which it will
maintain liquid assets in an amount at least equal in value to the Fund's net
commitments to purchase securities on a when-issued or delayed delivery basis.
If the value of these assets declines, the Fund will place additional liquid
assets in the account on a daily basis so that the value of the assets in the
account is equal to the amount of the commitments.
Investment Companies
The Fund may invest in other investment companies which invest principally
in securities in which the Fund is authorized to invest. These other investment
companies may include investment companies, some of which may be organized
outside of the United States, whose shares are only available to a limited
number of United States investors. Under the 1940 Act, in the absence of an
exemptive order from the Commission, the Fund may invest a maximum of 10% of its
total assets in the securities of other investment companies and not more than
5% of the Fund's total assets may be invested in the securities of any one
investment company, provided the investment does not represent more than 3% of
the voting stock of the acquired investment company at the time the shares are
purchased. To the extent the Fund invests in other investment companies, the
Fund's shareholders will incur certain duplicative fees and expenses, including
investment advisory fees. The Fund's investment in certain investment companies
will result in special U.S. federal income tax consequences described below
under "Taxation."
Borrowing
The Fund will not employ leverage to purchase portfolio securities.
However, the Fund may borrow money for temporary or emergency purposes
(including, for example, clearance of transactions) in an amount not exceeding
5% of the value of the Fund's total assets (including the amount borrowed), and
may borrow money in connection with repurchases of its Shares or tender offers
(see "Description of Shares") or to pay dividends or distributions required for
tax purposes in an amount up to one-third of the value of the Fund's total
assets (including the amount borrowed). The Fund will not purchase portfolio
securities during any period when borrowings exceed 5% of its total assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund that may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (as defined in "Investment Objective and
Policies"). If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
value or relative size of the position will not be considered a violation of the
restriction. Also, if the Fund receives from an issuer of securities held by the
Fund subscription rights to purchase securities of that issuer, and if the Fund
exercises such subscription rights at a time when the Fund's portfolio holdings
of securities of that issuer would otherwise exceed the limits set forth in
paragraph 1 below, it will not constitute a violation if, prior to receipt of
securities upon exercise of the rights, and after announcement of the rights,
the Fund has sold at least as many securities of the same class and value as it
would receive on exercise of the rights.
As a matter of fundamental policy:
(1) the Fund may not invest 25% or more of the total value of its assets in
a particular industry. For purposes of this restriction, a foreign government
(but not the United States government) is deemed to be an "industry," and
supranational organizations, in the aggregate, are deemed to be an "industry";
(2) the Fund may not issue senior securities or borrow money, except in
conformity with the limits set forth in the 1940 Act; notwithstanding the
foregoing, short-term credits necessary for settlement of securities
transactions are not considered borrowings or senior securities;
(3) the Fund may not purchase or sell commodities or commodity contracts
except for futures contracts, index futures contracts, and foreign currency
futures contracts and options thereon, in accordance with the applicable
restrictions under the 1940 Act;
(4) the Fund may not engage in the business of underwriting securities
issued by other persons, except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter; or
(5) the Fund may not purchase real estate, except that the Fund may (i)
purchase securities secured by real estate or interests therein or securities
issued by companies that invest in real estate or interests therein, (ii) make
or purchase real estate mortgage loans, and (iii) purchase interests in real
estate limited partnerships.
(6) the Fund may purchase and hold debt instruments (including bonds,
debentures or other obligations and certificates of deposit, bankers'
acceptances and fixed deposits). In addition, the Fund may make loans, which may
take the form of the purchase of debt obligations that are not publicly
distributed. The Fund may also enter into repurchase agreements with respect to
portfolio securities.
MANAGEMENT OF THE FUND
Investment Manager
The Fund's Investment Manager is Templeton Asset Management Ltd. The
Investment Manager is a Singapore corporation that is registered under the U.S.
Investment Advisers Act of 1940, as amended, with offices at 20 Raffles Place,
Singapore. An affiliate of the Investment Manager has established a
representative office in Moscow located at Leninsky Prospect 113/1, E-516 Park
Place, Moscow, Russia, which currently has a staff of securities analysts, and a
representative office in Poland, located at ____________________, Poland, which
currently has a staff of ______ securities analysts. The Investment Manager
expects these offices to provide it with a valuable resource for research and
securities analysis with regard to securities of Russia/Eurasia Companies. Dr.
J. Mark Mobius, Managing Director of the Investment Manager, will be the Fund's
principal portfolio manager of the team of [_____] investment professionals that
will manage the Fund in Singapore. The Investment Manager also serves as
investment manager to Templeton Russia Fund, Inc. and Templeton Vietnam
Opportunities Fund, Inc., two closed-end management investment companies
registered under the 1940 Act. For information on similar funds managed by the
Investment Manager, see Appendix ___. In addition, an affiliate of the
Investment Manager serves as investment manager to seven other U.S. investment
companies (or series thereof) and [ ] non-U.S. public and private funds that
invest primarily in equity securities of issuers in emerging markets, with
assets totaling $____________ billion as of __________, 1997. The seven other
U.S. investment companies are registered under the 1940 Act and invest primarily
in equity securities of issuers in emerging markets: Templeton Emerging Markets
Fund, Inc., Templeton China World Fund, Inc., Templeton Emerging Markets
Appreciation Fund, Inc., and Templeton Dragon Fund, Inc., closed-end management
investment companies, and Templeton Developing Markets Trust, the Emerging
Markets Series of Templeton Institutional Funds, Inc., and the Templeton
Developing Markets Fund series of Templeton Variable Products Series Fund,
open-end management investment companies (or series thereof).
The Investment Manager is wholly owned by Franklin Resources, Inc.
("Resources"), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, the Investment Manager
and its affiliates manage over $214 billion in assets. The Templeton
organization has been investing globally since 1940. The Investment Manager and
its affiliates have offices in Argentina, Australia, Bahamas, Canada, France,
Germany, Hong Kong, India, Italy, Japan, Korea, Luxembourg, Poland, Russia,
Singapore, South Africa, Taiwan, the United Kingdom, the United States, and
Vietnam.
Prior to joining the Templeton organization in 1987, Dr. Mobius was
president of the International Investment Trust Company Limited (investment
manager of Taiwan R.O.C. Fund) (1986-1987) and a director of Vickers da Costa,
Hong Kong (an international securities firm) (1983-1986). Dr. Mobius began
working in Vickers da Costa's Hong Kong office in 1980 and moved to Taiwan in
1983 to open the firm's office there and to direct operations in India,
Indonesia, Thailand, the Philippines and Korea. Before joining Vickers da Costa,
Dr. Mobius operated his own consulting firm in Hong Kong from 1970 until 1980.
Prior to 1970, Dr. Mobius was a research scientist for Monsanto Overseas
Enterprises Company in Hong Kong and the American Institute for Research in
Korea and Thailand. Dr. Mobius holds a BA in fine arts from Boston University,
an MA in mass communications from Boston University, and a Ph.D. in economics
from the Massachusetts Institute of Technology.
Subject to applicable regulations, Shares of the Fund may be purchased by
certain discretionary accounts of the Investment Manager and its affiliates.
The Investment Management Agreement
Under the Investment Management Agreement between the Fund and the
Investment Manager (the "Management Agreement"), the Investment Manager will
manage the Fund's assets in accordance with the Fund's stated investment
objective, policies and restrictions and subject to the supervision of the
Fund's Board of Trustees and will make investment decisions on behalf of the
Fund, including the selection of, and placement of orders with, brokers, dealers
and banks to execute portfolio transactions on behalf of the Fund. The
Investment Manager is not required to furnish any personnel, overhead items or
facilities for the Fund.
For its services, the Investment Manager will receive a monthly fee,
payable in arrears in U.S. dollars, at an annual rate of 1.35% of the Fund's
average weekly net assets. This fee is higher than those paid by most other U.S.
investment companies, because of the additional time and expense required of the
Investment Manager in pursuing the Fund's policy of investing in Russia/Eurasia
Company securities. It is expected, however, that the Fund's investment
management fee will be comparable to those of other U.S. closed-end investment
companies of comparable size that invest primarily in securities of emerging
market issuers.
The Fund will pay or cause to be paid all of it expenses, including: fees
paid to the Investment Manager and the Administrator; organization expenses
(which include out-of-pocket expenses, but not overhead or employee costs, of
the Investment Manager); legal expenses; auditing and accounting expenses; taxes
and governmental fees; stock exchange listing fees; dues and expenses incurred
in connection with membership in investment company organizations; fees and
expenses of the Fund's custodian, subcustodians, transfer agent and registrar;
expenses of preparing share certificates and other expenses in connection with
the issuance, offering or underwriting of securities issued by the Fund;
expenses related to shareholder servicing; expenses relating to investor and
public relations; expenses of registering or qualifying securities of the Fund
for sale; freight, insurance and other charges in connection with the shipment
of the Fund's portfolio securities; brokerage commissions or other costs,
including legal fees, associated with acquiring or disposing of portfolio
securities of the Fund; expenses of preparing and distributing reports, notices
and dividends of shareholders; costs of stationery; and litigation expenses, and
costs of shareholders' and other meetings.
The Management Agreement provides that the Investment Manager will select
brokers and dealers for execution of the Fund's portfolio transactions
consistent with the Fund's brokerage policies (see "Portfolio Transactions and
Brokerage"). Although the services provided by broker-dealers in accordance with
the brokerage policies incidentally may help reduce the expenses of or otherwise
benefit the Investment Manager and other investment advisory clients of the
Investment Manager and of its affiliates, as well as the Fund, the value of
those services is indeterminable and the Investment Manager's fee is not reduced
by any offset arrangement by reason thereof.
Under the Management Agreement, the Investment Manager is permitted to
provide investment advisory services to other clients, including clients that
may invest in the same types of securities as the Fund and, in providing those
services, the Investment Manager may use information furnished by others.
Conversely, information furnished by others to the Investment Manager in
providing services to other clients may be useful to the Investment Manager in
providing services to the Fund. When the Investment Manager determines to buy or
sell the same security for the Fund that the Investment Manager or one or more
of its affiliates has selected for one or more of its other clients or for
clients of its affiliates, orders are placed for execution by methods determined
by the Investment Manager, with approval by the Fund's Board of Trustees, to be
impartial and fair.
The Management Agreement provides that the Investment Manager will have no
liability to the Fund or any shareholder of the Fund for any error of judgment,
mistake of law, or any loss arising out of any investment or other act or
omission in the performance by the Investment Manager of its duties under the
Management Agreement or for any loss or damage resulting from the imposition by
any government of exchange control restrictions that might affect the liquidity
of the Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any war or political act of any foreign government to
which the assets might be exposed, except for any liability, loss or damage
resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part or reckless disregard of its duties under the
Management Agreement.
The Management Agreement by its terms continues in effect for a period of
two years from its initial date hereof. If not sooner terminated, it will
continue in effect for successive periods of twelve months thereafter as long as
each continuance is specifically approved annually by a vote of a majority of
the members of the Board of Trustees who are not interested persons of the
Investment Manager or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and by a majority vote either of the Fund's
Board of Trustees or of the Fund's outstanding voting securities. The Management
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act), and may be terminated by either party at any time
without payment of any penalty on 60 days' written notice, provided that
termination by the Fund is approved by a majority of the Trustees of the Fund in
office at the time or by vote of a majority of the Fund's outstanding voting
securities.
The Investment Manager may retain the services of consultants and, with the
approval of the shareholders and the Board of Trustees of the Fund, including a
majority of the Fund's "non-interested" Trustees, sub-investment advisers at no
additional cost to the Fund when the Investment Manager determines it to be
appropriate.
Administrator
Franklin Templeton Services, Inc. (the "Administrator"), 777 Mariners
Island Blvd., San Mateo, California 94403-7777, will enter into an
Administration Agreement with the Fund, under which the Administrator will
perform certain administrative functions for the Fund, including: (i) providing
office space, telephone, office equipment and supplies for the Fund: (ii) paying
compensation of the Fund's officers; (iii) authorizing expenditures and
approving bills for payment on behalf of the Fund; (iv) supervising preparation
of periodic reports to shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to correspondence and other
communications with individual shareholders; (v) pricing the Fund's portfolio
securities and supervising publication of the net asset value of the Fund's
Shares, earnings reports and other financial data; (vi) monitoring relationships
with organizations serving the Fund, including the custodian, transfer agent,
sub-administrator and printers; (vii) providing trading desk facilities to the
Fund; (viii) supervising compliance by the Fund with recordkeeping requirements
under the 1940 Act and regulations thereunder, maintaining books and records for
the Fund (other than those maintained by the custodian and transfer agent), and
preparing and filing Fund tax reports other than the Fund's income tax returns;
and (ix) providing executive, clerical and secretarial help needed to carry out
these responsibilities.
For its services, the Administrator will receive a monthly fee, payable in
arrears in U.S. dollars, at an annual rate of 0.15% of the Fund's average weekly
net assets. The Administrator is relieved of liability to the Fund for any act
or omission in the course of its performance under the Administration Agreement,
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties. The Administration Agreement may be terminated by
either party at any time on 60 days' written notice without payment of any
penalty, provided that termination by the Fund is approved by a majority of the
Trustees of the Fund in office at the time or by vote of a majority of the
outstanding voting securities of the Fund, and will terminate automatically in
the event of its assignment. The Administrator may delegate any or all
administrative functions to a sub-administrator.
TRUSTEES AND OFFICERS
The names and addresses of the Trustees and officers of the Fund are set
forth below, together with their positions with the Fund and their principal
occupations during the past five years, and, in the case of the Trustees, their
positions and certain other organizations and publicly held companies.
Name, Address and Principal Occupation During
Position with the Fund Past Five Years
[TO BE PROVIDED]
*___________________ are "interested persons" of the Fund under the 1940 Act,
which limits the percentage of interested persons that can comprise a fund's
board. [DISCLOSE AFFILIATION]. The remaining Board members of the Fund are not
interested persons (the "independent members of the Board").
The table above shows the officers and Board members who are affiliated with the
Investment Manager. Nonaffiliated members of the Board and _______are currently
paid an annual retainer and/or fees for attendance at Board and committee
meetings, the amount of which is based on the level of assets in the Fund.
Accordingly, the Fund pays the nonaffiliated Board members and _________ an
annual retainer of $1,000, a fee of $100 per Board meeting, and its portion of a
flat fee of $2,000 for each audit committee meeting and/or nominating and
compensation committee meeting attended. As shown above, the nonaffiliated Board
members also serve as directors or trustees of other investment companies in the
Franklin Templeton Group of Funds. They may receive fees from these funds for
their services. The following table provides the estimated compensation of
Trustees by the Fund for the fiscal year ending March 31, 1998 and total fees
paid to nonaffiliated Board members and ___________ by other funds in the
Franklin Templeton Group of Funds for the calendar year ended December 31, 1996.
<TABLE>
<S> <C> <C> <C>
Total Fees Received from Number of Boards in the
Estimated Fees to be the Franklin Templeton Franklin Templeton Group
Received from the Fund1 Group of Funds2 of Funds on which Each
Serves3
Name
------------- -------------------------- --------------------------- --------------------------
[TO BE PROVIDED]
<FN>
1. Estimated for the fiscal year ending March 31, 1998.
2. For the calendar year ended December 31, 1996.
3. The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group
of Funds currently includes ______ registered investment companies, with
approximately ________ U.S. based funds or series.
</FN>
</TABLE>
Nonaffiliated members of the Board and ________ are reimbursed for expenses
incurred in connection with attending board meetings, paid pro rata by each fund
in the Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation, including
pension or retirement benefits, directly or indirectly from the Fund or other
funds in the Franklin Templeton Group of Funds. Certain officers or Board
members who are shareholders of Resources may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Manager is responsible for selecting members of securities
exchanges, brokers and dealers (such members, brokers and dealers being
hereinafter referred to as "brokers") for the execution of the Fund's portfolio
transactions and, when applicable, the negotiation of commissions in connection
therewith.
Purchase and sale orders are usually placed with brokers who are selected
by the Investment Manager as being able to achieve "best execution" of such
orders. "Best execution" means prompt and reliable execution at the most
favorable securities price, taking into account a number of other considerations
as hereinafter set forth. The determination of what may constitute best
execution and price in the execution of a securities transaction by a broker
involves considerations, including, without limitation, the overall direct net
economic result of the Fund (involving both price paid or received and any
commissions and other costs paid), the efficiency with which the transaction is
effected, the ability to effect the transaction at all where a large block is
involved, the availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength and stability
of the broker. Such considerations are judgmental and are weighed by the
Investment Manager in determining the overall reasonableness of brokerage
commissions.
The Investment Manager is authorized to allocate brokerage business to
brokers who have provided brokerage and research services, including brokerage
and research services regarding direct investments, as such services are defined
in Section 28(e) at the U.S. Securities Exchange Act of 1934, as amended (the
"1934 Act"), for the Fund and/or other accounts, if any, for which the
Investment Manager exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act). Commission rates in foreign countries, which are
sometimes fixed rather than negotiable as in the United States, are likely to be
higher than rates in the United States. With respect to transactions as to which
fixed minimum commission rates are not applicable, the Investment Manager is
authorized to cause the Fund to pay a commission for effecting a securities
transaction in excess of the amount another broker would have charged for
effecting the transaction, if the Investment Manager in making the selection in
question determines in good faith that the amount of commission is reasonable in
relation to the value of the brokerage and research services provided by the
broker, viewed in terms of either that particular transaction or of the
Investment Manager's overall responsibilities with respect to the Fund and the
other accounts, if any, as to which it exercises investment discretion. In
reaching a determination, the Investment Manager is not required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of the
services. In demonstrating that determinations were made in good faith, the
Investment Manager must be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance to the Investment
Manager in the performance of its investment decision-making responsibilities;
and that the commissions paid were within a reasonable range. The determination
that commissions were within a reasonable range will be based on any available
information as to the level of commissions known to be charged by other brokers
on comparable transactions, but there will be taken into account (i) the Fund's
policy that obtaining a low commission is deemed secondary to obtaining a
favorable securities price, because it is recognized that usually it is more
beneficial to the Fund to obtain a favorable price than to pay the lowest
commission, and (ii) the quality, comprehensiveness and frequency of research
studies which are provided for the Investment Manager and are useful to the
Investment Manager in performing advisory services under the Management
Agreement. Research services provided by brokers to the Investment Manager are
considered to be in addition to, and not in lieu of, services required to be
performed by the Investment Manager under such Agreement.
NET ASSET VALUE
Net asset value will be calculated on a daily basis and published on a
weekly basis. To obtain the Fund's closing net asset value as of the previous
day, call 1-800-DIAL-BEN (1-800-342-5236) after 10:00 am Eastern time on any
business day. Net asset value will be calculated by dividing the value of the
Fund's securities plus any cash and other assets (including accrued interest and
dividends receivable) less all liabilities (including accrued expenses) by the
number of shares outstanding, the result being adjusted to the nearest whole
cent. A security listed or traded on a recognized stock exchange or NASDAQ is
valued at its last sale price on the principal exchange on which the security is
traded unless management believes, in the case of a particular security, that
the over-the-counter market represents the principal market for such security.
The value of a foreign security is determined in its national currency as of the
close of trading on the foreign exchange on which it is traded, or as of 4:00
p.m., New York time, if that is earlier, and that value is then converted into
its U.S. dollar equivalent at the foreign exchange rate in effect at noon, New
York time, on the day the value of the foreign security is determined. If no
sale is reported at that time, the mean between the last current bid and asked
price will be used. Occasionally, events which affect the value of securities
and exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange, and will therefore not be reflected in
the computation of the Fund's net asset value. If events materially affecting
the value of securities occur during that period, then the securities will be
valued at fair values as determined by the management pursuant to procedures
approved in good faith by the Board of Trustees. All other securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last current bid and asked price. Securities for which market
quotations are not readily available and other assets are valued at fair values
as determined by the management pursuant to procedures approved in good faith by
the Board of Trustees. The Fund's direct investments will initially be valued at
cost. Subsequently, the Board will review, at least quarterly, the valuation of
each investment in the light of reports prepared by the Administrator. If the
Board determines that there has been a material change of a long-term nature in
the value of the investment and that the Investment Manager has sufficient
reliable information available to it to revalue the investment, the investment
will be revalued. The Investment Manager will monitor corporate events,
including subsequent financings by the issuer, as well as any economic and
market factors directly affecting the issuer, in assessing the valuation of
direct investments. Also, pursuant to the requirements of the 1940 Act, the
Fund's assets will be subject to an independent audit on an annual basis.
However, given the high number of illiquid investments, including direct
investments, which are likely to be made by the Fund, valuation of the Fund's
portfolio will involve an element of judgment. See "Risk Factors and Special
Considerations--Illiquid Securities" and "--Direct Investments."
Shares of closed-end investment companies frequently trade at a discount
from the net asset value, but in certain instances have traded above net asset
value. The Fund cannot predict whether its Shares will trade above or below net
asset value.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Fund intends to distribute to the shareholders, at least annually,
substantially all of its net investment income and net realized capital gains.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose Fund Shares are registered in the shareholder's own name will
have all distributions reinvested automatically in additional Shares of the Fund
by Mellon Securities Trust Company (the "Plan Agent") as agent under the Plan
unless the shareholder elects to have distributions in cash. Shareholders whose
Shares are held by a broker or nominee that does not provide a dividend
reinvestment program may be required to have their Shares registered in their
own name to participate in the Plan. Investors who own Shares of the Fund
registered in street name should contact their broker or nominee for details.
All distributions to investors who do not participate in the Plan will be paid
by check mailed directly to the record holder (or, if the Shares are held in
street or other nominee name, then to the nominee) by Mellon Securities Trust
Company as dividend paying agent. The terms and conditions of the Plan are
contained in Appendix .
The Plan Agent serves as agent for the shareholders in administering the
Plan. When the Fund declares a dividend or capital gains distribution,
participants in the Plan will receive Shares of the Fund, as outlined below,
with the number of Shares determined as of the time of purchase (generally, the
payable date of the dividend ) or at another date determined by the Board of
Trustees. Whenever market price is equal to or exceeds net asset value at the
time Shares are valued for the purpose of determining the number of Shares to be
received, participants will be issued Shares of the Fund at a price equal to net
asset value but not less than 95% of the then-current market price of the Fund's
Shares. The Fund will not issue Shares under the Plan at a price below net asset
value. If net asset value determined at the time of purchase exceeds the market
price of Fund Shares at that time, or if the Fund should declare a dividend or
other distribution payable only in cash (i.e., if the Board of Trustees should
preclude reinvestment at net asset value), the Plan Agent will, as agent for the
participants, buy Fund Shares in the open market, on the New York Stock Exchange
or elsewhere, for the participants' accounts. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value of a Fund
Share, the average per Share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's Shares, resulting in the acquisition of fewer
Shares than if the dividend or distribution had been paid in Shares issued by
the Fund valued at net asset value.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in noncertificated form in
the name of the participant, and each shareholder's proxy will include those
Shares purchased pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. A $5.00 fee will be
imposed for withdrawal from participation in the Plan. There will be no
brokerage charges with respect to Shares issued directly by the Fund as a result
of dividends or capital gains distributions payable either in Shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any U.S. income tax that may be payable on such dividends or
distributions.
Experience under the Plan may indicate that changes thereto may be
desirable. Accordingly, the Fund reserves the right to amend or terminate the
Plan as applied to any dividend or distribution paid (i) subsequent to notice of
the change sent to all shareholders of the Fund at least 90 days before the
record date for such dividend or distribution or (ii) otherwise in accordance
with the terms of the Plan. The Plan also may be amended or terminated by the
Plan Agent by at least 90 days' prior written notice to all shareholders of the
Fund. All correspondence concerning the Plan should be directed to the Plan
Agent at Mellon Securities Trust Company, Dividend Reinvestment Services,
_________________________________.
TAXATION
U.S. Federal Income Taxes
The Fund intends to qualify as a regulated investment company under the
Code. To so qualify, the Fund must, with respect to each taxable year, among
other things: (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, and other income
(including gains from options, futures contracts, and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities, or
currencies; and (b) diversify its holdings so that, at the end of each quarter
of the taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash, cash items, U.S. Government securities, securities of other
regulated investment companies, and other securities, with such other securities
limited in respect of any one issuer to an amount not greater in value than 5%
of the Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund's
total assets is invested in the securities (other than U.S. Government
securities or securities of other regulated investment companies) of any one
issuer or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related businesses.
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income that it
distributes to its shareholders, provided that at least 90% of its investment
company taxable income for the taxable year is distributed; however, even if the
Fund qualifies as a regulated investment company, it will be subject to tax on
the income and gains which it does not distribute in a timely manner. See also
the discussion of passive foreign investment companies below. Investment company
taxable income includes dividends, interest, and net short-term capital gains in
excess of net long-term capital losses, but does not include net long-term
capital gains in excess of net short-term capital losses. The Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income. The Fund may borrow money or liquidate assets to make
such distributions.
If the Fund fails to satisfy the 90% distribution requirement or otherwise
fails to qualify as a regulated investment company in any taxable year, it will
be subject to tax in such year on all of its taxable income, regardless of
whether the Fund makes any distributions to its shareholders. In addition, in
that case, all of the Fund's distributions to its shareholders will be
characterized as ordinary income (to the extent of the Fund's current and
accumulated earnings and profits) and shareholders will not be entitled to treat
foreign income taxes paid by the Fund as having been paid by them in computing
their own federal income tax liability. In contrast, as explained below, if the
Fund qualifies as a regulated investment company, a portion of its distributions
may be characterized as long-term capital gain in the hands of shareholders, and
if the Fund meets certain requirements and so elects, shareholders may be
treated as having paid the foreign income taxes paid by the Fund.
Dividend distributions of investment company taxable income are taxable to
a U.S. shareholder as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, whether paid in cash or in Shares. Dividends
paid by the Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received from U.S. corporations, may qualify for the
dividends received deduction. However, the revised alternative minimum tax
applicable to corporations may reduce the value of the dividends received
deduction.
As a regulated investment company, the Fund will not be subject to U.S.
federal income tax on its net capital gain that it designates as a "capital gain
dividend" and distributes in a timely manner to its shareholders. Capital gain
dividends are taxable to shareholders as long-term capital gains whether paid in
cash or in Shares and regardless of length of time the shareholder has held the
Shares. Such distributions are not eligible for the dividends received
deduction. No later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
ordinary income dividends and capital gain dividends.
If the Fund retains all or a portion of its net capital gain, it will be
subject to a tax at current rates of up to 35% of the amount retained. The Board
of Trustees of the Fund will determine at least once a year whether to
distribute any net capital gain. The Fund expects to designate any amounts
retained as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. federal income taxation on long-term capital gains, (a) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their respective shares of the undistributed amount, and (b) will
be entitled to credit against their U.S. federal income tax liabilities their
respective shares of the tax paid by the Fund on the undistributed amount and to
claim refunds to the extent that their credits exceed their liabilities. For
U.S. federal income tax purposes, if the Fund designates amounts as
undistributed capital gains, the basis of shares owned by a shareholder of the
Fund will be increased by an amount equal to 65% of the amount of undistributed
capital gains included in the shareholder's income. Shareholders will be
notified annually as to the U.S. federal income tax status of their dividends
and distributions.
Any dividend declared by the Fund in October, November or December of any
year and payable to shareholders of record on a specified date in such a month
shall be deemed to have been paid by the Fund and received by each shareholder
on December 31, provided that such dividend is actually paid by the Fund during
January of the following year.
If the value of Shares is reduced below a shareholder's cost as a result of
a distribution by the Fund, the distribution will be taxable even though it, in
effect, represents a return of invested capital. Investors considering buying
shares just prior to a dividend or capital gain distribution payment date should
be aware that, although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those who purchase just prior to the
record date for a distribution may receive a distribution which will be taxable
to them.
If the Fund is the holder of record of corporate stock on the record date
for any dividends payable with respect to such stock, such dividends must be
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends), or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Certain types of debt securities that the Fund may acquire may be
considered as having original issue discount or market discount. Original issue
discount is included in the Fund's taxable income (which generally must be
distributed to shareholders) over the period during which the Fund holds the
debt security, even though no periodic payments representing the original issue
discount are received by the Fund. Generally, unless the Fund makes certain
elections, market discount is not included in the Fund's taxable income before
actual payments on a market discount debt security are received. Original issue
discount and market discount are characterized as ordinary income.
Under the Code, the Fund may be subject to a 4% excise tax on a portion of
its undistributed income. To avoid the tax, the Fund must distribute or be
deemed under Code rules to have distributed annually at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year and at least 98% of its capital gain net income for the 12-month
period ending, as a general rule, on October 31 of the calendar year. In
addition, the minimum amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any under distribution or
over distribution, as the case may be, in the previous year. For a distribution
to qualify under the foregoing test, the distribution generally must be declared
and paid during the year. However, as noted above, a special provision applies
to certain distributions paid during January.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), require the Fund to
recognize gain from constructive sales of certain appreciated financial
positions or otherwise accelerate recognition of income to the Fund, defer Fund
losses, and affect the determination of whether capital gains and losses are
characterized as long-term or short-term capital gains or losses. These rules
could therefore, in turn, affect the character, amount, and timing of
distributions to shareholders. These provisions also may require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), which may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy its distribution requirements for relief from income and excise taxes.
The Fund will monitor its transactions and may make such tax elections as Fund
management deems appropriate with respect to foreign currency, options, futures
contracts, forward contracts, or hedged investments.
Effect of Foreign Currencies; "Section 988" Gains or Losses. The Fund will
maintain accounts and calculate income by reference to the U.S. dollar for U.S.
federal income tax purposes. Some of the Fund's investments will be maintained
and income therefrom calculated by reference to certain foreign currencies
(including Russian Rubles) and such calculations will not necessarily correspond
to the Fund's distributable income and capital gains for U.S. federal income tax
purposes as a result of fluctuations in currency exchange rates. Furthermore,
exchange control regulations may restrict the ability of the Fund to repatriate
investment income or the proceeds of sales of securities. These restrictions and
limitations may limit the Fund's ability to make sufficient distributions to
satisfy the 90% distribution requirement for qualification as a regulated
investment company. Even if the Fund so qualified, these restrictions could
inhibit its ability to distribute all of its income in order to be fully
relieved of tax liability.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues income or other receivables (including
dividends) or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities
denominated in a foreign currency and certain forward contracts, futures, and
options, gains or losses attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the security or other
instrument and the date of disposition also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "Section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders or, in some cases, as
capital gain, rather than as an ordinary dividend.
Passive Foreign Investment Companies. The Fund may invest in shares of
foreign corporations which may be classified under the Code as passive foreign
investment 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 a so-called "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 shareholders. 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 were received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election would
involve marking to market the Fund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and any loss
from an actual disposition of Fund shares would be deductible as ordinary losses
to the extent of any net mark-to-market gains included in income in prior years.
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 Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
as compared to a fund that did not invest in PFIC shares.
Foreign Taxes. The Fund may be subject to certain taxes imposed by the
countries in which it invests or operates. See the discussion below for a
summary of certain Russian taxes. If the Fund qualifies as a regulated
investment company and if more than 50% of the 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, for U.S. federal income tax purposes, to treat
any foreign taxes paid by the Fund that qualify as income or similar taxes under
United States income tax principles as having been paid by the Fund's
Shareholders. For any year for which the Fund makes such an election, each
Shareholder will be required to include in its gross income an amount equal to
its allocable share of such taxes paid by the Fund and the Shareholders will be
entitled, subject to certain limitations, to credit their portions of these
amounts against their U.S. federal income tax liability, if any, or to deduction
of their portions from their U.S. taxable income, if any. No deduction for
foreign taxes may be claimed by individuals who do not itemize deductions. In
any year in which it elects to "pass through" foreign taxes to Shareholders, the
Fund will notify Shareholders within 60 days after the close of the Fund's
taxable year of the amount of such taxes and the sources of its income.
Generally, except in the case of certain electing individual taxpayers who
have limited creditable foreign taxes and no foreign source income other than
passive investment type income, a credit for foreign taxes paid or accrued is
subject to the limitation that it may not exceed the shareholder's U.S. tax
attributable to his or her total foreign source taxable income. For this
purpose, the source of the Fund's income flows through to its Shareholders. With
respect to the Fund, gains from the sale of securities may have to be treated as
derived from U.S. sources and certain currency fluctuation gains, including
Section 988 gains, may have to be treated as derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income, including foreign source passive income received from the Fund.
Shareholders may be unable to claim a credit for the full amount of their
proportionate share of the foreign taxes paid by the Fund. Furthermore, the
foreign tax credit is eliminated with respect to foreign taxes withheld on
dividends if the dividend-paying shares or the Fund's shares are held by the
Fund or the Shareholder, as the case may be, for less than 16 days (46 days in
the case of preferred shares) during the 30-day period (90-day period for
preferred shares) beginning 15 days (45 days for preferred shares) before the
shares become ex-dividend. The foreign tax credit can be applied to offset no
more than 90% of the alternative minimum tax imposed on corporations and
individuals.
The foregoing is only a general description of the foreign tax credit.
Because application of the credit depends on the particular circumstances of
each shareholder, shareholders are advised to consult their own tax advisers.
Shareholder Dispositions of Fund Shares. Upon the sale or exchange of
Shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and its basis in the Shares. Such gain or loss will be treated
as capital gain or loss if the Shares are capital assets in the shareholder's
hands, and will be long-term if the shareholder's holding period for the Shares
is more than 18 months, mid-term if the holding period is more than one year but
not more than 18 months, and otherwise will be short-term. Any loss realized on
a sale or exchange will be disallowed to the extent that the Shares disposed of
are replaced (including replacement through the reinvesting of dividends and
capital gain distributions in the Fund) within a period of 61 days beginning 30
days before and ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of Shares held
by the shareholder for six months or less will be treated for federal income tax
purposes as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares.
An amount received by a shareholder from the Fund in exchange for Shares
(pursuant to a repurchase of Shares or otherwise) generally will be treated as a
payment in exchange for the Shares tendered, which may result in taxable gain or
loss as described above. However, if the amount received by a shareholder
exceeds the fair market value of the Shares tendered, or if a shareholder does
not tender all of the Shares owned or deemed under the Code to be owned by the
shareholder, all or a portion of the amount received may be treated as a
dividend taxable as ordinary income or as a return of capital. In addition, if a
tender offer is made, any shareholders who do not tender their Shares could be
deemed, under certain circumstances, to have received a taxable distribution of
Shares as a result of their increased proportionate interest in the Fund.
Backup Withholding. The Fund may be required to withhold 31% of reportable
payments (which may include dividends, capital gain distributions, and
redemption proceeds, if any) to certain shareholders. A shareholder generally
may avoid becoming subject to this requirement by filing an appropriate form
certifying under penalties of perjury that such shareholder's taxpayer
identification number is correct and that he is not subject to backup
withholding, or is exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liability. Additional tax withholding
requirements that apply with respect to foreign shareholders are discussed
below.
Foreign Shareholders. U.S. taxation of a shareholder who, as to the United
States, is a non-resident alien individual, a foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder"), depends on whether
the income from the Fund is "effectively connected" with a U.S. trade or
business carried on by such shareholder. 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
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld
from such distributions. Furthermore, foreign shareholders 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
shareholders, but will not be able to claim a credit or deduction for the
foreign taxes treated as having been paid by them.
Distributions of capital gain dividends to a non-resident alien who is
present in the United States for fewer than one hundred eighty-three days during
the taxable year will not be subject to the 30% U.S. withholding tax. A
non-resident alien who is physically present in the United States for more than
one hundred eighty-two days during the taxable year generally is treated as a
resident for U.S. federal income tax purposes, in which case he or she will be
subject to U.S. federal income tax on his or her worldwide income including
ordinary income and capital gain dividends at the graduated rates applicable to
U.S. citizens, rather than the 30% U.S. withholding tax. In the case of a
foreign shareholder who is a non-resident alien individual, the Fund may be
required to withhold U.S. federal income tax at a rate of 31% of distributions
of capital gain dividends under the backup withholding system unless the foreign
shareholder makes required certifications to the Fund on a properly completed
U.S. Internal Revenue Service Form W-8. The amount so withheld could be applied
as a credit against any U.S. tax due from the shareholder or, if no tax is due,
refunded pursuant to a claim therefor properly filed on an income tax return.
Income Effectively Connected. If the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by a foreign shareholder,
then distributions of net investment income and net 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 shareholders may also be subject to the 30% branch
profits tax.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
Notices. Shareholders will be notified annually by the Fund of the
dividends, distributions and deemed distributions made by the Fund to its
shareholders. Furthermore, shareholders will be sent, if appropriate, various
written notices after the close of the Fund's taxable year regarding certain
dividends, distributions and deemed distributions that were paid (or that were
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes depending on each shareholder's particular situation.
Taxation of Russian Eurasia Region Countries
[TO BE PROVIDED]
THE TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES,
EACH SHAREHOLDER IS ADVISED TO CONSULT A TAX ADVISER WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF PARTICIPATION IN THE FUND, INCLUDING THE EFFECT AND
APPLICABILITY OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
DESCRIPTION OF SHARES
The Agreement and Declaration of Trust of the Fund permits the Trustees to
issue an unlimited number of full and fractional shares of beneficial interest,
of $0.01 par value. Shares of the Fund, when issued, will be fully paid and
non-assessable and will have no conversion, preemptive or other subscription
rights. Holders of the Shares are entitled to one vote per Share on all matters
to be voted upon by shareholders and will not be able to cumulate their votes in
the election of Trustees. Thus, holders of more than 50% of the Shares voting
for the election of Trustees have the power to elect 100% of the Trustees. Under
rules of the New York Stock Exchange, the Fund is required to hold annual
meetings of shareholders. All Shares are equal as to assets, earnings and the
receipt of dividends, if any, as may be declared by the Board of Trustees out of
funds available therefor. In the event of liquidation, dissolution or winding up
of the Fund, each Share is entitled to receive its proportion of the Fund's
assets remaining after payment of all debts and expenses.
The Fund does not presently intend to offer additional Shares, except that
additional Shares may be issued under the Plan. Other offerings of the Fund will
require approval of the Fund's Board of Trustees and may require shareholder
approval. Any additional offerings would also be subject to the requirements of
the 1940 Act, including the requirement that Shares may not be sold at a price
below the then-current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the Fund's outstanding voting securities.
The Fund is a closed-end investment company, and its shareholders will not
have the right to cause the Fund to redeem their Shares. The Fund, however, may
repurchase Shares from time to time in the open market or in private
transactions when it can do so at prices at or below the current net asset value
per Share on terms that represent a favorable investment opportunity. Subject to
its investment limitations, the Fund may borrow to finance the repurchase of
Shares. However, the payment of interest on any borrowings will increase the
Fund's expenses. In addition, the Fund is required under the 1940 Act to have
"asset coverage" of not less than 300% of its "senior securities representing
indebtedness" as those terms are defined in the 1940 Act. Asset coverage must
equal 300% immediately following any borrowing, any payment of dividends or
distributions on the Shares and any repurchase of the Shares.
The Fund's Shares will trade in the open market at a price which will be a
function of several factors, including their net asset value. The shares of
closed-end investment companies frequently trade at a discount from their net
asset values. The risk of the Shares trading at a discount may be greater for
investors selling their Shares in a relatively short period following completion
of the Offering. See "Risk Factors and Special Considerations." No assurance can
be given that it will be possible for investors to resell Shares of the Fund at
or above the initial public offering price or that the market price of the
Fund's Shares will equal or exceed net asset value. Because the Fund may
repurchase its Shares at prices below their net asset value or make a tender
offer for its Shares, the net asset value of those Shares that remain
outstanding will be increased. Although Share repurchases and tender offers may
have a favorable effect on the market price of the Fund's Shares, it should be
recognized that the acquisition of Shares by the Fund will decrease its total
assets and therefore may increase the Fund's expense ratio. In addition, the
sale of portfolio securities to finance the acquisition of Shares would increase
the Fund's portfolio turnover rate. Except for the limited circumstances
described below, the Fund has not established any policy with respect to tender
offers or Share repurchases, has not established any program for tender offers
or Share repurchases, and has not established a schedule for considering the
adoption of such a program. Additionally, the Board of Trustees is under no
obligation to consider a share repurchase program, tender offer, or any other
means of reducing a discount from net asset value.
Currently, the Trustees intend not to accept tenders or effect repurchases
when, (i) if consummated, then would (a) result in the delisting of the Fund's
Shares from the New York Stock Exchange, (b) impair the Fund's status as a
regulated investment company under the Code, or (c) result in a failure to
comply with applicable asset coverage requirements; (ii) the Fund would not be
able to liquidate portfolio securities in an orderly manner and consistent with
the Fund's investment objective and policies in order to repurchase Shares; or
(iii) there is, in the judgment of the Trustees, any material event or condition
which would have an adverse effect on the Fund or its shareholders if Shares
were repurchased. The Trustees may modify these conditions in light of
experience or changes in the surrounding circumstances.
Any tender offer by the Fund will be made at a price based upon the net
asset value as of the close of business on the last day of the tender offer. No
open market purchases of Shares will be made by the Fund during a tender offer.
Each offer will be made and shareholders notified in accordance with the
requirements of the 1934 Act, and the 1940 Act, either by publication or mailing
or both. Each offering document will contain the information prescribed by these
laws and the rules and regulations promulgated thereunder. Persons tendering
Shares may be required to pay a service charge to help defray certain costs of
the transfer agent. Any service charges will not be deducted from the
consideration paid for the tendered Shares. During the period of a tender offer,
the Fund's shareholders will be able to determine the Fund's current net asset
value (which will be calculated on each day the New York Stock Exchange is open)
by use of a toll-free telephone number. Any offer to repurchase Shares directly
from shareholders, other than a tender offer, could, under applicable rules
under the 1940 Act, be made no more frequently than once every two years, unless
more frequent repurchase offers were approved by shareholders.
The Fund is designed for long-term investment and not as a short-term
trading vehicle. The Fund has been organized as a closed-end investment company
because the Investment Manager believes that a stable pool of assets is required
to achieve the Fund's investment objective. The Investment Manager intends to
purchase securities perceived to have the potential to benefit over the long
term from the growth and opening of Russia/Eurasia Region markets. Many of these
securities cannot be readily sold, and at least for several years will be
illiquid. Given these factors, the Investment Manager does not believe that the
Fund could be successfully operated as an open-end fund or as an interval fund
that offers a periodic right to redeem shares. Realizing the benefits from the
Fund's investment program is a long-term process. Accordingly, an investment in
the Fund is not suitable for investors who do not have a long-term investment
outlook. Investors should plan to hold shares of the Fund for a period of years.
Anti-Takeover Provisions in the Declaration of Trust
The Fund's Agreement and Declaration of Trust includes provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund. Commencing with the first annual meeting of
shareholders, the Board of Trustees will be divided into three classes, each
having a term of three years. At the annual meeting of shareholders in each year
thereafter, the term of one class will expire. This provision could delay for up
to two years the replacement of a majority of the Board of Trustees. A Trustee
may be removed from office only by vote of the holders of at least two-thirds of
the Shares of the Fund entitled to be voted on the matter.
In addition, the Agreement and Declaration of Trust requires the favorable
vote of the holders of at least two-thirds of the Shares of the Fund then
entitled to be voted to approve, adopt or authorize the following:
(i) a conversion of the Fund to an open-end investment
company;
(ii) a conversion of the Fund into an interval fund pursuant
to Rule 23c-3 of the 1940 Act;
(iii)a merger or consolidation of the Fund with another
corporation; or
(iv) a sale of all or substantially all of the Fund's assets
(other than in the regular course of the Fund's
investment activities.)
unless the action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Trustees fixed in accordance with the
Bylaws, in which case the affirmative vote of a majority of the outstanding
Shares is required.
The Board of Trustees has determined that the two-thirds voting
requirements described above are in the best interests of shareholders
generally. Reference should be made to the Agreement and Declaration of Trust on
file with the Commission for the full text of these provisions, which could have
the effect of depriving shareholders of an opportunity to sell their Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund.
UNDERWRITING
Under the terms and subject to the conditions in the U.S. Underwriting
Agreement dated the date hereof, each of the Underwriters of the United States
[and Canadian] offering of Shares named below (the "U.S. Underwriters"), for
whom Smith Barney Inc. and [ ] are acting as the Representatives (the
"Representatives"), has severally agreed to purchase, and the Fund has agreed to
sell to each U.S. Underwriter, the number of Shares set forth opposite the name
of such U.S. Underwriter below:
U.S. Underwriter Number of Shares U.S. Underwriter Number of Shares
- ------------------- --------------------- ------------------- -----------------
Smith Barney Inc.
Total _________
Under the terms and subject to the conditions contained in the
International Underwriting Agreement dated the date hereof, each of the managers
of the concurrent international offering of Shares named below (the "Managers"),
for whom Smith Barney Inc. [ ] and [ ] are acting as lead managers (the "Lead
Managers"), has severally agreed to purchase, and the Fund has agreed to sell to
each Manager, the number of Shares set forth opposite the name of such Manager
below:
Manager Number of Shares Manager Number of Shares
- ------------------- ---------------------- --------------- --------------------
Smith Barney Inc. ...
Total _________
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer a certain number of Shares directly to the public at
the public offering price set forth on the cover page of this Prospectus and a
certain number to certain dealers at a price that represents a concession not in
excess of $[ ] per share below the public offering price. The U.S. Underwriters
and the Managers may allow, and such dealers may re-allow, a concession not in
excess of $[ ] per share to the other U.S. Underwriters or Managers,
respectively, or to certain other dealers. After the initial public offering,
the public offering price and such concessions may be changed by the U.S.
Underwriters and the Managers.
The Fund has granted to the U.S. Underwriters [and the Managers] an option,
exercisable at any time and from time to time for [45] days from the date of
this Prospectus, to purchase up to an aggregate of [ ] additional Shares at the
public offering price set forth on the cover page of this Prospectus less
underwriting discounts and commissions. The U.S. Underwriters [and the Managers]
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
Shares offered hereby. To the extent such option is exercised, each U.S.
Underwriter [and each Manager] will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite such U.S. Underwriter's [or
Manager's] name in the preceding table[s] bears to the total number of shares in
such table[s].
The Fund, the Investment Manager, the U.S. Underwriters and the Managers
have agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The Fund has agreed that, for a period of 180 days after the date of this
Prospectus, it will not, without the prior written consent of Smith Barney Inc.,
offer, sell, contract to sell or otherwise dispose of any Shares (or any
securities convertible into or exercisable or exchangeable for Shares) or grant
any options or warrants to purchase Shares.
The U.S. Underwriters and the Managers have entered into an Agreement
Between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the [ ] shares offered in the
United States [and Canadian] offering: (i) it is not purchasing any such shares
for the account of anyone other than a U.S. [or Canadian] Person (as defined
herein), and (ii) it has not offered or sold, and will not offer, sell, resell
or deliver, directly or indirectly, any of such shares or distribute any
prospectus relating to the United States [and Canadian] offering outside the
United States [or Canada] or to anyone other than a U.S. [or Canadian] Person.
In addition, each Manager has agreed that as part of the distribution of the [ ]
shares offered in the international offering: (i) it is not purchasing any such
shares for the account of any U.S. [or Canadian] Person, and (ii) it has not
offered or sold, and will not offer, sell, resell or deliver directly or
indirectly, any of such shares or distribute any prospectus relating to the
international offering in the United States [or Canada] or to any U.S. [or
Canadian] Person. Each Manager has also agreed that it will offer to sell Shares
only in compliance with all relevant requirements of any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S. Underwriters
and Managers, including: (i) certain purchases and sales between the U.S.
Underwriters and the Managers, (ii) certain offers, sales, resales, deliveries
or distributions to or through investment advisors or other persons exercising
investment discretion, (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as Manager or by a Manager who is also acting as a U.S.
Underwriter, and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, "U.S. [or Canadian]
Person" means any resident or national of the United States [or Canada], any
corporation, partnership or other entity created or organized in or under the
laws of the United States [or Canada] or any estate or trust, the income of
which is subject to United States [or Canadian] income taxation regardless of
the source of its income (other than the foreign branch of any U.S. [or
Canadian] Person), and includes any United States [or Canadian] branch of a
person other than a U.S. [or Canadian] Person.
[Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada in
which such offer is made.]
[Prior to _____________, 1997, the Shares will not be offered or sold in
the United Kingdom, by means of any document, other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent or in circumstances which do not constitute an offer to the
public within the meaning of the Companies Act, 1985. On or after
_______________, 1997, the Shares will not be offered or sold in the United
Kingdom other than to persons whose ordinary activities involve the acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their business or in circumstances which do not constitute an offer
to the public within the meaning of the Public Offers of Securities Regulations
1995. Any document issued in connection with the issue or sale of the Shares,
including the Prospectus, will be issued or passed on only to a person who is of
a kind described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1988 or is a person to whom the document may
otherwise lawfully be issued or passed on.]
No action has been or will be taken in any jurisdiction by the Fund or the
Managers that would permit an offering to the general public of the Shares in
any jurisdiction other than the United States.
Purchasers of the Shares may be required to pay stamp taxes and other
charges in accordance with the laws and practices of the country of purchase, in
addition to the offering price set forth on the cover page hereof.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of Shares
as may be mutually agreed. The price of any Shares so sold shall be the public
offering price as then in effect for Shares being sold by the U.S. Underwriters
and the Managers, less all or any part of the selling concession, unless
otherwise determined by mutual agreement. To the extent that there are sales
between the U.S. Underwriters and the Managers pursuant to the Agreement Between
U.S. Underwriters and Managers, the number of Shares initially available for
sale by the U.S. Underwriters and by the Managers may be more or less than the
number of shares appearing on the front cover of this Prospectus.
The U.S. Underwriting Agreement and the International Underwriting
Agreement each provide that it may be terminated in the absolute discretion of
Smith Barney Inc., without liability on the part of any of the Underwriters to
the Fund or the Investment Manager if prior to the closing date for the purchase
of the Shares or the closing date for the Shares pursuant to the over-allotment
option, as the case may be, (i) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange, the NASDAQ National Market System
or the NASDAQ Small Market, or the major Russian Stock Exchanges shall have been
suspended or materially limited or trading in securities of the Fund shall have
been suspended or materially limited, (ii) additional material governmental
restrictions, not in force on the date of the U.S. Underwriting Agreement or
International Underwriting Agreement, have been imposed upon trading in
securities generally, or a general moratorium on commercial banking activities
in New York and in Russia shall have been declared by either federal or state
authorities, or (iii) any outbreak or escalation of hostilities or other
international or domestic calamity, crisis or change in political, financial or
economic conditions, occurs, the effect of which is such as to make it in the
judgment of Smith Barney Inc. impracticable or inadvisable to commence or
continue the offering of the Shares at the offering price to the public set
forth on the cover page of this Prospectus or to enforce contracts for the
resale of the Shares by the Underwriters.
Prior to the offering, there has been no public market for the Shares of
the Fund. [During an initial period which is not expected to exceed [three]
months from the date of this Prospectus, the Fund's Shares will not be listed on
any securities exchange. Additionally, during such period, neither the
Underwriters nor any other person intends to make a market in the Fund's Shares,
although a limited market may develop. Consequently, it is anticipated that an
investment in the Fund will be illiquid during such period. The Fund intends to
apply for listing of its Shares on the New York Stock Exchange under the symbol
"REF" so that trading on that Exchange will begin no later than [three] months
from the date of this Prospectus if the listing is granted. The Fund expects
that it will meet the New York Stock Exchange standards for listing. In the
event the Fund's Shares are not approved for listing on the New York Stock
Exchange at the end of the [three-month] period, the Fund intends to apply
either to have the Fund's Shares listed on the American Stock Exchange or traded
on the NASDAQ National Market System.
The Fund has agreed to pay the Underwriters $_____________ in partial
reimbursement of their expenses.
The Fund anticipates that the Representatives and certain of the
Underwriters may from time to time act as brokers or dealers in connection with
the execution of the Fund's portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as brokers while they
are Underwriters.
CUSTODIAN AND TRANSFER AND DIVIDEND PAYING AGENT
The Chase Manhattan Bank is the custodian of the Fund's assets. Its address
is MetroTech Center, Brooklyn, New York 11245. The custodian may employ
subcustodians outside the U.S. approved by the Board of Trustees in accordance
with regulations under the 1940 Act. ChaseMellon Shareholder Services is the
transfer and dividend paying agent and registrar for the Fund. Its address is
___________________________________. Any or all transfer agency functions may be
delegated to a sub-transfer agent.
PUBLIC ACCOUNTANTS
The statement of assets and liabilities included in this Prospectus has
been examined by McGladrey & Pullen, LLP, independent certified public
accountants, 555 Fifth Avenue, New York, New York 10017, as indicated in their
report with respect thereto, and has been included herein in reliance upon the
authority of said firm as experts in giving said report.
LEGAL MATTERS
Certain matters under U.S. law in connection with this offering will be
passed on for the Fund by Dechert Price & Rhoads, Washington, D.C. and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom, Boston, Massachusetts.
Counsel will rely on the opinion of , as to certain matters of Delaware law.
Matters of Russian law will be passed on for the Fund and the Underwriters by
- -------------------------------------.
<PAGE>
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the U.S. Securities Act of 1933, as
amended, relating to the Shares offered hereby. For further information with
respect to the Fund and its Shares, reference is made to such Registration
Statement and the exhibits filed with it.
[Financial statements to be provided]
<PAGE>
APPENDIX A
[Multi-Industry Sector Information To Be Provided]
<PAGE>
APPENDIX B
THE RUSSIAN FEDERATION
The information set forth in this Appendix has been extracted from
various government and private publications. The Fund and its Board of Directors
make no representation as to the accuracy of the information, nor has the Fund
or its Board of Directors attempted to verify it; furthermore, no representation
is made that any correlation exists between Russia, or its economy in general,
and the Fund.
GENERAL INFORMATION
Geography and Population
Russia covers an area of over 6.6 square million miles, almost twice
the size of the United States. It is the largest country in the world, covering
one-eighth of the world's land surface, and spans eleven time zones. Russia is
divided into the following administrative units: 66 provinces, two metropolitan
cities (Moscow and St. Petersburg), 21 ethnic republics with their own
independent governments, and ten national regions. Russia has a population of
approximately 147.5 million. Russia continues to have a sizable, well-educated
intelligentsia and skilled labor force.
Political Background and Government
In the early 1900's, poor economic conditions caused revolutionary
movements to develop in the Russian empire, which led to the fall of the Romanov
dynasty in March 1917. On November 7, 1917, the Bolsheviks took power and
created the communist state of the Russian Soviet Federative Socialist Republic
(the Russian Federation). In 1922, the Union of Soviet Socialist Republics
(U.S.S.R.) was formed.
The U.S.S.R. was a centralized communist system consisting, after World
War II, of fifteen republics. The Russian Federation was the largest and most
dominant republic in the U.S.S.R. The Russian Federation accounted for over 60%
of Soviet Gross National Product and comprised over half of the total population
of the U.S.S.R. Russians also dominated the Soviet military, the Communist
Party, and the KGB. In the 1980's, the U.S.S.R. began to collapse, due in large
part to the republics' demands for independence and economic reforms which
undermined the centralized communist system. In August 1991, hardliners in the
army and Communist Party attempted a military coup. The coup failed, and it was
the downfall of communist power in the U.S.S.R. The republics each declared
independence from the U.S.S.R., and the Communist Party was suspended. By the
end of 1991, Soviet President Mikhail Gorbachev lost his position as president
and the U.S.S.R. was disbanded.
After the collapse of the Soviet Union, Russia was politically
unstable. The government, which launched radical economic reforms and policies
attempting stabilization, was opposed by conservatives, represented by the
Congress of People's Deputies (the CPD), and the Supreme Soviet. Much of the
political instability arose from the issue of whether the president of Russia or
the CPD held ultimate constitutional power. Boris Yeltsin was elected president
of Russia in June 1991, in the first fully free presidential election in Russia.
However, in December 1992, the CPD and the Supreme Soviet caused Egor Gaidar,
the acting prime minister, to be replaced with Viktor Chernomyrdin, who was
thought to be more conservative. In April 1993, President Yeltsin forced a
referendum to ascertain the level of the electorate's confidence in his
government. The referendum results showed strong support for Mr. Yeltsin and his
reforms.
In September 1993, President Yeltsin dissolved the CPD and the Supreme
Soviet. Opponents of President Yeltsin in the CPD refused to comply and
nominated an alternative government and president. On October 3, 1993,
opposition supporters led an armed insurrection, which failed. Since the failed
coup, the political situation
B-1
<PAGE>
has become more stable, although elections for the newly created State Duma
showed sweeping gains for the right wing Liberal Democrat party led by the
nationalist Vladimir Zhirinovsky.
The Russian constitution was approved by a referendum in December 1993.
As a result the legislature was changed to create a Federation Council and a
State Duma (with 450 representatives). The Constitution provides the president
with considerable powers, including command authority over the armed forces and
Security Council, and nominating the highest state officials. The president also
has authority, under certain circumstances, to dissolve the State Duma. Although
elected initially in December 1993, the Federation Council was reformed in
January 1996, and is now an appointed body comprised of ex-officio heads of both
the executive and legislative branches of each of the subdivisions which
comprise the Russian Federation. The State Duma continues to be elected one-half
from party lists and the other half on the basis of geographical districts.
The December 1995 State Duma elections resulted in an increase in
representation of anti-government parties consisting of the Communist Party of
the Russian Federation ("CPRF") and other political parties with which it is
allied. Consequently, the anti-government parties hold a majority of
parliamentary seats with respect to most issues. On the other hand, in 1996-97
the government came to be dominated increasingly by a coalition of
practically-minded liberals and reform-oriented centrists which are broadly
supportive of Yeltsin. The next parliamentary elections are due to be held in
December 1999, with a presidential election to follow in June 2000. As Mr.
Yeltsin is currently serving his second term, he will not be a candidate for the
presidency in 2000.
International Relations
After the collapse of the U.S.S.R. in 1991, Russia succeeded to the
diplomatic network and military power of the U.S.S.R. Russia is in the process
of gradually reconciling with the West and opening up economically. In 1992,
eleven of the fifteen former Soviet republics, including Russia, formed the
Commonwealth of Independent States (CIS), which was intended to function as a
vehicle for mutual cooperation. The CIS has failed to evolve into a strong
union.
In May 1994, Russia agreed to participate in NATO's Partnership for
Peace, a loose association between NATO and all of the countries of the former
Soviet bloc. In May 1997, Russia and the 16 NATO members signed the "Founding
Act on Mutual Relations, Cooperation and Security" which (i) clears the way for
a decision on new members to enter NATO in the face of previously vigorous
opposition by Russia to NATO's potential expansion eastward and (ii) set up a
NATO-Russia Permanent Joint Council for consultation between NATO and Russia on
security matters of common interest. That agreement, however, must be ratified
by the State Duma, and given the political composition of that body, may
encounter significant resistance.
Russia also continues to provide for its security, in part, through
discussions with countries considered by some to be hostile to Western
interests, including the People's Republic of China and Iran.
International Organizations
Russia is a member of various international organizations, including
the United Nations, of which Russia is a permanent member of its Security
Council, the International Monetary Fund, the World Bank, the International
Finance Corporation, and the European Bank for Reconstruction and Development.
In June 1997 Russia was admitted as the eighth member to the G8 (formerly G7).
Russia inherited observer status in the General Agreement on Tariffs and Trade
(GATT) from the former U.S.S.R. in 1991, and currently has an application
pending for membership to the World Trade Organization (WTO), the successor
entity to the GATT. As of the April 1997 WTO meeting, however, a variety of
issues remained either unresolved or had not yet been discussed. Russia also
signed a Partnership and Cooperation Agreement with the European Union in July
1995.
B-2
<PAGE>
THE ECONOMY
General Information
Under communism, the Soviet Union had a centrally-planned economic
system. The state owned all of the means of production and the State Planning
Committee (GosPlan) planned all aspects of the economic system, including what
and how much each enterprise produced, from where supplies were to be obtained,
and the allocation of output. All prices were controlled by the state.
The result of the centrally-planned system was inefficiency. Attempts
were made to reform the system beginning in the 1960's. In the late 1980's and
in 1990, under Soviet President Gorbachev, radical reforms were begun; however,
such reforms were abandoned under pressure from conservatives in industry and
the military. In 1991, the financial crisis became full-fledged. Output
decreased, inflation increased, and the budget deficit grew. After the attempted
coup by communist hardliners in 1991, as Soviet President Gorbachev lost power,
Russian President Yeltsin encouraged economic reform for the Russian Federation.
Yeltsin supported a stabilization program, which was to consist of liberalizing
prices, reducing centralized budget expenditures, and privatizing state
monopolies. After implementation of the program, the financial crisis continued
to worsen. Under pressure from conservatives, the government was forced
temporarily to give up some elements of reform in 1992.
The political struggle for economic reform continued in 1993. After a
run on the ruble in late 1994, Russia reverted back to earlier plans for a
"non-inflationary" budget. Economic reform efforts slowed in 1996, due largely
to uncertainty over the outcome of the presidential election in that year. On
May 20, 1997, President Yeltsin announced a new seven point economic reform
program. As part of this program, Yeltsin pledged to pay off government debts to
public-sector workers, overhaul the social welfare program, slash interest rates
to 20%, crack down on tax debtors in order to cut the tax burden by 15%, and to
fight corruption and bureaucracy.
National Budget
During the Soviet era, the budget of the Russian Federation was simply
a unit of the larger Soviet budget. During 1991, the Soviet budget collapsed, as
many of the Soviet republics continued to receive government funds but failed to
contribute to the Soviet budget. As of 1991, the budget deficit for the U.S.S.R.
was approximately 20% of gross national product. After the break-up of the
U.S.S.R., the Russian Federation cut spending in an attempt to balance its first
budget. The budget in 1992 had an official deficit of 3.6% of gross domestic
product, although it is believed that, due to differences between Russian and
Western accounting procedures, the actual deficit was higher. The budget in 1993
had an official deficit of 9.8% of gross domestic product. While the government
managed to reduce the budget deficit to 5.1% of GDP in 1995, uncertainty over
the outcome of the 1996 presidential elections contributed to a rise in the
deficit to 7.3% of GDP.
In order to further control the budget deficit, Yeltsin has announced a
two-pronged plan. First, the government plans to cut further government
expenditures. The Yeltsin government proposed to cut government expenditures by
a full 20% in 1997, including cuts in agriculture, health and culture, military
orders, coal subsidies, and fuel deliveries to the remote northern regions of
the country. This proposal has been met with opposition in the parliament.
Second, the Yeltsin government intends to reduce tax arrears owed currently by
many of the largest Russian companies.
Over the longer term, the government plans to reform state finances
through the introduction of a more streamlined tax code and by a major overhaul
of state subsidies and the state pension system. In addition, the Russian
Finance Ministry indicated its intent to float its third foreign bond issue
since entering international capital markets in November 1996. This latest issue
was expected (in June 1997) to mature in ten to twenty years, and the proceeds
were intended to cover the budget deficit.
B-3
<PAGE>
The following chart shows information relating to revenues and expenditures
of the Russian Federation in recent years:
<TABLE>
<CAPTION>
RUSSIAN NATIONAL BUDGET
(billions of Rubles)
(NOT ADJUSTED FOR INFLATION)
<S> <C> <C> <C> <C>
1992 1993 1994 1995
Total Income 5,327.6 41,771.1 48,000
Includes:
Income Tax 1,566.8 16,773.5 14,600
VAT 1,998.9 11,271.2 9,800
Personal Income Tax 431.3 4,383.2 4,600
Excise Tax 211.5 1,776.6 1,700
Foreign Activity Income 467.4 2,346.7 6,300
Underground and Natural Resources Use Royalties 104.7 1,153.7 N/A
Geologic Reserve Depletion Tax1 73.4 N/A N/A
Land Taxes 71.0 314.5 N/A
Privatization Income 62.3 318.9 N/A
Total Expenses 5,969.5 57,319.0 59,000
Includes:
Economic Projects 2,038.7 16,134.7 15,700
Social and Cultural Projects 1,383.1 14,297.0 15,700
Defense 855.3 7,210.0 7,900
Foreign Economic Operations 416.7 2,764.3 1,500
Law Enforcement and Government Administration Organs 301.1 4,100.1 5,300
Difference between Revenue and Expenses (641.9) (13,869.9(16,700)
As Percentage of Gross Domestic Product: 3.6 9.8 8.8
<FN>
1 This tax generates funds for new exploration.
N/A = Information not available.
Sources: Goskomstat, Russian Federation in 1992 -- Statistical Yearbook;
Goskomstat, The Russian Federation in Figures, 1993; Goskomstat, Russian
Socioeconomic Conditions, January-September, 1994 (Preprint).
</FN>
</TABLE>
B-4
<PAGE>
Traditionally, a Net Material Product (NMP) system was used in Russian
and Soviet statistics. The NMP system was developed in the U.S.S.R. to meet the
needs of a planned economy. NMP is the sum of gross output minus intermediate
inputs and depreciation for six branches of material production: (1) industry,
(2) agriculture, (3) construction, (4) transport and communications, (5) trade,
supply, and procurement, and (6) services for material production. NMP differs
from Gross Domestic Product (GDP) primarily in that it excludes depreciation and
value added of non-material service sectors. The difference between GDP and NMP
is estimated to be approximately 40%. It is anticipated that Russia will convert
at some point to the U.N. System of National Accounts. GDP is estimated by the
State Committee on Statistics (Goskomstat) by beginning with NMP, adding
depreciation, adding value added produced by the non-material production
sectors, and subtracting value added by non-material services within material
production sectors (to prevent double-counting).
The following chart sets forth the GDP of Russia and the percentage change
from the prior year's GDP:
<TABLE>
<CAPTION>
GROSS DOMESTIC PRODUCT
(in actual billions of rubles)
(NOT ADJUSTED FOR INFLATION)
<S> <C> <C> <C> <C>
1992 1993 1994 1995
GDP*Percentage change from prior year** 18,063.081 162,311.388
Goods*Percentage change from prior year** 10,518.379 79,157.287
Services*Percentage change from prior 5,886.284 68,532.191
year**
<FN>
* In actual prices (billion rubles).
** In comparable constant prices (rubles).
Sources: Goskomstat, The Russian Federation in Figures, 1992; The Russian
Federation in Figures, 1993; Goskomstat, Russia's Social and Economic
Position: January-June, 1994.
</FN>
</TABLE>
B-5
<PAGE>
Currency and Foreign Exchange Information
As part of the Soviet centrally-planned system, an artificial
"official" exchange rate was used. This rate changed only slightly from Rbs.
0.84: $1 in 1985 to Rbs. 0.62: $1 in 1992. In practice, however, there were
multiple exchange rates. In 1991, there were three main exchange rates for the
ruble against convertible currencies: the commercial rate, tourist rate, and
interbank market rate. The commercial rate was pegged to a basket of five
convertible currencies (U.S. dollar, Japanese yen, Deutsche mark, French franc,
and pound sterling). The commercial rate applied to foreign exchange surrendered
by enterprises to the government, imports financed through centralized foreign
exchange funds, and all capital flows. For Soviet citizens traveling abroad,
commercial banks were free to determine the tourist rate which depreciated from
Rbs. 5.5 in early 1991 to Rbs. 108 per U.S. dollar by the end of 1991. Finally,
the interbank market rate was established at foreign exchange auctions conducted
by the Vneshekonombank from January to April 1991 and under the auspices of
Gosbank beginning April 9, 1991. Beginning in 1992, the exchange system was
liberalized, and an effort was made to unify the multiple foreign exchange
arrangements. Nevertheless, for a period of time, several exchange rates
prevailed. As part of the market reform of 1992, the government moved to the use
in July 1992 of a single exchange rate determined freely by the market.
The official exchange rate has been set by reference to the Moscow
Interbank Currency Exchange rate since 1992. The Moscow Interbank Currency
Exchange is the largest currency exchange in Russia. The Central Bank of Russia
utilizes its rates to determine its ruble exchange rate. Currency exchanges are
also active in a number of other cities. Following a period of relative
stability, beginning in September 1994, the exchange rate again entered a period
of high volatility, ranging from a low of Rbs. 2,156: $1 to a high of Rbs.
3,926: $1.
Russia undertook a major initiative in 1995 to stabilize the ruble.
Prior to 1995, the Russia government had adopted an exchange rate policy which
called for continuous depreciation of the ruble at roughly the same rate as the
expected rate of inflation. After consistent rapid declines in the value of the
ruble relative to Western currencies, Russia began as a matter of exchange
policy in 1995 to maintain the ruble within certain pre-set bandwidths.
Simultaneously, in May 1996, Russia adopted a "crawling peg" exchange rate
regime, which facilitated ruble trading against the dollar through December of
the same year. Also in May 1996, Russia announced its intention to comply, by
July 1st of the same year, with IMF rules on currency convertibility, which
would make the ruble fully convertible for all current operations. In late 1996,
the Russia Central Bank decided to extend the "crawling peg" regime through
1997.
The following table sets forth the exchange rates of the ruble to the U.S.
dollar as of the following dates:
EXCHANGE RATE OF THE RUBLE
Exchange RateRubles: U.S. dollars
December 30, 1993 Rbs. 1,247: $1
December 30, 1994 Rbs. 3,550: $1
December 30, 1995 Rbs. 4,640: $1
December 30, 1996 Rbs. 5,560: $1
Sources: International Monetary Fund, International Financial Statistics
Yearbook, 1997.
B-6
<PAGE>
Banking and Finance
Under communism, the financial sector was highly centralized. The State
Bank of the Soviet Union (Gosbank) effectively controlled all financial aspects
of the centrally planned system. In the Soviet era, finance served only a
passive accounting function, instead of a mechanism for capital formation.
Gorbachev first decentralized the banking system in 1985, creating approximately
1,500 commercial banks in Russia. Resolution No. 821 of the Central Committee
and the Council of Ministers of July 17, 1987 provided for the creation of six
state banks: Gosbank, Promstroybank, Vneshekonombank, Agroprombank,
Zhilsotsbank, and Sberbank. Letter No. 206 of Gosbank of May 24, 1989
effectively provided for the conversion of certain U.S.S.R. banks to the
principle of profit and loss accounting and self-financing, thereby making those
banks independent. The Law "On the Central Bank of the RSFSR" passed in
December, 1990 decreed the creation of the Russian Central Bank (RCB). The
Resolution of the Supreme Soviet which brought the Law on the Central Bank into
force provided for the renaming of Gosbank as the Central Bank of the RSFSR
(Bank of Russia). Vneshekonombank remained the channel for the management of
Russian foreign debt.
Between 1991 and 1994, the proliferation of commercial banks was a
contributing factor to the dramatic rise in company debt during that period.
Many banks engaged in Soviet-era practices of channeling cheap credits to
favored enterprises, which enterprises were then eligible for matching credits
from the RCB. This practice was effectively curbed beginning in 1995, however,
with the RCB playing a more interventionist role in credit facilitation.
Following the ruble crisis in the fourth quarter 1994, the RCB withdrew
approximately 500 banking licenses. More strict RCB banking policy was further
reflected by a decrease by 205 of the number of banks between January and
November 1996, along with a corresponding Rb5trn increase in capitalization of
the banking system during the same period. By the end of 1996, Western sources
reported a viable private banking system capable of exerting increasing amounts
of influence over government economic policy. The banking system does, however,
remain strained by relative stability of the ruble and lower inflation which
limits profit opportunities, inadequate capitalization, a continuing enterprise
arrears problem, real estate problems, and a lack of banking experience.
With respect to foreign banks operating in Russia, a November 1993
decree had imposed a moratorium on foreign banks operating in Russia. Subsequent
decrees in 1994 and 1995, confirmed full banking powers on banks that were
licensed previously in Russia. These included U.S. banking giants Citibank and
Chase Manhattan, which had obtained licenses in October 1993. A new banking bill
became effective in January 1996, which expressly permits foreign banks to
establish full subsidiaries in Russia. The RCB, however, reserves the right to
condition a license for a foreign bank to operate in Russia upon reciprocity.
Employment
Under communism, unemployment technically did not exist. Unemployment,
however, began to rise sharply following economic reforms introduced in 1992.
The number of persons officially registered as unemployed in Russia increased
dramatically between 1994 to 1995, from approximately 1.6 million to 2.3
million. By the end of 1996 that figure had climbed to 2.5 million. According to
Goskomstat, that number amounted to 3.8% of the labor force as of December 1996.
Not all unemployed individuals, however, register with Russian
employment offices as being unemployed. In addition, persons such as part-time
workers and those on leave without payment or with partial payment are not
included in the definition of unemployed. Using the International Labor
Organization ("ILO") definition, which includes all persons available for work,
but not actually in employment, a full 9.3% of the labor force was unemployed by
the end of 1996, which figure rose to 9.7% by the end of April 1997.
B-7
<PAGE>
The following chart sets forth average monthly wages in rubles for the
periods indicated.
<TABLE>
<CAPTION>
AVERAGE MONTHLY WAGES
(NOT ADJUSTED FOR INFLATION)
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 Jan.-Mar. 1997
Wages (in rubles) 58,663 220,351 472,392 799,983 829,400
<FN>
Sources: The International Monetary Fund, Russian Federation - Recent Economic
Developments, Goskomstat.
</FN>
</TABLE>
Inflation
Under the centrally-planned system, inflation was suppressed by the
government through administratively determined prices. Although the official
retail price annual inflation was 1-2%, actual inflation was higher. Inflation
rose significantly in 1991. The consumer price index rose by 160% from December
1990 to December 1991, and rose at an average of approximately 40% per month in
1992. During 1993, inflation increased at approximately 20% to 25% per month on
average. Early in 1994, monthly inflation figures had declined significantly, to
a low of 4% increase during the month of August, but experienced reversals as
the year progressed. Western sources report, however, that in April 1997
consumer prices increased by a mere 1%, finishing out 20 consecutive months of a
steady decline in the rate of increase. This trend was largely mirrored by a
similar decline in the inflation rate for industrial inputs.
The following chart shows selected inflation indices in recent years as a
percentage of 1985 prices:
SELECTED RUSSIAN INFLATION INDICES
1993 1994 1995 1996 1997
Consumer PriceIndex (1) 940
Wholesale IndustrialPrice 990
Index (1)
Wholesale Agricultural Price 840
Index (1)
(1) Average for year, as a percentage of the previous year.
Sources: Goskomstat, The Russian Federation in Figures, 1992; Goskomstat, The
Russian Federation in Figures, 1993.
Agriculture
Agriculture in Russia was collectivized in the 1930's into collective
farms and state farms. This collectivization promoted inefficiency. The
agricultural system has been unable to provide sufficient food, requiring grain
and animal feeds to be imported since the 1970's.
Since the end of communism, agricultural reform has been important. The
government has permitted the prices of agricultural products to rise, providing
farms with an incentive to increase production. The government has also begun to
privatize the collective and state farms. Further, a presidential decree of
October 1993 has permitted private farmers to purchase land. In spite of these
changes, reform has been difficult and slow. Even though mosts collective and
state farms have been reorganized into either private farms, producer
cooperative
B-8
<PAGE>
or joint-stock companies, most have retained some form of collective labor
organization. Moreover, since many of the nomenklatura interests remain firmly
in charge, the change away from the collective model has occurred, for the most
part, in name only.
In general, agricultural production has declined over the past few
years, and that decline had continued to present. Agricultural, production
declined 7% as a whole in 1996, and an additional 6% during the first quarter of
1997 as compared with the year-earlier period. That trend in livestock is
similar. The following chart shows annual agricultural production as a
percentage of the previous year for the years through 1993 through 1996:
AGRICULTURAL INDICES
1993 1994 1995
Total Agriculture1 96.0
Crops1 96.0
Animal Products1 96.0
(1) Indices calculated on gross production in 1983 prices.
Sources: Statistical Yearbook - The Russian Federation Economy, 1992;
Goskomstat, The Russian Federation in Figures, 1993.
The following chart shows agricultural production in Russia for the years
1994 through 1996:
AGRICULTURAL PRODUCTION
(in millions of tonnes)
1993 1994 1995
CROPS
Grain 99.1
Sugar beets 25.5
Sunflower 2.8
Potatoes 37.7
Vegetables 9.8
Fruits, berries, grapes 3.2
ANIMAL PRODUCTS
Meat (including fowl)thou. tonnes 7,500
Milk, million tonnes 46.5
Eggs, billion 40.3
Wool, thousand tonnes 158
Source: Goskomstat, The Russian Federation in Figures, 1993.
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Energy
The former Soviet Union was the world's leading producer of all fuels.
The majority of the former Soviet Union's resources are located in the Russian
Federation. Oil and gas were the main earner of hard currency for the Soviet
Union and continue to be the main earner of hard currency for Russia. Natural
gas accounts for the largest percentage of energy output and final consumption.
Due to the depletion of existing fields, deterioration in the Russian
transportation infrastructure, and dire need for investment, oil production
experienced a pronounced decline beginning in 1991, which has continued through
1996. Although steady, the decline in gas production through the 1990's has not
been as pronounced - that sector finished out 1996 with a decline of only 5 bn
cu metres from the prior year.
It is believed that the Russian government is committed to increasing
the output of oil by allowing foreign investment in the oil industry and
increasing the price of oil in Russia. As of 1993, over 30 Russian-Western joint
ventures were actively producing oil, and accounted for four percent of
production. On the other hand, foreign investment in the Russian energy sector
has been impeded by legislative restrictions on production sharing. While the
Russian parliament did pass favorable legislation in June 1995, it remained
inoperative at the beginning of 1997. The State Duma imposed new restrictions on
production sharing in April 1997.
RUSSIAN NATIONAL ENERGY STATISTICS
(m tons unless otherwise indicated)
1991 1992 1993 1994 1995
Oil (including gas condensates) 462 399 354 316 307
Natural Gas (bn cu meters) 643 641 618 607 595
Coal 353 337 306 271 262
Peat 4.7 7.8 2.5 n/a n/a
Oil Shale 4.2 3.8 3.3 n/a n/a
Electricity (bn kwh)of which: 1,068120 1,008120 957119 876n/a 862n/a
nuclear
Sources: Economist Intelligence Unit, Russia Country Report, 1997; Goskomstat,
Statistical Yearbook of the Russian Federation.
Manufacturing/Industry
Under communist rule, industrial development focused on heavy industry,
especially defense. Nearly fifteen percent of Russia's industries are
defense-related. Consumer-goods industries have traditionally been
underdeveloped, although in recent years some defense plants have been converted
to the production of consumer durables. In 1992, industrial enterprises
accounted for 30% of total employment in Russia; however, consumer-oriented
industries comprised only a quarter of total industry output as of 1991. Russia
is the second largest steel producer in the world. Other important industries in
Russia are chemicals, timber and wood products, paper, and non-ferrous
materials. As the table below indicates, Russian industrial production has
continued to fall through 1996.
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RUSSIAN INDUSTRIAL PRODUCTION
(1990=100) 1992 1993 1994 1995 1996
Electricity 96 91 83 88 86
Fuels 87 77 69 76 74
Ferrous metallurgy 77 65 54 60 58
Non-ferrous metallurgy 68 59 54 56 53
Engineering & metalworking 77 65 45 41 37
Chemicals & petrochemicals 73 58 44 48 43
Timber & cellulose industry 78 63 44 44 34
Construction Materials 78 65 47 43 32
Light Industry 64 49 26 18 13
Food Industry 76 69 57 52 47
Total of which: 75 65 51 49 46
extractive industry 85 77 70 69 59
processing industry 74 63 48 46 44
Sources: Economist Intelligence Unit, Russia Country Report, 1997; Goskomstat,
Statistical Yearbook of the Russian Federation.
Early indications for the first quarter of 1997, however, show
stabilization in certain sectors of industrial production. During the first
quarter of 1997, real industrial production grew at a rate of between 0.3% and
1.5%, and by 0.7% compared with the same period in the previous year. The
strongest showing was made in the area of intermediate goods production. The
following chart indicates trends in Russian industrial production for the first
quarter of 1997:
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RUSSIAN INDUSTRIAL PRODUCTION
Trends for the 1st Quarter 1997
(real % change, year on year) Industry Raw Materials Intermediate Consumer
Goods Goods
Jan. - Dec. 1996 -5.5 -14.5 -4.3 -6.8
Jan. 1997 0.3 -0.2 0.2 0.7
Feb. 1997 1.5 -6.6 5.9 -4.5
Mar. 1997 0.4 -11.0 3.0 -1.0
Apr. 1997 0.5 n/a n/a n/a
Sources: Economic Intelligence Unit, Russia Country Report 2nd Quarter 1997,
Goskomstat.
Foreign Trade
In the late 1980's, Russia had a trade surplus with other countries in
the former Soviet Union and a trade deficit with countries outside the former
Soviet Union. In the early 1990's, both imports and exports fell dramatically.
In 1993, Russia imported approximately $27 billion of goods, which represents a
decrease of 27% from 1992, but exported $44 billion of goods, which represents
an increase from 1992. Russia maintained a strong $17 billion positive balance
of trade with foreign countries. In fact, Russia has recorded a positive balance
of trade since 1991. Moreover, the dollar value of both exports and imports with
countries outside the former Soviet Union, (hence total volume of trade) has
continued to increase through the first quarter of 1997. Despite a drastic
re-orientation in trade since 1989 toward transactions with Western
industrialized nations, trade with the CIS has increased in 1995 and 1996,
reaching to 10% of total trade during the latter. As mentioned above in the
section entitled "International Organizations", Russia has signed a Partnership
and Cooperation Agreement ("PCA") with the Economic Union. As an integral part
of the PCA, in 1995 Russia also signed a trade agreement with the EU. That
agreement, which entered into force in February 1996, abolishes, with certain
exceptions, EU quotas on industrial imports from Russia, and provides that in
1998 a mutual decision must be taken on whether to create a common free trade
zone.
The following charts demonstrate (1) the total dollar amount
of exports and imports of Russia for the years indicated and (2) Russia's trade
outside the former U.S.S.R. with major partners:
DOLLAR AMOUNT OF EXPORTS AND IMPORTS OF RUSSIA
(in billions of U.S. Dollars)
1994 1995 1996
Exports 69.6 81.5 88.2
Imports 48.5 63.7 65.1
Source: International Monetary Fund.
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RUSSIA'S FOREIGN TRADE WITH MAJOR TRADING PARTNERS
Total, in actual figures, in millions of U.S. dollars (1) and the share of
each country as a percentage of the total (2).
1994 (Jan-Jun) 1995
(1) (2) (1) (2)
Exports to:
Germany 2,492 11.7 6,041 9.2
Britain 2,024 9.5 3,095 4.7
China 1,342 6.3 3,432 5.2
Italy 1,491 7.0 3,397 5.2
Hungary 596 2.8 1,804 2.7
USA 1,385 6.5 4,537 6.9
Japan 831 3.9 621 0.9
Netherlands 575 2.7 3,201 4.9
Finland 767 3.6 2,365 3.6
France 554 2.6 1,542 2.3
Imports from:
Germany 2,244 17.0 6,536 19.7
Britain 422 3.2 1,099 3.3
China 515 3.9 865 2.6
Italy 634 4.8 1,851 5.6
Hungary 436 3.3 842 2.5
USA 1,241 9.4 2,648 8.0
Japan 607 4.6 763 2.3
Netherlands 766 5.8 1,646 5.0
Finland 752 5.7 2,041 6.2
France 515 3.9 1,074 3.2
Source: Goskomstat, Russia's Social and Economic Position: January-June, 1994.
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The majority of Russian exports are fuel and raw materials. In the first
half of 1994, more than 50% of the volume of exported goods were fuel and energy
goods, 25% were metals and diamonds, and 5% were machines and equipment. In the
first half of 1994, imports of machines and equipment were 31% of total imports,
foodstuffs and agricultural produce were 31%, and clothing and footwear were
10%. Trade with former Soviet republics consists mainly of industrial products.
The following chart shows the composition of trade with countries outside the
former Soviet Union:
EXPORTS AND IMPORTS OF RUSSIA BY PRODUCT
Russian exports and imports in actual prices, in billions of U.S. dollars
(1) and as a percentage of total volume (2).
1993 1994 1995
(1) (2) (1) (2) (1) (2)
Exports 44.3 100 53.0 100 65.7 100
Machines and equipment 2.9 6.5 3.2 6.0 5.3 8.1
Fuels & Minerals 20.7 46.7 22.8 43.1 26.4 40.2
Metals & precious stones 10.3 23.2 16.5 31.1 19.6 29.8
Chemicals & Rubber 2.6 6.0 4.1 7.8 6.3 9.6
Timber, cellulose & paper 1.9 4.2 2.2 4.1 3.9 5.9
Textiles & Textiles Products 0.2 0.4 0.9 1.7 0.8 1.3
Furs & leathers 0.1 0.2 0.4 0.7 0.3 0.4
Foodstuffs & raw produce 1.6 3.8 2.3 4.3 2.3 3.5
Other 4.0 9.0 0.6 1.2 0.8 1.2
Imports 26.8 100 28.3 100 33.2 100
Machines & equipment 9.1 33.8 10.6 37.6 12.9 38.8
Minerals 1.1 4.0 0.8 2.9 0.9 2.8
Metals & precious stones 0.9 3.5 1.1 4.0 1.7 5.0
Chemicals 1.7 6.2 3.1 11.0 3.8 11.4
Timber & cellulose 0.1 0.5 0.5 1.7 1.0 3.0
Textiles 3.7 13.9 2.2 7.6 1.6 4.7
Furs & leathers 0.7 2.6 0.2 0.6 0.1 0.4
Foodstuffs & raw produce 5.9 22.2 8.6 30.4 9.7 29.3
Other 3.6 13.3 1.2 4.2 1.5 4.6
Sources: Economist Intelligence Unit 1997-98, Goskomstat.
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Balance of Payments
The State Committee on Statistics (Goskomstat) estimates that Russia's
trade balance, excluding transactions with states of the former Soviet Union,
increased from $7.4 billion in 1992 to $9.5 billion in 1993, while its services
balance decreased from - $1.2 billion to - $2.7 billion. Other sources, however,
estimate that the trade balance declined, from $5.9 billion in 1991 to $3.1
billion in 1992, and the service balance declined from - $6.3 billion in 1991 to
- - $8.5 billion in 1992.
Western sources indicate that while Russia enjoyed a current account
surplus on total trade of $9.5bn in 1995, that surplus narrowed slightly (by
$0.3bn) to $9.2bn in 1996. At year end 1996, Russia had accumulated a $2bn
merchandise trade deficit with the CIS, but ran a $23bn merchandise trade
surplus with other regions of the world during the same period. In 1996, Russia
reduced her total services trade deficit from the 1995 figure of $8.7bn to
$6.5bn, due in large part to significant decrease in imports of services.
The following table sets forth Russia's balance of payments for the
last four years provided by the State Committee on Statistics. The table
excludes information on the balance of payments with states of the former Soviet
Union.
BALANCE OF PAYMENTS OF THE RUSSIAN FEDERATION
(excluding transactions with states of the former Soviet Union)
(in billions of U.S. dollars)
1993 1994 1995 1996
Trade Balance 9.5
Goods exports 43.7
Goods imports -27.0
Humanitarian and technical aid -1.0
Corrections to imports -7.2
Services Balance -2.7
Services exports 6.4
Services imports -9.1
Income (percent by credits) -2.9
Receivables 2.5
Payables -5.4
Transfers 2.3
into Russia 2.8
from Russia -0.5
Current Operating Accounts 6.2
Direct Investment 0.7
into Russia 1.4
from Russia -0.7
Portfolio Investment -1.0
into Russia 0.4
from Russia -1.4
Other Investments (credits) -7.8
Attraction of credits 6.5
Regular principal debt -15.6
payments -2.1
Granting of credits 10.6
Regular return on principal
debt -7.2
Other capital (assets and
liabilities of commercial
banks)
Delays and postponements
of payments on interest and -11.5
principal debt
Delays and postponements
of receivables on interest and
principal debt -11.5
Capital and financial
operating accounts -2.5
Reserves -3.3
Coining of gold 0.4
Corrections to International reserves 1.5
Omissions and errors -2.3
Total Balance 0.0
Source: Goskomstat, The Russian Federation in Figures, 1993.
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External Debt
Following the collapse of the Soviet Union in 1991, Russia assumed
responsibility for repayment of debt incurred by its former satellites. Russia
negotiated a series of rollover agreements between 1993 and 1995. As of January
1, 1994, Russia's foreign debt totaled more than $80 billion. Of this amount,
$26 billion was owed to commercial banks belonging to the London Club, $36
billion was owed to Paris Club countries, and more than $18 billion was owed to
commercial export firms. In October 1995, Russia reached a preliminary agreement
with the London Club to reschedule of $32.5bn debt over 25 years with a seven
year grace period. In April 1996, Russia reached a rescheduling agreement with
the Paris Club which calls for a six-year grace period, and the debt to be
repaid within twenty years. Western sources estimate that by the end of 1996,
Russia had accumulated $114bn in foreign debt, an increase of $10.3bn from
year-end 1995. By March 1997 the amount owed to the London Club had increased to
$35bn, and final negotiations for a rescheduling agreement had been pushed to
August.
Following implementation of the London and Paris Club agreements,
however, less than 17% of Russia's outstanding external debt is expected to
become due within the next 5 years, and all short term debt is to be converted
to long-term debt. In addition, Russia remains a creditor on international
capital markets, with claims on other countries (predominantly on non-preforming
loans) of $150bn as of June 1997.
FOREIGN INVESTMENT
Foreign direct investment in Russia is regulated by the foreign
investment law approved in July 1991. A more progressive edition of the law is
being prepared, which could improve the climate for foreign investment by
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reducing risks connected with the instability of the legislation and by more
precisely specifying the sectors subject to limitations for foreign investment.
A draft revision of the foreign investment law passed a first reading of the
State Duma in February 1997. Hearings on the revisions, however, were strongly
criticized by both Russian and foreign sources. The law is expected to undergo
substantial further revisions before consideration by the State Duma again in
the Fall 1997. Repatriation of interest, dividends, and capital is permitted
under existing legislation, as is 100 percent foreign ownership of most types of
businesses.
In 1992, direct investment in Russia was $1.4 billion with portfolio
investment at $0.2 billion. In 1993, direct investment in Russia was again $1.4
billion with portfolio investment rising to $0.4 billion. Although the estimates
vary widely, figures indicate that the cumulative stock of foreign direct
investment in Russia by the end of 1996 had reached $6.4bn, with inflows that
year reaching approximately $2.2bn. Foreign direct invetsment figures for Russia
remain low, however, due in significant part to capital flight.
The top sectors which attracted foreign investment in 1993 were
machine-building/metal working, fuels, trade and food service, and construction.
By the end of 1996, however, the composition of foreign direct investment had
changed with a greater emphasis on food, retail trade and catering, as well as
financial services. The following chart provides data on foreign invetsment in
Russia by sector:
RUSSIAN FOREIGN DIRECT INVESTMENT BY SECTOR
(In millions of dollars)
1994 1995 1996
Total 584 2,021 2,040
Fuel & Energy 97 110 181
Wood Processing & Paper 49 83 160
Food 17 250 572
Retail Trade & Catering 46 469 255
Transportation & Communications 42 77 147
Machinery & Metalworking 43 102 66
Finance, Insurance & Pensions 23 159 266
Other 267 771 393
Source: The International Monetary Fund, Russian Federation - Recent Economic
Trends, July 1997.
The table below shows a sharp increase in total investment in Russia
between 1995 and 1996, rising from $2.8 bn to $6.5 bn. Direct foreign investment
shows a modest 11% increase from $1.9 bn to $2.1 bn. Portfolio investment, on
the other hand, accounts for a significant majority of that increase. The
official statistics, however, classify only $45 mn as "portfolio". A large part
of the category "Other" went into government securities, which would normally be
considered portfolio investment. The statistics are confused further by the fact
that "Other" also includes long-term, as well as short-term loans.
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TOP TEN INVESTORS -YEARLY BASIS
($ MILLION)
1995 1996
TOTAL (A) TOTAL DIRECT PORTFOLIO OTHER (B)
Total 2,791.0 6,506.1 2,090.0 45.4 4,370.7
USA 812.1 1,695.2 849.2 10.6 835.4
Switzerland 419.8 1.323.4 110.5 0.3 1,212.6
Germany 293.5 288.9 208.5 -- 80.4
Britain 161.4 486.4 87.4 25.2 373.8
Liechtenstein 114.4 -- -- -- --
Belgium 105.3 65.0 38.7 -- 26.3
France 95.9 41.7 37.4 -- 4.3
Netherlands 83.3 979.6 28.9 -- 950.7
Japan 74.1 -- -- -- --
Austria 71.8 163.6 142.9 0.7 20.0
Italy -- 75.2 15.0 -- 60.2
Sweden -- 154.9 41.1 -- 113.8
Sources: U.S. Department of Commerce, Goskomstat and Ministry of Economy.
(A) Includes direct (1,880), portfolio (25), and other (886).
(B) GOR analysts specify these as both long and short term loans and
credits going primarily to purchase government securities (newly
available in 1996 to non-Russian entities).
The chart below lists the top ten country investors in Russia on an
accumulated basis. However, as the numbers include portfolio and "other"
investment, they are not considered to represent an accumulated stock of
investment, and can therefore only be taken as a general indication of the
activity identified. Analysts from the Russian Ministry of Economics, however,
identify as direct investment $5.5 bn of the accumulated total in 1995 and $6.8
bn in 1996. This represents a more conservative estimate of a $1.3 bn increase
in 1996 compared with $2.1 bn shown in the table above representing largely data
collected by Goskomstat.
TOP TEN INVESTORS - ACCUMULATED BASIS
1995 1996
PERCENT $ MILLION PERCENT $ MILLION
Total 100.0 7,854.5(C) 100.0 13,542.5(D)
USA 26.0 2,039.8 28.4 3,846.1
Switzerland 6.6 518.7 12.6 1,706.4
Germany 9.7 763.9 6.6 894.1
Britain 12.7 994.4 8.2 1,104.8
Belgium 2.5 199.1 -- --
France 7.6 596.9 -- --
Netherlands 4.1 320.7 8.8 1,190.0
Austria 2.7 210.6 2.9 388.7
Italy 4.5 351.8 4.1 560.9
Canada 2.5 196.1 -- --
Cyprus -- -- 6.6 897.7
Sweden -- -- 2.6 348.9
Liechtenstein -- -- 2.4 325.3
Sources: U.S. Department of Commerce, Goskomstat and Ministry of Economy.
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(C) Russian analysts consider USD 5.5 billion of this as direct
investment.
(D) 1996 figures include the commercial loans and credits referred to
in note (B) of Table I. USD 6.8 billion of totals is considered
direct investment.
The following chart illustrates foreign investment in Russia by
region:
FOREIGN INVESTMENT IN RUSSIA BY REGION
(in millions of U.S. dollars)
Region 1995 1996
Percent Million Percent Million
Total 100 2,791 100 6,506.1
Moscow (city) 46.9 1,312 66 4,291.6
Moscow (region) 7.3 205 6.3 411.9
Tatarstan 5.7 160.6 1.4 91.9
Petersburg 5.7 160.6 2.2 145.3
Tyumen 3.7 102.6 3.4 257.5
Samara 2.5 69.7 -- --
Tver 2.4 67.1 -- --
Nizhegorod 2.1 59.8 2.2 140.8
Novosibirsk 2.1 58.4 1.1 71.1
Sakhalin 1.8 50.1 -- --
Magadan -- -- 2.3 149.3
Leningrad (region) -- -- 2.2 143.6
Khabarovsk -- -- 1.1 71.1
Sources: U.S. Department of Commerce, 1997, Goskomstat, Russian
Ministry of Economy.
LEGAL SYSTEM
[Section to be updated by Russian counsel]
The supreme law in the Russian Federation is the constitution, which
provides for a federal state and separation of executive, legislative, and
judicial power. The executive and legislative branches of the federal state have
the power to enact legislation in various forms.
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The Russian Federation operates on a civil legal system.
Part I of a new Civil Code largely went into effect on January 1, 1995.
This first part deals with general provisions, legal entities (including
commercial organizations), rights, ownership, general issues of law of
contracts, agency, security and other questions of a general character. The
second part is still to be adopted and may go into effect late in 1995.
The Civil Code states that it has priority over all other legislation
including federal laws. It also identifies a number of issues to be governed by
federal laws. "The Fundamental Principles of Civil Legislation of the USSR and
Republics," adopted May 31, 1991, is still recognized as valid law in Russia but
only in those parts and to the extent that it is not inconsistent with or
superseded by the new Civil Code or other legislation adopted after June 12,
1990.
The new Civil Code has replaced previous legislation aimed at
addressing the movement toward a market economy and the subsequent development
of he private sector, such as the Law On Ownership and most of the Law On
Enterprises and Entrepreneurial Activities.
According to the Civil Code, legal persons are divided into commercial
(business) and non-commercial organizations. The Civil Code provides for several
types of business organizations. Among them is a joint-stock company that can be
"open" or "closed," the principal difference being the existence of a
shareholder's preemptive right in a closed joint stock company to acquire shares
sold by other shareholders. Open joint-stock companies may carry out public
shares issues. Other types of vehicles for business activity are (1) the limited
liability society which broadly is a similar type of entity to a closed
joint-stock company but with no shares issued to partners, (2) a full
partnership, (3) a "kommandit" partnership (a form of limited partnership), (4)
an additional liability society, and (5) a cooperative.
According to the Civil Code each particular type of business
organization is to be regulated by a corresponding Law, which in each case is
yet to be passed. Until the Law On Joint-Stock Companies is adopted, the
Regulations On Joint-Stock Companies approved by Resolution 601 of the Russian
Council of Ministers on December 25, 1990 will apply. Although much of it is
superseded, Regulation 601 still sets out some of the basic rules for the
establishment and management of joint-stock companies. A company is entitled to
issue only registered shares (although the draft Law "On the Securities Market"
adopted by the State Duma on May 24, 1995, but not yet effective, provides for
bearer shares subject to certain restrictions), which may be designated either
ordinary or preferred; all shares of the same category must have the same
rights. A fixed dividend on preferred shares and a rate of interest on bonds
must be set at the time of their issue. All shares have the right to dividends
except for those acquired less than 30 days before the announced day of the
dividend payment. Dividends on ordinary shares are paid out of he net profit of
a company after taxes. Given the speed of development of reforms in Russia and
the fact that Regulation 601 was passed in 1990, it is out of date and contains
a number of unsatisfactory provisions and omissions. There is a notable gap in
the regulations with respect to directors' rights and liabilities. There are
several issues related to joint-stock companies that are addressed in the Civil
Code itself such as the procedure for establishment of a company, the increase
and decrease of a company's capital, and general provisions relating to types of
shares, dividends, directors and management, auditing and subsidiaries and
liquidation.
Regulations on registration of business vehicles were recently adopted
by Presidential Decree on general questions related to the registration of
companies. Currently the minimum charter capital of any enterprise with foreign
investment, as well as all joint stock companies, state and municipal
enterprises, must be not less than 1,000 times the minimum monthly wage set by
the Russian Federation (currently, the minimum wage is 43,700 rubles). This is
reviewed periodically depending on the level of inflation. The minimum charter
capital of enterprises of all legal organizational forms other than joint stock
companies may not be less than 100 times the minimum monthly wage.
The primary regulation in the field of securities is the Regulation "On
the Issue and Circulation of Securities and Stock Exchanges in the R.S.F.S.R."
approved by Resolution No. 78 of the Government of the
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R.S.F.S.R. of 28 December 1991. This Regulation describes different activities
of investment institutions (brokers, investment consultants, investment
companies, investment funds), sets forth some of the licensing requirements for
investment institutions and establishes other basic rules for activity in the
securities market. It also regulates issues of securities by either private
placement (i.e., up to 100 investors and for an amount up to 50 million rubles)
and public offers (which necessitate publication and registration of an issue
prospectus). This regulation also contains rules on circulation of securities
and basic requirements for stock exchanges. Among other things it provides that
if one person or a group of connected persons acquires over 15 percent of the
shares of any issuers they shall notify the Ministry of Finance of the
acquisition and if a person or group of connected persons acquires 35 percent or
more of shares of any issuer or shares providing for over 50 percent of
shareholders' votes they must obtain prior consent of the State Anti-Monopoly
Committee.
In addition to Regulation No. 78, a large number of Instructions and
Letters issued by the Ministry of Finance, the Federal Commission on Securities
and the Stock Market, the Central Bank, the State Anti-Monopoly Committee, the
State Property Management Committee (GKI) and other bodies regulate various
aspects of the securities market. An important draft of a new federal law
establishing a framework for the securities market was adopted by the State Duma
(the lower chamber of the Russian Parliament) in its third reading on May 24,
1995. The draft requires approval by the Federation Council (the upper chamber
of the Russian Parliament). The draft shall become a law if and when the
President signs it. The likely time for signature, if this occurs, is unknown
but it has been indicated that it might be signed before the end of July this
year. The draft law contains sections regulating the issue and circulation of
certain types of securities, the formation and activity of professional
participants in the securities market, decisions to issue securities, prospectus
information and registration, offers and types of securities, disclosure
requirements, insider trading, advertising rules, regulation and licensing, the
powers of the Federal Commission on Securities and the Stock Market and powers
and requirements of self regulatory organizations, and imposes liability for
breach of regulations. It does not contain any provisions specifically relating
to regulation of the activities of investment companies in Russia, although many
of its provisions, if adopted, will be relevant to regulating operators on the
securities market generally, including the Fund.
Meanwhile, independently of preparation of the draft federal law, a
recent Governmental Regulation No. 336 of April 15, 1995 instructed certain
authorities to introduce a series of regulations concerning the securities
market to become effective shortly. These will be subordinate to the draft
securities market law. The purpose of such regulations is stated in the
Resolution to be protection of the interests of investors, prevention of
discrimination of both Russian and foreign investors and introduction of higher
standards for participants in the securities market. Among other things this
Resolution gives a direction to the Federal Commission on Securities and the
Stock Market to submit to the government a draft resolution on changes and
amendments to Regulations No. 601 and No. 78. Drafts of those subordinate
regulations have not yet been published.
The Russian judicial system is represented by three branches of courts:
courts of general jurisdiction, a system of arbitration courts for the
resolution of economic disputes, and the constitutional court. The courts
hearing general practice cases consist of the Supreme Court of the Russian
Federation, regional courts and district courts. Economic disputes (commercial
matters) are heard by courts of the arbitration court system headed by the High
Arbitration Court of the Russian Federation. Parties to a particular contract,
however, might provide for private arbitration (not to be confused with the
arbitration court) to be the forum for resolution of their disputes.
As successor of the U.S.S.R., Russia is a signatory to the 1958 New
York Convention of the Recognition and Enforcement of Foreign Arbitral Awards.
Russian courts therefore should recognize and enforce arbitral awards made in
other jurisdictions which are also signatories to that Convention. Foreign
arbitral awards may be enforced in Russia in accordance with the Civil Procedure
Code and the Code of Arbitration Procedure which recognize such arbitral awards.
There are a number of grounds, however, on which recognition and enforcement of
a foreign arbitral award may be refused, which are listed in the law "On
International Commercial Arbitration of 7 July 1993."
The Laws of the Russian Federation on International Commercial
Arbitration reproduces similar provisions contained in the UNCITRAL Model Law.
Under this law the arbitration is entitled to apply the law
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which the parties have chosen as applicable. Another important provision is that
an arbitral award irrespective of the country where it was made is recognized
and enforced subject to a written application to a competent court.
The International Commercial Arbitration Court is established under the
Chamber of Trade and Industry of the Russian Federation and may hear cases
arising from any relations where one of the parties is located abroad or where
one of the parties (if it is an enterprise) has foreign participation.
B-22
<PAGE>
APPENDIX C
[SECURITIES MARKETS DISCLOSURE TO BE PROVIDED]
<PAGE>
APPENDIX D
PAST PERFORMANCE OF THE INVESTMENT MANAGER
The following paragraphs present performance data for Templeton Russia
Fund, Inc. ("Russia Fund"), a closed-end, non-diversified, management investment
company registered with the Securities and Exchange Commission, and Templeton
Central and Eastern European Fund ("Central/Eastern European Fund"), a
closed-end investment company incorporated Luxembourg, both of which are managed
by the Investment Manager. The data is provided to illustrate the past
performance of the Investment Manager and the Fund's portfolio management team
in managing investment companies that are similar in many ways to the Fund.
However, the performance data for Russia Fund and Central/Eastern European Fund
does not represent the performance of the Fund, and should not be considered a
prediction of the future performance of the Fund. The Fund's actual performance
may be higher or lower than that of Russia Fund and Central/Eastern European
Fund.
The investment objectives, policies, risks, and strategies of Russia Fund
are similar to, although not exactly the same as, those of the Fund. The
investment objective of the Fund and Russia Fund is long-term capital
appreciation. Russia Fund invests primarily in equity securities, as will the
Fund. In addition to having the same portfolio manager, both funds will have
access to substantially similar resources in determining appropriate investment
opportunities. Whereas Russia Fund seeks to achieve its investment objective by
investing primarily (at least 65% total assets under normal market conditions)
in equity securities of Russian issuers, the Fund will invest primarily in the
equity securities of Russian issuers and of issuers located in other Russia
Eurasia Region countries, as defined in this Prospectus. The Fund is authorized
to invest up to 35% of its assets in debt securities, whereas Russia Fund can
invest only up to 25% of its assets in debt securities. While the Investment
Manager expects to invest a significant percentage of the Fund's assets in
Russian companies, especially during the Fund's initial two years of operations,
the Fund is not required to invest a minimum percentage of total assets in
Russian companies. In addition, the Fund is expected to invest a greater
percentage of its assets in issuers with smaller market capitalizations than
Russia Fund, which has tended to invest in companies with relatively large
market capitalizations. For the one-year period ended March 31, 1997 and for the
period June 15, 1995 (commencement of operations) to March 31, 1997, Russia
Fund's total return based on the change in net asset value was 181.92% and
57.92%, respectively, and the total return based on the change in market price
was 147.08% and 57.33%, respectively.1
The investment objectives, policies, risks, and strategies of
Central/Eastern European Fund are similar to, although not exactly the same as,
those of the Fund. The investment objective of the Fund and Central/Eastern
European Fund is long-term capital appreciation. Central/Eastern European Fund
invests primarily in equity securities, as will the Fund. In addition to having
the same portfolio manager, both funds will have access to substantially similar
resources in determining appropriate investment opportunities. Whereas
Central/Eastern European Fund seeks to achieve its investment objective by
investing primarily equity securities of Central and Eastern European and
issuers, the Fund will invest primarily in the equity securities of issuers
located in Russia/Eurasia Region countries, as defined in this Prospectus. While
the Central/Eastern European Fund is authorized to invest in Russian issuers,
the fund has not done so. For the one-year period ended September 5, 1997,
Central/Eastern European Fund's total return based on the change in net asset
value was [-53.5%] and the total return based on the change in market price was
[-67.7%]2.
[FN]
1. The total return figures assume reinvestment of dividends and capital gain
distributions at net asset value or market price on reinvestment date, in
accordance with the dividend reinvestment plan. Returns since inception
also reflect the payment of the maximum sales load payable on a purchase of
Russia Fund in the initial public offering.
2. [Disclosure regarding calculation of total return to be provided]
</FN>
<PAGE>
APPENDIX E
TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1. Each holder of shares (a "Shareholder") in Templeton Russia/Eurasia
Region Fund (the "Fund") whose Fund shares are registered in his or her own name
will automatically be a participant ("Participant") in the Dividend Reinvestment
Plan (the "Plan"), unless any such Shareholder specifically elects to receive
all dividends and capital gains in cash, paid by check, mailed directly to the
Shareholder. A Shareholder whose shares are registered in the name of a
broker-dealer or other nominee (the "Nominee") will be a Participant if (a) such
a service is provided by the Nominee and (b) the Nominee makes an election on
behalf of the Shareholder to participate in the Plan. Those Underwriters (as
defined in the Fund's Prospectus dated , 1997) which have the capacity to allow
participation intend to make such an election on behalf of Shareholders whose
shares are registered in their names, as Nominee, unless a Shareholder
specifically instructs his or her Nominee to pay dividends and capital gains in
cash. Mellon Securities Trust Company (the "Plan Agent") will act as agent for
Participants and will open an account under the Plan for each Participant in the
same name as such Participant's shares are registered on the books and records
of the transfer agent for the shares.
2. Whenever the Fund declares a capital gains distribution or an income
dividend payable in shares or cash, Participants will receive such distribution
or dividend in the manner described in paragraph 3 below as determined on the
date such distribution or dividend becomes payable.
3. Whenever the market price of the Fund's shares is equal to or exceeds
the net asset value price per share at the time shares are valued for the
purpose of determining the number of shares equivalent to the cash dividend or
capital gains distribution, Participants will be issued shares valued at the
greater of (i) net asset value per share or (ii) 95% of the then-current market
price. Participants will receive any such distribution or dividend entirely in
shares and the Plan Agent shall automatically receive such shares, including
fractions, for all Participants' accounts. If the net asset value per share of
the Fund's shares at the time of valuation exceeds the market price of the
Fund's shares at such time, or if the Fund should declare a dividend or capital
gains distribution payable only in cash, the Plan Agent will, as purchasing
agent for the Participants, buy shares in the open market, on the New York Stock
Exchange (the "Exchange") or elsewhere, for each Participant's account. The
valuation date will be the payable date for such distribution or dividend. If,
before the Plan Agent has completed its purchases, the market price exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or capital gains distribution
had been paid in shares issued by the Fund at net asset value per share. The
Plan Agent will apply all cash received as a dividend or capital gains
distribution to purchase shares on the open market as soon as practicable after
the payment date of such dividend or capital gains distribution, but in no event
later than 30 days after such date, except where necessary to comply with
applicable provisions of the federal securities laws.
4. For all purposes of the Plan: (a) the market price of the Fund's shares
on a particular date shall be the last sale price on the Exchange on that date
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such shares on the Exchange on such date
and (b) net asset value per share on a particular date shall be as determined by
or on behalf of the Fund.
5. The open-market purchases provided for above may be made on any
securities exchange where the shares of the Fund are traded, in the
over-the-counter market or in negotiated transactions, and may be on such terms
as to price, delivery and otherwise as the Plan Agent shall determine. Funds
held by the Plan Agent uninvested will not bear interest, and it is understood
that, in any event, the Plan Agent shall have no liability in connection with
any inability to purchase shares within 30 days after the payment date of a
dividend or capital gains distribution as herein provided, or with the timing of
any purchases effected. The Plan Agent shall have no responsibility as to the
value of the shares of the Fund acquired for any Participant's account.
6. The Plan Agent will hold shares acquired pursuant to the Plan in
non-certificated form in the Plan Agent's name or that of its Nominee. The Plan
Agent will forward to each Participant any proxy solicitation material and will
vote any shares so held for each Participant only in accordance with the proxy
returned by any such Participant to the Fund. Upon any Participant's written
request, the Plan Agent will deliver to her or him, without charge, a
certificate or certificates for the full shares.
7. The Plan Agent will confirm to each Participant acquisitions made for
its account as soon as practicable but not later than 60 days after the date
thereof. Although a Participant may from time to time have an undivided
fractional interest (computed to four decimal places) in a share of the Fund, no
certificates for a fractional share will be issued. However, dividends and
distributions on fractional shares will be credited to the Participant's
account.
8. Any stock dividends or split shares distributed by the Fund on shares
held by the Plan Agent for any Participant will be credited to such
Participant's account. In the event that the Fund makes available to
Participants transferable rights to purchase additional shares of other
securities, the Plan Agent will sell such rights and apply the proceeds of the
sale to the purchase of additional shares of the Fund for the account of
Participants.
9. The Plan Agent's service fee for handling capital gains distributions or
income dividends will be paid by the Fund. Participants will be charged a pro
rata share of brokerage commissions on all open market purchases.
10. Any Participant may withdraw shares for such Participant's account or
terminate such Participant's account under the Plan by notifying the Plan Agent
in writing. Such withdrawal or termination will be effective immediately if
notice is received by the Plan Agent not less than 10 days prior to any dividend
or distribution record date; otherwise such withdrawal or termination will be
effective, with respect to any subsequent dividend or distribution, on the first
trading day after the dividends paid for such record date have been credited to
the Participant's account. The Plan may be terminated by the Plan Agent or the
Fund upon notice in writing mailed to each Participant at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any withdrawal or termination, the Plan Agent will cause to be delivered to
each Participant a certificate or certificates for the appropriate number of
full shares and a cash adjustment for any fractional share (valued at the market
value of the shares at the time of withdrawal or termination); provided,
however, that any Participant may elect by notice to the Plan Agent in writing
in advance of such termination to have the Plan Agent sell part or all of the
shares in question and remit the proceeds to such Participant, net of any
brokerage commission. A $5.00 fee will be charged by the Plan Agent upon any
cash withdrawal or termination, and the Plan Agent is authorized to sell a
sufficient number of the Participant's shares to cover such fee and any
brokerage commission on such sale.
11. These terms and conditions may be amended or supplemented by the Plan
Agent or the Fund at any time or times, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, with respect to any such Participant, prior to the effective
date thereof, the Plan Agent receives written notice of the termination of that
Participant's account under the Plan. Any such amendment may include an
appointment by the Plan Agent in its place and stead of a successor plan agent
under these terms and conditions, with full power and authority to perform all
or any of the acts to be performed by the Plan Agent under these terms and
conditions. Upon any such appointment of a plan agent for the purpose of
receiving dividends and distributions, the Fund will be authorized to pay to
such successor plan agent, for Participants' accounts, all dividends and
distributions payable on the shares held in each Participant's name or under the
Plan for retention or application by such successor plan agent as provided in
these terms and conditions.
12. The Plan Agent shall at all times act in good faith and agree to use
its best efforts within reasonable limits to ensure the accuracy of all services
performed under the Plan and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by its or its employees' negligence, bad faith or willful
misconduct.
13. The Participant shall have no right to draw checks or drafts against
such Participant's account or to give instructions to the Plan Agent in respect
of any shares or cash held therein except as expressly provided herein.
14. The Participant agrees to notify the Plan Agent promptly in writing of
any change of address. Notices to the Participant may be given by the Plan Agent
by letter addressed to the Participant as shown on the records of the Plan
Agent.
15. This Plan and the account established hereunder for the Participant
shall be governed by and construed in accordance with the laws of the State of
New York and the rules and regulations of the Securities and Exchange
Commission, as they may be changed or amended from time to time.
<PAGE>
APPENDIX F
DESCRIPTION OF FUTURES CONTRACTS, OPTIONS ON SECURITIES
AND INDICIES AND FOREIGN CURRENCY HEDGING TRANSACTIONS
Futures Contracts. The Fund may purchase and sell financial futures
contracts. Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
The Fund may also buy and sell index futures contracts with respect to any
stock index traded on a recognized stock exchange or board of trade. An index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.
At the time the Fund purchases a futures contract, an amount of liquid
assets equal to the market value of the futures contract will be deposited in a
segregated account with the Fund's Custodian. When writing a futures contract,
the Fund will maintain with its Custodian liquid assets that, when added to the
amounts deposited with a futures commission merchant or broker as margin, are
equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or holding a call option permitting the Fund to
purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Fund's Custodian).
Options on Securities or Indices. The Fund may write (i.e., sell) covered
put and call options and purchase put and call options on securities or
securities indices that are traded on United States and foreign exchanges or in
the over-the-counter markets.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a securities index gives the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option.
The Fund may write a call or put option only if the option is "covered." A
call option on a security written by the Fund is "covered" if the Fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash or high grade U.S. Government
securities in a segregated account with its Custodian. A put option on a
security written by the Fund is "covered" if the Fund maintains liquid assets
with a value equal to the exercise price in a segregated account with its
Custodian, or else holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
The Fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the Investment Manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the Fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the Fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The Fund will cover put options on stock indices that it
writes by segregating liquid assets equal to the option's exercise price, or in
such other manner as may be in accordance with the rule of the exchange on which
the option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the Fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments. By writing a
put option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the Fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
accuracy of the correlation between the changes in value of the underlying
security or index and the changes in value of the Fund's security holdings being
hedged.
The Fund may purchase call options on individual securities to hedge
against an increase in the price of securities that the Fund anticipates
purchasing in the future. Similarly, the Fund may purchase call options on a
securities index to attempt to reduce the risk of missing a broad market
advance, or an advance in an industry or market segment, at a time when the Fund
holds uninvested cash or short-term debt securities awaiting investment. When
purchasing call options, the Fund will bear the risk of losing all or a portion
of the premium paid if the value of the underlying security or index does not
rise.
No assurance can be given that a liquid market will exist when the Fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of either
buyers or sellers, or the options exchange could suspend trading after the price
has risen or fallen more than the maximum specified by the exchange. Although
the Fund may be able to offset to some extent any adverse effects of being
unable to liquidate an option position, the Fund may experience losses in some
cases as a result of such inability.
Foreign Currency Hedging Transactions. In order to hedge against
foreign currency exchange rate risks, the Fund may enter into forward foreign
currency exchange contracts and foreign currency futures contracts, as well as
purchase put or call options on foreign currencies, as described below. The Fund
may also conduct its foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market.
The Fund may enter into forward foreign currency exchange contract
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. The Fund may enter into a
forward contract, for example, when it enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security. In addition, for example, when the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when the Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contact to buy that foreign currency for a fixed dollar
amount. This second investment practice is generally referred to as
"cross-hedging." Because in connection with the Fund's forward foreign currency
transactions an amount of the Fund's liquid assets equal to the amount of the
purchase will be held aside or segregated to be used to pay for the commitment,
the Fund will always have assets available sufficient to cover any commitments
under these contracts or to limit any potential risk. The segregated account
will be marked-to-market on a daily basis. While these contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts . In such
event, the Fund's ability to utilize forward contracts in the manner set forth
above may be restricted. Forward contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not engaged in such contracts.
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to the written or purchased by the Fund will be traded on
U.S. and foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the purchase or sale
for future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of securities
that the Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the Fund's Investment
Manager to forecast currency exchange rate movements correctly. Should exchange
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of foreign currency futures or may realize losses.
<PAGE>
<TABLE>
<S> <C>
No dealer, salesman or any other person has been authorized
to give any information or to make any representation not in
this Prospectus and, if given or made, such information or ___________ Shares
representation must not be relied upon as having been authorized
by the Fund, the Investment Manager, or any Underwriter. Neither TEMPLETON
the delivery of this Prospectus nor any sale made hereunder shall, RUSSIA/
under any circumstances, create any implication that there has EURASIA
been no change in the affairs of the Fund since the date hereof or FUND
that the information contained herein is correct as of any time
subsequent to its date. However, if any material change occurs
while this Prospectus is required by law to be delivered, this
Prospectus will be supplemented or amended accordingly. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make any such
offer or solicitation in such jurisdiction.
.........
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY........................................
FUND EXPENSES............................................. Shares of Beneficial Interest
THE FUND
USE OF PROCEEDS...........................................
INVESTMENT RATIONALE......................................
INVESTMENT OBJECTIVE AND POLICIES.........................
PROSPECTUS
RISK FACTORS AND SPECIAL CONSIDERATIONS
ADDITIONAL INVESTMENT PRACTICES...........................
INVESTMENT RESTRICTIONS...................................
MANAGEMENT OF THE FUND....................................
TRUSTEES AND OFFICERS.....................................
PORTFOLIO TRANSACTIONS AND BROKERAGE......................
NET ASSET VALUE...........................................
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN...
TAXATION
DESCRIPTION OF SHARES.....................................
UNDERWRITING..............................................
CERTAIN INVESTOR SUITABILITY STANDARDS....................
CUSTODIAN AND TRANSFER AND DIVIDEND PAYING AGENT..........
PUBLIC ACCOUNTANTS........................................
LEGAL MATTERS.............................................
ADDITIONAL INFORMATION....................................
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........ Smith Barney Inc.
STATEMENT OF ASSETS AND LIABILITIES.......................
APPENDIX A................................................
APPENDIX B................................................
APPENDIX C................................................
APPENDIX D................................................
APPENDIX E................................................ ........., 1997
APPENDIX F................................................
1 The total return figures assume reinvestment of dividends and capital gain
distributions at net asset value or market price on reinvestment date, in
accordance with the dividend reinvestment plan. Returns since inception also
reflect the payment of the maximum sales load payable on a purchase of Russia
Fund in the initial public offering. 2 [Disclosure regarding calculation of
total return to be provided]
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solication or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
ALTERNATE PAGE
(FOR INTERNATIONAL TRANCHE)
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED .
PROSPECTUS
Shares of Beneficial Interest
TEMPLETON RUSSIA/EURASIA FUND
Templeton Russia/Eurasia Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's investment
objective is long-term capital appreciation. To achieve its objective, the Fund
intends to invest primarily in equity securities of Russia/Eurasia Companies.
The term "Russia/Eurasia Company" means a legal entity (i) that is organized
under the laws of, or with a principal office and domicile in, the
Russia/Eurasia Region, or (ii) for which the principal equity securities trading
market is in the Russia/Eurasia Region, or (iii) that derives at least 50% of
its revenues or profits from goods produced or sold, investments made, or
services performed, in the Russia/Eurasia Region, or (iv) that has at least 50%
of its assets situated in the Russia/Eurasia Region. Under normal market
conditions, the Fund will invest at least 65% of its total assets in equity
securities of Russia/Eurasia Companies. The Fund may invest up to 35% of total
assets in debt securities issued by Russia/Eurasia Companies or issued or
guaranteed by Russia/Eurasia Region governmental entities which in the
Investment Manager's view offer the potential for capital appreciation.
As used in this Prospectus, the term "Russia/Eurasia Region" means Russia,
the Commonwealth of Independent States ("CIS"), including countries in Central
and Eastern Europe, and countries in Central Asia. Russia/Eurasia Region
countries include Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia,
Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Latvia,
Lithuania, Former Yugoslav Republic of Macedonia, Moldova, Montenegro, Poland,
Romania, Russia, Serbia, Slovakia, Slovenia, Turkmenistan, Ukraine, and
Uzbekistan, as well as any other countries in the Russia/Eurasia Region that may
be approved for investment by the Board of Trustees in the future. Appropriate
foreign sub-custody and securities registration arrangements are not now and may
not in the future be available to the Fund in many Russia/Eurasia Region
countries. As a result, the Fund expects initially to limit its investments to
the following countries: Russia, Poland, Hungary, Czech Republic, Romania,
Slovakia, and Slovenia. If appropriate foreign sub-custody arrangements become
available in the future, the Investment Manager may invest in any Russia/Eurasia
Region country, subject to the availability of suitable investments. The
Investment Manager is free to make investments without limit in any of the
Russia/Eurasia Region countries.
Investments in Russia/Eurasia Companies involve a high degree of risk and
special considerations not typically associated with investments in more
established economies or securities markets, such as political, economic and
legal uncertainties, and currency fluctuations. Additionally, the securities
markets in the Russia/Eurasia Region are emerging markets characterized by a
relatively small number of equity issues and relatively low trading volume,
resulting in substantially less liquidity and greater price volatility. The
methods of settlement, clearing, and registration of securities transactions in
Russia/Eurasia Region countries present significant risks to investors. A
substantial number of the securities in which the Fund will invest will be
illiquid and may have small market capitalizations. Investment in the Fund
should be considered highly speculative and there can be no assurance that the
Fund will achieve its investment objective. See "Risk Factors and Special
Considerations."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Maximum Maximum Proceeds to
Price to Public Sales Load(1) the Fund(2)
Per Share $20.00 $1.20 $18.80
Total(3) $------- $---- $-------
(Footnotes on following page)
The Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Shares will be made in New York, New York on or about
__________________, 1997.
[------------]
--------------
The date of this Prospectus is __________, 1997
<PAGE>
<TABLE>
<S> <C>
No dealer, salesman or any other person has been authorized ALTERNATE PAGE
to give any information or to make any representation not in this
Prospectus and, if given or made, such information or Shares
representation must not be relied upon as having been authorized
by the Fund, the Investment Manager, or any Underwriter. Neither TEMPLETON
the delivery of this Prospectus nor any sale made hereunder shall, RUSSIA/
under any circumstances, create any implication that there has EURASIA
been no change in the affairs of the Fund since the date hereof or FUND
that the information contained herein is correct as of any time
subsequent to its date. However, if any material change occurs
while this Prospectus is required by law to be delivered, this
Prospectus will be supplemented or amended accordingly. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make any such
offer or solicitation in such jurisdiction.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY
FUND EXPENSES Shares of Beneficial Interest
THE FUND
USE OF PROCEEDS
INVESTMENT RATIONALE
INVESTMENT OBJECTIVE AND POLICIES
PROSPECTUS
RISK FACTORS AND SPECIAL CONSIDERATIONS
ADDITIONAL INVESTMENT PRACTICES
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
PORTFOLIO TRANSACTIONS AND BROKERAGE
NET ASSET VALUE
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
TAXATION
DESCRIPTION OF SHARES
UNDERWRITING
CERTAIN INVESTOR SUITABILITY STANDARDS
CUSTODIAN AND TRANSFER AND DIVIDEND PAYING AGENT
PUBLIC ACCOUNTANTS
LEGAL MATTERS
ADDITIONAL INFORMATION
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS [_________________]
STATEMENT OF ASSETS AND LIABILITIES
APPENDIX A
APPENDIX B
APPENDIX C
APPENDIX D
APPENDIX E , 1997
APPENDIX F
</TABLE>
<PAGE>
PART B
NOT APPLICABLE
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(1) Financial Statements
Contained in Part A:
-- Report of Independent Accountants*
-- Statement of Assets and Liabilities*
Contained in Part B:
-- Not Applicable
Contained in Part C:
-- None
(2) Exhibits
(a) -- Agreement and Declaration of Trust
(b) -- Bylaws*
(c) -- Not Applicable
(d) -- Not Applicable
(e) -- Dividend Reinvestment Plan*
(f) -- Not Applicable
(g) -- Form of Investment Management Agreement*
(h)(i) -- Form of Purchase Agreement
(h)(ii) -- Standard Dealer Agreement*
(i) -- Not Applicable
(j) -- Form of Custody Agreement*
(k)(i) -- Form of Agent Agreement*
(k)(ii) -- Form of Business Management Agreement*
(l) -- Opinion and Consent of Dechert Price & Rhoads*
(m) -- Not Applicable
(n) -- Consent of Independent Accountants*
(o) -- Not Applicable
(p) -- Form of Investment Letter*
(q) -- Not Applicable
- -----------------------
* To be filed by Amendment.
<PAGE>
ITEM 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
ITEM 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
SEC Registration fees $_____
NASD fees and fees and expenses of qualification under
state securities laws (including fees of counsel) *
Printing (other than stock certificates) *
Engraving and printing stock certificates *
Legal fees and expenses *
Underwriters' expense allowance *
Miscellaneous *
Total *
* To be completed by amendment
ITEM 27. Persons Controlled by or under Common Control with Registrant
Upon conclusion of the initial public offering of the Registrant's
shares of beneficial interest, it is anticipated that no person will control or
be controlled by or under common control with the Registrant.
ITEM 28. Number of Holders of Securities
Shares of Beneficial Interest, par value $0.01 per share, one record
holder as of the effective date of this Registration Statement.
ITEM 29. Indemnification
Reference is made to Article VII of the Registrant's Trust Instrument,
which is filed herewith, and to Title 12, ss.3817 of the Delaware Code.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a trustee, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such a trustee, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 30. Business and Other Connections of the Investment Manager
Information as to the directors and officers of the Investment Manager,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers of
the Investment Manager in the last two years, is included in its application for
registration as an investment adviser on Form ADV (File No. 801-46997) filed
under the Investment Advisers Act of 1940 (the "Advisers Act") and is
incorporated herein by reference thereto.
<PAGE>
ITEM 31. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained at the offices of (a) Registrant, (b) Registrant's
administrator, (c) its custodians and (d) its transfer agent. The address of
each is as follows:
(a) Templeton Russia Eurasia Fund
500 East Broward Blvd.
Fort Lauderdale, Florida 33394
(b) Franklin Templeton Services, Inc.
777 Mariners Island Blvd.
San Mateo, California 94403-7777
(c) The Chase Manhattan Bank, N.A.
MetroTech Center
Brooklyn, New York 11245
(d) ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
ITEM 32. Management Services
None.
ITEM 33. Undertakings
(1) Registrant undertakes to suspend offering of the Shares of
Beneficial Interest covered hereby until it amends its Prospectus contained
herein if (i) subsequent to the effective date of this Registration Statement,
its net asset value declines more than 10 percent from its net asset value as of
the effective date of this Registration Statement, or (ii) its net asset value
increases to an amount greater than its net proceeds as stated in the Prospectus
contained herein.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) Registrant undertakes that:
(a) For the purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant has duly caused
this amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, D.C. on the
6th day of October, 1997.
TEMPLETON RUSSIA/EURASIA FUND
By: /s/Barbara J. Green
Barbara J. Green
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature Title Date
/s/Barbara J. Green Trustee and President October 6, 1997
Barbara J. Green (Principal Executive Officer)
/s/Samuel J. Forester, Jr. Trustee October 6, 1997
Samuel J. Forester, Jr.
/s/James R. Baio Treasurer October 6, 1997
James R. Baio (Principal Financial and
Accounting Officer)
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
of
TEMPLETON RUSSIA/EURASIA FUND
a Delaware Business Trust
Principal Place of Business:
500 East Broward Boulevard
Ft. Lauderdale, FL 33394
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I....................................................................1
Name and Definitions.......................................................1
Section 1. Name........................................................1
Section 2. Definitions.................................................1
(a) Trust........................................................1
(b) Trust Property...............................................1
(c) Trustees.....................................................1
(d) Shares.......................................................2
(e) Shareholder..................................................2
(f) Person.......................................................2
(g) 1940 Act.....................................................2
(h) Commission and Principal Underwriter.........................2
(i) Declaration of Trust.........................................2
(j) By-Laws......................................................2
(k) Interested Person............................................2
(l) Investment Manager...........................................2
ARTICLE II...................................................................2
Purpose of Trust...........................................................2
ARTICLE III..................................................................3
Shares.....................................................................3
Section 1. Division of Beneficial Interest.............................3
Section 2. Ownership of Shares.........................................3
Section 3. Investments in the Trust....................................3
Section 4. Status of Shares and Limitation of Personal Liability.......4
Section 5. Power of Board of Trustees to Change Provisions Relating....4
to Shares
Section 6. Establishment and Designation of Shares.....................4
Section 7. Indemnification of Shareholders.............................5
ARTICLE IV...................................................................5
The Board of Trustees......................................................5
Section 1. Number, Election and Tenure.................................5
Section 2. Effect of Death, Resignation, etc. of a Trustee............5
Section 3. Powers ..................................................6
Section 4. Payment of Expenses by the Trust...........................9
Section 5. Payment of Expenses by Shareholders........................9
Section 6. Ownership of Assets of the Trust...........................9
Section 7. Service Contracts.........................................10
- i -
<PAGE>
ARTICLE V...................................................................11
Shareholders' Voting Powers and Meetings..................................11
Section 1. Voting Powers..............................................11
Section 2. Voting Power and Meetings..................................11
Section 3. Quorum and Required Vote...................................12
Section 4. Action by Written Consent..................................12
Section 5. Record Dates...............................................12
Section 6. Additional Provisions......................................13
ARTICLE VI. 13
Net Asset Value and Distributions.........................................13
Section 1. Determination of Net Asset Value, Net Income, an...........13
and Distributions
ARTICLE VII 13
Compensation and Limitation of Liability of Trustees......................13
Section 1. Compensation...............................................13
Section 2. Indemnification and Limitation of Liability................13
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond .......14
or Surety
Section 4. Insurance..................................................14
ARTICLE VIII 14
Miscellaneous.............................................................14
Section 1. Liability of Third Persons Dealing with Trustees...........14
Section 2. Termination of Trust.......................................14
Section 3. Merger and Consolidation...................................15
Section 4. Amendments.................................................15
Section 5. Filing of Copies, References, Headings.....................15
Section 6. Applicable Law.............................................16
Section 7. Provisions in Conflict with Law or Regulations.............16
Section 8. Business Trust Only........................................16
- ii -
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
OF
TEMPLETON RUSSIA/EURASIA FUND
WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and
entered into as of the date set forth below by the Trustees named hereunder for
the purpose of forming a Delaware business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby direct that a Certificate
of Trust be filed with the office of the Secretary of State of the State of
Delaware and do hereby declare that the Trustees will hold IN TRUST all cash,
securities and other assets which the Trust now possesses or may hereafter
acquire from time to time in any manner and manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders of
Shares in this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This trust shall be known as "Templeton Russia/Eurasia
Fund" and the Trustees shall conduct the business of the Trust under that name
or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by
the context or specifically provided:
(a) Trust. The "Trust" refers to the Delaware business trust
established by this Agreement and Declaration of Trust, as amended from
time to time;
(b) Trust Property. The "Trust Property" means any and all property,
real or personal, tangible or intangible, which is owned or held by or for
the account of the Trust, including without limitation the rights
referenced in Article VIII, Section 9 hereof;
(c) Trustees. "Trustees" refers to the persons who have signed this
Agreement and Declaration of Trust, so long as they continue in office in
accordance with the terms hereof, and all other persons who may from time
to time be duly elected or appointed to serve on the Board of Trustees in
accordance with the provisions hereof, and reference herein to a Trustee or
the Trustees shall refer to such person or persons in their capacity as
trustees hereunder;
(d) Shares. "Shares" means the shares of beneficial interest into
which the beneficial interest in the Trust shall be divided from time to
time and includes fractions of Shares as well as whole Shares;
<PAGE>
(e) Shareholder. "Shareholder" means a record owner of outstanding
Shares;
(f) Person. "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other
entities, whether or not legal entities, and governments and agencies and
political subdivisions thereof, whether domestic or foreign;
(g) 1940 Act. The "1940 Act" refers to the Investment Company Act of
1940 and the Rules and Regulations thereunder, all as amended from time to
time;
(h) Commission and Principal Underwriter. The terms "Commission" and
"Principal Underwriter" shall have the respective meanings given them in
Section 2(a)(7) and Section 2(a)(29) of the 1940 Act;
(i) Declaration of Trust. "Declaration of Trust" shall mean this
Agreement and Declaration of Trust, as amended or restated from time to
time;
(j) By-Laws. "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time and incorporated herein by reference;
(k) Interested Person. The term "Interested Person" has the meaning
given it in Section 2(a)(19) of the 1940 Act and the rules thereunder;
(l) Investment Manager. "Investment Manager" or "Manager" means a
party furnishing services to the Trust pursuant to any contract described
in Article IV, Section 7(a) hereof;
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business
of a management investment company registered under the 1940 Act.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, with a
par value of $.01 per Share. The Trustees may authorize the division of Shares
into separate classes of Shares. If only one or no classes shall be established,
the Shares shall have the rights and preferences provided for herein and in
Article III, Section 6 hereof to the extent relevant and not otherwise provided
for herein, and all references to classes shall be construed (as the context may
require) to refer to the Trust.
Subject to the provisions of Section 6 of this Article III, each Share
shall have voting rights as provided in Article V hereof, and holders of the
Shares shall be entitled to receive
- 2 -
<PAGE>
dividends, when, if and as declared with respect thereto in the manner provided
in Article VI, Section I hereof. No Shares shall have any priority or preference
over any other Share of the same class with respect to dividends or
distributions upon termination of the Trust made pursuant to Article VIII,
Section 4 hereof. All dividends and distributions shall be made ratably among
all Shareholders of a particular class from the assets held with respect to such
class according to the number of Shares of such class held of record by such
Shareholder on the record date for any dividend or distribution or on the date
of termination, as the case may be. Shareholders shall have no preemptive or
other right to subscribe to any additional Shares or other securities issued by
the Trust. The Trustees may from time to time divide or combine the Shares into
a greater or lesser number of Shares without thereby materially changing the
proportionate beneficial interest of the Shares in the assets held by the Trust.
Section 2. Ownership of Shares. The ownership of Shares shall be recorded
on the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each class. No
certificates certifying the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the transfer of Shares of each
class and similar matters. The record books of the Trust as kept by the Trust or
any transfer or similar agent, as the case may be, shall be conclusive as to who
are the Shareholders of each class and as to the number of Shares of each class
held from time to time by each.
Section 3. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize. Each investment
shall be credited to the individual Shareholder's account in the form of full
and fractional Shares of the Trust, or such class as the purchaser shall select,
at the net asset value per Share next determined for such class after receipt of
the investment; provided, however, that the Trustees may, in their sole
discretion, impose a sales charge upon investments in the Trust.
Section 4. Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the existence of the
Trust shall not operate to terminate the Trust, nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders as partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust shall have any power to bind personally any
Shareholders, nor, except as specifically provided herein, to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.
- 3 -
<PAGE>
Section 5. Power of Board of Trustees to Change Provisions Relating to
Shares. Notwithstanding any other provisions of this Declaration of Trust and
without limiting the power of the Board of Trustees to amend the Declaration of
Trust as provided elsewhere herein, the Board of Trustees shall have the power
to amend this Declaration of Trust, at any time and from time to time, in such
manner as the Board of Trustees may determine in their sole discretion, without
the need for Shareholder action, so as to add to, delete, replace or otherwise
modify any provisions relating to the Shares contained in this Declaration of
Trust, provided that before adopting any such amendment without Shareholder
approval the Board of Trustees shall determine that it is consistent with the
fair and equitable treatment of all Shareholders and that Shareholder approval
is not otherwise required by the 1940 Act or other applicable law. If Shares
have been issued, Shareholder approval shall be required to adopt any amendments
to this Declaration of Trust which would adversely affect to a material degree
the rights and preferences of the Shares of any class or to increase or decrease
the par value of the Shares of any class.
Subject to the foregoing Paragraph, the Board of Trustees may amend the
Declaration of Trust to amend any of the provisions set forth in paragraphs (a)
through (i) of Section 6 of this Article III.
Section 6. Establishment and Designation of Shares. The establishment and
designation of any class of Shares shall be effective upon the resolution by a
majority of the then Trustees, adopting a resolution which sets forth such
establishment and designation and the relative rights and preferences of such
class. Each such resolution shall be incorporated herein by reference upon
adoption.
Shares of each class established pursuant to this Section 6, unless
otherwise provided in the resolution establishing such class, shall have the
following relative rights and preferences:
Section 7. Indemnification of Shareholders. If any Shareholder or former
Shareholder shall be exposed to liability by reason of a claim or demand
relating to his or her being or having been a Shareholder, and not because of
his or her acts or omissions, the Shareholder or former Shareholder (or his or
her heirs, executors, administrators, or other legal representatives or in the
case of a corporation or other entity, its corporate or other general successor)
shall be entitled to be held harmless from and indemnified out of the assets of
the Trust against all loss and expense arising from such claim or demand.
ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees constituting
the Board of Trustees shall be fixed from time to time by a written instrument
signed, or by resolution approved at a duly constituted meeting, by a majority
of the Board of Trustees,
- 4 -
<PAGE>
provided, however, that the number of Trustees shall in no event be less than
one (1) nor more than fifteen (15). The Board of Trustees, by action of a
majority of the then Trustees at a duly constituted meeting, may fill vacancies
in the Board of Trustees or remove Trustees with or without cause. Each Trustee
shall serve during the continued lifetime of the Trust until he or she dies,
resigns, is declared bankrupt or incompetent by a court of appropriate
jurisdiction, or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and until the election
and qualification of his or her successor. Any Trustee may resign at any time by
written instrument signed by him and delivered to any officer of the Trust or to
a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to the extent
expressly provided in a written agreement with the Trust, no Trustee resigning
and no Trustee removed shall have any right to any compensation for any period
following his or her resignation or removal, or any right to damages on account
of such removal. The Shareholders may fix the number of Trustees and elect
Trustees at any meeting of Shareholders called by the Trustees for that purpose.
Any Trustee may be removed at any meeting of Shareholders by a vote of
two-thirds of the outstanding Shares of the Trust. A meeting of Shareholders for
the purpose of electing or removing one or more Trustees may be called (i) by
the Trustees upon their own vote, or (ii) upon the demand of Shareholders owning
10% or more of the Shares of the Trust in the aggregate.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination, resignation, retirement, removal, or incapacity of one or more
Trustees, or all of them, shall not operate to annul the Trust or to revoke any
existing agency created pursuant to the terms of this Declaration of Trust.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is
filled as provided in Article IV, Section 1, the Trustees in office, regardless
of their number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by this Declaration of Trust.
As conclusive evidence of such vacancy, a written instrument certifying the
existence of such vacancy may be executed by an officer of the Trust or by a
majority of the Board of Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to fill vacancies, the Trust's
Investment Manager(s) are empowered to appoint new Trustees.
Section 3. Powers. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Board of Trustees, and such
Board shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in securities transactions of all
kinds on behalf of the Trust. Trustees in all instances shall act as principals;
and are and shall be free from the control of the Shareholders. The Trustees
shall have full power and authority to do any and all acts and to make and
execute any and all contracts and instruments that they may consider necessary
or appropriate in connection with the administration of the Trust. Without
limiting the foregoing, the Trustees may: adopt By-Laws not inconsistent with
this Declaration of Trust providing for the regulation and management of the
affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; fill vacancies in or
remove from their number, and may elect and remove such
- 5 -
<PAGE>
officers and appoint and terminate such agents as they consider appropriate;
appoint from their own number and establish and terminate one or more committees
consisting of two or more Trustees which may exercise the powers and authority
of the Board of Trustees to the extent that the Trustees determine; employ one
or more custodians of the assets of the Trust and may authorize such custodians
to employ subcustodians and to deposit all or any part of such assets in a
system or systems for the central handling of securities or with a Federal
Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both;
provide for the issuance and distribution of Shares by the Trust directly or
through one or more Principal underwriters or otherwise; redeem, repurchase and
transfer Shares pursuant to applicable law; set record dates for the
determination of Shareholders with respect to various matters; declare and pay
dividends and distributions to Shareholders from the assets of the Trust; and in
general delegate such authority as they consider desirable to any officer of the
Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian, transfer or shareholder servicing agent, or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees. Unless otherwise specified or required by law,
any action by the Board of Trustees shall be deemed effective if approved or
taken by a majority of the Trustees then in office. Any action required or
permitted to be taken at any meeting of the Board of Trustees, or any committee
thereof, may be taken without a meeting if all members of the Board of Trustees
or committee (as the case may be) consent thereto in writing, and the writing or
writings are filed with the minutes of the proceedings of the Board of Trustees,
or committee.
Without limiting the foregoing, the Trust shall have power and authority:
(a) To invest and reinvest cash, to hold cash uninvested, and to
subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options
on, lend or otherwise deal in or dispose of contracts for the future
acquisition or delivery of fixed income or other securities, and securities
of every nature and kind, including, without limitation, all types of
bonds, debentures, stocks, preferred stocks, negotiable or non-negotiable
instruments, obligations, evidences of indebtedness, certificates of
deposit or indebtedness, commercial paper, repurchase agreements, bankers'
acceptances, and other securities of any kind, issued, created, guaranteed,
or sponsored by any and all Persons, including, without limitation, states,
territories, and possessions of the United States and the District of
Columbia and any political subdivision, agency, or instrumentality thereof,
any foreign government or any political subdivision of the U.S. Government
or any foreign government, or any international instrumentality, or by any
bank or savings institution, or by any corporation or organization
organized under the laws of the United States or of any state, territory,
or possession thereof, or by any corporation or organization organized
under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or
interest in respect of any and all such investments of every kind and
description, including, without limitation, the right to
- 6 -
<PAGE>
consent and otherwise act with respect thereto, with power to designate one
or more Persons, to exercise any of said rights, powers, and privileges in
respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or
write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and right of subscription or otherwise which in
any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating that it
is trust property, whether in bearer, unregistered or other negotiable
form, or in its own name or in the name of a custodian or subcustodian or a
nominee or nominees or otherwise or to authorize the custodian or a
subcustodian or a nominee or nominees to deposit the same in a securities
depository, subject in each case to proper safeguards according to the
usual practice of investment companies or any rules or regulations
applicable thereto;
(f) To consent to, or participate in, any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which
is held in the Trust; to consent to any contract, lease, mortgage, purchase
or sale of property by such corporation or issuer; and to pay calls or
subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit
any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority
with relation to any security (whether or not so deposited or transferred)
as the Trustees shall deem proper, and to agree to pay, and to pay, such
portion of the expenses and compensation of such committee, depositary or
trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited
to claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and
any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes;
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(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such
insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring
the assets of the Trust or payment of distributions and principal on its
portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, principal
underwriters, or independent contractors of the Trust, individually against
all claims and liabilities of every nature arising by reason of holding
Shares, holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such
Person as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or
omitted that may be determined to constitute negligence, whether or not the
Trust would have the power to indemnify such Person against liability; and
(m) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life
insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and
agents of the Trust.
The Trust shall not be limited to investing in obligations maturing before
the possible termination of the Trust. The Trust shall not in any way be bound
or limited by any present or future law or custom in regard to investment by
fiduciaries. The Trust shall not be required to obtain any court order to deal
with any assets of the Trust or take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust, or partly
out of the principal and partly out of income, all expenses, fees, charges,
taxes and liabilities incurred or arising in connection with the Trust, or in
connection with the management thereof, including, but not limited to, the
Trustees' compensation and such expenses and charges for he services of the
Trust's officers, employees, investment adviser or manager, principal
underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular class, to pay directly, in advance or arrears, for
charges of the Trust's custodian or transfer, Shareholder servicing or similar
agent, an amount fixed from time to time by the Trustees, by setting off such
charges due from such Shareholder from declared but unpaid
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dividends owed such Shareholder and/or by reducing the number of shares in the
account of such Shareholder by that number of full and/or fractional Shares
which represent the outstanding amount of such charges due from such
Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trust, except that
the Trustees shall have power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee, he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be set forth
in the By-Laws, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust with any corporation, trust,
association or other organization; and any such contract may contain such
other terms as the Trustees may determine, including without limitation,
authority for the Investment Manager or administrator to determine from
time to time without prior consultation with the Trustees what investments
shall be purchased, held, sold or exchanged and what portion, if any, of
the assets of the Trust shall be held uninvested and to make changes in the
Trust's investments, or such other activities as may specifically be
delegated to such party.
(b) The Trustees may also, at any time and from time to time, contract
with any corporation, trust, association or other organization, appointing
it exclusive or nonexclusive distributor or Principal Underwriter for the
Shares or other securities to be issued by the Trust. Every such contract
shall comply with such requirements and restrictions as may be set forth in
the By-Laws; and any such contract may contain such other terms as the
Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to
time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
shareholder servicing agent for the Trust. Every such contract shall comply
with such requirements and restrictions as may be set forth in the By-Laws
or stipulated by resolution of the Trustees.
(d) The Trustees are further empowered, at any time and from time to
time, to contract with any entity to provide such other services to the
Trust, as the Trustees determine to be in the best interests of the Trust.
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(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
Manager, adviser, Principal Underwriter, distributor, or affiliate or
agent of or for any corporation, trust, association, or other
organization, or for any parent or affiliate of any organization with
which an advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer, shareholder
servicing or other type of service contract may have been or may
hereafter be made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust,
or that
(ii) any corporation, trust, association or other organization
with which an advisory, management or administration contract or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may have been
or may hereafter be made also has an advisory, management or
administration contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service contract
with one or more other corporations, trust, associations, or other
organizations, or has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing
the same, or create any liability or accountability to the Trust or its
Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of Article III, Section
6(d), the Shareholders shall have power to vote only (i) for the election or
removal of Trustees as provided in Article IV, Section 1, and (ii) with respect
to such additional matters relating to the Trust as may be required by this
Declaration of Trust, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger.
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Section 2. Voting Power and Meetings. Meetings of the Shareholders may be
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven (7) days
before such meeting, postage prepaid, stating the time and place of the meeting,
to each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust of the By-Laws, a written waiver thereof,
executed before or after the meeting by such Shareholder or his or her attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more classes is to vote as a single
class separate from any other Shares, forty percent (40%) of the Shares of each
such class entitled to vote shall constitute a quorum at a Shareholders' meeting
of that class. Any meeting of Shareholders may be adjourned from time to time by
a majority of the votes properly cast upon the question of adjourning a meeting
to another date and time, whether or not a quorum is present, and the meeting
may be held as adjourned within a reasonable time after the date set for the
original meeting without further notice. Subject to the provisions of Article
III, Section 6(d), when a quorum is present at any meeting, a majority of the
Shares voted shall decide any questions and a plurality shall elect a Trustee,
except when a larger vote is required by any provision of this Declaration of
Trust or the By-Laws or by applicable law.
Section 4. Action by Written Consent. Any action taken by Shareholders may
be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any class entitled to vote separately on the matter consent to the
action in writing and such written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the Shareholders of
any class who are entitled to vote or act any meeting or any adjournment
thereof, the Trustees may from time to time fix a time, which shall be not more
than ninety (90) days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such class having the right to
notice of and to vote at such meeting and any adjournment thereof, and in such
case only Shareholders of record on such record date shall have such right,
notwithstanding any transfer of shares on the books of the Trust after the
record date. For the purpose of determining the Shareholders of any class who
are entitled to receive payment of any dividend or of any other
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distribution, the Trustees may from time to time fix a date, which shall be
before the date for the payment of such dividend or such other payment, as the
record date for determining the Shareholders of such class having the right to
receive such dividend or distribution. Without fixing a record date the Trustees
may for voting and/or distribution purposes close the register or transfer books
for one or more class for all or any part of the period between a record date
and a meeting of Shareholders or the payment of a distribution. Nothing in this
Section shall be construed as precluding the Trustees from setting different
record dates for different classes.
Section 6. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value and Distributions
Section 1. Determination of Net Asset Value, Net Income, and Distributions.
Subject to Article III, Section 6 hereof, the Trustees, in their absolute
discretion, may prescribe and shall set forth in the By-laws or in a duly
adopted vote of the Trustees such bases and time for determining the per Share
or net asset value of the Shares or net income attributable to the Shares, or
the declaration and payment of dividends and distributions on the Shares, as
they may deem necessary or desirable.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. The Trustees shall
not be responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, Manager or Principal Underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee,
and the Trust out of its assets shall indemnify and hold harmless each and every
Trustee from and against any and all claims and demands whatsoever arising out
of or related to each Trustee's performance of his or her duties as a Trustee of
the Trust; provided that nothing herein contained shall indemnify, hold harmless
or protect any Trustee from or against any liability to the Trust or any
Shareholder 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.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or
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any of them in connection with the Trust shall be conclusively deemed to have
been issued, executed or done only in or with respect to their or his or her
capacity as Trustees or Trustee, and such Trustees or Trustee shall not be
personally liable thereon.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable to the Trust and to
any Shareholder solely for his or her own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice nor
for failing to follow such advice. The Trustees shall not be required to give
any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to the
fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee or officer in connection with any claim, action, suit or
proceeding in which he or she becomes involved by virtue of his or her capacity
or former capacity with the Trust, whether or not the Trust would have the power
to indemnify him or her against such liability under the provisions of this
Article.
ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 2. Termination of Trust or Series. Unless terminated as provided
herein, the Trust shall continue without limitation of time. The Trust may be
terminated at any time by vote of a majority of the Shares entitled to vote, or
by the Trustees by written notice to the Shareholders.
Upon termination of the Trust, after paying or otherwise providing for all
charges, taxes, expenses and liabilities held, whether due or accrued or
anticipated as may be determined by the Trustees, the Trust shall, in accordance
with such procedures as the Trustees consider appropriate, reduce the remaining
assets held, to distributable form in cash or shares or other securities, or any
combination thereof, and distribute the proceeds held to the Shareholders,
ratably according to the number of Shares held by the several Shareholders on
the date of termination.
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Section 3. Merger and Consolidation. The Trustees may cause (i) the Trust
to be merged into or consolidated with another Trust or company, (ii) the Shares
of the Trust to be converted into beneficial interests in another business trust
created pursuant to this Section 3 of Article VIII, or (iii) the Shares to be
exchanged under or pursuant to any state or federal statute to the extent
permitted by law. Such merger or consolidation, Share conversion or Share
exchange must be authorized by vote of a majority of the outstanding Shares of
the Trust, provided that in all respects the Trustees shall have power to
prescribe the procedure necessary or appropriate to accomplish a sale of assets,
merger or consolidation including the power to create one or more separate
business trusts to which all or any part of the assets, liabilities, profits or
losses of the Trust may be transferred and to provide for the conversion of
Shares of the Trust into beneficial interests in such separate business trust or
trusts.
Section 4. Amendments. This Declaration of Trust may be restated and/or
amended at any time by an instrument in writing signed by a majority of the then
Trustees and, if required, by approval of such amendment by Shareholders in
accordance with Article VI, Section 3 hereof. Any such restatement and/or
amendment hereto shall be effective immediately upon execution and approval. The
Certificate of Trust of the Trust may be restated and/or amended by a similar
procedure, and any such restatement and/or amendment shall be effective
immediately upon filing with the Office of the Secretary of State of the State
of Delaware or upon such future date as may be stated therein.
Section 5. Filing of Copies, References, Headings. The original or a copy
of this instrument and of each restatement and/or amendment hereto shall be kept
at the office of the Trust where it may be inspected by any Shareholder. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such restatements and/or amendments have been made and as
to any matters in connection with the Trust hereunder; and, with the same effect
as if it were the original, may rely on a copy certified by an officer of the
Trust to be a copy of this instrument or of any such restatements and/or
amendments. In this instrument and in any such restatements and/or amendments,
references to this instrument, and all expressions like "herein," "hereof" and
hereunder," shall be deemed to refer to this instrument as amended or affected
by any such restatements and/or amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. Whenever the
singular number is used herein, the same shall include the plural; and the
neuter, masculine and feminine genders shall include each other, as applicable.
This instrument may be executed in any number of counterparts each of which
shall deemed an original.
Section 6. Applicable Law. This Agreement and Declaration of Trust is
created under and is to be governed by and construed and administered according
to the laws of the State of Delaware and the Delaware Business Trust Act, as
amended from time to time (the "Act"). The Trust shall be a Delaware business
trust pursuant to such Act, and without limiting the provisions hereof, the
Trust may exercise all powers which are ordinarily exercised by such a business
trust.
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Section 7. Provisions in Conflict with Law or Regulations. The provisions
of the Declaration of Trust are severable, and if any provision of the
Declaration of Trust shall be held invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provision in any other
jurisdiction or any other provision of the Declaration of Trust in any
jurisdiction.
Section 8. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Business Trust Act, as amended
from time to time (the "Act"), and thereby to create only the relationship of
trustee and beneficial owners within the meaning of such Act between the
Trustees and each Shareholder. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment, or any form of legal relationship other than a business
trust pursuant to such Act. Nothing in this Declaration of Trust shall be
construed to make the Shareholders, either by themselves or with the Trustees,
partners or member of a joint stock association.
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IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into
this Declaration of Trust as of the 6th day of October, 1997.
/s/ Barbara J. Green /s/ Samuel J. Forester
Barbara J. Green Samuel J. Forester, Jr.
500 East Broward Boulevard 500 East Broward Boulevard
Ft. Lauderdale, FL 33394 Ft. Lauderdale, FL 33394
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 500 East Broward Boulevard,
Ft. Lauderdale, Florida 33394.
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