THE FUTURE GERMANY FUND, INC.
31 West 52nd Street
New York, New York 10019
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
June 29, 1995
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To our Stockholders:
Notice is hereby given that a Special Meeting of Stockholders of The Future
Germany Fund, Inc. (the "Fund") will be held at 2:00 P.M., New York time, on
June 29, 1995 at the offices of Deutsche Bank Securities Corporation, 31 West
52nd Street, 2nd Floor, New York, New York for the following purposes:
1. To approve a change in the Fund's investment objective from capital
appreciation primarily through investment in German equity securities
to long-term capital appreciation primarily through investment in
Central European equity securities.
2. To amend the Fund's fundamental investment restriction relating to
investments in options on German securities, securities indices and
futures also to permit investments in options, futures and options on
futures with respect to any securities or indices on securities in
which the Fund may invest.
3. To consider and act upon any other business as may come before the
meeting or any adjournment thereof.
Only holders of record of Common Stock at the close of business on May 10,
1995 are entitled to notice of and to vote at this meeting or any adjournment
thereof.
If you have any questions or need further information, please contact
Morrow & Co., Inc., the Fund's proxy solicitors, at 909 Third Avenue, New York,
New York 10022, or 1-800-662-5200. If your shares of the Fund are registered in
your name (not in the name of your bank, broker or other nominee) and you would
like to cast your vote using the telephone voting system, please see the
instruction card enclosed with this notice
Robert R. Gambee
Secretary
Dated: May 15, 1995
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN THE ENCLOSED PROXY
AND PROMPTLY RETURN IT TO THE FUND. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO
THE FUND OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN MAILING IN YOUR
PROXY PROMPTLY.
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THE FUTURE GERMANY FUND, INC.
31 West 52nd Street
New York, New York 10019
Special Meeting of Stockholders
June 29, 1995
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PROXY STATEMENT
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This proxy statement is furnished by the Board of Directors of The Future
Germany Fund, Inc. (the "Fund") in connection with the solicitation of proxies
for use at a Special Meeting of Stockholders (the "Meeting") to be held at 2:00
P.M., New York time, on June 29, 1995 at the offices of Deutsche Bank Securities
Corporation, 31 West 52nd Street, 2nd Floor, New York, New York. The purpose of
the Meeting and the matters to be acted upon are set forth in the accompanying
Notice of Special Meeting of Stockholders.
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted FOR the change in the Fund's investment objective, FOR the
amendment to the Articles of Incorporation to change the name of the Fund to
"The Central European Equity Fund, Inc." and FOR the amendment to one of the
Fund's fundamental investment restrictions. A Proxy may be revoked at any time
prior to the time it is voted by written notice to the Secretary of the Fund or
a subsequently executed proxy, or by attendance at the Meeting and voting in
person.
The close of business on May 10, 1995 has been fixed as the record date for
the determination of stockholders entitled to notice of, and to vote at, the
Meeting. On that date, the Fund had 12,001,963 shares of Common Stock
outstanding and entitled to vote. Each share will be entitled to one vote on
each matter that comes before the Meeting. It is expected that the Notice of
Special Meeting, Proxy Statement and form of Proxy will first be mailed to
stockholders on or about May 19, 1995.
Approval of the change in the Fund's investment objective (Proposal 1) and
approval of an amendment to one of the Fund's fundamental investment
restrictions (Proposal 2) each require approval of a majority of the Fund's
outstanding voting securities, which is defined in the Investment Company Act of
1940, as amended (the "1940 Act"), as the lesser of (1) 67% of the Fund's shares
present at a meeting of its shareholders if the owners of more than 50% of the
shares of the Fund then outstanding are present in person or by proxy or (2)
more than 50% of the Fund's outstanding shares (a "Majority Vote"). The Fund
intends to treat properly executed proxies that are marked "abstain" and broker
non-votes (defined below) as present for the purposes of determining whether a
quorum has been achieved at the Meeting. Under Maryland law, abstentions do not
constitute a vote "for" or "against" a matter and will be disregarded in
determining the "votes cast" on an issue. If a proxy is properly executed and
returned accompanied by instructions to withhold authority to vote, it
represents a broker "non-vote" (that is, a proxy from a broker or nominee
indicating that such person has not received instructions from the beneficial
owner or other person entitled to vote shares on a particular matter with
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respect to which the broker or nominee does not have discretionary power). The
shares represented by broker non-votes or proxies marked with an abstention will
be considered to be present at the Meeting for purposes of determining the
existence of a quorum for the transaction of business. Because of the
affirmative votes required for Proposals 1 and 2, abstentions and broker
non-votes will have the same effect as votes "against" such Proposals.
The Fund will make available to holders of record of Common Stock an
automated telephone voting option. The Fund believes that the telephone voting
option complies with Maryland law.
INTRODUCTION
The Board of Directors of the Fund has considered and voted to approve
certain matters that, subject to stockholder approval, would (i) change the
investment objective of the Fund to seeking long-term capital appreciation
primarily through investment in equity or equity-linked securities of companies
domiciled in Central Europe (as defined herein) and (ii) expand the fundamental
investment restriction of the Fund, which currently permits the Fund to engage
in certain transactions in put and call options on German securities and indices
and certain German financial futures, to permit transactions in options, futures
and options on futures with respect to any securities and indices in which the
Fund may invest. Such proposed changes, together with related modifications to
the investment policies of the Fund, which are set forth in Appendix A to this
Proxy Statement under "Investment Objective and Policies", are herein
collectively referred to as the "Proposed Investment Strategy." The Board of
Directors has also approved a change in the name of the Fund to "The Central
European Equity Fund, Inc.", to become effective only if the change of
investment objective described in (i) is approved by stockholders.
The Proposed Investment Strategy involves the two related Proposals set
forth below for stockholder consideration and approval. The Fund will not adopt
the Proposed Investment Strategy in its entirety unless stockholders approve
Proposals 1 and 2 described below. The effectiveness of Proposal 1 is not
dependent on stockholder approval of Proposal 2. The effectiveness of Proposal 2
is conditioned on stockholder approval of Proposal 1. The Directors have
carefully considered the Proposals and unanimously recommend their approval as a
group. As noted above, if Proposal 1 is approved by stockholders, the Fund's
name will be changed to "The Central European Equity Fund, Inc." and its New
York Stock Exchange trading symbol would be changed to "CEE".
Since a favorable vote on each of the two Proposals will have the effect of
approving the Proposed Investment Strategy, the proxy card provides stockholders
with the option of voting on both of the Proposals as a group by marking a
single box as "FOR", "AGAINST", or "ABSTAIN". The Board unanimously recommends a
vote FOR both of the Proposals as a group. In addition, the proxy card provides
stockholders with the alternative of voting on each of the Proposals separately
by marking separate boxes for each Proposal. In exercising the latter option,
stockholders should bear in mind that the effectiveness of Proposal 2 is
conditioned on stockholder approval of Proposal 1. Therefore, if you are in
favor of the Proposed Investment Strategy, you should not vote against either
specific Proposal.
(1) Change of the Fund's Investment Objective -- Adoption of an amendment
to the Fund's investment objective. The current objective is "to seek
capital appreciation through investment primarily in equity and
equity-linked securities of companies domiciled in the Federal Republic
of Germany." The proposed new investment objective would be "to seek
long-term capital appreciation primarily through investment in equity
or equity-linked securities of issuers domiciled in Central Europe (as
defined herein)."
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(2) Amendment to One of the Fund's Fundamental Investment Restrictions --
Adoption of an amendment to the Fund's investment restriction relating
to transactions by the Fund in put and call options and financial
futures. The current investment restriction permits the Fund to buy and
sell put and call options and write covered call options on certain
German securities and indices and to engage in financial futures
transactions on certain German securities and indices, in each case to
the extent permitted by U.S. law and for the limited purposes described
in the investment restrictions. As amended, the investment restriction
would permit the Fund to engage in the same types of transactions in
options and futures, but with respect to any securities or indices of
securities in which the Fund is permitted to invest under its amended
investment objective and also to engage in transactions in options on
such futures, in each case to the extent permitted under applicable
U.S. law.
The Proposed Investment Strategy will not alter the rights and privileges
of stockholders of the Fund. The value of a stockholder's investment in the Fund
will be the same immediately after the adoption of the above Proposals as it was
immediately before such adoption, but of course, the value of a stockholder's
investment in the Fund will fluctuate thereafter, as it currently does.
All references in this Proxy Statement to "DM" are to the Deutsche mark, to
"AS" are to the Austrian schilling and to "$" are to U.S. Dollars.
PROPOSAL 1: TO APPROVE A CHANGE IN THE FUND'S
INVESTMENT OBJECTIVE
Current Investment Objective and Policies. The Fund's current investment
objective is to seek capital appreciation through investment primarily in equity
and equity-linked securities of companies domiciled in the Federal Republic of
Germany. This objective is a fundamental policy that may not be changed without
a Majority Vote of the stockholders of the Fund. As a matter of fundamental
policy, under normal circumstances, the Fund's assets are invested in securities
of issuers domiciled in Germany, with at least 75% of the value of the Fund's
total assets invested in equity and equity-linked securities of such issuers.
The Fund may also invest up to 25% of the value of its total assets in
DM-denominated fixed income securities.
Proposed Investment Objective and Policies. Deutsche Bank Securities
Corporation, the Fund's Manager ("DBSC" or the "Manager"), and Deutsche Asset
Management GmbH, the Fund's investment adviser ("DBAM" or the "Investment
Adviser") have recommended, and the Directors have approved and authorized for
submission to stockholders, that the Fund's current investment objective be
changed to the following objective:
"To seek long-term capital appreciation through investment in equity or
equity-linked securities of issuers domiciled in Central Europe (which
term includes, for this purpose, the Republic of Austria, the Czech
Republic, the Federal Republic of Germany, the Republic of Hungary, the
Republic of Poland and the Slovak Republic)."
No assurance can be given that the Fund will be able to achieve its
objective. If this proposed investment objective is adopted, the Fund will, as a
matter of fundamental policy, invest under normal market conditions at least 65%
of the value of its total assets in the equity and equity-linked securities of
issuers domiciled in Central Europe, and at least 50% of the value of its total
assets in the securities of issuers domiciled in the Federal Republic of Germany
and the Republic of Austria. As a matter of fundamental policy, the Fund will
also not invest more than 10% of the value of its total assets in the securities
of issuers domiciled in any one country other than the Republic of Austria and
the Federal Republic of Germany, for which countries there shall be no
limitation on the proportion of the Fund's total assets that may be invested.
The Fund may also invest up to 35% of the value of its total assets in issuers
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domiciled in Eastern Europe (which term includes, for this purpose, the Republic
of Albania, the Republic of Bosnia and Herzegovina, the Republic of Belarus, the
Republic of Bulgaria, the Republic of Croatia, the Republic of Estonia, the
Republic of Latvia, the Republic of Lithuania, the Former Yugoslav Republic of
Macedonia, Romania, the Russian Federation, the Republic of Slovenia, Ukraine,
and the Federal Republic of Yugoslavia). Any future country or countries (or
other political entity) formed by combination or division of the countries
comprising Central Europe or Eastern Europe shall also be deemed to be included
within the term "Central Europe" or "Eastern Europe", respectively. Other
non-fundamental investment policies of the Fund that have been approved by the
Board, effective upon implementation of the Proposed Investment Strategy, are
described in Appendix A under "Investment Objective and Policies".
Recommendation of the Board of Directors. The Manager and the Investment
Adviser have advised the Board of Directors that they believe that recent
developments in the countries of Central Europe, including government
reformations and the continued development of capital markets, have created the
potential for further growth in the economies of such countries and offer
attractive investment opportunities. In addition, the Manager and Investment
Adviser have advised the Board that the economies of Eastern Europe also are
generally experiencing market-sector development and offer potential for
economic growth. Accordingly, the Board of Directors has approved, subject to
the adoption of the Proposed Investment Strategy by the stockholders, the
fundamental policies described above. The Manager and Investment Adviser expect
that the proportion of the Fund's assets allocated to Eastern Europe may remain
relatively low until their markets have further developed and do not expect the
proportion of the Fund's assets to be invested in the countries of Central
Europe other than Germany and Austria to be substantial in the near term. See
"Investment Objective and Policies" in Appendix A for a description of the
investment policies of the Fund as amended to take account of the Proposed
Investment Strategy and related changes to its investment policies.
Effect of Adoption of Proposal 1. The Fund has not previously been
permitted under normal market conditions to invest less than 75% of the value of
its total assets in equity and equity-linked securities of companies domiciled
in Germany (and has been subject to a limit of 10% of its total assets in
companies domiciled in the former East Germany). Upon the adoption of Proposal 1
by the stockholders, the Fund will be permitted to invest all of its assets
outside Germany, subject to the requirement that under normal circumstances at
least 65% of the value of its total assets must be invested in other Central
European countries and at least 50% must be invested in Germany and Austria. The
Fund would also be permitted to invest up to 100% of its total assets in German
equity and equity-linked securities, up to 100% in Austrian equities, and up to
10% in equities of any other single Central European country or any single
Eastern European country. One of the non-fundamental investment policies adopted
by the Board that would become effective upon implementation of the Proposed
Investment Strategy would for the time being place an overall limit on
investment in Eastern European equities of 20% of the value of the Fund's total
assets. Also, the Fund has not previously invested in the stock of investment
companies. Another non-fundamental investment policy adopted by the Board that
would become effective upon implementation of the Proposed Investment Strategy
would permit the Fund to invest up to 10% of the value of its total assets in
any investment companies that invest primarily in any one or several Central
European or Eastern European countries, and up to 5% of the value of its total
assets in any one such investment company, subject to any applicable additional
restrictions of the 1940 Act. Such investments may involve an additional layer
of expenses because of the fees and expenses payable by such other investment
companies.
The Fund does not currently engage in foreign exchange transactions as an
investment strategy nor does it hedge the value of its DM-denominated assets.
Following approval of Proposal 1 by the stockholders, the Fund may, as an
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<PAGE>
ordinary practice, attempt to hedge its foreign currency exposure other than its
exposure to the Deutsche mark and the Austrian schilling by entering into
forward currency contracts under which, for example, the Fund will sell fixed
amounts of Polish zlotys for fixed amounts of U.S. dollars (i.e., conventional
hedging) or for fixed amounts of Deutsche marks or Austrian schillings (i.e.,
cross-hedging). See "Investment Objective and Policies--Currency Transactions"
in Appendix A.
Transition. As noted above and in Appendix A, there are a number of legal
and practical limitations on the Fund's ability to invest in securities of
issuers domiciled in the countries of Central Europe (other than Germany and
Austria) and of Eastern Europe. Also, the Manager and Investment Adviser believe
at this time that investment opportunities in Austria are more limited than in
Germany. Accordingly, the Fund anticipates that its transition from
predominantly investing in German securities will be made slowly, and that for
at least the next year a majority of its investments will be in German
securities.
Special Considerations and Risk Factors. Investing in the securities of
issuers in emerging markets (i.e., the economies of Central Europe, excluding
Germany and Austria, and Eastern Europe) involves certain considerations that
are not typically associated with investing in Germany and Austria. The Fund's
investments in such emerging market countries may be considered speculative and
the Fund's stockholders will bear the risk of such investments. Stockholders
should consider the special considerations associated with the Proposed
Investment Strategy, described in Appendix A under "Special Considerations/Risk
Factors", before making any decision with respect to Proposals 1 or 2.
The Board unanimously recommends a vote FOR Proposal 1.
Required Vote. A Majority Vote of the Fund's stockholders entitled to vote
is required to approve the amendment to the Fund's investment objective. The
effectiveness of Proposal 2 is conditioned on stockholder approval of Proposal
1.
PROPOSAL 2: AMENDMENT TO THE FUND'S
FUNDAMENTAL INVESTMENT RESTRICTION WITH RESPECT
TO OPTIONS AND FINANCIAL FUTURES
Pursuant to an investment restriction of the Fund, the Fund may not buy,
sell or write put or call options or enter into futures contracts other than as
described in the next sentence. Currently, the Fund is generally permitted to
purchase put and call options for hedging purposes, and write (i.e., sell)
covered call options to generate income, in each case on German stock, bonds and
other securities as well as German securities indices, to the extent such
investments are traded on an organized exchange and such investments are
available and permitted by applicable law. For hedging purposes, the Fund may
also invest in the index and bond futures listed on the Deutsche Terminborse
(German Futures Exchange), to the extent available and legally permitted.
The Fund's policies currently permit it to "invest in other securities and
index options and futures compatible with its investment objective that may from
time to time become available on any organized exchange, if permitted by
applicable law." The foregoing could be regarded as automatically giving the
Fund additional flexibility upon adoption of Proposal 1, given the wider range
of securities and instruments in which the Fund may invest under the Proposed
Investment Strategy. However, the Board of Directors believes formal stockholder
approval would be appropriate. Accordingly, it has approved and authorized for
submission to stockholders that the investment restriction relating to
transactions in options and futures remain unchanged except that all references
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to German stocks, bonds and other securities and indices shall instead be deemed
references to any securities and indices of securities in which the Fund is
authorized to invest and except that options on futures are added to the types
of instruments in which the Fund may invest. See "Investment Objective and
Policies--Portfolio Structure" and "Investment Restrictions" in Appendix A.
Effect of Adoption of Proposal 2. For hedging purposes, the Fund may
currently purchase put and call options on German stocks and, if and when
permitted by applicable U.S. law, invest in the index and bond futures listed on
the Deutsche Terminborse (German Futures Exchange). The Fund may also purchase
put and call options on German bonds and other securities, as well as German
securities indices, if and when such investments become available. Option
contracts are currently available for 16 listed stocks only. Financial futures
contracts on the Deutscher Aktienindex (the German Stock Index) have recently
been approved by the Commodity Futures Trading Commission for trading by U.S.
investment companies and other U.S. persons. The Fund may invest in other stock
options and futures compatible with its investment objective that may from time
to time become available on the German Futures Exchange or on any other
organized exchange, if permitted by applicable U.S. law. The Fund may also write
(i.e., sell) covered call options on its portfolio securities and appropriate
securities indices for purposes of generating income.
Upon approval of Proposal 2, the Fund may purchase put and call options on
stock, other securities and securities indices, as well as security or index
futures, that may become available on any organized exchange in the countries of
Central Europe or Eastern Europe. The Fund may also write covered call options
on its portfolio securities and appropriate securities indices for purposes of
generating income. Trading in options is available on the Osterreichische
Termin-und Optionenborse (Austrian Futures and Options Exchange) in Austria,
although no futures contracts in Central European countries other than Germany
are legally available for investment by the Fund. See "Investment Objective and
Policies--Portfolio Structure" in Appendix A.
The Board unanimously recommends a vote FOR Proposal 2.
Required Vote. A Majority Vote of the Fund's stockholders entitled to vote
is required to approve the amendment to the investment restriction.
ADDRESS OF INVESTMENT ADVISER AND MANAGER
The principal office of the Investment Adviser is located at Bockenheimer
Landstrasse 42, 60323 Frankfurt am Main, Federal Republic of Germany. The
corporate office of the Manager is located at 31 West 52nd Street, New York, New
York 10019.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of May 10, 1995, no person, to the knowledge of management, owned of
record or beneficially, more than 5% of the outstanding Common Stock of the
Fund.
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OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of stockholders arise,
including any question as to an adjournment of the Meeting, the persons named in
the enclosed Proxy will vote thereon according to their best judgment in the
interests of the Fund.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the Fund's Annual Meeting
of Stockholders in 1996 must be received by the Fund on or before November 6,
1995, in order to be included in the Fund's proxy statement and form of proxy
relating to that meeting.
EXPENSES OF PROXY SOLICITATION
The cost of preparing, assembling and mailing material in connection with
this solicitation will be borne by the Fund. In addition to the use of mails,
proxies may be solicited personally by regular employees of the Fund or the
Manager or by telephone or telegraph. Brokerage houses, banks and other
fiduciaries may be requested to forward proxy solicitation materials to their
principals to obtain authorization for the execution of proxies, and they will
be reimbursed by the Fund for out-of-pocket expenses incurred in this
connection. The Fund has also made arrangements with Morrow & Co., Inc. to
assist in the solicitation of proxies, if called upon by the Fund, at an
estimated fee of $7,500 plus reimbursement of normal expenses.
ANNUAL REPORT DELIVERY
The Fund will furnish, without charge, a copy of its annual report for the
fiscal year ended October 31, 1994 to any stockholder upon request. Such
requests should be directed by mail to The Future Germany Fund, Inc., 31 West
52nd Street, New York, New York 10019 or by telephone to 1-800-GERMANY.
Robert R. Gambee
Secretary
Dated: May 15, 1995
STOCKHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING AND WHO WISH TO HAVE
THEIR SHARES VOTED ARE REQUESTED TO DATE AND SIGN THE ENCLOSED PROXY AND RETURN
IT TO THE FUND.
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APPENDIX A
NEW INVESTMENT OBJECTIVE AND POLICIES
If Proposal Nos. 1 and 2 are approved by stockholders, the Fund's
investment objective and policies and investment restrictions would read as
follows:
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of The Central European Equity Fund, Inc. (the
"Fund") is to seek long-term capital appreciation through investment primarily
in equity and equity-linked securities of issuers domiciled in Central Europe
(which term includes, for this purpose, the Republic of Austria, the Czech
Republic, the Federal Republic of Germany, the Republic of Hungary, the Republic
of Poland and the Slovak Republic). Under normal circumstances, at least 65% of
the value of the Fund's total assets will be invested in the securities of
issuers domiciled in Central Europe, and at least 50% of the value of its total
assets in the securities of issuers domiciled in the Federal Republic of Germany
and the Republic of Austria. The Fund may also invest in equity or equity-linked
securities of issuers domiciled in Eastern Europe (which term includes, for this
purpose, the Republic of Albania, the Republic of Bosnia and Herzegovina, the
Republic of Belarus, the Republic of Bulgaria, the Republic of Croatia, the
Republic of Estonia, the Republic of Latvia, the Republic of Lithuania, the
Former Yugoslav Republic of Macedonia, Romania, the Russian Federation, the
Republic of Slovenia, Ukraine and the Federal Republic of Yugoslavia). An issuer
is deemed to be "domiciled" in the country under whose laws the company is
organized or, if not organized under the laws of a Central European or Eastern
European country, in the country from which it derives a majority of its annual
revenues, as determined in good faith by Deutsche Bank Securities Corporation
("DBSC" or the "Manager"). Any future country or countries (or other political
entity) formed by combination or division of the countries comprising Central
Europe or Eastern Europe shall also be deemed to be included within the term
"Central Europe" or "Eastern Europe", respectively. The Fund may not invest more
than 10% of the value of its total assets in the securities of issuers domiciled
in any one Central European country or Eastern European country, except that
there is no limit on the proportion of the Fund's total assets that may be
invested in the Republic of Austria or the Federal Republic of Germany. The
Fund's investment objective and the foregoing investment policies are
fundamental, and may only be changed by the approval of a majority of the Fund's
outstanding voting securities, which is defined in the Investment Company Act of
1940, as amended (the "1940 Act"), as the lesser of (1) 67% of the Fund's shares
present at a meeting of its shareholders if the owners of more than 50% of the
shares of the Fund then outstanding are present in person or by proxy or (2)
more than 50% of the Fund's outstanding shares (a "Majority Vote"). The Fund
will not trade in securities for short-term gain. Current interest and dividend
income are not an objective of the Fund. No assurance can be given that the Fund
will be able to achieve its objective.
Portfolio Structure
The Fund will seek to achieve its investment objective of long-term capital
appreciation primarily by investing in equity and equity-linked securities of
companies in a broad spectrum of industries. Equity and equity-linked securities
include common stock, convertible and non-convertible preferred stock, whether
voting or non-voting, convertible bonds, bonds with warrants and unattached
warrants. Equity-linked securities refer to debt securities convertible into
equity and securities such as warrants, options and futures, the prices of which
reflect the value of the equity securities receivable upon exercise or
settlement thereof. The Fund may not invest more than 25% of the value of its
total assets in the securities of issuers having at the time of investment their
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principal business activities in the same industry. In selecting industries and
companies for investment by the Fund, Deutsche Asset Management GmbH (the
"Investment Adviser") and the Manager generally consider factors such as overall
growth prospects, competitive position in their product markets, management,
technology, research and development, productivity, labor costs, raw material
costs and sources, profit margins, return on investment, capital resources and
government regulation. The Fund may not purchase more than 10% of the voting
securities of any single issuer or invest more than 15% of the value of its
total assets in the securities of any one issuer. The Board of Directors has
adopted a non-fundamental policy that for the time being the Fund will not
invest more than 20% of the value of its total assets in securities of issuers
domiciled in Eastern Europe.
Although it intends to concentrate its investments in equities or
equity-linked securities that are listed on a recognized securities exchange or
otherwise publicly traded, the Fund may also invest in securities that are not
readily marketable. See "Special Considerations/Risk Factors--Illiquid
Securities." The Fund may also invest in other investment companies, subject to
applicable limitations under the 1940 Act and certain applicable state
securities regulations. These limitations include a prohibition on the Fund's
acquiring more than 3% of the voting securities of any other investment company,
and on the Fund's investing more than 5% of its total assets in securities of
any one investment company or more than 10% of its total assets in securities of
all investment companies. Any investment companies in which the Fund may invest
will have a policy of investing all or substantially all of their assets in one
or more Central European or Eastern European countries. Such investments may
involve an additional layer of expenses because of the fees and expenses payable
by such other investment companies. In determining whether to invest assets of
the Fund in other investment companies, the Manager and Investment Adviser will
take into consideration, among other factors, the advisory fee and other
expenses payable by such other investment companies.
The Fund may also invest in warrants if consistent with the Fund's
investment objective. The warrants in which the Fund may invest are a type of
security, usually issued together with another security of an issuer, that
entitles the holder to buy a fixed amount of common or preferred stock of such
issuer at a specified price for a fixed period of time (which may be in
perpetuity). Warrants are commonly issued attached to other securities of the
issuer as a method of making such securities more attractive and are usually
detachable and thus may be bought or sold separately from the issued security.
Warrants can be a speculative instrument. The value of a warrant may decline
because of a decrease in the value of the underlying stock, the passage of time
or a change in perception as to the potential of the underlying stock, or any
combination thereof. If the market price of the underlying stock is below the
exercise price set forth in the warrant on the expiration date, the warrant will
expire worthless. Publicly traded warrants currently exist with respect to the
stock of a significant number of German companies.
Certain German and Austrian companies have issued participation
certificates ("Participation Certificates" or "Genuss-Scheine"), which entitle
the holder to participate only in dividend distributions, generally at rates
above those declared on the issuers' common stock, but not to vote, nor usually
to any claim for assets in liquidation. Participation Certificates trade like
common stock on the German and Austrian stock exchanges. Such securities may
have higher yields; however, they may be less liquid than common stock. The Fund
may invest in Participation Certificates of German and Austrian issuers and,
when available, of issuers in other Central European and Eastern European
countries.
For hedging purposes, the Fund may also purchase put and call options on
stock of Central European and Eastern European issuers and, if and when
permitted by applicable U.S. law, invest in the index and bond futures and any
other derivative securities listed on any organized exchange. Options are
contracts which give the buyer the right, but not the obligation, to buy or sell
a fixed amount of securities at a fixed price for a fixed period of time. A
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futures contract is a binding obligation to purchase or deliver the specific
type of financial instrument, or the cash equivalent thereof in certain
circumstances, called for in the contract at a specific price at a future date.
The Fund will only invest in options or futures in an attempt to hedge against
changes or anticipated changes in the value of particular securities in its
portfolio or all or a portion of its portfolio. The Fund will not invest in
options or futures if, immediately thereafter, more than the amount of its total
assets would be hedged. Listed option contracts are currently available only for
16 listed German stocks and 7 listed Austrian stocks. Futures contracts on
certain German and Austrian government bonds are also available, although such
contracts are not currently approved for purchase by U.S. investment companies.
For hedging purposes, the Fund may also purchase put and call options on bonds
and other securities, as well as securities indices, if and when such
investments become available. The Fund may invest in other options, futures and
options on futures with respect to any securities or securities indices
compatible with its investment objective that may from time to time become
available on any organized exchange, if permitted by applicable law.
The Fund may also write (i.e., sell) covered call options on its portfolio
securities and appropriate securities indices for purposes of generating income.
The Fund may write (i.e., sell) covered call options on portfolio securities and
appropriate securities indices up to the amount of its entire portfolio. A call
option gives the holder the right to purchase the underlying securities from the
Fund at a special price (the "exercise price") for a stated period of time
(usually three, six or nine months). Prior to the expiration of the option, the
writer (i.e., seller) of the option has an obligation to sell the underlying
security to the holder of the option at the exercise price regardless of the
market price of the security at the time the option is exercised. The initial
purchaser of an option pays the writer a premium, which is paid at the time of
purchase and is retained by the writer whether or not the option is exercised. A
"covered" call option means that so long as the Fund is obligated as the writer
of the option, it will own (i) the underlying securities subject to the option,
(ii) securities convertible or exchangeable without the payment of any
consideration into the securities subject to the option or (iii) warrants on the
securities subject to the option exercisable at a price not greater than the
option exercise price and, at the time the option is exercisable, the securities
subject to the option. In the case of covered call options on securities
indices, references to securities in clauses (i), (ii) or (iii) will include
such securities as the Investment Adviser believes approximate the index (but
not necessarily all those comprising the index), as well as, in the case of
clauses (ii) and (iii), securities convertible, exchangeable or exercisable into
the value of the index. The writing of a call option may involve the pledge of
the underlying security which the call option covers, or other portfolio
securities. In order to make use of its authority to write covered call options,
the Fund may pledge its assets in connection therewith.
In the event the option is exercised, the writer may either deliver the
underlying securities at the exercise price or if it does not wish to deliver
its own securities, purchase new securities at a cost to the writer, which may
be more than the exercise price premium received, and deliver the new securities
for the exercise option. In the event the option is exercised, the Fund's
potential for gain is limited to the difference between the exercise price plus
the premium less the cost of the security. Alternatively, the option's position
could be extinguished or closed out by purchasing a like option. It is possible,
although considered unlikely, that the Fund might be unable to execute such a
closing purchase transaction. If the price of a security declines below the
amount to be received from the exercise price less the amount of the call
premium received and if the option could not be closed out, the Fund would hold
a security which might otherwise have been sold to protect against depreciation.
In addition, the Fund's portfolio turnover may increase to the extent that the
market price of underlying securities covered by call options written by the
Fund increases and the Fund has not entered into closing purchase transactions.
Brokerage commissions associated with writing options transactions are normally
higher than those associated with other securities transactions.
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The Fund may also invest up to 25% of its total assets in DM-denominated
fixed income securities. Such investments may include DM-denominated bonds
issued by The Federal Republic of Germany, the German Federal Railways and Post
Office and their successor entities, including Deutsche Bahn AG and Deutsche
Telekom AG, as well as in DM-denominated debt instruments issued by private and
public entities, including multinational lending institutions and supranational
institutions, which have been determined by the Fund's Investment Adviser and
Manager to be of comparable credit quality to securities rated in the three
highest categories by Moody's Investors Service, Inc. or Standard & Poor's
Corporation. When selecting a DM-denominated debt instrument from among several
investment opportunities, the Investment Adviser and Manager will consider the
potential for capital appreciation, taking into account maturity and yield
considerations. For temporary defensive purposes, the Fund also may invest in
U.S. dollar- and DM-denominated money market instruments, including bank time
deposits and certificates of deposit.
The Fund may also lend its portfolio securities to banks, securities
dealers and other institutions meeting the creditworthiness standards
established by the Fund's Board of Directors. The Fund may lend its portfolio
securities so long as the terms and the structure of such loans are not
inconsistent with the 1940 Act, which currently requires that (a) the borrower
pledge and maintain with the Fund collateral consisting of cash, a letter of
credit issued by a domestic United States bank or securities issued or
guaranteed by the United States Government having a value at all times of not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the loaned securities rises (i.e., the
value of the loan is "marked to market" on a daily basis), (c) the loan be made
subject to termination by the Fund at any time and (d) the Fund receive
reasonable interest on the loan (which may include a portion of the interest
from the Fund's investing any cash collateral in interest bearing short-term
investments). Any such collateral may be invested by the Fund in repurchase
agreements collateralized by securities issued or guaranteed by the United
States Government. Any distributions on the loaned securities and any increase
in their market value accrue to the Fund. Loan arrangements made by the Fund
will comply with all other applicable regulatory requirements. All relevant
facts and circumstances, including the creditworthiness of the borrowing
institution, will be monitored by the Fund's Investment Adviser and Manager, and
will be considered in making decisions with respect to lending of securities,
subject to review by the Fund's Board of Directors. The Fund may pay reasonable
negotiated fees in connection with loaned securities, so long as such fees are
set forth in a written contract and approved by the Fund's Board of Directors.
In addition, any voting rights may pass with the loaned securities, but if a
material event were to occur affecting an investment on loan, the loan may be
called and the securities voted. Any gain or loss in the market price of the
loaned securities that may occur during the term of the loan will be for the
account of the Fund.
Currency Transactions
The Fund may attempt to hedge its foreign currency exposure, other than its
exposure to the Deutsche mark ("DM") and the Austrian schilling ("AS"), by
entering into forward currency contracts. The Fund does not otherwise currently
engage in foreign exchange transactions as an investment strategy. However, at
such future time as the Manager and Investment Adviser believe that the Deutsche
mark or Austrian schilling might suffer a substantial decline against the U.S.
dollar, the Fund may, in order to hedge the value of the Fund's portfolio, enter
into forward contracts, e.g., to sell fixed amounts of Deutsche marks or
Austrian schillings for fixed amounts of U.S. dollars in the interbank market. A
forward currency contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract.
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The Fund's dealings in forward exchange transactions will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund, which will generally arise in
connection with the purchase or sale of its portfolio securities. Position
hedging is the sale of forward currency with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund may engage in "conventional hedging", which involves entering into
forward currency contracts to sell fixed amounts of a foreign currency (e.g.,
Polish zlotys) for fixed amounts of U.S. dollars in order to hedge the U.S.
dollar value of its portfolio. The Fund may also engage in "cross-hedging",
which involves entering into forward currency contracts to sell fixed amounts of
such foreign currency (e.g., Polish zlotys) for fixed amounts of another foreign
currency to which the Fund may seek exposure (i.e., Deutsche marks or Austrian
schillings).
The Fund may not position a hedge with respect to any currency to an extent
greater than the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or generally quoted in or currently
convertible into such currency. If the Fund enters into a position hedging
transaction, the Fund's custodian or subcustodian will place cash or U.S.
government or other high grade debt securities in a segregated account of the
Fund in an amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract, which value will be adjusted on a daily
basis. If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Fund's commitment with respect to the
contract.
INVESTMENT RESTRICTIONS
In addition to its investment objective and the other investment policies
so indicated in the first paragraph under "Investment Objective and Policies",
the Fund has adopted certain investment restrictions, which are fundamental
policies and cannot be changed without a Majority Vote of the Fund's
stockholders. For purposes of the foregoing restrictions and the restrictions
listed below, all percentage limitations apply only immediately after a
transaction, and any subsequent change in any applicable percentage resulting
from changing values will not require elimination of any security from the
Fund's portfolio.
The Fund may not:
(1) Purchase more than 10% of the voting securities of any single
issuer.
(2) Invest more than 15% of the value of its total assets in the
securities of any one issuer or more than 25% of the value of its total
assets in a particular industry.
(3) Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow for temporary or emergency purposes or for the
clearance of transactions in amounts not exceeding 10% of the value of its
total assets (not including the amount borrowed) and will not purchase
securities while any such borrowings are outstanding, and except that the
Fund may pledge its assets in connection with writing covered call options.
(4) Make real estate mortgage loans or other loans, except through the
purchase of debt obligations consistent with the Fund's investment
policies.
(5) Buy or sell commodities, commodity contracts, futures contracts,
real estate or interests in real estate (other than as described under
"Portfolio Structure" and "Currency Transactions" under "Investment
Objective and Policies").
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(6) Make short sales of securities or maintain a short position in any
security.
(7) Buy, sell or write put or call options (other than as described
under "Portfolio Structure" under "Investment Objective and Policies").
(8) Purchase securities on margin, except such short-term credits as
may be necessary or routine for the clearance or settlement of
transactions.
(9) Act as an underwriter, except to the extent the Fund may be deemed
to be an underwriter in connection with the sale of securities in its
portfolio.
(10) Purchase securities, the sale of which by the Fund could not be
effected without prior registration under the Securities Act of 1933, as
amended, except that this restriction shall not preclude the Fund from
acquiring non-U.S. securities.
The Fund is also subject to certain diversification requirements under the
Internal Revenue Code of 1986, as amended (the "Code") with respect to its
qualification as a regulated investment company under the Code.
SPECIAL CONSIDERATIONS/RISK FACTORS
Because the Fund intends to invest primarily in equity and equity-linked
securities of issuers domiciled in Central Europe and Eastern Europe, an
investor in the Fund should be aware of certain special considerations and risks
relating to investment in such issuers, and international investment generally,
which typically are not associated with investments in securities issued by U.S.
companies. The Fund is a closed-end investment company designed for long-term
investment and investors should not consider it a trading vehicle. See
"Investment Objective and Policies".
No assurance can be given that the Fund will achieve its investment
objective. The Fund is designed for aggressive investors and an investment in
the Fund should be considered speculative. The Fund should be considered an
investment for only a portion of an investor's assets and not a complete
investment program.
Investment in Emerging Market Countries
Economic and Political Factors
The economies of countries of Central Europe (other than Germany and
Austria) and of Eastern Europe (collectively, the "Emerging Market Countries")
generally differ, often unfavorably, from the United States economy in such
respects as general development, rate of inflation, volatility of the rate of
growth of gross domestic product, capital reinvestment and balance of payments
position, among others. The Emerging Market Countries have had centrally planned
socialist economies for much of this century. Recently, the governments of the
Emerging Market Countries have generally implemented reforms directed at
political and economic liberalization, including efforts to decentralize the
economic decision making process and to establish market-oriented economics.
However, there can be no assurance that current or future governments will
continue to pursue such policies. Furthermore, the transformation from a
centrally planned, socialist economy to a competitive market economy has
resulted in many economic and social disruptions, and there can be no assurance
that such disruptions will not occur again in the future. In addition, business
entities in many Emerging Market Countries do not have any significant recent
history of operating in a market-oriented economy, and the ultimate impact of
such countries' attempts to move toward more market-oriented economies is
currently unclear.
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Although democratic systems of government are generally established in the
Emerging Market Countries, those countries remain exposed to risks of political
change or periods of uncertainty. Nationalization, expropriation or confiscatory
taxation, currency blockage, political changes, government regulation, social
instability or diplomatic developments could affect adversely the economies of
one or more Emerging Market Countries or the Fund's investments in such
countries. Upon the accession to power of authoritarian regimes, the governments
of a number of Eastern European countries previously expropriated large
quantities of real and personal property. The claims of many property owners
against those governments were never finally settled. There can be no assurance
that such expropriations will not occur again in the future. In the event of
such expropriation, nationalization or other confiscation, the Fund could lose
all or a substantial portion of its investment in the country involved. In
addition, any change in the leadership or policies of the Emerging Market
Countries may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and adversely affect existing investment
opportunities.
Legal Framework
Certain of the Emerging Market Countries have only recently started to
develop a body of securities laws, tax laws and laws governing corporations. In
particular, a comprehensive body of case law and court decisions is not yet
available. Moreover, as a result of their recent socialist history, the Emerging
Market Countries generally still do not have developed legal structures
governing private or foreign investments and private property. Laws may not
exist to cover all contingencies or to protect adequately and the administration
of these laws may be subject to considerable discretion. In addition, there can
be no assurance that applicable laws and related interpretations will not change
or be applied in a manner that adversely affects the Fund and its operations.
Market Characteristics
The securities markets in the Emerging Market Countries are much smaller
than the U.S. securities markets. The securities markets of the Emerging Market
Countries that have functional trading markets have substantially less trading
volume, resulting in a lack of liquidity and high price volatility relative to
the U.S. securities markets. For example, the aggregate market capitalization as
at December 31, 1994 for securities listed on each of the Prague, Budapest,
Warsaw and Bratislava stock exchanges (the exchanges in the Emerging Market
Countries for which such data is available) was substantially less than 1% of
the aggregate market capitalization of the New York Stock Exchange (the "NYSE").
There is also a high concentration of market capitalization and trading volume
in a small number of issuers representing a limited number of industries, as
well as a high concentration of investors (including investment funds and other
institutional investors). In addition, securities traded in certain securities
markets may be subject to risks due to the inexperience of financial
intermediaries, the lack of modern technology, the lack of a sufficient capital
base to expand business operations and the possibility of permanent or temporary
termination of trading and greater spreads between bid and asked prices for
securities in such markets.
The Fund's holdings of equity securities of Emerging Market Country issuers
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 by market participants of the offerings of
other investment companies seeking to invest in the securities markets in the
Emerging Market Countries could increase demand for securities in such markets
and could adversely influence the prices paid by the Fund in purchasing
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securities for its portfolio and, in addition, could increase the period
required for the Fund to initially invest in equity securities of Emerging
Market Country issuers.
In addition to their smaller size and lesser liquidity, the securities
markets of the Emerging Market Countries are less developed than U.S. securities
markets. Regulatory standards are in many respects less stringent than U.S.
standards. There generally is less government supervision and regulation of
exchanges, brokers and issuers in these securities markets than there is in the
United States. Furthermore, there is a lower level of monitoring and oversight
of the markets and the activities of investors in such markets, and enforcement
of existing regulations has been extremely limited. Consequently, the prices at
which the Fund may acquire investments may be affected by other market
participants' anticipation of the Fund's investing, by trading by persons with
material non-public information ("insider trading") and by securities
transactions by brokers in anticipation of transactions by the Fund in
particular securities. Certain of these practices would generally be considered
unlawful if conducted in the U.S. securities markets.
Custody and Settlement Mechanisms
The stock markets in some Emerging Market Countries may have settlement
mechanisms that are less developed and reliable and more costly than those in
more mature economics. Some Emerging Market Countries' markets use physical
share delivery settlement procedures. In such circumstances there may be share
registration and delivery delays. In addition, securities traded in certain
Emerging Market Countries may be subject to risks due to the inexperience of
financial intermediaries, the lack of modern technology, the lack of a
sufficient capital base to expand business operations and the possibility of
permanent or temporary termination of trading and greater spreads between bid
and asked prices for securities in such markets. While the Fund will not invest
in a market unless adequate custodial arrangements are available, there is no
assurance that settlement delays or difficulties will not occur. The governments
of certain Emerging Market Countries may require that a governmental or
quasi-governmental authority act as custodian of the Fund's assets invested in
such countries. In addition, existing share registration and transfer
arrangements in the Russian Federation and certain other Emerging Market
Countries do not currently satisfy regulations under the 1940 Act relating to
custody of securities. As a result, the Fund would not be able to invest in
these countries in the absence of exemptive or no-action relief from the
Securities and Exchange Commission. Although conditional no-action relief
relating to certain custody arrangements in the Russian Federation was recently
granted to another fund, there can be no assurance that the Fund could obtain
similar or other acceptable relief for custodial arrangements in the Russian
Federation or any other such Emerging Market Country. In addition, the risk of
loss through governmental confiscation may be increased in such countries. The
securities markets in the Emerging Market Countries are generally in the
earliest stages of development and are undergoing a period of rapid growth and
regulatory reforms which may lead to difficulties in settlement and recording of
transactions and in interpreting and applying the relevant regulations.
Expenses of the Fund resulting from investment in securities of companies
domiciled in Emerging Market Countries, including custodial fees, are expected
to be higher than those incurred with respect to investments in securities of
companies domiciled in Germany. Therefore, implementing its investment objective
may somewhat increase the Fund's total expense ratio.
Investment and Repatriation Restrictions
Some Emerging Market 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. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
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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 Emerging Market Countries may
restrict investment opportunities in issuers or industries deemed sensitive to
national interests. Some countries may require governmental registration or
approval for the repatriation of investment income, capital or the proceeds of
sales of securities by foreign investors. The Fund may be required to submit
extensive documentation, and may be subject to significant time delays, in the
repatriation of capital or income. Amounts to be repatriated may be reduced by
fees or commissions charged by government authorities or banking institutions.
In addition, if there is a deterioration in a country's balance of payments or
for other reasons, a country may impose 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 by the application to the Fund of any restrictions on
investments or by withholding taxes imposed by Emerging Market 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 were 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 Code.
In certain Emerging Market Countries that currently restrict foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries, indirect foreign investment may still be possible
through investment funds which have been specially authorized. The Fund may
invest in these investment funds subject to the provisions of the 1940 Act.
However, if the Fund invests in such investment funds, the Fund's stockholders
will bear not only their proportional share of the expenses of the Fund
(including operating expenses and the fees of the Investment Adviser) but may
also bear indirectly similar expenses of the underlying investment funds. As
previously mentioned, the Fund may not invest more than 10% of its total assets
in investment companies.
Currency Exchange Controls
The ability of the Fund to exchange the currencies of the Central European
and Eastern European countries into U.S. dollars is subject to regulation by
governmental authorities in such countries. The Deutsche mark and Austrian
schilling are currently freely convertible into U.S. dollars. The Fund
anticipates that in general the foreign currencies received by it with respect
to most of its investments in the Emerging Market Countries will be convertible
into U.S. dollars. However, there can be no assurance that such countries will
not impose restrictions in the future on the movement of the U.S. dollars or
these foreign currencies across local borders or the convertibility of such
foreign currencies into U.S. dollars and therefore with the payment of any
distributions the Fund may make to its stockholders. The currencies of some
Emerging Market Countries are not currently freely convertible into other
currencies and are not internationally traded.
Currency Fluctuations
The Fund generally will hold assets denominated and traded in currencies of
the Central European and Eastern European countries and most of the Fund's
income will be received or realized in such currencies, although the Fund will
be required to compute its net asset value and to compute and distribute its
income in U.S. dollars. Accordingly, changes in the value of any currency in
which the Fund's investments are denominated against the U.S. dollar will result
in corresponding changes in the U.S. dollar value of the Fund's assets
denominated in such currencies and the Fund's net asset value, and will change
the U.S. dollar value of income and gains derived in such currencies. If the
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value of the currencies of countries in Central Europe and Eastern Europe in
which the Fund receives income falls relative to the U.S. dollar between accrual
of the income and making of Fund distributions, the amount of such currencies
required to be converted into U.S. dollars by the Fund to pay distributions will
increase and the Fund could be required to liquidate portfolio securities to
make such distributions. Similarly, if such exchange rates decline between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currencies required to be converted into U.S. dollars
to pay such expenses in U.S. dollars will be greater than the Central European
and Eastern European currencies equivalent of such expenses at the time they
were incurred. There can be no assurances that the Fund will be able to
liquidate securities in order to meet such distribution requirements.
The Manager generally will not seek to hedge against a decline in the value
of the Fund's DM- or AS-denominated portfolio securities resulting from a
currency devaluation or fluctuation. As a consequence the Fund will be subject
to the risk of changes in value of Deutsche marks and Austrian schillings
affecting the value of its portfolio assets, as well as the value of the amounts
of interest, dividends and net realized capital gains received or to be received
in such currencies. The Fund may, however, hedge its foreign currency exposure
other than its exposure to the Deutsche mark and the Austrian schilling by
entering into forward currency contracts. The Fund may hedge such exposure into
either Deutsche marks or Austrian schillings or into U.S. dollars. See
"Investment Objective and Policies--Currency Transactions".
Taxation
Income and capital gains on securities held by the Fund may be subject to
withholding and other taxes imposed by countries of Central Europe and Eastern
Europe, which will reduce the return to the Fund on those securities. The
imposition of such taxes and the rates imposed are subject to change. Certain of
these countries have entered into tax treaties with the United States which, in
certain circumstances, might protect the Fund from all or some of portion of
withholding taxes in the relevant country. However, there can be no assurance
that the Fund will be eligible for the benefits of such treaties. The Fund
intends to elect, when eligible, to "pass through" to the Fund's stockholders,
as a deduction or credit, the amount of foreign taxes paid by the Fund. The
taxes passed through to stockholders will be included in each stockholder's
income. Certain stockholders, including some non-U.S. stockholders, will not be
entitled to the benefit of a deduction or credit with respect to foreign taxes
paid by the Fund. Even if a stockholder is eligible and elects to credit foreign
taxes, such credit is subject to limitations which, in particular, may affect
the ability to credit capital gains taxes. Other foreign taxes, such as transfer
taxes, may be imposed on the Fund, but would not give rise to a credit or be
eligible to be passed through to stockholders. Also, a non-U.S. investor in the
Fund may be at a disadvantage as compared to making direct investments in
securities of issuers located in the investor's country of residence.
Illiquid Securities
Although the Fund intends to concentrate its investments in equities or
equity-linked securities that are listed on a recognized securities exchange or
otherwise publicly traded, the Fund is permitted to invest in securities that
are not readily marketable. These securities present risks not normally present
in securities for which there are public trading markets and may involve a large
degree of business and financial risk that can result in substantial losses.
Companies whose securities are not publicly traded are not subject to the same
disclosure and other legal requirements that are applicable to companies with
publicly traded securities. While some of them are large, companies whose
securities are not publicly traded tend to be smaller than publicly traded
companies and generally have smaller capitalizations and fewer resources, and
therefore often are more vulnerable to financial failure. Because of the absence
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of any public trading market for these investments, the Fund may take longer to
liquidate these positions than it would in the case of publicly traded
securities. The absence of a public trading market may also limit the Fund's
ability to obtain accurate market quotations for purposes of valuing its
portfolio securities and calculating its net asset value. Although these
securities may 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. In
addition to financial and business risks, issuers whose securities are not
publicly traded may not be subject to the same disclosure requirements
applicable to issuers whose securities are publicly traded. See "Investment in
Emerging Market Countries--Market Characteristics" and "Corporate Disclosure
Standards in Germany and Austria".
Role of Banks in German and Austrian Capital Markets
As is the case in other continental European developed countries, German
and Austrian commercial and banking laws permit commercial banks to act, either
directly or indirectly, as investment bankers/underwriters, managers of mutual
and other investment funds and investment advisers, as well as securities
broker/dealers. Many German and Austrian banks, including Deutsche Bank AG
("Deutsche Bank"), are members of stock exchanges in their respective countries.
Moreover, they may, directly or indirectly, also provide other financial
services such as life insurance, mortgage lending and installment financing.
Lastly, they may, and frequently do, maintain long-term equity participations in
industrial, commercial or financial enterprises, including enterprises whose
voting and other equity securities may be publicly traded and/or listed on
national securities exchanges. The German Banking Act has been amended on the
basis of legislation of the European Union so as to modify certain provisions
relating to capital adequacy and consolidation. Such amendments may have the
effect of increasing German banks' own funds and solvency ratios. In addition,
recently effective legislation requires notification of the newly established
Securities Trading Supervisory Office and publication if certain thresholds of
participation in the voting capital of a stock exchange listed corporation are
passed. See "The German Securities Markets".
Deutsche Bank, the parent of the Manager and the Investment Adviser, holds
significant participation in six listed German companies. The term "significant"
denotes direct ownership of over 25% of the voting equity which, under German
law, provides the holder with veto power in policy decisions, such as a change
of business objectives or major acquisitions. Deutsche Bank owns equity
interests ranging from 20% to 98% in holding companies that own participations
of 25% or more in an additional six listed German companies, most of which are
publicly owned. In addition, Deutsche Bank may maintain trading positions in the
securities of these and other (domestic and foreign) companies, and may make
trading markets in some of them, subject to limitations imposed by applicable
law including the limitations of the German Stock Exchange Law (Borsengesetz) of
1896, as amended. Deutsche Bank may, by virtue of such ownership or otherwise,
nominate and place one or more of its directors or officers on the Supervisory
Boards of these and other companies. Deutsche Bank and its affiliates may also
have commercial lending relationships with companies whose securities the Fund
may acquire.
In their capacity as underwriters, German and Austrian banks originate and
manage new issues of domestic and international fixed income and equity
securities both in their respective domestic primary market and in the
Euromarket. Deutsche Bank frequently acts as lead manager for domestic
underwritten offerings of both debt and equity securities. Directly and through
its various wholly-owned affiliates abroad, including Deutsche Bank Capital
Markets Limited and DBSC, Deutsche Bank is a major factor in the Eurobond
market. The Fund has received a limited exemption from the prohibition under the
1940 Act that otherwise precludes the Fund from purchasing any securities in an
A-11
<PAGE>
offering for which Deutsche Bank or one of its affiliates is the principal
underwriter. This limited exemption permits the Fund to invest in certain such
securities of German issuers. Deutsche Bank may also be active from time to time
as a dealer in various securities in which the Fund may invest. Although the
Fund will not purchase securities from or sell securities to Deutsche Bank, the
trading activities of Deutsche Bank as well as the investment positions and the
underwriting activities, described above, in such securities could have either
an adverse or beneficial effect on the price of those securities already held in
the Fund's portfolio or contemplated for purchase and, depending on the size of
Deutsche Bank's position, may or may not affect the availability of the
securities for investment by the Fund.
Corporate Disclosure Standards in Germany and Austria
Reporting, accounting, and auditing standards in Germany and Austria differ
from generally accepted accounting principles in the United States in important
respects. Corporations, other than many subsidiaries of U.S. companies, do not
provide all of the disclosure required by U.S. law and accounting practice, and
such disclosure may be less timely than required by such U.S. law and accounting
practices. Following the enactment, in 1985, of extensive amendments to
pertinent legislation in Germany and, in 1990, to the Austrian Accounting Act in
Austria, German and Austrian accounting guidelines have been adapted to
Directives Nos. 4, 7, and 8 of the Council of the European Communities, and with
respect to banks, to European Union banking law harmonization directives. As a
result, German accounting and reporting standards more closely approximate U.S.
law and practice in such areas as segmentation of sales by geographical and
principal product lines, and the required breakdown of operating and
non-operating income. Corporate disclosure and accounting standards in Austria
are very similar to those in Germany. Corporate disclosure standards in Emerging
Market Countries are generally less stringent than in Germany and Austria. See
"Investment in Emerging Market Countries--Market Characteristics".
Operating Expenses
The Fund's estimated annual operating expenses and its investment
management and advisory fees are higher than those of U.S. investment companies
investing exclusively in the securities of U.S. issuers, primarily because of
the additional time and expense required in investing in equity securities of
non-U.S. issuers. Investing in equity securities of non-U.S. issuers entails
additional time and expense because available public information concerning such
securities is limited in comparison to, and not as comprehensive as, that
available for U.S. equity securities. In addition, the Fund will indirectly bear
its proportionate share of management and investment advisory fees and other
costs incurred by any investment fund in which the Fund invests. As a result of
the relatively high expected operating expenses, the Fund will need to generate
higher relative returns to provide investors with an equivalent economic return.
Net Asset Value Discount
The Fund is a closed-end investment company. Shares of closed-end
investment companies frequently trade at a discount from net asset value. This
characteristic is a risk, separate and distinct from the risk that the Fund's
net asset value will decrease. The risk of purchasing shares of a closed-end
fund that might trade at a discount is more pronounced for investors who wish to
sell their shares in a relatively short period of time, since 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. Accordingly,
the Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes. It should be noted, however, that
shares of some closed-end funds have traded at premiums to net asset value.
Since March 1990, the Fund's shares have traded at prices below their net asset
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<PAGE>
value. The Fund's shares are not subject to redemption. Investors desiring
liquidity may, subject to applicable securities laws, trade their shares in the
Fund on any exchange where such shares are then listed at the then current
market value, which may differ from the then current net asset value.
Non-Diversified Status
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means 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.
However, the Fund conducts its operations so as to qualify as a "regulated
investment company" for purposes of the Code, which relieves the Fund of any
liability for Federal income tax to the extent that its earnings are distributed
to stockholders. To so qualify, among other requirements, the Fund will limit
its investments so that, at the close of each quarter of the taxable year, (i)
not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer or a group of related issuers and
(ii) at least 50% of the market value of its total assets will be represented by
cash, U.S. Government Securities, and other securities, with such other
securities limited, in respect of any one issuer, to not more than 5% of the
market value of the Fund's total assets and not more than 10% of the issuer's
outstanding voting securities. Because the Fund, as a non-diversified investment
company, may invest in a smaller number of individual issuers than a diversified
investment company, an investment in the Fund presents greater risk to an
investor than an investment in a similar diversified company.
A-13
<PAGE>
THE GERMAN SECURITIES MARKETS
General
Germany's securities markets, whose origins date back to the 16th century,
are among the world's largest. Worldwide in 1994, German equity markets were the
third largest in terms of trading volume and fifth largest in terms of market
capitalization.
Market Capitalization and Trading Volume
of Equity Securities on German Stock Exchanges(1)
(in billions)
Trading Volume
Market Capitalization for the year ended
as of December 31(2) December 31(2)
----------------------- ---------------------------
1990 ........... $ 347.15 DM561.20 $ 1,002.82 DM1,621.16
1991 ........... 359.11 596.48 758.08 1,259.17
1992 ........... 359.77 561.89 856.12 1,337.09
1993 ........... 483.59 800.10 1,111.65 1,839.22
1994 ........... 499.25 773.88 1,206.86 1,870.76
- ------------
(1) Excluding stocks of foreign-domiciled companies and investment companies.
(2) US Dollar equivalents calculated at year-end exchange rates.
Sources: Deutsche Borse AG and the Deutshe Bundesbank.
Equity securities trade on the country's eight regional stock exchanges, of
which Frankfurt accounted for approximately 74% of the total volume in 1994.
While trading in listed securities is not legally or otherwise confined to the
exchanges, they are believed to handle the largest part of trading volume in
equity transactions. In contrast, both domestic and foreign funded debt, though
generally listed, are largely traded off the exchanges.
German stock exchanges offer three different market segments within which
stocks are traded:
(i) The official market (Amtlicher Handel) comprises trading in
shares which have been formally admitted to official listing by the
admissions committee of the stock exchange concerned, based upon
disclosure in the listing application or "prospectus".
(ii) The regulated, unlisted market (Geregelter Market) comprises
trading in shares not admitted to official listing. Companies admitted to
this market segment are exempt from publishing a full listing prospectus,
but are required to submit an offering memorandum. Admission is granted by
a special committee which is also responsible for the supervision of the
establishment of prices.
(iii) The unofficial, unregulated telephone, or over-the-counter,
market (Freiverkehr) comprises trading in securities that have not
followed any special listing procedure. It includes trading in securities
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<PAGE>
by telephone or on the stock exchange premises, between banks or through
floor brokers prior to or after official trading hours.
For an official listing, the German stock exchanges and pertinent
legislation require public disclosure of all information about an issuer
considered material to an evaluation of the securities to be listed, including
the history and nature of the issuer's business; real property and other assets;
investments and participations involving more than 25% of the issuer's voting
equity; agreements to pool profits and losses with its affiliates; composition
of Boards of Directors (Supervisory Boards) and of management; as well as
authorized outstanding capital, including rights of holders of different classes
of its securities. Applications must further provide the latest annual financial
statements of the issuer with explanatory notes, including disclosure of any
liabilities not shown therein. They must also furnish details of the issuer to
be listed. Issuers are liable for completeness and accuracy of all information
jointly with the member bank sponsoring the issue. Generally, DM 0.5 million par
value (i.e., 10,000 shares of DM 50 par value) is considered to be the minimum
amount suitable for full listing. Individual stock exchanges may require larger
amounts. Financial statements must be available for the last three consecutive
years, and be published on a current basis at least semi-annually.
Applications for admission to regulated unlisted trading must contain
essentially similar information as that required for full listing, but in a
condensed form that may be submitted as a memorandum. However, the document, in
lieu of being published, may be deposited with paying agents so long as
reference is made in one of the official stock exchange publications. The issuer
and the sponsor are subject to essentially the same degree of liability as in an
official listing.
Applications are reviewed by a committee of each stock exchange, which
committee has the right to examine the completeness and accuracy of the
information and may reject issues considered incomplete or prejudicial to the
interest of investors.
Subject to the provisions of pertinent law, mainly the Borsengesetz (Stock
Exchange Law) of 1908, as amended, the board of governors, management and other
executive organs of the stock exchanges constitute self-administering and
self-regulating bodies exercising certain judicial and administrative functions
in circumstances laid down by applicable statutory law. Other statutory law
dealing with the public distribution of securities includes relevant provisions
of the Civil and Commercial Codes, the Stock Corporation Act, the Securities
Sales Prospectuses Act of 1990 and the Securities Trading Act of 1994, which
established a Securities Trading Supervisory Office as of January 1995,
including, inter alia, provisions that deal with securities fraud and insider
trading. In addition to these functions, the jurisdiction of the stock exchanges
extends to all matters of governance. Management of the exchanges is essentially
independent under the law. However, a representative of the State in which each
exchange is located sits on the board of directors of such exchange.
As of January 1, 1993, the Association of German Stock Exchanges
(Arbeitsgemeinschaft der Deutschen Wertpapierborsen), formerly responsible for
policy and administrative questions of national and international character,
merged with the previously established Frankfurter Wertpapier Borse AG, which
was then renamed Deutsche Borse AG. Deutsche Borse AG is not only the parent
entity of the Frankfurt Stock Exchange, but also holds all the shares in the
German Futures Exchange, the Deutscher Kassenverein AG (German Central
Securities Depository) and thus, indirectly, also of its subsidiaries, namely,
the Deutsche Auslandskassenverein AG (German Central Foreign Securities
Depository) as well as the Deutsche Wertpapierdatenzentrale GmbH (German
A-15
<PAGE>
Securities Data Center). Pursuant to a recently announced agreement between the
Frankfurt, Dusseldorf and Munich Stock Exchanges, it is expected that Deutsche
Borse AG will in the future also become the parent entity of the Dusseldorf and
Munich Stock Exchanges. The other regional stock exchanges, other than the
Frankfurt Stock Exchange, have an indirect 10% share in Deutsche Borse AG
through the Deutsche Borsenbeteiligungsgesellschaft mbH. The interest of the
regional exchanges in the Deutsche Borsenbeteiligungsgesellschaft mbH generally
reflects the relative size and relevance of the exchange. While Deutsche Borse
AG handles policy and administration matters of national and international
character, the regional exchanges deal with local issues.
Equity Markets
Primary Markets. The total value of primary offerings for each of the
previous five years of listed equity issues is shown in the table below. New
stock exchange listings represent a growing proportion of all capital increases.
They represent mostly the exercise of subscription rights and, in the case of
initial public offerings, a large number of non-voting participating preferred
issues. Subscription rights follow from the statutory preemptive rights of
existing shareholders to purchase additional securities, usually at a stated
price below market value when such securities are offered by an issuer. The Fund
may either exercise or sell rights it receives as a stockholder and will have
the opportunity to purchase on the open market the rights of stockholders not
wishing to exercise their rights. Non-voting participating preferred stock is
entitled to a stated minimum dividend, usually cumulative, and to additional
amounts when the common stock dividend is increased. Subject to the limited
prohibition on the Fund's purchasing securities in an offering for which
Deutsche Bank AG or one of its affiliates is the principal underwriter, the Fund
is able to invest in initial public offerings of non-voting participating
preferred issues along with other investors.
Primary Offerings of Listed Equity Securities by
Domestic Issuers
(millions of DM)
1990 1991 1992 1993 1994
------ ----- ------ ------ ------
Value .......... 21,970 9,501 10,367 14,908 25,111
- ------------
Source: Deutsche Borse AG.
Secondary Markets. Markets in listed securities are generally of the
auction type, but a substantial amount of listed securities also changes hands
in inter-bank dealer markets both on and off the stock exchanges. Price
formation is by outcry, as determined by officially appointed floor brokers who
are themselves exchange members, but who do not, as a rule, deal with the
public. Prices for active stocks, including those of larger companies, are
quoted continuously during stock exchange hours. Fifty shares generally
represent a standard transaction--less than the 100 share round lot on the NYSE
where, however, the average price per share is a fraction of that in Germany,
although measures adopted under German corporate law allow a reduction in the
nominal value of Shares. Odd lots are priced at an official "single quotation"
A-16
<PAGE>
set once a day by the appointed broker's matching all market orders. Less active
listed and stocks admitted to trading in the regulated unlisted market are
likewise quoted only once a day. Transactions settle on the second business day
following trading.
Stocks that comprise the DAX Index (Deutscher Aktienindex, i.e., German
Stock Index) as well as other shares with a relatively high trading volume,
equity warrants and government obligations and government agency securities are
also traded on the Integriertes Borsenhandels- und Informations-Systems
("IBIS"), an integrated electronic exchange system introduced by Deutsche Borse
AG. Since April 1991, IBIS has been available daily from 8:30 a.m. to 5:00 p.m.
to brokers and banks which are members of the stock exchange. IBIS is integrated
into the Frankfurt Stock Exchange and is subject to its rules and regulations.
Options on both domestic and foreign stocks have been traded since 1970
although trading activity is relatively low. Options trading in German
Government bonds began on April 1, 1986. There is also active trading in share
warrants, generally issued in conjunction with bonds. Short selling is generally
permitted and, except for general civil law, there are no special provisions for
delayed delivery or borrowing of securities, other than certain administrative
requirements.
As set forth under "Special Considerations/Risk Factors -- Role of Banks in
German and Austrian Capital Markets" in this Appendix A, German banks, brokers
and selected domestic investment trusts are regular members of the stock
exchanges. Banks may deal on a net basis for their own account, as well as for
accounts of domestic and foreign institutional customers during or after regular
stock exchange hours.
Orders executed for individual customers on the stock exchanges are subject
to uniform commission rate schedules. Exclusive of a small charge for floor
brokerage, scheduled commissions are 1.0% for equities. Such rates may be
discounted for certain large domestic and foreign investors.
Equity Securities. Two types of limited liability corporations issue equity
shares that are freely transferable and may therefore be publicly traded:
"Aktiengesellschaften" ("AG"), stock corporations, and "Kommanditgesellschaften
auf Aktien" ("KGaA"), limited partnerships, the limited interests in which are
evidenced by freely transferable shares. In either case, capital stock carries a
par value of not less than DM 50 per share. Between 85% and 90% of all corporate
stock outstanding is believed by the Manager to consist of common shares. Shares
are normally fully paid and non-assessable, except for certain insurance
companies that issue stock as to which the full par value is not paid at the
time of issuance. Therefore, the issuer can call for the balance due at a
subsequent time. The Fund invests in such securities. Shares are mostly in
bearer form. Common shares carry one vote each, but a number of German companies
limit the number of votes cast to a maximum that may not be exceeded regardless
of the amount of stock beneficially owned by any single party in interest.
Preferred stock is generally non-voting, and entitled to preferential
dividends, usually cumulative. Dividend rates are generally fixed at a
pre-determined differential above the common stock dividend. Part or all of such
payment may be guaranteed by the issuer or its parent. By law, non-voting
preferred stockholders become entitled to vote upon omission of two consecutive
years' dividends. In recent years, such preferred stock, which allows common
A-17
<PAGE>
stockholders to retain control, has been a popular instrument in a large number
of initial public offerings.
Certain German companies issue Participation Certificates, or
"Genuss-Scheine", which entitle the holder to participate only in dividend
distributions, generally at rates above those declared on the issuers' common
stock, but not to vote, nor usually to any claim for assets in liquidation.
Participation Certificates trade like common stock on the German stock
exchanges. Such securities may have higher yields; however they may be less
liquid than common stock.
The stocks of approximately 666 German companies, which account for a
disproportionately large share of sales within the German economy, trade either
officially listed or in the regulated, unlisted market on one or more German
stock exchanges. The total market value of traded stock as of December 31, 1994
was an estimated DM 773.9 billion.
Structure of Equity Markets. Germany's stock market offers broad
representation across most of the non-government owned industrial and financial
sectors, as indicated in the table below. However, its make-up varies
significantly from that of production values within the country's economy
because of private and foreign ownership of certain industries such as the
automobile, office equipment, tobacco and food and beverage industries. Set
forth in the table below is information concerning the industry composition of
the DAX Index and CDAX Index (Composite Deutscher Aktienindex).
Industry Composition of DAX(1) and CDAX(2) Index--as of December 31, 1994
DAX CDAX
------ ------
Banks and Insurance ............................ 30.73% 31.42%
Chemical Concerns/Pharmaceutical ............... 17.60 14.10
Auto Industry and Supply ....................... 15.87 10.33
Utilities and Energy ........................... 13.49 12.06
Electronics Industry ........................... 8.04 8.47
Mechanical Engineering ......................... 6.71 6.75
Steel and Raw Materials ........................ 4.08 4.87
Consumer Goods ................................. 2.09 5.75
Other .......................................... 1.39 6.26
----- ------
Total ...................................... 100.0 % 100.0 %
- --------------
(1) The DAX Index is comprised of 30 stocks representing approximately 60% of
the market capitalization of the German stock exchange.
(2) The CDAX Index is comprised of 320 stocks (subject to adjustments).
Source: Deutsche Asset Management GmbH.
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<PAGE>
Set forth in the table below is information concerning the total return of
the DAX Index and CDAX Index for each of the periods indicated.
Annual Total Return (1)
1990 1991 1992 1993 1994
-------- ------ -------- ------ ------
DAX ................... (21.90)% 12.86% (2.09)% 46.71% (7.06)%
CDAX .................. (14.69)% 4.74% (6.39)% 42.02% (5.83)%
Dollar-adjusted DAX ... (11.62)% 11.24% (8.33)% 36.85% 4.12%
Dollar-adjusted CDAX .. (3.47)% 3.24% (12.36)% 34.85% 5.50%
- -------------
(1) Based on U.S. dollar returns
Source: Deutsche Asset Management GmbH.
The stocks of the 20 largest German companies accounted for approximately
78% of the German stock market's total trading volume for the year ended
December 31, 1994. In the aggregate, stocks of the next 30 largest companies
accounted for approximately 12% of the German stock market's total trading
volume for the year ended December 31, 1994.
Trading volume tends to concentrate on the relatively few companies having
both large market capitalization and a broad distribution of their stock with
few or no large holders. The companies having the largest annual trading volume
of their stock in 1994 were Deutsche Bank AG with DM 224.6 billion, Daimler Benz
AG with DM 211.1 billion, Siemens Aktiengesellschaft with DM 173.4 billion,
Allianz Aktiengesellschaft Holding with DM 123.2 billion and Volkswagen
Aktiengesellschaft with DM 111.4 billion.
The actual float available for public trading is significantly smaller than
the aggregate market value cited above because of the large extent of long-term
holdings by non-financial corporations, family groups and banks. However, the
number of publicly traded shares has been increasing in recent years due to a
reduction in such holdings on the part of certain insurance companies and public
authorities. In addition, the continuing public offerings of equity securities
previously controlled by the federal government have contributed to the growing
size of the float.
Domestic institutional ownership of German equities, while large relative
to that by individuals, is less than that in certain other industrial countries.
The German Government is encouraging the expansion of private participation in
the equity markets, and has contributed to this process both directly, through
public sale of government-owned enterprises, as well as indirectly through
fiscal measures.
Trading Volume. Non-residents are represented on the German share market
both as issuers and as investors. Until 1989, increased activity by
non-residents had contributed to the rise of the trading volume on German stock
exchanges as capital market liberalization attracted investment from abroad. Net
purchases of German stocks by foreigners peaked in 1989 with DM 25.3 billion and
then declined sharply to DM 2.6 billion in 1990. By contrast, domestic investors
further increased the size of their share portfolios. Trading volumes pulled
back sharply in 1991 and recovered only modestly in 1992, as investors tended to
avoid the German equity market in favor of the income achievable in German fixed
income markets. Trading volumes recovered substantially in 1993, and foreign net
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<PAGE>
purchases returned to nearly the levels of 1989. The table below shows reported
trading volumes of both domestic and foreign securities and warrants on German
stock exchanges.
Stock Exchange Trading Volumes
(DM billions)
Stocks
---------------------------------------------------------
Total Domestic Foreign Warrants
------- -------- ------- --------
1987 ........ 848.8 671.2 57.8 119.9
1988 ........ 716.4 615.2 38.8 62.4
1989 ........ 1,376.6 1,181.8 60.2 134.5
1990 ........ 1,819.6 1,621.2 35.0 163.4
1991 ........ 1,358.5 1,259.2 26.9 72.4
1992 ........ 1,415.2 1,337.1 22.1 56.0
1993 ........ 1,985.8 1,839.2 43.0 103.6
1994 ........ 2,017.9 1,870.8 47.9 99.2
- ----------
Source: Deutsche Borse AG.
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<PAGE>
THE AUSTRIAN SECURITIES MARKETS
The Vienna Stock Exchange
The securities business in Austria, including securities underwriting and
trading, is conducted principally by banks. The major banks are members of the
Wiener Borse (Vienna Stock Exchange) (the "Exchange"), Austria's only securities
exchange. Austrian equity markets were the 34th largest in terms of trading
volume and 32nd largest in terms of market capitalization in 1993. The Exchange
is an independent, publicly chartered entity managed by a Council of 29 members.
The management of current business is the responsibility of the Secretary
General, under the direction of the President. The current President is the
Chairman of Raiffeisen Zentralbank Osterreich AG, one of Austria's largest
banks. The Chairmen of Creditanstalt-Bankverein and of Bank Austria currently
serve as two of its four Vice Presidents.
Listed equity securities trading is not confined to the Exchange. About
half of the trading volume in domestic equity securities occurred on the
Exchange in 1994. The balance of such trading is accomplished by banks off the
Exchange. Transactions occurring off the Exchange can be accomplished by two
principal methods. Banks may execute customer orders at the official Exchange
price, or, if the customer indicates its desire to trade at other than the
official price, the bank may execute the trade as principal or as broker in a
trade with another bank.
Austrian commercial banks act as securities brokers and dealers, and as
underwriters, and through subsidiaries as investment fund managers and
investment advisers. They also may hold equity participations, as well as
controlling interests, in industrial, commercial or financial enterprises,
including companies whose securities are publicly traded and listed on the
Exchange. See "Special Considerations and Risk Factors -- Role of Banks in
German and Austrian Capital Markets".
The Exchange has three separate market segments within which equity
securities are traded. The official market (Amtlicher Handel) comprises shares
and participation certificates of companies which have been formally admitted to
official listing by the Council of the Stock Exchange. For an official listing,
a domestic company must have capital with a minimum par value of at least AS 40
million, of which at least AS 10 million must be held by or offered to, the
investing public. A company applying for listing must submit to the Exchange a
prospectus containing a general description of the company and audited financial
statements for the previous three years. It must also undertake to provide
annual reports with audited financial statements and semi-annual reports. For a
listing in the second market segment, the unofficial market (Geregelter
Freiverkehr), a domestic company must have capital with a minimum par value of
at least AS 10 million, of which at least AS 2.5 million must be held by or
offered to, the investing public and must submit to the exchange a prospectus.
It must undertake to provide annual reports. In the third market segment, the
unregulated market (Sonstiger Wertpapierhandel), shares of companies which have
not followed the listing procedures of the other two market segments are traded,
in addition to warrants, bonds and other securities. Prices are established by
free brokers.
As of December 31, 1994, the official market segment and the second market
segment comprised shares and Participation Certificates of 153 domestic
companies.
The table below shows the number, market capitalization and trading volume
of listed Austrian equity securities (including Participation Certificates and
the second market segment) as of December 31 for 1989 through 1994.
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<PAGE>
<TABLE>
<CAPTION>
Total Equity
Equity Trading Trading Volume
Number of Number of Market Volumes on the Reported
Listed Equity Listed Capitalization Exchange by Banks
Year Securities Companies (AS millions) (AS millions) (AS millions)
---- ---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1990 299 142 AS281,016 AS220,584 N/A(1)
1991 325 151 259,126 189,522 AS91,238
1992 326 160 230,105 119,247 66,782
1993 377 155 330,003 175,442 63,409
1994 233 153 321,341 199,907 208,320
</TABLE>
- ----------------
(1) Comparable data not available for 1990.
Source: Vienna Stock Exchange.
Industry Composition. Austria's stock market offers representation across
most of the non-government owned industrial and financial sectors, as indicated
in the table below. However, its make-up varies significantly from that of
production values within the country's economy because of private and foreign
ownership of certain industries [such as the automobile, office equipment and
food and beverage industries]. Set forth in the table below is information
concerning the industry composition of the Vienna Stock Exchange Council Index
(the "Vienna Index"), the composite stock price index for shares traded on the
Exchange.
Industry Composition of the Vienna Index--as of January 5, 1995
Vienna Index(1)
---------------
Banks and Insurance ..................................... 35.1%
Construction ............................................ 16.4
Utilities ............................................... 13.7
Machinery ............................................... 10.5
Paper ................................................... 5.2
Breweries ............................................... 4.0
Real Estate ............................................. 3.5
Mining .................................................. 2.1
Conglomerates ........................................... 1.8
Transport ............................................... 1.8
Foodstuffs .............................................. 1.5
Trade & Services ........................................ 1.2
Chemicals ............................................... 1.1
Other ................................................... 2.1
------
Total ............................................... 100.0%
(1) The Vienna Index is comprised of 113 stocks (subject to adjustments).
Source: Vienna Stock Exchange.
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<PAGE>
Regulation. The Exchange and its members are subject to the supervision of
the Ministry of Finance, which is represented by the Stock Exchange
Commissioner. The Stock Exchange Law of 1989, together with the regulations
issued by the Exchange, form the regulatory framework for the Exchange. The 1989
law has adopted listing and prospectus requirements, periodic disclosure
requirements for listed companies, and disclosure requirements relating to the
purchase or sale of major shareholdings. These provisions of the Stock Exchange
Law are designed to approximate the requirements of the relevant directives of
the European Communities. The Stock Exchange Law has also introduced insider
trading rules for listed companies. An amendment to the Stock Exchange Law of
1993 made insider trading a criminal offense. There are no specific laws or
regulations governing the conduct of trading off the Exchange although banks
engaging in such trading are subject to the general supervision of the Ministry
of Finance. The major Austrian banks have agreed to abide by a Standard
Compliance Code.
Trading. The Exchange is open for trading between 9:30 a.m. and 1:30 p.m.
on each business day. Exchange prices are set by the Official Brokers who act as
intermediaries in all Exchange transactions but may not trade for their own
account. Equity securities are traded either at a single price per day
(Einheitskurs) calculated on the basis of the sale and the purchase orders
received or at fluctuating prices (Fliesshandel) for those securities with
significant trading volume. The regulations of the Exchange limit upward and
downward movements in the prices of domestic shares to 10% of the previous day's
closing price.
Settlement. Securities transactions are usually settled and cleared by way
of the so-called "Arrangement", which is administered by the Oesterreichische
Kontrollbank AG ("OeKB"). Most listed Austrian shares are represented by bearer
certificates deposited with OeKB. All transactions in a particular week are
settled on the second Monday following the transaction. The settlement date is
also the value date. Transfers are effected primarily by book-entry with net
payments being made through OeKB and deliveries of shares being credited to each
bank's account with the Wertpapiersammelbank, a department of OeKB which
provides depository and custody services for Austrian banks and certain foreign
depositories, including Deutscher Auslandskassenverein, Frankfurter Kassenverein
and Euroclear.
Transaction Costs. Orders executed for individual customers on the Exchange
or between banks are subject to commissions of approximately 1.25% (minimum
commission: AS 300-700) for equity securities. Such rates may be discounted for
certain large investors. The commission includes the stock exchange turnover tax
of 0.15%, the Official Broker's fee and the bank's commission.
The Primary Market. New issues of securities typically are placed by banks,
including underwriting syndicates of banks. Capital increases normally take the
form of issues of subscription rights, which may be traded. Equity securities
may also include Participation Certificates. See "The German Securities
Markets--Equity Markets--Equity Securities".
The Secondary Market. Austrian trading in listed equity securities
decreased substantially in 1991 and 1992. Annual trading volume in domestic
equity securities increased 47% from AS 119,247 million for the year ended
December 31, 1992 to AS 175,442 million for the year ended December 31, 1993. It
increased to AS 199,907 million (13%) for the year ended December 31, 1994. The
number of companies listed on the Exchange has increased from 142 at December
31, 1989 to 153 at December 31, 1994.
A-23
<PAGE>
Market Capitalization. The aggregate market capitalization of Austrian
equity securities was AS321,341 million as of December 31, 1994. The actual
float available for public trading is significantly smaller than the aggregate
market capitalization because of the large extent of long-term holdings by
banks, corporations and individuals. Although as of December 31, 1994 there were
153 quoted companies on the Exchange, market capitalization and trading is
concentrated in a limited number of companies. As of December 31, 1994 the 25
largest companies by market capitalization represented approximately 75% of
total market capitalization of Austrian shares listed on the Exchange.
Vienna Index. After a stagnating performance throughout the 1970s and early
1980s, the Vienna Index rose by 328.8% from the beginning of 1985 through the
end of 1989. From year-end 1989 to year-end 1992, the Vienna Index fell by
31.9%. In 1993, the Vienna Index rose by 38.8%. In 1994, the Vienna Index fell
by 11.2%.
Austrian Traded Index (ATX). In July 1991, the Vienna Stock Exchange
introduced the Austrian Traded Index (ATX), a new share index calculated in
real-time on the basis of the shares traded in consecutive trading
(Fliesshandel). The ATX (based on December 31, 1990 = 1,000) was 883.25 at
year-end 1991, 747.70 at year-end 1992, 1,128.78 at year-end 1993 (representing
a 50.96% increase over year-end 1992) and 1,055.24 at year-end 1994
(representing a 6.97% decrease from year-end 1993).
Options and Futures market (OTOB). In October 1991, the Vienna Stock
Exchange introduced OTOB, an option and futures market based on the market-maker
system. In 1993, this new market segment included stock options on the shares of
7 domestic companies traded in consecutive trading (Fliesshandel), ATX futures,
ATX options, and bond futures. In 1994, the total number of traded contracts was
2,895,429, the total contract value was AS 704.57 billion, the total premium
turnover was AS 6,102.11 million and at year-end 1994, the total open interest
amounted to AS 113,024 million.
Bond Market
Primary Market. The Austrian bond market is comprised primarily of
obligations issued by the Republic of Austria, local governments and publicly
controlled entities, and bonds of financial institutions. Corporate issues
account for only a relatively small portion of the primary market. As the
largest financial intermediary, the banking sector to a large extent finances
the budget deficit by purchasing government obligations.
A-24
<PAGE>
[Form of proxy for non-record holders]
<TABLE>
<S> <C>
PROXY
THE FUTURE GERMANY FUND, INC.
31 West 52nd Street
New York, New York 10019
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert R. Gambee and Joseph Cheung as Proxies, each with the power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all the shares of common stock of The Future Germany Fund,
Inc. (the "Fund") held of record by the undersigned on May 10, 1995 at a Special Meeting of Stockholders to be held on June 29, 1995
or any adjournment thereof.
TO APPROVE PROPOSALS 1 AND 2 SET FORTH BELOW, TOGETHER.
[ ] APPROVE [ ] DISAPPROVE [ ] ABSTAIN
(Instruction: If you wish to vote separately on Proposals 1 and 2, DO NOT mark the boxes above.
Instead, mark your vote below separately for each Proposal.)
1. TO APPROVE A CHANGE IN THE FUND'S INVESTMENT OBJECTIVE.
[ ] APPROVE [ ] DISAPPROVE [ ] ABSTAIN
2. TO APPROVE AN AMENDMENT TO THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION RELATING TO INVESTMENTS IN OPTIONS AND FUTURES.
[ ] APPROVE [ ] DISAPPROVE [ ] ABSTAIN
3. TO CONSIDER AND ACT UPON ANY OTHER BUSINESS AS MAY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
This proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction
is made, this proxy will be voted FOR Proposals 1 and 2.
When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation,
please provide the full name of the corporation and the signature of the authorized officer signing on its behalf.
----------------------------------------------------
Name (please print)
----------------------------------------------------
Name of Corporation (if applicable)
(By) (Date) 1995
-------------------------- ------------
(Signature)
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY USING THE ENCLOSED ENVELOPE.
</TABLE>
<PAGE>
[Form of proxy for record holders]
<TABLE>
<S> <C>
PROXY
THE FUTURE GERMANY FUND, INC.
31 West 52nd Street
New York, New York 10019
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert R. Gambee and Joseph Cheung as Proxies, each with the power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all the shares of common stock of The Future Germany Fund,
Inc. (the "Fund") held of record by the undersigned on May 10, 1995 at a Special Meeting of Stockholders to be held on June 29, 1995
or any adjournment thereof.
TO APPROVE PROPOSALS 1 AND 2 SET FORTH BELOW, TOGETHER.
[ ] APPROVE [ ] DISAPPROVE [ ] ABSTAIN
(Instruction: If you wish to vote separately on Proposals 1 and 2, DO NOT mark the boxes above.
Instead, mark your vote below separately for each Proposal.)
1. TO APPROVE A CHANGE IN THE FUND'S INVESTMENT OBJECTIVE.
[ ] APPROVE [ ] DISAPPROVE [ ] ABSTAIN
2. TO APPROVE AN AMENDMENT TO THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION RELATING TO INVESTMENTS IN OPTIONS AND FUTURES.
[ ] APPROVE [ ] DISAPPROVE [ ] ABSTAIN
3. TO CONSIDER AND ACT UPON ANY OTHER BUSINESS AS MAY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
This proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction
is made, this proxy will be voted FOR Proposals 1 and 2.
When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation,
please provide the full name of the corporation and the signature of the authorized officer signing on its behalf.
------------------------------------------------------------------
Personal Identification Number:
IF YOU WISH TO VOTE BY TELEPHONE
PLEASE SEE THE BLUE INSTRUCTION CARD.
------------------------------------------------------------------
----------------------------------------------------
Name (please print)
----------------------------------------------------
Name of Corporation (if applicable)
(By) (Date) 1995
-------------------------- ------------
(Signature)
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY USING THE ENCLOSED ENVELOPE.
</TABLE>
<PAGE>
[Separate Instruction Card]
Telephone Voting Instructions
Dear Shareholder:
Your vote is important. We have provided an automated telephone voting
option which you may access 24 hours a day by dialing 800-842-7629 on a touch
tone telephone and keying in your PERSONAL IDENTIFICATION NUMBER which is
located on the back of your proxy card.
After dialing 800-842-7629, you will hear the following instructions:
"Please enter your personal identification number:
------------------
Press 1 if you are voting in favor of management on ALL proposals or
Press 9 if you wish to vote against management on ALL proposals: ."
--
Once this is completed, the telephone voting option will automatically hang
up and your vote will be cast as you directed. There is no need for you to mail
back your proxy card.
However, if you wish to abstain from voting on a proposal or vote in favor
of one proposal and against the other, you should do so by signing your proxy
card and returning it in the envelope provided.
Thank you for voting.
<PAGE>
