<PAGE> 1
As filed with the U.S. Securities and Exchange Commission on August 12, 1996
SECURITIES ACT FILE NO. 33-75012
INVESTMENT COMPANY ACT FILE NO.
811-8346
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-2
Registration Statement under the Securities Act of 1933 /X/
Pre-Effective Amendment No. 2 /X/
Post-Effective Amendment No. / /
and/or
Registration Statement under the Investment Company Act of 1940 /X/
Amendment No. 2 /X/
(check appropriate box or boxes)
---------------------
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
(formerly Morgan Stanley European Emerging Markets Fund, Inc.)
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas
New York, New York 10020
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (212) 296-7100
---------------------
HAROLD J. SCHAAFF, JR.
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
C/O MORGAN STANLEY ASSET MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
With copies to:
G. DAVID BRINTON, ESQ.
ROGERS & WELLS
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 878-8000
PIERRE DE SAINT PHALLE, ESQ.
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
---------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this registration statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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Common Stock, $0.01 par
value........................ 5,750,000 shares $20.00 $115,000,000 $39,655.17
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</TABLE>
(1) Includes 750,000 shares subject to the Underwriters' over-allotment options.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Of this amount, $29,552 was previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
CROSS REFERENCE SHEET
PARTS A AND B OF PROSPECTUS*
<TABLE>
<CAPTION>
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
<C> <S> <C>
1. Outside Front Cover.............................. Front Cover Page
2. Inside Front and Outside Back Cover Pages........ Front Cover Page; Inside Front Cover
Page
3. Fee Table and Synopsis........................... Prospectus Summary; Fee Table
4. Financial Highlights............................. Not Applicable
5. Plan of Distribution............................. Cover Page; Prospectus Summary;
Underwriters
6. Selling Shareholders............................. Not Applicable
7. Use of Proceeds.................................. Use of Proceeds
8. General Description of the Registrant............ Cover Page; Prospectus Summary; The
Fund; Risk Factors and Special
Considerations; Investment
Objective and Policies; Investment
Restrictions; Common Stock
9. Management....................................... Prospectus Summary; Management of the
Fund; Estimated Expenses; Portfolio
Transactions and Brokerage; Common
Stock; Dividend Paying Agent,
Transfer Agent and Registrar;
Custodians
10. Capital Stock, Long-Term Debt and Other Prospectus Summary; Dividends and
Securities..................................... Distributions; Dividend
Reinvestment and Cash Purchase
Plan; Taxation; Common Stock;
Underwriters
11. Defaults and Arrears on Senior Securities........ Not Applicable
12. Legal Proceedings................................ Not Applicable
13. Table of Contents of the Statement of
Additional Information........................... Not Applicable
14. Cover Page....................................... Not Applicable
15. Table of Contents................................ Not Applicable
16. General Information and History.................. The Fund
17. Investment Objective and Policies................ Investment Objective and Policies;
Investment Restrictions
18. Management....................................... Management of the Fund
19. Control Persons and Principal Holders of
Securities..................................... Not Applicable
20. Investment Advisory and Other Services........... Management of the Fund; Estimated
Expenses; Dividend Paying Agent,
Transfer Agent and Registrar;
Custodians; Experts
21. Brokerage Allocation and Other Practices......... Portfolio Transactions and Brokerage
22... Tax Status....................................... Taxation
23... Financial Statements............................. Report of Independent Accountants;
Statement of Assets and Liabilities
</TABLE>
- ---------------
* As permitted under the General Instructions to Form N-2, all information
required to be set forth in Part B: Statement of Additional Information has
been included in Part A: The Prospectus.
Information required to be set forth in Part C is set forth under the
appropriate item, so numbered in Part C of this Registration Statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued August 12, 1996
5,000,000 Shares
Morgan Stanley Russia & New Europe Fund, Inc.
COMMON STOCK
------------------------
The Fund is a non-diversified, closed-end management investment company. The
Fund's investment objective is long-term capital appreciation. The Fund intends
to invest primarily in equity securities of issuers that, in the opinion of
Morgan Stanley Asset Management Inc., are likely to benefit from market and
political developments in Russia, the other former Soviet Republics and in other
countries in Central and Eastern Europe ("RNE countries"). The Fund also may
invest, from time to time, in debt securities issued or guaranteed by the
governments of or governmental entities in those countries ("Sovereign Debt").
It is the policy of the Fund, under normal market conditions, to invest
substantially all, but not less than 65%, of its total assets in equity
securities of Russian and other RNE country issuers and in Sovereign Debt. The
Fund expects that, from time to time, a significant portion of its assets will
be invested in the securities of Russian issuers. See "Investment Objective and
Policies." There can be no assurance that the Fund's investment objective will
be achieved. Morgan Stanley Asset Management Inc. will act as the Fund's
Investment Manager (the "Investment Manager"). The address of the Fund is 1221
Avenue of the Americas, New York, New York 10020 (telephone number (212)
296-7100).
------------------------
INVESTMENT IN THE FUND INVOLVES SPECIAL CONSIDERATIONS AND RISKS THAT ARE
NOT TYPICALLY ASSOCIATED WITH INVESTING IN THE STOCK MARKETS OF THE UNITED
STATES, SUCH AS CURRENCY FLUCTUATIONS AND RESTRICTIONS, GREATER GOVERNMENT
INVOLVEMENT IN THE ECONOMY AND POLITICAL AND LEGAL UNCERTAINTIES. ADDITIONALLY,
MANY OF THE SECURITIES MARKETS IN WHICH THE FUND INTENDS TO INVEST ARE JUST
BEGINNING TO DEVELOP AND, AS A CONSEQUENCE, THERE IS SUBSTANTIALLY MORE PRICE
VOLATILITY AND LESS LIQUIDITY IN SUCH MARKETS AND THE SETTLEMENT, CLEARING AND
REGISTRATION OF SECURITIES TRANSACTIONS ARE SUBJECT TO SIGNIFICANT RISKS. SHARES
OF CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST FREQUENTLY TRADED AT
DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL OFFERING PRICES. THE RISKS
ASSOCIATED WITH THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES MAY BE
GREATER FOR INVESTORS EXPECTING TO SELL SHARES OF A CLOSED-END INVESTMENT
COMPANY SOON AFTER THE COMPLETION OF AN INITIAL PUBLIC OFFERING OF THE COMPANY'S
SHARES. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS."
------------------------
The Underwriters have advised the Fund that they propose to offer the Shares
initially at the public offering price of $20.00 per Share. There is no sales
charge or underwriting discount charged to investors on purchases of Shares in
this offering. The Investment Manager or an affiliate (not the Fund) has agreed
to pay the Underwriters from its own assets a commission in connection with
sales of Shares in this offering. The Investment Manager also has agreed to pay
the Fund's expenses in connection with this offering in order to maintain a net
asset value of $20.00 per Share immediately following the completion of this
offering. The number of Shares to be sold by the Fund in its initial public
offering will not exceed 5,000,000 (plus the number of Shares that may be sold
to the Underwriters pursuant to the exercise, if any, of their over-allotment
options). See "Underwriters."
------------------------
Prior to this offering, there has been no public market for the Fund's
Shares. The Fund's Shares have been approved for listing on the New York Stock
Exchange upon notice of issuance under the symbol "RNE."
------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be read and
retained for future reference.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $20.00 A SHARE
------------------------
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC SALES LOAD(1) THE FUND(2)
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<S> <C> <C> <C>
Per Share.............................. $20.00 $0.00 $20.00
Total(3)............................... $100,000,000 $0.00 $100,000,000
</TABLE>
(Footnotes on following page)
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1996 at the
office of Morgan Stanley & Co. Incorporated, New York, New York, against payment
therefor in New York funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
A.G. EDWARDS & SONS, INC.
COWEN & COMPANY
FAHNESTOCK & CO.
INC.
EVEREN SECURITIES, INC.
, 1996
<PAGE> 4
(Continued from previous page)
- ------------
(1) The Fund and the Investment Manager have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. The Investment Manager or an affiliate
(not the Fund) will pay the Underwriters a commission in the gross amount of
% of the initial public offering price per share of Common Stock, in
connection with sale of Shares in this offering (other than shares acquired
for accounts managed by the Investment Manager).
(2) Before deducting organizational expenses payable by the Fund, estimated at
$ . Organizational
expenses will be amortized over a period not to exceed 60 months from the
date the Fund commences operations. Offering expenses, estimated at
$ , will be paid by Morgan Stanley Asset Management Inc. or an
affiliate (not the Fund).
(3) The Fund has granted the Underwriters options, exercisable up to 45 days
from the date hereof, to purchase up to an aggregate of 750,000 additional
Shares at the price to the public for the purpose of covering
over-allotments, if any. If the Underwriters exercise such options in full,
the total price to the public, sales load and proceeds to the Fund will be
$115,000,000, $0.00 and $115,000,000, respectively. See "Underwriters."
------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE INVESTMENT MANAGER OR BY
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING TO SELL OR A
SOLICITATION OF AN OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
PROSPECTUS SUMMARY............................................................................ 3
FEE TABLE..................................................................................... 8
THE FUND...................................................................................... 9
USE OF PROCEEDS............................................................................... 10
RISK FACTORS AND SPECIAL CONSIDERATIONS....................................................... 10
INVESTMENT OBJECTIVE AND POLICIES............................................................. 16
INVESTMENT RESTRICTIONS....................................................................... 21
MANAGEMENT OF THE FUND........................................................................ 23
ESTIMATED EXPENSES............................................................................ 30
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................................... 30
NET ASSET VALUE............................................................................... 31
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN................................................ 31
TAXATION...................................................................................... 33
COMMON STOCK.................................................................................. 38
UNDERWRITERS.................................................................................. 41
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR........................................... 42
CUSTODIANS.................................................................................... 42
EXPERTS....................................................................................... 43
LEGAL MATTERS................................................................................. 43
ADDITIONAL INFORMATION........................................................................ 43
REPORT OF INDEPENDENT ACCOUNTANTS............................................................. 44
STATEMENT OF ASSETS AND LIABILITIES........................................................... 45
APPENDIX A.................................................................................... A-1
APPENDIX B.................................................................................... B-1
APPENDIX C.................................................................................... C-1
</TABLE>
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKETS OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed information
included elsewhere in this Prospectus.
THE FUND................... The Fund is a non-diversified, closed-end
management investment company designed for
investors desiring to invest a portion of their
assets in equity securities of issuers that, in
the opinion of Morgan Stanley Asset Management
Inc., the Fund's Investment Manager, are likely
to benefit from market and political developments
in Russia, the other former Soviet Republics and
in other countries in Central and Eastern Europe.
The Fund may also invest, from time to time, in
debt securities issued or guaranteed by
governments of or governmental entities in those
countries ("Sovereign Debt"). A complete list of
countries in which the Fund intends to invest
("RNE countries") is set forth in Appendix A.
INVESTMENT OBJECTIVE AND
POLICIES................. The Fund's investment objective is long-term
capital appreciation. The Fund's policy, under
normal market conditions, is to invest
substantially all, but not less than 65%, of its
total assets in (i) equity securities (A) of
companies organized in, or for which the
principal trading market is in, an RNE country,
(B) denominated in the currency of an RNE country
and issued by companies to finance operations in
an RNE country and (C) of companies that alone or
on a consolidated basis derive 50% or more of
their revenues primarily from either goods
produced, sales made or services performed in an
RNE country (collectively, "RNE country issuers")
and (ii) Sovereign Debt. No assurance can be
given that the Fund's investment objective will
be realized.
The Fund intends to invest in equity securities of
RNE country issuers and Sovereign Debt as
appropriate opportunities arise. The amount
invested in any one RNE country will vary
depending on market conditions. The Fund is not
limited in the percentage of its assets that may
be invested in any one country and it is
anticipated that, from time to time, the Fund
will have a significant portion of its assets
invested in securities of Russian issuers. The
Fund anticipates that, initially, its investments
will be made primarily in Russia, the Czech
Republic, Hungary and Poland, which currently
have the most developed capital markets of the
RNE countries. Bulgaria, Croatia, Estonia,
Latvia, Lithuania, Slovakia, Slovenia and the
Ukraine also offer current investment
opportunities on a more limited basis. As
opportunities develop, investments may be made in
the remaining RNE countries.
THE OFFERING............... The Fund is offering 5,000,000 shares of Common
Stock, $.01 par value (the "Shares"), through a
group of underwriters (the "Underwriters") for
which Morgan Stanley & Co. Incorporated is acting
as lead representative. The Underwriters also
have been granted options to
3
<PAGE> 6
purchase up to 750,000 additional Shares solely
to cover over-allotments, if any. The number of
Shares to be sold by the Fund in its initial
public offering will not exceed 5,000,000 (plus
the number of Shares sold to the Underwriters
pursuant to the exercise, if any, of their
over-allotment options). The initial public
offering price is $20.00 per Share. See
"Underwriters."
NO SALES LOAD.............. The Shares will be sold during the initial public
offering without any sales charges. Morgan
Stanley Asset Management Inc. or an affiliate
(not the Fund) will pay the Underwriters a
commission in the gross amount of % of the
initial public offering price per Share of Common
Stock, in connection with the sale of the Shares
in this offering. See "Underwriting."
Morgan Stanley Asset Management Inc. also has
agreed to pay the Fund's expenses in connection
with this offering in order to maintain a net
asset value of $20.00 per Share immediately
following the completion of this offering.
LISTING.................... The Fund's Shares have been approved for listing on
the New York Stock Exchange upon notice of
issuance.
SYMBOL..................... "RNE"
INVESTMENT MANAGER......... Morgan Stanley Asset Management Inc. (the
"Investment Manager"), a wholly owned subsidiary
of Morgan Stanley Group Inc., will manage the
investments of the Fund pursuant to an Investment
Advisory and Management Agreement with the Fund
(the "Management Agreement"). As an investment
adviser, the Investment Manager emphasizes a
global investment strategy. At June 30, 1996, the
Investment Manager had, together with its
affiliated investment management companies,
assets under management (including assets under
fiduciary advisory control) totaling
approximately $104 billion, of which
approximately $9 billion was invested in emerging
country markets. The Investment Manager currently
acts as investment adviser for 13 closed-end
funds which principally invest in emerging
markets. Additionally, Morgan Stanley Group Inc.
has entered into a definitive agreement to
purchase the parent company of Van Kampen
American Capital, Inc., the fourth largest
non-proprietary mutual fund provider in the
United States with approximately $57 billion in
assets under management and/or supervision at
June 30, 1996. The acquisition is expected to
close by November 30, 1996. The Investment
Manager is a registered investment adviser under
the U.S. Investment Advisers Act of 1940 (the
"Advisers Act"). See "Management of the Fund."
MANAGEMENT FEES AND
ESTIMATED EXPENSES......... The Fund will pay the Investment Manager a fee,
computed weekly and payable monthly, at the
annual rate of 1.60% of the Fund's average weekly
net assets. This fee is higher than those paid by
most other U.S. investment companies, primarily
because of the additional time and expense
required of the Investment Manager in pursuing
the Fund's objective of investing in securities
of RNE country issuers and Sovereign Debt. This
investment objective entails additional time and
expense because public information concerning
securities of RNE country issuers is limited in
comparison to that available for U.S.
4
<PAGE> 7
companies and may not be subject to the same
accounting standards. See "Management of the
Fund."
The Fund will be responsible for all of its
operating expenses. The Fund's annual normal
operating expenses, including advisory,
administration and custodial fees, are estimated
to be approximately $ exclusive of
organization expenses estimated to be $
(which are to be amortized over five years). The
expenses of this offering estimated to be
$ will be paid by the Investment Manager
or an affiliate and will not be charged to the
capital of the Fund. See "Estimated Expenses."
ADMINISTRATION............. The Chase Manhattan Bank (the "Administrator") will
provide administrative services to the Fund
pursuant to an Administration Agreement (the
"Administration Agreement") with the Fund. The
Fund will pay the Administrator an annual
administration fee of $ plus % of the
average weekly net assets of the Fund. See
"Management of the Fund -- Administration."
DIVIDEND DISTRIBUTIONS AND
REINVESTMENT............. The Fund intends to distribute to stockholders at
least annually substantially all of its net
investment income and any net realized capital
gains. The Fund may elect annually, however, to
retain for investment any net realized long-term
capital gains. Unless the Fund is otherwise
instructed in writing in the manner described
under "Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan,"
stockholders will be presumed to have elected to
have all distributions automatically reinvested
in shares of the Fund. Stockholders who have
distributions automatically reinvested may also
make additional payments into the dividend
reinvestment and cash purchase plan to purchase
shares of the Fund on the open market. See
"Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan." Reinvested
dividends and undistributed long-term capital
gains will generally give rise to tax without a
corresponding amount of cash. See
"Taxation -- U.S. Federal Income Taxes."
CUSTODIANS................. Morgan Stanley Trust Company will act as custodian
for the Fund's assets held outside the United
States and may employ sub-custodians approved by
the Directors of the Fund in accordance with
regulations of the U.S. Securities and Exchange
Commission. The Chase Manhattan Bank will act as
custodian for the Fund's assets held in the
United States. See "Custodians."
RISK FACTORS AND SPECIAL
CONSIDERATIONS........... The Fund's investments in RNE countries involve
certain special considerations not typically
associated with investing in securities of U.S.
companies, including risks relating to (1)
political and economic considerations, such as
less social, political and economic stability and
the possibility that recent favorable economic
developments may be slowed or reversed by
unanticipated political or social events; (2) the
absence of developed legal structures governing
private or foreign investments and private
property; (3) the possibility of the loss of all
or a substantial portion of the Fund's assets
invested in RNE countries as a result of
expropriation; (4) restrictions on repatriation
of capital; (5) certain national policies which
may restrict the Fund's investment
5
<PAGE> 8
opportunities, including, without limitation,
restrictions on investing in issuers or
industries deemed sensitive to relevant national
interests; (6) currency exchange matters,
including fluctuations in the rate of exchange
between the U.S. dollar and the various
currencies in which the Fund's portfolio
securities are denominated, exchange control
regulations, currency exchange restrictions, and
costs associated with conversion of investment
principal and income from one currency into
another; (7) the absence, until recently, in
certain RNE countries of a capital market
structure or market-oriented economy; (8) less
developed and reliable custody and settlement
mechanisms; and (9) differences between U.S.
securities markets and the securities markets of
RNE countries, including potentially greater
price volatility in, significantly smaller
capitalization of, and relative illiquidity of,
some of these non-U.S. securities markets, the
absence of uniform accounting, auditing and
financial reporting standards, practices and
disclosure requirements and less government
supervision and regulation. The Fund will be
unable to invest in many RNE countries until
custody arrangements complying with the U.S.
Securities and Exchange Commission are
established. In addition, settlement mechanisms
in RNE countries are generally less developed and
reliable than those in countries with mature
economies and this could result in settlement
delays and other difficulties. The Fund may be
subject to withholding taxes, including
withholding taxes on realized capital gains that
may exist or may be imposed by the governments of
the countries in which the Fund invests. See
"Risk Factors and Special Considerations."
While the Fund expects that its investments in
equity securities of RNE country issuers will be
primarily in listed equity securities, it may
invest up to 35% of its total assets in unlisted
equity securities of RNE country issuers to the
extent permitted by any local investment
restrictions. Such investments may involve a high
degree of business and financial risk. Because of
the absence of any liquid trading market for
these investments, the Fund may take longer to
liquidate these positions than it would in the
case of listed securities. In addition to
financial and business risks, issuers whose
securities are not listed may not be subject to
the same disclosure requirements applicable to
issuers whose securities are listed. See "Risk
Factors and Special Considerations -- Investments
in Unlisted Securities."
The Fund may also invest a portion of its assets in
(i) debt securities of corporate RNE country
issuers, (ii) equity or debt securities of
corporate or governmental issuers located in
countries other than RNE countries and (iii)
short-term and medium-term debt securities of the
type described below under "Investment Objective
and Policies -- Temporary Investments."
The Fund may invest up to 50% of its total assets
in debt securities, including Sovereign Debt,
that are rated below investment grade by Standard
& Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's") or, if
unrated, are determined by the Investment Manager
to be comparable to securities rated below
investment grade by S&P or Moody's. Such
lower-quality, non-investment grade securities
are commonly referred to as "junk bonds"
6
<PAGE> 9
and are regarded as being predominantly
speculative and involve significant risks.
In addition, the Fund may enter into options and
futures contracts on a variety of instruments and
indexes and forward currency exchange contracts
in order to protect against fluctuation in
interest rates, foreign currency exchange risks
and declines in the value of portfolio securities
or increases in the costs of securities to be
acquired. Additionally, the Fund may enter into
options transactions on securities for purposes
of increasing its investment returns. Each of
these types of transactions involves special
risks. See "Investment Objective and Policies"
and Appendix C to this Prospectus.
The Fund is classified as a "non-diversified"
investment company under the Investment Company
Act of 1940, as amended (the "1940 Act"), which
means that the Fund is not limited by the 1940
Act in the proportion of its assets that may be
invested in the securities of a single issuer. As
a non-diversified investment company, the Fund
may invest a greater proportion of its assets in
the securities of a smaller number of issuers
and, as a result, may be subject to greater risk
of loss with respect to its portfolio securities.
However, the Fund intends to comply with the
diversification requirements imposed by the U.S.
Internal Revenue Code of 1986, as amended, for
qualification as a regulated investment company.
See "Investment Restrictions" and "Taxation --
U.S. Federal Income Taxes."
The Fund's Articles of Incorporation contain
certain anti-takeover provisions that may have
the effect of inhibiting the Fund's possible
conversion to open-end status and limiting the
ability of other persons to acquire control of
the Fund. In certain circumstances, these
provisions might also inhibit the ability of
stockholders to sell their shares at a premium
over prevailing market prices. See "Risk Factors
and Special Considerations" and "Common Stock."
Investors should carefully consider their ability
to assume the foregoing risks before making an
investment in the Fund. An investment in shares
of the Fund may not be appropriate for all
investors and should not be considered as a
complete investment program. See "Risk Factors
and Special Considerations."
DISCOUNT TO NET ASSET
VALUE...................... Shares of closed-end investment companies
frequently trade at a discount from net asset
value. This characteristic of shares of a
closed-end fund is a risk separate and distinct
from the risk that the Fund's net asset value
will decrease. The Fund cannot predict whether
its shares will trade at, above or below net
asset value. The risk of purchasing shares of a
closed-end investment company which might trade
at a discount from net asset value is more
pronounced for investors who purchase in the
initial public offering and who wish to sell
their shares in a relatively short period of
time. See "Net Asset Value."
7
<PAGE> 10
FEE TABLE
<TABLE>
<CAPTION>
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Sales Load (as a percentage of offering price).................................. None
Dividend Reinvestment and Cash Purchase Plan Fees............................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES):
Management Fees................................................................. 1.60%
Other Expenses.................................................................. %
Total Annual Expenses...................................................... %
=====
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
An investor would pay the following expenses on a $1,000
investment, assuming a 5% annual return............... $ $ $ $
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that an investor in the Fund will bear directly or
indirectly.
The Example set forth above assumes the absence of a sales load,
reinvestment of all dividends and distributions at net asset value and an
expense ratio of %. The tables above and the assumption in the Example of a
5% annual return are required by U.S. Securities and Exchange Commission (the
"Commission") regulations applicable to all investment companies. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN. Actual expenses and annual rates of return may be more or less
than those assumed for purposes of the Example. In addition, while the Example
assumes reinvestment of all dividends and distributions at net asset value,
participants in the Fund's Dividend Reinvestment and Cash Purchase Plan may
receive shares purchased or issued at a price or value different from net asset
value. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan."
The figures provided under "Other Expenses" are based upon estimated
amounts for the Fund's first fiscal year. See "Management of the Fund" for
additional information.
8
<PAGE> 11
THE FUND
The Fund, incorporated in Maryland on February 3, 1994, is a
non-diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's
investment objective is long-term capital appreciation. The Fund seeks to
achieve its objective by investing primarily in equity securities of issuers
that, in the opinion of the Investment Manager, are likely to benefit from
market and political developments in Russia, the other former Soviet Republics
and in other countries in Central and Eastern Europe. A complete list of
countries in which the Fund intends to invest ("RNE countries") is set forth in
Appendix A. The Fund is not limited in the percentage of its assets that may be
invested in any one country and it is anticipated that, from time to time, the
Fund may have a significant portion of its assets invested in securities of
Russian issuers. The Fund also may invest, from time to time, in debt securities
issued or guaranteed by RNE country governments or governmental entities
("Sovereign Debt"). No assurance can be given that the Fund's investment
objective will be realized. The Fund permits investors to gain exposure to the
securities markets of RNE countries that many investors would have difficulty
investing in directly. Due to the risks inherent in international investments
generally, the Fund should be considered as a vehicle for investing a portion of
an investor's assets in foreign securities markets and not as a complete
investment program.
At all times after its Initial Investment Period (as defined below under
"Use of Proceeds"), except during periods when a temporary defensive investment
strategy is appropriate, as determined by the Fund's investment manager, the
Fund intends to invest substantially all, but not less than 65%, of its total
assets in equity securities of RNE country issuers (as defined below under "Use
of Proceeds") and in Sovereign Debt. The Fund's holdings of equity securities
are expected to consist primarily of listed equity securities; however, the Fund
may invest up to 35% of its total assets in unlisted equity securities of RNE
country issuers to the extent permitted by any local investment restrictions,
including investments in new and early stage companies.
The Fund may also invest a portion of its assets in (i) debt securities of
corporate RNE country issuers, (ii) equity or debt securities of corporate or
governmental issuers located in countries other than RNE countries and (iii)
short-term and medium-term debt securities of the type described below under
"Investment Objective and Policies -- Temporary Investments." The Fund may
invest up to 50% of its total assets in debt securities, including Sovereign
Debt, that are rated below investment grade by S&P or Moody's or, if unrated,
are determined by the Investment Manager to be comparable to securities rated
below investment grade by S&P or Moody's. Such lower-quality, non-investment
grade securities are commonly referred to as "junk bonds" and are regarded as
being predominantly speculative and involve significant risks. See "Investment
Objective and Policies" and "Risk Factors and Special Considerations."
Most RNE countries have had centrally planned economies which were
primarily influenced by socialist or communist political philosophies and were
characterized by nationalized industries, fixed prices and limited external
trade. Over the past several years, however, most of these countries have
undertaken political and economic reforms, founded upon an ideological shift
from socialism or communism to capitalism. The reforms have had the effect, with
varying degrees of success, of creating market-driven economies and have made
foreign investments in these countries possible. The Investment Manager believes
that current conditions in most RNE countries, including, among other things,
established infrastructures, technical expertise and significant natural
resources, will result in a significant level of economic activity, offering the
potential for long-term capital appreciation from investment in equity
securities of RNE country issuers and Sovereign Debt.
9
<PAGE> 12
USE OF PROCEEDS
The net proceeds of this offering (estimated to be approximately
$100,000,000 if the Underwriters' over-allotment options are not exercised) will
be invested in accordance with the policies set forth under "Investment
Objective and Policies -- Temporary Investments."
The Fund expects to invest gradually by purchasing, on a selective basis in
the open market and in private transactions, equity securities (i) of companies
organized in, or for which the principal trading market is in, an RNE country,
(ii) denominated in the currency of an RNE country and issued by companies to
finance operations in an RNE country and (iii) of companies that alone or on a
consolidated basis derive 50% or more of their revenues primarily from either
goods produced, sales made or services performed in an RNE country
(collectively, "RNE country issuers"). The Fund may also invest from time to
time in Sovereign Debt. The Fund believes that, due to the nature of the equity
securities markets of RNE countries generally, combined with certain investment
diversification requirements applicable to the Fund and the Fund's desire to
invest selectively in order to avoid adversely influencing the prices paid by
the Fund for its portfolio securities, it may take up to one year from the date
of completion of the offering made hereby (the "Initial Investment Period"),
depending upon market conditions and the availability of appropriate securities,
for the Fund to be fully invested in accordance with its investment objective
and policies.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in securities of RNE country
issuers involves certain special considerations and risk factors, including
those set forth below, which are not typically associated with investing in
securities of U.S. issuers.
ECONOMIC AND POLITICAL RISKS
The economies of individual RNE countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of Gross Domestic
Product ("GDP") or Gross National Product ("GNP"), as the case may be, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Further, the economies of RNE countries generally are heavily
dependent upon international trade and, accordingly, have been and may continue
to be adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. Business entities in RNE
countries have only a limited history of operating in a market-oriented economy,
and the ultimate impact of such RNE countries' attempts to move toward more
market-oriented economies is currently unclear. Finally, nationalization,
expropriation or confiscatory taxation, currency blockage, political changes,
government regulation, social instability or diplomatic developments could
adversely affect the economy of an RNE country or the Fund's investments in such
country.
The Fund intends to seek investment opportunities in Russia, the other
former Soviet Republics and in other countries in Central and Eastern Europe.
Investing in these countries involves significant economic and political risk.
For example, most of these countries have had centrally planned, socialist
economies since shortly after World War II. The governments of these countries
currently are implementing or considering reforms directed at political and
economic liberalization, including efforts to decentralize the economic
decision-making process and move towards a more market-oriented economy. These
reforms have met with resistance, in some instances, and have prompted certain
political parties to advocate the return to a centrally planned economy. There
can be no assurance that these reforms will continue or, if continued, will
achieve their goals. Despite the implementation of privatization programs by RNE
countries, the governments of RNE countries have exercised and continue to
exercise significant influence over many aspects of the local economies, and the
number of public sector enterprises in the RNE countries is substantial. New
governments and new economic policies may have an unpredictable impact on the
economies of the RNE countries. Future actions by the government of an RNE
country could have a significant effect on the local economy, which could affect
private sector companies, market conditions and prices and yields of securities
in the Fund's portfolio.
10
<PAGE> 13
In addition, upon the accession to power of Communist regimes, the
governments of a number of RNE countries expropriated a large amount of private
property. The claims of many property owners against those governments were
never settled and any future settlements could have an adverse effect on the
value of certain investments in the Fund's portfolio. There can also be no
assurance that the Fund's investments in these countries would not be
expropriated, nationalized or otherwise confiscated. In the event of the
settlement of any such claims or such expropriation, nationalization or other
confiscation, the Fund could lose its entire investment in the country involved.
In addition, any change in the leadership or policies of RNE countries could
halt the expansion of or reverse the liberalization of foreign investment
policies now occurring and adversely affect existing investment opportunities.
ABSENCE OF DEVELOPED LEGAL STRUCTURES
In the years since the fall of Communism, the RNE countries have been
developing a body of securities and tax laws and laws governing corporations and
other business entities. Legal structures governing private and foreign
investment and private property, where they have been implemented, are new. Laws
may not exist to cover all business and commercial relationships or to protect
investors, particularly minority shareholders, adequately and furthermore, the
administration of laws and regulations by government agencies may be subject to
considerable discretion. There is a low level of monitoring and regulation of
securities markets in RNE countries generally, and of the activities of
investors in such markets, and there has been no or very limited enforcement to
date of existing regulations. In addition, even in circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
FOREIGN INVESTMENT AND REPATRIATION RESTRICTIONS; EXCHANGE CONTROLS
Some RNE countries prohibit certain kinds of investment or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. For example, certain
countries require governmental approval prior to investment by foreign persons,
or limit the amount of investment by foreign persons in a particular company, or
limit the investment by foreign persons to only a specific class of securities
of a company that may have less advantageous terms than securities of the
company available for purchase by nationals. Moreover, certain national policies
of certain RNE countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. Some countries require
governmental registration or approval for the repatriation of investment income,
capital or the proceeds of sales of securities by foreign investors. In
addition, if there is a deterioration in a country's balance of payments or for
other reasons, a country may impose temporary restrictions on foreign capital
remittances abroad. The Fund could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation of
capital, as well as by the application to the Fund of any restrictions on
investments or by withholding taxes imposed by RNE countries on interest or
dividends paid on securities held by the Fund or gains from the disposition of
such securities. If for any reason the Fund was unable, through borrowing or
otherwise, to distribute an amount equal to substantially all of its investment
company taxable income (as defined for U.S. tax purposes) within applicable time
periods, the Fund would cease to qualify for the favorable tax treatment
afforded to regulated investment companies under the U.S. Internal Revenue Code
of 1986, as amended (the "Code"). See "Taxation."
In RNE countries that currently restrict direct foreign investment in the
securities of companies listed and traded on the stock exchanges in those
countries, indirect foreign investment may still be possible through investment
funds which have been specially authorized. The Fund may invest in such
investment funds, subject to the provisions of the 1940 Act as discussed below
under "Investment Restrictions." However, if the Fund invests in such investment
funds, the Fund's stockholders may bear not only their proportionate share of
the expenses of the Fund (including operating expenses and the fees of the
Fund's investment manager), but may also bear indirectly similar expenses of the
underlying investment funds. See also "Taxation -- U.S. Federal Income Taxes --
Passive Foreign Investment Companies."
11
<PAGE> 14
FOREIGN CURRENCY CONSIDERATIONS
The Fund's assets will be invested primarily in equity securities of RNE
country issuers and Sovereign Debt and substantially all of the income received
by the Fund will be in foreign currencies. The Fund anticipates that in general
the foreign currencies received by it with respect to most of its RNE country
investments will be freely convertible into U.S. dollars on foreign exchange
markets and that in most cases the U.S. dollars received will be fully
repatriable out of the various RNE countries in which the Fund invests. However,
there can be no assurance that RNE countries will not impose restrictions in the
future on the movement of U.S. dollars or these foreign currencies across local
borders or the convertibility of such foreign currencies into U.S. dollars. If
such restrictions are imposed, they may interfere with the conversion of such
foreign currencies to U.S. dollars and therefore with the payment of any
distributions the Fund may make to its stockholders. Moreover, the currencies of
some RNE countries are not currently freely convertible into other currencies
and are not internationally traded. The Fund will compute and distribute its
income in U.S. dollars, and the computation of income will be made on the date
that the income is earned by the Fund at the foreign exchange rate in effect on
that date. Therefore, if the value of the foreign currencies in which the Fund
receives its income falls relative to the U.S. dollar between the earning of the
income and the time at which the Fund converts the foreign currencies to U.S.
dollars, the Fund may be required to liquidate securities in order to make
distributions if the Fund has insufficient cash in U.S. dollars to meet
distribution requirements. See "Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan." The liquidation of investments, if
required, may have an adverse impact on the Fund's performance. In addition, if
the liquidated investments include securities that have been held less than
three months, such sales may jeopardize the Fund's status as a regulated
investment company under the Code. See "Taxation -- U.S. Federal Income Taxes."
Since the Fund will invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the value of securities in the Fund's portfolio and the
unrealized appreciation or depreciation of investments. Further, the Fund may
incur costs in connection with conversions between various currencies. Foreign
exchange dealers realize a profit based on the difference between the prices at
which they are buying and selling various currencies. Thus, a dealer normally
will offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire immediately to resell that
currency to the dealer. The Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward, futures
or options contracts to purchase or sell foreign currencies.
The Fund may seek to protect the value of some portion or all of its
portfolio holdings against currency risks by engaging in hedging transactions.
The Fund may enter into forward currency exchange contracts and currency futures
contracts and options on such futures contracts, as well as purchase put or call
options on currencies, in U.S. or foreign markets. In order to hedge against
adverse market shifts, the Fund may purchase put and call options on securities,
write covered call options on securities and enter into securities index futures
contracts and related options. The Fund may also hedge against interest rate
fluctuations affecting portfolio securities by entering into interest rate
futures contracts and options thereon. For a description of such hedging
strategies, see "Investment Objective and Policies -- Foreign Currency Hedging
Transactions; Options and Futures Contracts" and Appendix C. There can be no
guarantee that instruments suitable for hedging currency or market shifts will
be available at the time when the Fund wishes to use them. Moreover, investors
should be aware that in most RNE countries markets for these hedging instruments
are either not highly developed or do not currently exist at all.
SECURITIES MARKETS OF RNE COUNTRIES
The securities markets of RNE countries have substantially less market
capitalization and trading volume than the securities markets of the United
States, Japan and Western Europe. Further, securities of RNE country issuers are
generally less liquid and more volatile than securities of comparable U.S.
issuers. Accordingly, these securities markets may be subject to greater
influence by adverse events generally affecting these markets, and by large
investors trading significant blocks of securities or by larger dispositions
than is the case in the United States. The limited liquidity of some of these
markets may affect the Fund's ability to
12
<PAGE> 15
acquire or dispose of securities at a price and time that it wishes to do so. In
the securities markets of most RNE countries, a few large companies account for
a substantial portion of such markets' total capitalization.
The securities markets of RNE countries are not as highly regulated and
supervised as U.S. securities markets. Consequently, the prices at which the
Fund may acquire investments may be affected by trading on material non-public
information and securities transactions by brokers in anticipation of
transactions by the Fund. Commissions and other transaction costs on certain RNE
country securities exchanges are generally higher than in the United States, and
securities settlements in such exchanges may in some instances be subject to
delays and related administrative costs. In addition, securities traded in
certain RNE 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.
CUSTODY AND SETTLEMENT MECHANISMS
At present, custody arrangements complying with the requirements of the
U.S. Securities and Exchange Commission are already available in Russia, the
Czech Republic, Poland, Hungary, Estonia and Slovakia. The Fund expects that
steps will be taken to permit the establishment of appropriate custody
arrangements in a number of additional RNE countries, although there can be no
assurance as to when or if those arrangements will occur. Since the Fund will
not invest in a market unless adequate custodial arrangements are available, the
range of RNE countries in which the Fund may currently invest is limited. In
addition, the governments of certain RNE countries may require that a
governmental or quasi-governmental authority act as custodian of the Fund's
assets invested in such countries. These authorities may not be qualified to act
as foreign custodians under the 1940 Act and, as a result, the Fund would not be
able to invest in these countries in the absence of exemptive relief from the
Commission. In addition, the risk of loss through government confiscation may be
increased in such countries.
Because the securities markets in RNE countries have only recently formed,
and the banking and telecommunications systems remain relatively undeveloped,
settlement, clearing and registration of securities transactions are subject to
significant risks not normally associated with investments in the United States
and other more developed markets. In certain markets, ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the issuer's share register and
normally evidenced by extracts from the register or in certain limited cases by
formal share certificates. However, in the absence of a central registration
system, these services are carried out by the issuer's themselves or by a
separate registrar. These registrars are not necessarily subject to effective
state supervision and it is possible the Fund could lose its share registration
through fraud, negligence or even mere oversight. In such jurisdictions, the
Fund will endeavor to ensure that its interests continue to be appropriately
recorded, either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
audits. However, these extracts have no legal enforceability and it is possible
that a subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights.
In addition, while applicable regulations may impose liability on
registrars for losses resulting from their errors, it may be difficult for the
Fund to enforce any rights it may have against the registrar or the issuer of
the securities in the event of the loss of a share registration. An issuer's
management may be able to exert considerable influence over who can purchase and
sell the issuer's shares by illegally instructing the registrar to refuse to
record transactions on the share register. This practice may prevent the Fund
from investing in the securities of certain RNE country issuers deemed suitable
by the Investment Manager. Further, this also could cause a delay in the sale of
portfolio securities by the Fund if a potential purchaser is deemed unsuitable,
which may expose the Fund to potential loss on the investment. Moreover, if the
local postal and banking systems do not meet the same standards as those of the
United States, no guarantee can be given that all entitlements attaching to
securities acquired by the Fund, including those relating to dividends, can be
realized. There is the risk that payments of dividends or other distributions by
bank wire or by check sent through the mail could be delayed or lost. In
addition, there is the risk of loss in connection with the
13
<PAGE> 16
insolvency of an issuer's bank or transfer agent, particularly because these
institutions may not be guaranteed by the state.
In light of the risks described above, the Board of Directors of the Fund
will approve certain procedures concerning the Fund's investments. Among these
procedures is a requirement that the Fund will not invest in an RNE country that
has no central registration system unless the RNE country issuer's registrar has
entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Fund. This requirement
will likely have the effect of precluding investments in certain RNE country
issuers that the Fund would otherwise make. In accordance with procedures to be
adopted by the Fund, the Fund's International Custodian will undertake to
provide certain information on a periodic basis to the Board of Directors
concerning the share registration and custody arrangements that exist in Russia.
REPORTING STANDARDS
RNE country issuers are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from those
applicable to U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an RNE country issuer may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. There is substantially less publicly available
information about RNE country issuers than there is about U.S. issuers, and the
information that is available may not be conceptually comparable to, or prepared
on the same basis as, that available in more developed capital markets, which
may make it difficult to assess the financial status of particular companies.
INVESTMENTS IN UNLISTED SECURITIES
The Fund may invest up to 35% of its total assets in the aggregate in
equity securities purchased directly from issuers or in unregulated
over-the-counter markets or other unlisted securities markets which may involve
a high degree of business and financial risk that can result in substantial
losses. Because of the absence of active and regulated trading markets for these
investments, and because of the difficulties in determining market values
accurately, the Fund may take longer to liquidate these positions than would be
the case for publicly listed securities. Although these securities may be resold
in privately negotiated transactions, the prices realized on these sales could
be less than those originally paid by the Fund. Further, companies whose
securities are not publicly listed may not be subject to public disclosure and
other investor protection requirements applicable to publicly traded securities.
INVESTMENTS IN LOWER-QUALITY SECURITIES
The Fund may invest up to 50% of its total assets in debt securities,
including Sovereign Debt, that are rated below investment grade by Standard &
Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's") or
if unrated, are determined by the Investment Manager to be comparable to
securities rated below investment grade by S&P or Moody's. Such lower-quality,
non-investment grade securities (that is, rated Ba1 or lower by Moody's or BB+
or lower by S&P) are commonly referred to as "junk bonds" and are regarded as
being predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
involve major risk exposure to adverse conditions. For example, lower-quality
securities generally tend to fluctuate in value in response to economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (which may not
be based on fundamental analysis) to a greater extent than investment grade
securities which react primarily to fluctuations in the general level of
interest rates (although lower-quality securities are also affected by changes
in interest rates). In the past, economic downturns or an increase in interest
rates have under certain circumstances caused a higher incidence of default by
the issuers of these securities. To the extent that the issuer of any
lower-quality debt security held by the Fund defaults, the Fund may incur
additional expenses in order to enforce its rights under such security or to
participate in a restructuring of the obligation. In addition, the prices of
lower-quality debt securities generally tend to be more volatile and the market
less liquid than is the case with investment grade securities. Adverse economic
events
14
<PAGE> 17
can further exacerbate these tendencies. Consequently, the Fund may at times
experience difficulty in liquidating its investments in such securities at the
prices it desires. There also can be significant disparities in the prices
quoted for lower-quality debt securities by various dealers which may make
valuing such securities by the Fund more subjective.
It is anticipated that the Fund's holdings of lower-quality debt securities
will consist predominantly of Sovereign Debt, some of which may trade at a
discount to face value. The Fund may invest in Sovereign Debt to hold and trade
in appropriate circumstances. Investment in Sovereign Debt may involve a high
degree of risk and such securities may be considered speculative in nature. The
issuers or governmental authorities that control the repayment of Sovereign Debt
may not be able or willing to repay the principal or interest when due in
accordance with the terms of such debt. A sovereign debtor's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of its debt service burden to the economy as a whole,
the sovereign debtor's policy towards the International Monetary Fund and the
political constraints to which a sovereign debtor may be subject. Sovereign
debtors may default on their debt and may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms, its
economic performance and the timely service of its debtor's obligations. Failure
to implement economic reforms, achieve appropriate levels of economic
performance or repay principal or interest when due may result in the
cancellation of commitments by third parties to lend funds to the sovereign
debtor, which may further impair the debtor's ability or willingness to timely
service its debts. In certain instances, the Fund may invest in Sovereign Debt
that is in default as to payment of principal or interest. To the extent the
Fund is holding any non-performing Sovereign Debt or other nonperforming debt,
it may incur additional expenses in connection with any restructuring of the
issuer's obligations or in otherwise enforcing its rights thereunder.
As a result of the foregoing, a sovereign debtor may default on its
obligations. If such an event occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
Sovereign Debt to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other Sovereign
Debt obligations in the event of default under their commercial bank loan
agreements.
Sovereign debtors in developing economies are among the world's largest
debtors to commercial banks, other governments, international financial
organizations and other financial institutions. The issuers of the Sovereign
Debt in which the Fund expects to invest have in the past experienced
substantial difficulties in servicing their external debt obligations, which led
to defaults on certain obligations and the restructuring of certain
indebtedness. Restructuring arrangements have included, among other things,
reducing and rescheduling interest and principal payments by negotiating new or
amended credit agreements and obtaining new credit to finance interest payments.
Holders of certain Sovereign Debt may be requested to participate in the
restructuring of such obligations and to extend further loans to their issuers.
There can be no assurance that the Sovereign Debt in which the Fund may invest
will not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect the Fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
The Fund may experience difficulties in disposing of certain Sovereign Debt
obligations because there may be a thin trading market for such securities. The
lack of a liquid secondary market may have an adverse impact on the market price
of such securities and the Fund's ability to dispose of particular securities
when necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
The lack of a liquid secondary market for certain Sovereign Debt securities also
may make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing the Fund's portfolio and calculating its net asset value.
15
<PAGE> 18
NET ASSET VALUE DISCOUNT; NONDIVERSIFICATION
The Fund is a newly organized company with no prior operating history.
Prior to this offering, there has been no public market for the Fund's shares.
Shares of closed-end investment companies frequently trade at a discount from
net asset value. This characteristic of shares of a closed-end fund is a risk
separate and distinct from the risk that a fund's net asset value will decrease.
The Fund cannot predict whether its own shares will trade at, below or above net
asset value. The risk of purchasing shares of a closed-end investment company
which might trade at a discount from net asset value is more pronounced for
investors who purchase in the initial public offering and who wish to sell their
shares in a relatively short period of time.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Thus, the Fund may invest a greater proportion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. The Fund,
however, intends to comply with the diversification requirements imposed by the
Code for qualification as a regulated investment company. See "Taxation -- U.S.
Federal Income Taxes" and "Investment Restrictions."
ADDITIONAL CONSIDERATIONS
Certain considerations concerning the Fund's hedging transactions are
discussed below under "Investment Objective and Policies -- Foreign Currency
Hedging Transactions; Options and Futures Contracts" and in Appendix C.
The Fund's Articles of Incorporation contain certain anti-takeover
provisions that may have the effect of inhibiting the Fund's possible conversion
to open-end status and limiting the ability of other persons to acquire control
of the Fund. In certain circumstances, these provisions might also inhibit the
ability of stockholders to sell their shares at a premium over prevailing market
prices. See "Common Stock."
Certain considerations concerning the Fund's ability to enter into
repurchase agreements, purchase securities on a when-issued or delayed delivery
basis and lend portfolio securities are discussed below under "Investment
Objective and Policies -- Temporary Investments" and " -- Lending of Portfolio
Securities."
The Fund may be subject to withholding taxes, including withholding taxes
on realized capital gains that may exist or may be imposed by the governments of
the countries in which the Fund invests. RNE countries generally have less
defined tax laws and procedures than in more developed economies and such laws
may permit retroactive taxation. As a result, the Fund could become subject to
local tax liabilities in the future that it did not anticipate in conducting its
investment activities or valuing its assets.
Investment in shares of Common Stock of the Fund should not be considered a
complete investment program and may not be appropriate for all investors.
Investors should carefully consider their ability to assume these risks before
making an investment in the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital appreciation. The
Fund seeks to achieve this objective by investing primarily in equity securities
(i) of companies organized in, or for which the principal trading market is in,
an RNE country, (ii) denominated in the currency of an RNE country and issued by
companies to finance operations in an RNE country and (iii) of companies that
alone or on a consolidated basis derive 50% or more of their revenues primarily
from either goods produced, sales made or services performed in an RNE country.
The Fund may also invest, from time to time, in Sovereign Debt. Income is not a
consideration in selecting investments or an investment objective. The Fund's
investment objective is a fundamental policy which may not be changed without
the approval of a majority of the Fund's outstanding voting securities. As used
herein, a "majority of the Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are
16
<PAGE> 19
represented and (ii) more than 50% of the outstanding shares. There is no
assurance the Fund will be able to achieve its investment objective.
It is the Fund's policy, under normal market conditions, to invest
substantially all, but not less than 65%, of its total assets in equity
securities of RNE country issuers and in Sovereign Debt. For this purpose,
"equity securities" means common and preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity swap agreements,
equity interests in trusts and partnerships and American, European, Global or
other types of Depositary Receipts.
The Fund's definition of "RNE country issuers" includes companies that may
have characteristics and business relationships common to companies in other
geographical regions. As a result, the value of the securities of such companies
may reflect economic and market forces applicable to such other regions, as well
as in the RNE countries. The Fund believes, however, that investment in such
companies will be appropriate because the Fund will invest only in those
companies which, in its view, have sufficiently strong exposure to economic and
market forces in RNE countries such that their value will tend to reflect
developments in RNE countries to a greater extent than developments in other
regions.
The Fund intends to invest in equity securities of RNE country issuers and
Sovereign Debt as appropriate opportunities arise. The amount invested in any
one RNE country will vary depending on market conditions. The Fund is not
limited in the percentage of its assets that may be invested in any one country
and it is anticipated that, from time to time, the Fund may have a significant
portion of its assets invested in securities of Russian issuers. The Fund
anticipates that, initially, its investments will be made primarily in Russia,
the Czech Republic, Hungary and Poland, which currently have the most developed
capital markets of the RNE countries. Bulgaria, Croatia, Estonia, Latvia,
Lithuania, Slovakia, Slovenia and the Ukraine also offer current investment
opportunities on a more limited basis. As opportunities develop, investments may
be made in the remaining RNE countries.
The Fund intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade for short-term gain. Accordingly, it
is anticipated that the annual portfolio turnover rate normally will not exceed
75%, although in any particular year, market conditions could result in
portfolio activity at a greater or lesser rate than anticipated. The portfolio
turnover rate for a year is calculated by dividing the lesser of sales or
purchases of portfolio securities during that year by the average monthly value
of the Fund's portfolio securities, excluding money market instruments. The rate
of portfolio turnover will not be a limiting factor when the Fund deems it
appropriate to purchase or sell securities for the Fund. However, the U.S.
federal tax requirement that the Fund derive less than 30% of its gross income
from the sale or disposition of securities held less than three months may limit
the Fund's ability to dispose of its securities. See "Taxation -- U.S. Federal
Income Taxes."
TYPES OF INVESTMENTS
The Fund will invest primarily in equity securities of RNE country issuers
and Sovereign Debt traded both in the securities markets of RNE countries and in
securities markets outside of RNE countries. Subject to obtaining any necessary
local regulatory approvals and certain other restrictions, the Fund may invest
through investment funds, pooled accounts or other investment vehicles designed
to permit investment in a portfolio of stocks listed in a particular developing
country or region. This could occur, for example, if a country requires foreign
portfolio investment to be made through an investment vehicle.
To the extent that the Fund's assets are not invested in equity securities
of RNE country issuers or in Sovereign Debt, the remainder of the assets may be
invested in (i) debt securities of corporate RNE country issuers, (ii) equity or
debt securities of corporate or governmental issuers located in countries other
than RNE countries and (iii) short-term and medium-term debt securities of the
type described below under "Temporary Investments." The Fund's assets may be
invested in debt securities when the Fund believes that, based upon factors such
as relative interest rate levels and foreign exchange rates, such debt
securities offer opportunities for long-term capital appreciation. It is likely
that many of the debt securities in which the Fund will invest will be unrated.
The Fund may invest up to 50% of its total assets in debt securities, including
17
<PAGE> 20
Sovereign Debt, that are rated below investment grade to S&P or Moody's or if
unrated, are determined by the Investment Manager to be comparable to securities
rated below investment grade by S&P or Moody's. Such lower-quality,
non-investment grade securities are commonly referred to as "junk bonds" and are
regarded as being predominantly speculative and involve significant risks.
It is anticipated that the Fund's holdings of lower-quality debt securities
will consist predominantly of Sovereign Debt, some of which may trade at
substantial discounts from face value and which may include Sovereign Debt
comparable to securities rated as low as D by S&P or C by Moody's. The Fund may
invest in Sovereign Debt to hold and trade in appropriate circumstances. The
Fund will only invest in Sovereign Debt when the Fund believes such investments
offer opportunities for long-term capital appreciation. Investment in Sovereign
Debt involves a high degree of risk and such securities are generally considered
to be speculative in nature. For a discussion of the specific risks associated
with investments in lower-quality securities, generally, and Sovereign Debt,
specifically, see "Risk Factors and Special Considerations -- Investments in
Lower-Quality Securities."
The Fund may invest indirectly in securities of RNE country issuers through
sponsored or unsponsored American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (collectively, hereinafter referred to as
"Depositary Receipts"). Depositary Receipts may not necessarily be denominated
in the same currency as the underlying securities into which they may be
converted. In addition, the issuers of the stock of unsponsored Depositary
Receipts are not obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and the
market value of the Depositary Receipts. ADRs are Depositary Receipts typically
issued by a United States bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs, GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by United States banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a United States corporation. Generally, Depositary Receipts in
registered form are designed for use in the United States securities markets and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. For purposes of the Fund's investment policies, the
Fund's investments in ADRs, EDRs, GDRs and other types of Depositary Receipts
will be deemed to be investments in the underlying securities.
The Fund may also invest through debt-equity conversion funds established
to exchange foreign debt of countries whose principal repayments are in arrears
into a portfolio of listed and unlisted equities, subject to certain
repatriation restrictions.
For temporary defensive purposes, the Fund may invest less than 65% of its
total assets in equity securities of RNE country issuers and Sovereign Debt, in
which case the Fund may invest in other equity or debt securities or may invest
in debt securities of the kind described under "Temporary Investments" below.
UNLISTED SECURITIES
Securities in which the Fund may invest include equity securities purchased
directly from issuers or in the unregulated over-the-counter markets or other
unlisted securities markets which may involve a high degree of business and
financial risk. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. 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. Further,
issuers whose securities are not listed may not be subject to the disclosure and
other investor protection requirements which may be applicable if their
securities were listed. If such securities are required to be registered under
the securities laws of one or more jurisdictions before being resold, the Fund
may be required to bear the expenses of registration. The Fund does not intend
to invest more than 35% of its total assets in unlisted securities.
18
<PAGE> 21
TEMPORARY INVESTMENTS
During periods in which the Investment Manager believes changes in
economic, financial or political conditions make it advisable, the Fund may for
temporary defensive purposes reduce its holdings in equity and other securities
and invest in certain short-term (less than 12 months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. The short-term and medium-term debt securities in which the Fund may
invest consist of (a) obligations of the governments of the United States or RNE
countries, their respective agencies or instrumentalities; (b) bank deposits and
bank obligations (including certificates of deposit, time deposits and bankers'
acceptances) of U.S. or RNE country banks denominated in any currency; (c)
floating rate securities and other instruments denominated in any currency
issued by international development agencies; (d) finance company and corporate
commercial paper and other short-term corporate debt obligations of U.S. or RNE
country corporations; and (e) repurchase agreements with banks and
broker-dealers with respect to such securities. The Fund intends to invest for
temporary defensive purposes only in short-term and medium-term debt securities
that are rated A or better by S&P or Moody's or, if unrated, that the Investment
Manager believes to be of comparable quality, i.e., subject to relatively low
risk of loss of interest or principal.
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed upon
price and date. Under a repurchase agreement, the seller is required to maintain
the value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Investment Manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price including accrued interest. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
The Fund expects to be fully invested in accordance with its investment
objective and policies within one year from the date of completion of the
offering made hereby. Pending such investment, the Fund's assets may be invested
entirely in the investments described above.
FOREIGN CURRENCY HEDGING TRANSACTIONS; OPTIONS AND FUTURES CONTRACTS
In order to hedge against foreign currency exchange rate risks, the Fund
may enter into forward foreign currency exchange contracts and foreign currency
futures contracts and may purchase and write (sell) put and call options on
foreign currency and on foreign currency futures contracts. The Fund may also
seek to hedge against interest rate fluctuations affecting portfolio securities
by entering into interest rate futures contracts and options thereon.
The Fund may seek to increase its return or hedge all or a portion of its
portfolio investments through transactions in options on securities. In
addition, the Fund may seek to hedge all or a portion of the investments held by
it, or which it intends to acquire, against adverse market fluctuations by
entering into stock index futures contracts and options thereon.
Under the regulations of the U.S. Commodity Futures Trading Commission
("CFTC"), the Fund will not be considered a "commodity pool," as defined under
such regulations, as a result of entering into the transactions in futures
contracts and related options described above, provided, among other things,
that:
(1) such transactions are entered into solely for bona fide hedging
purposes, as defined under CFTC regulations; or
(2) with respect to any Fund transactions in futures contracts or
related options which are not entered into for bona fide hedging purposes,
the aggregate initial margin and premiums do not exceed 5% of its total
assets (after taking into account any unrealized profits and losses).
The Fund will only engage in transactions in options and futures which are
traded on a recognized securities or futures exchange, including non-U.S.
exchanges to the extent permitted by the CFTC. Moreover, when the Fund purchases
a futures contract or a call option thereon or writes a put option thereon, an
amount
19
<PAGE> 22
of cash or liquid securities will be deposited in a segregated account with the
Fund's custodian in accordance with the regulations of the U.S. Securities and
Exchange Commission.
For a description of each of the instruments referred to above and an
explanation of certain of the associated risks, limitations on use and possible
strategies the Fund may utilize in connection therewith, see Appendix C.
EQUITY SWAPS AND RELATED TRANSACTIONS
The Fund may enter into equity swaps and may purchase or sell equity caps,
floors and collars. Equity swaps are agreements to exchange cash flows based on
a notional principal amount. The purchaser of an equity cap receives payments
from the seller to the extent that the selected equity index rises above a
predetermined level. The purchaser of an equity floor receives payments to the
extent that the selected equity index falls below a predetermined level. A
collar is a combination of a cap and a floor which preserves a certain return
within a predetermined range of values. The Fund would enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to manage the duration of its portfolio or to
protect against an increase in the price of the securities the Fund anticipates
purchasing at a later date. The Fund's use of swaps, caps, floors and collars is
subject to segregation and cover requirements which are similar to those to
which it is subject upon writing uncovered options.
The Fund may enter into equity swaps, caps and floors on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments on the payment date.
The Fund will not enter into any equity swap, cap or floor transaction unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction. If
there is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. Caps and floors are more recent innovations for
which standardized documentation has not yet been developed and, accordingly,
they are less liquid than swaps.
LENDING OF PORTFOLIO SECURITIES
The Fund may from time to time lend securities (but not in excess of
33 1/3% of its total assets) from its portfolio to brokers, dealers and
financial institutions and receive collateral in cash or securities believed by
the Investment Manager to be equivalent to securities rated investment grade by
S&P or Moody's which, while the loan is outstanding, will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities, including any accrued interest or dividend receivable. Any
cash collateral received by the Fund will be invested in short-term securities,
the income from which will increase the return to the Fund. The Fund will retain
all rights of beneficial ownership as to the loaned portfolio securities,
including voting rights and rights to interest or other distributions, and will
have the right to regain record ownership of loaned securities to exercise such
beneficial rights. Such loans will be terminable at any time. The Fund may pay
finders', administrative and custodial fees to persons unaffiliated with the
Fund in connection with the arranging of such loans.
20
<PAGE> 23
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund that may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (as defined in "Investment Objective and
Policies"). If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes will
not be considered a violation of the restriction. Also, if the Fund receives
from an issuer of securities held by the Fund subscription rights to purchase
securities of that issuer, and if the Fund exercises such subscription rights at
a time when the Fund's portfolio holdings of securities of that issuer would
otherwise exceed the limits set forth below, it will not constitute a violation
if, prior to receipt of securities upon exercise of such rights, and after
announcement of such rights, the Fund has sold at least as many securities of
the same class and value as it would receive on exercise of such rights.
As a matter of fundamental policy:
1. The Fund will not invest more than 25% of its total assets in a
particular industry (including for this purpose any securities issued by a
government other than the U.S. government).
2. The Fund may not make any investment for the purpose of
exercising control or management.
3. The Fund may not buy or sell commodities or commodity contracts
or real estate or interests in real estate, except that it may purchase and
sell futures contracts on stock indices, interest rates and foreign
currencies, swaps, securities which are secured by real estate or
commodities, and securities of companies which invest or deal in real
estate or commodities.
4. The Fund may not make loans, except that the Fund may (i) buy and
hold debt instruments in accordance with its investment objective and
policies, (ii) enter into repurchase agreements to the extent permitted
under applicable law, and (iii) make loans of portfolio securities.
5. The Fund may not act as an underwriter except to the extent that,
in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter under applicable securities laws.
6. The Fund may issue senior securities or borrow money in an amount
not in excess of 33 1/3% of the Fund's total assets (including the amount
borrowed and excluding the liability for the borrowing).
7. The Fund may purchase securities on margin and engage in short
sales of securities.
As a matter of operating policy, which may be changed by the Fund's Board
of Directors without a stockholder vote:
1. The Fund will not purchase securities on margin, except such
short-term credits as may be necessary for clearance of transactions and
the maintenance of margin with respect to futures contracts.
2. The Fund will not make short sales of securities or maintain a
short position (except that the Fund may maintain short positions in
foreign currency contracts, options and futures contracts and may make
short sales of securities "against the box").
3. The Fund will not issue senior securities, borrow money or pledge
its assets, except that the Fund may borrow from a lender (i) for temporary
or emergency purposes, (ii) for such short-term credits necessary for the
clearance or settlement of the transactions, (iii) to finance repurchases
of its shares (see "Common Stock"), or (iv) to pay any dividends required
to be distributed in order for the Fund to maintain its qualification as a
regulated investment company under the Code or otherwise to avoid taxation
under the Code, in amounts not exceeding 33 1/3% of its total assets
(including the amount borrowed and excluding the liability for the
borrowing), provided that the Fund will not purchase additional portfolio
securities when its borrowings exceed 5% of its assets. The Fund may pledge
its assets to secure such borrowings.
Unlike fundamental policies, operating policies of the Fund may be changed
by the Directors of the Fund, without a vote of the Fund's stockholders, if the
Directors determine such action is warranted. The Fund will notify its
stockholders of any change in any of the operating policies set forth above.
Such notice will also include a discussion of the increased risks of investment
in the Fund, if any, associated with such a change.
Under the 1940 Act, the Fund may invest only up to 10% of its total assets
in the aggregate in shares of other investment companies and only up to 5% of
its total assets in any one investment company, provided the
21
<PAGE> 24
investment does not represent more than 3% of the voting stock of the acquired
investment company at the time such shares are purchased. As a stockholder in
any investment company, the Fund will bear its ratable share of that investment
company's expenses, and would remain subject to payment of the Fund's
management, advisory and administrative fees with respect to assets so invested.
Stockholders of the Fund would therefore be subject to duplicative expenses to
the extent the Fund invests in other investment companies. See also "Taxation --
U.S. Federal Income Taxes -- Passive Foreign Investment Companies."
The Fund may be prohibited under the 1940 Act, absent exemptive relief,
from purchasing the securities of any company that, in its most recent fiscal
year, derived more than 15% of its gross revenues from securities-related
activities.
As a result of legal restrictions or market practices or both, the Fund, as
a U.S. entity, may be precluded from purchasing shares in public offerings by
certain RNE country issuers. Additionally, under the 1940 Act, the Fund may not
purchase any security of which the Investment Manager or any of its affiliates
is a principal underwriter during the public offering of such security.
In addition to the foregoing restrictions, the Fund may be subject to
investment limitations, portfolio diversification requirements and other
restrictions imposed by certain RNE countries in which it expects to invest.
22
<PAGE> 25
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS OF THE FUND
The Directors and officers of the Fund are listed below together with their
respective positions and a brief statement of their principal occupations during
the past five years and, in the case of Directors, their positions with certain
international organizations and publicly held companies.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PAST FIVE
NAME AND ADDRESS POSITION WITH FUND YEARS
- --------------------------------- ------------------ ----------------------------------------
<S> <C> <C>
Barton M Biggs (63)*............. Director and Chairman and Director of Morgan Stanley
1221 Avenue of the Americas Chairman of the Asset Management Inc. and Morgan Stanley
New York, New York 10020 Board Asset Management Limited; Managing
Director of Morgan Stanley & Co.
Incorporated; Director of Morgan Stanley
Group Inc.; Member of the Investment
Advisory Council of The Thailand Fund;
Director of the Rand McNally Company;
Member of the Yale Development Board;
Director and officer of various
investment companies managed by Morgan
Stanley Asset Management Inc.
Warren J. Olsen (39)*............ Director and Principal of Morgan Stanley & Co.
1221 Avenue of the Americas President Incorporated and Morgan Stanley Asset
New York, New York 10020 Management Inc.; Director and officer of
various investment companies managed by
Morgan Stanley Asset Management Inc.
Peter J. Chase (63).............. Director Chairman and Chief Financial Officer,
1441 Paseo De Peralta High Mesa Technologies, LLC; Chairman of
Santa Fe, New Mexico 87501 CGL, Inc.; Director of thirteen
investment companies managed by Morgan
Stanley Asset Management, Inc.; Member
of the Investment Advisory Council of
The Thailand Fund.
John W. Groghan (66)............. Director Chairman of Lincoln Capital Management
200 South Wacker Drive Company; Director of St. Paul Bancorp,
Chicago, Illinois 60606 Inc. and Lindsay Manufacturing Co.;
Director of thirteen investment
companies managed by Morgan Stanley
Asset Management Inc., Previously
Director of Blockbuster Entertainment
Corporation.
David B. Gill (70)............... Director Director of thirteen investment
3042 Cambridge Place, N.W. companies managed by Morgan Stanley
Washington, D.C. 20007 Asset Management Inc.; Director of the
Mauritius Fund Limited; Director of
Moneda Chile Fund Limited; Director of
First NIS Regional Fund SIAC; Director
of Commonwealth Africa Investment Fund
Ltd.; Member of the Investment Advisory
Council of The Thailand Fund; Chairman
of the Advisory Board of Advent Latin
American Private Equity Fund; Chairman
and Director of Norinvest Bank; Director
of Surinvest International Limited;
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PAST FIVE
NAME AND ADDRESS POSITION WITH FUND YEARS
- --------------------------------- ------------------ ----------------------------------------
Director of National Registry Company;
Previously Director of Capital Markets
Department of the International Finance
Corporation; Trustee, Batterymarch
Finance Management; Chairman and
Director of Equity Fund of Latin America
S.A. and Director of Commonwealth Equity
Fund Limited; and Director of Global
Securities, Inc.
Graham E. Jones (63)............. Director Senior Vice President of BGK Properties;
330 Garfield Street Trustee of nine investment companies
Suite 200 managed by Weiss, Peck & Greer; Trustee
Santa Fe, New Mexico 87501 of eleven investment companies managed
by Morgan Grenfell Capital Management
Incorporated; Director of thirteen
investment companies managed by Morgan
Stanley Asset Management Inc.; Member of
the Investment Advisory Council of The
Thailand Fund, Previously Chief
financial Officer of Practice Management
Systems, Inc.
<S> <C> <C>
John A. Levin (57)............... Director President of John A. Levin & Co., Inc.;
One Rockefeller Plaza Director of fourteen investment
New York, New York 10020 companies managed by Morgan Stanley
Asset Management Inc.
William G. Morton, Jr. (59)...... Director Chairman and Chief Executive Officer of
1 Boston Place Boston Stock Exchange; Director of Tandy
Boston, Massachusetts 02108 Corporation; Director of thirteen
investment companies managed by Morgan
Stanley Asset Management Inc.
Peter A. Nadosy (51)*............ Director Vice Chairman and Director of Morgan
1221 Avenue of the Americas Stanley Asset Management Inc. and
New York, New York 10020 Managing Director of Morgan Stanley &
Co. Incorporated; Previously President
of Morgan Stanley Asset Management Inc.
Frederick B. Whittemore (65)*.... Director Advisory Director of Morgan Stanley &
1251 Avenue of the Americas Co. Incorporated; Chairman for the
New York, New York 10020 United States National Committee for
Pacific Economic Cooperation; Director
and officer of thirteen investment
companies managed by Morgan Stanley
Asset Management Inc.; Previously
Managing Director of Morgan Stanley &
Co. Incorporated.
Harold J. Schaaff, Jr. (36)*..... Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated; General Counsel and
New York, New York 10020 Secretary of Morgan Stanley Asset
Management Inc.; Officer of various
investment companies managed by Morgan
Stanley Asset Management Inc.
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING PAST FIVE
NAME AND ADDRESS POSITION WITH FUND YEARS
- --------------------------------- ------------------ ----------------------------------------
<S> <C> <C>
Michael F. Klein (37)*........... Vice President Vice President of Morgan Stanley Asset
1221 Avenue of the Americas Management Inc.; Officer of various
New York, New York 10020 investment companies managed by Morgan
Stanley Asset Management Inc.;
Previously practiced law with the New
York law firm of Rogers & Wells.
Joseph P. Stadler (41)*.......... Vice President Vice President of Morgan Stanley Asset
1221 Avenue of the Americas Management Inc.; Officer of various
New York, New York 10020 investment companies managed by Morgan
Stanley Asset Management Inc.;
Previously with Price Waterhouse LLP.
Valerie Y. Lewis (40)*........... Secretary Vice President of Morgan Stanley Asset
1221 Avenue of the Americas Management Inc.; Officer of various
New York, New York 10020 investment companies managed by Morgan
Stanley Asset Management Inc.;
Previously with Citicorp.
James R. Rooney (37)*............ Treasurer Vice President and Manager of Fund
73 Tremont Street Administration, Chase Global Funds
Boston, Massachusetts 02108 Services Company; Officer of various
investment companies managed by Morgan
Stanley Asset Management Inc.;
Previously Assistant Vice President and
Manager of Fund Compliance and Control,
Scudder Stevens & Clark Inc. and Audit
Manager, Ernst & Young LLP.
Belinda Brady (28)*.............. Assistant Manager, Fund Administration, Chase
73 Tremont Street Treasurer Global Funds Services Company; Officer
Boston, Massachusetts 02108 of various investment companies managed
by Morgan Stanley Asset Management Inc.;
Previously with Price Waterhouse LLP.
</TABLE>
- ---------------
* Interested person of the Fund (as defined in the 1940 Act)
Messrs. Biggs and Nadosy are directors and officers and Messrs. Olsen,
Klein, Schaaff and Stadler and Ms. Lewis are officers of the Investment Manager.
Mr. Whittemore is an Advisory Director of Morgan Stanley & Co. Incorporated, an
affiliate of the Investment Manager and a registered broker-dealer, and he is
the owner of a beneficial interest in the Investment Manager. Mr. Rooney and Ms.
Brady are employees of Chase Global Funds Services Company, an affiliate of The
Chase Manhattan Bank, the Fund's Administrator.
The officers of the Fund, together with the Investment Manager, conduct and
supervise the Fund's daily business operations. The Directors review and
supervise the actions of the officers and the Fund's Investment Manager and
decide general policy.
The Fund pays to each of its Directors who is not an officer or employee of
the Investment Manager or any of their affiliates, in addition to certain
out-of-pocket expenses, an annual fee of $3,000 plus out-of-pocket expenses.
Each of the Directors who is not an "affiliated person" of the Investment
Manager within the meaning of the 1940 Act may enter into a deferred fee
arrangement (the "Fee Arrangement") with the Fund, pursuant to which such
Director defers to a later date the receipt of his Director's fees. The deferred
fees owed by the Fund are credited to a bookkeeping account maintained by the
Fund on behalf of such Director and accrue income from and after the date of
credit in an amount equal to the amount that would have been earned had such
fees (and all income earned thereon) been invested and reinvested either (i) in
shares of the Fund or
25
<PAGE> 28
(ii) at a rate equal to the prevailing rate applicable to 90-day U.S. Treasury
Bills at the beginning of each calendar quarter for which this rate is in
effect, whichever method is elected by a Director.
Under a Fee Arrangement, deferred Directors' fees (including the return
accrued thereon) will become payable in cash upon such Director's resignation
from the Board of Directors in generally equal annual installments over a period
of five years (unless the Fund has agreed to a longer or shorter payment period)
beginning on the first day of the year following the year in which such
Director's resignation occurred. In the event of a Director's death, remaining
amounts payable to him under the Fee Arrangement will thereafter be payable to
his designated beneficiary; in all other events, a Director's right to receive
payments is nontransferable. Under the Fee Arrangement, the Board of Directors
of the Fund, in its sole discretion, has reserved the right, at the request of a
Director or otherwise, to accelerate or extend the payment of amounts in the
deferred fee account at any time after the termination of a Director's service
as a director. In addition, in the event of the liquidation, dissolution or
winding up of the Fund or the distribution of all or substantially all of the
Fund's assets and property to its shareholders (other than in connection with a
reorganization or merger into another investment company advised by the
Investment Manager), all unpaid amounts in the deferred fee account maintained
by the Fund will be paid in a lump sum to Directors participating in the Fee
Arrangement on the effective date thereof.
Set forth below is a table showing the aggregate compensation paid by the
Fund to each of its Directors, as well as the total compensation paid to each
Director by other U.S. registered investment companies advised by the Investment
Manager or its affiliates (collectively the "Fund Complex") for their services
as directors of such investment companies for the fiscal year ended December 31,
1995.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
PENSION OR DEFERRED FUNDS
RETIREMENT TOTAL COMPENSATION CURRENTLY
BENEFITS ACCRUED COMPENSATION FROM FUND IN FUND
AGGREGATE DEFERRED AS PART FROM FUND COMPLEX COMPLEX
COMPENSATION COMPENSATION OF THE COMPLEX FOR FOR WHICH
FROM FROM FUND'S PAID TO INDIVIDUAL DIRECTOR
NAME OF DIRECTORS FUND FUND EXPENSES DIRECTORS DIRECTORS SERVES
- --------------------------- ------------ ------------ ---------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Barton M. Biggs(1)......... $0 0 None $ 0 0 17
Warren J. Olsen(1)......... 0 0 None 0 0 17
Peter J. Chase............. 0 0 None 47,300 0 13
John W. Croghan............ 0 0 None 48,645 35,657 13
David B. Gill.............. 0 0 None 46,719 26,719 13
Graham E. Jones............ 0 0 None 47,673 21,723 13
John A. Levin.............. 0 0 None 49,546 21,796 14
Peter A. Nadosy(1)......... 0 0 None 0 0 1
William G. Morton, Jr. .... 0 0 None 48,400 0 13
Frederick B.
Whittemore(1)............ 0 0 None 28,254 0 16
</TABLE>
- ---------------
(1) Messrs. Biggs and Nadosy are directors and officers of the Investment
Manager, Mr. Olsen is an officer of the Investment Manager and Mr.
Whittemore is a director of Morgan Stanley & Co. Incorporated, an affiliate
of the Investment Manager, and therefore are "interested persons" of the
Fund within the meaning of the 1940 Act. As such, Messrs. Biggs and Olsen do
not receive any compensation from the Fund or any other investment company
in the Fund Complex for their services as a director of such investment
companies.
The Fund's Board of Directors has an audit committee that is responsible
for reviewing financial and accounting matters. The members of the audit
committee are Messrs. . The Board of Directors also has a valuation
committee, the members for which are Messrs. . The members of the
audit committee receive an additional $500 per year for serving on the
committee.
As of the date of this Prospectus, none of the officers or Directors of the
Fund own any shares of the Fund's Common Stock.
The Board of Directors is divided into three classes, each class having a
term of three years. Each year the term of one class expires. The Fund's By-Laws
provide that each Director holds office until (i) the expiration of his term and
until his successor has been elected and qualified, (ii) his death, (iii) his
resignation, (iv) December 31 of the year in which he reaches seventy-three
years of age or (v) his removal as provided by statute or the Articles of
Incorporation. See "Common Stock."
26
<PAGE> 29
The Articles of Incorporation of the Fund contain a provision permitted
under the Maryland General Corporation Law (the "MGCL") which by its terms
eliminates the personal liability of the Fund's Directors and officers to the
Fund or its stockholders for monetary damages for breach of fiduciary duty as a
director or officer, subject to certain qualifications described below. The
Articles of Incorporation and the By-Laws of the Fund provide that the Fund will
indemnify directors, officers, employees or agents of the Fund to the full
extent permitted by the MGCL. Under Maryland law, a corporation may indemnify
any director or officer made a party to any proceeding by reason of service in
that capacity unless it is established that (1) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
(A) was committed in bad faith or (B) was the result of active and deliberate
dishonesty; (2) the director or officer actually received an improper personal
benefit in money, property or services; or (3) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. The Articles of Incorporation further provide that to
the fullest extent permitted by the MGCL, and subject to the requirements of the
1940 Act, no Director or officer will be liable to the Fund or its stockholders
for money damages. Under Maryland law, a corporation may restrict or limit the
liability of directors or officers to the corporation or its stockholders for
money damages, except to the extent that (1) it is proved that the person
actually received an improper benefit or profit in money, property, or services
or (2) a judgment or other final adjudication adverse to the person is entered
in a proceeding based on a finding in the proceeding that the person's action,
or failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. Nothing in the
Articles of Incorporation or the By-Laws of the Fund protects or indemnifies a
Director, officer, employee or agent against any liability to which he would
otherwise be subject by reason of acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or protects or
indemnifies a Director or officer of the Fund against any liability to the Fund
or its stockholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
INVESTMENT MANAGER
The Fund will employ Morgan Stanley Asset Management Inc. (the "Investment
Manager"), a wholly owned subsidiary of Morgan Stanley Group Inc., pursuant to
an Investment Advisory and Management Agreement, dated as of the date hereof
(the "Management Agreement"), to manage the investment and reinvestment of the
assets of the Fund, subject to the supervision of the Fund's Directors. The
Investment Manager's principal business address is 1221 Avenue of the Americas,
New York, New York 10020.
The Investment Manager provides portfolio management and named fiduciary
services to various closed-end and open-end investment companies, taxable and
nontaxable institutions, international organizations and individuals investing
in United States and international equity and fixed income securities. At June
30, 1996, the Investment Manager had, together with its affiliated investment
management companies, assets under management (including assets under fiduciary
advisory control) totaling approximately $104 billion, of which approximately $9
billion was invested in emerging country markets. The Investment Manager
currently acts as investment adviser for 13 closed-end funds which principally
invest in emerging markets.
Morgan Stanley Group Inc. has entered into a definitive agreement to
purchase the parent company of Van Kampen American Capital, Inc., the fourth
largest non-proprietary mutual fund provider in the United States with
approximately $57 billion in assets under management and/or supervision at June
30, 1996. The acquisition is expected to close by November 30, 1996.
The Investment Manager is a registered investment adviser under the U.S.
Investment Advisers Act of 1940, as amended (the "Advisers Act"). The Investment
Manager was one of the first institutional investors to enter the capital
markets of RNE countries, doing so in 1993, and manages several investment
companies investing in the RNE countries. The Investment Manager is under no
restriction and remains free, at any time, to sponsor and advise new investment
vehicles with investment restrictions similar or identical to those of the Fund.
As an investment adviser, the Investment Manager emphasizes a global
investment strategy and benefits from research coverage of a broad spectrum of
equity investment opportunities worldwide. The Investment Manager draws upon the
capabilities of its asset management specialists located in its various offices
27
<PAGE> 30
throughout the world. It also draws upon the research capabilities of Morgan
Stanley Group Inc. and its other affiliates, as well as the research and
investment ideas of other companies whose brokerage services the Investment
Manager utilizes.
In providing advisory services to the Fund, members of the Investment
Manager's senior management, including Mr. Barton M. Biggs, Mr. Madhav Dhar and
Ms. Marianne L. Hay, will establish guidelines regarding the allocation of the
Fund's investments among various RNE countries and the strategy for those
investments. The Investment Manager's senior management will meet regularly to
review the equity markets and determine the Fund's asset mix.
Barton M. Biggs is a Managing Director of Morgan Stanley & Co.
Incorporated, is Chairman of the Investment Manager and is Director of Global
Strategy for Morgan Stanley. In his capacity as Director of Global Strategy, he
focuses upon asset allocation, international events and the relative
attractiveness of the world's markets. He joined Morgan Stanley in 1973 as a
General Partner and Managing Director. He is a member of the Operating Committee
and Management Committee of Morgan Stanley Group Inc. and serves on its Board of
Directors. Mr. Biggs formed Morgan Stanley's research department in 1973, was
its Director of U.S. Research until 1979 and Director of Global Research from
1991 to 1994. In 1975, he founded Morgan Stanley Asset Management Inc. He has
been named to the Institutional Investor All American Research Team ten times
and in 1996 he was voted the top global strategist by the International
Institutional Investor poll. He served three years as an officer in the United
States Marine Corps and graduated from Yale University and the New York
University Graduate School of Business.
Madhav Dhar is a Managing Director of Morgan Stanley & Co. Incorporated. He
joined the Investment Manager in 1984 to focus on asset allocation and
investment strategy. Mr. Dhar is a co-head of the Investment Manager's Emerging
Markets Group with approximately $9 billion under management and serves as a co-
portfolio manager of the Global Emerging Markets Portfolios. Mr. Dhar also
coordinates the Investment Manager's developing country fund effort and has been
involved in the launching of each of Morgan Stanley's country funds. He holds a
B.S. (honors) in physics from St. Stephens College, Delhi University (India),
and an MBA from Carnegie-Mellon University.
Marianne L. Hay. is a Managing Director of Morgan Stanley & Co.
Incorporated and is a co-head of the Investment Manager's Emerging Markets Group
with approximately $9 billion under management and served as co-portfolio
manager of the Global Emerging Markets Portfolios. She joined the Investment
Manager in June 1993 as a Principal to work with the Investment Manager's senior
management covering all emerging markets, asset allocation, product development
and client service. Ms. Hay has 17 years' investment experience. Prior to
joining the Investment Manager, she was a director of Martin Currie Investment
Management Ltd., where her responsibilities included geographic asset allocation
and portfolio management for global and emerging markets funds, as well as being
director in charge of the company's North American clients. Prior to her tenure
at Martin Currie, she worked for the Bank of Scotland and the investment
management firm of Ivory and Sime plc. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland.
Once allocation and strategic guidelines have been established for the
Fund's investments by the Investment Manager's senior management, the Fund's
portfolio will be managed on a day-to-day basis by Michael Hewett. Mr. Hewett
joined the Investment Manager's London office in August 1994 where he
specializes in the securities markets of the former Soviet Union and North
Africa. Mr. Hewett has been actively involved in the Investment Manager's
investments throughout the RNE countries. Prior to joining the Investment
Manager, Mr. Hewett spent three years in the Investment Banking Division of
Morgan Stanley, where he spent time in both the Tokyo and London offices and
worked on a variety of deals including IPO's, privatizations, project financings
and acquisitions. He holds an M.A. (honors) degree from Oxford University in
Politics, Philosophy and Economics.
Mr. Hewett will be assisted by Paul Psaila. Mr. Psaila joined the
Investment Manager in 1994 and is currently an analyst covering Central and
Eastern Europe and working on general investment strategy issues. Before joining
the Investment Manager, Mr. Psaila was a Research Associate for the Overseas
Development
28
<PAGE> 31
Council for a year and worked as an Associate at the International Monetary Fund
for two years. He speaks both Spanish and French. He is a political science
graduate from Brandeis University and graduated from the Johns Hopkins School of
Advanced International Studies with a Masters degree in International Economics
and Latin American Studies.
MANAGEMENT AGREEMENT
Under the terms of the Management Agreement, the Investment Manager will
make all investment decisions, prepare and make available research and
statistical data, and supervise the purchase and sale of securities on behalf of
the Fund, including the selection of brokers and dealers to carry out the
transactions, all in accordance with the Fund's investment objective and
policies, under the direction and control of the Fund's Board of Directors. The
Investment Manager also will be responsible for maintaining records and
furnishing or causing to be furnished all required records or other information
of the Fund to the extent such records, reports and other information are not
maintained or furnished by the Fund's administrators, custodians or other
agents. The Investment Manager will pay the salaries and expenses of the Fund's
officers and employees, as well as the fees and expenses of the Fund's
Directors, who are directors, officers or employees of the Investment Manager or
any of its affiliates. However, the Fund will bear travel expenses or an
appropriate fraction thereof of officers and Directors of the Fund who are
directors, officers or employees of the Investment Manager or its affiliates to
the extent that such expenses relate to attendance at meetings of the Fund's
Board of Directors or any committee thereof.
The Investment Manager has agreed to pay the Fund's expenses in connection
with this offering in order to maintain a net asset value of $20.00 per Share
immediately following the completion of this offering. The Fund will pay all of
its other expenses, including, among others, organization expenses (but not the
overhead or employee costs of the Investment Manager); legal fees and expenses
of counsel to the Fund; auditing and accounting expenses; taxes and governmental
fees; dues and expenses incurred in connection with membership in investment
company organizations; fees and expenses of the Fund's custodians,
sub-custodians, transfer agents and registrars; fees and expenses with respect
to administration, except as may be provided otherwise pursuant to
administration agreements; expenses for portfolio pricing services by a pricing
agent, if any; expenses relating to investor and public relations; freight,
insurance and other charges in connection with the shipment of the Fund's
portfolio securities; brokerage commissions and other costs of acquiring or
disposing of any portfolio holding of the Fund; expenses of preparation and
distribution of reports, notices and dividends to stockholders; expenses of the
dividend reinvestment and cash purchase plan (except for brokerage expenses paid
by participants in such plan); costs of stationery; any litigation expenses; and
costs of stockholders' and other meetings.
For services under the Management Agreement, the Investment Manager will
receive a fee, computed weekly and payable monthly, at an annual rate of 1.60%
of the Fund's average weekly net assets. The Fund's management and advisory fees
are higher than advisory fees paid by most other U.S. investment companies,
primarily because of the additional time and expense required of the Investment
Manager in pursuing the Fund's objective of investing in securities of RNE
country issuers and Sovereign Debt. This investment objective entails additional
time and expense because available public information concerning securities of
RNE country issuers is limited in comparison to that available for U.S.
companies and accounting standards are more flexible. In addition, available
research concerning RNE country issuers is not comparable to available research
concerning U.S. companies.
Under the Management Agreement, the Investment Manager is permitted to
provide investment advisory services to other clients, including clients who may
invest in RNE country issuers and Sovereign Debt. Conversely, information
furnished by others to the Investment Manager in the course of providing
services to clients other than the Fund may be useful to the Investment Manager
in providing services to the Fund.
The Management Agreement will initially be effective for a period of two
years and will continue in effect from year to year thereafter provided such
continuance is specifically approved at least annually by (i) a vote of a
majority of those members of the Board of Directors who are not "interested
persons" of the Investment Manager or the Fund, cast in person at a meeting
called for the purpose of voting on such approval and
29
<PAGE> 32
(ii) by a majority vote of either the Fund's Board of Directors or the Fund's
outstanding voting securities. The Management Agreement may be terminated at any
time, without payment of penalty, by the Fund's Board of Directors, by a vote of
a majority the Fund's outstanding voting securities, or by the Investment
Manager upon 60 days' written notice. The Management Agreement will
automatically terminate in the event of its assignment, as defined under the
1940 Act.
The Management Agreement provides that the Investment Manager will not be
liable for any act or omission, error of judgment or mistake of law, or for any
loss suffered by the Fund in connection with matters to which the Management
Agreement relates, except for a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Manager in the
performance of its duties, or from reckless disregard by it of its obligations
and duties under the Management Agreement.
ADMINISTRATOR
Under an Administration Agreement (the "Administration Agreement") between
the Fund and The Chase Manhattan Bank (the "Administrator"), the Administrator
has agreed that Chase Global Funds Services Company, an affiliate of the
Administrator, will provide administrative services to the Fund. Such
administrative services include maintenance of the Fund's books and records,
calculations of net asset value, preparation and filing of reports with respect
to certain of the Fund's U.S. reporting requirements, monitoring of custody
arrangements with the Fund's custodians and other accounting and general
administrative services. The Directors of the Fund will supervise and monitor
the administrative services provided by the Administrator.
The Administrator, a New York state chartered bank and trust company,
provides corporate management and administrative services to investment
companies, and at February 29, 1996 had approximately $42 billion of investment
company assets under administration and approximately $450 billion of investment
company assets under custody. The Administrator's principal business address is
770 Broadway, New York, New York 10003. Chase Global Funds Services Company's
principal business address is 73 Tremont Street, Boston, Massachusetts 02108.
Under the Administration Agreement, the Fund will pay to the Administrator
an annual administration fee of $ plus % of the average weekly net
assets of the Fund, computed weekly and payable monthly.
ESTIMATED EXPENSES
On the basis of the anticipated size of the Fund immediately following the
receipt of the net proceeds from this offering, the Investment Manager estimates
that the Fund's normal annual operating expenses, including management,
administrative and custodial fees, exclusive of amortization of organization
expenses, will be approximately $ . While this estimate has been
made in good faith on the basis of information made available to the Investment
Manager, there can be no assurance, given the nature of the Fund as one of a few
investment companies investing primarily in equity securities of RNE country
issuers, that actual operating expenses will not be substantially more or less
than such estimate.
The Fund's annual operating expenses will be higher than normal annual
operating expenses of most closed-end investment companies of comparable size
investing in the United States and reflect the specialized nature of the Fund,
the extent of the advisory effort involved and the costs of communication and
other costs associated with investing in RNE countries rather than in the United
States.
Costs incurred by the Fund in connection with its initial registration and
public offering of shares, estimated at $ , will be paid by the
Investment Manager or an affiliate and will not be charged to the capital of the
Fund; costs incurred in connection with the Fund's organization, estimated at
$ , will be deferred and amortized on a straight-line basis over five
years starting with the commencement of the Fund's operations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Manager will place orders for securities to be purchased by
the Fund. The primary objective of the Investment Manager in choosing brokers
for the purchase and sale of securities for the Fund's
30
<PAGE> 33
portfolio will be to obtain the most favorable net results taking into account
such factors as price, commission, size of order, difficulty of execution and
the degree of skill required of the broker-dealer. The capability and financial
condition of the broker may also be criteria for the choice of that broker. The
placing and execution of orders for the Fund also will be subject to
restrictions under U.S. securities laws, including certain prohibitions against
trading among the Fund and its affiliates (including the Investment Manager or
its affiliates). The Fund may utilize affiliates of the Investment Manager in
connection with the purchase or sale of securities in accordance with rules or
exemptive orders adopted by the Commission when the Investment Manager believes
that the charge for the transaction does not exceed usual and customary levels.
In addition, the Fund may purchase securities in a placement for which
affiliates of the Investment Manager have acted as agent to or for issuers,
consistent with applicable rules adopted by the Commission or regulatory
authorization, if necessary. The Fund will not purchase securities from or sell
securities to any affiliate of the Investment Manager acting as principal.
The Investment Manager on behalf of the Fund may place brokerage
transactions through brokers who provide it with investment research services,
including market and statistical information and quotations for the Fund's
portfolio valuation purposes. The terms "investment research" and "market and
statistical information and quotations" include advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities and potential buyers or sellers of
securities, as well as the furnishing of analyses and reports concerning
issuers, industries, securities, economic factors and trends, and portfolio
strategy, each and all as consistent with those services mentioned in Section
28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act").
Research provided to the Investment Manager in advising the Fund will be in
addition to and not in lieu of the services required to be performed by the
Investment Manager itself, and the Investment Manager's fees will not be reduced
as a result of the receipt of such supplemental information. It is the opinion
of the management of the Fund that such information is only supplementary to the
Investment Manager's own research efforts, because the information must still be
analyzed, weighed and reviewed by the Investment Manager's staff. Such
information may be useful to the Investment Manager in providing services to
clients other than the Fund, and not all such information is necessarily used by
the Investment Manager in connection with the Fund. Conversely, information
provided to the Investment Manager by brokers and dealers through whom other
clients of the Investment Manager effect securities transactions may prove
useful to the Investment Manager in providing services to the Fund.
The Fund's Board of Directors will review at least annually the commissions
allocated by the Investment Manager on behalf of the Fund to determine if such
allocations were reasonable in relation to the benefits inuring to the Fund.
NET ASSET VALUE
The Fund intends to determine its net asset value no less frequently than
the close of business on the last business day of each week by dividing the
value of the net assets of the Fund (the value of its assets less its
liabilities) by the total number of shares of Common Stock outstanding. In
valuing the Fund's assets, all listed equity securities for which market
quotations are readily available will, regardless of purchase price, be valued
at the last sales price on the date of determination. Listed securities with no
such sales price and unlisted equity securities are valued at the mean between
the current bid and asked prices, if any, obtained from reputable brokers.
Short-term investments having a maturity of 60 days or less are valued at cost
with accrued interest or discount earned included in interest receivable. Other
securities as to which market quotations are readily available will be valued at
their market values. All other securities and assets will be taken at fair value
as determined in good faith by the Board of Directors although the actual
calculation may be done by others. In instances where price cannot be determined
in accordance with the above procedures, or in instances in which the Board of
Directors determines it is impractical or inappropriate to determine price in
accordance with the above procedures, the price will be at fair value as
determined in good faith in a manner as the Board of Directors may prescribe.
All assets and liabilities of the Fund not denominated in U.S. dollars will be
initially valued in the currency in which they are denominated and then will be
translated into U.S. dollars at the prevailing foreign exchange rate on the date
of valuation. The Fund's obligation to pay any local taxes,
31
<PAGE> 34
such as tax on remittances from an RNE country, will become a liability on the
date the Fund recognizes income or marks-to-market its assets and will have the
effect of reducing the Fund's net asset value.
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund intends to distribute to stockholders, at least annually,
substantially all of its investment company taxable income from dividends and
interest earnings and any net realized capital gains. See "Taxation -- U.S.
Federal Income Taxes." The Fund may elect annually, however, to retain for
reinvestment any net realized long-term capital gains.
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless the Plan Agent (as
defined below) is otherwise instructed by the stockholder in writing, to have
all distributions automatically reinvested by American Stock Transfer & Trust
Company (the "Plan Agent") in Fund shares pursuant to the Plan. Stockholders who
do not participate in the Plan will receive all distributions in cash paid by
check in U.S. dollars mailed directly to the stockholder by American Stock
Transfer & Trust Company, as paying agent. Stockholders who do not wish to have
distributions automatically reinvested should notify the Fund, c/o the Plan
Agent for Morgan Stanley Russia & New Europe Fund, Inc. at American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
The Plan Agent will serve as agent for the stockholders in administering
the Plan. If the Directors of the Fund declare an income dividend or realized
capital gains distribution payable either in the Fund's Common Stock or in cash,
as stockholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive Common Stock to be issued by the Fund
or to be purchased in the open market by the Plan Agent. If the market price per
share on the valuation date equals or exceeds the net asset value per share on
that date, the Fund will issue new shares to participants at net asset value,
unless the net asset value is less than 95% of the market price on the valuation
date, in which case, at 95% of the market price. The valuation date will be the
dividend or distribution payment date or, if that date is not a trading day on
the exchange on which the Fund's shares are then listed, the next preceding
trading day. If the net asset value exceeds the market price of Fund shares on
such valuation date, or if the Fund should declare a dividend or distribution
payable only in cash, the Plan Agent will, as agent for the participants, buy
Fund shares in the open market with the cash in respect of such dividend or
distribution, for the participants' account on, or shortly after, the payment
date.
Participants in the Plan have the option of making additional payments to
the Plan Agent, annually, in any amount from $100 to $3,000, for investment in
the Fund's Common Stock. The Plan Agent will use all funds received from
participants (as well as any dividends and distributions received in cash) to
purchase Fund shares in the open market on or about January 15 of each year. No
participant will have any authority to direct the time or price at which the
Plan Agent may purchase the Common Stock on its behalf. Any voluntary cash
payments received more than thirty days prior to such date will be returned by
the Plan Agent, and interest will not be paid on any uninvested cash payments.
To avoid unnecessary cash accumulations, and also to allow ample time for
receipt and processing by the Plan Agent, it is suggested that participants send
in voluntary cash payments to be received by the Plan Agent approximately ten
days before January 15. A participant may withdraw a voluntary cash payment by
written notice, if the notice is received by the Plan Agent not less than
forty-eight hours before such payment is to be invested. All voluntary cash
payments should be made by check drawn on a U.S. bank (or a non-U.S. bank, if
U.S. currency is imprinted on the check) payable in U.S. dollars and should be
mailed to the Plan Agent for Morgan Stanley Russia & New Europe Fund, Inc. at
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
The Plan Agent will maintain all stockholder accounts in the Plan and will
furnish written confirmations of all transactions in the account, including
information needed by stockholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy will include those shares purchased pursuant to the Plan.
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In the case of stockholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
There is no charge to participants for reinvesting dividends or
distributions. The Plan Agent's fees for the handling of the reinvestment of
dividends and distributions will be paid by the Fund. However, each
participant's account will be charged a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or distributions. A participant will also pay
brokerage commissions incurred in purchases from voluntary cash payments made by
the participant. Brokerage charges for purchasing small amounts of stock for
individual accounts through the Plan are expected to be less than the usual
brokerage charges for such transactions, because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the lower
commission thus attainable.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends and
distributions. See "Taxation -- U.S. Federal Income Taxes."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any voluntary cash payment made and any dividend or distribution paid
subsequent to notice of the change sent to all stockholders at least 90 days
before the record date for such dividend or distribution. The Plan also may be
amended or terminated by the Plan Agent by at least 90 days' written notice to
all stockholders. All correspondence concerning the Plan should be directed to
the Plan Agent for Morgan Stanley Russia & New Europe Fund, Inc. at American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
TAXATION
U.S. FEDERAL INCOME TAXES
The Fund intends to qualify and be treated as a regulated investment
company under the Code. To so qualify, the Fund must, among other things: (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities and gains from the sale or other disposition of foreign
currencies, or other income (including gains from options, futures contracts and
forward contracts) derived with respect to the Fund's business of investing in
stocks, securities or currencies; (b) derive less than 30% of its gross income
from the sale or other disposition of the following assets held for less than
three months -- (i) stock and securities, (ii) options, futures and forward
contracts (other than options, futures and forward contracts on foreign
currencies), and (iii) foreign currencies (and options, futures and forward
contracts on foreign currencies) which are not directly related to the Fund's
principal business of investing in stocks and securities (or options and futures
with respect to stock or securities); and (c) diversify its holdings so that, at
the end of each quarter, (i) at least 50% of the value of the Fund's total
assets is represented by cash and cash items (including receivables), U.S.
Government securities, securities of other regulated investment companies, and
other securities, with such other securities limited in respect of any one
issuer to an amount not greater in value than 5% of the Fund's total assets and
to not more than 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of the Fund's total assets is invested in
the securities (other than U.S. Government securities or securities of other
regulated investment companies) of any one issuer or of any two or more issuers
that the Fund controls and that are determined to be engaged in the same
business or similar or related businesses. The Fund expects that all of its
foreign currency gains will be directly related to its principal business of
investing in stock and securities. Legislation is currently pending before the
U.S. Congress that would repeal the requirement that a regulated investment
company must derive less than 30% of its gross income from the sale or other
disposition of assets described in (b) above, that are held for less than three
months. However, it cannot be predicted whether this legislation will become law
and, if so enacted, what form it will eventually take.
As a regulated investment company, provided that the Fund distributes to
its stockholders at least 90% of its investment company taxable income for the
taxable year, the Fund will not be subject to U.S. federal income tax on the
portion of its investment company taxable income that it distributes to its
stockholders;
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however, the Fund will be subject to tax on the portion of its income and gains
that it does not distribute to its stockholders. Investment company taxable
income includes, among other things, dividends, interest and net short-term
capital gains in excess of net long-term capital losses, but does not include
net long-term capital gains in excess of net short-term capital losses. The Fund
intends to distribute annually to its stockholders substantially all of its
investment company taxable income. If necessary, the Fund may borrow money
temporarily or liquidate assets to make such distributions. As discussed below,
however, it is possible that the Fund may not distribute net long-term capital
gains in excess of short-term capital losses. Dividend distributions of
investment company taxable income are taxable to a U.S. stockholder as ordinary
income to the extent of the Fund's current and accumulated earnings and profits,
whether paid in cash or in shares of Common Stock. Thus, reinvested dividends
will give rise to tax without a corresponding receipt of cash. Distributions in
excess of the Fund's current and accumulated earnings and profits will first
reduce the adjusted tax basis of a holder's stock and, to the extent such
distributions exceed the positive adjusted tax basis of such stock, will
constitute capital gains to such holder (assuming the stock is held as a capital
asset). Since the Fund will not invest in the stock of domestic corporations,
distributions to corporate stockholders of the Fund will not be entitled to the
deduction for dividends received by corporations. If the Fund fails to satisfy
the 90% distribution requirement or fails to qualify as a regulated investment
company in any taxable year, it will be subject to tax in such year on all of
its taxable income, whether or not the Fund makes any distributions to its
stockholders.
As a regulated investment company, the Fund also will not be subject to
U.S. federal income tax on the portion of its net long-term capital gains in
excess of net short-term capital losses and capital loss carryovers from the
prior eight years, if any, that it distributes to its stockholders. If the Fund
retains for reinvestment or otherwise an amount of such net long-term capital
gains, it will be subject to a tax of up to 35% of the amount retained. The
Board of Directors of the Fund will determine at least once a year whether to
distribute any net long-term capital gains in excess of net short-term capital
losses and capital loss carryovers from prior years. The Fund expects to
designate amounts retained as undistributed capital gains in a notice to its
stockholders who are stockholders of record as of the close of a taxable year of
the Fund who, if subject to U.S. federal income taxation, (a) will be required
to include in income for U.S. federal income tax purposes, as long-term capital
gains, their proportionate shares of the undistributed amount, and (b) will be
entitled to credit against their U.S. federal income tax liabilities their
proportionate shares of the tax paid by the Fund on the undistributed amount and
to claim refunds to the extent that their credits exceed their liabilities. For
U.S. federal income tax purposes, the basis of shares owned by a stockholder of
the Fund will be increased by an amount equal to 65% of the amount of
undistributed capital gains included in the stockholder's income. Distributions
of net long-term capital gains, if any, by the Fund are taxable to its
stockholders as long-term capital gains whether paid in cash or in shares and
regardless of how long the stockholder has held the Fund's shares. Such
distributions of net long-term capital gains are not eligible for the dividends
received deduction. Under the Code, net long-term capital gains will be taxed at
a rate no greater than 28% for individuals and 35% for corporations.
Stockholders will be notified annually as to the U.S. federal income tax status
of their dividends and distributions.
Stockholders receiving dividends or distributions in the form of additional
shares pursuant to the Plan should be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that the stockholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares equal to such amount.
If the net asset value of shares is reduced below a stockholder's cost as a
result of a distribution by the Fund, the distribution will be taxable even if
it, in effect, represents a return of invested capital. Investors considering
buying shares just prior to a dividend or capital gain distribution payment date
should be aware that, although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those who purchase just
prior to the record date for a distribution will receive a distribution which
will be taxable to them. The amount of capital gains realized and distributed
(which from an investment standpoint may represent a partial return of capital
rather than income) in any given year will be the result of investment
performance, among other things, and can be expected to vary from year to year.
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If the Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends are included in the
Fund's gross income not as of the date received but as of the later of (a) the
date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock,
either of which dates may be earlier than the date the dividend is received.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated income, and stockholders
may receive dividends in an earlier year than would otherwise be the case.
Under the Code, the Fund may be subject to a 4% excise tax on a portion of
its undistributed income. To avoid the tax, the Fund must distribute annually at
least 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year and at least 98% of its capital gain net income
for the 12-month period ending, as a general rule, on October 31 of the calendar
year. For this purpose, any income or gain retained by the Fund that is subject
to corporate income tax will be treated as having been distributed at year-end.
For purposes of the excise tax, a registered investment company shall: (1)
reduce its capital gain net income, but not below its net capital gain, by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses incurred after October 31 of any year, or after the
end of its taxable year if it has made a taxable year election, in determining
the amount of ordinary taxable income for the current calendar year and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year. In addition, the minimum amounts that must be
distributed in any year to avoid the excise tax will be increased or decreased
to reflect any under-distribution or over-distribution, as the case may be, in
the previous year. For a distribution to qualify under the foregoing test, the
distribution generally must be declared and paid during the year. Any dividend
declared by the Fund in October, November or December of any year and payable to
stockholders of record on a specified date in such a month shall be deemed to
have been received by each stockholder on December 31 of such year and to have
been paid by the Fund not later than December 31 of such year, provided that
such dividend is actually paid by the Fund during January of the following year.
Accordingly, such distributions will be taxable to shareholders in the year the
distributions are declared and become payable, rather than the year in which the
distributions are received by the shareholders.
The Fund will maintain accounts and calculate income by reference to the
U.S. dollar for U.S. federal income tax purposes. Certain investments will be
maintained and income therefrom calculated by reference to non-U.S. currencies,
and such calculations will not necessarily correspond to the Fund's
distributable income and capital gains for U.S. federal income tax purposes as a
result of fluctuations in currency exchange rates. Furthermore, exchange control
regulations may restrict the ability of the Fund to repatriate investment income
or the proceeds of sales of securities. These restrictions and limitations may
limit the Fund's ability to make sufficient distributions to satisfy the 90% and
98% distribution requirements for avoiding income and excise taxes.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to stockholders. These provisions
also may require the Fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were sold for fair value at the close
of the taxable year) which may cause the Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the 90% and 98% distribution requirements for avoiding income and excise taxes.
The Fund will monitor its transactions, will make the appropriate tax elections,
and will make the appropriate entries in its books and records when it acquires
any foreign currency, option, futures contract, forward contract, or hedged
investment to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company and minimize the imposition of income
and excise taxes.
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The Fund may make investments that accrue income that is not matched by a
current receipt of cash by the Fund, such as investments in certain obligations
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security at maturity over its basis immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis on
debt instruments, including Sovereign Debt. In addition, income may continue to
accrue for federal income tax purposes with respect to a non-performing
investment. Any of the foregoing income would be treated as income earned by the
Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a concurrent receipt of cash to
the Fund, the Fund may be required to borrow money temporarily or liquidate
other securities to be able to make distributions to its investors. The extent
to which the Fund may liquidate securities at a gain may be limited by the 30%
limitation discussed above.
For backup withholding purposes, the Fund may be required to withhold 31%
of reportable payments (which may include dividends and capital gain
distributions) to certain noncorporate shareholders. A stockholder, however, may
avoid becoming subject to this requirement by filing an appropriate form
certifying under penalty of perjury that such stockholder's taxpayer
identification number is correct and that such stockholder is not subject to
backup withholding, or is exempt from backup withholding. Backup withholding is
not an additional tax. Any amounts withheld under the backup withholding rules
from payments made to a shareholder may be credited against such shareholder's
federal income tax liability.
Upon the sale or exchange of its shares, a stockholder will realize a
taxable gain or loss depending upon the amount realized and the stockholder's
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the stockholder's hands, and will be
long-term if the stockholder's holding period for the shares is more than 12
months and otherwise will be short-term. Any loss realized on a sale or exchange
will be disallowed to the extent that the shares disposed of are replaced
(including replacement through the reinvestment of dividends and capital gains
distributions in the Fund) within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a stockholder on the sale of Fund shares held by the
stockholder for six months or less will be treated for federal income tax
purposes as a long-term capital loss to the extent of any distributions of
long-term capital gains received by the stockholder with respect to such shares.
A repurchase by the Fund of shares generally will be treated as a sale of
the shares by a stockholder provided that after the repurchase the stockholder
does not own, either directly or by attribution under Section 318 of the Code,
any shares. If, after a repurchase a stockholder continues to own, directly or
by attribution, any shares, and has not experienced a meaningful reduction in
its proportionate interest in the Fund, it is possible that any amounts received
in the repurchase by such stockholder will be taxable as a dividend to such
stockholder. If, in addition, the Fund has made such repurchases as part of a
series of redemptions, there is a risk that stockholders who do not have any of
their shares repurchased would be treated as having received a dividend
distribution as a result of their proportionate increase in the ownership of the
Fund.
Passive Foreign Investment Companies
If the Fund purchases stock in certain foreign passive investment entities
described in the Code as passive foreign investment companies ("PFIC"), the Fund
will be subject to U.S. federal income tax on a portion of any "excess
distribution" with respect to the stock of a PFIC held by the Fund
(distributions received by the Fund on such stock in any year that exceeds 125%
of the average annual distribution received by the Fund in the three preceding
years or the Fund's holding period, if shorter, and any gain from the
disposition of such PFIC stock) even if such income is distributed as a taxable
dividend by the Fund to its stockholders. Additional charges in the nature of
interest may be imposed on the Fund in respect of deferred taxes arising from
such "excess distributions." If the Fund were to invest in a PFIC and elect to
treat the PFIC as a "qualified electing fund" under the Code (and if the PFIC
were to comply with certain reporting requirements), in lieu of the foregoing
requirements the Fund would be required to include in income each
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year its pro rata share of the PFIC's ordinary earnings and net realized capital
gains, whether or not such amounts were actually distributed to the Fund.
Legislation has been proposed in the U.S. Congress which would, in the case
of a PFIC having "marketable stock," permit U.S. stockholders, such as the Fund,
to elect to mark-to-market the PFIC stock annually. Otherwise, U.S. stockholders
would be treated substantially the same as under current law. Special rules
applicable to mutual funds would classify as "marketable stock" all stock in
PFICs held by the Fund. It is unclear if or when the proposed legislation will
become law and if it is enacted the form it will take. On March 31, 1992, the
U.S. Internal Revenue Service released proposed regulations providing a
mark-to-market election for regulated investment companies that would have
effects similar to the proposed legislation. These regulations would be
effective for taxable years ending after promulgation of the regulations as
final regulations. Whether and to what extent final regulations may be applied
retroactively by the Fund is unclear.
Foreign Tax Credits
Income and gains received by the Fund from sources outside the United
States may be subject to withholding and other taxes imposed by foreign
countries. If (i) the Fund qualifies as a regulated investment company, (ii)
certain distribution requirements are satisfied, and (iii) more than 50% of the
value of the Fund's total assets at the close of any taxable year consists of
stocks or securities of foreign corporations, which for this purpose should
include obligations issued by foreign government issuers, the Fund may elect,
for U.S. federal income tax purposes, to treat any foreign country's income or
withholding taxes paid by the Fund that can be treated as income taxes under
U.S. federal income tax principles, as paid by its stockholders. The Fund
expects all of the foregoing conditions to be satisfied, and expects to make the
foregoing election in each year that it qualifies to do so. As a consequence,
each stockholder will be required to include in its income an amount equal to
its allocable share of such income taxes paid by the Fund to a foreign country's
government and the stockholders will be entitled, subject to certain
limitations, to credit their portions of these amounts against their U.S.
federal income tax due, if any, or to deduct their portions from their U.S.
taxable income, if any. In general, a stockholder may elect each year whether to
claim a deduction or a credit for such foreign taxes paid. However, no
deductions for foreign taxes may be claimed by certain foreign stockholders, and
by non-corporate stockholders who do not itemize deductions. Stockholders that
are exempt from tax under Section 501(a) of the Code, such as pension plans,
generally will derive no benefit from the Fund's election. However, such
stockholders increase should not be disadvantaged because the amount of
additional income they are deemed to receive equal to their allocable share of
such foreign countries' income taxes paid by the Fund generally will not be
subject to U.S. federal income tax.
The amount of foreign taxes that may be credited against a stockholder's
U.S. federal income tax liability will generally be limited to an amount equal
to the stockholder's United States federal income tax rate multiplied by its
foreign source taxable income. For this purpose, the Fund expects that the
capital gains and foreign currency gains it distributes, whether as dividends or
capital gains distributions, generally will not be treated as foreign source
taxable income. In addition, this limitation must be applied separately to
certain categories of foreign source income, one of which is foreign source
passive income. For this purpose, foreign source passive income includes
dividends, interest, capital gains and certain foreign currency gains. As a
consequence, certain stockholders may not be able to claim a foreign tax credit
for the full amount of their proportionate share of foreign taxes paid by the
Fund although taxes that cannot be claimed in the year they are paid as a result
of this limitation may be carried back or carried forward to certain prior or
succeeding years. Each stockholder will be notified within 60 days of the close
of the Fund's taxable year whether, pursuant to the election described above,
the foreign taxes paid by the Fund will be treated as paid by its stockholders
for that year and, if so, such notification will designate (i) such
stockholder's portion of the foreign taxes paid and (ii) the portion of the
Fund's dividends and distributions that represents income derived from foreign
sources.
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Foreign Stockholders
Taxation of a stockholder who, as to the United States, is a foreign
investor depends, in part, on whether the stockholder's income from the Fund is
"effectively connected" with a United States trade or business carried on by the
stockholder.
If the foreign investor is not a resident alien and the income from the
Fund is not effectively connected with a United States trade or business carried
on by the foreign investor, distributions of net investment income and net
realized short-term capital gains will be subject to a 30% (or lower treaty
rate) United States withholding tax. Furthermore, foreign investors may be
subject to an increased United States tax on their income resulting from the
Fund's election (described above) to "pass-through" amounts of foreign taxes
paid by the Fund, but may not be able to claim a credit or deduction with
respect to the foreign taxes treated as having been paid by them. Distributions
of net realized long-term capital gains, amounts retained by the Fund which are
designated as undistributed capital gains, and gains realized upon the sale of
shares of the Fund will not be subject to United States tax unless a foreign
investor who is a nonresident alien individual is physically present in the
United States for more than 182 days during the taxable year and, in the case of
gain realized upon the sale of Fund shares, unless (i) such gain is attributable
to an office or fixed place of business in the United States or (ii) such
nonresident alien individual has a tax home in the United States and such gain
is not attributable to an office or fixed place of business located outside the
United States. If the Fund retains capital gains and designates such amounts as
described above, foreign stockholders who are not subject to U.S. federal income
tax on net capital gains can obtain a refund of their proportionate shares of
the taxes paid by the Fund by filing a U.S. federal income tax return. In the
case of a foreign investor who is a nonresident alien individual, the Fund may
be required to withhold U.S. federal income tax at a rate of 31%, unless the
foreign investor files an appropriate form certifying under penalty of perjury
as to his nonresident alien status.
If a foreign investor is a resident alien or if dividends or distributions
from the Fund are effectively connected with a United States trade or business
carried on by the foreign investor, dividends of net investment income,
distributions of net short-term and long-term capital gains, amounts retained by
the Fund that are designated as undistributed capital gains and any gains
realized upon the sale of shares of the Fund will be subject to United States
income tax at the rates applicable to United States citizens or domestic
corporations. If the income from the Fund is effectively connected with a United
States trade or business carried on by a foreign investor that is a corporation,
then such foreign investor also may be subject to the 30% branch profits tax at
a 30% rate (or lower treaty rate) on its effectively connected earnings and
profits withdrawn from its U.S. trade or business.
The tax consequences to a foreign stockholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Stockholders may be required to provide appropriate documentation
to establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is effectively connected with a United States
trade or business carried on by them, (b) whether they may claim the benefits of
an applicable tax treaty and (c) any other tax consequences to them resulting
from an investment in the Fund.
Notices
Stockholders will be notified annually by the Fund as to the United States
federal income tax status of the dividends, distributions and deemed
distributions made by the Fund to its stockholders. Furthermore, stockholders
will be sent, if appropriate, various written notices after the close of the
Fund's taxable year as to the U.S. federal income tax status of certain
dividends, distributions and deemed distributions that were paid (or that were
treated as having been paid) by the Fund to its stockholders during the
preceding taxable year.
OTHER TAXATION
Dividends, distributions and deemed distributions also may be subject to
additional state, local and foreign taxes depending on each stockholder's
particular position. Investors should consult with their tax advisers concerning
the state, local and foreign tax consequences, if any, resulting from an
investment in the Fund.
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THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY
INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE
OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT HIS OWN TAX ADVISER
WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF PARTICIPATION IN THE
FUND, INCLUDING THE EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN, AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock, $0.01 par value. Shares of the Fund, when issued, will be fully paid and
nonassessable and will have no conversion, preemptive or other subscription
rights. Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by stockholders and are not able to cumulate their
votes in the election of Directors. Thus, holders of more than 50% of the shares
voting for the election of Directors have the power to elect 100% of the
Directors. All shares are equal as to assets, earnings and the receipt of
dividends and distributions, if any, as may be declared by the Board of
Directors out of funds available therefor. In the event of liquidation,
dissolution or winding up of the Fund, each share of Common Stock is entitled to
receive its proportion of the Fund's assets remaining after payment of all debts
and expenses. The Fund's Board of Directors has the authority to classify and
reclassify any authorized but unissued shares of capital stock and to establish
the rights and preferences of such unclassified shares.
The Fund does not presently intend to offer additional shares of Common
Stock, except that additional shares may be issued under the Plan. Other
offerings of the Fund's shares will require approval of the Fund's Board of
Directors and may require stockholder approval. Any such additional offerings
would also be subject to the requirements of the 1940 Act, including the
requirement that shares may not be sold at a price below the then current net
asset value (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing stockholders or with the consent of a
majority of the Fund's shares.
The Fund is a closed-end investment company, and as such its stockholders
do not have the right to cause the Fund to redeem their shares of Common Stock.
The Fund, however, may repurchase shares of Common Stock from time to time in
the open market or in private transactions when it can do so at prices at or
below the current net asset value per share on terms that represent a favorable
investment opportunity. Subject to its investment limitations, the Fund may
borrow to finance the repurchase of shares. However, the payment of interest on
such borrowings will increase the Fund's expenses and consequently reduce net
income. In addition, the Fund is required under the 1940 Act to maintain "asset
coverage" of not less than 300% of its "senior securities representing
indebtedness" as such terms are defined in the 1940 Act.
The Fund's shares of Common Stock will trade in the open market at a price
which is a function of several factors, including their net asset value and
yield. The shares of closed-end investment companies frequently sell at a
discount from, but sometimes at or at a premium over, their net asset values.
See "Risk Factors and Special Considerations." There can be no assurance that it
will be possible for investors to resell shares of the Fund at or above the
price at which shares are offered by this Prospectus or that the market price of
the Fund's shares will equal or exceed net asset value. The Fund may from time
to time repurchase its shares at prices below their net asset value or make a
tender offer for its shares. While this may have the effect of increasing the
net asset value of those shares that remain outstanding, the effect of such
repurchases on the market price of the remaining shares cannot be predicted.
Any offer by the Fund to repurchase shares will be made at a price based
upon the net asset value of the shares at the close of business on or within 14
days after the last date of the offer. Each offer will be made and stockholders
notified in accordance with the requirements of the 1934 Act and the 1940 Act,
either by publication or mailing or both. Each offering document will contain
such information as is prescribed by such laws and the rules and regulations
promulgated thereunder. When a repurchase offer is authorized by the Fund's
Board of Directors, a stockholder wishing to accept the offer may be required to
offer to sell all (but not less than all) of the shares owned by such
stockholder (or attributed to him for federal income tax
39
<PAGE> 42
purposes under Section 318 of the Code). The Fund will purchase all shares
tendered in accordance with the terms of the offer unless it determines to
accept none of them (based upon one of the conditions set forth below). Persons
tendering shares may be required to pay a service charge to help defray certain
costs of the transfer agent. Any such service charges will not be deducted from
the consideration paid for the tendered shares. During the period of a
repurchase offer, the Fund's stockholders will be able to determine the Fund's
current net asset value (which will be calculated weekly) by use of a tollfree
telephone number.
In the event that the Fund would have to liquidate certain investments to
finance such repurchases of shares, and the portfolio securities to be
liquidated have been held less than three months, such sales may jeopardize the
Fund's status as a regulated investment company under the Code because of the
limitation imposed thereunder that not more than 30% of the Fund's gross income
may be derived from the sale of securities held for less than three months. The
Fund's Articles of Incorporation and By-Laws include provisions that could limit
the ability of others to acquire control of the Fund, to modify the structure of
the Fund or to cause it to engage in certain transactions. These provisions,
described below, also could have the effect of depriving stockholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of the Fund in a
tender offer or similar transaction. In the opinion of the Fund, however, these
provisions offer several possible advantages. They potentially require persons
seeking control of the Fund to negotiate with its management regarding the price
to be paid for the shares required to obtain such control, they promote
continuity and stability and they enhance the Fund's ability to pursue long-term
strategies that are consistent with its investment objective.
The Fund's Articles of Incorporation provide that the Fund's Board of
Directors have the sole power to adopt, alter or repeal the Fund's By-Laws. The
Directors are divided into three classes, each having a term of three years,
with the term of one class expiring each year. In addition, a Director may be
removed from office only with cause and only by a majority of the Fund's
stockholders, and the affirmative vote of 75% or more of the Fund's outstanding
shares is required to amend, alter or repeal the provisions in the Fund's
Articles of Incorporation relating to amendments to the Fund's By-Laws and to
removal of Directors. See "Management of the Fund -- Directors and Officers of
the Fund." These provisions could delay the replacement of a majority of the
Directors and have the effect of making changes in the Board of Directors more
difficult than if such provisions were not in place.
The affirmative vote of the holders of 75% or more of the outstanding
shares is required to (1) convert the Fund from a closed-end to an open-end
investment company, (2) merge or consolidate with any other entity or enter into
a share exchange transaction in which the Fund is not the successor corporation,
(3) dissolve or liquidate the Fund, (4) sell all or substantially all of its
assets, (5) cease to be an investment company registered under the 1940 Act or
(6) issue to any person securities in exchange for property worth $1,000,000 or
more, exclusive of sales of securities in connection with a public offering,
issuance of securities pursuant to a dividend reinvestment plan or other stock
dividend or issuance of securities upon the exercise of any stock subscription
rights. However, if such action has been approved or authorized by the
affirmative vote of at least 70% of the entire Board of Directors, the
affirmative vote of only a majority of the outstanding shares would be required
for approval, except in the case of the issuance of securities, in which no
stockholder vote would be required unless otherwise required by applicable law.
The affirmative vote of the holders of 75% or more of the outstanding shares
entitled to vote thereon is required to amend, alter or repeal the foregoing
provisions of the Fund's Articles of Incorporation. The principal purpose of the
above provisions is to increase the Fund's ability to resist takeover attempts
and attempts to change the fundamental nature of the business of the Fund that
are not supported by either the Board of Directors or a large majority of the
stockholders. These provisions make it more difficult to liquidate, takeover or
open-end the Fund and thereby are intended to discourage investors from
purchasing its shares with the hope of making a quick profit by forcing the Fund
to change its structure. These provisions, however, would apply to all actions
proposed by anyone, including management, and would make changes in the Fund's
structure accomplished through a transaction covered by the provisions more
difficult to achieve. The foregoing provisions also could impede or prevent
transactions in which holders of shares of Common Stock might obtain prices for
their shares in excess of the current market prices at which the Fund's shares
were then trading. Although these provisions could have the effect of depriving
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Fund, the Fund believes the conversion of the Fund from a closed-end to
40
<PAGE> 43
an open-end investment company to eliminate the discount may not be desired by
stockholders, who purchased their Common Stock in preference to stock of the
many mutual funds available.
The Fund intends to hold annual meetings of its stockholders as required by
the rules of the New York Stock Exchange. Under Maryland law and the Fund's
By-Laws, the Fund will call a special meeting of its stockholders upon the
written request of stockholders entitled to cast at least 25% of all the votes
at such meeting. Such request for such a special meeting must state the purpose
of the meeting and the matters proposed to be acted on at it. The secretary of
the Fund is required to (i) inform the stockholders who make the request of the
reasonably estimated cost of preparing and mailing a notice of the meeting and
(ii) on payment of these costs to the Fund, notify each stockholder entitled to
notice of the meeting. Notwithstanding the above, under Maryland law and the
Fund's By-Laws, unless requested by stockholders entitled to cast a majority of
all the votes entitled to be cast at the meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of the stockholders held during the preceding 12
months.
41
<PAGE> 44
UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement, dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated is acting as Representative, have severally agreed to
purchase, and the Fund has agreed to sell to them, severally, the number of
shares of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------
<S> <C>
Morgan Stanley & Co. Incorporated.........................
Donaldson, Lufkin & Jenrette..............................
A.G. Edwards & Sons, Inc..................................
Cowen & Company...........................................
Fahnestock & Co. Inc......................................
EVEREN Securities, Inc....................................
---------
Total..................................................... 5,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Shares are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are committed to take and pay for all of the Shares
(other than those covered by the over-allotment options described below) if any
are taken.
The Underwriters have advised the Fund that they propose to offer the
Shares initially at the public offering price set forth on the cover page of
this Prospectus. There is no sales charge or underwriting discount charged to
investors on purchases of Shares in the offering. The Investment Manager or an
affiliate (not the Fund) has agreed to pay the Underwriters from its own assets
a commission in connection with sales of the Shares in the offering (other than
Shares acquired for accounts managed by the Investment Manager), in the gross
amount of $ per Share. Such payment is equal to % of the initial public
offering price per Share. From this amount, the Underwriters may allow to
selected dealers a payment in an amount not in excess of $ per Share sold by
such dealers and such dealers may reallow a payment not in excess of $ per
Share to certain other dealers.
Pursuant to the Underwriting Agreement, the Fund and the Investment Manager
have agreed to indemnify the several Underwriters in connection with this
offering against certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
The Fund has granted to the Underwriters options, exercisable from time to
time for up to 45 days from the date of this Prospectus, to purchase up to
750,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus. The Underwriters may exercise
such options solely for the purpose of covering over-allotments, if any,
incurred in the sale of the Shares offered hereby.
The Fund has agreed in the Underwriting Agreement not to offer, sell,
contract to sell or otherwise dispose of any Shares or any securities
convertible into or exchangeable for Common Stock for a period of 180 days after
the date of this Prospectus, without the prior written consent of Morgan Stanley
& Co. Incorporated, as representative of the several Underwriters, provided that
the Fund may issue shares under its dividend reinvestment and cash purchase plan
during such 180-day period.
Prior to the offering, there has been no public market for the Common Stock
or any other securities of the Fund. Consequently, the initial public offering
price has been determined by negotiations among the Fund, the Investment Manager
and the Underwriters. There can be no assurance, however, that the price at
which the Shares will sell in the public market after the offering will not be
lower than the price at which they are sold by the Underwriters.
In order to satisfy one of the requirements for listing of the Fund's
Common Stock on the New York Stock Exchange, the Underwriters will undertake to
sell lots of 100 or more Shares to a minimum of 2,000 beneficial holders in the
United States.
42
<PAGE> 45
The Investment Manager is an affiliate of Morgan Stanley & Co.
Incorporated. Certain Directors and officers of the Fund are also affiliated
with Morgan Stanley & Co. Incorporated. The Fund anticipates that Morgan Stanley
& Co. Incorporated and certain of the other Underwriters may from time to time
act as brokers or dealers in connection with the execution of the Fund's
portfolio transactions after they have ceased to be selling agents or
underwriters of the Fund's Common Stock and, subject to certain restrictions,
may act as brokers while they are selling agents or underwriters.
Employees of the Investment Manager and its affiliates, and directors and
officers of the Fund and any other investment company managed by the Investment
Manager, may purchase Shares in this offering at the price appearing on the
cover page of this Prospectus, provided that the Shares must be held by the
investor for up to 90 days and, provided further, that if the Shares trade in
the secondary market at a premium over the public offering price when secondary
trading commences, sales to these associated persons will be canceled.
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company (the "Transfer Agent") acts as the
Fund's dividend paying agent, transfer agent and the registrar for the Fund's
Common Stock. The principal address of the Transfer Agent is 40 Wall Street, New
York, New York 10005.
CUSTODIANS
Morgan Stanley Trust Company is the custodian for the Fund's assets held
outside the United States (the "International Custodian"). The principal
business address of the International Custodian is One Pierrepont Plaza,
Brooklyn, New York 11201.
Under a custody agreement (the "International Custody Agreement") between
the International Custodian and the Fund, the International Custodian has agreed
to hold all property of the Fund delivered to it in safekeeping in a segregated
account, receive and collect all income and transaction proceeds with respect to
such property, accept and deliver securities on the purchase, sale, redemption,
exchange or conversion thereof, pay from the Fund's account the purchase price
of any securities acquired by the Fund, as well as any taxes and other expenses
payable in connection with securities transactions, maintain all necessary books
and records with respect to the property of the Fund held by it, provide the
Fund with periodic reports regarding the Fund's account and, in general, attend
to all nondiscretionary details in connection with the sale, purchase, transfer
and other dealings with the securities and other property of the Fund held by
it.
For its services the International Custodian will receive a fee calculated
as a percentage of the Fund's assets in its custody, plus an amount for each
transaction effected in the Fund's account. In addition, the International
Custodian will be reimbursed by the Fund for any out-of-pocket expenses incurred
by it in connection with the performance of its duties under the International
Custody Agreement. The International Custody Agreement provides that the Fund
shall indemnify the International Custodian against any liability, loss or
expense (including attorneys fees and disbursements) incurred in connection with
the International Custody Agreement, except to the extent such liability, loss
or expense results from the negligence or willful misconduct of or breach by the
International Custodian or any sub-custodian.
The International Custodian may employ one or more sub-custodians outside
the United States that are approved by the Board of Directors in accordance with
regulations under the 1940 Act. The fees and expenses of any such sub-custodians
are paid by the International Custodian.
The Chase Manhattan Bank is the custodian for the Fund's assets held in the
United States (in such capacity, the "U.S. Custodian"). For its services, the
U.S. Custodian will receive a fee calculated as a percentage of the Fund's
assets in its custody, plus an amount for each transaction effected in the
Fund's account. The principal business address of the U.S. Custodian is 770
Broadway, New York, New York 10003.
43
<PAGE> 46
EXPERTS
The statement of assets and liabilities of the Fund has been included in
this Prospectus in reliance upon the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. The address of Price Waterhouse LLP is 1177 Avenue of the Americas,
New York, New York 10036.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Fund by Rogers & Wells, New York and by its special Maryland counsel, Piper &
Marbury L.L.P., Baltimore, Maryland. Certain legal matters will be passed upon
for the Underwriters by Davis Polk & Wardwell, New York, New York.
It is likely that foreign persons, such as any sub-custodians of the Fund,
will not have assets in the United States that could be attached in connection
with any U.S. action, suit or proceeding. The Fund has been advised that there
is substantial doubt as to the enforceability in the countries in which such
persons reside of the civil remedies and criminal penalties afforded by the U.S.
federal securities laws. It is also unclear if extradition treaties now in
effect between the United States and any such countries would subject such
persons to effective enforcement of criminal penalties.
The books and records of the Fund required under U.S. law will be
maintained at the Fund's principal office in the United States and will be
subject to inspection by the Commission.
ADDITIONAL INFORMATION
The Fund has filed with the U.S. Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the U.S. Securities Act
of 1933, as amended, with respect to the Common Stock offered hereby. Further
information concerning the Shares and the Fund may be found in the Registration
Statement, of which this Prospectus constitutes a part. The Registration
Statement may be inspected without charge at the Commission's office in
Washington, D.C., and copies of all or any part thereof may be obtained from
such office after payment of the fees prescribed by the Commission. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants,
including the Fund, that file electronically with the Commission.
44
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
Morgan Stanley Russia & New Europe Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of Morgan
Stanley Russia & New Europe Fund, Inc. (the "Fund") at , 1996 in
conformity with generally accepted accounting principles. This financial
statement is the responsibility of the Fund's management; our responsibility is
to express an opinion on this financial statement based on our audit. We
conducted our audit of this financial statement in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
, 1996
45
<PAGE> 48
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Assets:
Cash.......................................................................... $
Deferred organization expenses (Note 1).......................................
--------
Total Assets............................................................... $
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Organization Expenses Payable................................................. $
Commitments and Contingencies (Note 2)........................................
--------
Total Liabilities.......................................................... $
--------
Stockholder's Equity:
Common Stock, $.01 par value, authorized 100,000,000 shares;
shares issued and outstanding..............................................
--------
Paid-in Surplus...............................................................
--------
Total Stockholder's Equity....................................................
--------
Total Liabilities and Stockholder's Equity.................................... $
========
Net Assets...................................................................... $
========
Net Asset Value per share....................................................... $
========
</TABLE>
NOTE 1. ORGANIZATION:
Morgan Stanley Russia & New Europe Fund, Inc. (formerly Morgan Stanley
European Emerging Markets Fund, Inc.) (the "Fund") was organized in Maryland on
February 3, 1994 and is registered with the Securities and Exchange Commission
as a non-diversified closed-end management investment company under the
Investment Company Act of 1940. The Fund has had no operations other than the
issue of shares of its common stock on , 1996 to Morgan Stanley
Asset Management Inc. ("MSAM" or the "Investment Manager"). Organization costs
estimated at $ will be deferred and amortized on a straight-line basis
over a 60-month period from the date the Fund commences operations.
NOTE 2. AGREEMENTS:
The Fund intends to enter into an Investment Advisory and Management
Agreement with the Investment Manager pursuant to which the Investment Manager
will be responsible for providing investment management services to the Fund.
For its services under the Investment Advisory and Management Agreement, MSAM
will receive a fee, computed weekly and payable monthly, at the rate of 1.60% of
the Fund's average weekly net assets. The Investment Manager has agreed to pay
the Fund's offering expenses in connection with the initial public offering of
the Fund's Common Stock in order to maintain a net asset value of $20.00 per
share immediately following the completion of the offering.
The Fund intends to enter into an administrative agreement with The Chase
Manhattan Bank (the "Administrator") pursuant to which Chase Global Funds
Services Company ("Chase Global"), an affiliate of
46
<PAGE> 49
the Administrator, will provide the Fund with certain administrative services.
For its administrative services, the Administrator will receive an annual fee of
$ plus % of the average weekly net assets of the Fund. Certain
employees of Chase Global are officers of the Fund.
The Fund also intends to enter into a custody agreement with Morgan Stanley
Trust Company (the "International Custodian") pursuant to which the
International Custodian will provide the Fund with custody services for the
Fund's assets held outside the United States. With respect to its assets in the
United States, the Fund intends to enter into another custody agreement with The
Chase Manhattan Bank (in such capacity, the "U.S. Custodian"). The custody
agreements with the International Custodian and the U.S. Custodian provide for
an annual fee based on the amount of assets under custody, plus transactional
fees.
47
<PAGE> 50
APPENDIX A
LIST OF RNE COUNTRIES
Albania
Armenia
Azerbaijan
Belarus
People's Republic of Bulgaria
Croatia
Czech Republic
Estonia
Georgia
Republic of Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Macedonia
Moldova
Montenegro
Republic of Poland
Romania
Russian Federation
Serbia
Slovakia
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
A-1
<PAGE> 51
APPENDIX B
RUSSIA AND NEW EUROPEAN COUNTRIES
The information set forth in this Appendix has been extracted from various
sources believed by the Fund to be reliable. However, the Fund makes no
representation as to the accuracy of the information, nor has the Fund or its
Board of Directors attempted to verify it. Furthermore, no representation is
made that any correlation will exist between RNE countries, economies or stock
markets in general and the performance of the Fund.
INTRODUCTION
A complete list of countries in which the Fund intends to invest (the "RNE
countries") is set forth in Appendix A and includes Russia, the other former
Soviet Republics and countries in Central and Eastern Europe. The Fund
anticipates that initially its investments will consist primarily of listed
equity securities, unlisted equity securities and debt instruments of issuers in
Russia, the Czech Republic, Poland and Hungary, which are currently the RNE
countries that the Fund believes offer the greatest opportunity for immediate
investment. Investment opportunities also exist, on a more limited basis, in
Bulgaria, Croatia, Slovenia, Slovakia, the Ukraine and the Baltic States
(Lithuania, Latvia and Estonia). As opportunities develop, investments may be
made in Albania, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan,
Macedonia, Moldova, Montenegro, Romania, Serbia, Tajikistan, Turkmenistan and
Uzbekistan. The economies and securities markets of the Czech Republic, Poland
and Hungary, as well as Russia, are separately discussed below. Data on the
United States, the European Community and Germany appear for comparative
purposes only.
Political and Economic Developments. Most RNE countries have had centrally
planned economies which were primarily influenced by socialist or communist
political philosophies and were characterized by nationalized industries, fixed
prices and limited external trade. Over the past several years, most of these
countries have undertaken political and economic reforms, founded upon an
ideological shift from socialism or communism to capitalism. These reforms have
had the effect, with varying degrees of success, of creating market-driven
economies and have made foreign investment in these countries possible.
The transition to a market-driven economy has been difficult in most of the
formerly socialist or communist RNE countries and had the immediate effect of
high inflation rates, increased unemployment and a significant decline in living
standards as real wages fell. In addition, most of these countries' external
trade was formerly limited to the former Soviet Union and other Warsaw Pact
countries. As a consequence of all of these factors, many of these countries
have experienced a significant drop in GDP.
In the last two years, these reforms have led to an improvement in the
economies of the more developed RNE countries. The economies of the Czech
Republic, Poland and Hungary have been growing in real terms over the last two
years, and the Organization for Economic Cooperation and Development (the
"OECD") forecasts real GDP growth in Russia in 1996. In addition, significant
progress has been made in all of these countries in reducing inflation and
government budget deficits.
In 1995, the combined total GDP of Russia, the Czech Republic, Poland and
Hungary was approximately $570.1 billion and the combined total GDP of all RNE
countries was approximately $750 billion. By way of comparison, in the same
period, the GDP for the United States was $7.3 trillion. In 1995, the average
GDP per capita of the Czech Republic, Poland and Hungary was $3,865. By way of
comparison, in the same year, the GDP per capita for Germany was $29,643.
The Investment Manager believes that current conditions in most RNE
countries will result in a significant level of economic activity, offering the
potential for long-term capital appreciation from investment in equity
securities of RNE country issuers and Sovereign Debt. The strategic location of
these countries between Western Europe and Asia should benefit the economies of
many RNE countries by permitting them to take advantage of the modernization,
technology and capital available in Western Europe and the large consumer base
of Asia. Many RNE countries have privatized and are privatizing formerly
state-run enterprises and there is a substantial restructuring of established
industries as their economies shift from
B-1
<PAGE> 52
quota-driven command economies to free market, supply and demand-driven
economies and companies begin to identify and exploit domestic and export
markets. The private sector, however, is not as developed in RNE countries as it
is in Western Europe.
The total population of RNE countries is approximately 410 million (more
than 6% of the world's population). The population of most RNE countries is
well-educated, with literacy rates that compare favorably to those in Western
Europe. For example, in the Czech Republic, Poland and Hungary, the literacy
rates averaged 99% in 1993 as compared with 100% in Germany in the same period.
Annual wage rates, however, in the Czech Republic, Poland and Hungary are
significantly lower than in the United States and Germany, averaging $5,024 in
1995 for workers in the manufacturing industries.
It should be noted, however, that RNE countries have adopted the principles
of capitalism with varying degrees of success. The ideological shift from
communism to capitalism and the accompanying changes from a centrally-planned
economy to one driven by demand has, in the view of the Investment Manager,
better positioned the RNE countries to begin the process of "catching up" (i.e.,
achieve parity in living standards) with Western Europe. However, the process
has been difficult and there can be no guarantee that these countries will not
abandon their reforms under political pressure, especially as the process of
moving to a market economy may in the short-term be painful and cause a certain
amount of social injustice. Some of these countries, including Armenia,
Azerbaijan, Georgia, Montenegro, Romania and Serbia, are currently characterized
by varying degrees of political instability. Consequently, the reforms
undertaken in these countries may or may not be completed. Although there has
been a great increase in foreign investment in RNE countries, there can be no
guarantee that the infusion of capital will be sufficient to allow the countries
to "catch up," or achieve parity with developed countries in terms of economic
development. In addition, there is the risk that if reforms are abandoned
foreign assets could be nationalized or expropriated.
B-2
<PAGE> 53
SELECTED ECONOMIC DATA OF CERTAIN RNE COUNTRIES
<TABLE>
<CAPTION>
CONSUMER PRICE
GDP 1995 GDP PER CAPITA, POPULATION INFLATION
COUNTRY (US$ BILLIONS) 1995(US$) 1993(MILLIONS) LITERACY RATE 1995
- ------------------------ ----------------- ----------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Albania................. $ 2.45(e) $ 726(e) 3.4 100% 8.0%
Armenia................. 0.13(e) 36(e) 3.7 n/av 176.0
Azerbaijan.............. 1.58(e) 213(e) 7.4 n/av 412.0
Belarus................. 2.74(e) 266(e) 10.3 n/av 250.0
Bulgaria................ 13.01(e) 1,550(e) 8.5 96 62.0
Croatia................. 16.00(e) 3,347(e) 4.8 97 2.0
Czech Republic.......... 44.94(e) 4,320(e) 10.3 100 9.1
Estonia................. 3.51(e) 2,340(e) 1.5 100 28.8
Georgia................. 0.05(e) 10(e) 5.6 98 250.0
Hungary................. 43.75 4,248 10.3 99 28.2
Latvia.................. 5.84(e) 2,246(e) 2.6 n/av 23.2
Lithuania............... 6.09(e) 1,646(e) 3.7 n/av 35.5
Moldova................. 1.70(e) 386(e) 4.4 96 30.0
Poland.................. 117.46 3,027 38.4 99 26.8
Romania................. 3.55 1,567 22.8 97 32.3
Russia.................. 363.98 2,456 148.5 98 198.0
Serbia and Montenegro... 14.80 1,404 10.7 n/av 79.0
Slovakia................ 17.38 3,219 5.3 100 99
Slovenia................ 18.55 9,369 2.0 99 12.6
Ukraine................. 31.90(e) 624(e) 51.1 98 380.0
</TABLE>
- ---------------
Sources: The World Almanac, 1996; The World Bank Atlas, 1995; The Economist
Intelligence Unit Country Reports, 1996.
n/av = not available
e = estimated
Securities Markets. Among RNE countries, there are active stock markets in
Russia, the Czech Republic, Hungary and Poland. There are also less active stock
markets in Bulgaria, Croatia, Estonia, Latvia, Lithuania, Slovenia, Slovakia and
the Ukraine and the Fund expects that stock markets will develop in other RNE
countries in the near future.
The securities markets of RNE countries continue to develop rapidly
following the implementation of political and economic reforms. These markets
are largely affected by the inflow of international funds which in turn is
affected by world economic events and monetary policy. The returns from these
markets may show a low correlation with global equity markets thereby providing
opportunities for investment diversification. The securities markets of Russia,
the Czech Republic, Poland and Hungary have developed fastest and had a total
market capitalization of over $50 billion as of December 31, 1995. By
comparison, the aggregate market capitalization on the New York Stock Exchange
was $6.0 trillion as of December 31, 1995. During 1995, the average weekly
trading volume on the exchanges of the Czech Republic, Poland and Hungary was
approximately $69.8 million, $53.3 million and $6.8 million, respectively. As
Russian securities are primarily traded over the counter, no official weekly
volume figures are available. The average weekly trading volume on the New York
Stock Exchange during 1995 was approximately $59.3 billion.
B-3
<PAGE> 54
STOCK MARKET DATA FOR CERTAIN RNE COUNTRIES
<TABLE>
<CAPTION>
MARKET PRICE/
CAPITALIZATION NUMBER OF EARNINGS
AT DECEMBER 31, 1995 LISTED SECURITIES RATIO
(US$ BILLIONS) AT DECEMBER 31, 1995 AT DECEMBER 31, 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Czech Republic....................... $15.66 65(2) 11.2
Hungary.............................. 2.40 42 12.0
Poland............................... 4.56 65 7.0
Russia............................... 15.86 50(3) n/av
Taiwan............................... 187.21 347 21.4
United States (1).................... 6,013 2,675 18.5
</TABLE>
- ---------------
Source: International Finance Corporation, Emerging Stock Market Factbook 1996.
(1) New York Stock Exchange only.
(2) In addition, approximately 1,635 companies are traded over-the-counter.
(3) Number of stocks listed on the Moscow Times 50.
n/av = not available
<TABLE>
<CAPTION>
STOCK INDICES
DATE OF ----------------------------------
STOCK MARKET DECEMBER DECEMBER DECEMBER
ESTABLISHMENT 1993 1994 1995
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Czech Republic (1)........................... June 1993 n/av 557 426
Hungary (2).................................. June 1990 1264.1 1470.1 1528.9
Poland (3)................................... April 1991 12,439.0 7473.1 7859.5
Russia(4).................................... March 1994 n/av 92.9 62.7
</TABLE>
- ---------------
Source: International Finance Corporation, Emerging Stock Market Factbook 1996.
(1) PX 50 (April 1994 = 1,000).
(2) BSE BUX (January 1992 = 1,000).
(3) WIG All Share Perf. (April 1991 = 1,000).
(4) MT 50 (August 1994 = 100).
n/av = not available
RUSSIA
Introduction. The Russian Federation has a land area of approximately 6.6
million square miles. By the middle of 1995, it had a population of
approximately 148.5 million, which accounts for approximately 40% of the
population of all of the RNE countries.
Political and Economic Developments. At the beginning of the 20th century,
the Russian Empire extended throughout vast territories in Eastern Europe and
included most of northern and central Asia. It was ruled as an autocracy by the
Romanov dynasty. Discontent, especially in the urban areas, grew in the first
decade of the 20th century. Token reforms were made by the government, but were
insufficient to placate the increasingly restive workers and peasants. In
February 1917, the Tsar abdicated. A provisional government was formed, but it
was soon replaced by the Bolsheviks in November 1917. A Federation was formed,
but it, in turn, was replaced by the Union of Soviet Socialist Republics (the
"Soviet Union") in 1922. The Soviet Union experienced considerable hardship as a
result of the collectivization campaign in the early 1930s and the widespread
repression under Stalin, who established a dictatorship after the death of Lenin
in 1924. Shortly after the death of Stalin in 1953, Nikita Khrushchev assumed
predominance in the Soviet leadership. He instituted certain political and
economic reforms, but was overthrown in 1964 and replaced by Leonid Brezhnev.
Throughout the 1970s, Soviet economic performance gradually worsened.
Brezhnev's successor, Yuri Andropov made some cautious attempts at economic
reforms during his short tenure. These reforms were continued and greatly
expanded under Mikhail Gorbachev. In the early 1990s, the Soviet Republics
became, by stages, first states in a loose federation, then fully independent
states, some of which were constituted into the Commonwealth of Independent
States. The Soviet Union was dissolved in December 1992.
B-4
<PAGE> 55
In June 1991, Boris Yeltsin was elected president of Russia. He proceeded
to propose and implement a variety of political and economic reforms to
transform Russia from a centrally-planned economy to a market oriented system,
although many of these reforms were considered controversial and were delayed by
political maneuvering and opposition. In July 1996, Yeltsin succeeded in winning
re-election but questions concerning his health continue to be raised.
Although statistical indicators show that Russia's economy is improving,
Russia has suffered severe economic hardship over the past five years. The
economic reforms initiated by Yeltsin's government since January 1992 have
sought to liberalize most prices, reduce central government expenditures and
achieve lasting structural changes by means of the transfer to private ownership
of state enterprises. Considerable progress has been made towards these goals. A
far reaching privatization scheme has been implemented which has resulted in
almost 80% of the industrial workforce shifting from the state to the private
sector. The vast majority of retail prices have been liberalized, which resulted
in high inflation through 1995. In addition, dramatic re-structuring has
occurred in many of Russia's key industries such as the energy sector. The
rouble has become freely convertible for trade purposes, and, although it has
suffered tremendous depreciation over the last five years, it now trades within
a managed "crawling band" against the U.S. dollar. The International Monetary
Fund ("IMF") has recognized Russia's progress and in 1996 granted a further
three year $10.1 billion loan program, complementing its earlier standby
facility of $6.8 billion in 1995. The $10.1 billion loan is to be dispensed over
the three years subject to the fulfillment of various economic criteria. As a
result of spending related to Yeltsin's campaign for re-election, the IMF
recently withheld the July installment of the loan and is expected to reconsider
the release of the funds in August. Russia has also managed to make significant
progress in re-structuring its debts with both the Paris and London Clubs of
creditors.
Russia's economy has not displayed positive growth since 1990, but most
recently the rate of contraction has fallen substantially. The rate of GDP
growth, in real terms, was -8.7% in 1993, -12.6% in 1994 and -4.0% in 1995.
The relaxation of price controls caused inflation to reach a high of 2,000%
per annum in 1991. Since then the rate of inflation has fallen to 876% in 1993,
307% in 1994 and 198% in 1995. Inflation has continued to decline dramatically
during 1996 with monthly April inflation being recorded at 2.2% for the month.
These recent statistics indicate that Russia's drastic economic reforms
have produced encouraging results, and the economic situation appears to be
stabilizing. However, opposition parties to the reform process are still a
strong political force, particularly in the Russian parliament. President
Yeltsin's reelection, by a substantial margin, in July of 1996 has removed a
great deal of the political uncertainty in Russia, and has re-affirmed the
country's commitment to economic reform.
Securities Markets. After the 1990 law relating to the establishment of
securities exchanges, a significant number of exchanges were created throughout
Russia. This number has now fallen from over 200 exchanges to approximately 60
exchanges, the largest of which are located in Moscow, St. Petersburg and
Vladivostok. The vast majority of share transactions are carried out in the
over-the-counter market between Moscow brokers. A screen based system known as
the Russian Trading System ("RTS"), modeled on NASDAQ, has been in existence
since early 1995. Although the majority of large scale trades are executed
outside of RTS, the system is steadily increasing its share of market volume. As
a result of Russia's mass privatization process, there are a significant number
of companies whose equity securities could trade in Russia. However, during the
first quarter of 1996, approximately 104 issues were listed on the RTS, 50 of
which are included in the Moscow Times 50 index. Approximately 21 of those
issues are considered to be fully liquid, trading at least every three days. In
June 1996 the market capitalization of the top 50 stocks in Russia was
approximately $19 billion.
Russia's securities markets are regulated by the Federal Securities Market
Commission. Legislation has been recently passed to help the Commission protect
shareholders' rights and also to ensure against securities fraud. Although
shareholder protection is increasing in Russia, nearly all of the legislation is
new and has not been implemented or tested. The Moscow over-the-counter market
is also self-regulated by its brokers, through a body known as PAUFOR.
Membership in PAUFOR has certain requirements including minimum capitalization
and annual audits of financial statements. PAUFOR is responsible for the
maintenance of an orderly market, and has established numerous dealing practices
and rules.
B-5
<PAGE> 56
Clearing and settlement procedures in Russia, while improving, are still
being developed. Transfer of share ownership generally may only be effected
through the traded company's share registry and there may be significant delays
and difficulties in getting shares properly issued and registered. Certain
organizations, such as the National Registry Company, sponsored by the IFC and
the European Bank of Reconstruction and Development ("EBRD") , have been set up
to help with these problems and are beginning to become integrated into the
market.
Russian companies, with few exceptions, generally have no meaningful
historical financial data, and shareholder reporting obligations are unclear.
This is changing however, as many of the larger capitalized companies have
engaged Western accounting firms to help them prepare their financial
statements. Russian accounting differs significantly from Western accounting,
and as a result the current Russian accounts published by firms are unreliable.
Also, there are limitations on private security ownership and foreign ownership
of certain strategic industries, particularly those associated with national
defense.
SELECTED ECONOMIC DATA FOR RUSSIA
<TABLE>
<CAPTION>
1991 1992 1993(E) 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
GDP Growth.................................. -5.0% -14.5% -8.7% -12.6% -4.0%
Inflation Rate.............................. 93% 1,354% 876% 307% 198%
Total External Debt (US$ billions).......... $67.5 $79.0 $83.1 $94.2 $105.7(e)
Exchange Rate (Rouble per US$).............. 22 220 932 2,191 4,558
</TABLE>
- ---------------
Source: The Economist Intelligence Unit Country Reports, 1996.
e = estimated
THE CZECH REPUBLIC
Introduction. The Czech Republic has a land area of approximately 30,000
square miles. By the middle of 1995, it had a population of approximately 10.3
million, which accounts for nearly 3.0% of the population of all of the RNE
countries.
Political and Economic Developments. The Republic of Czechoslovakia was
established in 1918, following the collapse of the Austro-Hungarian Empire by
the joining of the Czech lands of Bohemia and Moravia, and Slovakia. From 1918
to 1939, a stable democratic system of government existed in Czechoslovakia and
the country's economy was considered to be the most industrialized and
prosperous in Eastern and Central Europe. Czechoslovakia was occupied by German
forces from 1939 to 1945. After the expulsion of the German forces, a communist
People's Republic was established in 1948 under the Soviet Union's influence.
Subsequently, the country aligned itself with the Soviet-led Eastern European
bloc, joining the Council for Mutual Assistance (CMEA) and the Warsaw Pact.
Czechoslovakia followed a rigid Stalinist pattern of government. In the 1960s,
reforms were undertaken that contemplated more genuine elections, greater
freedom of expression and greater separation of the Communist Party and the
State. However, Czechoslovakia's reformist policies were regarded by other
members of the Eastern European bloc and, in particular, the Soviet Union as
endangering the unity of the Warsaw Pact countries. In 1968, Warsaw Pact forces
invaded Czechoslovakia and replaced the government with a less reform-minded
government.
In the late 1980s, as a result of the general weakening of communist
control in many Eastern and Central European countries, a series of
demonstrations occurred, which led indirectly to the establishment of several
opposition parties. Late in 1989, a new government was formed with a majority of
non-Communist members. In 1990, the first free legislative elections since 1946
were held and this led to the establishment of a new federal government
committed to political and economic reform; Czechoslovakia became a federation
known as the "Czech and Slovak Republics." Subsequently, negotiations were held
to dissolve Czechoslovakia into separate states. In November 1992, the
Czechoslovakian Federal Assembly adopted legislation providing for the
constitutional disbanding of the Federation. On January 1, 1993, Czechoslovakia
officially became two separate nations, namely, the Czech Republic and Slovakia.
B-6
<PAGE> 57
Price controls in the former Czechoslovakia were removed in January 1991
and this led to a steep rise in inflation. In 1991, the consumer price index
rose at an annual rate of 56.6%. Since then, however, the implementation of a
tight monetary and fiscal policy by the government has resulted in a lessening
of inflation. In 1995, the consumer price index is estimated to have risen at an
annual rate of 9.1%. The Czech Central Bank remains vigilant in its fight
against inflation, and continues to implement a tight monetary policy using both
open market operations and higher reserve requirements. Reform policies
initially caused a fall in domestic demand which, combined with the loss of the
Soviet export market, resulted in a pronounced drop in output in 1991, with real
GDP falling by 14.2%. Since then, a recovery in domestic demand and a pronounced
improvement in exports has caused the economy to grow in real terms by 2.6% in
1994 and 4.8% in 1995. The Czech Republic has been extremely successful at
restricting state expenditures, and as a result has run a budget surplus over
the last three years. The budget surplus as a percentage of GDP has been 0.1%,
1.0% and 0.6% in 1993, 1994 and 1995 respectively. The Czech Republic has
fulfilled several of the economic and fiscal requirements set forth in the
Maastricht Treaty, namely, its budget deficit is less than 3% of GDP, government
debt is less than 60% of GDP and its currency has not been subject to
devaluation in the past two years.
The June 1996 parliamentary elections prevented the formation of a majority
government. A coalition, minority government has been formed by the former
Premier Vaclav Klaus. Despite these changes, it is expected that the Czech
Republic will continue on its reformist path.
Before the dissolution of Czechoslovakia, a large scale mass-privatization
program was implemented that distributed shares in almost 1,500 state-owned
companies with an estimated market capitalization of $10 billion to the citizens
of Czechoslovakia. The program has resulted in the rapid transfer of the
majority of state enterprises into the private sector, which is speeding
economic restructuring and recovery. Foreign companies have been able to
participate, to some extent, in the privatization process. Nominally or wholly
private firms now produce over 60% of the country's output. However, through the
National Property Fund, the government continues to hold significant minority
positions in most large Czech enterprises. Exports continue to play an important
role in the recovery of the economy. Despite the collapse of the Soviet Union in
1991 (formerly Czechoslovakia's largest trading partner), exporters entered into
other markets and hard-currency exports rose from approximately $13.0 million in
1993 to $14.0 million in 1994 and an estimated $17.0 million in 1995. As a
result of the growth in the economy, demand for imports has also increased
dramatically up 39.6% in 1995, and events caused the Czech republic to have an
increased but manageable current account deficit of 4.2% of GDP. Germany and
Austria are now the Czech Republic's principal trading partners, due in part to
their historic and geographic links with the Czech Republic. The Czech
government has entered into agreements with the European Community as well as
the European Free Trade Association and this has helped to further increase in
exports. The rate of unemployment stood at 2.9% in December 1995.
The Securities Market. The Prague Stock Exchange ("PSE") was originally
opened in 1871, but was closed at the end of World War II. The PSE was reopened
in June 1993 following the mass-privatization of state-owned industries. There
are only 65 companies that have satisfied the disclosure requirements of the PSE
and are officially "listed." Currently, there are 1,635 companies eligible for
over-the-counter trading, with approximately 330-350 companies trading actively
each session. At the end of 1995, the market capitalization of the PSE was
approximately $15.7 billion with an estimated weekly turnover of approximately
$69.8 million. Approximately 80% of this volume was from over-the-counter
trades. At the end of 1995, average price to earnings ratio of the PX 50 index
was 11.2. The Czech securities markets are regulated by a Securities Commission
established by the Ministry of Finance. The Securities Commission administers
and regulates the financial reporting system, supervises participants in the
securities markets and establishes guidelines for the listing of securities.
Clearing and settlement of trades occurs within three business days and is
effected through the Czech National Bank's Clearing Centre.
The Czech Commercial Code and the Accountancy Act, both promulgated in
1992, establish requirements relating to the capitalization, books and records
and auditing of Czech companies. All Czech enterprises are required to publish
financial reports, including an income statement and balance sheet. Currently,
companies with foreign participation, joint stock companies and certain limited
liability companies are required to have annually audited financial statements
which are approved by two auditors, one of which is
B-7
<PAGE> 58
required to be a Czech national and the other of which may be a foreign auditing
firm recognized by the Ministry of Finance.
Foreign Investment and Repatriation. Currently, there are no restrictions
on foreign portfolio investment except that certain restrictions exist with
respect to securities offered in privatizations or by financial or defense
institutions. There are no restrictions on the repatriation of the proceeds of
securities transactions. Since January 1, 1991, the Czech Koruna has been
internally convertible. The Czech National Bank is responsible for fixing
foreign exchange rates for the Koruna and controlling the Czech Republic's
monetary policy.
SELECTED ECONOMIC DATA FOR THE CZECH REPUBLIC
<TABLE>
<CAPTION>
1991(1) 1992(1) 1993 1994 1995
-------------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
GDP Growth............................. -14.2% -6.4% -0.9 % 2.6 % 4.8%
Inflation Rate......................... 56.6% 11.1% 20.8 % 10.0 % 9.1%
Current Account (US$ millions)......... $ 328 $ -140 $ 682 $ -81 $-1,900
Total External Debt (US$ billions)..... $7.2 $6.8 $8.5 $10.7 $14.9
Exchange Rate (Koruna per US$)......... 29.5 28.3 29.2 28.8 26.5
</TABLE>
- ---------------
Source: The Economist Intelligence Unit Country Reports, 1996.
(1) Data for the years 1991 to 1992 is for Czechoslovakia.
POLAND
Introduction. Poland has a land area of approximately 121,000 square
miles. By the middle of 1995, it had a population of approximately 38.4 million,
which accounts for nearly 11.1% of the population of all of the RNE countries.
Political and Economic Development. Poland was declared an independent
republic in November 1918. The country was ruled by a military regime from 1926
until 1939. It was invaded and occupied by Germany in 1939 and subsequently by
Soviet forces in 1945. A pro-communist provisional government was set up under
Soviet auspices in 1946. The elections in January 1947 were won by a
communist-led bloc, which subsequently established a People's Republic. Minor
economic and political reforms were undertaken in the 1960s; however, Poland
continued to be characterized by a centrally-planned economy, nationalized
industries, fixed prices and little external trade. Social discontent increased
in the 1970s. In the 1980s, labor unrest grew. At first the government attempted
to suppress the trade unions and, in particular, Solidarity, but later made
concessions, which, by the end of the 1980s, resulted in the government
proposing the adoption of radical economic and political reforms. The late 1980s
and early 1990s were characterized by extensive reshuffling of the government.
In May 1990, the first fully free elections in more than 50 years were held. The
government that resulted has demonstrated a commitment to continue the process
of moving from a communist economy to a market-driven capitalist one.
The first post-communist government in Poland implemented a stabilization
and liberalization program in January 1990 that expanded the reforms started
during the 1980s. That program led to a drastic reduction in the money supply,
higher interest rates, elimination of the budget deficit and price
liberalization. The extreme austerity measures had profound economic and social
repercussions. In the first quarter of 1990, industrial production and
officially recorded real wages dropped by about 30% and 50% respectively.
Unemployment, which was 6.3% at the end of 1990, grew to 11.8% by the end of
1991 as the number of pensioners grew by 12%. The government was under pressure
to meet demands for higher social spending. The inadequacy of the tax
administration system, growing unemployment, and the delay in the receipt of
revenues from the mass privatization program led to a deficit between budget
funding and payment schedules. As a consequence, the government incurred high
budget deficits, which reached more than 6% of GDP in 1992.
After two years of contraction, GDP began to increase in 1992 and 1993,
rising 2.6% and 3.8% respectively, and culminating with almost 7% growth in
1995. Industrial output rose by 9.4% in real terms
B-8
<PAGE> 59
from 1994 to 1995 and Poland was the first country in Central and Eastern Europe
to achieve recovery of GDP to pre-transition levels. The combination of tight
monetary and fiscal policies -- coupled with a "crawling-peg" exchange rate and
regulated wages -- led to a significant decline in inflation.
During the first months of 1990, inflation was more than 5% a month, but by
1995 it fell to 26.8% per annum. The slowdown in inflation led Poland's Central
Bank to cut the discount rate by 2% during winter 1995-96. Economic reform has
led to the dislocation of many of the country's workforce. The unemployment rate
rose during the early 1990s, reaching approximately 16.7% in the third quarter
of 1994 and then declined to 15% by the end of 1995.
Growth in exports has been an important component of Poland's economic
performance. The depreciation of Poland's currency against the US dollar coupled
with the liberalization of trade led to a rapid increase in exports, especially
to Western Europe. Officially recorded merchandise exports were $17.1 billion in
1994 and $22.9 in 1995. Along with improved economic growth, imports have
increased. Officially recorded merchandise imports were $18.9 billion in 1994
and are estimated to have increased $25.5 billion in 1995. Since the fall of
communism, the composition of Poland's exports has changed dramatically. After
more than 40 years, Russia (the former Soviet Union) lost its position as
Poland's largest trading partner and was replaced by Germany. In 1995, 38.3% of
the country's exports went to Germany.
In March 1991, certain western creditor governments agreed to cancel 50% of
Poland's debt in two stages on the condition that the Polish economy stay within
IMF fiscal and economic guidelines. Since that time, Poland's external debt
situation has improved significantly. Total external hard currency debt was
$53.6 billion in 1991 and has fallen to an estimated $43.5 billion by 1995.
Total external debt as a percentage of GDP was 37% in 1995. As a percentage of
exports, external debt was 190% by 1995. As a consequence of the debt reduction,
Poland's government was able to issue a five-year $250m Eurobond in June 1995.
One of the government's most important economic achievements has been
privatization. In August 1992, the government designed a mass privatization
program that offered shares in 514 state-owned companies through a selection of
15 National Investment Funds (NIF). Every Polish citizen is entitled to a
voucher at a nominal fee that entitles the holder to one share of each NIF,
which are managed by both domestic and international investment managers.
Vouchers in the investment funds started trading on July 15, 1996 and the NIFs
are expected to list in 1997. It is estimated that the private sector in Poland
contributes 65% of GDP, compared to 31% in 1990.
The Securities Market. The Warsaw Stock Exchange ("WSE") was re-opened by
an act of the Polish government in July 1991, 52 years after its close in 1939.
The trading system is similar to the French par casier method of quotation, the
main features being that it is order driven, centralized onto a single exchange
floor and paperless. On December 31, 1995, the market capitalization on the WSE
was approximately $4.6 billion with an estimated weekly turnover of $53.3
million. The average price to earnings ratio of the WIG All Share index at the
end of 1995 was 7.0. The government of Poland has established a Securities
Commission (the "Commission") as its main administrative body responsible for
monitoring the Polish securities market, supervising all public trading,
including trading on the WSE, and regulating brokers. In addition, a Brokers
Association is responsible for regulating the activities and conduct of brokers.
Currently, there are two categories of publicly traded securities: securities
listed on the WSE and securities traded over-the-counter. The disclosure
requirements are less stringent for issuers whose securities are traded
over-the-counter. Clearing and settlement occurs within three business days
through the National Depository for Securities, which is operated by the WSE.
The Polish Commercial Code sets forth requirements regarding
capitalization, shareholders meetings, records and auditing for Polish
companies. Recent amendments to the Commercial Code are aimed at modernizing its
legal norms and adapting them to models prevailing in the European Community.
All joint stock companies, limited liability companies and certain other
entities are required to have annually audited financial statements.
Foreign Investment and Repatriation. Currently, there are no restrictions
on foreign investment in Polish securities, except with respect to securities of
issuers whose business relates to management of sea or air ports, real estate,
the defense industry, wholesaling of imported consumer goods or legal services.
Investments
B-9
<PAGE> 60
may be made in such industries if authorization is obtained from the Ministry of
Privatization. Also, permission must be sought from the relevant licensing
authority to purchase shares of issuers in industries where licenses from the
Polish government are required, such as the banking or brokerage industry or a
business involving the production of alcohol, cigarettes or medicine.
In early 1990, internal convertibility of the Polish zloty was introduced.
Both the initial investment in and any profits resulting from business
activities may be freely repatriated, provided the currency exchange is made at
an authorized foreign exchange bank. In the case of dividends, repatriation is
only allowed after an audit certificate has been issued and the necessary taxes
have been paid. The National Bank of Poland is responsible for overseeing the
banking system in Poland and for controlling monetary policy and exchange rates.
SELECTED ECONOMIC DATA FOR POLAND
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
GDP Growth....................................... -7.0% 2.6% 3.8% 5.3% 7.0%
Inflation Rate................................... 76.7% 45.3% 36.9% 33.3% 26.8%
Current Account (US$ billions)................... $ -2.2 $ -3.1 $ -5.8 $ -2.5 $ -2.2(e)
Total External Hard-currency Debt (US$
billions)...................................... $ 53.6 $ 48.7 $ 45.3 $ 42.2 $ 43.5(e)
Exchange Rate (New Zloty per US$)................ 1.06 1.36 1.81 2.27 2.43
</TABLE>
- ---------------
Source: The Economist Intelligence Unit Country Reports, 1996.
e = estimated
HUNGARY
Introduction. Hungary has a land area of approximately 36,000 square
miles. By the middle of 1995, it had a population of approximately 10.3 million,
which accounts for nearly 3.0% of the population of all of the RNE countries.
Political and Economic Developments. Hungary allied itself with Germany
before World War II. Having sought to break the alliance in 1944, Hungary was
forcibly occupied by German forces. In January 1945, Hungary was liberated by
Soviet troops and it became a republic in February 1946. In the 1947 elections,
the communists became the largest single party and by the end of the year
emerged as the leading political force. A People's Republic was established in
1949. Opposition was subsequently removed by means of purges and political
trials. After the death of Stalin in 1953, a period of liberalization followed.
Nevertheless, until the mid-1980s, Hungary was characterized by having a
centrally-planned economy, nationalized industries, fixed prices and little
external trade.
In March 1985, the electoral law was revised, giving voters a wide choice
of candidates, albeit still all members of the state party, the Hungarian
Socialist Workers' Party (HSWP). In May 1988, a special ideological conference
of the HSWP was held and this led in the following months to a relaxation of
censorship laws, the establishment of trade unions and independent political
groups and the adoption of an austere economic program designed to revitalize
the economy. In February 1989, the HSWP agreed to support a multi-party
political system and the first free multi-party elections were held in March and
April 1990. The resulting government declared its intention to withdraw from the
Warsaw Pact, seek membership in the European Community and effect a full
transition to a Western-style market economy.
Through the use of tight monetary and fiscal policies, the government was
able to slow inflation after price controls were relaxed in January 1991.
Inflation declined from 35.0% in 1991 to 18.8% in 1994, but rose again to 28.2%
in 1995. Over 90% of price controls were removed in 1991 and now almost all
state subsidies have been cut. Attempts to control inflation caused significant
contraction in the economy through 1993, as GDP declined by 11.9% in 1991, 3.0%
in 1992, and 0.8% in 1993. However, the economy began to expand and GDP grew by
2.9% in 1994 and by 1.5% in 1995.
B-10
<PAGE> 61
The structural adjustments that the public sector has been undergoing has
put upward pressure on unemployment. The number of unemployed accounted for
11.6% of the work force in February 1996. The rapid rise in unemployment and
other factors associated with moving to a market economy have placed
considerable demands on the social security system and this, combined with an
inefficient and inadequate system of taxation, has contributed to the
government's budget deficit, which in 1995 was estimated to amount approximately
to 3.3% of Hungary's GDP. In March 1995, the Hungarian government implemented an
austerity plan designed to ameliorate what is known as a "twin deficits"
problem--large current account and budget deficits. The plan called for a 9%
currency devaluation, the introduction of a crawling peg exchange rate system, a
comprehensive 8% tariffs increase, and a 3% reduction in public sector wages.
Many of the plan's goals were achieved in a short period of time. The current
account deficit was reduced from $4.1 billion in 1994 to slightly less than $2.5
billion by the end of 1995 and the total public sector deficit was cut 9.8% of
GDP to 6.5%. Austerity measures, however, reduced economic growth in 1995 to
1.5% versus 2.9% in 1994 and growth in industrial production dropped almost in
half from 9.5% in 1994. As a result of Hungary's progress toward macroeconomic
stabilization, the International Monetary Fund granted a standby credit and the
country has been officially admitted to the OECD.
The government has indicated that it intends to continue to privatize most
state-owned companies. To date, a substantial number of state-run enterprises
have been privatized and a substantial portion of sales have been to foreign
investors. Although there was relatively little privatization in late 1994 and
early 1995, the government hoped that the passage of the privatization law in
May 1995 would expedite the process by making it more transparent and allowing
for "simplified" privatization of smaller companies. Privatization receipts rose
to $3.6 billion in 1995, more than the entire amount raised during the period
from 1990 to 1994. The government has encouraged privatization by extending tax
incentives, enacting legislation allowing repatriation of profits and otherwise
liberalizing foreign investment rules. Hungary has attracted more foreign
investment than any other Eastern European country. By late 1995, the
privatization process was unexpectedly accelerated. The proceeds from the sale
of companies such as the state oil and gas company raised $3.5 billion, more
than three times the sum originally budgeted by the government, and foreign
direct investment reached roughly $4.5 billion, an all-time high. As a result,
monetary reserves increased from less than $7 billion in 1994 to about $12
billion in 1995.
Exports continue to play a pivotal role in the economy, despite the greatly
reduced demand of other ex-Warsaw Pact nations. The value of exports in dollar
terms increased from $10.7 billion in 1994 to $12.9 billion in 1995. GDP per
capita at the end of 1995 was $4,248. In the first quarter of 1996, real wages
declined 9.5% compared to the corresponding period of 1995. The unemployment
rate in Hungary was 10.4% at the end of 1995.
The Securities Market. The Budapest Stock Exchange ("BSE") was established
in June 1990. The BSE served to create an organized marketplace for the public
offering and trading of new securities, many of which were expected to arise
from the planned privatizations of state-owned enterprises. On December 31,
1995, capitalization on the BSE was approximately $2.4 billion, with an
estimated weekly turnover of $6.8 million. Although currently only 42 companies
are listed on the BSE, additional listings are anticipated. The average price to
earnings ratio of the BSE BUX index was approximately 12.0 as of December 31,
1995. The State Securities Supervision (SSS) is responsible for monitoring the
securities market and establishing guidelines for the regulation of new issues,
market participants and the BSE. Clearing and settlement occurs within five
business days and is effected through the Clearing Depository Center, which is
operated by the BSE.
The Hungarian Companies Act sets forth requirements regarding
capitalization, shareholders meetings, records and auditing for various legal
entities organized in Hungary. Currently, an annual audit is required for public
limited and certain limited liability companies and it is anticipated that an
annual audit will be required of all businesses by 1998.
Foreign Investment and Repatriation. Currently, there are no restrictions
on foreign investment in Hungarian securities, but investment in certain
sectors, such as banking, defense, utilities and insurance, may require prior
approval from the government. All foreigners must register their holdings of
shares and the Ministry of Finance and Ministry of Trade must be advised if
ownership exceeds 50% of the securities of a
B-11
<PAGE> 62
company. Repatriation of dividends and capital in dollars is automatic if the
initial investment was in dollars, and the shareholders' resolutions granting
such outlays are valid. The State Banking Supervision and the National Bank of
Hungary, an independent entity, are responsible for the supervision and control
of the banking system, monetary policy and foreign exchange.
SELECTED ECONOMIC DATA FOR HUNGARY
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
--------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
GDP Growth.................................... -11.9% -3.0% -0.8% 2.9 1.5
Inflation Rate................................ 35.0% 23.0% 22.5% 18.8 28.2
Current Account (US$ billions)................ $ 0.4 $ 0.4 $ -4.3 $ -4.1 $ -2.5
Total External Debt (US$ billions)............ $22.6 $22.0 $24.2 $28.0 $30.8
Exchange Rate (Forint per US$)................ 75.7 79.0 91.9 105.2 125.7
</TABLE>
- ---------------
Source: The Economist Intelligence Unit Country Reports, 1996.
B-12
<PAGE> 63
APPENDIX C
DESCRIPTION OF VARIOUS FOREIGN CURRENCY AND INTEREST RATE HEDGES
AND OPTIONS ON SECURITIES AND SECURITIES INDEX FUTURES CONTRACTS AND RELATED
OPTIONS
FOREIGN CURRENCY HEDGING TRANSACTIONS
Foreign Currency Sales Contract. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specified amount of a
foreign currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks and brokers).
The Fund has established procedures consistent with the general statement of
policy of the U.S. Securities and Exchange Commission concerning forward
purchases or sales of foreign currencies. Since that policy currently recommends
that an amount of the Fund's assets equal to the amount of the commitment be
held aside or segregated to be used to pay for the commitment, the Fund will
always have liquid, unencumbered assets available sufficient to cover any
commitments under contracts to purchase or sell foreign currencies or to limit
any potential risk. The segregated account will be marked to market on a daily
basis. While these contracts are not presently regulated by the U.S. Commodity
Futures Trading Commission (the "CFTC"), the CFTC may in the future assert
authority to regulate forward foreign currency exchange contracts. In such
event, the Fund's ability to utilize forward foreign currency exchange contracts
in the manner set forth above may be restricted.
Foreign Currency Futures Contracts and Related Options. A foreign currency
futures contract is a standardized contract for the delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Foreign currency futures contracts traded in the United States are
traded on regulated exchanges. Parties to a futures contract must make initial
"margin" deposits to secure performance of the contract, which generally range
from 2% to 15% of the contract price. There also are requirements to make
"variation" margin deposits as the value of the futures contract fluctuates. The
Fund may enter into futures contracts for hedging purposes only. In addition,
the Fund may not enter into futures contracts on foreign currency (or with
respect to interest rates or securities indexes (described below)) or related
options if the aggregate amount of initial margin deposits and premiums on the
Fund's futures and related options positions would exceed 5% of the fair market
value of the Fund's total assets after taking into account unrealized profits
and unrealized losses on any such contracts it has entered into. In addition,
with respect to long positions in futures contracts on currency (or with respect
to interest rates or stock indexes) or options on futures, the underlying
commodity value of such contracts will not exceed the sum of cash and cash
equivalents segregated for this purpose plus accrued profits on the contracts
held at the futures commission merchant.
The Fund may purchase and write call and put options on foreign currency
futures contracts. An option on a foreign currency futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in a foreign
currency futures contract at a specified exercise price at any time on or before
the expiration date of the option. The potential loss related to the purchase of
an option on a futures contract is limited to the premium paid for the option
(plus transaction costs). Because the value of the option is fixed at the point
of sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily. To the extent the Fund purchases an option on a foreign currency
futures contract any change in the value of such option would be reflected in
the net asset value of the Fund.
Options on Currencies. A put option purchased by the Fund on a currency
gives the Fund the right to sell the currency at the exercise price until the
expiration of the option. A call option purchased by the Fund gives the Fund the
right to purchase a currency at the exercise price until the expiration of the
option.
Currency Hedging Strategies. The Fund may enter into forward foreign
currency exchange contracts and foreign currency futures contracts and related
options in several circumstances. For example, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when
C-1
<PAGE> 64
the Fund anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock in" the
dollar price of the security or the dollar equivalent of such dividend or
interest payment, as the case may be. In addition, when the Investment Manager
believes that the currency of a particular foreign country may suffer a
substantial decline against the dollar, it may enter into a forward or futures
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract or, prior to
maturity, enter into an offsetting contract. Such offsetting transactions with
respect to forward contracts must be effected with the currency trader who is a
party to the original forward contract. Offsetting transactions with respect to
futures contracts are effected on the same exchange on which the initial
transaction occurred. The Fund will enter into such futures contracts and
related options if it is expected that there will be a liquid market in which to
close out such contract. There can, however, be no assurance that such a liquid
market will exist in which to close a futures contract or related option or that
the opposite party to the forward contract will agree to the offset, in which
case the Fund may suffer a loss.
As a matter of operating policy, which may be changed by the Fund's Board
of Directors without a shareholders vote, the Fund will not enter into such
forward or futures contracts to protect the value of its portfolio securities on
a regular basis, and will not do so if, as a result, the Fund will have more
than 20% of the value of its total assets committed to the consummation of such
contracts. The Fund also will not enter into such forward or futures contracts
or maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. Further, the Fund generally will not enter into a
forward or futures contract with a term of greater than one year. The Fund may
attempt to accomplish objectives similar to those described above with respect
to forward and futures contracts for currency by means of purchasing put or call
options on foreign currencies on exchanges.
While the Fund may enter into forward, futures and options contracts to
reduce currency exchange rate risks, changes in currency prices may result in a
poorer overall performance for the Fund than if it had not engaged in any such
transaction. Moreover, there may be an imperfect correlation between the Fund's
portfolio holdings of securities denominated in a particular currency and
forward, futures or options contracts entered into by the Fund. Such imperfect
correlation may prevent the Fund from achieving the intended hedge or expose the
Fund to risk of foreign exchange loss.
Certain provisions of the Code may limit the extent to which the Fund may
enter into forward or futures contracts or engage in options transactions. These
transactions may also affect the character and timing of income and the amount
of gain or loss recognized by the Fund and its stockholders for U.S. federal
income tax purposes. See "Taxation -- U.S. Federal Income Taxes."
INTEREST RATE FUTURES AND OPTIONS THEREON
Interest Rate Futures Contracts. The Fund may enter into futures contracts
on government debt securities for the purpose of hedging its portfolio against
the adverse effects of anticipated movements in interest rates. For example, the
Fund may enter into futures contracts to sell U.S. Government Treasury Bills
(take a "short position") in anticipation of an increase in interest rates.
Generally, as interest rates rise, the market value of any fixed-income
securities held by the Fund will fall, thus reducing the net asset value of the
Fund. However, the value of the Fund's short position in the futures contracts
will also tend to increase, thus offsetting all or a portion of the depreciation
in the market value of the Fund's fixed-income investments which are being
hedged. The Fund may also enter into futures contracts to purchase government
debt securities (take a "long position") in anticipation of a decline in
interest rates. The Fund might employ this strategy in order to offset entirely
or in part an increase in the cost of any fixed-income securities it intends to
subsequently purchase.
Options on Futures Contracts. The Fund may purchase and write call and put
options on interest rate futures contracts which are traded on contract markets
and enter into closing transactions with respect to such
C-2
<PAGE> 65
options to terminate an existing position. The Fund may use such options in
connection with its hedging strategies. Generally, these strategies would be
employed under the same market and market sector conditions in which the Fund
enters into futures contracts. An option on an interest rate futures contract
operates in the same manner as an option on a foreign currency futures contract
(described above), except that it gives the purchaser the right, in return for
the premium paid, to assume a position in an interest rate futures contract
instead of a currency futures contract. The Fund may purchase put options on
futures contracts rather than taking a short position in the underlying futures
contract in anticipation of an increase in interest rates. Similarly, the Fund
may purchase call options on futures contracts as a substitute for taking a long
position in futures contracts to hedge against the increased cost resulting from
a decline in interest rates of fixed-income securities which the Fund intends to
purchase. The Fund also may write a call option on a futures contract rather
than taking a short position in the underlying futures contract, or write a put
option on a futures contract rather than taking a long position in the
underlying futures contracts. The writing of an option, however, will only
constitute a partial hedge, since the Fund could be required to enter into
futures contract at an unfavorable price and will in any event be able to
benefit only to the extent of the premium received.
Risk Factors in Transactions in Interest Rate Futures Contracts and Options
Thereon. The Fund's ability to effectively hedge all or a portion of its fixed
income securities through the use of interest rate futures contracts and options
thereon depends in part on the degree to which price movements in the securities
underlying the option or futures contract correlate with price movements of the
fixed-income securities held by the Fund. In addition, disparities in the
average maturity or the quality of the Fund's investments as compared to the
financial instrument underlying an option or futures contract may also reduce
the correlation in price movements. Transactions in options on futures contracts
involve similar risks, as well as the additional risk that movements in the
price of the option will not correlate with movements in the price of the
underlying futures contract.
OPTIONS ON SECURITIES AND SECURITIES INDEX FUTURES CONTRACTS AND RELATED OPTIONS
Options on Securities. In order to hedge against market shifts, the Fund
may purchase put and call options on securities. In addition, the Fund may seek
to increase its income or may hedge a portion of its portfolio investments
through writing (i.e., selling) covered call options. A put option gives the
holder the right to sell to the writer of the option an underlying security at a
specified price at any time during or at the end of the option period. In
contrast, a call option gives the purchaser the right to buy the underlying
security covered by the option from the writer of the option at the stated
exercise price. A "covered" call option means that so long as the Fund is
obligated as the writer of the option, it will own (i) the underlying securities
subject to the option, or (ii) securities convertible or exchangeable without
the payment of any consideration into the securities subject to the option. As a
matter of operating policy, the value of the underlying securities on which
options will be written at any one time will not exceed 5% of the total assets
of the Fund.
The Fund will receive a premium from writing call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund will limit
its opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. Thus, in some periods the Fund
will receive less total return and in other periods greater total return from
writing covered call options than it would have received from its underlying
securities had it not written call options.
The Fund may purchase options on securities (including Sovereign Debt) that
are listed on securities exchanges or traded over the counter. In purchasing a
put option, the Fund will seek to benefit from a decline in the market price of
the underlying security, while in purchasing a call option, the Fund will seek
to benefit from an increase in the market price of the underlying security. If
an option purchased is not sold or exercised when it has remaining value, or if
the market price of the underlying security remains equal to or greater than the
exercise price, in the case of a put, or remains equal to or below the exercise
price, in the case of a call, during the life of the option, the Fund will lose
its investment in the option. For the purchase of an option to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price, in the case of a put, and must increase sufficiently above the
exercise price, in the case of a call, to cover the premium and transaction
costs. Because premiums paid by the Fund on options are small in relation to the
C-3
<PAGE> 66
market value of the investments underlying the options, buying options can
result in large amounts of leverage. The leverage offered by trading in options
could cause the Fund's net asset value to be subject to more frequent and wider
fluctuation than would be the case if the Fund did not invest in options.
Stock Index Futures Contracts and Related Options. The Fund may, for
hedging purposes, enter into securities index futures contracts and purchase and
write put and call options on stock index futures contracts, in each case that
are traded on regulated exchanges, including non-U.S. exchanges to the extent
permitted by the CFTC. A stock index futures contract is an agreement to take or
make delivery of an amount of cash equal to the difference between the value of
the index at the beginning and at the end of the contract period. Successful use
of stock index futures will be subject to the Investment Manager's ability to
predict correctly movements in the direction of the relevant stock market. No
assurance can be given that the Investment Manager's judgment in this respect
will be correct.
The Fund may enter into stock index futures contracts to sell a stock index
in anticipation of or during a market decline to attempt to offset the decrease
in market value of equities in its portfolio that might otherwise result. When
the Fund is not fully invested in common stocks and anticipates a significant
market advance, it may enter into futures contracts to purchase the index in
order to gain rapid market exposure that may in part or entirely offset
increases in the cost of common stocks that it intends to purchase. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position but, under unusual market
conditions, a futures position may be terminated without the corresponding
purchase of common stocks.
The Fund may purchase and write put and call options on stock index futures
contracts in order to hedge all or a portion of its investments and may enter
into closing purchase transactions with respect to written options in order to
terminate existing positions. There is no guarantee that such closing
transactions can be effected. An option on a stock index futures contract
operates in the same manner as an option on a foreign currency futures contract
(described above), except that it gives the purchaser the right, in return for
the premium paid, to assume a position in a stock index futures contract instead
of a currency futures contract.
C-4
<PAGE> 67
MORGAN STANLEY RUSSIA &
NEW EUROPE FUND, INC.
<PAGE> 68
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
-- Report of Independent Accountants
-- Statement of Assets and Liabilities dated , 1996
(2) Exhibits
<TABLE>
<S> <C> <C>
(a)(1) -- Articles of Incorporation*+
(2) -- Articles of Amendment**
(b) -- By-Laws, as amended**
(c) -- Not applicable
(d) -- Specimen certificate for Common Stock, par value $.01 per share**
(e) -- Dividend Reinvestment and Cash Purchase Plan**
(f) -- Not applicable
(g) -- Form of Investment Advisory and Management Agreement with the
Investment Manager**
(h)(1) -- Form of Underwriting Agreement**
(2) -- Form of Master Agreement Among Underwriters*+
(3) -- Form of Master Dealer Agreement*+
(i) -- Not applicable
(j)(1) -- Form of International Custody Agreement***
(2) -- Form of U.S. Custody Agreement***
(k)(1) -- Form of Agreement for Stock Transfer Services**
(2) -- Form of Administration Agreement***
(l)(1) -- Opinion and Consent of Rogers & Wells***
(2) -- Opinion and Consent of Piper & Marbury L.L.P.***
(m) -- Not applicable
(n) -- Consent of Independent Accountants***
(o) -- Not applicable
(p) -- Form of Investment Letter***
(q) -- Not applicable
(r) -- Not applicable
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
+ Filed pursuant to the EDGAR (Electronic Data Gathering, Analysis, and
Retrieval) phase-in requirements.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
(i)
<PAGE> 69
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement. These
expenses will be paid by Morgan Stanley Asset Management Inc., the Fund's
investment adviser.
<TABLE>
<S> <C>
U.S Securities and Exchange Commission Registration fees....... $39,655.17
New York Stock Exchange listing fees........................... 50,425.00
Printing (other than stock certificates)....................... *
Engraving and printing stock certificates...................... *
Fees and expenses of qualification under state securities laws
(excluding fees of counsel).................................. *
Auditing and accounting fees................................... *
Legal fees and expenses........................................ *
NASD fee....................................................... 12,000.00
Miscellaneous.................................................. *
----------
Total........................................................ $ *
=========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of the effective date of the Registration Statement:
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
- ------------------------------------------------------------------------------- --------------
<S> <C>
Common Stock, $.01 par value.............................................. One
</TABLE>
ITEM 29. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
Article SEVENTH of the Fund's Articles of Incorporation, Article VII of the
Fund's By-laws, the Investment Advisory and Management Agreement, the
Underwriting Agreement, the International Custody Agreement and the U.S. Custody
Agreement provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(ii)
<PAGE> 70
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The description of the business of Morgan Stanley Asset Management Inc. is
set forth under the caption "Management of the Fund" in the Prospectus forming
part of this Registration Statement.
The information as to the directors and officers of Morgan Stanley Asset
Management Inc. set forth in Morgan Stanley Asset Management Inc.'s Form ADV
filed with the Securities and Exchange Commission on December 15, 1981 (File No.
801-15757) and as amended through the date hereof is incorporated herein by
reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Morgan Stanley Russia & New Europe Fund, Inc.
c/o Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
(Fund's Articles of Incorporation and By-Laws)
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
(with respect to its services as Investment Manager)
Chase Global Funds Services Company
73 Tremont Street
Boston, Massachusetts 02108
(with respect to its services as Administrator)
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
(with respect to its services as Custodian for the Fund's international
assets)
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
(with respect to its services as Custodian for the Fund's U.S. assets)
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(with respect to its services as Transfer Agent)
ITEM 32. MANAGEMENT SERVICES
Not applicable
(iii)
<PAGE> 71
ITEM 33. UNDERTAKINGS
(a) The Fund undertakes to suspend offering its shares until it amends its
prospectus contained herein if (1) subsequent to the effective date of
its Registration Statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of this
Registration Statement; or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.
(b) The Fund hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Fund under Rule
497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
and
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(c) To comply with the restrictions on indemnification set forth in
Investment Company Act Release No. IC-11330, September 4, 1980.
(iv)
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Amendment to the Registrant's Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 9th day of August, 1996.
MORGAN STANLEY RUSSIA & NEW EUROPE
FUND, INC.
By: /s/ WARREN J. OLSEN
----------------------------------
Warren J. Olsen
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Warren J. Olsen and Harold J. Schaaff, Jr., and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all Amendments (including pre-effective
and post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registrant's Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------------- ---------------
<C> <S> <C>
/s/ BARTON M. BIGGS Director and August 9, 1996
- ------------------------------------- Chairman of the Board
Barton M. Biggs
/s/ WARREN J. OLSEN Director and President August 9, 1996
- ------------------------------------- (Principal Executive Officer)
Warren J. Olsen
/s/ PETER J. CHASE Director August 9, 1996
- -------------------------------------
Peter J. Chase
/s/ JOHN W. CROGHAN Director August 9, 1996
- -------------------------------------
John W. Croghan
/s/ DAVID B. GILL Director August 9, 1996
- -------------------------------------
David B. Gill
/s/ GRAHAM E. JONES Director August 9, 1996
- -------------------------------------
Graham E. Jones
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------------- ---------------
<C> <S> <C>
/s/ JOHN A. Director August 9, 1996
LEVIN
- -------------------------------------
John A. Levin
/s/ WILLIAM G. MORTON, JR. Director August 9, 1996
- -------------------------------------
William G. Morton, Jr.
/s/ PETER A. NADOSY Director August 9, 1996
- -------------------------------------
Peter A. Nadosy
/s/ FREDERICK B. WHITTEMORE Director August 9, 1996
- -------------------------------------
Frederick B. Whittemore
/S/ JAMES R. ROONEY Treasurer August 9, 1996
- ------------------------------------- (Principal Financial and
James R. Rooney Accounting Officer)
</TABLE>
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ------------------------------------------------------------- ------------
<S> <C> <C> <C> <C>
(2) Exhibits
(a)(1) -- Articles of Incorporation*+..................................
(2) -- Articles of Amendment**
(b) -- By-Laws, as amended**........................................
(c) -- Not applicable...............................................
(d) -- Specimen certificate for Common Stock, par value $.01 per
share**......................................................
(e) -- Dividend Reinvestment and Cash Purchase Plan**...............
(f) -- Not applicable...............................................
(g) -- Form of Investment Advisory and Management Agreement with the
Investment Manager**.........................................
(h)(1) -- Form of Underwriting Agreement**.............................
(2) -- Form of Master Agreement Among Underwriters*+................
(3) -- Form of Master Dealer Agreement*+............................
(i) -- Not applicable...............................................
(j) (1) -- Form of International Custody Agreement***...................
(2) -- Form of U.S. Custody Agreement***............................
(k)(1) -- Form of Agreement for Stock Transfer Services**..............
(2) -- Form of Administration Agreement***..........................
(l) (1) -- Opinion and Consent of Rogers & Wells***.....................
(2) -- Opinion and Consent of Piper & Marbury L.L.P.***.............
(m) -- Not applicable...............................................
(n) -- Consent of Independent Accountants***........................
(o) -- Not applicable...............................................
(p) -- Form of Investment Letter***.................................
(q) -- Not applicable...............................................
(r) -- Not applicable...............................................
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
+ Filed pursuant to the EDGAR (Electronic Data Gathering, Analysis, and
Retrieval) phase-in requirements.
<PAGE> 1
Exhibit 2(a)(i)
ARTICLES OF INCORPORATION
OF
MORGAN STANLEY EUROPEAN EMERGING MARKETS FUND, INC.
THE UNDERSIGNED, Stefanie V. Chang, whose post office address is c/o
Rogers & Wells, 200 Park Avenue, New York, New York 10166, being at least
eighteen years of age, does hereby act as an incorporator, under and by virtue
of the general laws of the State of Maryland authorizing the formation of
corporations and with the intention of forming a corporation.
FIRST: The name of the corporation (hereinafter called the "Corporation") is
Morgan Stanley European Emerging Markets Fund, Inc.
SECOND: The Corporation was formed for the following purposes:
(1) To act as a closed-end investment company of the
management type registered as such with the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940, as amended.
(2) To hold, invest and reinvest its assets in securities and
other investments or to hold all or part of its assets in cash.
(3) To issue and sell shares of its capital stock in such
amounts and on such terms and conditions and for such purposes and for such
amount or kind of consideration as may now or hereafter be permitted by law.
<PAGE> 2
(4) To enter into management, supervisory, advisory,
administrative, underwriting and other contracts and otherwise do business with
other corporations, and subsidiaries or affiliates thereof, or any other firm or
organization, notwithstanding that the Board of Directors of the Corporation may
be composed in part of officers, directors or employees of such corporation,
firm or organization and, in the absence of fraud, the Corporation and such
corporation, firm or organization may deal freely with each other and neither
such management, supervisory, advisory, administrative or underwriting contract
nor any other contract or transaction between the Corporation and such
corporation, firm or organization shall be invalidated or in any way affected
thereby.
(5) To do any and all additional acts and exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and generally
to enjoy all of the powers, rights and privileges granted to, or conferred upon,
corporations by the General Laws of the State of Maryland now or hereafter in
force.
THIRD: The post office address of the place at which the principal office of the
Corporation in the State of Maryland is located is c/o The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202.
The name of the Corporation's resident agent is The
Corporation Trust Incorporated, and its post office address is 32
2
<PAGE> 3
South Street, Baltimore, Maryland 21202. Said resident agent is a
corporation of the State of Maryland.
FOURTH: Section 1. (1) The total number of shares of capital stock that the
Corporation has authority to issue is 100,000,000 shares of capital stock of the
par value of $0.01 each, having an aggregate par value of $1,000,000, all of
which 100,000,000 shares are initially classified as "Common Stock."
(2) The following is a description of the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the Common
Stock of the Corporation:
(a) Each share of Common Stock shall have one vote, and,
except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting
power for all purposes shall be vested in the holders of the
Common Stock.
(b) Subject to the provisions of law and any preferences of
any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another
class of the Corporation's stock, may be paid on the Common
Stock of the Corporation at such time and in such amounts as
the Board of Directors may deem advisable.
(c) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the
holders of the Common Stock shall be entitled, after payment
or provision for payment of the debts and other liabilities of
the Corporation and the amount to which the holders of any
class of stock hereafter classified or reclassified having a
preference on distributions in the liquidation, dissolution or
winding up of the Corporation shall be entitled, together with
the holders of any other class of stock hereafter classified
or reclassified not having a preference on distributions in
the liquidation, dissolution or winding up of the Corporation,
to share ratably in the remaining net assets of the
Corporation.
3
<PAGE> 4
Section 2. (1) Without the assent or vote of the stockholders,
the Board of Directors shall have the authority by resolution to classify and
reclassify any authorized but unissued shares of capital stock from time to time
by setting or changing in any one or more respects the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of the capital stock.
(2) The foregoing powers of the Board of Directors to classify
and reclassify any of the shares of capital stock shall include, without
limitation, subject to the provisions of the Charter, authority to classify or
reclassify any unissued shares of such stock into a class or classes of
preferred stock, preference stock, special stock or other stock, and to divide
and classify shares of any class into one or more series of such class, by
determining, fixing, or altering one or more of the following:
(a) The distinctive designation of such class or series and
the number of shares to constitute such class or series;
provided that, unless otherwise prohibited by the terms of
such or any other class or series, the number of shares of any
class or series may be decreased by the Board of Directors in
connection with any classification or reclassification of
unissued shares and the number of shares of such class or
series may be increased by the Board of Directors in
connection with any such classification or reclassification,
and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into
shares of Common Stock or any other class or series shall
become part of the authorized capital stock and be subject to
classification and reclassification as provided in this
subparagraph;
(b) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be
payable on shares of such class or series, whether any such
dividends shall rank senior or junior to or on a parity with
the dividends payable on any other
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<PAGE> 5
class or series of stock, and the status of any such dividends
as cumulative, cumulative to a limited extent or
non-cumulative and as participating or non-participating;
(c) Whether or not shares of such class or series shall have
voting rights, in addition to any voting rights provided by
law and, if so, the terms of such voting rights;
(d) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and
conditions thereof, including provisions for adjustment of the
conversion or exchange rate in such events or at such times as
the Board of Directors shall determine;
(e) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of
such redemption, including the date or dates upon or after
which they shall be redeemable and the amount per share
payable in case of redemption, which amount may vary under
different conditions and at different redemption dates; and
whether or not there shall be any sinking fund or purchase
account in respect thereof, and if so, the terms thereof;
(f) The rights of the holders of shares of such class or
series upon the liquidation, dissolution or winding up of the
affairs of, or upon any distribution of the assets of, the
Corporation, which rights may vary depending upon whether such
liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates,
and whether such rights shall rank senior or junior to or on a
parity with such rights of any other class or series of stock;
(g) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the
payment of dividends or making of distributions on, or the
acquisition of, or the use of moneys for purchase or
redemption of, any stock of the Corporation, or upon any other
action of the Corporation, including action under this
subparagraph, and, if so, the terms and conditions thereof;
and
(h) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares
of such class or series, not inconsistent with law and the
Charter of the Corporation.
(3) For the purposes hereof and of any articles supplementary
to the Charter providing for the classification or
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<PAGE> 6
reclassification of any shares of capital stock or of any other charter document
of the Corporation - (unless otherwise provided in any such articles or
document), any class or series of stock of the Corporation shall be deemed to
rank:
(a) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall
be entitled to the receipt of dividends or of amounts
distributable on liquidation, dissolution or winding up, as
the case may be, in preference or priority to holders of such
other class or series;
(b) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend
rates, dividend payment dates or redemption or liquidation
price per share thereof be different from those of such
others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable
upon liquidation, dissolution or winding up, as the case may
be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and
(c) junior to another class or series either as to dividends
or upon liquidation, if the rights of the holders of such
class or series shall be subject or subordinate to the rights
of the holders of such other class or series in respect of the
receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
(4) The provisions of Section 2 of this Article Fourth may not
be amended, altered or repealed except by vote of three-fourths of the shares of
capital stock of the Corporation outstanding and entitled to vote thereupon.
Section 3. The presence in person or by proxy of the holders
of record of a majority of the aggregate number of shares of capital stock
issued and outstanding and entitled to vote thereat shall constitute a quorum
for the transaction of any
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<PAGE> 7
business at all meetings of the stockholders except as otherwise provided by law
or in these Articles of Incorporation.
Section 4. Notwithstanding any provision of the General Laws
of the State of Maryland requiring action to be taken or authorized by the
affirmative vote of the holders of a designated proportion greater than a
majority of the shares of capital stock of the Corporation outstanding and
entitled to vote thereupon, such action shall, except as otherwise provided in
these Articles of Incorporation, be valid and effective if taken or authorized
by the affirmative vote of the holders of a majority of the total number of
shares of capital stock of the Corporation outstanding and entitled to vote
thereupon voting together as a single class.
Section 5. No holder of shares of capital stock of the
Corporation shall, as such holder, have any preemptive right to purchase or
subscribe for any part of any new or additional issue of stock of any class, or
of rights or options to purchase any stock, or of securities convertible into,
or carrying rights or options to purchase, stock of any class, whether now or
hereafter authorized or whether issued for money, for a consideration other than
money or by way of a dividend or otherwise, and all such rights are hereby
waived by each holder of capital stock and of any other class of stock or
securities which may hereafter be created.
Section 6. All persons who shall acquire capital stock in the
Corporation shall acquire the same subject to the provisions of these Articles
of Incorporation.
Section 7. (1) Except as otherwise provided in subsection 2 of
this Section 7 of this Article Fourth, the
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<PAGE> 8
affirmative vote of at least three-fourths of the shares of capital stock of the
Corporation outstanding and entitled to vote thereupon voting together as a
single class shall be necessary to authorize any of the following actions:
(a) the conversion of the Corporation to an "open-end company"
or any amendment to these Articles of Incorporation to make
the Corporation's common stock a "redeemable security" (as
such terms are defined in the Investment Company Act of 1940);
(b) the merger or consolidation of the Corporation with or
into any other company (including, without limitation, a
partnership, corporation, joint venture, business trust,
common law trust or any other business organization) or share
exchange in which the Corporation is not the successor
corporation;
(c) the dissolution or liquidation of the Corporation
notwithstanding any other provision in these Articles of
Incorporation;
(d) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) of all or substantially all of the assets of the
Corporation other than in the ordinary course of the
Corporation's business;
(e) a change in the nature of the business of the Corporation
so that it would cease to be an investment company registered
under the Investment Company Act of 1940; or
(f) the issuance or transfer by the Corporation (in one
transaction or a series of transactions) of any securities of
the Corporation to any other person in exchange for cash,
securities or other property having an aggregate fair market
value of $1,000,000 or more excluding (i) sales of any
securities of the Corporation in connection with a public
offering thereof, (ii) issuances of any securities of the
Corporation pursuant to a dividend reinvestment plan adopted
by the Corporation or pursuant to a stock dividend and (iii)
issuances of any securities of the Corporation upon the
exercise of any stock subscription rights distributed by the
Corporation.
(2) If the Board of Directors approves, by a vote of at least
seventy percent of the entire Board of Directors, any action
8
<PAGE> 9
listed in subsection (1) of this Section 7 of this Article Fourth other than the
action described in clause (1) (f), the affirmative vote of only a majority of
the shares of capital stock of the Corporation outstanding and entitled to vote
thereupon voting together as a single class shall be necessary to authorize such
action. If the Board of Directors approves, by a vote of at least seventy
percent of the entire Board of Directors, an action described in clause (1) (f)
of this Section 7 of this Article Fourth, no shareholder vote shall be required
to authorize such action.
(3) The provisions of this Section 7 of this Article Fourth
may not be amended, altered or repealed except by the approval of at least
three-fourths of the shares of capital stock of the Corporation outstanding and
entitled to vote thereupon voting together as a single class.
FIFTH: The initial number of directors of the Corporation is three (3), and the
name of the directors who shall act as such until the first annual meeting or
until their successor or successors are duly elected and qualify are Joseph P.
Stadler, Madhav Dhar and Harold J. Schaaff, Jr. The By-Laws of the Corporation
may fix the number of directors at a number other than three and may authorize
the Board of Directors, by the vote of a majority of the entire Board of
Directors, to increase or decrease the number of directors within a limit
specified in the By-Laws, provided that in no case shall the number of directors
be less than the number prescribed by law, and to fill the vacancies created by
9
<PAGE> 10
any such increase in the number of directors. Unless otherwise provided by the
By-Laws of the Corporation, the directors of the Corporation need not be
stockholders.
The By-Laws of the Corporation may divide the Directors of the
Corporation into classes and proscribe the tenure of office of the several
classes; but no class shall be elected for a period shorter than that from the
time of the election of such class until the next annual meeting and thereafter
for a period shorter than the interval between annual meetings or for a longer
period than five years, and the term of office of at least one class shall
expire each year.
A director may be removed only with cause, and any such
removal may be made only by the stockholders of the Corporation.
The provisions of this Article Fifth may not be amended,
altered or repealed except by a vote of three-fourths of the shares of common
stock of the Corporation outstanding and entitled to vote thereupon.
SIXTH: Section 1. All corporate powers and authority of the
Corporation (except as at the time otherwise provided by statute, by these
Articles of Incorporation or by the By-Laws) shall be vested in and exercised by
the Board of Directors.
Section 2. The Board of Directors shall have the sole power to
adopt, alter or repeal the By-Laws of the Corporation except to the extent that
the By-Laws otherwise provide. The provisions of this Section 2 of this Article
Sixth may not be amended, altered or repealed except by vote of three-fourths of
the
10
<PAGE> 11
shares of capital stock of the Corporation outstanding and entitled to vote
thereupon voting together as a single class.
Section 3. The Board of Directors shall have the power from
time to time to determine whether and to what extent, and at what times and
places and under what conditions and regulations, the accounts and books of the
Corporation (other than the stock ledger) or any of them shall be open to the
inspection of stockholders; and no stockholder shall have any right to inspect
any account, book or document of the Corporation except to the extent permitted
by statute or the By-Laws.
Section 4. The Board of Directors shall have the power to
determine, as provided herein, or if a provision is not made herein, in
accordance with generally accepted accounting principles, what constitutes net
income, total assets and the net asset value of the shares of capital stock of
the Corporation.
Section 5. The Board of Directors shall have the power to
distribute dividends from the funds legally available therefor in such amounts,
if any, and in such manner to the stockholders of record as of a date, as the
Board of Directors may determine.
Section 6. Without the assent or vote of the stockholders, the
Board of Directors shall have the power to authorize the issuance from time to
time of shares of the capital stock of any class of the Corporation, whether now
or hereafter authorized, and securities convertible into shares of capital stock
of the Corporation of any class or classes, whether now or hereafter authorized,
for such consideration as the Board of Directors may deem advisable.
11
<PAGE> 12
Section 7. Without the assent or vote of the stockholders, the
Board of Directors shall have the power to authorize and issue obligations of
the Corporation, secured or unsecured, as the Board of Directors may determine,
and to authorize and cause to be executed mortgages and liens upon the real or
personal property of the Corporation.
Section 8. The provisions of Sections 6 and 7 of this Article
Sixth may not be amended, altered or repealed except by vote of three-fourths of
the shares of capital stock of the Corporation outstanding and entitled to vote
thereupon voting together as a single class.
SEVENTH: Section 1. To the fullest extent permitted by Maryland
statutory or decisional law, subject to the requirements of the Investment
Company Act of 1940, as amended, no director or officer of the Corporation shall
be personally liable to the Corporation or its security holders for money
damages. This limitation on liability applies to events occurring at the time a
person serves as a director or officer of the Corporation whether or not such
person is a director or officer at the time of any proceeding in which such
liability is asserted. No amendment of these Articles of Incorporation or repeal
of any provision hereof shall limit or eliminate the benefits provided to
directors and officers under this provision in connection with any act or
omission that occurred prior to such amendment or repeal.
Section 2. The Corporation shall indemnify, to the fullest
extent permitted by law (including the Investment Company
12
<PAGE> 13
Act of 1940) as currently in effect or as the same may hereafter be amended, any
person made or threatened to be made a party to any action, suit or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that such person or such person's testator or intestate is or was a director or
officer of the Corporation or serves or served at the request of the Corporation
any other enterprises as a director or officer. To the fullest extent permitted
by law (including the Investment Company Act of 1940) as currently in effect or
as the same may hereafter be amended, expenses incurred by any such person in
defending any such action, suit or proceeding shall be paid or reimbursed by the
Corporation promptly upon receipt by it of an undertaking of such person to
repay such expenses if it shall ultimately be determined that such person is not
entitled to be indemnified by the Corporation. The rights provided to any person
by this Section 2 of this Article Seventh shall be enforceable against the
Corporation by such person who shall be presumed to have relied upon it in
serving or continuing to serve as a director or officer as provided above. No
amendment of this Section 2 of this Article Seventh shall impair the rights of
any person arising at any time with respect to events occurring prior to such
amendment. For purposes of this Section 2 of this Article Seventh, the term
"Corporation" shall include any predecessor of the Corporation and any
constituent corporation (including any constituent of a constituent) absorbed by
the Corporation in a consolidation or merger; the term "other enterprise" shall
include any corporation, partnership, joint venture, trust or employee benefit
plan; service
13
<PAGE> 14
"at the request of the Corporation" shall include service as a director or
officer of the Corporation which imposes duties on, or involves services by,
such director or officer with respect to an employee benefit plan, its
participants or beneficiaries; any excise taxes assessed on a person with
respect to an employee benefit plan shall be deemed to be indemnifiable
expenses; and action by a person with respect to any employee benefit plan which
such person reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the best
interests of the Corporation. The provisions of this Section 2 of this Article
Seventh shall be in addition to the other provisions of this Article Seventh.
Section 3. Nothing in this Article Seventh protects or
purports to protect any director or officer against any liability to the
Corporation or its security holders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Section 4. Each section or portion thereof of this Article
Seventh shall be deemed severable from the remainder, and the invalidity of any
such section or portion shall not affect the validity of the remainder of this
Article.
EIGHTH: The duration of the Corporation shall be perpetual.
NINTH: From time to time, any of the provisions of these Articles of
Incorporation may be amended, altered or repealed
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<PAGE> 15
(including any amendment that changes the terms of any of the outstanding stock
by classification, reclassification or otherwise), and other provisions that
may, under the statutes of the State of Maryland at the time in force, be
lawfully contained in articles of incorporation may be added or inserted, upon
the vote of the holders of a majority of the shares of common stock of the
Corporation outstanding and entitled to vote thereupon. If these Articles of
Incorporation specifically so provide, however, any such amendment, alteration,
repeal, addition or insertion may be affected only upon the vote of
three-fourths of the shares of common stock of the Corporation outstanding and
entitled to vote thereupon. The provisions of the prior sentence may not be
amended, altered or repealed except by vote of three-fourths of the shares of
common stock of the corporation outstanding and entitled to vote thereupon. All
rights at any time conferred upon the stockholders of the Corporation by these
Articles of Incorporation are subject to the provisions of this Article Ninth.
IN WITNESS WHEREOF, I have executed these Articles of
Incorporation acknowledging the same to be my act, on February 2, 1994.
/s/Stefanie V. Chang
-----------------------------
Incorporator
Witness:
/s/Jon R. Lewis
- --------------------------
15
<PAGE> 1
Exhibit 2(a)(2)
MORGAN STANLEY EUROPEAN EMERGING MARKETS FUND, INC.
ARTICLES OF AMENDMENT
MORGAN STANLEY EUROPEAN EMERGING MARKETS FUND, INC., a Maryland
corporation having its principal office c/o The Corporation Trust Incorporated,
32 South Street, Baltimore, Maryland 21202 (hereinafter called the Corporation),
hereby certifies to the State Department of Assessments and Taxation of
Maryland, that:
1. The charter of the Corporation is hereby amended by striking out the
FIRST section of the Articles of Incorporation and inserting in lieu thereof the
following:
"FIRST: The name of the corporation (hereinafter called the
"Corporation") is Morgan Stanley Russia & New Europe Fund, Inc."
2. The foregoing amendment to the charter of the Corporation has been
duly approved by the entire Board of Directors by Unanimous Written Consent
dated as of the 30th day of July, l996 and at the time of the approval by the
Directors there were no shares of stock of the Corporation entitled to vote on
the matter either outstanding or subscribed for.
The President acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief the matters and facts set forth in these Articles with
respect to the authorization and approval of the amendment of the Corporation's
charter are true in all material respects, and that this statement is made under
the penalties of perjury.
<PAGE> 2
IN WITNESS WHEREOF, Morgan Stanley Russia & New Europe Fund, Inc. has
caused these Articles to be signed in its name and on its behalf by its
President and attested by its Secretary on July 31, 1996.
MORGAN STANLEY EUROPEAN EMERGING
MARKETS FUND, INC.
By: /s/ Warren J. Olsen
-------------------
Warren J. Olsen
President
Attest:
By: /s/ Valerie Y. Lewis
--------------------
Valerie Y. Lewis
Secretary
<PAGE> 1
Exhibit 2(b)
- -------------------------------------------------------------------------------
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
A Maryland corporation
AMENDED AND RESTATED BY-LAWS
July 30, 1996
- -------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I Stockholders......................................................................................... 1
Section 1.1. Place of Meeting............................................................ 1
Section 1.2. Annual Meetings............................................................. 1
Section 1.3. Special Meetings............................................................ 1
Section 1.4. Notice of Meetings of Stockholders.......................................... 2
Section 1.5. Record Dates................................................................ 3
Section 1.6. Quorum; Adjournment of Meetings............................................. 3
Section 1.7. Voting and Inspectors....................................................... 4
Section 1.8. Conduct of Stockholders' Meetings........................................... 5
Section 1.9. Concerning Validity of Proxies,
Ballots, etc................................................................ 5
Section 1.10. Action Without Meeting...................................................... 6
ARTICLE II Board of Directors.................................................................................. 6
Section 2.1. Function of Directors....................................................... 6
Section 2.2. Number of Directors......................................................... 6
Section 2.3. Classes of Directors; Term of Directors ......................................6
Section 2.4. Vacancies................................................................... 7
Section 2.5. Increase or Decrease in Number of
Directors................................................................... 7
Section 2.6. Place of Meeting............................................................ 8
Section 2.7. Regular Meetings............................................................ 8
Section 2.8. Special Meetings............................................................ 8
Section 2.9. Notices..................................................................... 8
Section 2.10. Quorum...................................................................... 9
Section 2.11. Executive Committee......................................................... 9
Section 2.12. Other Committees............................................................ 10
Section 2.13. Telephone Meetings.......................................................... 10
Section 2.14. Action Without a Meeting.................................................... 10
Section 2.15. Compensation of Directors................................................... 11
ARTICLE III Officers........................................................................................... 11
Section 3.1. Executive Officers.......................................................... 11
Section 3.2. Term of Office.............................................................. 12
Section 3.3. Powers and Duties........................................................... 12
Section 3.4. Surety Bonds................................................................ 12
ARTICLE IV Capital Stock....................................................................................... 13
Section 4.1. Certificates for Shares..................................................... 13
Section 4.2. Transfer of Shares.......................................................... 13
Section 4.3. Stock Ledgers............................................................... 13
Section 4.4. Transfer Agents and Registrars.............................................. 13
Section 4.5. Lost, Stolen or Destroyed Certificates...................................... 14
ARTICLE V Corporate Seal; Location of Offices; Books; Net Asset Value.......................................... 14
Section 5.1. Corporate Seal.............................................................. 14
Section 5.2. Location of Offices......................................................... 15
Section 5.3. Books and Records........................................................... 15
Section 5.4. Annual Statement of Affairs................................................. 15
Section 5.5. Net Asset Value............................................................. 15
</TABLE>
i
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TABLE OF CONTENTS
(Continued)
<TABLE>
<S> <C>
ARTICLE VI Fiscal Year and Accountant........................................................... 16
Section 6.1. Fiscal Year................................................................. 16
Section 6.2. Accountant.................................................................. 16
ARTICLE VII Indemnification and Insurance........................................................ 16
Section 7.1. General..................................................................... 16
Section 7.2. Indemnification of Directors and
Officers.................................................................... 16
Section 7.3. Insurance................................................................... 18
ARTICLE VIII Custodian............................................................................ 18
ARTICLE X Amendment of By-Laws................................................................. 19
</TABLE>
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MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
Amended and Restated
By-Laws
ARTICLE I
Stockholders
Section 1.1. Place of Meeting. All meetings of the
stockholders should be held at the principal office of the Corporation in the
State of Maryland or at such other place within the United States as may from
time to time be designated by the Board of Directors and stated in the notice of
such meeting.
Section 1.2. Annual Meetings. The annual meeting of the
stockholders of the Corporation shall be held during the first six months of
each year on such date and at such hour as may from time to time be designated
by the Board of Directors and stated in the notice of such meeting, for the
purpose of electing directors for the ensuing year and for the transaction of
such other business as may properly be brought before the meeting.
Section 1.3. Special Meetings. Special meetings of the
stockholders for any purpose or purposes may be called by the Chairman of the
Board, the President, or a majority of the Board of Directors. Special meetings
of stockholders shall also be called by the Secretary upon receipt of the
request in writing signed by stockholders holding not less than 25% of the votes
entitled to be cast thereat. Such request shall state the purpose or purposes of
the proposed meeting and the matters proposed to be acted on at such proposed
meeting. The Secretary shall inform such stockholders of the reasonably
estimated costs of preparing and
<PAGE> 5
mailing such notice of meeting and upon payment to the Corporation of such
costs, the Secretary shall give notice as required in this Article to all
stockholders entitled to notice of such meeting. No special meeting of
stockholders need be called upon the request of the holders of common stock
entitled to cast less than a majority of all votes entitled to be cast at such
meeting to consider any matter which is substantially the same as a matter voted
upon at any special meeting of stockholders held during the preceding twelve
months.
Section 1.4. Notice of Meetings of Stockholders. Not less than
ten days' and not more than ninety days' written or printed notice of every
meeting of stockholders, stating the time and place thereof (and the purpose of
any special meeting), shall be given to each stockholder entitled to vote
thereat and to each other stockholder entitled to notice of the meeting by
leaving the same with such stockholder or at such stockholder's residence or
usual place of business or by mailing it, postage prepaid, and addressed to such
stockholder at such stockholder's address as it appears upon the books of the
Corporation. If mailed, notice shall be deemed to be given when deposited in the
mail addressed to the stockholder as aforesaid.
No notice of the time, place or purpose of any meeting of
stockholders need be given to any stockholder who attends in person or by proxy
or to any stockholder who, in writing executed and filed with the records of the
meeting, either before or after the holding thereof, waives such notice.
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<PAGE> 6
Section 1.5. Record Dates. The Board of Directors may fix, in
advance, a record date for the determination of stockholders entitled to notice
of or to vote at any stockholders meeting or to receive a dividend or be
allotted rights or for the purpose of any other proper determination with
respect to stockholders and only stockholders of record on such date shall be
entitled to notice of and to vote at such meeting or to receive such dividends
or rights or otherwise, as the case may be; provided, however, that such record
date shall not be prior to ninety days preceding the date of any such meeting of
stockholders, dividend payment date, date for the allotment of rights or other
such action requiring the determination of a record date; and further provided
that such record date shall not be prior to the close of business on the day the
record date is fixed, that the transfer books shall not be closed for a period
longer than 20 days, and that in the case of a meeting of stockholders, the
record date or the closing of the transfer books shall not be less than ten days
prior to the date fixed for such meeting.
Section 1.6. Quorum; Adjournment of Meetings. The presence in
person or by proxy of stockholders entitled to cast a majority of the votes
entitled to be cast thereat shall constitute a quorum at all meetings of the
stockholders, except as otherwise provided in the Articles of Incorporation. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the holders of a majority of the stock present in person or by
proxy shall have power to adjourn the meeting from time to time, without notice
other than announcement at the
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<PAGE> 7
meeting, until the requisite amount of stock entitled to vote at such meeting
shall be present, to a date not more than 120 days after the original record
date. At such adjourned meeting at which the requisite amount of stock entitled
to vote thereat shall be represented, any business may be transacted which might
have been transacted at the meeting as originally notified.
Any meeting of stockholders, annual or special, may adjourn
from time to time to reconvene at the same or some other place, and notice need
not be given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the Corporation may transact any business which might have been
transacted at the original meeting.
Section 1.7. Voting and Inspectors. At all meetings,
stockholders of record entitled to vote thereat shall have one vote for each
share of common stock standing in his name on the books of the Corporation (and
such stockholders of record holding fractional shares, if any, shall have
proportionate voting rights) on the date for the determination of stockholders
entitled to vote at such meeting, either in person or by proxy appointed by
instrument in writing subscribed by such stockholder or his duly authorized
attorney.
All elections shall be had and all questions decided by a
majority of the votes cast at a duly constituted meeting, except as otherwise
provided by statute or by the Articles of Incorporation or by these By-Laws.
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At any election of Directors, the Chairman of the meeting may,
and upon the request of the holders of ten percent (10%) of the stock entitled
to vote at such election shall, appoint two inspectors of election who shall
first subscribe an oath or affirmation to execute faithfully the duties of
inspectors at such election with strict impartiality and according to the best
of their ability, and shall after the election make a certificate of the result
of the vote taken. No candidate for the office of Director shall be appointed
such Inspector.
Section 1.8. Conduct of Stockholders' Meetings. The meetings
of the stockholders shall be presided over by the Chairman of the Board, or if
he is not present, by the President, or if he is not present, by a
vice-president, or if none of them is present, by a Chairman to be elected at
the meeting. The Secretary of the Corporation, if present, shall act as a
Secretary of such meetings, or if he is not present, an Assistant Secretary
shall so act; if neither the Secretary nor the Assistant Secretary is present,
then the meeting shall elect its Secretary.
Section 1.9. Concerning Validity of Proxies, Ballots, etc. At
every meeting of the stockholders, all proxies shall be received and taken in
charge of and all ballots shall be received and canvassed by the Secretary of
the meeting, who shall decide all questions touching the qualification of
voters, the validity of the proxies and the acceptance or rejection of votes,
unless inspectors of election shall have been appointed by the Chairman of the
meeting, in which event such inspectors of election shall decide all such
questions.
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<PAGE> 9
Section 1.10. Action Without Meeting. Any action to be taken
by stockholders may be taken without a meeting if (1) all stockholders entitled
to vote on the matter consent to the action in writing, (2) all stockholders
entitled to notice of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent and (3) said consents and waivers are filed with
the records of the meetings of stockholders. Such consent shall be treated for
all purposes as a vote at the meeting.
ARTICLE II
Board of Directors
Section 2.1. Function of Directors. The business and affairs
of the Corporation shall be conducted and managed by a Board of Directors. All
powers of the Corporation shall be exercised by the Board of Directors except as
conferred on or reserved to the stockholders by statute.
Section 2.2. Number of Directors. The Board of Directors shall
consist of not less than three nor more than fourteen Directors, as may be
determined from time to time by vote of a majority of the Directors then in
office. Directors need not be stockholders.
Section 2.3. Classes of Directors; Term of Directors. The
Directors shall be divided into three classes, designated Class I, Class II and
Class III. All classes shall be as nearly equal in number as possible. The
Directors as initially classified shall hold office for terms as follows: the
Class I Directors shall hold office until the date of the annual meeting of
stockholders in 1997 or until their successors shall be elected and
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<PAGE> 10
qualified; the Class II Directors shall hold office until the date of the annual
meeting of stockholders in 1998 or until their successors shall be elected and
qualified; and the Class III Directors shall hold office until the date of the
annual meeting of stockholders in 1999 or until their successors shall be
elected and qualified. Upon expiration of the term of office of each class as
set forth above, the Directors in each such class shall be elected for a term of
three years to succeed the Directors whose terms of office expire. Each Director
shall hold office until the expiration of his term and until his successor shall
have been elected and qualified, or until his death, or until he shall have
resigned, or until December 31 of the year in which he shall have reached
seventy-three years of age, or until he shall have been removed as provided by
Statute or the Articles of Incorporation.
Section 2.4. Vacancies. In case of any vacancy in the Board of
Directors through death, resignation or other cause, other than an increase in
the number of Directors, subject to the provisions of law, a majority of the
remaining Directors, although a majority is less than a quorum, by an
affirmative vote, may elect a successor to hold office until the next annual
meeting of stockholders or until his successor is chosen and qualified.
Section 2.5. Increase or Decrease in Number of Directors. The
Board of Directors, by the vote of a majority of the entire Board, may increase
the number of Directors and may elect Directors to fill the vacancies created by
any such increase in the number of Directors until the next annual meeting of
stockholders or until their successors are duly chosen and
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qualified. The Board of Directors, by the vote of a majority of the entire
Board, may likewise decrease the number of Directors to a number not less than
that permitted by law.
Section 2.6. Place of Meeting. The Directors may hold their
meetings within or outside the State of Maryland, at any office or offices of
the Corporation or at any other place as they may from time to time determine.
Section 2.7. Regular Meetings. Regular meetings of the Board
of Directors shall be held at such time and on such notice as the Directors may
from time to time determine.
The annual meeting of the Board of Directors shall be held as
soon as practicable after the annual meeting of the stockholders for the
election of Directors.
Section 2.8. Special Meetings. Special meetings of the Board
of Directors may be held from time to time upon call of the Chairman of the
Board, the President, the Secretary or two or more of the Directors, by oral or
telegraphic or written notice duly served on or sent or mailed to each Director
not less than one day before such meeting.
Section 2.9. Notices. Unless required by statute or otherwise
determined by resolution of the Board of Directors in accordance with these
By-laws, notices to Directors need not be in writing and need not state the
business to be transacted at or the purpose of any meeting, and no notice need
be given to any Director who is present in person or to any Director who, in
writing executed and filed with the records of the meeting either before or
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after the holding thereof, waives such notice. Waivers of notice need not state
the purpose or purposes of such meeting.
Section 2.10. Quorum. One-third of the Directors then in
office shall constitute a quorum for the transaction of business, provided that
if there is more than one Director, a quorum shall in no case be less than two
Directors. If at any meeting of the Board there shall be less than a quorum
present, a majority of those present may adjourn the meeting from time to time
until a quorum shall have been obtained. The act of the majority of the
Directors present at any meeting at which there is a quorum shall be the act of
the Directors, except as may be otherwise specifically provided by statute or by
the Articles of Incorporation or by these By-Laws.
Section 2.11. Executive Committee. The Board of Directors may
appoint from the Directors an Executive Committee to consist of such number of
Directors (not less than two) as the Board may from time to time determine. The
Chairman of the Committee shall be elected by the Board of Directors. The Board
of Directors shall have power at any time to change the members of such
Committee and may fill vacancies in the Committee by election from the
Directors. When the Board of Directors is not in session, to the extent
permitted by law, the Executive Committee shall have and may exercise any or all
of the powers of the Board of Directors in the management and conduct of the
business and affairs of the Corporation. The Executive Committee may fix its own
rules of procedure, and may meet when and as provided by such rules or by
resolution of the Board of Directors, but in every case the
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presence of a majority shall be necessary to constitute a quorum. During the
absence of a member of the Executive Committee, the remaining members may
appoint a member of the Board of Directors to act in his place.
Section 2.12. Other Committees. The Board of Directors may
appoint from the Directors other committees which shall in each case consist of
such number of Directors (not less than two) and shall have and may exercise
such powers as the Board may determine in the resolution appointing them. A
majority of all the members of any such committee may determine its action and
fix the time and place of its meetings, unless the Board of Directors shall
otherwise provide. The Board of Directors shall have power at any time to change
the members and powers of any such committee, to fill vacancies and to discharge
any such committee.
Section 2.13. Telephone Meetings. Members of the Board of
Directors or a committee of the Board of Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means, subject to the provisions of the
Investment Company Act of 1940, constitutes presence in person at the meeting.
Section 2.14. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or any committee
thereof may be taken without a meeting, if a written consent to such action is
signed by all members of the Board or of such committee, as the case may be, and
such written
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<PAGE> 14
consent is filed with the minutes of the proceedings of the Board or such
committee.
Section 2.15. Compensation of Directors. No Director shall
receive any stated salary or fees from the Corporation for his services as such
if such Director is, otherwise than by reason of being such Director, an
interested person (as such term is defined by the Investment Company Act of
1940, as amended) of the Corporation or of its investment manager or principal
underwriter. Except as provided in the preceding sentence, Directors shall be
entitled to receive such compensation from the Corporation for their services as
may from time to time be voted by the Board of Directors.
ARTICLE III
Officers
Section 3.1. Executive Officers. The executive officers of the
Corporation shall be chosen by the Board of Directors. These may include a
Chairman of the Board of Directors (who shall be a Director) and shall include a
President, a Secretary and a Treasurer. The Board of Directors or the Executive
Committee may also in its discretion appoint one or more Vice- Presidents,
Assistant Secretaries, Assistant Treasurers and other officers, agents and
employees, who shall have such authority and perform such duties as the Board or
the Executive Committee may determine. The Board of Directors may fill any
vacancy which may occur in any office. Any two offices, except those of
President and Vice-President, may be held by the same person, but no officer
shall execute, acknowledge or verify any instrument in more than
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<PAGE> 15
one capacity, if such instrument is required by law or these ByLaws to be
executed, acknowledged or verified by two or more officers.
Section 3.2. Term of Office. The term of office of all
officers shall be one year and until their respective successors are chosen and
qualified. Any officer may be removed from office at any time with or without
cause by the vote of a majority of the whole Board of Directors. Any officer may
resign his office at any time by delivering a written resignation to the
Corporation and, unless otherwise specified therein, such resignation shall take
effect upon delivery.
Section 3.3. Powers and Duties. The officers of the
Corporation shall have such powers and duties as shall be stated in a resolution
of the Board of Directors, or the Executive Committee and, to the extent not so
stated, as generally pertain to their respective offices, subject to the control
of the Board of Directors and the Executive Committee.
Section 3.4. Surety Bonds. The Board of Directors may require
any officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his duties
to the Corporation, including responsibility for negligence and for the
accounting of any of the Corporation's property, funds or securities that may
come into his hands.
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ARTICLE IV
Capital Stock
Section 4.1. Certificates for Shares. Each stockholder of the
Corporation shall be entitled to a certificate or certificates for the full
number of shares of stock of the Corporation owned by him in such form as the
Board may from time to time prescribe.
Section 4.2. Transfer of Shares. Shares of the Corporation
shall be transferable on the books of the Corporation by the holder thereof in
person or by his duly authorized attorney or legal representative, upon
surrender and cancellation of certificates, if any, for the same number of
shares, duly endorsed or accompanied by proper instruments of assignment and
transfer, with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require; in the case of shares not
represented by certificates, the same or similar requirements may be imposed by
the Board of Directors.
Section 4.3. Stock Ledgers. The stock ledgers of the
Corporation, containing the names and addresses of the stockholders and the
number of shares held by them respectively, shall be kept at the principal
offices of the Corporation or, if the Corporation employs a Transfer Agent, at
the offices of the Transfer Agent of the Corporation.
Section 4.4. Transfer Agents and Registrars. The Board of
Directors may from time to time appoint or remove transfer agents and/or
registrars of transfers of shares of stock of the Corporation, and it may
appoint the same person as both transfer
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agent and registrar. Upon any such appointment being made all certificates
representing shares of capital stock thereafter issued shall be countersigned by
one of such transfer agents or by one of such registrars of transfers or by both
and shall not be valid unless so countersigned. If the same person shall be both
transfer agent and registrar, only one countersignature by such person shall be
required.
Section 4.5. Lost, Stolen or Destroyed Certificates. The Board
of Directors or the Executive Committee or any officer or agent authorized by
the Board of Directors or Executive Committee may determine the conditions upon
which a new certificate of stock of the Corporation of any class may be issued
in place of a certificate which is alleged to have been lost, stolen or
destroyed; and may, in its discretion, require the owner of such certificate or
such owner's legal representative to give bond, with sufficient surety, to the
Corporation and each Transfer Agent, if any, to indemnify it and each such
Transfer Agent against any and all loss or claims which may arise by reason of
the issue of a new certificate in the place of the one so lost, stolen or
destroyed.
ARTICLE V
Corporate Seal; Location of
Offices; Books; Net Asset Value
Section 5.1. Corporate Seal. The Board of Directors may
provide for a suitable corporate seal, in such form and bearing such
inscriptions as it may determine. Any officer or director shall have the
authority to affix the corporate seal. If the Corporation is required to place
its corporate seal to a document,
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it shall be sufficient to place the word "(seal)" adjacent to the signature of
the authorized officer of the Corporation signing the document.
Section 5.2. Location of Offices. The Corporation shall have a
principal office in the State of Maryland. The Corporation may, in addition,
establish and maintain such other offices as the Board of Directors or any
officer may, from time to time, determine.
Section 5.3. Books and Records. The books and records of the
Corporation shall be kept at the places, within or without the State of
Maryland, as the directors or any officer may determine; provided, however, that
the original or a certified copy of the by-laws, including any amendments to
them, shall be kept at the Corporation's principal executive office.
Section 5.4. Annual Statement of Affairs. The President or any
other executive officer of the Corporation shall prepare annually a full and
correct statement of the affairs of the Corporation, to include a balance sheet
and a financial statement of operations for the preceding fiscal year. The
statement of affairs should be submitted at the annual meeting of stockholders
and, within 20 days of the meeting, placed on file at the Corporation's
principal office.
Section 5.5. Net Asset Value. The value of the Corporation's
net assets shall be determined at such times and by such method as shall be
established from time to time by the Board of Directors.
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ARTICLE VI
Fiscal Year and Accountant
Section 6.1. Fiscal Year. The fiscal year of the Corporation,
unless otherwise fixed by resolution of the Board of Directors, shall begin on
the first day of January and shall end on the last day of December in each year.
Section 6.2. Accountant. The Corporation shall employ an
independent public accountant or a firm of independent public accountants as its
Accountant to examine the accounts of the Corporation and to sign and certify
financial statements filed by the Corporation. The employment of the Accountant
shall be conditioned upon the right of the Corporation to terminate the
employment forthwith without any penalty by vote of a majority of the
outstanding voting securities at any stockholders' meeting called for that
purpose.
ARTICLE VII
Indemnification and Insurance
Section 7.1. General. The Corporation shall indemnify
directors, officers, employees and agents of the Corporation against judgments,
fines, settlements and expenses to the fullest extent authorized and in the
manner permitted, by applicable federal and state law.
Section 7.2. Indemnification of Directors and Officers. The
Corporation shall indemnify to the fullest extent permitted by law (including
the Investment Company Act of 1940) as currently in effect or as the same may
hereafter be amended, any person made or
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threatened to be made a party to any action, suit or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that
such person or such person's testator or intestate is or was a director or
officer of the Corporation or serves or served at the request of the Corporation
any other enterprise as a director or officer. To the fullest extent permitted
by law (including the Investment Company Act of 1940) as currently in effect or
as the same may hereafter be amended, expenses incurred by any such person in
defending any such action, suit or proceeding shall be paid or reimbursed by the
Corporation promptly upon receipt by it of an undertaking of such person to
repay such expenses if it shall ultimately be determined that such person is not
entitled to be indemnified by the Corporation. The rights provided to any person
by this Article VII shall be enforceable against the Corporation by such person
who shall be presumed to have relied upon it in serving or continuing to serve
as a director or officer as provided above. No amendment of this Article VII
shall impair the rights of any person arising at any time with respect to events
occurring prior to such amendment. For purposes of this Article VII, the term
"Corporation" shall include any predecessor of the Corporation and any
constituent corporation (including any constituent of a constituent) absorbed by
the Corporation in a consolidation or merger; the term "other enterprises" shall
include any corporation, partnership, joint venture, trust or employee benefit
plan; service "at the request of the Corporation" shall include service as a
director or officer of the Corporation which imposes duties on, or involves
services by,
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such director or officer with respect to an employee benefit plan, its
participants or beneficiaries; any excise taxes assessed on a person with
respect to an employee benefit plan shall be deemed to be indemnifiable
expenses; and action by a person with respect to any employee benefit plan which
such person reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the best
interests of the Corporation.
Section 7.3. Insurance. Subject to the provisions of the
Investment Company Act of 1940, the Corporation, directly, through third parties
or through affiliates of the Corporation, may purchase, or provide through a
trust fund, letter of credit or surety bond insurance on behalf of any person
who is or was a Director, officer, employee or agent of the Corporation, or who,
while a Director, officer, employee or agent of the Corporation, is or was
serving at the request of the Corporation as a Director, officer, employee,
partner, trustee or agent of another foreign or domestic corporation,
partnership joint venture, trust or other enterprise against any liability
asserted against and incurred by such person in any such capacity or arising out
of such person's position, whether or not the Corporation would have the power
to indemnify such person against such liability.
ARTICLE VIII
Custodian
The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, foreign or domestic, as may be
designated by the Board of Directors, subject
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to the provisions of the Investment Company Act of 1940, as amended, and other
applicable laws and regulations; and the funds and securities held by the
Corporation shall be kept in the custody of one or more such custodians,
provided such custodian or custodians can be found ready and willing to act, and
further provided that the Corporation and/or the Custodians may employ such
subcustodians as the Board of Directors may approve and as shall be permitted by
law.
ARTICLE X
Amendment of By-Laws
The By-Laws of the Corporation may be altered, amended, added
to or repealed only by majority vote of the entire Board of Directors.
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<PAGE> 1
EXHIBIT 2(d)
COMMON STOCK COMMON STOCK
MORGAN STANLEY
RUSSIA & NEW EUROPE FUND, INC.
INCORPORATED UNDER THE LAWS CUSIP 61744N 10 2
OF THE STATE OF MARYLAND SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.01, OF
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC. (hereinafter called the
"Corporation"), transferable on the books of the Corporation by the registered
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar or its
designated agent.
IN WITNESS WHEREOF, the Corporation has caused the facsimile signatures
of its duly authorized officers and its facsimile seal to be affixed hereto.
Dated:
/s/ /s/
- ------------------------------ ------------------------------
Secretary President
[SEAL]
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NEW YORK)
Transfer Agent
and Registrar
By
Authorized Signatory
<PAGE> 2
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
A FULL STATEMENT OF THE DESIGNATION AND ANY PREFERENCES, CONVERSION AND
OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS,
QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH
CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE AND THE AUTHORITY OF THE
BOARD OF DIRECTORS TO SET THE RELATIVE RIGHTS AND PREFERENCES OF ANY SERIES OF
CAPITAL STOCK MAY BE OBTAINED FROM THE CORPORATION BY ANY STOCKHOLDER UPON
REQUEST AND WITHOUT CHARGE.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT -- ________ Custodian _________
(Cust) (Minor)
under Uniform Gifts to Minors Act
_________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
/ /
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name and address
including postal zip code of assignee)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________________
_______________________________________________________________________ Attorney
to transfer the said shares on the books of the within-named Corporation with
full power of substitution in the premises
Dated: _______________________
Signature(s) ___________________________________
NOTICE The signature(s) to this
assignment must correspond with the
name as written upon the face of
the Certificate, in every
particular, without alteration or
enlargement, or any change
whatever.
Signature Guaranteed By:
______________________________
<PAGE> 1
Exhibit 2(e)
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
TERMS AND CONDITIONS
1. Each stockholder ("Stockholder") holding shares of common
stock of Morgan Stanley Russia & New Europe Fund, Inc. (the "Fund") will be
deemed to have elected, unless American Stock Transfer & Trust Company (the
"Plan Agent") is otherwise instructed by the stockholder in writing, to have all
distributions automatically reinvested by the Plan Agent in the Fund's shares
pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan").
Stockholders who elect not to participate in the Plan will receive all
distributions, net of any applicable U.S. withholding tax, in cash and will be
paid by check in U.S. dollars mailed directly to such Stockholder by American
Stock Transfer & Trust Company, as dividend disbursing agent. The Plan Agent
will act as agent in administering the Plan for each Stockholder participating
therein and will open an account for each such Stockholder under the Plan in the
same name as her or his shares of common stock are registered. Stockholders who
do not wish to participate in the Plan should notify the Fund, the Plan Agent at
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
2. Whenever the Directors of the Fund declare an income
dividend or capital gains distribution payable in either shares of the Fund's
common stock or cash, Stockholders participating in the
<PAGE> 2
Plan will take such dividend or distribution entirely in shares of common stock
to be issued by the Fund or to be purchased in the open market by the Plan
Agent, and the Plan Agent shall automatically receive such shares of common
stock, including fractions, for such Stockholder's account. Whenever the market
price per share of common stock equals or exceeds the net asset value per share
at the time the shares of common stock are valued for the purpose of determining
the number of shares of common stock equivalent to the dividend or distribution
(the "Valuation Date"), Stockholders participating in the Plan will be issued
shares of common stock by the Fund valued at net asset value or, if the net
asset value is less than 95% of the market price on the Valuation Date, then at
95% of the market price. If net asset value per share on the Valuation Date
exceeds the market price per share on that date, the Plan Agent, as agent for
Stockholders participating in the Plan, will buy shares of the Fund's common
stock on the open market, on the New York Stock Exchange or elsewhere, for such
Stockholders' accounts. If, before the Plan Agent has completed such purchases,
the market price exceeds the net asset value per share, the average per share
purchase price paid by the Plan Agent may exceed the net asset value per share,
resulting in the acquisition of fewer shares than if the dividend or
distribution had been paid in shares issued by the Fund at net asset value.
Additionally, if the market price exceeds the net asset value per share before
the Plan Agent has completed its purchases, the Plan Agent is permitted to cease
purchasing shares and the Fund may issue the remaining shares at a price equal
to the greater of (a)
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<PAGE> 3
net asset value or (b) 95% of the then current market price. In a case where the
Plan Agent has terminated open market purchases and the Fund has issued the
remaining shares, the number of shares received by each Stockholder
participating in the Plan in respect of the dividend or distribution will be
based on the weighted average of prices paid for shares purchased in the open
market and the price at which the Fund issues the remaining shares. The
Valuation Date shall be the dividend or distribution payment date or, if that
date is not a New York Stock Exchange trading day, the next preceding trading
day.
3. Whenever the directors of the Fund declare an income
dividend or capital gains distribution payable only in cash, the Plan Agent, as
agent for the Stockholders participating in the Plan, will buy shares of the
Fund's common stock on the open market, on the New York Stock Exchange or
elsewhere, with the cash in respect of such dividend or distribution for the
accounts of such Stockholders, on, or shortly after, the payment date. To the
extent the market price exceeds the net asset value of the common stock when the
Plan Agent makes such purchases, Stockholders participating in the Plan may
receive fewer shares of common stock than if the dividend or distribution had
been payable in common stock issued by the Fund.
4. Stockholders participating in the Plan have the option of
making additional cash payments to the Plan Agent, annually, in any amount from
$100 to $3,000, for investment in shares of common stock of the Fund. The Plan
Agent will use all funds received from Stockholders participating in the Plan
(as well
3
<PAGE> 4
as any dividends or distributions received in cash) to purchase shares of common
stock on the open market on or about the 15th of January of each year. Any
voluntary cash payments received more than 30 days prior to such date will be
returned by the Plan Agent, and interest will not be paid on any such amounts.
To avoid unnecessary cash accumulations, and also to allow ample time for
receipt and processing by the Plan Agent, Stockholders participating in the Plan
should send in voluntary cash payments to be received by the Plan Agent
approximately ten days before the 15th of January. A Stockholder participating
in the Plan may withdraw a voluntary cash payment by written notice, if the
notice is received by the Plan Agent not less than 48 hours before the payment
is to be invested. All voluntary cash payments should be made by check drawn on
a U.S. bank, (or a non-U.S. bank, if the U.S. currency is imprinted on the
check) payable in U.S. dollars, and should be mailed to the Plan Agent at
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005. If any check is returned unpaid for any reason, the Plan Agent will be
entitled to sell any number of shares from the Stockholder's account required to
recoup any funds expended to purchase shares for such Stockholder's account.
5. The Plan Agent will apply all cash received as a dividend
or distribution or as a voluntary cash payment to purchase shares of common
stock on the open market as soon as practicable after the payment date of the
dividend or distribution, but in no event later than 30 days after such payment
date, except where necessary to comply with applicable provisions of the federal
4
<PAGE> 5
securities laws. No Stockholder participating in the Plan will have any
authority to direct the time or price at which the Plan Agent may purchase
shares of the Fund's common stock on such Stockholder's behalf.
6. For all purposes of the Plan: (a) the market price of
shares of common stock of the Fund on a particular date shall be the last sales
price on the New York Stock Exchange at the close of the previous trading day
or, if there is no sale on the New York Stock Exchange on that date, then the
mean between the closing bid and asked quotations for such stock on the New York
Stock Exchange on such date, (b) each Valuation Date shall be the dividend or
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day, and (c) the net asset value per
share of common stock on a particular date shall be as determined by or on
behalf of the Fund.
7. The open-market purchases provided for above may be made on
any securities exchange where the shares of common stock of the Fund are traded,
in the over-the-counter market or in negotiated transactions, and may be on such
terms as to price, delivery and otherwise as the Plan Agent shall determine.
Funds held by the Plan Agent will not bear interest. In addition, it is
understood that the Plan Agent shall have no liability (other than as provided
in paragraph 15 hereof) in connection with any inability to purchase shares of
common stock within 30 days after the payment date of any dividend or
distribution as herein provided or with the timing of any purchases effected.
The Plan Agent shall
5
<PAGE> 6
have no responsibility as to the value of the shares of common stock of the Fund
acquired for any Stockholder's account.
8. The Plan Agent will hold shares of common stock acquired
pursuant to the Plan in non-certificated form in the name of the Stockholder for
whom such shares are being held, and each Stockholder's proxy will include those
shares of common stock held pursuant to the Plan. The Plan Agent will forward to
each Stockholder participating in the Plan any proxy solicitation material
received by it. In the case of Stockholders, such as banks, brokers or nominees,
that hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time to
time by such Stockholders as representing the total amount registered in the
names of such Stockholders and held for the account of beneficial owners who
participate in the Plan. Upon a Stockholder's written request, the Plan Agent
will deliver to her or him, without charge and within ten days, a certificate or
certificates representing all full shares of common stock held by the Plan Agent
pursuant to the Plan for the benefit of such Stockholder.
9. The Plan Agent will confirm, in writing, each acquisition
made for the account of a Stockholder participating in the Plan as soon as
practicable, but in any event not later than 60 days after the date thereof.
Such confirmation will indicate the number of shares purchased and the price per
share paid, and will include any applicable tax information pertaining to such
Stockholder's account. It is understood that the reinvestment of dividends and
distributions does not relieve the participant of any
6
<PAGE> 7
income tax which may be payable on such dividends. Any Stockholder who is
subject to U.S. backup withholding tax, or who is a foreign Stockholder subject
to U.S. income tax withholding, will have the applicable tax withheld from all
dividends and distributions received and only the net amount will be reinvested
in shares of the Fund's common stock. Although a Stockholder may from time to
time have an undivided fractional interest in a share of common stock of the
Fund, no certificates for fractional shares will be issued. However,
distributions and dividends on fractional shares of common stock will be
credited to each Stockholder's account. In the event of termination of a
Stockholder's account under the Plan, the Plan Agent will adjust for any such
undivided fractional interest in cash at the current market value of the shares
of common stock at the time of termination.
10. Any stock dividends or split shares distributed by the
Fund on shares of common stock held by the Plan Agent for a Stockholder will be
credited to the Stockholder's account. In the event that the Fund makes
available to Stockholders rights to purchase additional shares of common stock
or other securities, the Plan Agent will forward to each Stockholder
participating in the Plan any materials received by it relating to such rights.
11. The Plan Agent's fees for the handling of the reinvestment
of dividends and distributions will be paid by the Fund; however, Stockholders
participating in the Plan will be charged a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or distributions. A Stockholder
7
<PAGE> 8
will also pay brokerage commissions incurred in connection with purchases from
voluntary cash payments made by such Stockholder. Brokerage charges for
purchasing small amounts of stock for individual accounts through the Plan are
expected to be less than the usual brokerage charges for such transactions
because the Plan Agent will be purchasing stock for all participants in large
blocks and prorating the lower commission thus attainable.
12. A Stockholder may terminate her or his participation in
the Plan by notifying the Plan Agent, in writing, at American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005. Such termination will
be effective immediately if notice is received by the Plan Agent prior to any
dividend or distribution record date; otherwise such termination will be
effective, with respect to any subsequent dividend or distribution, on the first
trading day after the dividend or distribution paid for such record date shall
have been credited to such Stockholder's account. The Plan may be terminated by
the Plan Agent or the Fund with respect to any voluntary cash payments made or
any dividends or distributions paid subsequent to a notice of termination in
writing mailed to the Stockholders at least 90 days prior to the record date for
such dividend or distribution by the Fund. Upon any termination, the Plan Agent
will cause a certificate or certificates for the full shares held for a
Stockholder under the Plan, and cash adjustment for any fractional shares, to be
delivered to her or him or, upon the request of such Stockholder, will sell all
of the shares held for the Stockholder under the Plan, within ten days of
receiving the Stockholder's instructions,
8
<PAGE> 9
and will deliver the proceeds less any brokerage commissions and transfer taxes
to the Stockholder.
13. If any Stockholder has withdrawn shares from the Plan, or
acquires shares which have been withdrawn from the Plan, and wishes to have such
shares held through and subject to the Plan, such Stockholder may resubmit such
shares by notifying the Plan Agent at American Stock Transfer & Trust Company,
40 Wall Street, New York, New York 10005.
14. These terms and conditions may be amended or supplemented
by the Plan Agent or the Fund at any time or times but, except when necessary or
appropriate to comply with applicable law or the rules or policies of the
Securities and Exchange Commission or any other regulatory authority, only by
mailing to the Stockholders appropriate written notice at least 90 days prior to
the effective date thereof. The amendment or supplement shall be deemed to be
accepted by the Stockholders unless, prior to the effective date thereof, the
Plan Agent receives written notice of the termination of a Stockholder's account
under the Plan. Any such amendment may include an appointment by the Plan Agent
in its place and stead of a successor Plan Agent under these terms and
conditions, with full power and authority to perform all or any of the acts to
be performed by the Plan Agent under these terms and conditions. Upon any such
appointment of a successor Plan Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Plan Agent,
for the Stockholders' accounts, all dividends and distributions payable on the
shares of common stock held in the Stockholders' name or under
9
<PAGE> 10
the Plan for retention or application by such successor Plan Agent as provided
in these terms and conditions.
15. The Plan Agent shall at all times act in good faith and
agree to use its best efforts within reasonable limits to ensure the accuracy of
all services performed under this Plan and to comply with applicable law, but
assumes no responsibility and shall not be liable for loss or damage due to
errors unless such error is caused by its negligence, bad faith or willful
misconduct or that of its employees.
10
<PAGE> 1
EXHIBIT 2(G)
INVESTMENT ADVISORY AND
MANAGEMENT AGREEMENT
AGREEMENT, dated as of _________ __, 1996, between MORGAN
STANLEY RUSSIA & NEW EUROPE FUND, INC., a Maryland corporation (the "Fund"), and
MORGAN STANLEY ASSET MANAGEMENT INC., a Delaware corporation (the "Investment
Manager").
WHEREAS, the Fund is a closed-end, non-diversified management
investment company registered under the U.S. Investment Company Act of 1940, as
amended (the "1940 Act"), the shares of common stock of which are registered
under the Securities Act of 1933, as amended; and
WHEREAS, the Fund's investment objectives are set forth in the
Prospectus dated the date hereof (the "Prospectus") contained in the Fund's
Registration Statement on Form N-2 (File Nos. 33-75012 and 811-8346) (the
"Registration Statement"); and
WHEREAS, the Fund desires to retain the Investment Manager to
render investment management services with respect to its assets and the
Investment Manager is willing to render such services.
NOW, THEREFORE, in consideration of the mutual covenants
hereafter contained, it is hereby agreed by and between the parties hereto as
follows:
1. Appointment of Investment Manager. (a) The Fund
hereby employs the Investment Manager for the period and on the
terms and conditions set forth herein, subject at all times to the
supervision of the Board of Directors of the Fund, to:
(i) make all investment decisions for the Fund,
prepare and make available to the Fund research and statistical data in
connection therewith, and to supervise the acquisition and disposition
of securities by the Fund, including the selection of brokers or
dealers to carry out transactions, all in accordance with the Fund's
investment objective and policies and limitations, as the same are set
forth in the Prospectus, and in accordance with guidelines and
directions from the Fund's Board of Directors;
(ii) assist the Fund as it may reasonably
request in the conduct of Fund's business, subject to the direction and
control of the Fund's Board of Directors;
(iii) maintain or cause to be maintained for
the Fund all books and records required under the 1940 Act, to the
extent that such books and records are not maintained or
<PAGE> 2
furnished by the administrators, custodians or other agents of
the Fund; and
(iv) furnish at the Investment Manager's
expense for the use of the Fund such office space and facilities as the
Fund may require for its reasonable needs, to the extent not furnished
by the Fund's administrators, custodians or other agents, and furnish
at the Investment Manager's expense clerical services in the United
States related to research, statistical and investment work.
The Investment Manager is authorized as agent of the Fund to give instructions
to the custodians from time to time of the Fund's assets as to deliveries of
securities and payments of cash for the account of the Fund. In connection with
the selection of brokers or dealers and the placing of orders for the purchase
and sale of securities for the Fund, the Investment Manager is directed at all
times to seek to obtain for the Fund the most favorable net results as
determined by the Board of Directors of the Fund. Subject to this requirement
and the provisions of the 1940 Act, the U.S. Securities Exchange Act of 1934, as
amended, and any other applicable provisions of law, nothing shall prohibit the
Investment Manager from selecting brokers or dealers with which it or the Fund
is affiliated or which provide the Investment Manager with investment research
services as described in the Fund's Prospectus.
(b) The Investment Manager accepts such employment and agrees
during the term of this Agreement to render such services, to permit any of its
directors, officers or employees to serve without compensation as directors or
officers of the Fund if elected to such positions, and to assume the obligations
set forth herein for the compensation herein provided. The Investment Manager
shall for all purposes herein provided be deemed to be an independent contractor
and, unless otherwise expressly provided or authorized, shall have no authority
to act for or represent the Fund in any way or otherwise be deemed an agent of
the Fund.
2. Compensation. For the services and facilities described in
Section 1, the Fund agrees to pay in United States dollars to the Investment
Manager, a fee, computed weekly and payable monthly, at an annual rate of 1.60%
of the Fund's average weekly net assets. For the month and year in which this
Agreement becomes effective or terminates, there shall be an appropriate
proration on the basis of the number of days that this Agreement is in effect
during such month and year, respectively.
3. Investment in Fund Stock. The Investment Manager agrees
that it will not make a short sale of any capital stock of the Fund, or purchase
any share of the capital stock of the Fund other than for investment.
4. Non-Exclusivity of Services. Nothing herein shall be
construed as prohibiting the Investment Manager from providing investment
advisory services to, or entering into investment
2
<PAGE> 3
advisory agreements with, any other clients (such as other registered investment
companies), including clients who may invest in RNE country issuers (as such
term is defined in the Fund's Prospectus), so long as the Investment Manager's
services to the Fund are not impaired thereby.
5. Standard of Care; Indemnification. (a) The Investment
Manager may rely on information reasonably believed by it to be accurate and
reliable. Neither the Investment Manager nor its officers, directors, employees,
agents or controlling persons (as defined in the 1940 Act) shall be subject to
any liability for any act or omission, error of judgment or mistake of law, or
for any loss suffered by the Fund, in the course of, connected with or arising
out of any services to be rendered hereunder, except by reason of willful
misfeasance, bad faith or gross negligence on the part of the Investment Manager
in the performance of its duties or by reason of reckless disregard on the part
of the Investment Manager of its obligations and duties under this Agreement.
Any person, even though also employed by the Investment Manager, who may be or
become an employee of the Fund shall be deemed, when acting within the scope of
his employment by the Fund, to be acting in such employment solely for the Fund
and not as an employee or agent of the Investment Manager.
(b) The Fund agrees to indemnify and hold harmless the
Investment Manager, its officers, directors, employees, agents, shareholders,
controlling persons or other affiliates (each an "Indemnified Party"), for any
losses, costs and expenses incurred or suffered by any Indemnified Party arising
from any action, proceeding or claims which may be brought against such
Indemnified Party in connection with the performance or non-performance in good
faith of its functions under this Agreement, except losses, costs and expenses
resulting from willful misfeasance, bad faith or gross negligence in the
performance of such Indemnified Party's duties or from reckless disregard on the
part of such Indemnified Party of such Indemnified Party's obligations and
duties under this Agreement.
6. Allocation of Charges and Expenses. (a) The Investment
Manager shall assume and pay for maintaining its staff and personnel, and shall,
at its own expense, provide the equipment, office space and facilities necessary
to perform its obligations hereunder. The Investment Manager shall pay the
salaries and expenses of such of the Fund's officers and employees, as well as
the fees and expenses of such of the Fund's directors who are directors,
officers or employees of the Investment Manager or any of its affiliates,
provided, however, that the Fund, and not the Investment Manager, shall bear
travel expenses or an appropriate fraction thereof of directors and officers of
the Fund who are directors, officers or employees of the Investment Manager or
its affiliates to the extent that such expenses relate to attendance at meetings
of the Fund's Board of Directors or any committees thereof. The Investment
Manager also shall assume and pay all of the Fund's offering expenses in
connection with the
3
<PAGE> 4
initial public offering of the Fund's common stock, including, without
limitation, SEC filing fees, New York Stock Exchange listing fees, expenses
relating to the printing and distribution of the Fund's preliminary and final
prospectuses, the engraving and printing of the Fund's stock certificates, fees
and expenses of qualification under state securities laws (other than fees of
counsel to the Underwriters), auditing and accounting fees, legal fees and
expenses of the Fund, fees relating to filings with the National Association of
Securities Dealers and all other miscellaneous related expenses. In no event
shall the Investment Manager assume or pay any other Fund expenses, including,
without limitation, expenses relating to the organization of the Fund.
(b) In addition to the fee of the Investment
Manager, the Fund shall assume and pay the following expenses: organization
expenses (but not the overhead or employee costs of the Investment Manager);
legal fees and expenses of counsel to the Fund; auditing and accounting
expenses; taxes and governmental fees; dues and expenses incurred in connection
with membership in investment company organizations; fees and expenses of the
Fund's custodians, sub-custodians, transfer agents and registrars; fees and
expenses with respect to administration, except as may be herein expressly
provided otherwise or provided otherwise pursuant to administration agreements;
expenses for portfolio pricing services by a pricing agent, if any; expenses
relating to investor and public relations; freight, insurance and other charges
in connection with the shipment of the Fund's portfolio securities; brokerage
commissions or other costs of acquiring or disposing of any portfolio holding of
the Fund; expenses of preparation and distribution of reports, notices and
dividends to stockholders; expenses of the dividend reinvestment and cash
purchase plan (except for brokerage expenses paid by participants in such plan);
costs of stationery; any litigation expenses; and costs of stockholders' and
other meetings.
7. Potential Conflicts of Interest. (a) Subject to applicable
statutes and regulations, it is understood that directors, officers or agents of
the Fund are or may be interested in the Investment Manager or its affiliates as
directors, officers, employees, agents, shareholders or otherwise, and that the
directors, officers, employees, agents or shareholders of the Investment Manager
or its affiliates may be interested in the Fund as directors, officers, agents
or otherwise.
(b) If the Investment Manager considers the
purchase or sale of securities for the Fund and other advisory clients of the
Investment Manager at or about the same time, transactions in such securities
will be allocated among the Fund and such other clients in a manner deemed fair
and reasonable by the Investment Manager, subject to any guidelines that may be
adopted by the Board of Directors of the Fund.
8. Duration and Termination. (a) This Agreement shall become
effective for a period of two years from the date the Fund's
4
<PAGE> 5
Registration Statement is declared effective by the U.S. Securities and Exchange
Commission (the "SEC"), and will continue in effect from year to year
thereafter, provided that such continuance is specifically approved at least
annually by (i) a vote of a majority of the members of the Fund's Board of
Directors who are neither parties to this Agreement nor interested persons of
the Fund or of the Investment Manager or of any entity regularly furnishing
investment advisory services with respect to the Fund pursuant to an agreement
with the Investment Manager, cast in person at a meeting called for the purpose
of voting on such approval, and (ii) a vote of a majority of either the Fund's
Board of Directors or the Fund's outstanding voting securities.
(b) This Agreement may nevertheless be terminated at
any time, without payment of penalty, by the Fund's Board of Directors, by a
vote of a majority of the Fund's outstanding voting securities, or by the
Investment Manager upon 60 days' written notice. This Agreement shall
automatically be terminated in the event of its assignment, provided, however,
that a transaction which does not, in accordance with the 1940 Act, result in a
change of actual control or management of the Investment Manager's business
shall not be deemed to be an assignment for the purposes of this Agreement.
(c) Termination of this Agreement shall not (i)
affect the right of the Investment Manager to receive payments of any unpaid
balance of the compensation described in Section 2 earned prior to such
termination, or (ii) extinguish the Investment Manager's right of
indemnification under Section 5.
As used herein, the terms "interested person," "assignment,"
and "vote of a majority of the outstanding voting securities" shall have the
meanings set forth in the 1940 Act.
9. Amendment. This Agreement may be amended by mutual
agreement, but only after authorization of such amendment by the affirmative
vote of (i) the holders of a majority of the outstanding voting securities of
the Fund, and (ii) a majority of the members of the Fund's Board of Directors
who are not interested persons of the Fund or of the Investment Manager, cast in
person at a meeting called for the purpose of voting on such approval.
10. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of New York, provided, however, that
nothing herein shall be construed as being inconsistent with the 1940 Act.
5
<PAGE> 6
11. Notices. Any communication hereunder shall be in writing
and shall be delivered in person or by telex or facsimile (followed by mailing
such written communication, air mail postage prepaid, on the date on which such
telex or facsimile is sent, to the address set forth below). Any communication
or document to be made or delivered by one person to another pursuant to this
Agreement shall be made or delivered to that other person at the following
relevant address (unless that other person has by fifteen (15) days' notice to
the other specified another address):
If to the Investment Manager:
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: General Counsel
Telephone No.: (212) 296-7100
Facsimile No.: (212) 921-5477
Telex No.: (212) 680-1248
If to the Fund:
Morgan Stanley Russia & New Europe Fund, Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: President
Telephone No.: (212) 296-7100
Facsimile No.: (212) 921-5477
Telex No.: (212) 680-1248
Communications or documents made or delivered by personal delivery shall be
deemed to have been received on the day of such delivery. Communications or
documents made or delivered by telex or facsimile shall be deemed to have been
received, if by telex, when acknowledged by the addressee's correct answer back
code and, if by facsimile, upon production of a transmission report by the
machine from which the facsimile was sent which indicates that the facsimile was
sent in its entirety to the facsimile number of the recipient; provided that a
hard copy of the communication or document so made or delivered by telex or
facsimile was posted the same day as the communication or document was made or
delivered by electronic means.
12. Jurisdiction. Each party hereto irrevocably agrees that
any suit, action or proceeding against either of the Investment Manager or the
Fund arising out of or relating to this Agreement shall be subject exclusively
to the jurisdiction of the United States District Court for the Southern
District of New York or the Supreme Court of the State of New York, New York
County, and each party hereto irrevocably submits to the jurisdiction of each
such court in connection with any such suit, action or proceeding. Each party
hereto waives any objection to the laying of venue of any such suit, action or
proceeding in either such court, and waives any claim that such suit, action or
proceeding has been
6
<PAGE> 7
brought in an inconvenient forum. Each party hereto irrevocably consents to
service of process in connection with any such suit, action or proceeding by
mailing a copy thereof in English by registered or certified mail, postage
prepaid, to their respective addresses as set forth in this Agreement.
13. Representation and Warranty of the Investment Manager. The
Investment Manager represents and warrants that it is duly registered as an
investment adviser under the U.S. Investment Advisers Act of 1940, as amended,
and that it will use its reasonable efforts to maintain effective its
registration during the term of this Agreement.
14. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Investment
Advisory and Management Agreement by their officers thereunto duly authorized as
of the day and year first written above.
MORGAN STANLEY RUSSIA & NEW EUROPE
FUND, INC.
By:
---------------------------------
Name: Warren J. Olsen
Title: President
MORGAN STANLEY ASSET MANAGEMENT
INC.
By:
---------------------------------
Name: Warren J. Olsen
Title: President
8
<PAGE> 1
EXHIBIT 2(H)(1)
5,000,000 Shares
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
COMMON STOCK
PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
September , 1996
<PAGE> 2
September , 1996
Morgan Stanley & Co.
Incorporated
/names of other co-managers/
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC., a Maryland
corporation (the "Fund"), is a newly incorporated, non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended. The Fund proposes to issue and sell to the several
Underwriters named in Schedule I hereto (the "Underwriters") 5,000,000 shares of
its Common Stock, $.01 par value per share (the "Firm Shares"). The Fund also
proposes to issue and sell to the several Underwriters not more than an
additional 750,000 shares of its Common Stock, $.01 par value per share (the
"Additional Shares"), if and to the extent that you, as Manager(s) of the
offering, shall have determined to exercise, on behalf of the Underwriters, the
right to purchase such shares of common stock granted to the Underwriters in
Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares." The shares of Common Stock, $.01 par
value per share, of the Company to be outstanding after giving effect to the
sales contemplated hereby are hereinafter referred to as the "Common Stock."
The Fund has filed with the Securities and Exchange Commission
(the "Commission") a notification on Form N-8A (the "Notification") of
registration of the Fund as an investment company and a registration statement
on Form N-2, including a prospectus, relating to the Shares. The registration
statement as amended at the time it becomes effective, including the information
(if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act of 1933, as
amended, is hereinafter referred to as the "Registration Statement;" the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus." The Securities Act of 1933, as amended, and the
rules and regulations of the Commission
1
<PAGE> 3
thereunder are collectively referred to as the "Securities Act;" the Investment
Company Act of 1940, as amended, and the rules and regulations of the Commission
thereunder are collectively referred to as the "Investment Company Act;" and the
Securities Act and the Investment Company Act are collectively referred to as
the "Acts."
If the Company has filed an abbreviated registration statement to
register additional shares of Common Stock pursuant to Rule 462(b) under the
Securities Act (the "Rule 462 Registration Statement"), then any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462 Registration Statement.
1. REPRESENTATIONS AND WARRANTIES RELATING TO THE FUND. The Fund
and Morgan Stanley Asset Management Inc. (the "Investment Manager"), jointly and
severally, represent and warrant to and agree with each of the Underwriters
that:
(a) The Registration Statement has become effective, no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or, to the knowledge
of the Fund or the Investment Manager, threatened by the Commission.
(b) The Fund has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Maryland, has
the corporate power and authority to conduct its business as described in
the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business requires
such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Fund. The Fund has no subsidiaries.
(c) The Fund is registered with the Commission as a
non-diversified, closed-end management investment company under the
Investment Company Act and no order of suspension or revocation of such
registration has been issued or proceedings therefor initiated or, to the
knowledge of the Fund or the Investment Manager, threatened by the
Commission. No person is serving or acting as an officer or director of, or
investment adviser to, the Fund except in accordance with the provisions of
the Investment Company Act and the Investment Advisers Act of 1940, as
amended, and the rules and regulations of the Commission thereunder
2
<PAGE> 4
(such act and rules being collectively referred to as the "Advisers Act").
(d) Each of this Agreement, the Investment Advisory and Management
Agreement between the Investment Manager and the Fund (the "Management
Agreement"), the Administration Agreement between The Chase Manhattan Bank
(the "Administrator") and the Fund (the "Administration Agreement"), the
International Custody Agreement between Morgan Stanley Trust Company (the
"International Custodian") and the Fund (the "International Custody
Agreement"), the Russia Custody Agreement between The Chase Manhattan Bank
(the "Russia Custodian") and the Fund (the "Russia Custody Agreement"), the
U.S. Custody Agreement between The Chase Manhattan Bank (the "U.S.
Custodian") and the Fund (the "U.S. Custody Agreement") and the Transfer
Agency Agreement between American Stock Transfer & Trust Company (the
"Transfer Agent") and the Fund (the "Transfer Agency Agreement") (this
Agreement, the Management Agreement, the Administration Agreement, the
International Custody Agreement, the Russia Custody Agreement, the U.S.
Custody Agreement and the Transfer Agency Agreement are referred to herein,
collectively, as the "Fundamental Agreements") has been duly authorized,
executed and delivered by the Fund. Each Fundamental Agreement, other than
this Agreement, assuming due authorization, execution and delivery by the
other parties thereto, and the Dividend Reinvestment and Cash Purchase Plan
(the "Plan") constitutes the legal, valid and binding obligation of the
Fund, enforceable against the Fund in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent transfers),
reorganization, moratorium or similar laws affecting creditors' rights
generally and by general principles of equity, regardless of whether
considered in a proceeding in equity or at law.
(e) None of (A) the execution and delivery by the Fund of, and the
performance by the Fund of its obligations under, each Fundamental
Agreement or the adoption by the Fund of the Plan, or (B) the issue and
sale by the Fund of the Shares as contemplated by this Agreement
contravenes or will contravene any provision of applicable law or the
articles of incorporation or by-laws of the Fund or any agreement or other
instrument binding upon the Fund that is material to the Fund, or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction
3
<PAGE> 5
over the Fund. No consent, approval, authorization, order or permit of, or
qualification with, any governmental body or agency, self-regulatory
organization or court or other tribunal is required for the performance by
the Fund of its obligations under the Fundamental Agreements or the Plan,
except such as have been obtained and as may be required by the Acts, the
Securities Exchange Act of 1934 (such act and the rules and regulations of
the Commission thereunder being collectively referred to as the "Exchange
Act") or the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(f) The authorized capital stock of the Fund conforms in all
material respects to the description thereof contained in the Prospectus,
and the articles of incorporation and by-laws of the Fund, the Fundamental
Agreements and the Plan conform in all material respects to the
descriptions thereof contained in the Prospectus.
(g) The articles of incorporation and by-laws of the Fund, the
Fundamental Agreements and the Plan comply with all applicable provisions
of the Acts, and all approvals of such documents required under the
Investment Company Act by the Fund's shareholders and Board of Directors
have been obtained and are in full force and effect.
(h) The Fundamental Agreements (other than this Agreement) and the
Plan are in full force and effect and neither the Fund nor, to the Fund's
knowledge, any other party to any such agreement is in default thereunder
and, to the knowledge of the Fund and the Investment Manager, no event has
occurred which with the passage of time or the giving of notice or both
would constitute a default thereunder. The Fund is not currently in breach
of, or in default under, any other written agreement or instrument to which
it or its property is bound or affected.
(i) The shares of Common Stock outstanding prior to the issuance
of the Shares have been duly authorized and are validly issued, fully paid
and non-assessable and the form of certificates used to evidence the Common
Stock is in due and proper form and complies with all provisions of
applicable law.
(j) The Shares have been duly authorized and, when issued, paid
for and delivered in accordance with
4
<PAGE> 6
the terms of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of the Shares will not be subject to any
pre-emptive or similar rights. No person has rights to the registration of
any securities because of the filing of the Registration Statement.
(k) The Shares and any shares of Common Stock outstanding prior to
the issuance of the Shares have been approved for listing on the New York
Stock Exchange, Inc. (the "New York Stock Exchange"), subject to official
notice of issuance. The Fund's Registration Statement on Form 8-A under the
Exchange Act is effective.
(l) The Fund intends to direct the investment of the proceeds of
the offering described in the Prospectus in such a manner as to comply with
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and the Fund is eligible to qualify as a regulated
investment company under Subchapter M of the Code.
(m) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, of the Fund, or in the investment
objectives, investment policies, liabilities, business, prospects or
operations of the Fund from that set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement) and there have been no transactions entered into by the Fund
which are material to the Fund other than those in the ordinary course of
its business or as described in the Prospectus.
(n) There are no legal or governmental proceedings pending or, to
the knowledge of the Fund and the Investment Manager, threatened to which
the Fund is a party or is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(o) The Fund has all necessary consents, authori- zations,
approvals, orders (including exemptive orders), certificates and permits of
and from, and has
5
<PAGE> 7
made all declarations and filings with, all governmental authorities,
self-regulatory organizations and courts and other tribunals to own and use
its assets and to conduct its business in the manner described in the
Prospectus, except to the extent that the failure to obtain or file the
foregoing would not have a material adverse effect on the Fund.
(p) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 497 under the Securities Act, complied when so filed in
all material respects with the Acts.
(q) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Acts and (iii) the Prospectus does not contain
and, as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph (q) do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Fund in writing by
such Underwriter through you expressly for use therein.
(r) The statement of assets and liabilities included in the
Registration Statement and the Prospectus presents fairly the financial
position of the Fund as at the date indicated and said statement has been
prepared in conformity with generally accepted accounting principles. Price
Waterhouse LLP, whose report appears in the Prospectus, are independent
public accountants with respect to the Fund as required by the Acts.
(s) There are no material restrictions, limitations or regulations
with respect to the ability of the Fund to invest its assets as described
in the Prospectus, other than as described therein.
6
<PAGE> 8
(t) Any advertisement used with the written consent of the Fund in
the public offering of the Shares pursuant to Rule 482 under the Securities
Act (an "Omitting Prospectus") complies with the requirements of Rule 482,
and does not contain an untrue statement of a material fact.
2. REPRESENTATIONS AND WARRANTIES RELATING TO THE INVESTMENT
MANAGER. The Investment Manager represents and warrants to and agrees with each
of the Underwriters that:
(a) The Investment Manager has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State of
Delaware, has the corporate power and authority to conduct its business as
described in the Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its
business requires such qualification, except to the extent that failure to
be so qualified or be in good standing would not have a material adverse
effect on the Investment Manager.
(b) The Investment Manager is duly registered as an investment
adviser under the Advisers Act, and is not prohibited by the Advisers Act
or the Investment Company Act from acting under the Management Agreement as
an investment adviser to the Fund as contemplated by the Prospectus, and no
order of suspension or revocation of such registration has been issued or
proceedings therefor initiated or, to the knowledge of the Investment
Manager, threatened by the Commission.
(c) Each of this Agreement and the Management Agreement has been
duly authorized, executed and delivered by the Investment Manager and
complies with all applicable provisions of the Acts. The Management
Agreement, assuming due authorization, execution and delivery by the other
parties thereto, constitutes the legal, valid and binding obligation of the
Investment Manager, enforceable against the Investment Manager in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or similar
laws affecting creditors' rights generally and by general principles of
equity, regardless of whether considered in a proceeding in equity or at
law.
7
<PAGE> 9
(d) The execution and delivery by the Investment Manager of, and
the performance by the Investment Manager of its obligations under, this
Agreement and the Management Agreement do not and will not contravene any
provision of applicable law or the certificate of incorporation or by-laws
of the Investment Manager or any agreement or other instrument binding upon
the Investment Manager that is material to the Investment Manager, or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Investment Manager. No consent, approval,
authorization, order or permit of, or qualification with, any governmental
body or agency, self-regulatory agency or court or other tribunal is
required for the performance by the Investment Manager of its obligations
under this Agreement or the Management Agreement except such as have been
obtained and as may be required by the Acts, the Exchange Act or the
securities or Blue Sky laws of the various states in connection with the
offer and sale of the Shares.
(e) There are no legal or governmental proceedings pending or, to
the knowledge of the Investment Manager, to which the Investment Manager is
a party or is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described.
(f) The Investment Manager has all necessary consents,
authorizations, approvals, orders (including exemptive orders),
certificates and permits of and from, and has made all declarations and
filings with, all governmental authorities, self-regulatory organizations
and courts and other tribunals to own and use its assets and to conduct its
business in the manner described in the Prospectus, except to the extent
that the failure to obtain or file the foregoing would not have a material
adverse effect on the Investment Manager.
(g) The Investment Manager has the financial resources available
to it necessary for the performance of its services and obligations as
contemplated in the Prospectus.
(h) The Management Agreement is in full force and effect and
neither the Investment Manager nor, to the Investment Manager's knowledge,
the Fund is in default thereunder and, to the knowledge of the Investment
Manager, no event has occurred which with the passage
8
<PAGE> 10
of time or the giving of notice or both would constitute a default under
such document.
(i) All information furnished by the Investment Manager for use in
the Registration Statement and Prospectus, including, without limitation,
the description of the Investment Manager, does not, and on the Closing
Date will not, contain any untrue statement of a material fact or omit to
state any material fact necessary to make such information not misleading.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the business or operations of the
Investment Manager from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement).
3. AGREEMENTS TO SELL AND PURCHASE. The Fund hereby agrees to sell
to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the Fund
the respective numbers of Firm Shares set forth in Schedule I hereto opposite
its name at $20.00 a Share (the "Purchase Price").
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Fund further agrees
to sell to the Underwriters the Additional Shares, and the Underwriters shall
have the right to purchase from time to time in the aggregate, severally and not
jointly, the Additional Shares at the Purchase Price. If you, on behalf of the
Underwriters, elect to exercise such option, you shall so notify the Company in
writing not later than 45 days after the date of this Agreement, which notice
shall specify the number of Additional Shares to be purchased by the
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 5 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. At any time that Additional Shares are to be purchased, each
Underwriter agrees, severally and not jointly, to purchase the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) that bears the same proportion to the total number of
Additional
9
<PAGE> 11
Shares to be purchased at such time as the number of Firm Shares set forth in
Schedule I hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.
For each of the Shares sold to the several Underwriters pursuant
to this Agreement (other than Shares purchased by the Investment Manager from an
Underwriter on behalf of accounts over which the Investment Manager has
discretionary authority), the Investment Manager agrees to pay to Morgan Stanley
& Co. Incorporated for its own account and the account of each Underwriter a fee
equal to an amount computed by multiplying (A) $________ , by (B) the sum of the
number of Shares purchased by Morgan Stanley & Co. Incorporated and each such
Underwriter on the Closing Date and any Option Closing Date.
The Fund hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not
offer, sell, contract to sell or otherwise dispose of any shares of its Common
Stock or any securities convertible into or exercisable or exchangeable for such
Common Stock for a period of 180 days after the date of the initial public
offering of the Shares, other than (i) the Shares and (ii) any shares of Common
Stock of the Fund issued pursuant to the Plan.
4. TERMS OF PUBLIC OFFERING. The Fund and the Investment Manager
are advised by you that the Underwriters propose to make a public offering of
their respective portions of the Shares as soon after the Registration Statement
and this Agreement have become effective as in your judgment is advisable. The
Fund and the Investment Manager are further advised by you (i) that the Shares
are to be offered to the public initially at a price of $20.00 per share (the
"Public Offering Price"), and (ii) that the Underwriters may, out of the
Underwriters' fee described in the third paragraph of Section 3 hereof, pay a
fee to certain dealers selected by you not in excess of $____ a share, and
such dealers may further pay a fee not in excess of $____ a share to any
Underwriter or to certain other dealers.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on ____________, 1996, or at
such other time on the same or such other date, not later than _________, 1996,
as shall be
10
<PAGE> 12
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "Closing Date."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 3 or at such other time on the same or on such other
date, in any event not later than _______, 1996, as shall be designated in
writing by you. Such notice shall be provided at least two business days prior
to such Option Closing Date. The time and date of any such payment are
hereinafter referred to as an "Option Closing Date."
Payment of the Underwriters' fee described in the third paragraph
of Section 3 hereof shall be made to Morgan Stanley & Co. Incorporated for its
own account and the account of each Underwriter in Federal or other funds
immediately available in New York City on the Closing Date and any Option
Closing Date.
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or an Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or such Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Firm Shares and the Additional Shares to
the Underwriters duly paid, against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The respective
obligations of the Fund and the Investment Manager and the several obligations
of the Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than the date hereof.
The several obligations of the Underwriters hereunder are subject
to the following further conditions:
(a) There shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise,
of the Fund or the Investment Manager, or in the investment objectives,
investment policies, liabilities, business, prospects
11
<PAGE> 13
or operations of the Fund from that set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and that makes
it, in your judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date
separate certificates, dated the Closing Date and signed by an executive
officer of each of the Fund and the Investment Manager in his or her
capacity as such, to the effect set forth in clause (a) above and to the
effect that the respective representations and warranties of the Fund and
the Investment Manager contained in this Agreement shall be true and
correct as of the Closing Date. Each officer signing and delivering such a
certificate may rely upon the best of his or her knowledge as to
proceedings threatened.
(c) The Investment Manager and the Fund shall have each performed
all of their respective obligations to be performed hereunder on or prior
to the Closing Date.
(d) You shall have received on the Closing Date an opinion of
Rogers & Wells, counsel for the Fund, dated the Closing Date, to the effect
that:
(i) the Registration Statement is effective under the
Securities Act and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement is in effect and no proceedings for such purpose are
pending or threatened by the Commission;
(ii) the Fund has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of
Maryland, has the corporate power and authority to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business requires such qualification,
except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the
Fund;
(iii) the Fund is registered with the Commission as a
non-diversified, closed-end management investment company under
the Investment
12
<PAGE> 14
Company Act and, to the best of such counsel's knowledge, no order
of suspension or revocation of such registration has been issued
or proceedings therefor initiated or threatened by the Commission;
(iv) each Fundamental Agreement has been duly authorized,
executed and delivered by the Fund. Each Fundamental Agreement,
other than this Agreement, assuming due authorization, execution
and delivery by the other parties thereto, and the Plan
constitutes the legal, valid and binding obligation of the Fund,
enforceable against the Fund in accordance with its terms except
as such enforceability may be limited by applicable bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws
affecting creditors' rights generally and by general principles of
equity, regardless of whether considered in a proceeding in equity
or at law;
(v) none of (A) the execution and delivery by the Fund of,
and the performance by the Fund of its obligations under, each
Fundamental Agreement or the adoption by the Fund of the Plan, or
(B) the issuance and sale by the Fund of the Shares as
contemplated by this Agreement, contravenes or will contravene any
provision of applicable U.S., State of New York or State of
Maryland law or the articles of incorporation or by-laws of the
Fund or any material agreement or instrument binding upon the Fund
that is known to such counsel, or any judgment, order or decree of
any U.S., State of New York or State of Maryland governmental
body, agency or court having jurisdiction over the Fund that is
known to such counsel. No consent, approval, authorization, permit
or order of, or qualification with, any U.S. or State of New York
governmental body or agency, self-regulatory organization or court
or other tribunal, is required for the performance by the Fund of
its obligations under the Fundamental Agreements or the Plan,
except as may be required by the Acts, the Exchange Act or the
securities or Blue Sky laws of the various states and in
connection with the offer and sale of the Shares by the
Underwriters;
13
<PAGE> 15
(vi) The authorized capital stock of the Fund conforms in all
material respects to the description thereof contained in the
Prospectus; and the articles of incorporation and by-laws of the
Fund, the Fundamental Agreements and the Plan conform in all
material respects as to legal matters to the descriptions thereof
contained in the Prospectus;
(vii) the articles of incorporation and by-laws of the Fund,
the Fundamental Agreements and the Plan comply with all applicable
provisions of the Acts, and all approvals of such documents
required under the Investment Company Act by the Fund's
shareholders and Board of Directors have been obtained and are in
full force and effect;
(viii) to the knowledge of such counsel, the Fundamental
Agreements (except for this Agreement) and the Plan are in full
force and effect and, to such counsel's knowledge, neither the
Fund nor any other party to any such agreement is in default
thereunder and, to the knowledge of such counsel, no event has
occurred which with the passage of time or the giving of notice or
both would constitute a default thereunder. To the knowledge of
such counsel, the Fund is not currently in breach of, or in
default under, any other written agreement or instrument to which
it or its property is bound or affected;
(ix) the shares of Common Stock outstanding prior to issuance
of the Shares have been duly authorized and are validly issued,
fully paid and non-assessable, and the form of certificate used to
evidence the Common Stock is in due and proper form and complies
with all provisions of applicable law;
(x) the Shares have been duly authorized and, when issued,
paid for and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and non-assessable
and the issuance of the Shares will not be subject to any
pre-emptive or similar rights;
(xi) the Shares have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance, and the
Fund's Registration Statement on Form 8-A under the Exchange Act
is effective;
14
<PAGE> 16
(xii) the Fund does not require any tax or other rulings to
enable it to qualify as a regulated investment company under
Subchapter M of the Code;
(xiii) the statements in the Prospectus under "Taxation - U.S.
Federal Income Taxes" and "Common Stock", insofar as such
statements constitute a summary of the law or legal conclusions,
documents or proceedings referred to therein, are accurate in all
material respects and fairly present the information called for
with respect to such legal matters, legal conclusions, documents
and proceedings and fairly summarize the matters referred to
therein;
(xiv) the descriptions, if any, in the Prospectus of U.S. or
State of New York statutes, regulations and legal or governmental
proceedings are accurate in all material respects and fairly
summarize the matters referred to therein;
(xv) there are no U.S. or State of New York statutes or
regulations, or, to the best of such counsel's knowledge after due
inquiry, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not
described or filed as required; and, to the best of such counsel's
knowledge after due inquiry, there are no legal or governmental
proceedings pending or threatened, that are required to be
described in the Registration Statement or the Prospectus and are
not so described; and
(xvi) the Registration Statement, the Notification and the
Prospectus and any supplements or amendments thereto (except for
financial statements and schedules included therein as to which
such counsel need not express any opinion) comply as to form in
all material respects with the Acts.
In addition to the foregoing opinion, such counsel shall advise
the Underwriters that, in the light of such counsel's understanding of the
applicable law and the experience it has gained through its practice
thereunder, nothing has come to its attention that would lead it to believe
that (except for financial statements, schedules and other financial,
economic or statistical information contained in the Registration
15
<PAGE> 17
Statement or the Prospectus, as to which counsel need express no belief)
the Registration Statement, on the date it became effective, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus, as of the time it was first provided
to the Underwriters or as of the Closing Date, contained or contains any
untrue statement of a material fact or omitted or omits to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Counsel shall
also be permitted to state that because of the limitations inherent in the
independent verification of factual matters and the character of
determinations involved in the registration process, that counsel does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus.
(e) You shall have received on the Closing Date an opinion of
Harold J. Schaaff, Jr., general counsel for the Investment Manager, dated
the Closing Date, to the effect that:
(i) the Investment Manager has been duly incorporated, is
validly existing as a corporation in good standing under the laws
of the State of Delaware, has the corporate power and authority to
conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business requires such
qualification, except to the extent that failure to be so
qualified or be in good standing would not have a material adverse
effect on the Investment Manager;
(ii) the Investment Manager is duly registered as an
investment adviser under the Advisers Act and is not prohibited by
the Advisers Act or the Investment Company Act from acting under
the Management Agreement as an investment manager to the Fund as
contemplated by the Prospectus, and no order of suspension or
revocation of such registration has been issued or proceedings
therefor initiated or, to the best of such counsel's knowledge,
threatened by the Commission;
16
<PAGE> 18
(iii) each of this Agreement and the Management Agreement has
been duly authorized, executed and delivered by the Investment
Manager. The Management Agreement, assuming due authorization,
execution and delivery by the Fund, constitutes the legal, valid
and binding obligation of the Investment Manager, enforceable
against the Investment Manager in accordance with its terms,
except as such enforceability may be limited by applicable
bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or
similar laws affecting creditors' rights generally and by general
principles of equity, regardless of whether considered in a
proceeding in equity or at law;
(iv) the execution and delivery by the Investment Manager of,
and the performance by the Investment Manager of its obligations
under, this Agreement and the Management Agreement will not
contravene any provision of applicable U.S. or State of New York
law or the certificate of incorporation or by-laws of the
Investment Manager or, to the best of such counsel's knowledge,
any agreement or other instrument binding upon the Investment
Manager that is material to the Investment Manager, or, to the
best of such counsel's knowledge, any judgment, order or decree of
any U.S. or State of New York governmental body, agency or court
having jurisdiction over the Investment Manager, and no consent,
approval or authorization, or order of, or qualification with, any
U.S. or State of New York governmental body or agency is required
for the performance by the Investment Manager of its obligations
under this Agreement, except such as may be required by the Acts,
the Exchange Act or the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares by the
Underwriters;
(v) to the best knowledge of such counsel, there are no
actions, investigations or other proceedings of any nature,
whether foreign or domestic, pending, commenced or threatened,
which in any case or in the aggregate, might result in any
material adverse change in the business of the Investment Manager
or which question the validity of this Agreement or the Management
Agreement or
17
<PAGE> 19
the performance by the Investment Manager of such Agreements; and
(vi) the description of the Investment Manager in the
Prospectus does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(f) You shall have received on the Closing Date an opinion of
Davis Polk & Wardwell, special counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in subparagraphs (iv) (but
only as to this Agreement), (vi), (x) and (xiii) (but only as to the
statements in the Prospectus under "Common Stock," and the statements in
the Prospectus under "Underwriters," and only with respect to matters of
U.S. law or legal conclusions) of paragraph (d) above and the last
paragraph of (d) above (except that no belief need be expressed with
respect to statements in the Prospectus contained in Appendix A thereto).
With respect to the last paragraph of (d) and (f) above, Rogers &
Wells and Davis Polk & Wardwell may state that their opinion and belief are
based upon their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification except as specified. With respect to paragraphs (d) and (f) above,
Rogers & Wells and Davis Polk & Wardwell may rely as to matters governed by the
laws of the State of Maryland upon an opinion of Maryland counsel for the Fund
and, to the extent any such counsel deems appropriate, upon the representations
of the Fund contained herein; provided that (A) such Maryland counsel for the
Fund is reasonably satisfactory to your counsel and (B) a copy of the opinion so
relied upon is delivered to you and is in form and substance satisfactory to
your counsel.
(g) You shall have received on the Closing Date a certificate from
a duly authorized officer of the International Custodian, certifying that
the International Custody Agreement is in full force and effect and is the
legal, valid, binding and enforceable obligation of the International
Custodian, assuming that such Agreement is a legal, valid, binding and
enforceable obligation of the other party thereto.
18
<PAGE> 20
(h) You shall have received on the Closing Date a certificate from
a duly authorized officer of the Russia Custodian, certifying that the
Russia Custody Agreement is in full force and effect and is the legal,
valid, binding and enforceable obligation of the Russia Custodian, assuming
that such Agreement is a legal, valid, binding and enforceable obligation
of the other party thereto.
(i) You shall have received on the Closing Date a certificate from
a duly authorized officer of the U.S. Custodian, certifying that the U.S.
Custody Agreement is in full force and effect and is the legal, valid,
binding and enforceable obligation of the U.S. Custodian, assuming that
such Agreement is a legal, valid, binding and enforceable obligation of the
other party thereto.
(j) You shall have received on the Closing Date a certificate from
a duly authorized officer of the Administrator certifying that the
Administration Agreement is in full force and effect and is the legal,
valid, binding and enforceable obligation of the Administrator, assuming
that such Agreement is a legal, valid, binding and enforceable obligation
of the other party thereto.
(k) You shall have received on the date of this Agreement a letter
dated such date, and also on the Closing Date a letter dated the Closing
Date, in each case in form and substance satisfactory to you, from Price
Waterhouse LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information regarding the Fund contained in the
Registration Statement and the Prospectus.
(l) All proceedings taken by the Fund and the Investment Manager
in connection with the organization and registration of the Fund and the
Shares under the Acts shall be satisfactory in form and substance to you
and counsel for the Underwriters.
(m) No proceedings shall have been instituted or threatened by the
Commission which would adversely affect the Fund's standing as a registered
investment company under the Investment Company Act or the standing of the
Investment Manager as a registered investment adviser under the Advisers
Act.
19
<PAGE> 21
(n) Not more than 10% of the assets of the Fund shall be subject
to any existing mortgage, pledge, lien, encumbrance, claim or equity.
(o) The Shares shall have been duly authorized for listing on the
New York Stock Exchange, subject only to official notice of issuance
thereof.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on each Option Closing Date
of such updated versions of the documents, certificates and opinions set forth
above in this Section 6 as you may reasonably request with respect to the good
standing of the Fund and the Investment Manager, the due authorization and
issuance of the Additional Shares and other matters related to the issuance of
the Additional Shares.
7. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Fund covenants with
each Underwriter as follows:
(a) To notify you immediately, and confirm such notice in
writing, (i) of the institution of any proceedings pursuant to
Section 8(e) of the Investment Company Act and (ii) of the
happening of any event during the period described in paragraph
(d) below which in the judgment of the Fund makes any statement in
the Notification, the Registration Statement or the Prospectus
untrue in any material respect or which requires the making of any
change in or addition to the Notification, the Registration
Statement or the Prospectus in order to make the statements
therein not misleading in any material respect. If at any time the
Commission shall issue any order suspending the effectiveness of
the Registration Statement or an order pursuant to Section 8(e) of
the Investment Company Act, the Fund will make every reasonable
effort to obtain the withdrawal of such order at the earliest
possible moment.
(b) To furnish to you, without charge, a signed copy of
each of the Notification and the Registration Statement (including
exhibits thereto) and for delivery to each other Underwriter a
conformed copy of the Notification and the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 10:00 A.M., New York City
20
<PAGE> 22
time on the business day next succeeding the date of this
Agreement and during the period described in paragraph (d) below,
as many copies of the Prospectus and any supplements and
amendments thereto or to the Registration Statement as you may
reasonably request.
(c) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to
file with the Commission within the applicable period specified in
Rule 497(b) under the Securities Act any prospectus required to be
filed pursuant to such Rule.
(d) If, during such period after the first date of the
public offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith
to prepare, file with the Commission and furnish, at its own
expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Fund) to which Shares may have
been sold by you on behalf of the Underwriters and to any other
dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended
or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with
law.
(e) To use its best efforts to maintain its qualification
as a regulated investment company under Subchapter M of the Code.
(f) To endeavor to qualify the Shares for offer and sale
under the securities or Blue Sky
21
<PAGE> 23
laws of such jurisdictions as you shall reasonably request.
(g) To make generally available to the Fund's security
holders and to you as soon as practicable an earning statement
covering the twelve-month period ending September 30, 1997 that
satisfies the provisions of Section 11(a) of the Securities Act
and the rules and regulations of the Commission thereunder.
8. COVENANTS OF THE INVESTMENT MANAGER. In further
consideration of the agreements of the Underwriters and the Fund, the Investment
Manager covenants with the Underwriters and the Fund as follows:
(a) To use reasonable efforts to cause the Fund to comply with
each of its covenants and agreements contained in paragraphs (a) through
(g) of Section 7 above.
(b) To pay or cause to be paid, whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is
terminated, all costs, expenses, fees and taxes incident to (i) the
preparation, printing and filing of the Notification, the Registration
Statement and of each amendment thereto, each preliminary prospectus and
the Prospectus, and any amendments or supplements thereto, (ii) the
printing of this Agreement, the Underwriters' Questionnaire and such other
agreements as you may reasonably request, (iii) the preparation, issuance
and delivery of the certificates for the Shares to the Underwriters,
including stock transfer taxes, if any, payable upon the sale, issuance and
delivery by the Fund to the Underwriters of the Shares, (iv) the fees and
disbursements of the Fund's counsel and accountants, (v) furnishing such
copies of the Registration Statement, the Notification, the Prospectus and
any related preliminary prospectus, and all amendments and supplements
thereto, as may be reasonably requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold, (vi) the printing and delivery to the Underwriters of
copies of the Blue Sky Survey, including reasonable fees and disbursements
of counsel, (vii) the review (if any) of the offering of the Shares by the
National Association of Securities Dealers, Inc. and (viii) the fees and
22
<PAGE> 24
expenses incurred with respect to the listing of the Shares on the New York
Stock Exchange, including the listing fees of the New York Stock Exchange
and the preparation, printing and the filing fees with respect to the
distribution of documents relating thereto, and the registration of the
Shares under the Exchange Act.
9. INDEMNITY AND CONTRIBUTION. Each of the Fund and the Investment
Manager, jointly and severally, agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act (a "controlling person") from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred by any Underwriter or any such controlling person
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus, any Omitting Prospectus or the Prospectus (as amended or
supplemented if the Fund shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission based upon
information relating to any Underwriter or furnished to the Fund in writing by
any Underwriter through you expressly for use therein; provided that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting such
losses, claims, damages or liabilities purchased Shares or Additional Shares, or
any person controlling such Underwriter, if a copy of a Prospectus (as then
amended or supplemented if the Fund shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law to have been delivered, at or prior to the
written confirmation of the sale of the Shares or Additional Shares to such
person, and if a Prospectus (as so amended or supplemented) would have cured the
defect giving rise to such losses, claims, damages or liabilities; provided
further, that the Investment Manager will be required to indemnify and hold
harmless any indemnified party pursuant to this paragraph only to the extent
that the Fund fails to indemnify and hold harmless such indemnified party
pursuant to this paragraph.
23
<PAGE> 25
Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Fund and the Investment Manager, their respective
directors, and each officer of the Fund who signs the Registration Statement and
each person, if any, who controls the Fund or the Investment Manager within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any and all losses, claims, damages and liabilities caused
by any untrue statements or alleged untrue statement of a material fact
contained in the Registration Statement, the Prospectus (as amended or
supplemented if the Fund shall have furnished any amendments or supplements
thereto), any preliminary prospectus, or any Omitting Prospectus, or caused by
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
only with reference to information relating to such Underwriter furnished to the
Fund in writing by such Underwriter through you expressly for use in the
Registration Statement, the Prospectus, any amendment or supplement thereto, or
any preliminary prospectus.
In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to either of the two preceding paragraphs, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the fees and expenses of more than one separate
firm (in addition to any local counsel) for all Underwriters and all persons, if
any, who control Underwriters within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, (b)
24
<PAGE> 26
the fees and expenses of more than one separate firm (in addition to any local
counsel) for the Fund, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Fund within the meaning of
either such Section , and (c) the fees and expenses of more than one separate
firm (in addition to any local counsel) for the Investment Manager, its
directors and each person, if any, who controls the Investment Manager within
the meaning of either such Section , and that all such fees and expenses shall
be reimbursed as they are incurred. In the case of any such separate firm for
the Underwriters and such control persons of Underwriters, such firm shall be
designated in writing by Morgan Stanley. In the case of any such separate firm
for the Fund, and such directors, officers and control persons of the Fund, such
firm shall be designated in writing by the Fund. In the case of any such
separate firm for the Investment Manager, and such directors and control persons
of the Investment Manager, such firm shall be designated in writing by the
Investment Manager. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by the second and third sentences of this paragraph,
the indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
If the indemnification provided for in the first or second
paragraph of this Section 9 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
25
<PAGE> 27
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Fund and the Investment Manager on the one
hand and the Underwriters on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Fund and the Investment Manager on the one hand and of the Underwriters on
the other hand in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Fund or the
Investment Manager on the one hand and of the Underwriters on the other hand
shall be deemed to be in the same respective proportions as the aggregate public
offering price of the Shares, minus the aggregate amount of the Underwriters'
fee provided in Section 3 hereof, on the one hand and the aggregate amount of
the Underwriters' fee provided in Section 3 hereof on the other hand, bear to
the aggregate public offering price of the Shares. The relative fault of the
parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Fund or
the Investment Manager on the one hand or by the Underwriters on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Underwriters'
respective obligations to contribute pursuant to this Section 9 are several in
proportion to the respective number of Shares they have purchased hereunder, and
not joint. The Investment Manager agrees to pay any amounts that are payable by
the Fund pursuant to this paragraph to the extent that the Fund fails to make
all contributions required to be made by the Fund pursuant to this paragraph.
The Fund, the Investment Manager and the Underwriters agree that
it would not be just or equitable if contribution pursuant to this Section 9
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding
26
<PAGE> 28
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and offered to the public exceeds
the amount of any damages that such Underwriter has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 9 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
The indemnity and contribution provisions contained in this
Section 9 and the representations and warranties of the Fund and the Investment
Manager contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter, its officers or directors
or any person controlling any Underwriter, the Investment Manager, its officers
or directors or any person controlling the Investment Manager or the Fund, its
officers or directors or any person controlling the Fund and (iii) acceptance of
and payment for any of the Shares.
10. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Fund, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) a general moratorium on
commercial banking activities shall have been declared by either federal or New
York State authorities or (iii) there shall have occurred any outbreak or
escalation of hostilities or any change in financial markets or any calamity or
crises that, in your judgment, is material and adverse and (b) in the case of
any of the events specified in clauses (a)(i) through (iii), such event singly
or together with any other such events makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
27
<PAGE> 29
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the later of (x) execution and delivery hereof by the
parties hereto and (y) notification of the effectiveness of the Registration
Statement by the Commission.
If, on the Closing Date or the Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
Shares or Additional Shares that it or they have agreed to purchase hereunder on
such date, and the aggregate number of Shares or Additional Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of the Shares or Additional
Shares to be purchased on such date, the other Underwriters shall be obligated
severally in the proportions that the number of Shares set forth opposite their
respective names in Schedule I bears to the aggregate number of Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as you may specify, to purchase the Shares or Additional Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase on such date; provided that in no event shall the number of Shares
or Additional Shares that any Underwriter has agreed to purchase pursuant to
Section 3 be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares or Additional Shares without the written
consent of such Underwriter. If, on the Closing Date or the Option Closing Date,
as the case may be, any Underwriter or Underwriters shall fail or refuse to
purchase Shares or Additional Shares and the aggregate number of Shares or
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Shares or Additional Shares to be purchased
on such date, and arrangements satisfactory to you and the Fund for the purchase
of such Shares are not made within 36 hours after such default, this Agreement
shall terminate without liability on the part of any non-defaulting Underwriter,
the Fund and the Investment Manager. In any such case either you or the Fund
shall have the right to postpone the Closing Date or the Option Closing Date, as
the case may be, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and in the Prospectus or
in any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or
28
<PAGE> 30
refusal on the part of the Fund or the Investment Manager to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Fund or the Investment Manager shall be unable to perform its
obligations under this Agreement, the Fund or the Investment Manager, as the
case may be, will reimburse the Underwriters or such Underwriters as have so
terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
Very truly yours,
MORGAN STANLEY RUSSIA & NEW
EUROPE FUND, INC.
By
-----------------------------
MORGAN STANLEY ASSET
MANAGEMENT INC.
By
-----------------------------
Accepted, September __, 1996
MORGAN STANLEY & CO.
INCORPORATED
/names of other co-managers/
Acting on behalf of themselves
and the several Underwriters
named in Schedule I hereto.
By MORGAN STANLEY & CO.
INCORPORATED
29
<PAGE> 31
By
-----------------------------
30
<PAGE> 32
SCHEDULE I
NUMBER
UNDERWRITER OF SHARES
Morgan Stanley & Co. Incorporated........................
---------
Total..........................................
=========
<PAGE> 1
Exhibit 2(h)(2)
MORGAN STANLEY & CO.
Incorporated
1251 Avenue of the Americas
New York, New York 10020
MASTER AGREEMENT AMONG UNDERWRITERS
August 1, 1982
Dear Sirs:
From time to time we may invite you (and others) to participate on the
terms set forth herein as underwriter in connection with certain public
offerings of securities that are managed by us. If we invite you to participate
in a specific offering (an "Offering") to which this Master Agreement Among
Underwriters shall apply, we will send you, by wire, telex or other written
means, an agreement among underwriters, substantially in the form of Exhibit A
hereto (an "AAU"). Any such AAU may exclude or revise such provisions of this
Master Agreement Among Underwriters or may contain such additional provisions as
you and we mutually deem appropriate. An Underwriters' Questionnaire to be used
in connection with such Offerings is attached as Exhibit B hereto.
Each AAU shall relate to a specific Offering and shall identify (i)
the securities to be offered, their principal terms, the issuer thereof and, if
different from the issuer, the seller or sellers of such securities, (ii) the
underwriting agreement providing for the purchase of such securities by the
several underwriters and whether such agreement provides the several
underwriters with an option to purchase additional securities to cover
over-allotments, (iii) the price at which such securities are to be purchased by
the several underwriters from the seller or sellers thereof (or a formula
establishing the maximum such price), (iv) the offering terms, including, if
applicable, the public offering price, concession, reallowance and management
fee with respect to such securities, (v) the manager or managers for such
Offering and (vi) if applicable, the trustee for the indenture under which such
securities will be issued.
Each AAU shall also set forth your proposed participation in the
Offering to which it relates and you hereby agree to accept such participation
on the terms set forth or contemplated herein and in such AAU without further
action on your part. YOU MAY DECLINE SUCH PARTICIPATION ONLY IF WE RECEIVE BY
WIRE, TELEX OR OTHER WRITTEN MEANS A NOTICE FROM YOU TO THAT EFFECT BEFORE THE
TIME SPECIFIED IN SUCH AAU FOR SUCH A NOTICE. IF WE DO NOT RECEIVE SUCH A NOTICE
BY SUCH TIME, SUCH AAU SHALL CONSTITUTE A VALID AND BINDING CONTRACT BETWEEN US.
Unless we have received by wire, telex or other written means a notice
from you stating exceptions to the Underwriters' Questionnaire attached as
Exhibit B hereto before the time specified in an AAU for such a notice, you
hereby confirm that you have no exceptions in connection with the Offering to
which such AAU relates.
<PAGE> 2
Except to the extent an AAU provides otherwise, you and we hereby
agree that the following general provisions shall be incorporated by reference
in each AAU. For purposes of such general provisions, the term Applicable AAU
means the AAU incorporating such general provisions by reference; the term
Agreement means the Applicable AAU including the general provisions incorporated
therein by reference as it applies to the Offering identified in such Applicable
AAU; the terms Securities, Issuer, Underwriting Agreement, Underwriters, Manager
and Trustee shall have the meanings set forth in the Applicable AAU; the term
Firm Securities means the Securities that the several Underwriters are initially
committed to purchase under the Underwriting Agreement; and the term Additional
Securities means the Securities, if any, that the several Underwriters have an
option to purchase under the Underwriting Agreement to cover over-allotments.
I.
1.1. You understand that the Issuer has filed with the Securities and
Exchange Commission (the "Commission") a registration statement including a
prospectus relating to the Securities. If the registration statement relates to
securities to be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933 (the "1933 Act"), the term Registration
Statement means such registration statement as amended to the date of the
Underwriting Agreement. Otherwise, the term Registration Statement means such
registration statement as amended at the time when it becomes effective. The
term Prospectus means the prospectus, together with the final prospectus
supplement, if any, relating to the offering of the Securities, filed pursuant
to Rule 424 under the 1933 Act. The term preliminary prospectus means any
preliminary prospectus relating to the offering of the Securities or any
preliminary prospectus supplement together with a prospectus relating to the
offering of the Securities. As used herein the terms Registration Statement,
Prospectus and preliminary prospectus shall include in each case the material,
if any, incorporated by reference therein.
1.2. You authorize the Manager, on your behalf, to determine the form
of the Underwriting Agreement and to execute and deliver to the seller or
sellers (collectively, the "Seller") of the Securities the Underwriting
Agreement to purchase (i) up to the amount of Firm Securities set forth in the
Applicable AAU and (ii) if the Manager elects on behalf of the several
Underwriters to exercise any option to purchase Additional Securities, up to the
amount of Additional Securities set forth in the Applicable AAU, subject, in
each case, to reduction pursuant to Article III. The amount of Firm Securities
set forth opposite each Underwriter's name in the Underwriting Agreement plus
any additional Firm Securities which you may become obligated to purchase under
the Underwriting Agreement or Article X hereof is hereinafter referred to as the
original purchase obligation of such Underwriter and the ratio which such
original purchase obligation bears to the total amount of Firm Securities set
forth in the Underwriting Agreement is hereinafter referred to as the
underwriting percentage of such Underwriter.
II.
2.1. You authorize the Manager to act as manager of the offering of
the Securities for sale by the Underwriters (the "Underwriters' Securities") or
by the Seller pursuant to delayed delivery contracts (the "Contract
Securities"), if any, contemplated by the Underwriting Agreement. You authorize
the Manager to (i) vary the offering terms of the Securities in effect at any
time, including, if applicable, the public offering price, concession and
reallowance, (ii) purchase any or all of the Additional Securities for the
accounts of the several Underwriters pursuant to the Underwriting Agreement,
(iii) determine, within the
2
<PAGE> 3
limits of any formula set forth in the Applicable AAU, on your behalf, the price
at which the Securities are to be purchased by the several Underwriters from the
Seller, (iv) agree, on your behalf, to any addition to, change in or waiver of
any provision of the Underwriting Agreement (other than a change in the purchase
price of the Securities from that contemplated by the Applicable AAU or an
increase of your original purchase obligation) and (v) take any other action as
may seem advisable to the Manager in respect of the offering of the Securities.
2.2. The public offering of the Securities is to [sic] made as soon
after the Underwriting Agreement is entered into by the Seller and the Manager,
as in the Manager's judgment is advisable, on the terms and conditions set forth
in the Prospectus and the Applicable AAU. Any public advertisement of the
offering of the Securities shall be made by the Manager on behalf of the
Underwriters on such date as the Manager shall determine. You agree not to
advertise such offering prior to the date of the Manager's advertisement thereof
without the Manager's consent. Any advertisement you may make of such offering
after such date will be your own responsibility and at your own expense.
2.3. You authorize the Manager to sell for your account to
institutions such Securities purchased by you from the Seller as the Manager
shall determine. Except for sales for the accounts of Underwriters designated by
a purchasing institution, aggregate sales of Securities to institutions shall be
made for the accounts of the several Underwriters as nearly as practicable in
their respective underwriting percentages.
2.4. You authorize the Manager to sell for your account to dealers
such Securities purchased by you from the Seller as the Manager shall determine.
Sales of Securities to dealers shall be made for the account of each Underwriter
approximately in the proportion that Securities of such Underwriter held by the
Manager for such sales bears to all Securities so held.
2.5. The Manager will advise you promptly, on the date of the public
offering, as to the Securities purchased by you which you shall retain for
direct sale. At any time prior to the termination of the Agreement, any
Securities purchased by you, which are held by the Manager for sale for your
account as set forth above but not sold, may, on your request and at the
Manager's discretion, be released to you for direct sale, and Securities so
released to you shall no longer be deemed held for sale by the Manager.
2.6. From time to time prior to the termination of the Agreement, on
the request of the Manager, you will advise the Manager of the amount of
Securities remaining unsold which were retained by or released to you for direct
sale and of the amount of Securities and other securities of the Issuer
remaining unsold which were delivered to you pursuant to Article IV hereof, and,
on the request of the Manager, you will release to the Manager any such
Securities and other securities remaining unsold (i) for sale by the Manager for
your account to institutions or dealers, (ii) for sale by the Seller pursuant to
delayed delivery contracts or (iii) if, in the Manager's opinion, such
Securities or other securities are needed to make delivery against sales made
pursuant to Article IV hereof.
III.
3.1. You agree that arrangements for sales of Contract Securities will
be made only through the Manager acting either directly or through dealers
(including Underwriters acting as dealers), and you authorize the Manager to act
on your behalf in making such arrangements. The aggregate amount of Securities
to be purchased by the several Underwriters shall be reduced by the respective
amounts of Contract Securities attributed to such Underwriters as hereinafter
provided. Subject to the provisions of Section 3.2, the aggregate amount of
Contract Securities shall be attributed to the Underwriters as nearly as
practicable in their respective underwriting percentages, except that, as
determined by the Manager in its discretion, (i)
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<PAGE> 4
Contract Securities directed and allocated by a purchaser to particular
Underwriters shall be attributed to such Underwriters and (ii) Contract
Securities for which arrangements have been made for sale through dealers shall
be attributed to each Underwriter approximately in the proportion that
Securities of such Underwriter held by the Manager for sales to dealers bear to
all Securities so held. The fee with respect to Contract Securities payable to
the Manager for the accounts of the Underwriters pursuant to the Underwriting
Agreement shall be credited to the accounts of the respective Underwriters in
proportion to the Contract Securities attributed to such Underwriters pursuant
to the provisions of this Section 3.1, less, in the case of each Underwriter,
the commission to dealers on Contract Securities sold through dealers and
attributed to such Underwriter.
3.2. If the amount of Contract Securities attributable to an
Underwriter pursuant to Section 3.1 would exceed such Underwriter's original
purchase obligation reduced by the amount of Underwriters' Securities sold by or
on behalf of such Underwriter, such excess shall not be attributed to such
Underwriter, and such Underwriter shall be regarded as having acted only as a
dealer with respect to, and shall receive only the commission to dealers on,
such excess.
IV.
4.1. You authorize Morgan Stanley & Co. Incorporated to buy and sell
(i) Securities, (ii) shares of common stock ("Common Stock") of the Issuer, if
the Securities are Common Stock or securities of the Issuer that may be
exchanged for or converted into Common Stock, and (iii) any other securities of
the Issuer designated in the Applicable AAU, in addition to Securities sold
pursuant to Article II hereof, in the open market or otherwise, for long or
short account, on such terms as it shall deem advisable, and to over-allot in
arranging sales. Such purchases and sales and over-allotments shall be made for
the accounts of the several Underwriters as nearly as practicable in their
respective underwriting percentages. Any securities which may have been
purchased by Morgan Stanley & Co. Incorporated for stabilizing purposes in
connection with the offering of the Securities prior to the execution of the
Applicable AAU shall be treated as having been purchased pursuant to this
Section 4.1 for the accounts of the several Underwriters. At no time shall your
net commitment pursuant to the foregoing authorization exceed 10% of your
original purchase obligation. On demand you will take up and pay for any
securities of the Issuer so purchased for your account and deliver against
payment any securities of the Issuer so sold or over-allotted for your account.
Morgan Stanley & Co. Incorporated agrees to notify you if it engages in any
stabilization transaction requiring reports to be filed pursuant to Rule 17a-2
under the Securities Exchange Act of 1934 (the "1934 Act") and to notify you of
the date of termination of stabilization. You agree to file with Morgan Stanley
& Co. Incorporated any reports required of you pursuant to such Rule not later
than five business days following the day upon which stabilization was
terminated and you authorize Morgan Stanley & Co. Incorporated to file on your
behalf with the Commission any reports required by such Rule.
4.2. If pursuant to the provisions of Section 4.1 and prior to the
termination of the Agreement (or prior to such earlier date as Morgan Stanley &
Co. Incorporated may have determined) Morgan Stanley & Co. Incorporated
purchases or contracts to purchase for the account of any Underwriter in the
open market or otherwise any Securities which were retained by, or released to,
you for direct sale, or any Securities which may have been issued on transfer or
in exchange for such Securities, and which Securities were therefore not
effectively placed for investment by you, you authorize Morgan Stanley & Co.
Incorporated either to charge your account with an amount equal to the
concession to dealers with respect thereto, which amount shall be credited
against the cost of such Securities, or to require you to repurchase such
Securities at a price equal to the total cost of such purchase, including
transfer taxes, accrued interest, dividends and commissions, if any.
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<PAGE> 5
4.3. If the Securities are Common Stock or securities of the Issuer
that may be exchanged for or converted into Common Stock, you agree that you
will not, without the advanced approval of Morgan Stanley & Co. Incorporated,
buy, sell, deal or trade in (i) any Common Stock, (ii) any security of the
Issuer convertible into Common Stock or (iii) any right or option to acquire or
sell Common Stock or any security of the Issuer convertible into Common Stock,
for your own account or for the account of a customer, except:
(a) as provided for in the Agreement or the Underwriting
Agreement;
(b) that you may convert any security of the Issuer
convertible into Common Stock owned by you and sell the Common Stock
acquired upon such conversion and that you may deliver Common Stock
owned by you upon the exercise of any option written by you as
permitted by the provisions set forth herein;
(c) in brokerage transactions on unsolicited orders which have
not resulted from activities on your part in connection with the
solicitation of purchases and which are executed by you in the ordinary
course of your brokerage business; and
(d) that on or after the date of the initial public offering
of the Securities, you may execute covered writing transactions in
options to acquire Common Stock, when such transactions are covered by
Securities, for the accounts of customers.
An opening uncovered writing transaction in options to acquire Common Stock for
your account or for the account of a customer shall be deemed, for purposes of
this Section 4.3, to be a sale of Common Stock which is not unsolicited. The
term "opening uncovered writing transaction in options to acquire" as used above
means a transaction where the seller intends to become a writer of an option to
purchase any Common Stock which he does not own. An opening uncovered purchase
transaction in options to sell Common Stock for your account or for the account
of a customer shall be deemed, for purposes of this paragraph, to be a sale of
Common Stock which is not unsolicited. The term "opening uncovered purchase
transaction in options to sell" as used above means a transaction where the
purchaser intends to become an owner of an option to sell Common Stock which he
does not own.
4.4. If the Securities are not shares of Common Stock or securities of
the Issuer that may be exchanged for or converted into Common Stock, you agree
that you will not bid for or purchase, or attempt to induce any other person to
purchase, any Securities or any other securities of the Issuer designated in the
Applicable AAU other than (i) as provided for in the Agreement or the
Underwriting Agreement, (ii) as approved by Morgan Stanley & Co. Incorporated or
(iii) as a broker in executing unsolicited orders.
4.5. You represent that you have not participated, since you were
invited to participate in the offering of the Securities, in any transaction
prohibited by Sections 4.3 or 4.4 and that you have at all times complied with
the provisions of Rule 10b-6 of the Commission applicable to such offering.
V.
5.1. On the date on which the Underwriters are required to pay the
Seller for the Firm Securities, at the office of Morgan Stanley & Co.
Incorporated, 55 Water Street, New York, New York, prior to 8:45 A.M. (New York
City time) you will deliver to the Manager a certified or official bank check,
payable to the order of Morgan Stanley & Co. Incorporated in New York Clearing
House funds (or other next day funds), for (i) an amount equal to the public
offering price less the selling concession in respect of the Firm
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<PAGE> 6
Securities to be purchased by you, (ii) an amount equal to the public offering
price less the selling concession in respect of such of the Firm Securities to
be purchased by you as shall have been retained by or released to you for direct
sale or (iii) the amount set forth or indicated in the Applicable AAU, as the
Manager shall advise. You will make similar payment as the Manager may direct
for Additional Securities, if any, to be purchased by you on the date specified
by the Manager for such payment. The Manager will make payment to the Seller
against delivery to the Manager for your account of the Securities to be
purchased by you and the Manager will deliver to you the Securities paid for by
you which shall have been retained by or released to you for direct sale. Unless
you promptly give the Manager instructions otherwise, if transactions in the
Securities may be settled through the facilities of The Depository Trust
Company, payment for and delivery of Securities purchased by you will be made
through such facilities, if you are a member, or, if you are not a member,
settlement may be made through your ordinary correspondent who is a member.
VI.
6.1. You authorize the Manager to charge your account as compensation
for the Manager's services in connection with the Securities, including the
purchase from the Seller and the management of the offering of the Securities,
the amount, if any, set forth as the Management Fee in the Applicable AAU.
6.2. You authorize the Manager to charge your account with your
underwriting percentage of all expenses incurred by the Manager under the
Agreement in connection with the offering of the Securities or in connection
with the purchase, carrying and sale of any securities of the Issuer under the
Agreement.
VII.
7.1. You authorize the Manager to advance the Manager's own funds for
your account, charging current interest rates, or to arrange loans for your
account for the purpose of carrying out the provisions of the Agreement, and in
connection therewith, to hold or pledge as security therefor all or any
securities of the Issuer which the Manager may be holding for your account under
the Agreement.
7.2. Out of payment received by the Manager for Securities sold for
your account which have been paid for by you, the Manager will remit to you
promptly an amount equal to the price paid by you for such Securities.
7.3. The Manager may deliver to you from time to time against payment,
for carrying purposes only, any securities of the Issuer purchased by you or for
your account under the Agreement which the Manager is holding for sale for your
account but which are not sold and paid for. You will redeliver to the Manager
against payment any securities of the Issuer delivered to you for carrying
purposes at such times as the Manager may demand.
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<PAGE> 7
VIII.
8.1. The Agreement shall terminate 30 days after the date of the
initial public offering of the Securities unless sooner terminated by the
Manager. The Manager may at its discretion by notice to you prior to the
termination of the Agreement alter any of the terms or conditions of offering
determined pursuant to Article II or III hereof, or terminate or suspend the
effectiveness of Article IV hereof, or any part thereof. No termination or
suspension pursuant to this paragraph shall affect the Manager's authority under
Article IV hereof to cover any short position incurred under the Agreement.
8.2. Upon termination of the Agreement or prior thereto at the
Manager's discretion, the Manager shall deliver to you any Securities purchased
by you from the Seller and held by the Manager for sale for your account to
institutions and dealers but not sold and paid for and any securities of the
Issuer which are held by the Manager for your account pursuant to the provisions
of Article IV hereof. If at the termination of the Agreement the aggregate
amount of any securities of the Issuer so held and not sold and paid for does
not exceed 10% of the aggregate amount of Securities, Morgan Stanley & Co.
Incorporated may, in its discretion, sell for the accounts of the several
Underwriters any such securities so held, at such prices, on such terms and in
such manner as it may determine. As soon as practicable after termination of the
Agreement, your account shall be settled and paid. The Manager may reserve from
distribution such amount as the Manager deems advisable to cover possible
additional expenses. The determination by the Manager of the amount so to be
paid to or by you shall be final and conclusive. Any of your funds in the
Manager's hands may be held with the Manager's general funds without
accountability for interest.
8.3. Notwithstanding any settlement on the termination of the
Agreement, you agree to pay any transfer taxes which may be assessed and paid
after such settlement on account of any sales or transfers under the Agreement
for your account and your underwriting percentage of (i) all expenses incurred
by the Manager in investigating or defending against any claim or proceeding
which is asserted or instituted by any party (including any governmental or
regulatory body) other than an Underwriter relating to the Registration
Statement, any preliminary prospectus or Prospectus (or any amendment or
supplement thereto) and (ii) any liability, including attorneys' fees, incurred
by the Manager in respect of any such claim or proceeding, whether such
liability shall be the result of a judgment or as a result of any settlement
agreed to by the Manager, other than any such expense or liability as to which
the Manager receives indemnity pursuant to Section 8.4 or indemnity or
contribution pursuant to the Underwriting Agreement.
8.4. You agree to indemnify and hold harmless each other Underwriter
and each person, if any, who controls any such Underwriter within the meaning of
either Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the extent
and upon the terms which you agree to indemnify and hold harmless the Seller,
the Issuer, its directors, its officers who signed the Registration Statement
and any person controlling the Seller or the Issuer as set forth in the
Underwriting Agreement.
8.5. Regardless of any termination of the Agreement, your agreements
contained in Sections 8.3 and 8.4 shall remain operative and in full force and
effect regardless of (i) any termination of the Underwriting Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Seller or Issuer, its directors or
officers or any person controlling the Seller or Issuer and (iii) acceptance of
and payment for any Securities.
IX.
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<PAGE> 8
9.1. You understand that it is your responsibility to examine the
Registration Statement, the Prospectus, any amendment or supplement thereto
relating to the offering of the Securities, any preliminary prospectus and the
material, if any, incorporated by reference therein and you will familiarize
yourself with the terms of the Securities and the other terms of the offering
thereof which are to be reflected in the Prospectus and the Applicable AAU. The
Manager is authorized, with the approval of counsel for the Underwriters, to
approve on your behalf any amendments or supplements to the Registration
Statement or the Prospectus.
9.2. You will keep an accurate record of the names and addresses of
all persons to whom you give copies of the Registration Statement, the
Prospectus or any preliminary prospectus (or any amendment or supplement
thereto), and, when furnished with any subsequent amendment to the Registration
Statement, any subsequent prospectus or any memorandum outlining changes in the
Registration Statement or any prospectus, you will, upon request of the Manager,
promptly forward copies thereof to such persons.
9.3. You confirm that the information that you have given or are
deemed to have given in response to the Underwriters' Questionnaire attached as
Exhibit B hereto which information has been furnished to the Issuer for use in
the Registration Statement or the Prospectus is correct. You will notify the
Manager immediately of any development before the termination of the Agreement
which makes untrue or incomplete any information that you have given or are
deemed to have given in response to the Underwriters' Questionnaire.
9.4. Unless you have promptly notified the Manager in writing
otherwise, your name as it should appear in the Prospectus and your address are
set forth on the signature pages hereof.
9.5. You represent that your commitment to purchase the Securities
will not result in a violation of the financial responsibility requirements of
Rule 15c3-1 under the 1934 Act or of any similar provision of any applicable
rules of any securities exchange to which you are subject.
9.6. You represent that you are a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or that you are a
foreign bank or dealer not eligible for membership in the NASD. In making sales
of Securities, if you are such a member, you agree to comply with all applicable
rules of the NASD, including, without limitation, the NASD's Interpretation with
Respect to Free-Riding and Withholding and Section 24 of Article III of the
NASD's Rules of Fair Practice, or, if you are such a foreign bank or dealer, you
agree to comply with such Interpretation and Sections 8, 24 and 36 of such
Article as though you were such a member and Section 25 of such Article as it
applies to a nonmember broker or dealer in a foreign country.
9.7. The Manager will file a Further State Notice with the Department
of State of New York, if required.
X.
10.1. If the Underwriting Agreement is terminated as permitted by the
terms thereof, your obligations hereunder with respect to the offering of the
Securities shall immediately terminate except (i) as set forth in Section 8.5,
(ii) that you shall remain liable for your underwriting percentage of all
expenses and for any purchases or sales which may have been made for your
account pursuant to the provisions of Article IV hereof and (iii) that such
termination shall not affect any obligations of any defaulting Underwriter.
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<PAGE> 9
10.2. If any Underwriter shall default in its obligations (i) pursuant
to Section 4.1, (ii) to pay amounts charged to its account pursuant to Section
6.2 or (iii) pursuant to Section 8.3, 8.4 or 10.1, you will assume your
proportionate share (determined on the basis of the respective underwriting
percentages of the non-defaulting Underwriters) of such obligations, but no such
assumption shall relieve any defaulting Underwriter from liability for its
default.
10.3. The Manager is authorized to arrange for the purchase by others
(including the Manager or any other Underwriter) of any Securities not purchased
by any defaulting Underwriter. If such arrangements are made, the respective
amounts of Securities to be purchased by the remaining Underwriters and such
other person or persons, if any, shall be taken as the basis for all rights and
obligations hereunder, but this shall not relieve any defaulting Underwriter
from liability for its default.
10.4. If any Underwriter shall default in its obligation to purchase
the amount of Firm Securities or Additional Securities which it has agreed to
purchase under the Underwriting Agreement and to the extent that arrangements
shall not have been made by the Manager for others to assume the obligations of
such defaulting Underwriter, each non-defaulting Underwriter severally agrees to
assume, at the Manager's request, its share of the obligations of such
defaulting Underwriter in the proportion which the amount of Firm Securities set
forth opposite its name in the Underwriting Agreement bears to the aggregate
amount of Firm Securities set forth opposite the names of all non-defaulting
Underwriters in the Underwriting Agreement, or in such proportions as the
Manager may specify, provided that in no event shall the amount of Securities
which any Underwriter has agreed to purchase be increased pursuant to this
Section 10.4 and the Underwriting Agreement, without the written consent of such
Underwriter, by an amount in excess of one-ninth of the amount of Securities
which such Underwriter agreed to purchase before giving effect to any such
increase. No such assumption shall relieve any default Underwriter from
liability for its default.
XI.
11.1. If you are a foreign bank or dealer and you are not registered
as a broker-dealer under Section 15 of the 1934 Act, you agree that while you
are acting as an Underwriter in respect of the Securities and in any event
during the term of the Agreement, you will not directly or indirectly effect in,
or with persons who are nationals or residents of, the United States any
transactions (except for the purchases provided for in the Underwriting
Agreement and transactions contemplated by Articles II and IV hereof) in (i)
Securities, (ii) Common Stock, if the Securities are Common Stock or securities
of the Issuer that may be exchanged for or converted into Common Stock or (iii)
any other securities of the Issuer designated in the Applicable AAU.
11.2. If you are a foreign bank or dealer, you represent that in
connection with sales and offers to sell Securities made by you outside the
United States (a) you will not offer or sell any Securities in any jurisdiction
except in compliance with applicable laws and (b) you will either furnish to
each person to whom any such sale or offer is made a copy of the then current
preliminary prospectus, if any, or of the Prospectus (as then amended or
supplemented), as the case may be, or inform such person that such preliminary
prospectus, if any, or Prospectus will be available upon request. Any offering
material in addition to the then current preliminary prospectus or the
Prospectus furnished by you to any person in connection with any offers or sales
referred to in the preceding sentence (i) shall be prepared and so furnished at
your sole risk and expense and (ii) shall not contain information relating to
the Securities or the Issuer which is inconsistent in any respect with the
information contained in the then current preliminary prospectus, if any, or in
the Prospectus (as then amended or supplemented), as the case may be. It is
understood that no action has been
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taken by the Manager, the Seller or the Issuer to permit a public offering in
any jurisdiction other than the United States where action would be required for
such purpose.
XII.
12.1. Nothing contained in this Master Agreement Among Underwriters or
the Agreement constitutes you partners with the Manager or with the other
Underwriters and the obligations of you and of each of the other Underwriters
are several and not joint. Each Underwriter elects to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code
of 1954, as amended.
12.2. The Manager shall be under no liability to you for any act or
omission except for obligations expressly assumed by the Manager in the
Agreement.
12.3. This Master Agreement Among Underwriters may be terminated by
either party hereto upon five business days' written notice to the other party;
provided that with respect to any Offering for which an AAU was sent prior to
such notice, this Master Agreement Among Underwriters as it applies to such
Offering shall remain in full force and effect and shall terminate with respect
to such Offering in accordance with Article VIII hereof.
12.4. This Master Agreement Among Underwriters and the Agreement shall
be governed by and construed in accordance with the laws of the State of New
York.
Please confirm your acceptance of this Master Agreement Among
Underwriters by signing and returning to us the enclosed duplicate copy hereof.
Very truly yours,
MORGAN STANLEY & CO.
Incorporated
By
Managing Director
Confirmed and accepted
as of August 1, 1982
..............................
(Name of Underwriter)
..............................
..............................
(Address)
By ...........................
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Title:
(If person signing is not an officer or partner,
please attach instrument of authorization.)
EXHIBIT A
[name of participating underwriter]
MORGAN STANLEY & CO. INCORPORATED
AGREEMENT AMONG UNDERWRITERS
[date]
[Name of Issuer]
[Title of Securities]
Dear Sirs:
[Name of Issuer] (the "Issuer") proposes to issue and sell [specify amount]
[Title of Securities] (the "Firm Securities") pursuant to the Underwriting
Agreement, to be dated , 19 (the "Underwriting Agreement"), between the Issuer
and ourselves (the "Manager"), on behalf of the several underwriters named
therein (the "Underwriters"). {1} [In addition, the several Underwriters shall
have an option to purchase from [Name of Seller] an additional [specify amount]
[Title of Securities] (the "Additional Securities") to cover over-allotments.]
{2} The term Securities shall mean the Firm Securities [and the Additional
Securities].(2)
Except to the extent supplemented or superseded by the terms set forth
herein, the provisions contained in the Morgan Stanley & Co. Incorporated Master
Agreement Among Underwriters, dated August 1, 1982 (the "Master Agreement"), are
incorporated by reference herein.
You hereby confirm your agreement with the Manager with respect to the
offering of the Securities and with respect to the purchase by the Manager and
the other Underwriters, including yourselves, severally of the Securities [for
which delayed delivery contracts ("Delayed Delivery Contracts") are not entered
into by the Issuer as contemplated in the Underwriting Agreement]. {3} [You
hereby agree that any action that the Manager is authorized to take, under the
Underwriting Agreement, this Agreement or the Master Agreement may be taken by
Morgan Stanley & Co. Incorporated on the Manager's behalf.] {4}
You hereby agree to purchase up to [specify amount] of Firm Securities [and
up to [specify amount] of Additional Securities](2) pursuant to the Underwriting
Agreement on the following terms:
Price to Public:({5})
Purchase Price:(5)
Underwriting Fee:
Selling Concession:
Reallowance:
[Fee for delayed delivery
securities:](3)
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Management Fee:
Offering Date:
Anticipated Closing Date:
together with any other additional securities of the Issuer which you may be
required to purchase pursuant to the Master Agreement.
[Principal terms of Securities, if appropriate, e.g., yield, sinking
funds, call protection, redemption rights.]
[The trustee for the indenture under which the Securities will be
issued is [Name of Trustee] [, a subsidiary of [Name of trustee's parent
company].] {6}
[You will not, without the Manager's consent, sell any of the
Securities to any account over which you exercise discretionary authority]. {7}
[The amount of the Securities you hereby agree to purchase may be
reduced on the terms set forth in the Master Agreement by sales of Securities
pursuant to Delayed Delivery Contracts.](3)
[[Title of Restricted Securities] are hereby designated as "other
Securities of the Issuer" referred in Sections 4.1, 4.4 and 11.1 of the Master
Agreement.] {8}
Unless we receive a notice to the contrary by wire, telex or other
written means from you by [specify time], you agree to accept your participation
in the offering and confirm that you have no exceptions to the Underwriters'
Questionnaire attached as Exhibit B to the Master Agreement.
Please contact [insert name] at [insert phone number] of Morgan
Stanley & Co. Incorporated or [insert name] at [insert phone number] of the
[Issuer] if you have any questions relating to the offering of the Securities,
including the terms of the Underwriting Agreement or any other matters.
Very truly yours,
MORGAN STANLEY & CO.
Incorporated
By ..........................
Title:
[MORGAN STANLEY & CO.
Incorporated
Name of Co-Manager
By: MORGAN STANLEY & CO.
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<PAGE> 13
Incorporated
By ..........................
Title: ] (4)
<PAGE> 14
EXHIBIT B
UNDERWRITERS' QUESTIONNAIRE
In connection with each Offering governed by the Morgan Stanley & Co.
Incorporated Master Agreement Among Underwriters, dated August 1, 1982, except
as indicated in a reply to the applicable AAU, each underwriter participating in
such Offering severally advises the Issuer that:
(a) neither such underwriter nor any of its directors, officers or partners
have a material relationship, as "material" is defined in Regulation C under the
Securities Act of 1933, with the Issuer;
(b) if the Registration Statement is on Form S-1, neither such underwriter
nor any "group" (as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934) of which such underwriter is aware is the beneficial owner
of more than 5% of any class of voting securities of the Issuer;
(c) other than as may be stated in the Morgan Stanley & Co. Incorporated
Master Agreement Among Underwriters, dated August 1, 1982, the Applicable AAU,
the dealer agreement, if any, the Prospectus or the Registration Statement, such
underwriter does not know and has no reason to believe that there is an
intention to over-allot or that the price of any security may be stabilized to
facilitate the offering of the Securities;
(d) other than as may be stated in the Prospectus, such underwriter does
not know of any other discounts or commissions to be allowed or paid to the
underwriters or of any other items that would be deemed by the National
Association of Securities Dealers, Inc. to constitute underwriting compensation
for purposes of the Association's Rules of Fair Practice and such underwriter
does not know of any discounts or commissions to be allowed or paid to dealers,
including any cash, securities, contracts or other consideration to be received
by any dealer in connection with the sale of the Securities;
(e) if the Securities are to be issued under an indenture qualified under
the Trust Indenture Act of 1939:
(i) such underwriter (if a corporation) does not have outstanding
nor has such underwriter assumed or guaranteed any securities issued
otherwise than in its present corporate name;
(ii) neither such underwriter nor any of its directors, officers
or partners is an affiliate, as defined in Rule O-2 under the Trust
Indenture Act of 1939, of the Trustee or its parent holding company,
if any, and neither of them nor any of their directors or executive
officers is a director, officer, partner, employee, appointee or
representative of such underwriter as designated in said Act; and
(iii) neither such underwriter nor any of its directors, executive
officers or partners owns beneficially any shares of voting securities
of the Trustee or its parent holding company, if any; and
1
<PAGE> 15
(f) such underwriter has not prepared any report or memorandum for external
use in connection with the offering of the Securities; and if the Registration
Statement is on Form S-1, such underwriter has not prepared any engineering,
management or similar reports or memoranda relating to broad aspects of the
business, operations or products of the Issuer within the past twelve months
(except for reports solely comprised of recommendations to buy, sell or hold the
securities of the Issuer, unless such recommendations have changed within the
past six months).
If an underwriter notes an exception with respect to material of the type
referred to in clause (f), such underwriter will send three copies of each item
of such material, together with a statement as to distribution identifying
classes of recipients and the number of copies distributed to each such class,
to Morgan Stanley & Co. Incorporated, 1251 Avenue of the Americas, New York, New
York 10020, Attention: Syndicate Department.
As used herein, the term "beneficially" is defined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934.
2
<PAGE> 1
Exhibit 2(h)(3)
MORGAN STANLEY & CO.
INCORPORATED
1251 Avenue of the Americas
New York, New York 10020
MASTER DEALER AGREEMENT
August 1, 1982
Dear Sirs:
From time to time we may invite you (and others) to
participate on the terms set forth herein as dealer in connection with certain
public offerings of securities by one or more underwriters ("Underwriters") that
are managed by us. If we invite you to participate in a specific offering (an
"Offering") to which this Master Dealer Agreement shall apply, we will give you
express notice (a "Pricing Wire") by wire, telex or other written means
specifying (i) the securities to be offered and the issuer thereof, (ii) the
offering terms, including, if applicable, the public offering price, concession
and reallowance with respect to such securities and (iii) the extent to which
the general provisions set forth in this Master Dealer Agreement shall apply.
Each Pricing Wire shall also set forth your allotment for the
Offering to which it relates and you hereby agree to accept such allotment on
the terms set forth or contemplated herein and in such Pricing Wire without
further action on your part. YOU MAY DECLINE SUCH ALLOTMENT ONLY IF WE RECEIVE
BY WIRE, TELEX OR OTHER WRITTEN MEANS A NOTICE FROM YOU TO THAT EFFECT BEFORE
THE TIME SPECIFIED IN SUCH PRICING WIRE FOR SUCH A NOTICE. IF WE DO NOT RECEIVE
SUCH A NOTICE BY SUCH TIME, SUCH PRICING WIRE SHALL BE BINDING UPON YOU AND
SHALL CONSTITUTE A RECONFIRMATION OF YOUR ACCEPTANCE OF THIS MASTER DEALER
AGREEMENT.
Except to the extent that the applicable Pricing Wire provides
otherwise, you hereby agree as follows with respect to each Offering to which we
invite you to participate as a dealer. For purposes of the following provisions,
with respect to any Offering, the term Securities means the securities to be
publicly offered; the term preliminary prospectus means any preliminary
prospectus relating to
<PAGE> 2
the offering of the Securities or any preliminary prospectus supplement together
with a prospectus relating to the offering of the Securities; the term
Prospectus means the prospectus, together with the final prospectus supplement,
if any, relating to the offering of the Securities, filed pursuant to Rule 424
under the Securities Act of 1933; and the terms Public Offering Price and
Reallowance shall mean, respectively, the public offering price and reallowance,
if any, then in effect with respect to the Securities.
I.
1.1. Securities sold to you for reoffering shall be promptly
offered to the public upon the terms set forth in the Prospectus and the Pricing
Wire. If a Reallowance is in effect for the Offering, Securities may also be
offered for sale at a concession from the Public Offering Price not in excess of
the Reallowance to any Underwriter or to any other member of the National
Association of Securities Dealers, Inc. (the "NASD") or to any foreign bank or
dealer (not eligible for membership in the NASD), who enters into an agreement
with us in the form of this Master Dealer Agreement and whom we have invited to
participate as a dealer in connection with the Offering.
1.2. If the Securities are shares of common stock ("Common
Stock") of the issuer thereof (the "Issuer") or securities of the Issuer that
may be exchanged for or converted into Common Stock, you agree that you will
not, without our approval in advance, at any time prior to the completion by you
of distribution of Securities acquired by you pursuant to this Master Dealer
Agreement and the applicable Pricing Wire, buy, sell, deal or trade in (i) any
Common Stock, (ii) any security of the Issuer convertible into Common Stock or
(iii) any right or option to acquire or sell Common Stock or any security of the
Issuer convertible into Common Stock, for your own account or for the account of
a customer, except:
(a) as provided for in this Master Dealer Agreement, the
applicable Pricing Wire, the agreement among underwriters, if any, or
the underwriting agreement relating to the Securities;
(b) that you may convert any security of the Issuer
convertible into Common Stock owned by you and sell the Common Stock
acquired upon such conversion and that you may deliver Common Stock
owned by you upon the exercise of any option written by you as
permitted by the provisions set forth herein;
(c) in brokerage transactions on unsolicited orders which have
not resulted from activities on your part in connection with the
solicitation of
2
<PAGE> 3
purchases and which are executed by you in the ordinary course of your
brokerage business; and
(d) that on or after the date of the initial public offering
of the Securities, you may execute covered writing transactions in
options to acquire Common Stock, when such transactions are covered by
Securities, for the accounts of customers.
An opening uncovered writing transaction in options to acquire Common Stock for
your account or for the account of a customer shall be deemed, for purposes of
this Section 1.2, to be a sale of Common Stock which is not unsolicited. The
term "opening uncovered writing transaction in options to acquire" as used above
means a transaction where the seller intends to become a writer of an option to
purchase any Common Stock which he does not own. An opening uncovered purchase
transaction in options to sell Common Stock for your account or for the account
of a customer shall be deemed, for purposes of this paragraph, to be a sale of
Common Stock which is not unsolicited. The term "opening uncovered purchase
transaction in options to sell" as used above means a transaction where the
purchaser intends to become an owner of an option to sell Common Stock which he
does not own.
1.3. If the Securities are not shares of Common Stock or
securities of the Issuer that may be exchanged for or converted into Common
Stock, you agree that you will not bid for or purchase, or attempt to induce any
other person to purchase, any Securities or any other securities of the Issuer
designated in the Pricing Wire other than (i) as provided in this Master Dealer
Agreement, the agreement among underwriters, if any, or the underwriting
agreement relating to the Securities or (ii) as a broker in executing
unsolicited orders.
1.4. You represent that you have not participated, since the
date you were invited to participate in the offering of the Securities, in any
transaction prohibited by Section 1.2 or 1.3 and that you have at all times
complied with the provisions of Rule 10b-6 of the Securities and Exchange
Commission applicable to such offering.
1.5. You agree to advise us from time to time upon request,
prior to the termination of this Master Dealer Agreement as it applies to the
offering of the Securities, of the amount of Securities remaining unsold which
were purchased by you from us or from any other Underwriter or dealer for
reoffering and, on our request, you will resell to us any such Securities
remaining unsold at the purchase price thereof if, in our opinion, such
Securities are needed to make delivery against sales made to others.
1.6. If prior to the termination of this Master Dealer
Agreement as it applies to the offering of the Securities (or prior to such
earlier date as we have
3
<PAGE> 4
determined) we purchase or contract to purchase in the open market or otherwise
any Securities which were purchased by you from us or from any other Underwriter
or dealer for reoffering (including any Securities which may have been issued on
transfer or in exchange for such Securities), and which Securities were
therefore not effectively placed for investment by you, you authorize us either
to charge your account with an amount equal to the concession from the Public
Offering Price at which you purchased such Securities, which shall be credited
against the cost of such Securities, or to require you to repurchase such
Securities at a price equal to the total cost of such purchase, including any
commissions and transfer taxes on redelivery.
II.
2.1. If you purchase any Securities from us in connection with
your participation as dealer in such Offering, you agree that such purchases
will be evidenced by our written confirmation and will be subject to the terms
and conditions set forth in the confirmation and in the Prospectus.
2.2. Securities purchased by you from us in connection with
your participation as dealer in such Offering shall be paid for in full at (i)
the Public Offering Price, (ii) such price less the applicable concession or
(iii) the price set forth or indicated in the Pricing Wire, as we shall advise,
at the office of Morgan Stanley & Co. Incorporated, 55 Water Street, New York,
New York, at such time and on such day as we may advise you, by certified or
official bank check payable in New York Clearing House funds (or other next day
funds) to the order of Morgan Stanley & Co. Incorporated against delivery of the
Securities. If you are called upon to pay the Public Offering Price for the
Securities purchased by you, the applicable concession will be paid to you, less
any amounts charged to your account pursuant to Article I above, after
termination of this Master Dealer Agreement as it applies to the offering of the
Securities. Unless you promptly give us written instructions otherwise, if
transactions in the Securities may be settled through the facilities of The
Depository Trust Company, payment for and delivery of Securities purchased by
you will be made through such facilities, if you are a member, or, if you are
not a member, settlement may be made through your ordinary correspondent who is
a member.
III.
3.1. We will advise you of the date and time of termination of
this Master Dealer Agreement as it applies to the offering of the Securities or
of any designated provisions hereof. This Master Dealer Agreement shall, in any
event, terminate with respect to the offering of the Securities 30 days after
the date of the initial public offering of the Securities unless sooner
terminated by us.
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<PAGE> 5
IV.
4.1. In purchasing Securities, you will rely only on the
Prospectus and on no other statements whatsoever, written or oral.
4.2. You represent that you are a member in good standing of
the NASD or that you are a foreign bank or dealer, not eligible for membership
in the NASD, which agrees not to offer or sell any Securities in, or to persons
who are nationals or residents of, the United States. In making sales of
Securities, if you are such a member, you agree to comply with all applicable
rules of the NASD, including, without limitation, the NASD's Interpretation with
Respect to Free-Riding and Withholding and Section 24 of Article III of the
NASD's Rules of Fair Practice, or, if you are such a foreign bank or dealer, you
agree to comply with such Interpretation and Sections 8, 24 and 36 of such
Article as though you were such a member and Section 25 of such Article as it
applies to a nonmember broker or dealer in a foreign country.
4.3. If you are a foreign bank or dealer, you represent that
in connection with sales and offers to sell Securities made by you outside the
United States (a) you will not offer or sell any Securities in any jurisdiction
except in compliance with applicable laws and (b) you will either furnish to
each person to whom any such sale or offer is made a copy of the then current
preliminary prospectus, if any, or of the Prospectus (as then amended or
supplemented), as the case may be, or inform such person that such preliminary
prospectus, if any, or Prospectus will be available upon request. Any offering
material in addition to the then current preliminary prospectus or the
Prospectus furnished by you to any person in connection with any offers or sales
referred to in the preceding sentence (i) shall be prepared and so furnished at
your sole risk and expense and (ii) shall not contain information relating to
the Securities or the Issuer which is inconsistent in any respect with the
information contained in the then current preliminary prospectus, if any, or in
the Prospectus (as then amended or supplemented), as the case may be. It is
understood that no action has been taken by us or the Issuer to permit a public
offering in any jurisdiction other than the United States where action would be
required for such purpose.
4.4. You will not give any information or make any
representations other than those contained in the Prospectus, or act as agent
for the Issuer, any Underwriter or us.
4.5. You agree that we, as manager or co-manager of the
offering of the Securities, have full authority to take such action as may seem
advisable to us in respect of all matters pertaining to such offering.
5
<PAGE> 6
4.6. Neither we, as manager, nor any Underwriter shall be
under any liability to you for any act or omission, except for obligations
expressly assumed by us in this Master Dealer Agreement.
4.7. All communications to us relating to the offering of the
Securities shall be addressed to the Syndicate Department, Morgan Stanley & Co.
Incorporated, 1251 Avenue of the Americas, New York, New York 10020. Unless you
have otherwise notified us in writing, any notices to you shall be deemed to
have been duly given if mailed or telegraphed to you at the address shown below.
V.
5.1. Neither we, as manager, nor any Underwriter will have any
responsibility with respect to the right of any dealer to sell Securities in any
jurisdiction, notwithstanding any information we may furnish in that connection.
VI.
6.1. This Master Dealer Agreement may be terminated by either
party hereto upon five business days' written notice to the other party;
provided that with respect to any Offering for which a Pricing Wire was sent
prior to such notice, this Master Dealer Agreement as it applies to such
Offering shall remain in full force and effect and shall terminate with respect
to such Offering in accordance with Article III hereof.
6.2. This Master Dealer Agreement and each Pricing Wire shall
be governed by and construed in accordance with the laws of the State of New
York.
Please confirm your acceptance of this Master Dealer Agreement
by signing and returning to us the enclosed duplicate copy hereof.
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
By
Managing Director
6
<PAGE> 7
Confirmed and accepted
as of August 1, 1982
(Name of Dealer)
(Address)
By...........................
Title:
(If person signing is not an officer or partner,
please attach instrument of authorization.)
7
<PAGE> 1
EXHIBIT 2(K)(1)
[AMERICAN STOCK TRANSFER & TRUST COMPANY LETTERHEAD]
August 1, 1996
Ms. Valerie Y. Lewis
Secretary
Morgan Stanley Asset Management, Inc.
1221 Avenue of the Americas, 22nd Floor
New York, NY 10020
Dear Ms. Lewis:
This is to confirm that American Stock Transfer & Trust Company will
provide Morgan Stanley Russia & New Europe Fund, Inc. (the "Fund") with
complete Registrar, Transfer Agent and Dividend Reinvestment services for a
flat monthly fee of $1,000.00 (such fee includes out-of-pocket expenses such as
but not limited to line charges associated with toll-free telephone calls,
imprinting shareholder names on proxy cards, insurance, stationery and
facsimile charges). We guarantee this rate for a period of three years.
The following services are included in American Stock Transfer & Trust
Company's flat monthly fee:
CERTIFICATES
- Issuance and registration of all stock certificates.
- Processing legal transfers and transactions requiring special
handling.
- Mailing certificates to shareholders as a result of transfers.
- Provide daily reports of processed transfers.
- Process indemnity bond and replace lost certificates.
- Combine certificates in large denominations.
- Maintain stop transfers, including the placing and removing of same.
ACCOUNT MAINTENANCE
- Maintenance of all shareholder accounts.
- Processing address changes.
- Opening of new accounts, closing and consolidation of existing
accounts.
- Maintenance, placement and removal of stop transfers.
- Posting of all debits and credit certificate transactions.
- Social Security solicitation.
- Handling of shareholder and broker inquiries.
<PAGE> 2
AMERICAN
Stock Transfer & Trust
COMPANY
ANNUAL CASH DISTRIBUTIONS
- - Preparation and mailing of checks to shareholders.
- - Insertion of all required enclosures.
- - Issuance of replacement checks.
- - Maintenance of Postal return items.
- - Check reconciliation.
- - Providing check registers to fund and providing photocopies of canceled
checks when requested.
- - Furnish requested dividend information to shareholders.
- - Process address change requests.
DIVIDEND REINVESTMENT PLAN ADMINISTRATION
- - Prepare and acknowledge cash receipts from shareholders.
- - Prepare and mail dividend reinvestment statements (annually).
- - Correspondence with members of the plan.
- - Process and mail proceeds to shareholders wishing to terminate the plan.
- - Mailing year-end tax information to shareholders and IRS.
- - Maintain existing accounts and establish new dividend reinvestment plan
accounts.
- - Process withdrawal and redemption requests.
- - Certificate depository and safekeeping.
ANNUAL SHAREHOLDER MEETING
- - Provide shareholders list as of the record date.
- - Proxy vote solicitation for routine meetings.
- - Printing of shareholder name on proxy cards.
- - Verification of broker bills.
- - Mailings to shareholders.
- - Attend and act as Inspector of Election for Annual Meeting.
- - Respond to inquiries as to whether specific accounts were voted.
PROXY DISTRIBUTION AND TALLYING
- - Contact brokers and nominees for votes before annual meetings, including
mailing search cards and processing omnibus proxies received.
- - Proxy tabulations.
- - Preparation of Proxy Tabulation Reports (daily).
- - Provide final report on how each shareholder voted on each proposal.
-2-
<PAGE> 3
[AMERICAN STOCK TRANSFER & TRUST COMPANY LOGO]
- --------------------------------------------------
LISTS AND MAILINGS
- --------------------------------------------------
- Providing various statistical reports as requested.
- Enclosing multiple proxy cards to same household in one envelope.
- Monitor undeliverable mail and suppress mailing until correct address is
located.
- Furnishing shareholder listings, in any sequence.
- Geographical detail reports showing all stocks issued and surrendered over a
specific period.
- Providing complete sets of mailing labels and reports.
- Address, enclose and mail quarterly reports, semi-annual reports and annual
reports to shareholders.
- --------------------------------------------------
REMOTE ACCESS
- --------------------------------------------------
This service gives you the ability to directly access your shareholder
database. The following options are available:
- Shareholder maintenance.
- Proxy tabulation.
- Certificate information.
- Correspondence.
- Shareholder addresses.
- --------------------------------------------------
TAX FORMS
- --------------------------------------------------
- Prepare and mail year-end 1099 forms and 1042 forms for non-residents.
- Furnishing year-end 1099 forms to shareholders.
- Replacing lost 1099 forms to shareholders.
- Escheatment reports furnished to various state agencies.
- --------------------------------------------------
INTEREST AND DIVIDEND TAX COMPLIANCE ACT OF 1983
- --------------------------------------------------
- Process and record keep accumulated uncashed dividends.
- Withholding tax from shareholder accounts not in compliance with the
provisions of the Act.
- Reconciling and reporting taxes withheld, including additional 1099
reporting requirements, to the Internal Revenue Services.
- Responding to shareholder inquiries regarding the Regulations.
- Mailing to new accounts who have had taxes withheld, to inform them of
procedures to be followed to curtail subsequent back-up withholding.
- Annual mailing to pre-1984 account which have not yet been certified.
- Performing shareholder file adjustments to reflect certification of accounts.
- 3 -
<PAGE> 4
[American Stock Transfer & Trust Company Logo]
All certificate issuances, reports, mailings, labels, transfers and
transactions, described above will be provided to you and your shareholders on
an UNLIMITED BASIS.
This Agreement and the duties, obligations and services to be provided
herein, may not be assigned or otherwise transferred without the prior written
consent of the Fund.
Termination of this Agreement may be made with thirty days written
notice by either party. The Fund will pay for all services rendered through the
date of termination.
This agreement shall be construed in accordance with the laws of the
State of New York.
If the above meets with your approval, please sign below, return one
copy to us and retain one for your records.
Very truly yours,
AMERICAN STOCK TRANSFER
& TRUST COMPANY
/s/ MICHAEL KARFUNKEL
---------------------------------------
Michael Karfunkel
President
AGREED TO AND ACCEPTED THIS
______ DAY OF ___________, 1996.
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
BY
--------------------------------------------
- ----------------------------------------------
Print Name and Title
- 4 -
