<PAGE> 1
As filed with the U.S. Securities and Exchange Commission on September 24, 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. 3 /X/
Post-Effective Amendment No. / /
and/or
Registration Statement under the Investment Company Act of 1940 /X/
Amendment No. 3 /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>
<CAPTION>
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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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<S> <C> <C> <C> <C>
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) 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 September 24, 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 September 30, 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, New York, against payment
therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
A.G. EDWARDS & SONS, INC.
COWEN & COMPANY
EVEREN SECURITIES, INC.
FAHNESTOCK & CO. INC.
September 24, 1996
<PAGE> 4
(Continued from previous page)
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(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
4.0% 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
$80,000. Organizational expenses will be amortized over a period not to
exceed 60 months from the date the Fund commences operations. Offering
expenses, estimated at $420,000, 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 OCTOBER 21, 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.......................................................... 31
NET ASSET VALUE............................................................................... 32
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN................................................ 32
TAXATION...................................................................................... 33
COMMON STOCK.................................................................................. 39
UNDERWRITERS.................................................................................. 42
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR........................................... 43
CUSTODIAN..................................................................................... 43
EXPERTS....................................................................................... 44
LEGAL MATTERS................................................................................. 44
ADDITIONAL INFORMATION........................................................................ 44
REPORT OF INDEPENDENT ACCOUNTANTS............................................................. 45
STATEMENT OF ASSETS AND LIABILITIES........................................................... 46
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, $0.01 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 4.0% 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 $3,050,000 exclusive of
organization expenses estimated to be $80,000
(which are to be amortized over five years). The
expenses of this offering estimated to be
$420,000 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............. Chase Global Funds Services Company (the
"Administrator"), a subsidiary of The Chase
Manhattan Bank, will provide administrative
services to the Fund pursuant to an
Administration Agreement (the "Administration
Agreement"). The Fund will pay the Administrator
an annual administration fee of $65,000 plus
0.09% 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."
CUSTODIAN.................. The Chase Manhattan Bank will act as custodian for
the Fund's assets and may employ sub-custodians
approved by the Directors of the Fund in
accordance with regulations of the U.S.
Securities and Exchange Commission. See
"Custodian."
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.................................................................. 1.45%
Total Annual Expenses...................................................... 3.05%
=====
</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............... $ 31 $ 94 $ 160 $336
</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 3.05%. 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. See "Appendix B -- Russia and New European
Countries."
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. The social and economic
difficulties resulting from local corruption and crime could adversely effect
the value of the Fund's investments. 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
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 a local 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 Global 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 RNE countries.
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, 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 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.
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.
SWAPS
The Fund may enter into swaps and options or swaps related to the equity
and fixed income markets in which the Fund may invest. Swaps are agreements to
exchange cash flows based on a notional principal amount. The Fund's use of
swaps 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 swaps 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 swap 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.
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. Croghan (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
26210 Ingleton Circle companies managed by Morgan Stanley
Easton, Maryland 21601 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 (58)............... 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>
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.
25
<PAGE> 28
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 (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, Olsen,
Nadosy and Whittemore currently 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. Croghan, Levin and Morton. The Board of Directors also has
a valuation committee, the members for which are Messrs. Olsen and Levin. The
members of the audit committee receive an additional $500 per year for serving
on the committee.
26
<PAGE> 29
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."
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 October 31, 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
27
<PAGE> 30
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
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.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment Manager. Investment decisions for the Fund and
other clients will be made with a view to achieving their respective investment
objectives and after consideration of such factors as their current holdings,
tax aspects, availability of cash for investments and the size of their
investments generally. Frequently a particular security may be bought or sold
for only one client (i.e., an investment otherwise appropriate for the Fund may
not be acquired by the Fund) or in different amounts and at different times for
more than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients on the same day, in which event, such transactions will be
allocated among the clients in a manner believed by the Investment Manager to be
equitable to each. In some cases, this procedure could have an adverse effect on
the price or amount of the securities purchased or sold by the Fund. Purchase
and sale orders for the Fund may be combined with those of other clients of the
Investment Manager in the interest of the most favorable net results to the
Fund.
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 Biggs joined Morgan Stanley in 1973 as a General Partner and
Managing Director. He formed Morgan Stanley's research department, and was
Director of U.S. research from 1973 to 1979. He was also Director of Global
Research from 1979 to 1986 and from 1991 to 1991. Currently, he is Director of
Global Strategy. In 1975, he founded Morgan Stanley Asset Management Inc. which
currently has ten offices and assets of about $61.3 billion. He is the Chairman
of the Investment Manager and all of its investment companies. He is a member of
the Operating Committee and Management Committee of the Morgan Stanley Group,
and was elected to the Board of Directors in 1991. In addition, he is a director
of the Rand McNally Company. Prior to joining Morgan Stanley, he spent eight
years as a managing partner of a hedge fund, Fairfield Partners. He graduated
from Yale University and the New York University Graduate School of Business
with Distinction, and served three years as an officer in the U.S. Marine Corps.
The Institutional Investor magazine named him as a strategist to its
All-American Research Team ten times and in 1996 he was voted top global
strategist by the Institutional Investor International Research Poll.
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
28
<PAGE> 31
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 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
29
<PAGE> 32
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 (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 Chase Global Funds Services Company (the "Administrator"), a
subsidiary of The Chase Manhattan Bank, the Administrator will provide
administrative services to the Fund. Such administrative services include
maintenance of the Fund's books and records, calculation 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 Delaware corporation, provides administrative services
to investment companies and at June 30, 1996 had approximately $64 billion of
investment company assets under administration. The Administrator'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 $65,000 plus 0.09% 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,
30
<PAGE> 33
including management, administrative and custodial fees, exclusive of
amortization of organization expenses, will be approximately $3,050,000. 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 $420,000, 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 $80,000,
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 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.
31
<PAGE> 34
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, 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.
32
<PAGE> 35
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.
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
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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; 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
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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.
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
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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.
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.
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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 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
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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.
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.
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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.
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
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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 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
40
<PAGE> 43
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 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 Securities Corporation.......
A.G. Edwards & Sons, Inc..................................
Cowen & Company...........................................
EVEREN Securities, Inc....................................
Fahnestock & Co. 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 $0.80 per Share. Such payment is equal to 4.0% 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 $0.60 per Share sold by
such 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, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any Shares or any
securities convertible into or exercisable or exchangeable for Shares or enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of Shares, whether any such transaction
described above is to be settled by delivery of Shares or such other securities,
in cash or otherwise, for a period of 180 days after the date of this
Prospectus, 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.
42
<PAGE> 45
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.
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. For its services, the Transfer Agent will receive a
monthly maintenance fee of $1,000 plus out of pocket expenses.
CUSTODIAN
The Chase Manhattan Bank acts as global custodian for all of the Fund's
assets (the "Global Custodian"). The principal business address of the Global
Custodian is 270 Park Avenue, New York, New York 10017-2070.
Under a global custody agreement (the "Global Custody Agreement") between
the Global Custodian and the Fund, the Global 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 Global 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 Global 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 Global Custody
Agreement. The Global Custody Agreement provides that the Fund shall indemnify
the Global Custodian against any liability, loss or expense (including attorneys
fees and disbursements) incurred in connection with the Global Custody
Agreement, except to the extent such liability, loss or expense results from the
negligence or willful misconduct of or breach by the Global Custodian or any
sub-custodian.
The Global 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 Global Custodian.
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 September 12, 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
September 24, 1996
45
<PAGE> 48
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 12, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash.......................................................................... $100,000
Deferred organization costs (Note 1).......................................... 80,000
--------
Total Assets............................................................... 180,000
--------
Liabilities:
Organization costs payable.................................................... 80,000
Commitments (Note 2)
Net Assets:
Common Stock, $0.01 par value, authorized 100,000,000 shares;
5,000 shares issued and outstanding........................................ 50
Paid-in Surplus............................................................... 99,950
--------
Total Net Assets.............................................................. $100,000
========
Net Asset Value per share....................................................... $ 20.00
========
</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 September 11, 1996 to Morgan Stanley
Asset Management Inc. ("MSAM" or the "Investment Manager"). Organization costs
estimated at $80,000 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 annual 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 administration agreement pursuant to
which Chase Global Funds Services Company (the "Administrator"), a subsidiary of
The Chase Manhattan Bank, will provide the Fund with certain administrative
services. For its administrative services, the Administrator will receive an
annual fee of $65,000 plus 0.09% of the average weekly net assets of the Fund.
The Fund also intends to enter into a global custody agreement with The
Chase Manhattan Bank (the "Global Custodian") pursuant to which the Global
Custodian will provide the Fund with custody services for all of the Fund's
assets. The custody agreement with the Global Custodian provides for an annual
fee based on the amount of assets under custody, plus transactional fees.
46
<PAGE> 49
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> 50
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> 51
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 $5,024 in
1995 for workers in the manufacturing industries.
It should be noted, however, that RNE countries have adopted the principles
of capitalism with varying degrees of success. The ideological shift from
communism to capitalism and the accompanying changes from a centrally-planned
economy to one driven by demand has, in the view of the Investment Manager,
better positioned the RNE countries to begin the process of "catching up" (i.e.,
achieve parity in living standards) with Western Europe. However, the process
has been difficult and there can be no guarantee that these countries will not
abandon their reforms under political pressure, especially as the process of
moving to a market economy may in the short-term be painful and cause a certain
amount of social injustice. Some of these countries, including Armenia,
Azerbaijan, Georgia, Montenegro, Romania and Serbia, are currently characterized
by varying degrees of political instability. Consequently, the reforms
undertaken in these countries may or may not be completed. Although there has
been a great increase in foreign investment in RNE countries, there can be no
guarantee that the infusion of capital will be sufficient to allow the countries
to "catch up," or achieve parity with developed countries in terms of economic
development. In addition, there is the risk that if reforms are abandoned
foreign assets could be nationalized or expropriated.
B-2
<PAGE> 52
SELECTED ECONOMIC DATA OF CERTAIN RNE COUNTRIES
<TABLE>
<CAPTION>
CONSUMER PRICE
GDP 1995 GDP PER CAPITA, POPULATION INFLATION
COUNTRY (US$ 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 approximately $40 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 $59.3 billion.
B-3
<PAGE> 53
STOCK MARKET DATA FOR CERTAIN RNE COUNTRIES
<TABLE>
<CAPTION>
MARKET PRICE/
CAPITALIZATION NUMBER OF EARNINGS
AT DECEMBER 31, 1995 LISTED SECURITIES RATIO
(US$ BILLIONS) AT DECEMBER 31, 1995 AT DECEMBER 31, 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Czech Republic....................... $15.66 65(3) 11.2
Hungary.............................. 2.40 42 12.0
Poland............................... 4.56 65 7.0
Russia............................... 15.86 50(4) n/av
Taiwan(1)............................ 187.21 347 21.4
United States (1)(2)................. 6,013 2,675 18.5
</TABLE>
- ---------------
Source: International Finance Corporation, Emerging Stock Market Factbook 1996.
(1) Included for comparative purposes only.
(2) New York Stock Exchange only.
(3) In addition, approximately 1,635 companies are traded over-the-counter.
(4) 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> 54
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 and it was
recently announced that Yeltsin was considering undergoing heart by-pass
surgery.
The recent civil war in Chechnya has highlighted the political tensions
that exist between the central government in Moscow and some of the regions
within the Russian Federation. The risk exists that armed conflict in Chechnya
will continue, which could deter foreign investment and international aid and
weaken the reformist government's control.
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 ruble
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.
Russia's economy has been characterized by high rates of inflation. The
relaxation of price controls caused inflation to reach a high of 2,000% per
annum in 1991. Since then the annual 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 appears to have
removed a great deal of the political uncertainty in Russia, and has re-affirmed
the country's commitment to economic reform. Furthermore, the Investment Manager
believes that if Yeltsin were to step down from the presidency due to health
problems, that the political situation in Russia is sufficiently stable to
absorb a change in leadership.
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
B-5
<PAGE> 55
was approximately $19 billion and although no price/earnings ratio is currently
available, the Investment Manager believes that the Russian market is generally
undervalued.
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.
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 $105.7(e)
Exchange Rate (Ruble per US$)................. 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.
B-6
<PAGE> 56
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.
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
B-7
<PAGE> 57
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 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
B-8
<PAGE> 58
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 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.
B-9
<PAGE> 59
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 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.
B-10
<PAGE> 60
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.
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
B-11
<PAGE> 61
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 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> 62
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> 63
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> 64
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> 65
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> 66
MORGAN STANLEY RUSSIA &
NEW EUROPE FUND, INC.
<PAGE> 67
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
-- Report of Independent Accountants
-- Statement of Assets and Liabilities dated September 12, 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) -- Form of Global 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.
+ Filed pursuant to the EDGAR (Electronic Data Gathering, Analysis, and
Retrieval) phase-in requirements on August 12, 1996.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
(i)
<PAGE> 68
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)...................... 225,000.00
Engraving and printing stock certificates..................... 9,850.00
Fees and expenses of qualification under state securities laws
(excluding fees of counsel)................................. 20,000.00
Auditing and accounting fees.................................. 7,500.00
Legal fees and expenses....................................... 50,000.00
NASD fee...................................................... 12,000.00
Miscellaneous................................................. 5,569.83
-----------
Total....................................................... $420,000.00
===========
</TABLE>
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, $0.01 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 and the Global 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> 69
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)
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017-2070
(with respect to its services as Global Custodian for the Fund'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> 70
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> 71
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 24th day of September, 1996.
MORGAN STANLEY RUSSIA & NEW EUROPE
FUND, INC.
By: /s/ WARREN J. OLSEN
------------------------------
Warren J. Olsen
President
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>
* Director and September 24, 1996
- ------------------------------------- Chairman of the Board
Barton M. Biggs
/s/ WARREN J. OLSEN Director and President September 24, 1996
- ------------------------------------- (Principal Executive Officer)
Warren J. Olsen
* Director September 24, 1996
- -------------------------------------
Peter J. Chase
* Director September 24, 1996
- -------------------------------------
John W. Croghan
* Director September 24, 1996
- -------------------------------------
David B. Gill
* Director September 24, 1996
- -------------------------------------
Graham E. Jones
* Director September 24, 1996
- -------------------------------------
John A. Levin
* Director September 24, 1996
- -------------------------------------
William G. Morton, Jr.
* Director September 24, 1996
- -------------------------------------
Peter A. Nadosy
* Director September 24, 1996
- -------------------------------------
Frederick B. Whittemore
* Treasurer September 24, 1996
- ------------------------------------- (Principal Financial and
James R. Rooney Accounting Officer)
*By: /s/ WARREN J. OLSEN
- -------------------------------------
Warren J. Olsen
Attorney-in-Fact
</TABLE>
<PAGE> 72
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) -- Form of Global 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.
+ Filed pursuant to the EDGAR (Electronic Data Gathering, Analysis, and
Retrieval) phase-in requirements on August 12, 1996.
<PAGE> 1
EXHIBIT 2(d)
COMMON STOCK COMMON STOCK
MORGAN STANLEY
RUSSIA & NEW EUROPE FUND, INC.
INCORPORATED UNDER THE LAWS CUSIP 616911 10 3
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
[CHASE LOGO]
EXHIBIT J
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective September 30, 1996, and is
between THE CHASE MANHATTAN BANK ("Bank") and MORGAN STANLEY RUSSIA & NEW
EUROPE FUND, INC. ("Customer").
1. CUSTOMER ACCOUNTS.
Bank agrees to establish and maintain the following accounts
("Accounts"):
(a) A custody account in the name of Customer ("Custody Account")
for any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive,
purchase or subscribe for the same or evidencing or representing any other
rights or interests therein and other similar property whether certificated or
uncertificated as may be received by Bank or its Subcustodian (as defined in
Section 3) for the account of Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account")
for any and all cash in any currency received by Bank or its Subcustodian for
the account of Customer, which cash shall not be subject to withdrawal by draft
or check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver Securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts
may be established and separately accounted for as additional Accounts
hereunder.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.
All Securities delivered to the Bank or to any Subcustodian
(other than in bearer form) shall be registered in the name of the Customer or
in the name of a nominee of the Customer or in the name of the Bank or any
nominee of the Bank (with or without indication of fiduciary status) or in the
name of any Subcustodian or any nominee of such Subcustodian appointed pursuant
to Section 3 hereof or shall be properly endorsed and in form for transfer
satisfactory to the Bank. In the absence of Proper Instructions, the Bank shall
have no power or authority to withdraw, deliver, assign, hypothecate, pledge or
otherwise dispose of any Securities and non-cash Assets, except in accordance
with the express terms hereof.
Unless Instructions specifically require another location acceptable to
Bank:
<PAGE> 2
(a) Securities shall be held in the country or another jurisdiction
in which the principal trading market for such Securities is located, where
such Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" as such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by,
or under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3
(or their securities depositories), such arrangement must be authorized by a
written agreement, signed by Bank and Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets that are in the
Accounts in accounts which Bank has established with one or more of its
branches or Subcustodians. Bank and Subcustodians are authorized to hold any of
the Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and
principal place of business of any Subcustodian of Customer's Assets and the
name and address of the governmental agency or other regulatory authority that
supervises or regulates such Subcustodian.
4. USE OF SUBCUSTODIAN.
(a) Bank shall identify the Assets on its books as belonging to
Customer.
(b) A Subcustodian shall hold such Assets together with assets
belonging to other customers of Bank in accounts identified on such
Subcustodian's books as custody accounts for the exclusive benefit of customers
of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be
subject only to the instructions of Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
the Bank's customer's assets shall provide that such assets shall not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of such Subcustodian except for safe custody or administration, and that
the beneficial ownership of such assets shall be freely transferable without
the payment of money or value other than for safe custody or administration.
The foregoing shall not apply to the extent of any special agreement or
arrangement made by Customer with any particular Subcustodian.
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<PAGE> 3
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) Bank or its subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion, may
advance Customer such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at
any time prior to actual collection and reconciliation to the Deposit Account,
with interest, dividends, redemptions or any other amount due, Customer shall
promptly return any amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit
Account for the amount previously credited. Bank or its Subcustodian shall have
no duty or obligation to institute legal proceedings, file a claim or a proof
of claim in any insolvency proceeding or take any other action with respect to
the collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities shall be transferred, exchanged or delivered by Bank
or its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are actually
received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts
in its discretion if the related transaction fails to settle within a
reasonable period, determined by Bank in its discretion, after the
contractual settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6
are returned by the recipient thereof, Bank may reverse the credits and
debits of the particular transaction at any time.
7. ACTIONS OF BANK.
A. Bank shall follow Instructions received regarding assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
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<PAGE> 4
(i) Present for payment any Securities which are called,
redeemed or retired or otherwise become payable and all coupons and
other income items which call for payment upon presentation, to the
extent that Bank or Subcustodian is actually aware of such
opportunities.
(ii) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of
Securities.
(iii) Exchange interim receipts or temporary Securities for
definitive Securities.
(iv) Appoint brokers and agents for any transaction involving
the Securities, including, without limitation, Affiliates of Bank or
any Subcustodian.
(v) Issue statements to Customer, at times mutually agreed
upon, identifying the Assets in the Accounts.
B. Upon receipt of Instructions and not otherwise, the Bank, directly or
through the use of a Securities Depository or the Book-Entry System, shall;
(i) Execute and deliver to such persons as may be designated
in such Instructions, proxies, consents, authorizations, and any other
instruments whereby the authority of the Customer as owner of any securities may
be exercised;
(ii) Deliver any Securities held for the Customer against
receipt of other securities or cash issued or paid in connection with the
liquidation, reorganization, refinancing, merger, consolidation or
recapitalization of any corporation, or the exercise of any conversion
privilege;
(iii) Deliver any securities held for the Customer to any
protective committee, reorganization committee or other person in connection
with the reorganization, refinancing, merger, consolidation, recapitalization
or sale of assets of any corporation, against receipt of such certificates of
deposit, interim receipts or other instruments or documents as may be issued to
it to evidence such delivery;
(iv) Make such transfers or exchanges of the assets of the
Customer and take such other steps as shall be stated in said Instructions to
be for the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Customer;
(v) Release Securities belonging to the Customer to any bank
or trust company for the purpose of pledge or hypothecation to secure any loan
incurred by the Customer; provided, however, that securities shall be released
only upon payment to the Bank of the monies borrowed, except that in cases
where additional collateral is required to secure a borrowing already made,
subject to proper prior authorization, further Securities may be released for
the purpose; and pay such loan upon redelivery to it of the securities pledged
or hypothecated therefor and upon surrender of the note or notes evidencing the
loan;
(vi) Deliver any Securities held for the Customer upon the
exercise of a covered call option written by the Customer on such Securities;
and
(vii) Deliver Securities held for the Customer pursuant to
separate security lending agreements concerning the lending of the Customer's
securities into which the Customer may enter, from time to time; it being
understood that the Bank shall not be obligated to act as lending agent for
the Customer.
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<PAGE> 5
The Bank will send the Customer an advice or notification of any
transfers of Assets to or from the Accounts. Such statements, advices or
notifications shall indicate the identity of the entity having custody of the
Assets. Unless the Customer sends the Bank a written exception or objection to
any Bank statement within sixty (60) days of receipt, the Customer shall be
deemed to have approved such statement.
All collection of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the Custody Account in
respect of which Bank has agreed to take any action hereunder.
8. CORPORATE ACTION; PROXIES; TAX RECLAIMS.
(a) Corporate Actions. Whenever Bank receives information concerning the
Securities which requires discretionary action by the beneficial owner of the
Securities (other than a proxy), such as subscription rights, bonus issues,
stock repurchase plans and rights offerings, or legal notices or other material
intended to be transmitted to securities holders ("Corporate Actions"), Bank
shall give Customer notice of such Corporate Actions to the extent that Bank's
central corporate actions department has actual knowledge of a Corporate Action
in time to notify its customers and Bank shall use reasonable efforts to obtain
information concerning Corporate Actions.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person, but if Instructions are
not received in time for Bank to take timely action, or actual notice of such
Corporate Action was received too late to seek Instructions, Bank is authorized
to sell such rights entitlement or fractional interest and to credit the
Deposit Account with the proceeds or take any other action it deems, in good
faith, to be appropriate in which case it shall be held harmless for any such
action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for
a reduction of withholding tax and any refund of any tax paid or tax credits
which apply in each applicable market in respect of income payments on
Securities for the benefit of Customer which Bank believes may be available
to such Customer.
(ii) The provision of tax reclaim services by Bank is
conditional upon Bank receiving from the beneficial owner of Securities (A) a
declaration of its identity and place of residence and (B) certain other
documentation (pro forma copies of which are available from Bank). Customer
acknowledges that if Bank does not receive such declarations, documentation and
information, additional United Kingdom taxation shall be deducted from all
income received in respect of Securities issued outside the United Kingdom and
that U.S. non-resident alien tax or U.S. backup withholding tax shall be
deducted from U.S. source income. Customer shall provide Bank such
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<PAGE> 6
documentation and information as Bank may require in connection with
taxation, and warrants that, when given, this information shall be true
and correct in every respect, not misleading in any way, and contain all
material information. Customer undertakes to notify Bank immediately if
any such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third party
for any tax, fines or penalties payable by Bank or Customer, and shall
be indemnified accordingly, whether these result from the inaccurate
completion of documents by Customer or any third party, or as a result
of the provision to Bank or any third party of inaccurate or misleading
information or the withholding of material information by Customer or
any other third party, or as a result of any delay of any revenue
authority or any other matter beyond the control of Bank. The Bank shall
be liable for any such tax, fines or penalties resulting from the
willful default, gross negligence or bad faith of the Bank, its
employees, Subcustodians or agents.
(iv) Customer confirms that Bank is authorized to deduct from
any cash received or credited to the Deposit Account any taxes or levies
required by any revenue or governmental authority for whatever reason in
respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with
respect to taxation levied by the revenue authorities of the countries
notified to Customer from time to time and Bank may, by notification in
writing, at its absolute discretion, supplement or amend the markets in
which the tax reclaim services are offered. Other than as expressly
provided in this sub-clause, Bank shall have no responsibility with
regard to Customer's tax position or status in any jurisdiction.
(vi) Customer confirms that, in connection with the tax
reclaim services contemplated hereby, Bank is authorized to disclose any
information requested by any revenue authority or any governmental body
in relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in
whole or in part, by one or more third parties appointed by Bank (which
may be Affiliates of Bank); provided that Bank shall be liable for the
performance of any such third party to the same extent as Bank would
have been if it performed such services itself.
9. NOMINEES.
Securities which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository, as
the case may be. Bank may without notice to Customer cause any such Securities
to cease to be registered in the name of any such nominee and to be registered
in the name of Customer. In the event that any Securities registered in a
nominee name are called for partial redemption by the issuer, Bank may allot
the called portion to the respective beneficial holders of such class of
security in any manner Bank deems to be fair and equitable. Customer shall hold
Bank, Subcustodians, and their respective nominees harmless from any liability
arising directly or indirectly from their status as a mere record holder of
Securities in the Custody Account.
10. AUTHORIZED PERSONS.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank
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<PAGE> 7
receives Instructions from Customer or its designated agent that any such
employee or agent is no longer an Authorized Person.
11. INSTRUCTIONS.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded.
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer shall hold Bank
harmless for the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or Bank's failure to produce such confirmation at any
subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. STANDARD OF CARE; LIABILITIES.
(a) Bank shall be responsible for the performance of only such
duties as are set forth herein or expressly contained in Instructions which are
consistent with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its
obligations hereunder and the safekeeping of Assets. Bank shall be
liable to Customer for any loss which shall occur as the result of the
failure of a Subcustodian to exercise reasonable care with respect to
the safekeeping of such assets to the same extent that Bank would be
liable to Customer if Bank were holding such Assets in New York. In the
event of any loss to Customer by reason of the failure of Bank or its
Subcustodian to utilize reasonable care, Bank shall be liable to
Customer only to the extent of Customer's direct damages, to be
determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without
reference to any special conditions or circumstances. Bank shall have no
liability whatsoever for any consequential, special, indirect or
speculative loss or damages (including, but not limited to, lost
profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if Bank
has been advised as to the possibility of the same and regardless of the
form of the Action. Bank shall not be responsible for the insolvency of
any Subcustodian which is not a branch or Affiliate of Bank.
(ii) Bank shall not be responsible for any act, omission,
default or the solvency of any broker or agent which it or a
Subcustodian appoints unless such appointment was made negligently or in
bad faith, and such act does not constitute willful misfeasance on the
part of the Bank or a reckless disregard of the Bank's duties,
obligations and responsibilities hereunder.
(iii) Bank shall be indemnified by, and without liability to
Customer for any action taken or omitted by Bank whether pursuant to
Instructions or otherwise within the scope hereof if such act or
omission was in good faith, without negligence. In performing its
obligations
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<PAGE> 8
hereunder, Bank may rely on the genuineness of any document which it
believes in good faith to have been validly executed.
(iv) Customer agrees to pay for and hold Bank harmless from
any liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with
respect to income from or Assets in the Accounts, other than any income
tax on profits payable by the Bank with respect to fees paid to the Bank
out of the Account for services rendered by the Bank hereunder.
(v) Bank shall be entitled to rely, and may act, upon the
advice of counsel (who may be counsel for Customer) on all matters and
shall be without liability for any action reasonably taken or omitted
pursuant to such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable
for any loss which results from: 1) the general risk of investing, or 2)
investing or holding Assets in a particular country including, but not
limited to, losses resulting from malfunction, interruption of or error
in the transmission of information caused by any machines or system or
interruption of communication facilities, abnormal operating conditions,
nationalization, expropriation or other governmental actions; regulation
of the banking or securities industry; currency restrictions,
devaluations or fluctuations; and market conditions which prevent the
orderly execution of securities transactions or affect the value of
Assets.
(viii) Neither party shall be liable to the other for any loss
due to forces beyond their control including, but not limited to strikes
or work stoppages, acts of war (whether declared or undeclared) or
terrorism, insurrection, revolution, nuclear fusion, fission or
radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of
this Section 12, it is specifically acknowledged that Bank shall have no duty
or responsibility to:
(i) question Instructions or make any suggestions to
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise Customer or an Authorized Person regarding any
default in the payment of principal or income of any security other than
as provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party to
which Securities are delivered or payments are made pursuant hereto; and
(v) review or reconcile trade confirmations received from
brokers. Customer or its Authorized Persons (as defined in Section 10)
issuing Instructions shall bear any responsibility to review such
confirmations against Instructions issued to and statements issued by
Bank.
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<PAGE> 9
(c) Customer authorizes Bank to act hereunder notwithstanding that
Bank or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Securities, act as a lender to the issuer of Securities, act in the
same transaction as agent for more than one customer, have a material interest
in the issue of Securities, or earn profits from any of the activities listed
herein.
13. FEES AND EXPENSES.
Customer agrees to pay Bank for its services hereunder the fees set
forth in Schedule B hereto or such other amounts as may be agreed upon in
writing, together with Bank's reasonable out-of-pocket or incidental expenses,
including, but not limited to, legal fees (but excluding legal fees in
connection with the preparation, review and execution hereof). Bank shall have
a lien on and is authorized to charge any Accounts of Customer for any amount
owing to Bank under any provision hereof.
14. MISCELLANEOUS.
(a) Foreign Exchange Transactions. To facilitate the
administration of Customer's trading and investment activity, Bank is
authorized to enter into spot or forward foreign exchange contracts with
Customer or an Authorized Person for Customer and may also provide foreign
exchange through its subsidiaries, Affiliates or Subcustodians. Instructions,
including standing instructions, may be issued with respect to such contracts
but Bank may establish rules or limitations concerning any foreign exchange
facility made available. In all cases where Bank, its subsidiaries, Affiliates
or Subcustodians enter into a foreign exchange contract related to Accounts,
the terms and conditions of the then current foreign exchange contract of Bank,
its subsidiary, Affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement shall apply to such transaction.
(b) Certification of Residency, etc. Customer certifies that it is
a resident of the United States and agrees to notify Bank of any changes in
residency. Bank may rely upon this certification or the certification of such
other facts as may be required to administer Bank's obligations hereunder.
Customer shall indemnify Bank against all losses, liability, claims or demands
arising directly or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent
public accountants reasonable access to the records of Bank relating to the
Assets as is required in connection with their examination of books and records
pertaining to Customer's affairs. Subject to restrictions under applicable law,
Bank shall also obtain an undertaking to permit Customer's independent public
accountants reasonable access to the records of any Subcustodian which has
physical possession of any Assets as may be required in connection with the
examination of Customer's books and records.
(d) Governing Law; Successors and Assigns, Captions. THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by
either party, but shall bind the successors in interest of Customer and Bank.
The captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer represents that
the Assets deposited in this Accounts are (Check one):
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<PAGE> 10
__ Employee Benefit Plan or other assets subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")
__ Investment Company assets subject to certain U.S. Securities and
Exchange Commission ("SEC") rules and regulations:
__ Neither of the above.
This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - ____ and the following Rider(s) [Check
applicable rider(s)]:
__ ERISA
__ INVESTMENT COMPANY
__ PROXY VOTING
__ SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof
are held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or
delay on the part of either party in exercising any power or right hereunder
operates as a waiver, nor does any single or partial exercise of any power or
right preclude any other or further exercise, or the exercise of any other
power or right. No waiver by a party of any provision hereof, or waiver of any
breach or default, is effective unless in writing and signed by the party
against whom the waiver is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents
and warrants to Bank that: (A) it has full authority and power to deposit and
control the Securities and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement is its
legal, valid and binding obligation, enforceable in accordance with its terms;
(D) it shall have full authority and power to borrow moneys and enter into
foreign exchange transactions; and (E) it has not relied on any oral or written
representation made by Bank or any person on its behalf, and acknowledges that
this Agreement sets out to the fullest extent the duties of Bank. (ii) Bank
hereby represents and warrants to Customer that: (A) it has the power and
authority to perform its obligations hereunder, (B) this Agreement constitutes
a legal, valid and binding obligation on it; enforceable in accordance with its
terms; and (C) that it has taken all necessary action to authorize the
execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when
actually received. Any notices or other communications which may be required
hereunder are to be sent to the parties at the following addresses or such
other addresses as may subsequently be given to the other party in writing: (a)
Bank: The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, N.Y. 11245,
Attention: Global Custody Division; and (b) Customer: Morgan Stanley Russia &
New Europe, Inc., 1221 Avenue of the Americas, New
10
<PAGE> 11
York, N.Y. 10020, ATT: M. Paul Martin (Phone: (212) 296-7517 and fax 921-5477),
with a copy to Morgan Stanley Asset Management, Inc., 1221 Avenue of the
Americas, New York, N.Y. 10020, attn.: General Counsel.
(j) Termination. This Agreement may be terminated by Customer or
Bank by giving sixty (60) days written notice to the other, provided that such
notice to Bank shall specify the names of the persons to whom Bank shall
deliver the Assets in the Accounts. If notice of termination is given by Bank,
Customer shall, within sixty (60) days following receipt of the notice, deliver
to Bank Instructions specifying the names of the persons to whom Bank shall
deliver the Assets. In either case Bank shall deliver the Assets to the persons
so specified, after deducting any amounts which Bank determines in good faith
to be owed to it under Section 13. If within sixty (60) days following receipt
of a notice of termination by Bank, Bank does not receive Instructions from
Customer specifying the names of the persons to whom Bank shall deliver the
Assets, Bank, at its election, may deliver the Assets to a bank or trust
company doing business in the State of New York to be held and disposed of
pursuant to the provisions hereof, or to Authorized Persons, or may continue to
hold the Assets until Instructions are provided to Bank.
(k) Imputation of Certain Information. Bank shall not be held
responsible for and shall not be required to have regard to information held by
any person by imputation or information of which Bank is not aware by virtue of
a `Chinese Wall' arrangement. If Bank becomes aware of confidential information
which in good faith it feels inhibits it from effecting a transaction hereunder
Bank may refrain from effecting each transaction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
By: ____________________________________
Title:
Date:
THE CHASE MANHATTAN BANK
By: ____________________________________
Title:
Date:
11
<PAGE> 12
STATE OF NEW YORK)
:ss
COUNTY OF NEW YORK)
On this day of September, 1996, before me personally
came , to me known, who being by me duly
sworn, did depose and say that he is President of MORGAN STANLEY RUSSIA & NEW
EUROPE FUND, INC., the entity described in and which executed the foregoing
instrument; that he knows the seal of said entity, that the seal affixed to
said instrument is such seal, that it was so affixed by order of said entity,
and that he signed his name thereto by like order.
________________________________
Sworn to before me this ___________
day of September ___, 1996.
___________________________________
Notary
<PAGE> 13
STATE OF NEW YORK }
: SS.
COUNTY OF NEW YORK }
On this day of September, 1996, before me personally came
, to me known, who being by me duly sworn, did depose and
say that he/she resides in at
; that he is a Vice President of the
CHASE MANHATTAN BANK, the corporation described in and which executed the
foregoing instrument; that he/she knows the seal of said corporation, that the
seal affixed to said instrument is such corporate seal, that it was so affixed
by order of the Board of Directors of said corporation, and that he/she signed
his/her name thereto by like order.
------------------------------------
Sworn to before me this______________
day of September, 1996.
- -------------------------------------
Notary
<PAGE> 14
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
effective September 30, 1996
Customer represents that the Assets being placed in Bank's custody are
subject to the Investment Company Act of 1940, as amended (the "Act"), as the
same may be amended from time to time.
Except to the extent that Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the SEC or the Exemptive Order applicable to accounts of this
nature issued to Bank (1940 Act, Release No. 12053, November 20, 1981), as
amended, or unless Bank has otherwise specifically agreed, Customer shall be
solely responsible to assure that the maintenance of Assets hereunder complies
with such rules, regulations, interpretations or exemptive order promulgated
by or under the authority of the Securities and Exchange Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used herein shall
mean a branch of a qualified U.S. bank, an eligible foreign custodian or
an eligible foreign securities depository, which are further defined as
follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the Act;
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company, incorporated or organized under the laws of a country
other than the United States, that is regulated as such by that
country's government or an agency thereof and that has shareholders'
equity in excess of $200 million in U.S. currency (or a foreign
currency equivalent thereof) as of the close of its fiscal year most
recently completed prior to the date hereof, (ii) a majority owned
direct or indirect subsidiary of a qualified U.S. bank or bank holding
company that is incorporated or organized under the laws of a country
other than the United States and that has shareholders' equity in
excess of $100 million in U.S. currency ( or a foreign currency
equivalent thereof) as of the close of its fiscal year most recently
completed prior to the date hereof, (iii) a banking institution or
trust company incorporated or organized under the laws of a country
other than the United States or a majority owned direct or
indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other
than the United States which has such other qualifications as shall be
specified in Instructions and approved by Bank; or (iv) any other
entity that shall have been so qualified by exemptive order, rule or
other appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws
of a country other than the United States, which operates
(i) the central system for handling securities or equivalent
book-entries in that country; or (ii) a transnational system for the
central handling of securities or equivalent book-entries.
<PAGE> 15
Customer represents that its Board of Directors has approved each of
the Subcustodians listed in Schedule A hereto and the terms of the subcustody
agreements between Bank and each Subcustodian, which are attached as Exhibits I
through ___ of Schedule A, and further represents that its Board has determined
that the use of each Subcustodian and the terms of each subcustody agreement
are consistent with the best interests of the Fund(s) and its (their)
shareholders. Bank shall supply Customer with any amendment to Schedule A for
approval. Customer has supplied or shall supply Bank with certified copies of
its Board of Directors resolution(s) with respect to the foregoing prior to
placing Assets with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made pursuant
to Section 5 and 6 hereof may be made only for the purposes listed
below. Instructions must specify the purpose for which any transaction
is to be made and Customer shall be solely responsible to assure that
Instructions are in accord with any limitations or restrictions
applicable to Customer by law or as may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise become
payable;
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses;
(g) In connection with any borrowings by Customer requiring a pledge of
Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to Customer;
(i) For the purpose of redeeming shares of the capital stock of Customer
and the delivery to, or the crediting to the account of, Bank, its
Subcustodian or Customer's transfer agent, such shares to be purchased
or redeemed;
(j) For the purpose of redeeming in kind shares of Customer against
delivery to Bank, its Subcustodian or Customer's transfer agent of such
shares to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement
among Customer, Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of The National Association of
Securities Dealers, Inc., relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange, or of any similar organ-
2
<PAGE> 16
ization or organizations, regarding escrow or other arrangements in
connection with transactions by Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only upon
payment to Bank of monies for the premium due and a receipt for the Securities
which are to be held in escrow. Upon exercise of the option, or at expiration,
Bank shall receive from brokers the Securities previously deposited. Bank shall
act strictly in accordance with Instructions in the delivery of Securities to
be held in escrow and shall have no responsibility or liability for any such
Securities which are not returned promptly when due other than to make proper
request for such return;
(m) For spot or forward foreign exchange transactions to facilitate security
trading, receipt of income from Securities or related transactions;
(n) For other proper purpose as may be specified in Instructions issued by an
officer of Customer which shall include a statement of the purpose for which
the delivery or payment is to be made, the amount of the payment or specific
Securities to be delivered, the name of the person or persons to whom delivery
or payment is to be made, and a certification that the purpose is a proper
purpose under the instruments governing Customer; and
(o) Upon the termination hereof as set forth in Section 14(j).
Section 12. Standard of Care; Liabilities.
Add the following at the end of Section 12:
(d) Bank hereby warrants to Customer that in its opinion, after due inquiry,
the established procedures to be followed by each of its branches, each branch
of a qualified U.S. Bank, each eligible foreign custodian and each eligible
foreign securities depository holding Customer's Securities pursuant hereto
afford protection for such Securities at least equal to that afforded by
Bank's established procedures with respect to similar Securities held by Bank
and its securities depositories in New York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from Customer, Bank shall furnish Customer such reports
(or portions thereof) of Bank's system of internal accounting controls
applicable to Bank's duties hereunder. Bank shall endeavor to obtain and
furnish Customer with such similar reports as it may reasonably request with
respect to each Subcustodian and securities depository holding Assets.
3
<PAGE> 17
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC. (the "Customer")
dated September 30, 1996.
1. Global Proxy Services (the "Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures")
furnished to Customer, as the same may be amended by Bank from time to
time on prior notice to Customer. The Procedures are incorporated by
reference herein and form a part of this Rider.
2. The Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by
Bank to Customer of the dates of pending shareholder meetings,
resolutions to be voted upon and the return dates as may be received by
Bank or provided to Bank by its Subcustodians or third parties, and (b)
voting by Bank of proxies based on Customer Directions. Original proxy
materials or copies thereof shall not be provided. Notifications shall
generally be in English and, where necessary, shall be summarized and
translated from such non-English materials as have been made available
to Bank or its Subcustodian. In this respect Bank's only obligation is
to provide information from sources it believes to be reliable and/or to
provide materials summarized and/or translated in good faith. Bank
reserves the right to provide Notifications, or parts thereof, in the
language received. Upon reasonable advance request by Customer, backup
information relative to Notifications, such as annual reports,
explanatory material concerning resolutions, management recommendations
or other material relevant to the exercise of proxy voting rights shall
be provided as available, but without translation.
3. While Bank shall attempt to provide accurate and complete Notifications,
whether or not translated, Bank shall not be liable for any losses or
other consequences that may result from reliance by Customer upon
Notifications where Bank prepared the same in good faith.
4. Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Services Bank shall be acting solely as the
agent of Customer, and shall not exercise any discretion with regard to
such Services.
5. Proxy voting may be precluded or restricted in a variety of
circumstances, including, without limitation, where the relevant
Financial Assets are: (i) on loan; (ii) at registrar for registration or
reregistration; (iii) the subject of a conversion or other corporate
action; (iv) not held in a name subject to the control of Bank or its
Subcustodian or are otherwise held in a manner which precludes voting;
(v) not capable of being voted on account of local market regulations or
practices or restrictions by the issuer; or (vi) held in a margin or
collateral account.
6. Customer acknowledges that in certain countries Bank may be unable to
vote individual proxies but shall only be able to vote proxies on a net
basis (e.g., a net yes or no vote given the voting instructions
received from all customers).
<PAGE> 18
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall
in no event sell, license, give or otherwise make the information
provided hereunder available, to any third party, and shall not
directly or indirectly compete with Bank or diminish the market for the
Services by provision of such information, in whole or in part, for
compensation or otherwise, to any third party.
8. The names of Authorized Persons for Services shall be furnished to
Bank in accordance with Section 10 of the Agreement. Fees for the
Services shall be agreed as set forth in Section 13 of the Agreement
or separately agreed.
2
<PAGE> 19
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH: MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
DATE September 30, 1996
<PAGE> 20
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the pertinent provisions
of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's
nominee or the nominee of a central depository) and communications with
respect to Securities in the Custody Account as call for voting or
relate to legal proceedings within a reasonable time after sufficient
copies are received by Bank for forwarding to its customers. In
addition, Bank shall follow coupon payments, redemptions, exchanges or
similar matters with respect to Securities in the Custody Account and
advise Customer or the Authorized Person for such Account of rights
issued, tender offers or any other discretionary rights with respect to
such Securities, in each case, of which Bank has received notice from
the issuer of the Securities, or as to which notice is published in
publications routinely utilized by Bank for this purpose.
<PAGE> 21
AMENDMENT, dated September , 1996 to the September , 1996 custody
agreement ("Agreement"), between MORGAN STANLEY RUSSIA & NEW EUROPE FUND, INC.
("Customer"), having a place of business at 1221 Avenue of the Americas, New
York, N.Y. 10024 and THE CHASE MANHATTAN BANK ("Bank"), having a place of
business at 270 Park Ave., New York, N.Y. 10017-2070.
It is hereby agreed as follows:
Section 1. Except as modified hereby, the Agreement is confirmed
in all respects. Capitalized terms used herein without definition shall have
the meanings ascribed to them in the Agreement.
Section 2. The Agreement is amended as follows by adding the
following as new Section 15:
"(a) "CMBI" shall mean Chase Manhattan Bank International, an
indirect wholly-owned subsidiary of Bank, located in Moscow, Russia, and any
nominee companies appointed by it.
"(b) "International Financial Institution" shall mean any bank
in the top 1,000 (together with their affiliated companies) as measured by
"Tier 1" capital or any broker/dealer in the top 100 as measured by capital.
"(c) "Negligence" shall mean the failure to exercise
"Reasonable Care".
"(d) "No-Action Letter" shall mean the response of the
Securities and Exchange Commission's Office of Chief Counsel of Investment
Management, dated April 18, 1995, in respect of the Templeton Russia Fund, Inc.
(SEC Ref. No. 95-151-CC, File No. 811-8788) providing "no-action" relief under
Section 17(f) of The Investment Company Act of 1940, as amended, and SEC Rule
17f-5 thereunder, in connection with custody of such Templeton Russia Fund,
Inc.'s investments in Russian Securities.
"(e) "Reasonable Care" shall mean the use of reasonable
custodial practices under the applicable circumstances as measured by the
custodial practices then prevailing in Russia of International Financial
Institutions acting as custodians for their institutional investor clients in
Russia.
"(f) "Registrar Company" shall mean any entity providing share
registration services to an issuer of Russian Securities.
"(g) "Registrar Contract" shall mean a contract between CMBI
and a Registrar Company (and as the same may be amended from time to time)
containing, inter alia, the contractual provisions described at paragraphs
(a)-(e) on pps. 5-6 of the No-Action Letter.
"(h) "Russian Security" shall mean a Security issued by a
Russian issuer.
"(i) "Share Extract" shall mean: (i) an extract of its share
registration books issued by a Registrar Company indicating an investor's
ownership of a security; and (ii) a form prepared by CMBI or its agent in those
cases where a Registrar Company is unwilling to issue a Share Extract.
Section 3. Section 6(a) of the Agreement is amended by adding the
following at the end thereof: "With respect to Russia, payment for Russian
Securities shall not be made prior to the issuance and receipt of the Share
Extract relating to such Russian Security. Delivery of Russian Securities may
be made in accordance with the customary or established securities trading or
securities processing practices and procedures in Russia. Delivery of Russian
Securities may also be made in any manner specifically required by Instructions
acceptable to the Bank. Customer shall promptly supply such transaction and
settlement information as may be requested by Bank or CMBI in connection with
particular transactions."
<PAGE> 22
Section 4. Section 8 of the Agreement is amended by adding a new
paragraph to the end thereof as follows: "It is understood and agreed that Bank
need only use its reasonable efforts with respect to performing the functions
described in this Section 8 with respect to Russian Securities, it being
understood that proxy voting services are not available."
Section 5. Section 12(a)(i) of the Agreement is amended with
respect to Russian custody by deleting the phrase "reasonable care" wherever it
appears and substituting, in lieu thereof, the phrase "Reasonable Care".
Section 6. Section 12(a)(i) of the Agreement is further amended
with respect to Russian custody by inserting the following at the end of the
first sentence thereof: "; provided that, with respect to Russian Securities,
Bank's responsibilities shall be limited to safekeeping of relevant Share
Extracts."
Section 7. Section 12(a)(i) of the Agreement is further amended
with respect to Russian custody by inserting the following after the second
sentence thereof: "Delegation by Bank to CMBI shall not relieve Bank of any
responsibility to Customer for any loss due to such delegation, and Bank shall
be liable for any loss or claim arising out of or in connection with the
performance by CMBI of such delegated duties to the same extent as if Bank had
itself provided the custody services hereunder. In connection with the
foregoing, neither Bank nor CMBI shall assume responsibility for, and neither
shall be liable for, any action or inaction of any Registrar Company and no
Registrar Company shall be, or shall be deemed to be, Bank, CMBI, a
Subcustodian, a securities depository or the employee, agent or personnel of
any of the foregoing. To the extent that CMBI employs agents to perform any of
the functions to be performed by Bank or CMBI with respect to Russian
Securities, neither Bank nor CMBI shall be responsible for any act, omission,
default or for the solvency of any such agent unless the appointment of such
agent was made with Negligence or in bad faith, except that where Bank or CMBI
uses (i) an affiliated nominee or (ii) an agent to perform the share
registration or share confirmation functions described in paragraphs (a)-(e) on
pps. 5-6 of the No-Action Letter, and, to the extent applicable to CMBI, the
share registration functions described on pps. 2-3 of the No-Action Letter,
Bank and CMBI shall be liable to Customer as if CMBI were responsible for
performing such services itself."
Section 8. Section 12(a)(ii) is amended with respect to Russian
custody by deleting the word "negligently" and substituting, in lieu thereof,
the word "Negligently".
Section 9. Section 12(a)(iii) is amended with respect to Russian
custody by deleting the word "negligence" and substituting, in lieu thereof,
the word "Negligence".
Section 10. Add a new Section 16 to the Agreement as follows:
"(a) Bank will advise Customer (and will update such advice
from time to time as changes occur) of those Registrar Companies with which
CMBI has entered into a Registrar Contract. Bank shall cause CMBI both to
monitor each Registrar Company and to promptly advise Customer and its
investment advisor when CMBI has actual knowledge of the occurrence of any one
or more of the events described in paragraphs (i)-(v) on pps. 8-9 of the
No-Action Letter with respect to a Registrar Company that serves in that
capacity for any issuer the shares of which are held by Customer.
"(b) Where Customer is considering investing in the Russian
Securities of an issuer as to which CMBI does not have a Registrar Contract
with the issuer's Registrar Company, Customer may request that Bank ask that
CMBI both consider whether it would be willing to attempt to enter into such a
Registrar Contract and to advise Customer of its willingness to do so. Where
CMBI has agreed to make such an attempt, Bank will advise Customer of the
occurrence of any one or more of the events described in paragraphs (i)-(iv) on
pps. 8-9 of the No-action Letter of which CMBI has actual knowledge.
<PAGE> 23
(c) Where Customer is considering investing in the Russian
Securities of an issuer as to which CMBI has a Registrar Contract with the
issuer's Registrar Company. "Customer may advise Bank of its interest in
investing in such issuer and, in such event, Bank will advise Customer of the
occurrence of any one or more of the events described in paragraphs (i)-(v) on
pps. 8-9 of the No-Action Letter of which CMBI has actual knowledge."
Section 11. Add a new Section 17 to the Agreement as follows:
"Customer shall pay for and hold Bank and CMBI harmless from any liability or
loss resulting from the imposition or assessment of any taxes (including, but
not limited to, state, stamp and other duties) or other governmental charges,
and any related expenses incurred by Bank, CMBI or their respective agents with
respect to income on Customer's Russian Securities.
Section 12. Add a new Section 18 to the Agreement as follows: "Customer
acknowledges and agrees that CMBI may not be able, in given cases and despite
its reasonable efforts, to obtain a Share Extract from a Registrar Company and
CMBI shall not be liable in any such event including with respect to any losses
resulting from such failure, provided that CMBI performs in accordance with
Section 2 hereof."
Section 13. Add a new Section 19 to the Agreement as follows:
"Customer acknowledges that it has received, reviewed and understands Bank's
market report for Russia, including, but not limited to, the risks described
therein."
Section 14. Add a new Section 20 to the Agreement as follows: "Subject
to the cooperation of a Registrar Company, for at least the first two years
following CMBI's first use of a Registrar Company, Bank shall cause CMBI to
conduct share confirmations on at least a quarterly basis, although thereafter
confirmations may be conducted on a less frequent basis if Customer's Board of
Directors, in consultation with CMBI, determines it to be appropriate."
Section 15. Add a new Section 21 to the Agreement as follows: "Bank
shall cause CMBI to prepare for distribution to Customer's Board of Directors a
quarterly report identifying: (i) any concerns it has regarding the Russian
share registration system that should be brought to the attention of the Board
of Directors; and (ii) the steps CMBI has taken during the reporting period to
ensure that Customer's interests continue to be appropriately recorded."
Section 16. Add a new Section 22 to the Agreement as follows: "Except
as provided in new Section 16(b), the services to be provided by Bank hereunder
will be provided only in relations to Russian Securities for which CMBI has
entered into a Registrar Contract with the relevant Registrar Company."
*****************
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
MORGAN STANLEY RUSSIA & NEW
EUROPE FUND, INC. THE CHASE MANHATTAN BANK
By: ----------------------- By: --------------------
Name: Name:
Title: Title:
Date: Date:
<PAGE> 1
EXHIBIT K(2)
ADMINISTRATION AGREEMENT
* Fund Administration Services
* Fund Accounting Services
CHASE GLOBAL FUNDS SERVICES COMPANY
September 30, 1996
<PAGE> 2
ADMINISTRATION AGREEMENT
TABLE OF CONTENTS
-----------------
SECTION PAGE
- ------- ----
1. Appointment...................................................... 1
2. Representations and Warranties................................... 1
3. Delivery of Documents............................................ 3
4. Services Provided................................................ 4
5. Fees and Expenses................................................ 5
6. Limitation of Liability and Indemnification...................... 7
7. Term............................................................. 10
8. Notices.......................................................... 10
9. Waiver........................................................... 11
10. Force Majeure.................................................... 11
12. Amendments....................................................... 11
12. Severability..................................................... 11
13. Governing Law.................................................... 11
Signatures............................................................. 12
<PAGE> 3
ADMINISTRATION AGREEMENT
TABLE OF CONTENTS (CONTINUED)
-----------------------------
PAGE
----
Schedule A -- Fees and Expenses........................................ A-1
Schedule B -- Fund Administration Services Description................. B-1
Schedule C -- Fund Accounting Services Description..................... C-1
<PAGE> 4
ADMINISTRATION AGREEMENT
AGREEMENT made as of September 30, 1996 by and between MORGAN
STANLEY RUSSIA & NEW EUROPE FUND, INC. (the "Fund"), a Maryland corporation, and
CHASE GLOBAL FUNDS SERVICES COMPANY ("Chase"), a Delaware corporation.
W I T N E S S E T H:
WHEREAS, the Fund is registered as a non-diversified, closed-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Fund wishes to contract with Chase to provide
certain services with respect to the Fund;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Fund hereby appoints Chase to provide services
for the Fund, as described hereinafter, subject to the supervision of the Board
of Directors of the Fund (the "Board"), for the period and on the terms set
forth in this Agreement. Chase accepts such appointment and agrees to furnish
the services herein set forth in return for the compensation as provided in
Section 5 of and Schedule A to this Agreement.
2. REPRESENTATIONS AND WARRANTIES.
(a) Chase represents and warrants to the Fund that:
(i) Chase is a corporation, duly organized and
existing under the laws of the State of Delaware;
(ii) Chase is duly qualified to carry on its
business in the Commonwealth of Massachusetts;
1
<PAGE> 5
(ii) Chase is empowered under applicable laws and by its
Articles of Incorporation and By-Laws to enter into and perform this Agreement.
(iv) all requisite corporate proceedings have been taken to
authorize Chase to enter into and perform this Agreement,
(v) Chase has, and will continue to have, access to the
facilities, personnel and equipment required to fully perform its duties and
obligations hereunder,
(vi) no legal or administrative proceedings have been
instituted or threatened which would impair Chase's ability to perform its
duties and obligations under this Agreement; and
(vii) Chase's entrance into this Agreement shall not cause a
material breach or be in material conflict with any other agreement or
obligation of Chase or any law or regulation applicable to Chase,
(b) The Fund represents and warrants to Chase that:
(i) the Fund is a Maryland corporation, duly organized and
existing and in good standing under the laws of Maryland;
(ii) the Fund is empowered under applicable laws and by its
Articles of Incorporation and By-Laws, each as amended, to enter into and
perform this Agreement;
(iii) all requisite proceedings have been taken to authorize
the Fund to enter into and perform this Agreement;
(iv) the Fund is an investment company properly registered
under the 1940 Act;
(v) a registration statement under the Securities Act of
1933, as amended ("1933 Act") and the 1940 Act on Form N-2 has been filed and
will be effective and will remain effective during the term of this Agreement,
and all necessary filings under the laws of the states will have been made and
will be current during the term of this Agreement;
2
<PAGE> 6
(vi) no legal or administrative proceedings have been
instituted or threatened which would impair the Fund's ability to perform its
duties and obligations under this Agreement;
(vii) the Fund's registration statements comply in all
material respects with the 1933 Act and the 1940 Act (including the rules and
regulations thereunder) and none of the Fund's prospectuses and/or statements
of additional information contain any untrue statement of material fact or omit
to state a material fact necessary to make the statements therein not
misleading; and
(viii) the Fund's entrance into this Agreement shall not cause
a material breach or be in material conflict with any other agreement or
obligation of the Fund or any law or regulation applicable to it.
3. DELIVERY OF DOCUMENTS. The Fund will promptly furnish to Chase
such copies, properly certified or authenticated, of contracts, documents and
other related information that Chase may request or requires to properly
discharge its duties. Such documents may include but are not limited to the
following:
(a) Resolutions of the Board authorizing the appointment of
Chase to provide certain services to the Fund and approving this Agreement;
(b) The Fund's Articles of Incorporation, as amended;
(c) The Fund's By-Laws, as amended;
(d) The Fund's Notification of Registration on Form N-8A under
the 1940 Act as filed with the Securities and Exchange Commission ("SEC");
(e) The Fund's registration statement including exhibits, as
amended, on Form N-2 (the "Registration Statement") under the 1933 Act and the
1940 Act, as filed with the SEC;
(f) Copies of the Investment Advisory Agreement between the
Fund and its investment adviser (the "Advisory Agreement");
(g) Opinions of counsel and auditors' reports;
3
<PAGE> 7
(h) The Fund's Prospectus and all amendments and supplements
thereto (such Prospectus and supplements thereto (such Prospectus supplements
thereto, as presently in effect and as from time to time hereafter amended and
supplemented, herein called the "Prospectuses"); and
(i) Such other agreements as the Fund may enter into from time
to time including securities lending agreements, futures and commodities
account agreements, brokerage agreements and options agreements.
4. SERVICES PROVIDED.
(a) Chase will provide the following services subject to the
control, direction and supervision of the Board and in compliance with the
objectives, policies and limitations set forth in the Fund's Registration
Statement, Articles of Incorporation and By-Laws; applicable laws and
regulations; and all resolutions and policies implemented by the Board:
(i) Fund Administration, and
(ii) Fund Accounting.
A non-exclusive description of each of the above services is contained in
Schedules B and C, respectively, to this Agreement.
(b) Chase will also:
(i) provide office facilities with respect to the
provision of the services contemplated herein (which may be in the offices of
Chase or a corporate affiliate of Chase);
(ii) provide the services of individuals to serve as
officers of the Fund who will be designated by Chase and elected by the Board
subject to reasonable Board approval;
(iii) provide or otherwise obtain personnel sufficient
for provision of the services contemplated herein;
4
<PAGE> 8
(iv) Furnish equipment and other materials, which are necessary
or desirable for provision of the services contemplated herein, and
(v) keep records relating to the services contemplated herein
in such form and manner as Chase may deem appropriate or advisable. To the
extent required by Section 31 of the 1940 Act and the rules thereunder, Chase
agrees that all such records prepared or maintained by Chase relating to the
services provided hereunder are the property of the fund and will be preserved
for the periods prescribed under Rule 31a-2 under the 1940 Act, maintained at
the Fund's expense, and made available in accordance with such Section and
rules.
5. FEES AND EXPENSES
(a) As compensation for he services rendered to the Fund pursuant
to this Agreement the Fund shall pay Chaise monthly fees determined as set
forth in Schedule A to this Agreement. Such fees are to be billed monthly and
shall be due and payable upon receipt of the invoice. Upon any termination of
the provision of services under this Agreement before the end of any month, the
fee for the part of the month before such termination shall be prorated
according to the proportion which such part bears to the full monthly period
and shall be payable upon the date of such termination.
(b) For the purpose of determining fees calculated as a function of
for the Fund's total assets, the value of the Fund's total assets and net assets
shall be computed as required by its currently effective Prospectus, generally
accepted accounting principles, and resolutions of the Board.
(c) The Fund may request additional services, additional processing,
or special reports, with such specifications and documentation as may be
reasonably required by the Fund. If Chase elects to provide such services or
arrange for their provision, it shall be entitled to additional fees and
expenses at its customary rates and charges, or as otherwise agreed upon with
the Fund.
5
<PAGE> 9
(d) Chase will bear its own expenses in connection with the
performance of the services under this Agreement except as provided herein or as
agreed to by the parties. The Fund agrees to promptly reimburse Chase of any
services, equipment or supplies ordered by or for the Fund through Chase and
for any other expenses that Chase may incur on the Fund's behalf at the Fund's
request or as consented to by the Fund. Such other expenses to be incurred in
the operation of the Fund and to be borne by the Fund, include, but are not
limited to: taxes; interest; brokerage fees and commissions; salaries and fees
of officers and directors who are not officers, directors, shareholders or
employees of Chase, or the Fund's investment adviser, SEC and state Blue Sky
registration and qualification fees, levies, fines and other charges, EDGAR
filing fees', processing services and related fees; postage and mailing costs;
costs of share certificates; advisory and administration fees, charges and
expenses of pricing and data services, independent public accountants and
custodians; insurance premiums including fidelity bond premiums; legal
expenses; consulting fees; customary bank charges and fees; costs of
maintenance of corporate existence; expenses of typesetting and printing of
Prospectuses for regulatory purposes and or distribution to current
shareholders of the Fund; expenses of printing and production costs of
shareholders' reports and proxy statements and materials; expenses of proxy
solicitation, proxy tabulation and annual meetings; costs and expenses of Fund
stationery and forms; costs and expenses of special telephone and data lines
and devices; costs associated with corporate, shareholder, and Board meetings;
trade association dues and expenses, reprocessing costs to Chase caused by third
party errors; and any extraordinary expenses and other customary Fund expenses.
In addition, Chase may utilize one or more independent pricing services to
obtain securities prices and to act as backup to the primary pricing services,
in connection with determining the net asset values of the Fund. The Fund will
reimburse Chase for the Fund's share of the cost of such services based upon
the actual usage, or a pro-rata estimate of the use, of the services for the
benefit of the Fund.
6
<PAGE> 10
(e) All fees, out-of-pocket expenses, or additional charges of
Chase shall be billed on a monthly basis and shall be due and payable upon
receipt of the invoice.
(f) In the event that the Fund is more than sixty (60) days
delinquent in its payments of monthly billings in connection with this
Agreement (with the exception of specific amounts which may be contested in
good faith by the Fund), this Agreement may be terminated upon thirty (30)
days' written notice to the Fund by Chase. The Fund must notify Chase in
writing of any contested amounts within thirty (30) days of receipt of a
billing for such amounts. Disputed amounts are not due and payable while they
are being investigated.
6. Duties, Responsibilities and Limitation of Liability.
(a) Chase shall be obligated to exercise due care and diligence and
to act in good faith in performing the services provided for under this
Agreement. Furthermore, Chase shall be entitled to rely on any oral or written
instructions, notices or other communications from the Fund and its custodians,
officers and directors, investors, agents, legal counsel and other service
providers that Chase reasonably believes to be genuine, valid and authorized.
(b) Subject to the foregoing, Chase shall not be liable for any
error of judgement or mistake of law or for any loss or expense suffered by the
Fund, in connection with the matters to which this Agreement relates, except for
a loss or expense caused by or resulting from willful misfeasance, bad faith or
negligence on the part of Chase in the performance of its duties or from
reckless disregard by Chase of its obligations and duties under this Agreement.
(c) Subject to the foregoing, Chase shall not be responsible for,
and the Fund shall indemnify and hold Chase harmless from and against, any and
all losses, damages, costs, reasonable attorneys' fees and expenses, payments,
expenses and liabilities incurred by Chase, any of its agents or the Fund's
agents in the performance of the duties described herein, including, but not
limited to, those arising out of or attributable to:
(i) any and all actions of Chase or its officers or agents
required to be taken pursuant to this Agreement;
(ii) the reliance on or use by Chase or its officers or
agents of information, records, or documents which are received by Chase or its
officers or agents and furnished to it or them by or on behalf of the Fund, and
which have been prepared or maintained by the Fund or any other third party on
behalf of the Fund;
7
<PAGE> 11
(iii) the Fund's refusal or failure to comply with the terms
of this Agreement or the Fund's lack of good faith, or its actions, or lack
thereof, involving negligence or willful misfeasance;
(iv) the breach of any representation or warranty of the
Fund hereunder;
(v) the taping or other form of recording of telephone
conversations or other forms of electronic communications with other agents of
the Fund, its investors and shareholders, or reasonable and justifiable
reliance by Chase on telephone or other electronic instructions of any person
acting on behalf of a shareholder or shareholder account for which telephone or
other electronic services have been authorized;
(vi) The reliance on or carrying out by Chase or its
officers or agents of any proper instructions reasonably believed to be duly
authorized, or requests of the Fund or recognition by Chase of any share
certificates that are reasonably believed to bear the proper signatures of the
officers of the Fund and the proper countersignature of any transfer agent or
registrar of the Fund;
(vii) the offer or sale of shares by the Fund in violation of
any requirement under the Federal securities laws or regulations or the
securities laws or regulations of any state or in violation, of any stop order
or other determination or ruling by any Federal agency or any state agency with
respect to the officer or sale of such shares in such state resulting from
activities, actions, or omissions by the Fund or its service providers and
agents other than Chase or existing or arising out of activities, actions or
omissions by or on behalf of the Fund prior to the effective date of this
Agreement;
8
<PAGE> 12
(viii) any failure of the Fund's registration statement to
comply with the 1933 Act and the 1940 Act (including the rules and regulations
thereunder) and any other applicable laws, or any untrue statement of a
material fact or omission of a material fact necessary to make any statement
therein not misleading in the Fund's Prospectus;
(ix) the failure by the Fund to substantially comply with
applicable securities, tax, commodities and other laws, rules and regulations;
and
(x) all actions, omissions, or errors caused by or
resulting from the willful misfeasance, bad faith or negligence of third party
to whom Chase, or the Fund has assigned any rights and/or delegated any duties
under this Agreement at the request of or as required by the Fund, provided
that each of such third parties was chosen by the Fund.
(d) Chase shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, reasonable attorneys' fees
and expenses, payments, expenses and liabilities arising out of or attributable
to Chase's refusal or failure to comply with the terms of this Agreement;
Chase's breach of any representation or warranty made by it herein; or Chase's
lack of good faith, or acts involving negligence, willful misfeasance or
reckless disregard of its duties.
9
<PAGE> 13
ADDITIONAL PROPOSED SECTIONS
x. PROPRIETARY AND CONFIDENTIAL INFORMATION.
Chase agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Fund, all records and
other information relative to the Fund's prior, present or potential
shareholders, and to not use such records and information for any purpose other
than performance of Chase's responsibilities and duties hereunder. Chase may
seek a waiver of such confidentiality provisions by furnishing reasonable prior
notice to the Fund and obtaining approval in writing from the Fund, which
approval shall not be unreasonably withheld and may not be withheld where Chase
may be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities.
Waivers of confidentiality are automatically effective without further action
by Chase with respect to U.S. Internal Revenue Service levies, subpoenas and
similar actions, or with respect to requests by the Fund.
x. HIRING OF EMPLOYEES.
The Fund and Chase agree that they will not enter into
discussions of employment or make offers of employment to each others'
employees without prior written approval of the other.
x. ASSIGNABILITY.
This Agreement shall not be assigned by any of the parties
hereto without the prior consent in writing of the other party; provided,
however, that Chase may in its own discretion and without limitation or prior
consent of the Fund, whenever and on such terms and conditions as Chase deems
necessary or appropriate, subcontract, delegate or assign its rights,
10
<PAGE> 14
duties, obligations and liabilities to subsidiaries or affiliates of Chase;
provided, further, that any such subcontract, agreement or understanding shall
not discharge Chase or its affiliates or subsidiaries, as the case may be, from
its obligations hereunder. Similarly, Chase or its affiliated subcontractor,
designee, or assignee may at its discretion, without notice to the Fund, enter
into such subcontracts, agreements and understandings, whenever and on such
terms and conditions as Chase or they deem necessary or appropriate to perform
services hereunder, with non-affiliated third parties; provided that such
sub-contract, agreement or understanding shall not discharge Chase, or its
subcontractor, designee, or assignee, as the case may be, from Chases's
obligations hereunder.
x. Headings.
All section headings contained in this Agreement are for
convenience of reference only, do not form a part of this Agreement and shall
not affect in any way the meaning or interpretation of this Agreement.
11
<PAGE> 15
7. TERM. This Agreement shall become effective on the date first
hereinabove written and may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement shall continue in effect
unless terminated by either party on 90 days' prior written notice. Upon
termination of this Agreement, the Fund shall pay to Chase such compensation
and any out-of-pocket or other reimbursable expenses which may become due or
payable under the terms hereof as of the date of termination or after the date
that the provision of services ceases, whichever is later.
8. NOTICES. Any notice required or permitted hereunder shall be in
writing and shall be deemed effective on the date of personal delivery (by
private messenger, courier service or otherwise) or upon confirmed receipt of
telex or facsimile, whichever occurs first, or upon receipt if by mail to the
parties at the following address (or such other address as a party may specify
by notice to the other):
If to the Fund:
Morgan Stanley Russia & New Europe Fund, Inc.
c/o Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas, Fl. 22
New York, NY 10020
Attention: Harold J. Scheoff, Jr.
Fax: (212) 296-2054
If to Chase:
Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108
Attention: Karl O. Hartmann, Esq.
Fax: 617-557-8616
12
<PAGE> 16
9. WAIVER. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waiver nor
shall it deprive such party of the right thereafter to insist upon strict
adherence to that term or any term of this Agreement. Any waiver must be in
writing signed by the waiving party.
10. FORCE MAJEURE. Chase shall not be responsible or liable for any
harm, loss or damage suffered by the Fund, its investors, or other third
parties or for any failure or delay in performance of Chases obligations under
this Agreement arising out of or caused, directly or indirectly, by
circumstances beyond Chase's control. In the event of a force majeure, any
resulting harm, loss, damage, failure or delay by Chase will give the Fund the
right to terminate this Agreement.
11. AMENDMENTS. This Agreement may be modified or amended from time
to time by mutual written agreement between the parties. No provision of this
Agreement may be changed, discharged, or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, discharge or termination is sought.
12. SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of the Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance it shall nevertheless
remain applicable to all other persons and circumstances.
13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK.
13
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first written above.
MORGAN STANLEY RUSSIA
& NEW EUROPE FUND, INC.
By:____________________________________
Name:__________________________________
Title:_________________________________
CHASE GLOBAL FUNDS
SERVICES COMPANY
By:___________________________________
Name:_________________________________
Title:________________________________
14
<PAGE> 18
ADMINISTRATION AGREEMENT
SCHEDULE A
FEES AND EXPENSES
FUND ADMINISTRATION AND ACCOUNTING FEES
A. For the services under this Agreement, the Fund shall pay to the
Administrator an annual fee of $65,000 plus .9 of 1% of the average net
assets of the Fund, such fee to be computed weekly and payable monthly.
B. Out-of-pocket expenses, including but not limited to those in Section
5(d), will be computed and billed to the Fund, payable upon receipt, on
a monthly basis.
A-1
<PAGE> 19
ADMINISTRATION AGREEMENT
SCHEDULE B
GENERAL DESCRIPTION OF FUND ADMINISTRATION SERVICES
1. FINANCIAL AND TAX REPORTING
A. Prepare management reports and Board of Directors materials,
such as unaudited financial statements and summaries of
dividends and distributions.
B. Report Fund performance to outside services as directed by Fund
management.
C. Calculate dividend and capital gain distributions in accordance
with distribution policies detailed in the Fund's Prospectus.
Assist Fund management in making final determinations of
distribution amounts.
D. Estimate and recommend year-end dividend and capital gain
distributions necessary to establish Fund's status as a
regulated investment company ("RIC") under Section 4982 of the
Internal Revenue Code of 1986, as amended (the "Code") regarding
minimum distribution requirements.
E. Working with the Fund's public accountants or other
professionals, prepare and file Fund's Federal tax return on
Form 1120-RIC along with all state and local tax returns where
applicable. Prepare and file Federal Excise Tax Return (Form
8613).
F. Prepare and file Fund's semi-annual and annual Form N-SAR with
the SEC.
G. Prepare and coordinate printing of Fund's Semiannual and Annual
Reports to Shareholders.
H. In conjunction with transfer agent, notify shareholders as to
what portion, if any, of the distributions made by the Fund's
during the prior fiscal year were exempt-interest dividends
under Section 852 (b)(5)(A) of the Code.
I. Provide Form 1099-MISC to persons other than corporations
(i.e., Directors) to whom the Fund paid more than $600 during
the year.
B-1
<PAGE> 20
J. Prepare and file California State Expense Limitation
Report, if applicable.
K. Provide financial information for Fund proxies and
prospectuses (Expense Table).
II. PORTFOLIO COMPLIANCE
A. Assist with monitoring each Investment Fund's
compliance with investment restrictions (e.g., issuer
or industry diversification, etc.) listed in the current
prospectus(es) and Statement(s) of Additional
Information, although primary responsibility for such
compliance shall remain with the Fund's investment
adviser or investment manager.
B. Assist with monitoring each Investment Fund's
compliance with the requirements of Section 851 of the
Code for qualification as a RIC (i.e., 90% Income, 30%
Income - Short Three, Diversification Tests), although
primary responsibility for such compliance shall remain
with the Fund's investment adviser or investment
manager.
C. Assist with monitoring investment manager's compliance
with Board directives such as "Approved Issuers
Listings for Repurchase Agreements", Rule 17a-7, and
Rule 12d-3 procedures, although primary responsibility
for such compliance shall remain with the Fund's
investment adviser or investment manager.
D. Mail quarterly requests for "Securities Transaction
Reports" to the Fund's Directors and Officers and
"access persons" under the terms of the Fund's Code of
Ethics and SEC regulations.
III. REGULATORY AFFAIRS AND CORPORATE GOVERNANCE
A. Prepare and file post-effective amendments to the Fund's
registration statement and supplements as needed.
B. Prepare and file proxy materials and administer
shareholder meetings.
C. Prepare and file all state registrations of a the Fund's
securities including annual renewals; registering new
funds, portfolios, or classes; preparing and filing
sales reports; filing copies of the registration
statement, prospectus and statement of additional
information; and increasing registered amounts of
securities in individual states.
B-2
<PAGE> 21
D. Prepare Board materials for Board meetings.
E. Assist with the review and monitoring of fidelity bond and
errors and omissions insurance coverage and the submission of
any related regulatory filings.
F. Prepare and update documents such as charter document, by-laws,
and foreign qualification filings.
G. Provide support with respect to routine regulatory examinations
or investigations of the Fund.
H. File copies of financial reports to shareholders with the SEC
under Rule 30b2-1.
IV. GENERAL ADMINISTRATION
A. Furnish officers of the Fund, subject to reasonable Board
approval.
B. Prepare fund, portfolio or class expense projections, establish
accruals and review on a periodic basis, including expenses
based on a percentage of average daily net assets (advisory and
administrative fees) and expenses based on actual charges
annualized and accrued daily (audit fees, registration fees,
directors' fees, etc.).
C. For new funds, portfolios and classes, obtain Employer or
Taxpayer Identification Number and CUSIP numbers, as necessary.
Estimate organizational costs and expenses and monitor against
actual disbursements.
D. Coordinate all communications and data collection with regard to
any regulatory examinations and yearly audits by independent
accountants.
B-3
<PAGE> 22
ADMINISTRATION AGREEMENT
SCHEDULE C
DESCRIPTION OF FUND ACCOUNTING SERVICES
I. GENERAL DESCRIPTION
Chase shall provide the following accounting services to the Fund:
A. Maintenance of the books and records for the Fund's assets,
including records of all securities transactions.
B. Calculation of each funds', portfolios' or classes' Net Asset
Value in accordance with the Prospectus, and after the fund,
portfolio or class meets eligibility requirements, transmission
to NASDAQ and to such other entities as directed by the Fund.
C. Accounting for dividends and interest received and distributions
made by the Fund.
D. Coordinate with the Fund's independent auditors with respect to
the annual audit, and as otherwise requested by the Fund.
E. As mutually agreed upon, Chase will provide domestic and/or
international reports.
C-1
<PAGE> 1
EXHIBIT
L(1)
[ROGERS & WELLS LETTERHEAD]
September 24, 1996
Morgan Stanley Russia & New Europe
Fund, Inc.
1221 Avenue of the Americas
New York, New York 10020
Ladies and Gentlemen:
We have acted as counsel for Morgan Stanley Russia & New Europe Fund,
Inc., a Maryland corporation (the "Fund"), in connection with the organization
of the Fund, its registration as a closed-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the
preparation and filing with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act of a
Registration Statement on Form N-2 (the "Registration Statement") relating to
the proposed public offering by the Fund of up to 5,750,000 shares of common
stock, par value $0.01 per share (the "Shares") of the Fund.
In so acting, we have examined and relied upon originals or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, documents, certificates and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinions expressed below.
As to matters governed by the laws of the State of Maryland, we have relied on
the opinion of Messrs. Piper & Marbury attached hereto.
Based upon the foregoing, and on such examination of law as we have
deemed necessary, we are of the opinion that:
1. The Fund has been duly incorporated and is validly existing in
good standing under the laws of the State of Maryland.
<PAGE> 2
[ROGERS & WELLS LETTERHEAD]
Morgan Stanley Russia
& New Europe Fund, Inc. September 24, 1996
2
2. When the Shares have been offered and sold as contemplated in the
Registration Statement and in accordance with the terms of the Underwriting
Agreement, filed as an Exhibit to the Registration Statement, the Shares will
be validly issued, fully paid and non-assessable.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an Exhibit to the Registration Statement and to the
reference to this firm under the heading "Legal Matters" in the form of
prospectus contained therein. In giving this consent, we do not admit that we
are within the category of persons whose consent is required under Section 7 of
the 1933 Act or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ ROGERS & WELLS
<PAGE> 1
EXHIBIT
L(2)
[PIPER & MARBURY L.L.P. LETTERHEAD]
September 24, 1996
Rogers & Wells
200 Park Avenue
New York, New York 10166
Re: Morgan Stanley Russia & New Europe Fund, Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel to Morgan Stanley Russia &
New Europe Fund, Inc., a Maryland corporation (the "Company"), in connection
with the Company's Registration Statement on Form N-2, including all amendments
or supplements thereto, filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and the
Investment Company Act of 1940, as amended (File Nos. 33-7502 and 811-8346) and
the issuance of shares of the Company's Common Stock, par value of $0.01 per
share (the "Shares"), pursuant to the Registration Statement.
In this capacity, we have examined the Company's Charter and By-Laws,
the proceedings of the Board of Directors of the Company relating to the
issuance of the Shares and such other statutes, certificates, instruments and
documents relating to the Company and matters of law as we have deemed
necessary to the issuance of this opinion. In such examination, we have assumed
the genuineness of all signatures, the legal capacity of all individuals who
have executed any of the aforesaid documents, the conformity of final documents
in all material respects to the versions thereof submitted to us in draft form,
the authenticity of all documents submitted to us as originals, the conformity
with originals of all documents submitted to us as copies and the due
authorization, validity and binding effect of all such documents (other than
the authorization, execution and delivery of the documents by the Company).
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
<PAGE> 2
PIPER & MARBURY
L.L.P.
Rogers & Wells
September 24, 1996
Page 2
1. The Company has been duly incorporated and is validly existing as
a corporation under the laws of the State of Maryland.
2. The issuance and sale of the Shares have been duly authorized and
when issued and paid for as contemplated in the Registration Statement, the
Shares will be legally issued, fully paid and nonassessable.
You may rely upon this opinion in rendering your opinion to the Company
which is to filed as an exhibit to the Registration Statement. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE> 1
EXHIBIT 2(n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Pre-Effective Amendment No. 3 to the registration statement on Form N-2 of our
report dated September 24, 1996 relating to the Statement of Assets and
Liabilities of Morgan Stanley Russia & New Europe Fund, Inc. at September 12,
1996. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
September 24, 1996
<PAGE> 1
EXHIBIT 2(p)
September 10, 1996
Morgan Stanley Russia & New Europe Fund, Inc.
c/o Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Ladies and Gentlemen:
Morgan Stanley Asset Management Inc. ("MSAM") agrees to purchase 5,000
shares of Common Stock, par value $.01 per share (the "Shares"), of the Fund at
a price of $20.00 per share. MSAM shall tender to the Fund the amount of
$100,000 in full payment for the Shares.
MSAM represents and warrants to the Fund that the Shares are being
acquired for investment and not with a view to distribution thereof, and that
MSAM has no present intention to redeem or dispose of any of the Shares.
Very truly yours,
MORGAN STANLEY ASSET
MANAGEMENT INC.
/s/ Warren J. Olsen
______________________________________
By: Warren J. Olsen
Title: Principal
