As filed with the Securities and Exchange Commission on October 12, 1995
Securities Act File No. 33-_____
Investment Company Act File No. 811-8878
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form N-2
(Check appropriate box or boxes)
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / Pre-Effective Amendment No. ___
/ / Post-Effective Amendment No. ___
and/or
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ Amendment No. 5
THE CZECH REPUBLIC FUND, INC.
Exact name of Registrant as specified in charter
Oppenheimer Tower
One World Financial Center
200 Liberty Street
New York, New York 10281
(Address of Principal Executive Offices)
1-800-421-4777
(Registrant's Telephone Number, including Area Code)
Alan H. Rappaport, Chairman
Oppenheimer Tower
The Czech Republic Fund, Inc.
One World Financial Center
200 Liberty Street
New York, New York 10281
(Name and Address of Agent for Service)
Copies to:
Sarah E. Cogan, Esq. Rose F. DiMartino, Esq.
Simpson Thacher & Bartlett Willkie Farr & Gallagher
425 Lexington Avenue One Citicorp Center
New York, New York 10017 153 E. 53rd Street
(212) 455-2000 New York, New York 10022
(212) 935-8000
_________________________
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. /X/
<PAGE>
It is proposed that this filing will become effective when declared
effective pursuant to Section 8(c).
This Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is -----./ /
_________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered Per Share <F1> Offering Price<F1> Fee
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share . . . . . . . . . . 1,600,000 $13.25 $21,200,000 $7,311
<FN><F1> Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, based on the
average of the high and low sale prices reported on the New York Stock Exchange
on October 5, 1995.
</TABLE>
_________________________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
THE CZECH REPUBLIC FUND, INC.
Form N-2
CROSS REFERENCE SHEET
Parts A and B of the Prospectus<F1>
1. Outside Front Cover . . . . . . . . . . . . . . . Outside Front
Cover Page of
Prospectus
2. Inside Front and Outside
Back Cover Pages . . . . . . . . . . . . . . . . . Inside Front and
Outside Back
Cover of
Prospectus
3. Fee Table and Synopsis . . . . . . . . . . . . . . Fee Table;
Prospectus
Summary
4. Financial Highlights . . . . . . . . . . . . . . . Prospectus
Summary;
Financial
Highlights
5. Plan of Distribution . . . . . . . . . . . . . . . Outside Front
Cover Page of
Prospectus;
Prospectus
Summary; The
Offer
6. Selling Stockholders . . . . . . . . . . . . . . . Not Applicable
7. Use of Proceeds . . . . . . . . . . . . . . . . . Use of Proceeds
8. General Description of
the Registrant . . . . . . . . . . . . . . . . . . Outside Front
Cover Page of
Prospectus;
Summary; Risk
Factors; The
Fund; Investment
Objective and
Policies;
Investment
Restrictions;
Description of
Capital
9. Management . . . . . . . . . . . . . . . . . . . . Management of the
Fund; Portfolio
[FN]<F1>Pursuant to Form N-2, all information required to be set forth in
Part B has been included in Part A.
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C to this Registration Statement.<PAGE>
Transactions;
Description of
Capital Stock;
Custodian,
Transfer Agent,
Dividend Paying
Agent and
Registrar.
10. Capital; Stock, Long-Term Debt,
and other Securities . . . . . . . . . . . . . . . Dividends and
Distributions;
Dividend
Reinvestment and
Cash Purchase
Plan; Taxation;
Description of
Capital Stock
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 . . . . . . . . . Prospectus
Summary; The Fund
17. Investment Objective and Policies . . . . . . . . Prospectus
Summary;
Investment
Objective and
Policies;
Additional
Investment
Activities;
Investment
Restrictions;
Portfolio
Transactions
18. Management . . . . . . . . . . . . . . . . . . . . Prospectus
Summary;
Management of
the Fund
<PAGE>
19. Control Persons and Principal
Holders of Securities . . . . . . . . . . . . . . Management of the
Fund; Description
of Capital Stock
20. Investment Advisory and Other
Services . . . . . . . . . . . . . . . . . . . . . Prospectus
Summary;
Management of the
Fund; Custodian,
Transfer Agent,
Dividend Paying
Agent and
Registrar;
Experts
21. Brokerage Allocation and Other
Practices . . . . . . . . . . . . . . . . . . . . Portfolio
Transactions
22. Tax Status . . . . . . . . . . . . . . . . . . . . Dividends and
Distributions;
Dividend
Reinvestment and
Cash Purchase
Plan; Taxation
23. Financial Statements . . . . . . . . . . . . . . . Financial
Statements
<PAGE>
_______________________________________________________________________________
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
_______________________________________________________________________________
1,600,000 Shares
The Czech Republic Fund, Inc.
Common Stock
Issuable Upon Exercise of Rights
to Subscribe for Such Shares of Common Stock
_________________________
The Czech Republic Fund, Inc. (the "Fund") is issuing to its
stockholders of record ("Record Date Stockholders") as of the close of business
on ________, 1995 (the "Record Date") transferable rights ("Rights") entitling
the holders thereof to subscribe for up to an aggregate of 1,600,000 shares
(the "Shares") of the Fund's common stock, par value $.001 per share (the
"Common Stock"), at the rate of one Share for each three Rights held (the
"Offer"). Record Date Stockholders will receive one Right for each full share
of Common Stock held and stockholders who fully exercise their Rights will be
entitled to subscribe for additional shares of Common Stock pursuant to the
Over-Subscription Privilege as described below. Fractional Shares will not be
issued upon the exercise of Rights. Accordingly, Shares may be purchased only
pursuant to the exercise of Rights in integral multiples of three. The number
of Rights to be issued to a Record Date Stockholder will be rounded up to the
nearest number of Rights evenly divisible by three. In the case of shares of
Common Stock held of record by Cede & Co. ("Cede"), as nominee for The
Depository Trust Corporation ("DTC"), or any other depository or nominee, the
number of Rights issued to Cede or such other depository or nominee will be
adjusted to permit rounding up (to the nearest number of Rights evenly
divisible by three) of the Rights to be received by beneficial owners for whom
it is the holder of record only if Cede or such other depository or nominee
provides to the Fund on or before the close of business on ___________, 1995
written representation of the number of Rights required for such rounding. The
Fund's currently outstanding shares of Common Stock are, and the Shares offered
hereby will be, listed for trading on the New York Stock Exchange, Inc. (the
"New York Stock Exchange") under the symbol "CRF" and on the Osaka Securities
Exchange under the symbol "8684". The Rights are transferable and will trade
on the New York Stock Exchange under the symbol "CRF.RT." See "The Offer." THE
SUBSCRIPTION PRICE PER SHARE (THE "SUBSCRIPTION PRICE") WILL BE $________.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, on
____________, 1995 unless extended as described herein (the "Expiration Date").
The Fund announced the Offer after the close of trading on the New York Stock
Exchange on October __, 1995. The net asset value per share of Common Stock
<PAGE>
at the close of business on October __, 1995 and on ______________, 1995 was
$______ and $_______, respectively, and the last reported sale price of a share
of the Fund's Common Stock on the New York Stock Exchange on October __, 1995
and _____________, 1995 was $________ and $_________, respectively.
The Fund is a non-diversified, closed-end management
investment company. The Fund's investment objective is long-term capital
appreciation, which it seeks to achieve by investing primarily in securities of
Czech Issuers (as defined in this Prospectus). It is the Fund's policy, under
normal market conditions, to invest at least 65% of its total assets in
securities of Czech Issuers. The Fund may invest up to 35% of its net assets
in securities of other Central European Issuers (as defined in this
Prospectus). In addition, it is the Fund's policy, under normal market
conditions, to invest at least 65% of its total assets in equity securities,
and up to 35% of the Fund's net assets may be invested in debt securities.
There can be no assurance that the Fund's investment objective will be
achieved. 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. Investment in Czech Issuers and other Central European
Issuers involves certain risk considerations which are not involved in
investments in securities of U.S. companies or the U.S. government. The debt
obligations in which the Fund invests may be rated below investment grade or,
if unrated, be of comparable quality. There are special risks and
considerations associated with investing in such high yield/high risk debt
obligations. See "Investment Objective and Policies" and "Risk Factors."
This Prospectus sets forth concisely the information about the
Fund that a prospective investor ought to know before investing in the Fund.
Investors are advised to read this Prospectus and retain it for future
reference.
(Continued on the following page)
_________________________
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.
_________________________
<TABLE>
<CAPTION>
Subscription Price Sales Load<F1> Proceeds to Fund<F2>
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . . . . . . . . $ <F3> $ $
Total . . . . . . . . . . . . . . . . . . . . . . $ $ $ <F4>
</TABLE>
(Footnotes on the following page)
<PAGE>
_________________________
OPPENHEIMER & CO., INC.
_________________________
The date of this Prospectus is ________, 1995
<PAGE>
(Continued from Previous Page)
Advantage Advisers, Inc., a subsidiary of Oppenheimer & Co.,
Inc., has served as the Fund's Investment Manager since the Fund's inception in
1994. Quest for Value Advisors, an affiliate of Oppenheimer & Co., Inc., and
BAI Fondsberatung GmbH, an affiliate of Bank Austria Aktiengesellschaft, have
served as the Fund's Investment Adviser and Regional Adviser, respectively,
since the Fund's inception. See "Management of the Fund." The Fund's address
is Oppenheimer Tower, One World Financial Center, 200 Liberty Street, New York,
New York 10281, and its telephone number is 1-800-421-4777. All questions and
inquiries relating to the Offer should be directed to the Information Agent,
Shareholder Communications Corporation, 17 State Street, New York, New York
10004, toll free at (800) ______________, ext. ____, or collect at (212)
_______________.
An immediate dilution, which could be substantial, of the
aggregate net asset value of the Common Stock owned by Record Date Stockholders
who do not fully exercise their Rights may occur as a result of the Offer
because the Subscription Price per Share may be less than the Fund's net asset
value per share on the Expiration Date (and the Fund will incur expenses in
connection with the Offer), and the number of shares outstanding after the
Offer is likely to increase in a greater percentage than the increase in the
size of the Fund's assets. In addition, as a result of the terms of the Offer,
Record Date Stockholders who do not fully exercise their Rights should expect
that they will, upon the completion of the Offer, own a smaller proportional
interest in the Fund than would otherwise be the case. See "Risk
Factors--Dilution" and "The Offer--Terms of the Offer."
(Footnotes from Previous Page)
<F1> In connection with the Offer, the Fund has agreed to pay to
Oppenheimer & Co., Inc. (the "Dealer Manager") and other
broker-dealers included in the selling group to be formed and managed
by the Dealer Manager ("Selling Group Members") a fee of ____% of the
Subscription Price per Share for each Share either issued upon the
exercise of Rights as a result of their soliciting efforts or sold to
the public. Certain other broker-dealers that have executed and
delivered a Soliciting Dealer Agreement (each a "Soliciting Dealer")
and have solicited the exercise of Rights will receive fees for their
soliciting efforts of ____% of the Subscription Price per Share. The
Fund has agreed to pay the Dealer Manager a fee for financial advisory
services in connection with the Offer equal to ____% of the aggregate
Subscription Price for the Shares, and has agreed to indemnify the
Dealer Manager and each Soliciting Dealer against certain liabilities
under the U.S. Securities Act of 1933, as amended. See "Distribution
Arrangements." Assumes that the exercise of all Rights was solicited
by the Dealer Manager and other Selling Group Members.
<F2> Before deduction of offering expenses incurred by the Fund, estimated
at $________, including up to $________ payable to the Dealer Manager
as partial reimbursement for its expenses.
<F3> Represents the subscription price per Share payable by holders of
Rights. Sales of Shares may be made during the Subscription Period by
<PAGE>
the Dealer Manager and other Selling Group Members at prices set by
the Dealer Manager from time to time. See "Distribution
Arrangements."
<F4> Assumes all Rights are exercised at the Subscription Price.
IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGER MAY
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS
AND 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.
In this Prospectus, unless otherwise specified, all references
to "U.S. Dollars," "U.S. $," "dollars" and "$" are to United States dollars and
to "korunas," "crowns" and "Kc" are to the lawful currency of the Czech
Republic and to "Kcs" are to the lawful currency of the former Czechoslovakia.
On ________, 1995, the U.S. Dollar value of the koruna was Kc ____ = U.S. $1.00
as reported in The Wall Street Journal on ________, 1995. See "Appendix B --
The Czech Economy -- Foreign Exchange."
Certain numbers and percentages have been rounded for ease of
presentation which may result in amounts not totaling precisely.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information included elsewhere in this Prospectus.
THE OFFER
Terms of the Offer
The Czech Republic Fund, Inc. (the "Fund") is issuing to its
stockholders of record ("Record Date Stockholders") as of the close of business
on ________, 1995 (the "Record Date") transferable rights ("Rights") to
subscribe for up to an aggregate of 1,600,000 shares (the "Shares") of the
Fund's common stock, par value $.001 per Share ("Common Stock") at the rate of
one Share for each three Rights held (the "Offer"). Each Record Date
Stockholder is being issued one Right for each full share of Common Stock owned
on the Record Date. The number of Rights to be issued to a Record Date
Stockholder will be rounded up to the nearest number of Rights evenly divisible
by three. Accordingly, no fractional Shares will be issued. In the case of
shares held of record by Cede & Co. ("Cede"), as nominee for The Depository
Trust Corporation ("DTC"), or by any other depository or nominee (in each
instance a "Nominee Holder"), the number of Rights issued to Cede or such other
depository or nominee will be adjusted to permit rounding up (to the nearest
number of Rights evenly divisible by three) of the Rights to be received by
beneficial owners for whom it is the holder of record only if Cede or such
other depository or nominee provides to the Fund on or before the close of
business on ________, 1995 written representation of the number of Rights
required for such rounding. The Rights entitle the holders thereof ("Rights
Holders") to acquire at the Subscription Price (as hereinafter defined) one
Share for each three Rights held. The Subscription Period commences on
________, 1995 and ends at 5:00 p.m., New York time, on ________, 1995, unless
extended by the Fund and the Dealer Manager (the "Expiration Date"). The
Rights are evidenced by Subscription Certificates which will be mailed to the
Record Date Stockholders other than Foreign Record Date Stockholders. See
"Foreign Stockholders."
The right of a Rights Holder to acquire Shares during the
Subscription Period is hereinafter referred to as the "Primary Subscription."
All Rights may be exercised immediately upon receipt and until 5:00 p.m., New
York time, on the Expiration Date. Rights Holders purchasing Shares in the
Primary Subscription, including those who purchase Shares pursuant to the
Over-Subscription Privilege (as hereinafter defined), are hereinafter referred
to as "Exercising Rights Holders."
Nominees who hold shares of Common Stock for the account of others,
such as banks, brokers, trustees or depositories for securities, should notify
the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee
should complete the Subscription Certificate and submit it to the Subscription
Agent (as hereinafter defined) with proper payment. In addition, beneficial
owners of Common Stock or Rights held through such a nominee should contact the
nominee and request the nominee to effect transactions in accordance with the
beneficial owner's instructions. See "The Offer."
<PAGE>
Over-Subscription Privilege
Any Record Date Stockholder who fully exercises all Rights issued to
such Record Date Stockholder by the Fund is entitled to subscribe for Shares
which were not otherwise subscribed for by others in the Primary Subscription
(the "Primary Over-Subscription Privilege"). In addition, any Rights Holder
who exercises Rights is entitled to subscribe for Shares which are not
otherwise subscribed for in the Primary Subscription or pursuant to the Primary
Over-Subscription Privilege (the "Secondary Over-Subscription Privilege,"
which, together with the Primary Over-Subscription Privilege, is referred to
herein as the "Over-Subscription Privilege"). Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, which is more fully
discussed under "The Offer -- Over-Subscription Privilege."
Subscription Price
The Subscription Price per Share is $________. The Subscription
Price is approximately a __% discount to the Fund's net asset value per share
on ________, 1995 and approximately a ___% discount to the last reported sale
price per share of Common Stock on the New York Stock Exchange on ________,
1995. See "Description of Capital Stock."
The Subscription Price is discussed further under "The Offer -- The
Subscription Price." In addition, information with respect to the quarterly
high and low market prices of the Fund's Common Stock on the New York Stock
Exchange, the corresponding net asset value per share and the premium and
discount at which the Fund's Common Stock was trading is provided under "Market
and Net Asset Value Information."
Exercise of Rights
Rights will be evidenced by Subscription Certificates (see Appendix
E) and may be exercised by completing a Subscription Certificate and delivering
it, together with payment, either by means of a Notice of Guaranteed Delivery
(see Appendix F) or a check, to Boston Financial Data Services, Inc. (the
"Subscription Agent"), by mail, express mail or overnight courier to
____________________. Exercising Rights Holders will have no right to modify
or rescind a purchase after the Subscription Agent has received a properly
completed and executed Subscription Certificate or Notice of Guaranteed
Delivery. See "The Offer -- Exercise of Rights" and "The Offer--Payment for
Shares." There is no minimum number of Rights which must be exercised for the
Offer to close.
Sales of Rights
The Rights are transferable until the last Business Day (as defined
below) prior to the Expiration Date. The Rights will be listed for trading on
the New York Stock Exchange and the Shares will be listed for trading on the
New York Stock Exchange and the Osaka Securities Exchange. The Fund has used
its best efforts to ensure that an adequate trading market for the Rights will
exist by causing the Rights to be listed on the New York Stock Exchange and by
retaining the Dealer Manager, the Subscription Agent and the Information Agent.
The Fund expects that a market for the Rights will develop and that the value
of the Rights, if any, will be reflected by the market price. Rights may be
<PAGE>
sold directly by a Rights Holder, or may be sold through the Subscription Agent
if delivered to the Subscription Agent on or before ________, 1995. Trading of
the Rights on the New York Stock Exchange will be conducted on a when-issued
basis commencing on ________, 1995, and on a regular-way basis from ________,
1995 through the last Business Day prior to the Expiration Date. If the
Subscription Agent receives Rights for sale in a timely manner, it will use its
best efforts to sell the Rights through or to the Dealer Manager. Any
commissions in connection with the sale of Rights by the Subscription Agent
will be paid by the applicable selling Rights Holders. Neither the Fund, the
Subscription Agent nor the Dealer Manager will be responsible if Rights cannot
be sold, and none of them has guaranteed any minimum sale price for the Rights.
For purposes of this Prospectus, a "Business Day" means any day on which
trading is conducted on the New York Stock Exchange. See "The Offer -- Sale of
Rights."
Rights Holders are urged to obtain a recent trading price for the
Rights on the New York Stock Exchange from their broker, bank, financial
adviser or the financial press. Exercising Rights Holders' inquiries should be
directed to the Information Agent, Shareholder Communications Corporation,
Investor Relations Department. See "Information Agent" below.
Dealer Manager and Soliciting Fees
In connection with the Offer, the Fund has agreed to pay Oppenheimer
& Co., Inc., as Dealer Manager, and other Selling Group Members a fee equal to
____% of the Subscription Price per Share for Shares either issued upon the
exercise of Rights as a result of their soliciting efforts or sold to the
public. Certain other broker-dealers that have executed and delivered a
Soliciting Dealer Agreement and have solicited the exercise of Rights will
receive fees for their soliciting efforts of up to ____% of the Subscription
Price per Share. The Fund will pay to the Dealer Manager a fee equal to ____%
of the aggregate Subscription Price for Shares issued upon exercise of the
Rights for financial and advisory services, including advice with respect to
the advisability, timing, size and pricing of the Offer, the formation and
management of the Selling Group, the coordination of soliciting efforts among
soliciting dealers, the Subscription Agent and the Information Agent and
market-making activities to assure a liquid and orderly market for the Rights
and the Shares. The Fund has also agreed to reimburse the Dealer Manager for
its out-of-pocket expenses in connection with the Offer up to an aggregate of
$________. See "Distribution Arrangements."
Foreign Restrictions
Subscription Certificates will not be mailed to Record Date
Stockholders whose record addresses are outside the United States (for these
purposes the United States includes its territories and possessions and the
District of Columbia) ("Foreign Record Date Stockholders"). The Rights to
which such Subscription Certificates relate will be held by the Subscription
Agent for such Foreign Record Date Stockholders' accounts until instructions
are received to exercise, sell or transfer the Rights. If no instructions have
been received by 12:00 Noon, New York time, three Business Days prior to the
Expiration Date, the Subscription Agent will use its best efforts to sell the
Rights through or to the Dealer Manager. The net proceeds, if any, from the
<PAGE>
sale of those Rights will be remitted to the Foreign Record Date Stockholders
on a pro rata basis. See "The Offer -- Foreign Stockholders."
It is anticipated that Rights issued to Foreign Record Date
Stockholders in Japan, who hold approximately ___% of the shares of Common
Stock, will be sold by the Subscription Agent or otherwise on behalf of such
Foreign Record Date Stockholders.
Purpose of the Offer
The Board of Directors of the Fund has determined that it is in the
best interests of the Fund and its stockholders to increase the assets of the
Fund available for investment so that the Fund may take advantage of the
availability of attractively priced equity and debt securities of Czech Issuers
and other Central European Issuers. The Board of Directors believes that
increasing the size of the Fund should also increase the liquidity of the
Fund's shares and reduce the Fund's expenses as a proportion of average net
assets, although no assurance can be given that this result will be achieved.
At ________, 1995, the Fund had net assets of $________. Also, the Offer seeks
to reward the Fund's stockholders by giving them the right to purchase
additional shares of common stock at a price below market and net asset value
without incurring any direct transaction costs. The distribution to
stockholders of transferable rights which themselves may have intrinsic value
will also afford non-participating stockholders the potential of receiving a
cash payment upon sale of such Rights, receipt of which may be viewed as
partial compensation for the possible dilution of their interest in the Fund.
The Board of Directors determined to proceed with the offer of transferable
Rights after having considered the dilutive effect of the Offer on stockholders
who are unwilling or unable to fully exercise their Rights, as well as the
alternatives of a secondary offering and the issuance of non-transferable
Rights. After careful consideration, the Fund's Board of Directors unanimously
voted to approve the Offer. See "The Offer -- Purpose of the Offer."
Use of Proceeds
If all of the Rights are exercised in full at the Subscription Price
of $_____ per Share and the maximum solicitation fee is paid to the Dealer
Manager and other Selling Group Members, the net proceeds to the Fund would be
approximately $________, after deducting offering expenses payable by the Fund
estimated to be approximately $________. It is expected that the net proceeds
of the Offer will be fully invested in investments conforming to the Fund's
investment objective and policies within six months from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities for purchase. Pending such investment it is anticipated that the
proceeds will be invested in Temporary Investments, as described under
"Investment Objective and Policies -- Temporary Investments." However, there
can be no assurance that all Rights will be exercised in full.
Information Agent
The Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street
<PAGE>
New York, New York 10004
Toll Free: (800) ________, ext. ____
or
Call Collect: (212) ________
IMPORTANT DATES TO REMEMBER
Event Date
- ----- ------
Record Date . . . . . . . . . . . . . . . . ________, 1995
Subscription Period . . . . . . . . . . . . ________, 1995 to ________,
1995 (unless extended)
Expiration Date . . . . . . . . . . . . . . ________, 1995
Payment for Shares or Notices of Guaranteed
Delivery Due . . . . . . . . . . . . . . . ________, 1995
Subscription Certificates and Payment for
Shares Due pursuant to Notices of
Guaranteed Delivery . . . . . . . . . . . . ________, 1995
Confirmation Date . . . . . . . . . . . . . ________, 1995
THE FUND
Information Regarding the Fund
The Fund has been engaged in business as a non-diversified,
closed-end management investment company since September 30, 1994, when it
completed an initial public offering of 4,400,000 shares of its Common Stock.
The Fund's investment objective is long-term capital appreciation, which it
seeks to achieve by investing primarily in securities of Czech Issuers. It is
the Fund's policy, under normal market conditions, to invest at least 65% of
its total assets in securities of Czech Issuers. In addition, the Fund may
invest up to 35% of its total assets in securities of other Central European
Issuers (as defined below). It is the Fund's policy, under normal market
conditions, to invest at least 65% of its total assets in equity securities,
and up to 35% of the Fund's net assets may be invested in debt securities. For
temporary defensive purposes, the Fund may invest without limitation in
Temporary Investments. See "Investment Objective and Policies -- Portfolio
Structure" for other eligible investments. No assurance can be given that the
Fund's investment objective will be realized. See "Investment Objective and
Policies" and "Risk Factors."
Czech Issuers are (i) companies (A) organized under the laws of the
Czech Republic or its predecessors, or (B) whose principal business activities
are conducted in the Czech Republic, and which derive at least 50% of their
revenues or profits from goods produced or sold, investments made, or services
performed, in the Czech Republic, or have at least 50% of their assets in the
Czech Republic, or (C) which have issued securities which are traded
<PAGE>
principally in the Czech Republic, and (ii) the government, governmental
entities or political subdivisions of the Czech Republic.
Central European Issuers are (i) companies (A) organized under the
laws of a Central European country or its predecessors, or (B) whose principal
business activities are conducted in one or more Central European countries,
and which derive at least 50% of their revenues or profits from goods produced
or sold, investments made, or services performed in one or more Central
European countries, or have at least 50% of their assets in one or more such
countries, or (C) which have issued securities which are traded principally in
a Central European country, and (ii) governments, governmental entities or
political subdivisions of Central European countries. For purposes of the
Fund's investment policies, Central European countries, in addition to the
Czech Republic, are Austria, Hungary, Poland and Slovakia. See "Investment
Objective and Policies -- Portfolio Structure."
Up to 35% of the Fund's net assets (i) may be invested, subject to
certain restrictions, in (A) debt securities issued or guaranteed by a Czech
Issuer or other Central European Issuer, (B) debt securities denominated in
korunas or the lawful currency of another Central European country and (C)
short-term debt securities of the type described under "Investment Objective
and Policies -- Temporary Investments" and (ii) may be utilized to purchase and
sell options on securities, financial futures, fixed income indices and other
financial instruments, and to enter into currency transactions, sell securities
short and loan portfolio securities. See "Risk Factors." The Fund's assets
may be invested in debt securities (other than Temporary Investments) when the
Investment Adviser (as defined below) believes that, based upon factors such as
relative interest rate levels and foreign exchange rates, such securities offer
opportunities for long-term capital appreciation.
The Fund currently has 4,400,000 shares of Common Stock outstanding,
which are listed and traded on the New York Stock Exchange under the symbol
"CRF" and are also listed and traded on the Osaka Securities Exchange under the
symbol "8684". See "Description of Capital Stock." As of September 30, 1995,
the net assets of the Fund were approximately $62 million. As of September 30,
1995, approximately 81.6% of the Fund's assets were invested in equity and debt
securities of Czech Issuers and 15.4% of the Fund's assets were invested in
equity and debt securities of other Central European Issuers.
Information Regarding the Fund's Investment Manager, Investment Adviser,
Regional Adviser, Administrator and Custodian
The Investment Manager is Advantage Advisers, Inc., a subsidiary of
Oppenheimer & Co., Inc. (the "Investment Manager"), the Investment Adviser is
Quest for Value Advisors, an affiliate of Oppenheimer & Co., Inc. (the
"Investment Adviser"), and the Regional Adviser is BAI Fondsberatung GmbH, an
affiliate of Bank Austria Aktiengesellschaft (the "Regional Adviser").
Pursuant to a management agreement (the "Management Agreement"), the Investment
Manager supervises the Fund's investment program, including advising and
consulting with the Investment Adviser regarding the Fund's overall investment
strategy and advising the Fund and the Investment Adviser regarding the Fund's
use of leveraging techniques, including the extent and timing of the Fund's use
of such techniques. In addition, the Investment Manager consults with the
Investment Adviser on a regular basis regarding the Investment Adviser's
<PAGE>
decisions concerning the purchase, sale or holding of particular securities.
The Investment Manager also provides and procures provision of research and
statistical data to the Fund. In addition to the foregoing, the Investment
Manager monitors the performance of the Fund's outside service providers,
including the Fund's administrator, transfer agent and custodian.
Pursuant to an investment advisory agreement (the "Advisory
Agreement") among the Investment Manager, the Investment Adviser and, with
respect to certain provisions, the Fund, the Investment Adviser acts, pursuant
to delegated authority, as an investment adviser to the Fund and is responsible
on a day-to-day basis for investing the Fund's portfolio in accordance with its
investment objective and policies. The Investment Adviser has discretion over
investment decisions for the Fund and, in that connection, initiates purchase
and sale orders for the Fund's portfolio securities. In addition, the
Investment Adviser makes available research and statistical data to the Fund.
Pursuant to an advisory agreement (the "Regional Advisory Agreement")
between the Investment Manager and the Regional Adviser, the Regional Adviser
furnishes advice and makes recommendations to the Investment Adviser regarding
the purchase, sale or holding of particular Czech and Central European
securities and provides research and statistical data to the Investment
Adviser. The Regional Adviser is not responsible, nor has discretionary
authority, for the actual investment decisions of the Fund.
The Fund pays the Investment Manager a monthly fee at an annual rate
of 1.00% of the Fund's average weekly net assets for its services, and the
Investment Manager pays each of the Investment Adviser and the Regional Adviser
a monthly fee at an annual rate of 0.40% and 0.20%, respectively, of the Fund's
average weekly net assets for its services. See "Management of the Fund --
Compensation and Services." The advisory fees paid by the Fund are higher than
those paid by most other U.S. investment companies, primarily because of the
additional time and expense required of the Investment Manager, the Investment
Adviser and the Regional Adviser in pursuing the Fund's objective of long-term
capital appreciation through investing primarily in securities of Czech
Issuers.
Oppenheimer & Co., Inc. serves as the Fund's administrator (the
"Administrator") pursuant to the terms of an Administration Agreement. The
Fund pays the Administrator a monthly fee at an annual rate of 0.20% of the
Fund's average weekly net assets for its services. See "Management of the Fund
- -- Administrator."
State Street Bank and Trust Company acts as custodian for the Fund's
assets and employs foreign sub-custodians approved by the Board of Directors of
the Fund in accordance with the U.S. Investment Company Act of 1940 (the "1940
Act"). State Street Bank and Trust Company acts as transfer agent, dividend
paying agent and registrar for the Fund's Common Stock.
Since the Investment Manager's, the Investment Adviser's, the
Regional Adviser's and the Administrator's fees are based on the average weekly
net assets of the Fund, each will benefit from an increase in the Fund's assets
resulting from the Offer. See "Management of the Fund." In addition, two of
the Fund's six Directors are "interested persons" (as such term is defined
under the 1940 Act) of the Fund who could benefit indirectly from the Offer
<PAGE>
because of such Directors' indirect affiliations with the Dealer Manager, the
Investment Manager, the Investment Adviser and the Administrator. See
"Management of the Fund."
Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan
The Fund's policy is to distribute annually to holders of Common
Stock substantially all of its net investment income, and to distribute any net
realized capital gains at least annually.
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), all dividends and distributions are automatically reinvested in
additional shares of Common Stock of the Fund unless a shareholder elects to
receive cash. Participants also have the option of making additional cash
payments, annually, to be used to acquire additional shares of Common Stock of
the Fund in the open market. See "Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan" and "Taxation -- United States Federal
Income Taxes."
Risk Factors
An immediate dilution, which could be substantial, of the aggregate
net asset value of the shares of Common Stock owned by Record Date Stockholders
who do not fully exercise their Rights may occur as a result of the Offer
because the Subscription Price per Share may be less than the Fund's net asset
value per share on the Expiration Date (and the Fund will incur expenses in
connection with the Offer), and the number of shares outstanding after the
Offer will increase in a greater percentage than the increase in the size of
the Fund's assets. In addition, Record Date Stockholders who do not fully
exercise their Rights should expect that they will, at the completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. Although it is not possible to state precisely the amount of such a
decrease in net asset value because it is not known at this time what the net
asset value per share will be on the Expiration Date or what proportion of the
Shares will be subscribed for, such dilution could be substantial. For
example, assuming that all Rights are exercised and that the Subscription Price
of $_____ is __% below the Fund's net asset value of $_____ per share as of
________, 1995, the Fund's net asset value per share (after payment of the
Dealer Manager and Soliciting Fees and estimated offering expenses) would be
reduced approximately $_____. The distribution to stockholders of transferable
Rights which themselves may have intrinsic value will afford non-participating
stockholders the potential of receiving a cash payment upon sale of such
Rights, receipt of which may be viewed as partial compensation for the possible
dilution of their interest in the Fund. No assurance can be given, however,
that a market for the Rights will develop or as to the value, if any, that such
Rights will have. See "Risk Factors -- Dilution."
Investment in the Fund involves certain special risk considerations
not associated with investing in securities of U.S. companies, including risks
related to (a) greater social, economic and political uncertainty, (b)
significantly greater price volatility, substantially less liquidity and much
smaller market capitalization of securities markets, (c) restrictions on
foreign investment and repatriation of capital, (d) exchange control
regulations, (e) currency exchange rate fluctuations, which may increase the
<PAGE>
costs associated with conversion of investment principal and income from one
currency to another, (f) higher rates of inflation and (g) greater governmental
involvement in the economy.
The value of the Fund's assets may be adversely affected by
political, economic, and social factors, changes in the law or regulations of
the Czech Republic or other Central European countries and the status of
political and economic foreign relations of the Czech Republic and other
Central European countries. Developments in the region may also affect the
value of the Fund's assets. In addition, the economy of the Czech Republic and
other Central European countries may differ favorably or unfavorably from the
U.S. economy in such respects as the rate of growth of gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Several Central European countries have
substantial external debts. Actions of the government of the Czech Republic or
other Central European countries in the future could have a significant effect
on the local economy, which could affect private sector companies and the Fund,
market conditions, and prices and yields of securities in the Fund's portfolio.
Until recently, the economies of the Czech Republic and other Central
European countries were tightly controlled by Communist governments and
composed almost exclusively of state owned enterprises. Accordingly, these
countries face many challenges arising from decades of Communist rule.
Although the Czech Republic and certain other Central European countries have
begun to initiate a number of market-oriented reforms, there can be no
assurance that these reforms will persist. Central European economies and
individual Central European business entities lack a significant history of
operating in a market-oriented system. See "Risk Factors -- Political,
Economic and Other Factors."
The securities markets in the Czech Republic and other Central
European countries are substantially smaller, less liquid, and significantly
more volatile than the securities markets in the United States. In addition,
there is little historical data on these securities markets since they are of
recent origin. A substantial proportion of securities transactions in the
Czech Republic and certain other Central European countries are privately
negotiated outside of stock exchanges and over-the-counter markets. A high
proportion of the shares of many Czech and other Central European companies are
held by a limited number of investment funds and other institutional investors,
which may limit the number of shares available for investment by the Fund. A
limited number of issuers represent a disproportionately large percentage of
market capitalization and trading value. In recent months, after having
experienced substantial price increases, the securities markets of the Czech
Republic and other Central European countries experienced major declines. See
"Risk Factors -- Market Characteristics."
The prices at which the Fund may acquire investments may be affected
by the market's anticipation of the Fund's investing, trading on material non-
public information and securities transactions by brokers in anticipation of
transactions by the Fund in particular securities. These and other factors may
also affect the rate at which the Fund can initially invest the proceeds of the
Offering.
<PAGE>
Substantially all of the Fund's assets are invested and are expected
to continue to be invested in securities denominated in foreign currencies.
Decreases in the value of the koruna or other Central European currencies
relative to the U.S. Dollar will result in a corresponding decrease in the U.S.
Dollar value of the Fund's assets denominated in such currencies and a
corresponding increase in the amount of securities required to be liquidated to
meet distribution requirements. Conversely, increases in the value of such
currencies relative to the U.S. Dollar will result in a corresponding increase
in the U.S. Dollar value of the Fund's assets denominated in such currencies
and a corresponding decrease in the amount of securities required to be
liquidated to meet distribution requirements. See "Risk Factors -- Foreign
Currency Considerations."
The ability of the Fund to exchange korunas and other Central
European currencies into U.S. Dollars and repatriate investment income, capital
and proceeds is subject to regulation by Czech and other Central European
authorities. The Fund could be adversely affected by changes in the
interpretation of existing laws or treaties or by delays in obtaining or the
failure to obtain any required approval. See "Risk Factors -- Exchange
Controls."
Foreign investment in the securities of Czech and other Central
European companies is restricted and controlled to varying degrees. These
restrictions or controls may limit or preclude foreign investment in certain
cases, may require government approval prior to foreign investment, or may give
preferential treatment to nationals over foreign investors. See "Risk Factors
- -- Investment Restrictions."
The Fund has not established any minimum rating criteria for the debt
securities in which it may invest. Accordingly, the Fund may invest in
securities rated in medium to low rating categories of internationally
recognized statistical rating organizations and unrated securities of
comparable credit quality ("high yield/high risk" securities). Such securities
are speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security and generally involve a
greater volatility of price than securities in higher rated categories. Under
rating agency guidelines, these lower-rated securities will likely have some
quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions. The Fund may
invest in securities having the lowest ratings for non-subordinated debt
instruments assigned by Moody's Investors Service, Inc. ("Moody's") or Standard
& Poor's Ratings Group ("S&P") (i.e., rated in the category "C" by Moody's or
"D" by S&P) or in comparable unrated securities. The Fund is not required to
dispose of securities in the event of a decline in their credit quality or
ratings. Some of the debt securities held by the Fund may not be paying
interest currently or may be in payment default. Under rating agency
guidelines, these securities are considered to have extremely poor prospects of
ever attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or
economic conditions, and/or to be in default or not current in the payment of
interest or principal. Unrated securities deemed by the Investment Adviser to
be comparable to these lower- and lowest-rated securities will have similar
<PAGE>
characteristics. See "Appendix D -- Ratings." The value of debt securities
held by the Fund may be expected to vary inversely in relation to fluctuations
in interest rates in the relevant markets. See "Risk Factors -- High
Yield/High Risk and Unrated Debt."
Accounting, auditing, financial and other reporting standards in the
Czech Republic and other Central European countries may not be established, or
to the extent established are not equivalent to, and in many respects are less
rigorous than, U.S. standards. Therefore, certain material disclosures may not
be made and less information may be available to investors investing in such
countries than in the United States. The Czech Republic and other Central
European countries have only recently developed a body of securities laws, tax
laws and laws governing corporations. Laws may not exist to cover all
contingencies or to protect investors adequately and the administration of
these laws may be subject to considerable discretion. In addition, there can
be no assurance that applicable laws, including tax laws, and related
interpretations, will not change or be applied in a manner that adversely
affects the Fund and its operations. Due to the newness of Central European
securities markets, there is a low level of monitoring and regulation of the
markets and the activities of investors in such markets, and there has been no
or very limited enforcement to date of existing regulations. In addition, the
judicial systems have very limited experience with the adjudication of
securities claims and corporate disputes. Consequently, it may be more
difficult for the Fund to obtain a judgement in a court outside the United
States to the extent that there is a default with respect to a security of a
Central European issuer or the Fund has any other claim against such an issuer.
Settlement procedures in certain Central European countries are less
developed and reliable than those in the United States and in other developed
securities markets, and the Fund may experience settlement delays or other
material difficulties. Accordingly, the Fund may be subject to significant
delays or limitations on the timing of its direct investments in the Czech
Republic and Central Europe (including the initial investment of the proceeds
from the offering made hereby). The foregoing factors could impede the ability
of the Fund to effect portfolio transactions on a timely basis and could have
an adverse impact on the net asset value of shares of the Fund's Common Stock
and the price at which the shares trade.
The Fund may invest without limitation in illiquid securities, i.e.,
securities for which there is no readily available market or no market at all.
The Fund, however, limits its investments in securities acquired in private
placements from the issuers and unlisted equity securities which are illiquid
to 20% of its total assets. The Fund may encounter substantial delays and
could incur losses in attempting to resell illiquid securities. In addition to
the foregoing, a substantial proportion of secondary market securities
transactions in the Czech Republic and other Central European countries are
privately negotiated between market participants outside of securities
exchanges and over-the-counter markets, even if the securities are also traded
on an exchange or in an over-the-counter market. The Fund's investment
policies do not limit its ability to participate in such transactions. There
may be significant disparities between the prices paid for securities in
private transactions and the prices at which the same securities trade on an
exchange or in an over-the-counter market. These factors may limit the Fund's
<PAGE>
ability to obtain accurate market quotations for purposes of valuing its
portfolio securities and calculating its net asset value. See "Investment
Objective and Policies -- Other Investments."
The Fund's investment policies permit it to use various investment
practices that involve special considerations, including purchasing and selling
options on securities, financial futures, fixed income indices and other
financial instruments, entering into financial futures contracts, entering into
interest rate transactions, entering into currency transactions, entering into
equity swaps and related transactions, entering into securities transactions on
a when-issued or delayed delivery basis, entering into repurchase agreements
and lending portfolio securities. The extent to which the Fund can engage
currently in many of these investment practices in the Czech Republic and other
Central European countries is limited. See "Additional Investment Activities,"
"Investment Objective and Policies -- Other Investments," "Risk Factors --
Investment Practices" and Appendix A.
Although the Fund has no present intention to do so, the Fund may
utilize leverage by borrowing or by issuing preferred stock or short-term debt
securities in an amount up to 10% of the Fund's total assets. Leverage by the
Fund would create an opportunity for increased return but, at the same time,
would create special risks. For example, leverage may exaggerate changes in
the net asset value of the Common Stock and in the return on the Fund's
portfolio. Although the principal of any leverage would be fixed, the Fund's
assets may change in value during the time the leverage is outstanding.
Leverage would create expenses for the Fund which could, during any period,
exceed the income from the assets acquired with the proceeds of the leverage.
Furthermore, an increase in interest rates could reduce or eliminate the
benefits of leverage and could reduce the value of the Fund's securities. The
Fund may also borrow by entering into reverse repurchase agreements, which
would subject the Fund to additional market risk, as well as credit risk with
respect to the buyer of the securities under the agreement.
The Fund is classified as a "non-diversified" investment company
under the 1940 Act which means that the Fund is not limited by the 1940 Act in
the proportion of its assets that may be invested in the securities of a single
issuer. However, the Fund intends to comply with the diversification
requirements imposed by the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. 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, will
be subject to greater risk of loss with respect to its portfolio securities.
Income and capital gains on securities held by the Fund may be
subject to withholding and other taxes imposed by Central European countries,
which will reduce the return to the Fund on those securities. The imposition
of such taxes and the rates imposed are subject to change. There can be no
assurance that the benefits of the income tax treaty between the United States
and the Czech Republic will be available to the Fund. The Fund intends to
elect, when eligible, to "pass-through" to the Fund's shareholders, as a
deduction or credit, the amount of foreign taxes paid by the Fund. The taxes
passed through to shareholders will be included in each shareholder's income.
Certain shareholders, including some non-U.S. shareholders, will not be
<PAGE>
entitled to the benefit of a deduction or credit with respect to foreign taxes
paid by the Fund. Even if a shareholder is eligible and elects to credit
foreign taxes, such credit is subject to limitations which, in particular, may
affect the ability to credit capital gains taxes. Other foreign taxes, such as
transfer taxes, may be imposed on the Fund, but would not give rise to a
credit, or be eligible to be passed through to shareholders. See "Taxation."
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 holders of Common Stock to sell their shares at a
premium over prevailing market prices. The Fund's Board of Directors has
determined that these provisions are in the best interests of shareholders
generally. See "Risk Factors."
Shares of closed-end investment companies frequently trade at a
discount from net asset value. This characteristic is a risk separate and
distinct from the risk that the Fund's net asset value will decrease as a
result of its investment activities. The Fund cannot predict whether its
shares will trade at, above or below net asset value. The Fund's shares have
generally traded at a discount to net asset value.
The Fund is intended primarily for long-term investors and should not
be considered as a vehicle for trading purposes. An investment in shares of
Common Stock of the Fund may not be appropriate for all investors and should
not be considered as a complete investment program. See "Risk Factors."
The operating expense ratio of the Fund is higher than that of a fund
investing predominantly in the securities of U.S. issuers since the expenses of
the Fund (such as investment advisory and administration fees, custodial and
communication costs) are higher. The operating expense ratio of the Fund for
the year ended August 31, 1995 was ____%. See "Management of the Fund."
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
Stockholder Transaction Expenses:
Sales Load (as a percentage of offering price)(1)(2) . . . . . . . . . . . . . . . . . . . . %
Annual Expenses (as a percentage of net assets):
Management and Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
Other Expenses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
Total Annual Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
</TABLE>
Example
An investor would pay the following expenses on a $1,000 investment,
assuming a 5% annual return throughout the periods indicated(3):
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
-----------------------------------------------------------------
1 year 3 years 5 years 10 years
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$ $ $ $
</TABLE>
____________________
[FN]
<F1> The Fund has agreed to pay to the Dealer Manager and each other Selling
Group Member a fee equal to ____% of the Subscription Price per Share
for each Share either issued upon the exercise of Rights as a result of
their soliciting efforts or sold to the public. Certain other
broker-dealers that have executed and delivered a Soliciting Dealer
Agreement and have solicited the exercise of Rights will receive fees
for their soliciting efforts of up to ____% of the Subscription Price
per Share. The Fund has agreed to pay the Dealer Manager a fee for
financial advisory services in connection with the Offer equal to ____%
of the aggregate Subscription Price for the Shares. These fees will be
borne by all of the Fund's stockholders, including those stockholders
who do not exercise their Rights. See "Distribution Arrangements." The
Example assumes that the exercise of Rights was solicited by the Dealer
Manager and other Selling Group Members.
<F2> The figures provided under "Other Expenses" are based on estimated
amounts for the current fiscal year and do not include expenses of the
Fund incurred in connection with the Offer, estimated at $________. See
"Management of the Fund" for additional information.
<F3> The Example reflects the Sales Load and other expenses of the Fund
incurred in connection with the Offer and assumes that all of the Rights
are exercised.
<PAGE>
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 reinvestment of all dividends and
distributions at net asset value and an expense ratio of ____%. The table
above and the assumption in the Example of a 5% annual return are required by
Securities and Exchange Commission regulations applicable to all investment
companies. In addition, while the example assumes reinvestment of all
dividends and distributions at net asset value, this may not be the case for
participants in the Plan. See "Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan." The Example should not be considered a
representation of past or future expenses or annual rates of return and actual
expenses or annual rates of return may be more or less than those assumed for
purposes of the Example.
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth selected data for a share of Common Stock
outstanding for the period September 30, 1994 (commencement of operations)
through August 31, 1995. The information contained in the table below has been
audited by Price Waterhouse LLP, the Fund's independent accountants, whose
report thereon was unqualified. The information set forth below should be read
in conjunction with the financial statements and notes thereto contained in the
Fund's Annual Report to Stockholders as of August 31, 1995, which is available
upon request from Boston Financial Data Services, [phone number], and which is
incorporated by reference into this Prospectus.
<TABLE>
<CAPTION>
For the Period September 30,
1994<F1> through August 31, 1995
-------------------------------
(For a share outstanding
through each period)
<S> <C>
Per Share Operating Performance
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <F2>
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized and unrealized gains (losses) on investments, foreign currency holdings, and
other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . .
Net increase (decrease) from investment operations . . . . . . . . . . . . . . . . . . . . . .
Less distributions
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total dividends and distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share market value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Investment Return
Based on market value<F3> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratios/Supplemental Data
Net assets, end of period (in 000's) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of expenses to average net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . <F4>
Ratio of net investment income to average net assets . . . . . . . . . . . . . . . . . . . . . <F4>
Portfolio turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
____________________
<FN>
<F1> Commencement of Operations.
<F2> Initial public offering price of $15.00 per share less underwriting discount of $0.98 per share and offering expenses of
$0.27 per share.
<F3> Total investment return is calculated assuming a purchase of common stock at the offering price of $15.00 per share less
sales commission of $0.98 per share on the first day and a sale at the current market price on the last day of the period
reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices
obtained under the Plan. Total investment return does not reflect sales charges or brokerage commissions and is not
annualized.
<PAGE>
<F4> Annualized.
</TABLE>
<PAGE>
MARKET AND NET ASSET VALUE INFORMATION
The Fund's currently outstanding shares of Common Stock are, and the
Shares offered by this Prospectus will be, listed on the New York Stock
Exchange and the Osaka Securities Exchange. Shares of the Common Stock
commenced trading on the New York Stock Exchange on September 23, 1994 and on
the Osaka Securities Exchange on October 5, 1995.
In the past, the Fund's shares have generally traded at a discount in
relation to net asset value. Shares of other closed-end investment companies
frequently trade at a discount from net asset value. See "Risk Factors."
The following table shows for each of the periods indicated the high
and low market prices of the Common Stock on the New York Stock Exchange, the
corresponding net asset value per share and the premium or discount at which
the Fund's shares were trading.
<TABLE>
<CAPTION>
Premium or (Discount)
Market Price<F1> Net Asset Value<F2> as % of Net Asset Value
-------------------------- -------------------------- --------------------------
Quarter Ended High Low High Low High Low
- -------------------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
November 30, 1994 . . . . . . . . . . . . 15.125 11.25 13.79 13.5 4.00 (16.67))
February 28, 1995 . . . . . . . . . . . . 12.375 10.375 13.540 12.49 (6.93) (17.57))
May 31, 1995 . . . . . . . . . . . . . . 12.75 10.125 12.88 12.39 0.44 (17.20))
August 31, 1995 . . . . . . . . . . . . . 12.625 11.50 13.16 12.71 (1.65) (11.66)
through ________, 1995 . . . . . . . . .
____________________
<FN>
<F1> As provided by PFPC Inc., the Fund's Sub-Administrator.
<F2> Based on the Fund's computations.
</TABLE>
The last reported sale price, net asset value per share and
percentage premium to net asset value of the Common Stock on ________, 1995
were $______, $______, and _____%, respectively.
<PAGE>
THE OFFER
Terms of the Offer
The Fund is issuing to its stockholders of record ("Record Date
Stockholders") as of the close of business on ________, 1995 (the "Record
Date") transferable rights ("Rights") to subscribe for up to an aggregate of
1,600,000 shares (the "Shares") of Common Stock at the rate of one Share for
each three Rights held (the "Offer"). Each Record Date Stockholder is being
issued one Right for each full share of Common Stock owned on the Record Date.
The number of Rights to be issued to a Record Date Stockholder will be rounded
up to the nearest number of Rights evenly divisible by three. Accordingly, no
fractional Shares will be issued. In the case of shares held of record by
Cede, as nominee for DTC, or any other depository or nominee, the number of
Rights issued to Cede or such other depository or nominee will be adjusted to
permit rounding up (to the nearest number of Rights evenly divisible by three)
of the Rights to be received by beneficial owners for whom it is the holder of
record only if Cede or such other depository or nominee provides to the Fund on
or before the close of business on ________, 1995 written representation of the
number of Rights required for such rounding. The Rights entitle Rights Holders
to acquire at the Subscription Price (as hereinafter defined) one Share for
each three Rights held. The Subscription Period commences on ________, 1995
and ends at 5:00 p.m., New York time, on ________, 1995, unless extended by the
Fund and the Dealer Manager (the "Expiration Date"). The Rights are evidenced
by Subscription Certificates which will be mailed to the Record Date
Stockholders other than Foreign Record Date Stockholders. See "Foreign
Stockholders."
Completed Subscription Certificates may be delivered to the
Subscription Agent at any time during the Subscription Period, which commences
on ________, 1995 and ends at 5:00 p.m., New York time, on ________, 1995,
unless extended by the Fund and the Dealer Manager. See "--Expiration of the
Offer." Parties that purchase Rights prior to the Expiration Date may also
purchase Shares in the Primary Subscription. All Rights may be exercised
immediately commencing on ________, 1995 and until 5:00 p.m. on the Expiration
Date.
Any Record Date Stockholder who fully exercises all Rights initially
issued to such Record Date Stockholder by the Fund will be entitled to
subscribe for Shares which were not otherwise subscribed for by Exercising
Rights Holders in the Primary Subscription (the "Primary Over-Subscription
Privilege"). In addition, any Rights Holder who exercises Rights is entitled
to subscribe for Shares which are not otherwise subscribed for in the Primary
Subscription or pursuant to the Primary Over-Subscription Privilege (the
"Secondary Over-Subscription Privilege" and, together with the Primary
Over-Subscription Privilege, the "Over-Subscription Privilege"). Shares
acquired pursuant to the Over-Subscription Privilege are subject to allotment,
which is more fully discussed below under "--Over-Subscription Privilege."
Rights will be evidenced by Subscription Certificates (see Appendix
E) and may be exercised by completing a Subscription Certificate and delivering
it, together with payment, either by means of a Notice of Guaranteed Delivery
(see Appendix F) or a check, to the Subscription Agent. The method by which
Rights may be exercised and Shares paid for is set forth below under
<PAGE>
"--Exercise of Rights" and "--Payment for Shares." An Exercising Rights Holder
will have no right to rescind a purchase after the Subscription Agent has
received a completed Subscription Certificate or Notice of Guaranteed Delivery.
See "--Payment for Shares" below. Shares issued pursuant to an exercise of
Rights will be listed for trading on the New York Stock Exchange and the Osaka
Securities Exchange.
The Rights are transferable until the close of business on the last
Business Day prior to the Expiration Date and will be listed for trading on the
New York Stock Exchange. Assuming a market exists for the Rights, the Rights
may be purchased and sold through usual brokerage channels, or may be sold
through the Subscription Agent if delivered to the Subscription Agent on or
before ________, 1995. Although no assurance can be given that a market for
the Rights will develop, trading in the Rights on the New York Stock Exchange
may be conducted until and including the close of trading on the last Business
Day prior to the Expiration Date. The method by which Rights may be
transferred is set forth below under "--Sale of Rights."
There is no minimum number of Rights which must be exercised in order
for the Offer to close.
Purpose of the Offer
The Board of Directors of the Fund has determined that it is in the
best interests of the Fund and its stockholders to increase the assets of the
Fund available for investment so that the Fund may take advantage of the
availability of attractively priced equity and debt securities of Czech Issuers
and other Central European Issuers. The Board of Directors believes that
increasing the size of the Fund should increase the liquidity of the Fund's
shares and reduce the Fund's expenses as a proportion of average net assets,
although no assurance can be given that this result will be achieved. At
September 30, 1995, the Fund had net assets of approximately $62 million.
Also, the Offer seeks to reward the Fund's stockholders by giving them the
right to purchase additional shares of Common Stock at a price below market and
net asset value without incurring any direct transaction costs. The
distribution to stockholders of transferable Rights which themselves may have
intrinsic value will also afford non-participating stockholders the potential
of receiving a cash payment upon sale of such Rights, receipt of which may be
viewed as partial compensation for the possible dilution of their interest in
the Fund. The Board of Directors determined to proceed with the offer of
transferable Rights after having considered the dilutive effect of the Offer on
stockholders who are unwilling or unable to fully exercise their Rights, as
well as the alternatives of a secondary offering and the issuance of
non-transferable Rights. After careful consideration, the Fund's Board of
Directors unanimously voted to approve the Offer.
In reaching its decision, the Board of Directors was advised by the
Investment Adviser that the availability of new funds would provide the Fund
with additional investment flexibility as well as increase the Fund's ability
to invest in additional investment opportunities in the Czech and other Central
European securities markets without having to sell portfolio securities that
the Investment Adviser believes should be held. Furthermore, the Investment
Adviser believes that additional investment opportunities exist in the Czech
Republic and other Central European countries at this particular time by reason
<PAGE>
of, among other factors, the second wave of privatizations by the Czech
government earlier this year, and the expectation that additional companies
will be privatized in the future.
The Investment Manager, the Investment Adviser, the Regional Adviser
and the Administrator will benefit from the Offer because their fees are based
on the average weekly net assets of the Fund. It is not possible to state
precisely the amount of additional compensation they will receive as a result
of the Offer because it is not known how many Shares will be subscribed for and
because the proceeds of the Offer will be invested in additional portfolio
securities which will fluctuate in value. However, in the event that all the
Rights are exercised in full and on the basis of the Subscription Price, the
Investment Manager, the Investment Adviser, the Regional Adviser and the
Administrator would receive additional annual fees of approximately $________,
$________, $________ and $________, respectively, as a result of the increase
in assets under management. Two of the Fund's Directors who voted to authorize
the Offer are "interested persons" of the Fund as that term is defined in the
1940 Act. These Directors could benefit indirectly from the Offer because of
their indirect affiliations with the Investment Manager, the Investment Adviser
and the Administrator. The other four Directors who voted to authorize the
Offer are not "interested persons" of the Fund. See "Management of the Fund."
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer.
Over-Subscription Privilege
Shares not subscribed for in the Primary Subscription will be
offered, by means of the Primary Over-Subscription Privilege, to Record Date
Stockholders who have exercised all Rights issued to them by the Fund and who
wish to acquire more than the number of Shares for which the Rights issued to
them are exercisable. Record Date Stockholders should indicate, on the
Subscription Certificate which they submit with respect to the exercise of the
Rights issued to them, how many Shares they are willing to acquire pursuant to
the Primary Over-Subscription Privilege. If sufficient Shares remain, all
over-subscriptions will be honored in full.
If subscriptions for Shares pursuant to the Primary Over-Subscription
Privilege exceed the Shares available, the available Shares will be allocated
among those Record Date Stockholders (including beneficial owners of shares of
Common Stock of the Fund on the Record Date which are held of record by a
nominee such as a broker, trustee or depository for securities), who subscribe
for an aggregate of 100 or fewer Shares (inclusive of Shares subscribed for by
such Record Date Stockholders in the Primary Subscription). Any Shares
remaining thereafter will be allocated among all other Record Date
Stockholders. In each case, if insufficient Shares are available to permit
such allocation, Shares will be allocated pro rata among such other Record Date
Stockholders being prorated, based on the number of Rights originally issued to
them by the Fund so that the number of shares issued to Record Date
Stockholders who subscribe for an aggregate of more than 100 shares pursuant to
the Primary Over-Subscription Privilege will generally be in proportion to the
number of Shares owned by them in the Fund on the Record Date. Any Rights
Holder who exercises Rights is entitled to subscribe for Shares which are not
<PAGE>
otherwise subscribed for in the Primary Subscription or pursuant to the Primary
Over-Subscription Privilege. Rights Holders should indicate, on the
Subscription Certificate which they submit with respect to the exercise of any
Rights, how many Shares they are willing to acquire pursuant to the Secondary
Over-Subscription Privilege. If sufficient Shares remain after the Primary
Over-Subscription, all over-subscriptions by Rights Holders will be honored in
full in the Secondary Over-Subscription. If remaining Shares are insufficient
to permit such allocation, such Shares will be allocated pro rata among Rights
Holders being prorated, based on the number of Shares such Rights Holders
subscribed for in the Primary Subscription relative to the aggregate number of
Shares subscribed for in the Primary Subscription by all such Rights Holders
then being prorated.
The percentage of Shares each over-subscribing Exercising Rights
Holder may acquire may be rounded up or down to result in delivery of whole
Shares. The allocation process may involve a series of allocations in order to
assure that the total number of Shares available for over-subscriptions is
distributed on a pro rata basis.
The Fund will not offer or sell any Shares which are not subscribed
for pursuant to the Primary Subscription or the Over-Subscription Privilege.
The Subscription Price
The Subscription Price per Share is $_____. Exercising Rights
Holders will have no right to modify or rescind a purchase after receipt by the
Subscription Agent of a properly completed and executed Subscription
Certificate or a Notice of Guaranteed Delivery. The Fund does not have the
right to withdraw the Offer after the Rights have been distributed.
The Fund announced the Offer after the close of trading on the New
York Stock Exchange on October __, 1995. The net asset value per share of
Common Stock at the close of business on October __, 1995 and on ________, 1995
was $________ and $________, respectively, and the last reported sales price of
a share of the Common Stock on the New York Stock Exchange on October __, 1995
and ________, 1995 was $________ and $________, respectively. The Subscription
Price of $________ is approximately a __% discount to the Fund's net asset
value per share on ________, 1995 and approximately a __% discount to the last
reported sale price of a share of Common Stock on the New York Stock Exchange
on ________.
Expiration of the Offer
The Offer will expire at 5:00 p.m., New York time, on ________, 1995,
unless extended by the Fund and the Dealer Manager (the "Expiration Date").
Rights will expire on the Expiration Date and may not be exercised thereafter.
Subscription Agent
The Subscription Agent is Boston Financial Data Services, Inc., a
subsidiary of State Street Bank and Trust Company, the Fund's custodian,
transfer agent, dividend paying agent and registrar. The Subscription Agent
will receive for its administrative, processing, invoicing and other services
as subscription agent, a fee estimated to be $________, as well as
reimbursement for all out-of-pocket expenses related to the Offer which are
<PAGE>
expected to be $________. Questions regarding Subscription Certificates should
be directed to Boston Financial Data Services, Inc. (telephone ________);
stockholders may also consult their brokers or nominees. Signed Subscription
Certificates (see Appendix E) should be sent by mail, express mail or overnight
courier to Boston Financial Data Services, Inc., Corporate Reorganization
Department, Two Heritage Drive, North Quincy, Massachusetts 02171.
Subscription Certificates may also be sent by facsimile to (617) 774-4519, with
the original Subscription Certificate to be sent by one of the methods
described above. Facsimiles should be confirmed by telephone at (617) 774-
4511.
Information Agent
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number and address listed below:
Shareholder Communications Corporation
17 State Street
New York, New York 10004
Toll Free: (800) ________, ext. ___
or
Call Collect (212) ________
The Information Agent will receive a fee of $________, as well as
reimbursement for all out-of-pocket expenses related to the Offer which are
expected to be $________.
Sale of Rights
The Rights are transferable until the last Business Day prior to the
Expiration Date. The Rights will be listed on the New York Stock Exchange
under the symbol "CRF.RT" and may be sold on the New York Stock Exchange
through the usual investment channels. The Fund has used its best efforts to
ensure that an adequate trading market for the Rights will exist by causing the
Rights to be listed on the New York Stock Exchange and by retaining the Dealer
Manager, the Subscription Agent and the Information Agent. Although there can
be no assurance that such a market for the Rights will develop, trading in the
Rights on the New York Stock Exchange may be conducted until the close of
trading on the last Business Day prior to the Expiration Date.
Sales through Subscription Agent. Rights Holders who do not wish to
exercise any or all of their Rights may instruct the Subscription Agent to sell
any unexercised Rights. Subscription Certificates representing the Rights to
be sold by the Subscription Agent must be received by the Subscription Agent on
or before ________, 1995. Upon timely receipt by the Subscription Agent of
appropriate instructions to sell the Rights the Subscription Agent will use its
best efforts to complete the sale and the Subscription Agent will remit the
proceeds of sale, net of commissions, to the Rights Holders. Rights may be
sold through or to the Dealer Manager on the New York Stock Exchange or
otherwise. No brokerage commissions will be charged to holders of less than
100 Rights, and beneficial owners of less than 100 Rights held on their behalf
by qualified financial institutions, who elect to direct the Subscription Agent
to sell such Rights in whole but not in part. Any commissions on sales of 100
Rights or more will be paid by the selling Rights Holder. If the Rights can be
<PAGE>
sold, sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Subscription Agent on the day such
Rights are sold. The sale price of any Rights sold to the Dealer Manager will
be based upon the then current market price for the Rights less amounts
comparable to the usual and customary brokerage fees. The Subscription Agent
will also attempt to sell all Rights which remain unclaimed as a result of
Subscription Certificates being returned by the postal authorities to the
Subscription Agent as undeliverable as of the fourth Business Day prior to the
Expiration Date. For holders of more than 100 Rights, such sales will be made
net of commissions on behalf of the nonclaiming Record Date Stockholders. The
Subscription Agent will hold the proceeds from those sales for the benefit of
such nonclaiming Record Date Stockholders until such proceeds are either
claimed or escheat. There can be no assurance that the Subscription Agent will
be able to complete the sale of any such Rights, and neither the Fund, the
Subscription Agent nor the Dealer Manager has guaranteed any minimum sale price
for the Rights.
Other Transfers. The Rights are transferable until the close of
business on the last Business Day prior to the Expiration Date. The Rights
evidenced by a single Subscription Certificate may be transferred in whole or
in part (in a number evenly divisible by three) by delivering to the
Subscription Agent a Subscription Certificate properly endorsed for transfer,
with instructions to register such portion of the Rights evidenced thereby in
the name of the transferee and to issue a new Subscription Certificate to the
transferee evidencing such transferred Rights. In such event, a new
Subscription Certificate evidencing the balance of the Rights will be issued to
the transferring Rights Holder or, if the transferring Rights Holder so
instructs, to an additional transferee. The signature on the Subscription
Certificate must correspond with the name as written upon the face of the
Subscription Certificate in every particular, without alteration or
enlargement, or any change whatever. A signature guarantee must be provided by
an eligible financial institution as defined in Rule 17Ad-15 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), subject to the standards and
procedures adopted by the Subscription Agent.
Rights Holders wishing to transfer all or a portion of their Rights
should allow up to three Business Days prior to the Expiration Date for (i) the
transfer instructions to be received and processed by the Subscription Agent;
(ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. None of the Fund, the Subscription Agent nor the Dealer
Manager shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior
to the Expiration Date.
Except for the fees charged by the Subscription Agent and brokerage
commissions charged to holders of less than 100 Rights (which will be paid by
the Fund as described above), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred or charged in
connection with the purchase, sale or exercise of Rights will be for the
account of the transferor of the Rights, and none of such commissions, fees or
<PAGE>
expenses will be paid by the Fund, the Subscription Agent or the Dealer
Manager.
The Rights will be eligible for transfer through, and the exercise of
the Primary Subscription (but not the Over-Subscription Privilege) may be
effected through, the facilities of The Depository Trust Company ("DTC");
Rights exercised through DTC are referred to as "DTC Exercised Rights." The
holder of a DTC Exercised Right may exercise the Over-Subscription Privilege in
respect of such DTC Exercised Right by properly executing and delivering to the
Subscription Agent, at or prior to 5:00 p.m., New York time, on the Expiration
Date, a Nominee Holder Over-Subscription Form (see Appendix G), together with
payment of the Subscription Price for the number of Shares for which the
Over-Subscription Privilege is to be exercised. Copies of the Nominee Holder
Over-Subscription Form may be obtained from the Subscription Agent.
Exercise of Rights
Rights may be exercised by completing and signing the reverse side of
the Subscription Certificate which accompanies this Prospectus and mailing it
in the envelope provided, or otherwise delivering the completed and signed
Subscription Certificate to the Subscription Agent, together with payment of
the Subscription Price for the Shares as described below under "--Payment for
Shares." Completed Subscription Certificates and payment for the Shares must be
received by the Subscription Agent prior to 5:00 p.m., New York time, on the
Expiration Date (unless payment is effected by means of a Notice of Guaranteed
Delivery as described below under "--Payment for Shares") at the offices of the
Subscription Agent at the address set forth above. Rights may also be
exercised through an Exercising Rights Holder's broker, who may charge such
Exercising Rights Holder a servicing fee.
Nominees who hold shares of Common Stock for the account of others,
such as banks, brokers, trustees or depositories for securities, should notify
the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee
should complete the Subscription Certificate and submit it to the Subscription
Agent with the proper payment. In addition, beneficial owners of Common Stock
or Rights held through such a nominee should contact the nominee and request
the nominee to effect transactions in accordance with the beneficial owner's
instructions.
Exercise of the Over-Subscription Privilege
Record Date Stockholders who fully exercise all Rights issued to them
by the Fund, and, secondarily, Rights Holders, may participate in the
Over-Subscription Privilege by indicating on their Subscription Certificate the
number of Shares they are willing to acquire pursuant thereto. If sufficient
Shares remain after the Primary Subscription, all over-subscriptions will be
honored in full; otherwise the number of Shares issued pursuant to the
Over-Subscription Privilege will be allocated as described above under
"--Over-Subscription Privilege."
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent, before any Primary
<PAGE>
Over-Subscription Privilege may be exercised as to any particular beneficial
owner, as to the aggregate number of Rights exercised pursuant to the Primary
Subscription and the number of Shares subscribed for pursuant to the Primary
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Before any Secondary
Over-Subscription Privilege may be exercised as to any particular beneficial
owner, such nominee holders of Rights will be required to certify to the
Subscription Agent as to the aggregate number of Rights exercised pursuant to
the Primary Subscription and the number of Shares subscribed for pursuant to
the Secondary Over-Subscription Privilege by such beneficial owner. A Nominee
Holder Over-Subscription Form and Beneficial Owner Certification is contained
in Appendix G.
Payment for Shares
Exercising Rights Holders may choose between the following methods of
payment:
(1) An Exercising Rights Holder can send the Subscription
Certificate, together with payment for the Shares acquired in
the Primary Subscription and any additional Shares subscribed
for pursuant to the Over-Subscription Privilege to the
Subscription Agent based upon the Subscription Price of $_____
per Share. A subscription will be accepted when payment,
together with the properly completed and executed Subscription
Certificate, is received by the Subscription Agent at its
[Shareholders Services Division]; such payment and Subscription
Certificates to be received by the Subscription Agent no later
than 5:00 p.m., New York time, on the Expiration Date. The
Subscription Agent will deposit all checks received by it for
the purchase of Shares into a segregated interest-bearing
account of the Fund (the interest from which will belong to the
Fund) pending proration and distribution of Shares. A PAYMENT
PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER
OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES OF
AMERICA, MUST BE PAYABLE TO THE CZECH REPUBLIC FUND, INC. AND
MUST ACCOMPANY A PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION
CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED AND
BE RECEIVED BY 5:00 P.M. ON THE EXPIRATION DATE.
(2) Alternatively, a subscription will be accepted by the
Subscription Agent if, prior to 5:00 p.m., New York time, on the
Expiration Date, the Subscription Agent has received a Notice of
Guaranteed Delivery (see Appendix F) by facsimile (telecopy) or
otherwise from a bank, a trust company, or a New York Stock
Exchange member guaranteeing delivery of (i) payment of the full
Subscription Price for the Shares subscribed for in the Primary
Subscription and any additional Shares subscribed for pursuant
to the Over-Subscription Privilege, and (ii) a properly
completed and executed Subscription Certificate. The
Subscription Agent will not honor a Notice of Guaranteed
Delivery unless a properly completed and executed Subscription
Certificate and full payment for the Shares is received by the
<PAGE>
Subscription Agent by the close of business on the third
Business Day after the Expiration Date (the "Protect Period").
Within seven Business Days following the Protect Period (the
"Confirmation Date"), the Subscription Agent will send to each Exercising
Rights Holder (or, if the Common Stock is held by a Nominee Holder, to such
Nominee Holder) the share certificates representing the Shares purchased
pursuant to the Primary Subscription and, if applicable, the Over-Subscription
Privilege, along with a letter explaining the allocation of Shares pursuant to
the Over-Subscription Privilege. Any excess payment to be refunded by the Fund
to an Exercising Rights Holder who is not allocated the full amount of Shares
subscribed for pursuant to the Over-Subscription Privilege will be refunded by
the Subscription Agent within seven Business Days following the Protect Period.
An Exercising Rights Holder will have no right to modify or rescind a purchase
after the Subscription Agent has received a properly completed and executed
Subscription Certificate or a Notice of Guaranteed Delivery. All payments by a
Rights Holder must be in United States dollars by money order or check drawn on
a bank located in the United States and payable to The Czech Republic Fund,
Inc.
Whichever of the two methods described above is used, issuance of the
Shares purchased is subject to collection of checks and actual payment. If an
Exercising Rights Holder who acquires Shares pursuant to the Primary
Subscription or Over-Subscription Privilege does not make payment of any
amounts due, the Fund and the Subscription Agent reserve the right to take any
or all of the following actions: (i) find other stockholders or Rights Holders
for such subscribed and unpaid for Shares; (ii) apply any payment actually
received by it toward the purchase of the greatest whole number of Shares which
could be acquired by such holder upon exercise of the Primary Subscription
and/or Over-Subscription Privilege, and/or (iii) exercise any and all other
rights or remedies to which it may be entitled, including, without limitation,
the right to set-off against payments actually received by it with respect to
such subscribed Shares.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF
THE SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT PRIOR TO 5:00 P.M., NEW YORK TIME, ON
THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST
FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Fund, whose
determinations will be final and binding. The Fund in its sole discretion, may
waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been received
or accepted until all irregularities have been waived or cured within such time
as the Fund determines in its sole discretion. The Fund will not be under any
duty to give notification of any defect or irregularity in connection with the
<PAGE>
submission of Subscription Certificates or incur any liability for failure to
give such notification.
Nominees who hold shares of Common Stock for the account of others,
such as banks, brokers, trustees or depositories for securities, should notify
the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee
should complete the Subscription Certificate and submit it to the Subscription
Agent with the proper payment. In addition, beneficial owners of Common Stock
or Rights held through such a nominee should contact the nominee and request
the nominee to effect transactions in accordance with the beneficial owner's
instructions.
Delivery of Share Certificates
Certificates representing Shares purchased pursuant to the Primary
Subscription will be delivered to Exercising Rights Holders as soon as
practicable after the corresponding Rights have been validly exercised and full
payment for such Shares has been received and cleared. Certificates
representing Shares purchased pursuant to the Over-Subscription Privilege will
be delivered to Exercising Rights Holders as soon as practicable after the
Expiration Date and after all allocations have been effected. Participants in
the Fund's Plan will have any Shares acquired in the Primary Subscription and
pursuant to the Over-Subscription Privilege credited to their stockholder
dividend reinvestment accounts in the Plan. Participants in the Plan wishing
to exercise Rights issued in respect of the Shares held in their accounts in
the Plan must exercise them in accordance with the procedures set forth above.
Stockholders whose Shares are held of record by Cede or by any other depository
or nominee on their behalf or their broker-dealer's behalf will have any Shares
acquired in the Primary Subscription credited to the account of Cede or such
other depository or nominee. Shares acquired pursuant to the Over-Subscription
Privilege will be certificated and stock certificates representing such Shares
will be sent directly to Cede or such other depository or nominee. Stock
certificates will not be issued for Shares credited to Plan accounts.
Foreign Stockholders
Subscription Certificates will not be mailed to Foreign Record Date
Stockholders. The Rights to which such Subscription Certificates relate will
be held by the Subscription Agent for such Foreign Record Date Stockholders'
accounts until instructions are received to exercise, sell or transfer the
Rights. If no instructions have been received by 12:00 Noon, New York time,
three Business Days prior to the Expiration Date, the Subscription Agent will
use its best efforts to sell the Rights of those Foreign Record Date
Stockholders through or to the Dealer Manager. The net proceeds, if any, from
the sale of those Rights will be remitted to the Foreign Record Date
Stockholders.
It is anticipated that Rights issued to Foreign Record Date
Stockholders in Japan, who hold approximately ___% of the shares of Common
Stock, will be sold by the Subscription Agent or otherwise on behalf of such
Foreign Record Date Stockholders.
<PAGE>
Federal Income Tax Consequences of the Offer
The U.S. federal income tax consequences to holders of Common Stock
with respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Stockholders will
not result in taxable income to such holders nor will such holders
realize taxable income as a result of the exercise of the Rights.
2. The basis of a Right will be (a) to a holder of Common
Stock to whom it is issued and who exercises or sells the Right (i)
if the fair market value of the Right immediately after issuance is
less than 15% of the fair market value of the Common Stock with
regard to which it is issued, zero (unless the holder elects, by
filing a statement with his timely filed federal income tax return
for the year in which the Rights are received, to allocate the basis
of the Common Stock between the Right and the Common Stock based on
their respective fair market values immediately after the Right is
issued), and (ii) if the fair market value of the Right immediately
after issuance is 15% or more of the fair market value of the Common
Stock with regard to which it is issued, a portion of the basis in
the Common Stock based upon their respective fair market values
immediately after the Right is issued; (b) to a holder of Common
Stock to whom it is issued and who allows the Right to expire, zero;
and (c) to anyone who purchases a Right in the market, the purchase
price for a Right.
3. The holding period of a Right received by a Record Date
Stockholder includes the holding period of the Common Stock with
regard to which the Right is issued.
4. Any gain or loss on the sale of a Right will be treated as
a capital gain or loss if the Right is a capital asset in the hands
of the seller. Such a capital gain or loss will be long- or
short-term, depending on how long the Right has been held, in
accordance with paragraph 3 above. A Right will be a capital asset
in the hands of the person to whom it is issued if the Common Stock
to which the Right relates would be a capital asset in the hands of
that person. If a Right is allowed to expire, there will be no loss
realized unless the Right had been acquired by purchase, in which
case there will be a loss equal to the basis of the Right.
5. If the Right is exercised by the Record Date Stockholder,
the basis of the Common Stock received will include the basis
allocated to the Right and the amount paid upon exercise of the
Right.
6. If the Right is exercised, the holding period of the Common
Stock acquired begins on the date the Right is exercised.
7. Gain recognized by a foreign shareholder on the sale of a
Right will be taxed in the same manner as gain recognized on the sale
of Fund shares. See "Taxation -- Foreign Shareholders."
<PAGE>
The Fund is required to withhold and remit to the U.S. Treasury 31%
of reportable payments paid on an account if the holder of the account is a
taxpayer to which the backup withholding rules apply and has provided the Fund
with either an incorrect taxpayer identification number or no number at all or
fails to certify that he is not subject to such withholding.
The foregoing is only a summary of the applicable federal income tax
laws and does not include any state or local tax consequences of the Offer.
Exercising Rights Holders should consult their own tax advisers concerning the
tax consequences of this transaction. See "Taxation."
Notice of Net Asset Value Decline
The Fund has, pursuant to the Securities and Exchange Commission's
regulatory requirements, undertaken to suspend the Offer until it amends this
Prospectus if, subsequent to ________, 1995 (the effective date of the Fund's
Registration Statement) the Fund's net asset value declines more than 10% from
its net asset value as of that date.
Employee Plan Considerations
Record Date Stockholders that are employee benefit plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including corporate savings and 401(k) plans, Keogh or H.R. 10 plans of
self-employed individuals and Individual Retirement Accounts ("IRAs") and other
plans eligible for special tax treatment under the Code or subject to Section
4975 of the Code (collectively, "Plans") should be aware that additional
contributions of cash to the Plan (other than rollover contributions or
trustee-to-trustee transfers from other Plans) in order to exercise Rights
would be treated as Plan contributions and, when taken together with
contributions previously made, may subject a Plan to excise taxes for excess or
nondeductible contributions. In the case of Plans qualified under Section
401(a) of the Code and certain other plans, additional cash contributions could
cause the maximum contribution limitations of Section 415 of the Code or other
qualification rules to be violated. Furthermore, it may be a reportable
distribution and there may be other adverse tax consequences if Rights are sold
or transferred by a Plan to another account. A sale of Rights by a Plan
account to an unrelated third party and retention of cash proceeds by the Plan
account, or the direct exercise of Rights by a Plan account, should not be
treated as a taxable Plan distribution. Plans contemplating making additional
cash contributions to exercise Rights should consult with their counsel prior
to making such contributions.
Plans and other tax exempt entities, including governmental plans,
should also be aware that if they borrow in order to finance their exercise of
Rights, they may become subject to the tax on unrelated business taxable income
("UBTI") under Section 511 of the Code. If any portion of an IRA is used as
security for a loan, the portion so used is also treated as distributed to the
IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and
the Code contain prohibited transaction rules, that may impact the exercise or
transfer of Rights. Due to the complexity of these rules and the penalties for
<PAGE>
noncompliance, Plans should consult with their counsel regarding the
consequences of their exercise or transfer of Rights under ERISA and the Code.
THE FUND
The Fund, incorporated under the laws of the State of Maryland on
March 3, 1994, has been engaged in business as a non-diversified, closed-end
management investment company registered under the 1940 Act since September 30,
1994, when it completed an initial public offering of 4,400,000 shares of its
Common Stock. The Fund's investment objective is long-term capital
appreciation, which it seeks to achieve by investing primarily in securities of
"Czech Issuers" (as defined below). There is no assurance that the Fund's
investment objective will be achieved. See "Investment Objective and Policies"
and "Risk Factors."
The Fund currently has 4,400,000 shares of Common Stock outstanding,
which are listed and traded on the New York Stock Exchange under the symbol
"CRF" and the Osaka Securities Exchange under the symbol "8684." See
"Description of Capital Stock." As of September 30, 1995, the net assets of
the Fund were approximately $62 million. The Fund's principal executive
offices are located at Oppenheimer Tower, One World Financial Center, 200
Liberty Street, New York, New York 10281 and its telephone number is 1-800-421-
4777.
USE OF PROCEEDS
Assuming all Shares offered pursuant to the Primary Subscription are
sold at the Subscription Price of $________ per Share and the maximum
solicitation fee is paid to the Dealer Manager and other Selling Group Members,
the net proceeds of the Offer are estimated to be $________, after payment of
estimated offering expenses. Expenses related to the issuance of the Shares
will be borne by the Fund and will reduce the net asset value of the Common
Stock. The Investment Manager and the Investment Adviser anticipate that
investment of such proceeds, in accordance with the Fund's investment objective
and policies, will take up to six months from their receipt by the Fund,
depending on market conditions and availability of appropriate securities for
purchase. Pending such investment in accordance with the Fund's investment
objective and policies, the proceeds will be held in Temporary Investments as
described under "Investment Objective and Policies -- Temporary Investments."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital
appreciation, which it seeks to achieve by investing primarily in securities of
Czech Issuers. The Fund's investment objective and its policy to invest, under
normal market conditions, at least 65% of its assets in securities of Czech
Issuers, are fundamental policies of the Fund which may not be changed without
the approval of a "majority of the Fund's outstanding voting securities" (as
defined herein). See "Investment Restrictions."
Portfolio Structure
It is the Fund's policy, under normal market conditions, to invest at
least 65% of the Fund's total assets in securities of Czech Issuers. In
addition, the Fund may invest up to 35% of its total assets in securities of
<PAGE>
other Central European Issuers. Czech Issuers are (i) companies (A) organized
under the laws of the Czech Republic or its predecessors, or (B) whose
principal business activities are conducted in the Czech Republic, and which
derive at least 50% of their revenues or profits from goods produced or sold,
investments made, or services performed, in the Czech Republic, or have at
least 50% of their assets in the Czech Republic, or (C) which have issued
securities which are traded principally in the Czech Republic, and (ii) the
government, governmental entities or political subdivisions of the Czech
Republic. Central European Issuers are (i) companies (A) organized under the
laws of a Central European country or its predecessors, or (B) whose principal
business activities are conducted in one or more Central European countries,
and which derive at least 50% of their revenues or profits from goods produced
or sold, investments made, or services performed in one or more Central
European countries, or have at least 50% of their assets in one or more such
countries, or (C) which have issued securities which are traded principally in
a Central European country, and (ii) governments, governmental entities or
political subdivisions of Central European countries. Determinations as to the
eligibility of issuers under the foregoing definitions will be made by the
Investment Adviser based on publicly available information and inquiries made
to the companies.
The Fund considers Central Europe to be comprised of the area north
of Italy and the former Yugoslavia, west of Romania and the former Soviet
Union, east of Switzerland and Germany and south of the Baltic Sea. This
region comprises the countries of the Czech Republic, Austria, Hungary, Poland
and Slovakia. Based on current and anticipated market conditions, the Fund has
adopted a policy to limit its investments relating to each of the foregoing
countries (other than the Czech Republic) to 15% of its total assets. For
purposes of applying the foregoing limitation, if a company meets the
definition of a Central European Company as a result of relationships with
respect to more than one Central European country, the Fund may consider the
company to be associated with any of such countries. Due to the rapidly
evolving nature of Central European markets, the Fund reserves the ability to
modify its limitation on investments relating to any one Central European
country (other than the Czech Republic) if market conditions should develop so
as to warrant such a change in investment policy.
It is the Fund's policy, under normal market conditions, to invest at
least 65% of its total assets in equity securities, and up to 35% of the Fund's
net assets may be invested in debt securities. Equity securities include
common and preferred stock (including convertible preferred stock), American,
Global or other types of Depositary Receipts ("ADRs"), convertible bonds, notes
and debentures, equity interests in trusts, partnerships, joint ventures or
similar enterprises and common stock purchase warrants and rights.
As of September 30, 1995, approximately 81.6% of the Funds's assets
were invested in equity and debt securities of Czech Issuers and 15.4% of the
Fund's assets were invested in equity and debt securities of other Central
European Issuers.
The Fund's assets may be invested in debt securities (other than
Temporary Investments, as described under "Investment Objective and Policies --
Temporary Investments") when the Investment Adviser believes that, based upon
<PAGE>
factors such as relative interest rate levels and foreign exchange rates, such
securities offer opportunities for long-term capital appreciation. Up to 35%
of the Fund's net assets (i) may be invested, subject to certain restrictions,
in (A) debt securities issued or guaranteed by a Czech Issuer or other Central
European Issuer, (B) in debt securities denominated in korunas or the lawful
currency of another Central European country and (C) short-term debt securities
of the type described under "Investment Objective and Policies -- Temporary
Investments" and (ii) may be utilized to purchase and sell options on
securities, financial futures, fixed income indices and other financial
instruments, and to enter into currency transactions and lend portfolio
securities. See "Risk Factors -- Investment Practices." The Fund has not
established any minimum rating criteria for the debt securities (other than
Temporary Investments) in which it may invest. In addition, the Fund is not
required to dispose of securities in the event of a decline in their credit
quality or ratings. See "Risk Factors -- High Yield/High Risk and Unrated
Debt." A description of the ratings used by Moody's and S&P is set forth in
Appendix D hereto. The Fund expects that debt securities guaranteed by a Czech
or Central European governmental or private entity would be guaranteed as to
payment of principal and interest by the full faith and credit of the relevant
guarantor. If, however, such a debt security were not so guaranteed, the Fund
would nonetheless expect to be permitted to invest in the security as a result
of either the issuer of the security or the currency in which the security is
denominated satisfying the Fund's policies with respect to investment in debt
securities. In evaluating the quality of debt obligations the Investment
Adviser takes into consideration, among other things, the issuer's financial
resources, its operating history, its sensitivity to economic and political
conditions and trends, anticipated changes in interest rates, the quality of
the issuer's management and regulatory matters. The Fund is permitted to
invest up to 100% of its assets in Temporary Investments for temporary
defensive purposes due to political, market or other factors affecting markets
in the Czech Republic or other Central European countries.
The Fund is permitted to invest in investment funds which invest
principally in securities in which the Fund is authorized to invest. The Fund
may invest in such funds as a means of investing in other equity securities in
which the Fund is authorized to invest when the Investment Adviser believes
that such investments may be more advantageous to the Fund than a direct market
purchase of such securities (e.g., if such funds trade at a significant
discount to net asset value, chiefly as a result of transitory market
conditions that the Investment Adviser expects will change). Under the 1940
Act, the Fund is restricted in the amount it may invest in such funds. See
"Additional Investment Activities -- Investment Funds." For a discussion of
possible consequences under U.S. Federal income tax laws of the Fund's
investment in foreign investment funds. See "Taxation -- The Fund."
The Fund may invest its assets in a broad spectrum of industries. In
selecting industries and companies for investment, the Investment Adviser
considers overall growth prospects, financial condition, competitive position,
technology, research and development, productivity, labor costs, raw material
costs and sources, profit margins, return on investment, structural changes in
local economies, capital resources, the degree of government regulation or
deregulation, management and other factors.
<PAGE>
Temporary Investments
The Fund may hold and/or invest its assets in cash and/or Temporary
Investments (as defined below) for cash management purposes, pending investment
in accordance with the Fund's investment objective and policies and to meet
operating expenses. In addition, the Fund may take a temporary defensive
posture and invest without limitation in Temporary Investments. The Fund may
assume a temporary defensive posture when, due to political, market or other
factors broadly affecting markets, the Investment Adviser determines that
either opportunities for capital appreciation in those markets may be
significantly limited or that significant diminution in value of the securities
traded in those markets may occur. As a temporary defensive measure, the Fund
may also increase the percentage of its assets invested in a particular Central
European country. To the extent that the Fund invests in Temporary
Investments, it may not achieve its investment objective.
Temporary Investments are debt securities denominated in U.S. Dollars
or in another freely convertible currency including: (1) short-term (less than
12 months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by (a) the U.S. Government, the
Czech Government or the governments of other Central European countries, their
agencies or instrumentalities or (b) international organizations designated or
supported by multiple foreign governmental entities to promote economic
reconstruction or development ("supranational entities"); (2) finance company
obligations, corporate commercial paper and other short-term commercial
obligations, in each case rated, or issued by companies with similar securities
outstanding that are rated, Prime-1 or A or better by Moody's or A-1 or A or
better by S&P or, if unrated, of comparable quality as determined by the
Investment Adviser; (3) obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances) of banks, subject to the
restriction that the Fund may not invest more than 25% of its total assets in
bank securities; and (4) repurchase agreements with respect to securities in
which the Fund may invest. The banks whose obligations may be purchased by the
Fund and the banks and broker-dealers with which the Fund may enter into
repurchase agreements include any member bank of the Federal Reserve System and
any U.S. or foreign broker-dealer or any foreign bank that has been determined
by the Investment Adviser to be creditworthy.
Repurchase agreements are contracts pursuant to which the seller of a
security agrees at the time of sale to repurchase the security at an agreed
upon price and date. When the Fund enters into a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement, marked to market daily, at not less than their repurchase
price. Repurchase agreements may involve risks in the event of insolvency or
other default by the seller, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities.
Other Investments
Illiquid Securities and Private Securities Transactions. The Fund is
permitted to invest without limitation in illiquid securities, i.e. securities
for which there is no readily available market or no market at all. The Fund,
however, limits its investments in securities acquired in private placements
from the issuers and unlisted equity securities which are illiquid to 20% of
<PAGE>
its total assets. The Fund does not invest in mortgage certificates. The Fund
may be unable to dispose of its holdings in illiquid securities at then current
prices and may have to dispose of such securities over extended periods of
time. In addition to the foregoing, a substantial proportion of secondary
market securities transactions in the Czech Republic and other Central European
countries are privately negotiated between market participants outside of
securities exchanges and organized over-the-counter markets, even if the
securities are also traded on an exchange or in an organized over-the-counter
market. The Fund's investment policies do not limit its ability to participate
in such transactions. There may be significant disparities between the prices
paid for securities in private transactions and the prices at which the same
securities trade on an exchange or in an organized over-the-counter market. In
addition, these factors may limit the Fund's ability to obtain accurate market
quotations for purposes of valuing its portfolio securities and calculating its
net asset value. See "Risk Factors -- Illiquid Securities and Private
Securities Transactions." In many cases, such illiquid securities will be
subject to contractual or legal restrictions on transfer. In addition, issuers
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements that may be applicable if their
securities were publicly traded.
Convertible Securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest generally paid or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible
securities have several unique investment characteristics such as (1) higher
yields than common stocks, but lower yields than comparable nonconvertible
securities, (2) a lesser degree of fluctuation in value than the underlying
stock since they have fixed income characteristics, and (3) the potential for
capital appreciation if the market price of the underlying common stock
increases.
A convertible security might be subject to redemption at the option
of the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
In selecting convertible debt securities for the Fund, the following
factors, among others, may be considered by the Investment Adviser: (1) the
creditworthiness of the issuers of the securities; (2) the interest income
generated by the securities; (3) the potential for capital appreciation of the
securities and the underlying stock; (4) the conversion prices of the
securities relative to the underlying stocks; and (5) the conversion prices of
the securities relative to other comparable securities.
Warrants. The Fund is permitted to invest in warrants, which are
securities permitting, but not obligating, their holder to subscribe for other
securities. Warrants do not carry with them the right to dividends or voting
<PAGE>
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As
a result, an investment in warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does
not necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
Equity-Linked Debt Securities. The Fund is permitted to invest in
equity-linked debt securities. Equity-linked debt securities are corporate
debt securities which involve equity features, such as warrants or contingent
interest or participations based on revenues, sales or profits (i.e., interest
or other payments, often in addition to a fixed rate of return, that are based
on the borrower's attainment of specified levels of revenues, sales or profits
and thus enable the holder of the security to share in the potential success of
the venture). The amount of interest and/or principal payments which the
issuer of equity-linked debt securities is obligated to make may be linked to
the performance of a specified index of equity securities and may be
significantly greater or less than payment obligations in respect of other
types of debt securities. An investment in equity-linked debt securities may
be considered more speculative than other types of debt securities. In
selecting equity-linked debt securities for the Fund, the Investment Adviser
may consider, among other factors, the creditworthiness of the issuers of the
securities and, if applicable, the volatility of the index of equity
securities.
ADDITIONAL INVESTMENT ACTIVITIES
In addition to the investment policies discussed above, the Fund is
permitted to engage in certain additional investment activities. Such
activities may be limited by law or regulations of the Czech Republic or other
Central European countries.
Hedging and Derivatives
The Fund is authorized to use various hedging and investment
strategies described below to hedge various market risks (such as broad or
specific market movements and interest rates and currency exchange rates), to
manage the effective maturity or duration of debt instruments held by the Fund,
or to seek to increase the Fund's income or gain. Although these strategies
are regularly used by some investment companies and other institutional
investors, few, if any, of these strategies can practicably be used to a
significant extent by the Fund at the present time and may not become available
for extensive use in the future. Techniques and instruments may change,
however, over time as new instruments and strategies are developed or
regulatory changes occur. Limitations on the portion of the Fund's assets that
may be used in connection with the investment strategies described below are
set out in Appendix A hereto.
Subject to the constraints described above, the Fund may purchase and
sell interest rate, currency or stock index futures contracts and enter into
currency forward contracts and currency swaps and related transactions, it may
purchase and sell (or write) exchange listed and over-the-counter put and call
options on debt and equity securities, currencies, futures contracts, fixed
<PAGE>
income and stock indices and other financial instruments and it may enter into
interest rate and equity swaps and related transactions and other similar
transactions which may be developed to the extent the Investment Adviser
determines that they are consistent with the Fund's investment objective and
policies and applicable regulatory requirements (collectively, these
transactions are referred to herein as "Hedging and Derivatives"). The Fund
may enter into futures contracts or options thereon for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on such open contracts and options would not exceed
5% of the liquidation value of the Fund's portfolio; provided, that in the case
of an option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The Fund's interest
rate transactions may take the form of swaps, caps, floors and collars,
currency forward contracts, currency futures contracts, currency swaps and
options on currency or currency futures contracts.
Hedging and Derivatives may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of those securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular debt or equity securities. The ability of
the Fund to utilize Hedging and Derivatives successfully will depend on the
Investment Adviser's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select
portfolio securities. The use of Hedging and Derivatives in certain
circumstances will require that the Fund segregate cash, U.S. Government
securities or other liquid high grade debt obligations to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency.
A detailed discussion of Hedging and Derivatives, including
applicable requirements of the Commodity Futures Trading Commission, the
requirement to segregate assets with respect to these transactions and special
risks associated with such strategies, appears as Appendix A hereto. See also
"Risk Factors -- Investment Practices."
The degree of the Fund's use of Hedging and Derivatives may be
limited by certain provisions of the Code. See "Taxation."
When-Issued and Delayed Delivery Securities
The Fund is permitted to purchase securities on a when-issued or
delayed delivery basis. Securities purchased on a when-issued or delayed
delivery basis are purchased for delivery beyond the normal settlement date at
a stated price. No income accrues to the purchaser of a security on a
when-issued or delayed delivery basis prior to delivery. Such securities are
recorded as an asset and are subject to changes in value based upon changes in
market prices. Purchasing a security on a when-issued or delayed delivery
basis can involve a risk that the market price at the time of delivery may be
lower than the agreed-upon purchase price, in which case there could be an
unrealized loss at the time of delivery. The Fund will only make commitments
<PAGE>
to purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities but may sell them before the
settlement date if it is deemed advisable. The Fund generally will establish a
segregated account in which it will maintain liquid assets in an amount at
least equal in value to the Fund's commitments to purchase securities on a
when-issued or delayed delivery basis. If the value of these assets declines,
the Fund will place additional liquid assets in the account on a daily basis so
that the value of the assets in the account is equal to the amount of such
commitments. As an alternative, the Fund may elect to treat when-issued or
delayed delivery securities as senior securities representing indebtedness,
which are subject to asset coverage requirements under the 1940 Act. See
"Investment Restrictions."
Loans of Portfolio Securities
The Fund is permitted to lend portfolio securities. By doing so, the
Fund attempts to earn income through the receipt of interest on the loan. In
the event of the bankruptcy of the other party to a securities loan, the Fund
could experience delays in recovering the securities it lent. To the extent
that, in the meantime, the value of the securities the Fund lent has increased,
the Fund could experience a loss. Any physical transfer of portfolio
securities outside the Czech Republic is currently subject to limitation under
the Czech foreign exchange law.
Any securities that the Fund may receive as collateral for a loan
will not become a part of its portfolio at the time of the loan and, in the
event of a default by the borrower, the Fund will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Fund is permitted to invest. During the time securities are on loan, the
borrower will pay the Fund any accrued income on those securities, and the Fund
may invest the cash collateral and earn additional income or receive an
agreed-upon fee from a borrower that has delivered cash equivalent collateral.
Cash collateral received by the Fund will be invested in securities in which
the Fund is permitted to invest. The value of securities loaned will be marked
to market daily. Portfolio securities purchased with cash collateral are
subject to possible depreciation. Loans of securities by the Fund will be
subject to termination at the Fund's or the borrower's option. The Fund may
pay reasonable negotiated fees in connection with loaned securities, so long as
such fees are set forth in a written contract and approved by the Fund's Board
of Directors.
Investment Funds
The Fund is permitted to invest in investment funds, other than those
for which the Investment Manager, the Investment Adviser or the Regional
Adviser serves as investment adviser or sponsor, which invest principally in
securities in which the Fund is authorized to invest. Among such investment
funds are "voucher funds," which are investment funds formed in connection with
the privatization by the Czech government (or the predecessor government of the
Czech and Slovak Federal Republic) of a number of state-owned companies and the
issuance of investment vouchers to private citizens reflecting ownership
interests therein. See "Appendix B -- The Czech Republic -- The Czech Economy
- -- Investment Funds." Under the 1940 Act, the Fund may invest a maximum of 10%
of its total assets in the securities of other investment companies. In
<PAGE>
addition, under the 1940 Act, not more than 5% of the Fund's total assets may
be invested in the securities of any one investment company. To the extent the
Fund invests in other investment funds, the Fund's shareholders will incur
certain duplicative fees and expenses, including investment advisory fees. The
Fund's investment in certain investment funds will result in special U.S.
federal income tax consequences described below under "Taxation."
Leverage
Although the Fund has no present intention to do so, the Fund is
permitted to utilize leverage by borrowing or by issuing preferred stock or
short-term debt securities in an amount up to 10% of the Fund's total assets.
Borrowings may be secured by the Fund's assets.
Leverage by the Fund creates an opportunity for increased return but,
at the same time, creates special risks. For example, leverage may exaggerate
changes in the net asset value of the Common Stock and in the return on the
Fund's portfolio. Although the principal of any leverage will be fixed, the
Fund's assets may change in value during the time the leverage is outstanding.
Leverage will create expenses for the Fund which can exceed the income from the
assets acquired with the proceeds of the leverage. Furthermore, an increase in
interest rates could reduce or eliminate the benefits of leverage and could
reduce the value of the Fund's Common Stock.
The Fund also is permitted to enter into reverse repurchase
agreements with any member bank of the Federal Reserve System and any
broker-dealer or any foreign bank that has been determined by the Investment
Adviser to be creditworthy. Under a reverse repurchase agreement, the Fund
would sell securities and agree to repurchase them at a mutually agreed date
and price. At the time the Fund enters into a reverse repurchase agreement, it
may establish and maintain a segregated account, with its custodian or a
designated sub-custodian, containing cash, U.S. Government securities or other
liquid, high grade debt obligations, having a value not less than the
repurchase price (including accrued interest). Reverse repurchase agreements
involve the risk that the market value of the securities purchased with the
proceeds of the sale of securities received by the Fund may decline below the
price of the securities the Fund is obligated to repurchase. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy
or becomes insolvent, the buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Fund's obligations to
repurchase the securities, and the Fund's use of proceeds of the reverse
repurchase agreement may effectively be restricted pending the decision.
Reverse repurchase agreements will be treated as borrowings for purposes of
calculating the Fund's borrowing limitation to the extent the Fund does not
establish and maintain a segregated account (as described above).
INVESTMENT RESTRICTIONS
The following restrictions, along with the Fund's investment
objective and its policy to invest at least 65% of the Fund's total assets in
securities of Czech Issuers under normal market conditions, are, subject to the
succeeding sentence, the Fund's only fundamental policies, that is, policies
that cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities. In addition, as a matter of fundamental
<PAGE>
policy, and notwithstanding any other fundamental investment policy or
limitation, the Fund may invest all or a portion of its assets invested in the
Czech Republic or another Central European Country through one or more
subsidiaries, trusts or other similar arrangements (including a branch)
established by the Fund at any such time that the Board of Directors of the
Fund determines that it is in the best interests of the Fund's shareholders.
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 represented or (ii) more than 50% of the
outstanding shares. The other policies and investment restrictions referred to
herein are not fundamental policies of the Fund and may be changed by the
Fund's Board of Directors without shareholder approval. If a percentage
restriction set forth below or elsewhere herein is adhered to at the time a
transaction is effected, later changes in percentage resulting from any cause
other than actions by the Fund will not be considered a violation. Under its
fundamental restrictions, the Fund may not:
(1) purchase any securities which would cause 25% or more of the
value of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to investment in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(2) issue senior securities or borrow money, except for senior
securities (including borrowing money, including on margin if margin
securities are owned, entering into reverse repurchase agreements and
entering into similar transactions) not in excess of 10% of its total
assets (excluding the amount borrowed); provided, however, that the Fund's
obligations under when-issued and delayed delivery transactions and
similar transactions and reverse repurchase agreements are not treated as
senior securities if covering assets are appropriately segregated, and the
use of Hedging and Derivatives shall not be deemed to involve the issuance
of a "senior security" or a "borrowing";
(3) purchase or sell commodities or commodity contracts, including
futures contracts and options thereon, except that the Fund may engage in
Hedging and Derivatives;
(4) make loans, except that (a) the Fund may (i) purchase and hold
debt instruments (including bonds, debentures or other obligations and
certificates of deposit, bankers' acceptances and fixed time deposits) in
accordance with its investment objective and policies, (ii) enter into
repurchase agreements with respect to portfolio securities, and (iii) make
loans of portfolio securities, as described under "Additional Investment
Activities -- Loans of Portfolio Securities" herein; and (b) delays in the
settlement of securities transactions will not be considered loans;
(5) underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter;
(6) purchase or sell real estate, real estate mortgage loans or real
estate limited partnership interests (other than securities secured by
<PAGE>
real estate or interests therein or securities issued by companies that
invest in real estate or interests therein);
(7) purchase securities on margin (except as provided in (2) above
and except for delayed delivery or when-issued transactions, such
short-term credits as are necessary for the clearance of transactions, and
margin deposits in connection with transactions in futures contracts,
options on futures contracts, options on securities and securities indices
and currency transactions) or make short sales;
(8) invest for the purpose of exercising control over management of
any company;
(9) invest more than 25% of its total assets in a particular company
or issuer; or
(10) acquire more than 25% of any class of outstanding stock of any
company.
As a matter of operating policy, which may be changed by the Fund's
Board of Directors without stockholder vote, the Fund will not purchase or
borrow securities from or sell or lend securities to interested persons or
affiliated persons, as defined under the 1940 Act, except as permitted under
the 1940 Act.
RISK FACTORS
Investing in securities of Czech and other Central European issuers
involves certain risks, and special risk considerations, including those set
forth below, which are not associated with investing in securities of U.S.
companies. Further, certain investments that the Fund may purchase and
investment techniques in which the Fund may engage, involve risks, including
those set forth below.
Dilution
An immediate dilution, which could be substantial, of the aggregate
net asset value of the shares of Common Stock owned by Record Date Stockholders
who do not fully exercise their Rights may occur as a result of the Offer
because the Subscription Price may be less than the Fund's net asset value per
share on the Expiration Date (and the Fund will incur expenses in connection
with the Offer), and the number of shares outstanding after the Offer may
increase in a greater percentage than the increase in the size of the Fund's
assets. In addition, Record Date Stockholders who do not fully exercise their
Rights should expect that they will, at the completion of the Offer, own a
smaller proportional interest in the Fund than would otherwise be the case.
Although it is not possible to state precisely the amount of such a decrease in
net asset value because it is not known at this time what the net asset value
per share will be on the Expiration Date or what proportion of the Shares will
be subscribed for, such dilution could be substantial. For example, assuming
that all Rights are exercised and that the Subscription Price of $________ is
__% below the Fund's net asset value of $________ per share as of ________,
1995, the Fund's net asset value per share would be reduced approximately
$_______. The distribution to stockholders of transferable Rights which
themselves may have intrinsic value will afford non-participating stockholders
<PAGE>
the potential of receiving a cash payment upon sale of such Rights, receipt of
which may be viewed as partial compensation for the possible dilution and their
interest in the Fund. No assurance can be given, however, that a market for
the rights will develop or as to the value, if any, that such Rights will have.
Political, Economic and Other Factors
The value of the Fund's assets may be adversely affected by
political, economic, and social factors, changes in law or regulations of the
Czech Republic or other Central European countries and the status of foreign
relations of Central European countries. Developments in the region may also
affect the value of the Fund's assets. In addition, the economy of the Czech
Republic or other Central European countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Many Central European
countries have substantial external debt. Despite privatization programs that
have been implemented, the governments of Central European countries have
exercised and continue to exercise significant influence over many aspects of
the local economies, and the number of public sector enterprises in Central
European countries is substantial. New governments and new economic policies
may have an unpredictable impact on Central European economies. Future actions
by the government of the Czech Republic or other Central European countries
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.
The economy of the Czech Republic was tightly controlled by a
Communist government and composed almost exclusively of state owned enterprises
until 1989. Since 1990, the Government of the Czech Republic (including its
predecessor, the Government of the Czech and Slovak Federal Republic) has
committed itself to implementing an economic structural reform program with the
objective of liberalizing the Czech Republic's exchange and trade policies,
privatizing state-owned companies, controlling inflation, promoting sound
monetary and fiscal policy, reforming the financial sector, and placing greater
reliance on market mechanisms to direct economic activity. A significant
component of the program is the promotion of foreign investment in key areas of
the economy and the further development of the private sector. While the
Government's policies have resulted in improved economic performance, there can
be no assurance that the economic recovery will be sustained. Moreover, there
can be no assurance that the economic reforms will persist, and any reversal
thereof by the current or any future Government could adversely affect the
Fund. Although, in the judgment of the Investment Manager, the Investment
Adviser and the Regional Adviser, the current political situation in the Czech
Republic is stable, there can be no assurance that the Czech Republic or other
Central European countries will not experience political instability in the
future that could adversely affect the market values of the Fund's portfolio
holdings and the Fund's Common Stock. In particular, since the Czech Republic
is ruled by a coalition government, a shift in the allegiance of parties
comprising the coalition could result in a change in government and, as a
consequence, a change in political or economic policies. In contrast to the
political situation in the Czech Republic, certain other Central European
countries have recently held or will shortly hold elections in which Socialist
<PAGE>
parties identified with former ruling Communist or Socialist parties have
gained or may gain parliamentary majorities from parties which have supported
economic reforms. Although the Socialist governments which to date have been
elected in these countries have pledged to continue to implement economic
reform policies, there can be no assurance that economic reforms will continue.
Moreover, there can be no assurance that the Czech Republic or other countries
in which the Fund invests will not adopt policies adversely affecting the
Fund's investments. For example, upon the accession to power of Communist
regimes approximately 40 years ago, large amounts of property were expropriated
and the claims of many property owners against the governments were never
settled. Although the government of the Czech Republic has settled many claims
through a restitution program, there can be no assurance that additional claims
in the Czech Republic or other Central European countries will not impose
significant costs upon the governments or that the Fund's investments in
certain countries would not be expropriated, nationalized or otherwise
confiscated.
Although the Czech Republic removed most wage and price controls in
January 1991, the elimination of remaining wage and price controls in the Czech
Republic or other Central European countries, would result in increased
inflation and could lead to reduced competitiveness of certain exports. The
dismissal of workers in connection with the transformation of Central European
economies from state control to market-based incentives or the commencement of
bankruptcy proceedings involving Central European companies may lead to a rise
in unemployment and have a destabilizing impact.
The Czech Republic and other Central European countries lack a
well-developed infrastructure. Telecommunication capabilities are limited and
banks and financial systems are not well developed. In response to liquidity
problems that certain Czech banks had experienced, the Czech National Bank has
proposed new regulations. See "Appendix B -- The Czech Economy -- Banking and
Finances." Continued problems in the banking sector could adversely affect
economic development in the Czech Republic. Individual business entities lack
a significant history of operating in a market-oriented system. Many companies
in the Czech Republic and other Central European countries are recently
constituted. Many existing enterprises have been radically reorganized and
restructured as a result of the shift from a planned command and control
economy to a free market, and many enterprises continue to restructure in
response to rapidly changing economic conditions.
The economies of the Czech Republic and certain other Central
European countries are heavily dependent on the manufacturing sector, and
adverse developments affecting this sector in a particular country would
adversely affect the economy as a whole. In addition, Central European
economies generally are heavily dependent upon international trade and have
been and may continue to be adversely affected by trade barriers and other
protectionist measures, exchange controls and relative currency values. These
economies may also be adversely affected by economic or political developments
in or controversies with neighboring countries and major trading partners. The
economies of the Czech Republic and certain other Central European countries
are heavily dependent on oil and gas imported from Russia via a pipeline
through Ukraine and the Slovak Republic. Political or economic turmoil in any
one of these nations could result in an energy crisis that would adversely
<PAGE>
affect the economic stability of the Czech Republic and certain other Central
European countries and consequently adversely affect the Fund. Political or
economic turmoil in nearby regions could also lead to an influx of refugees to
one or more Central European countries with adverse economic and political
effects on such countries.
The extent of environmental regulation and protection by Central
European countries has not matched Western standards. Significant areas of
these countries are seriously polluted and will require remedial measures. In
addition, a significant portion of the electricity generated in the Czech
Republic is produced by a nuclear power plant which may require modifications
and which, if decommissioned or otherwise interrupted, would adversely affect
the Czech economy. Addressing these conditions will impose significant costs
on the Central European governments.
The quality and reliability of official data published by the
governments, government agencies and securities exchanges of the Czech Republic
and other Central European countries is generally not equivalent to that of
more developed Western countries. The statistical information presented herein
regarding the Czech Republic may therefore not accurately reflect the
characteristics being measured. In addition, as a result of significant
political, economic and other structural changes in these countries in recent
years and the newness of their securities markets, meaningful long-term
historical information is generally not available.
Market Characteristics
The Prague Stock Exchange (the "PSE") is the only stock exchange in
the Czech Republic. The Czech Republic also has an organized over-the-counter
market, known as the "RM System," on which securities traded on the PSE, as
well as other securities, may trade. A substantial majority of securities
transactions in the Czech Republic are privately negotiated off the PSE and
outside of the RM System, however. The large volume of trades effected in such
privately negotiated transactions makes it difficult to determine a true market
price for securities and to obtain accurate information regarding trading
values. The securities markets in the Czech Republic and other Central
European countries are substantially smaller, less liquid and significantly
more volatile than the securities market in the United States. As of
__________, 1995, __ equity securities and ___ debt securities were listed on
the PSE. Securities are not required to be listed in order to trade on the
PSE, however, and as of __________, 1995, approximately ___ equity securities
and ___ debt securities were traded on the PSE. As of August 31, 1995, the
aggregate market capitalization of equity securities of companies eligible for
trading on the PSE was approximately U.S. $_____ billion (Kc. ___ billion).
For the period from April 6, 1993 (inception of the PSE) through __________,
1995, the average monthly equity trading value of companies traded on the PSE
was approximately U.S. $____ million (Kc. ____ billion), resulting in an
aggregate trading value for the period of approximately U.S. $____ billion (Kc.
_____ billion). For __________, 1995, the equity trading value on the PSE was
approximately U.S. $____ million (Kc. ___ billion), while for __________, the
equity trading value on the PSE was approximately U.S. $____ million (Kc. ____
billion). By comparison, for __________, the average daily equity trading
value on the New York Stock Exchange was approximately $____ billion and the
<PAGE>
aggregate trading value for the period was $____ trillion. On __________,
1995, the market capitalization of the New York Stock Exchange was $___
trillion. The relatively small market capitalization of, and trading volume
on, the Central European securities exchanges can be expected to cause the
Fund's investments in securities traded on such exchanges to be comparatively
less liquid and subject to greater price volatility than comparable U.S.
investments.
The development of the Czech securities market has been influenced to
a significant degree by the methods used in the privatization of Czech
companies and, in particular, by voucher privatization. The voucher funds
formed at the time of the first wave of large-scale privatizations in the Czech
Republic attracted approximately 73% of all vouchers held by the public. See
"Appendix B -- The Czech Republic -- Privatization" and "-- The Czech Republic
- -- Investment Funds." As a result, although precise data is not available, a
limited number of voucher funds own a high proportion of the shares of many
Czech companies and may act in concert in the trading of company shares.
Officers of these funds and related parties may participate in the management
of portfolio companies, and bank affiliates of these funds may possess detailed
information regarding these companies as a result of their lending activities.
These factors, combined with a lack of generally available information
regarding Czech issuers, may result in the Fund having less information
regarding Czech issuers than certain other investors. Moreover, in view of the
size of positions held by voucher funds and other institutional investors,
their trading activities could materially affect the prices of securities held
by the Fund and the Fund's ability to acquire and dispose of investments at
prices and times it considers advantageous. The concentration of share
holdings in institutional investors is also a feature of certain other Central
European securities markets. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading value
of the PSE. For example, as of __________, 1995, the five largest companies
traded on the PSE, in terms of market capitalization, represented approximately
___% of the total equity market capitalization of the PSE. For the months of
___________ 1995 and _________ 1995, the ten most actively traded equity
securities on the PSE by trading value accounted for approximately ___% and
____%, respectively, of the aggregate equity trading value of the PSE. The
limited liquidity of the Czech securities market and other Central European
securities markets may also affect the Fund's ability to acquire or dispose of
securities at the price and time it desires.
Price levels in the securities markets of the Czech Republic and
other Central European countries have been characterized by substantial
volatility. From early 1994 through mid-1995, the markets experienced major
declines. However, in recent months price levels have increased.
Settlement procedures in certain Central European countries are less
developed and reliable than those in the United States and in other developed
markets, and the Fund may experience settlement delays or other material
difficulties. Accordingly, the Fund may be subject to significant delays or
limitations on the timing of its investments in the Czech Republic and other
Central European countries (including the initial investment of the proceeds
from the offering made hereby). Securities trading in the Czech Republic and
other emerging Central European securities markets may also be subject to risks
<PAGE>
due to a lack of experience of securities brokers, a lack of modern technology
and a possible lack of sufficient capital to expand market operations. The
foregoing factors could impede the ability of the Fund to effect portfolio
transactions on a timely basis and could have an adverse effect on the net
asset value of shares of the Fund's Common Stock and the price at which the
shares trade.
Financial Information and Standards; Regulatory Matters
In addition to their smaller size, lesser liquidity and greater
volatility, Czech and Central European securities markets are less developed
than U.S. securities markets. Disclosure and regulatory standards are
substantially less stringent than U.S. standards. Issuers in the Czech
Republic and other Central European countries are subject to accounting,
auditing and financial standards and requirements that differ significantly
from those applicable to U.S. issuers. Certain issuers are subject to limited
or no disclosure requirements, and no prospectus describing a state-owned
company is issued in connection with its privatization and the commencement of
trading in the company's securities. With respect to issuers that are subject
to disclosure requirements, the assets and profits appearing on their financial
statements may not reflect their 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 Central European
issuers than there is about U.S. issuers.
Issuers of securities in the Czech Republic and other Central
European countries may not be subject to regulation comparable to that to which
U.S. issuers are subject with respect to such matters as insider trading rules,
tender offer regulation, shareholder proxy requirements and the timely
disclosure of information. In addition, there is substantially less
governmental supervision and regulation of the securities exchanges and
securities professionals in the Czech Republic and other Central European
countries than exists in the United States.
In the years since the fall of Communism, the Czech Republic and
other Central European countries have been developing a body of securities and
tax laws and laws governing corporations. Legal structures governing private
and foreign investments and private property, where they have been implemented,
are new. Laws may not exist to cover all contingencies or to protect investors
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 the securities markets and the activities
of investors in such markets, and has been no or very limited enforcement to
date of existing regulations. Furthermore, many regulations are inapplicable
to transactions conducted directly between market participants, where the bulk
of trading in the Czech Republic occurs. In addition, even in circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law. Czech and other Central European judicial systems have
very limited experience with the administration of corporate and commercial law
and may not be well equipped to resolve disputes. Consequently, it may be more
difficult for the Fund to obtain a judgment in a court outside the United
States to the extent that there is a default with respect to a security of a
<PAGE>
Central European issuer or the Fund has any other claim against any such
issuer.
Investment Restrictions
Foreign investment in the securities of Czech and Central European
companies is restricted and controlled to varying degrees. These restrictions
or controls may at times limit or preclude foreign investment in certain Czech
Companies and Central European Issuers. The Czech Republic and other Central
European countries may require governmental approval prior to investment by
foreign persons or limit the amount of investment by foreign persons in a
particular company, or give preferential treatment to nationals over foreign
investors. In particular, there are specific limitations on the foreign
purchase of an equity interest in a Czech bank and Czech National Bank approval
is required for the purchase of any Czech bank shares by a nonresident of the
Czech Republic. In addition, the Czech Republic and other Central European
countries may restrict investment opportunities in issuers or industries deemed
important to governmental interests such as defense related firms and public
airports.
Foreign Currency Considerations
The Fund's assets are invested principally in securities of Czech and
other Central European issuers and substantially all of the income received by
the Fund is in korunas or other Central European currencies. However, the Fund
computes and distributes its income in U.S. Dollars, and the computation of
income is made on the date that the income is earned by the Fund at the foreign
exchange rate on that date. Therefore, if the value of the koruna or other
Central European currency falls relative to the U.S. Dollar between the earning
of the income and the time at which the Fund converts the korunas or other
Central European 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
"Taxation" and "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 -- The Fund."
Since the Fund invests primarily in securities denominated or quoted
in korunas or other Central European currencies, changes in the exchange rates
between the U.S. Dollar and such Central European currencies will affect the
dollar value of securities in the Fund's portfolio and the unrealized
appreciation or depreciation of investments. Furthermore, the Fund may incur
costs in connection with conversions between U.S. Dollars and Central European
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 conducts its
foreign currency exchange transactions either at the spot rate prevailing in
the foreign currency exchange market, at regulated official rates for
currencies that are not freely convertible or internationally traded or through
<PAGE>
entering into forward, futures or options contracts to purchase or sell foreign
currencies, if available.
Exchange Controls
The ability of the Fund to exchange korunas and other Central
European currencies into U.S. Dollars and repatriate investment income, capital
and proceeds of sales realized from its investments in Czech and other Central
European securities is subject to regulation by Czech and other Central
European government authorities, although prior registration or approval
generally is not required under current regulations. There can be no assurance
that the governments of the Czech Republic or other Central European countries
will not, whether for purposes of managing its balance of payments or for other
reasons, impose additional restrictions in the future on foreign capital
remittances abroad or otherwise modify the exchange control regime applicable
to foreign investors in such a way that may adversely affect the ability of the
Fund to repatriate its income and capital. The Fund could be adversely
affected by delays in obtaining or the failure to obtain any required
government or central bank approval for repatriation of capital, as well as by
the application to the Fund of any restrictions on investments. 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 Code.
High Yield/High Risk and Unrated Debt
The Fund has not established any minimum rating criteria for the debt
securities in which it may invest. Accordingly, the Fund may invest in
securities rated in medium to low rating categories of internationally
recognized statistical rating organizations and unrated securities of
comparable quality (such securities are referred to herein as "high yield/high
risk securities"). Such securities are speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rated categories. Under rating agency guidelines, these
lower-rated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. The Fund may invest in securities having the
lowest ratings for non-subordinated debt instruments assigned by Moody's or S&P
(i.e., rated in the category "C" by Moody's or "D" by S&P) or in comparable
unrated securities. The Fund is not required to dispose of securities in the
event of a decline in their credit quality or ratings. Some of the debt
securities held by the Fund may not be paying interest currently or may be in
payment default. Under rating agency guidelines, these securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default,
to be unlikely to have the capacity to pay interest and repay principal when
due in the event of adverse business, financial or economic conditions, and/or
to be in default or not current in the payment of interest or principal.
Unrated securities deemed by the Investment Adviser to be comparable to these
lower- and lowest-rated securities will have similar characteristics. See
<PAGE>
"Appendix D -- Ratings." In purchasing such securities, the Fund relies on the
Investment Adviser's analysis, judgment and experience in evaluating the
creditworthiness of an issuer of such securities. Achievement of the Fund's
investment objective through investing in lower quality debt securities may be
more dependent on the Investment Adviser's credit analysis than would be the
case for higher quality debt securities. The Investment Adviser takes into
consideration, among other things, the issuer's financial resources, its
operating history, its sensitivity to economic and political conditions and
trends, anticipated changes in interest rates, the quality of the issuer's
management and regulatory matters.
The market values of high yield/high risk securities tend to be less
sensitive than higher quality securities to fluctuations in the general level
of interest rates and more sensitive to changes in the equity markets,
individual corporate developments or political developments concerning
government issuers. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of
such issuers generally are greater than is the case with higher rated
securities. For example, during a sustained period of rising interest rates,
an economic downturn or a sustained period of political uncertainty or unrest,
issuers of high yield/high risk securities may be more likely to experience
financial stress, especially if such issuers are highly leveraged. During such
periods, service of debt obligations also may be adversely affected by the
issuer's inability to meet specific projected business forecasts, specific
issuer developments or the unavailability of additional financing. In
addition, these periods can be expected to result in increased volatility of
market prices and yields of lower rated securities and thus in the Fund's net
asset value. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield/high risk securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield/high risk securities may have redemption or call features
which would permit an issuer to repurchase the securities from the Fund. If a
call were exercised by the issuer during a period of declining interest rates,
the Fund in all likelihood would have to replace the called securities with
lower yielding securities, thus decreasing the net investment income to the
Fund and dividends to shareholders.
The Fund may have difficulty disposing of certain high yield/high
risk securities, as there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it is generally not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse
impact on market price and the Fund's ability to dispose of particular issues
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.
Reduced secondary market liquidity for certain high yield/high risk securities
may also make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers
<PAGE>
of prices for actual sales. The Fund's Directors or the Investment Adviser
carefully consider the factors affecting the market for high yield/high risk
securities in determining whether any particular security is liquid or illiquid
and whether current market quotations are readily available. Adverse publicity
and investor perceptions, which may not be based on fundamental analysis, also
may decrease the value and liquidity of high yield/high risk securities,
particularly in a thinly traded market. Factors adversely affecting the market
value of high yield/high risk securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio
holding or to participate in the restructuring of the obligations.
Investment Practices
The risks and special considerations of certain of the investment
practices in which the Fund may engage pursuant to its investment policies are
described above under "Investment Objective and Policies" and "Additional
Investment Activities." In general, instruments to hedge most of the securities
in which the Fund invests, as well as the currencies in which they are quoted
or denominated, are not currently available. Accordingly, the Fund expects to
have substantial exposure to the risks associated with such securities and
currencies, as described herein. However, to the extent the Fund uses Hedging
and Derivatives, the Fund will bear certain risks associated with these
instruments, including possible default by the other party to the transaction,
illiquidity and, to the extent the Investment Adviser's view as to certain
market movements is incorrect, the risk that the use of Hedging and Derivatives
could result in losses greater than if Hedging and Derivatives had not been
used. Use of put and call options could result in losses to the Fund, force
the sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions could result in the Fund's
incurring losses as a result of the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency.
The use of options and futures transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund could create the possibility that losses on the hedging instrument will be
greater than gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain
markets, the Fund might not be able to close out a position without incurring
substantial losses. To the extent the Fund utilizes futures and options
transactions for hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and, at the same
time, limit any potential gain to the Fund that might result from an increase
in value of the position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium and transaction costs. Losses resulting from the use of
Hedging and Derivatives will reduce the Fund's net asset value, and possibly
income, and the losses can be greater than if Hedging and Derivatives had not
been used. Additional information regarding the risks and special
<PAGE>
considerations associated with Hedging and Derivatives appears in Appendix A
hereto.
Illiquid Securities and Private Securities Transactions
The Fund is permitted to invest without limitation in illiquid
securities as described above under "Investment Objective and Policies -- Other
Investments." The Fund, however, limits its investments in securities acquired
in private placements from the issuers and unlisted equity securities which are
illiquid to 20% of its total assets. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with these
investments will be particularly acute in situations in which the Fund's
operations require cash, such as when the Fund repurchases shares or pays
dividends or distributions, and could result in the Fund borrowing to meet
short-term cash requirements or incurring capital losses on the sale of such
investments. Further, companies whose securities are not publicly traded are
not subject to the disclosure and other investor protection requirements which
would be applicable if their securities were publicly traded. In addition to
the foregoing, a substantial proportion of secondary market securities
transactions in the Czech Republic and other Central European countries are
privately negotiated between market participants outside of securities
exchanges and organized over-the-counter markets, even if the securities are
also traded on an exchange or in an organized over-the-counter market. There
may be significant disparities between the prices paid for securities in
private transactions and the prices at which the same securities trade on an
exchange or in an organized over-the-counter market, in part because trading
limits applicable to transactions on the PSE are not applicable to private
transactions. See "Appendix C-- The Czech Securities Market -- The Prague
Stock Exchange -- Regulation of Price Movements on the PSE." These factors may
limit the Fund's ability to obtain accurate market quotations for purposes of
valuing its portfolio securities and calculating its net asset value, and the
sale price of certain of the Fund's securities may be significantly lower or
higher than the Fund's most recent determination of their fair value.
Leverage
Although the Fund has no present intention to do so, the Fund may
utilize leverage by borrowing or by issuing preferred stock or short-term debt
securities in an amount up to 10% of the Fund's total assets. Leverage by the
Fund would create an opportunity for increased return but, at the same time,
would create special risks. For example, leverage may exaggerate changes in
the net asset value of the Common Stock and in the return on the Fund's
portfolio. Although the principal of any leverage would be fixed, the Fund's
assets may change in value during the time the leverage is outstanding.
Leverage would create expenses for the Fund which can, during any period,
exceed the income from the assets acquired with the proceeds of the leverage.
Furthermore, an increase in interest rates could reduce or eliminate the
benefits of leverage and could reduce the value of the Fund's securities. The
Fund may also borrow by entering into reverse repurchase agreements, which
would subject the Fund to additional market risk, as well as credit risk with
respect to the buyer of the securities under the agreement.
<PAGE>
Withholding and Other Taxes
Income and capital gains on securities held by the Fund may be
subject to withholding and other taxes imposed by Central European countries,
which will reduce the return to the Fund on those securities. The imposition
of such taxes and the rates imposed are subject to change. The benefits
allowed under the income tax treaty between the United States and the Czech
Republic will be available to the Fund if the Fund satisfies certain criteria.
There can be no assurance that all of these criteria will be satisfied. In
addition, the Treaty has only recently become effective, there has been no
legal or regulatory interpretation of the Treaty by the Czech authorities, and
there can be no assurance as to the interpretation of the Treaty by the Czech
authorities. Accordingly, there can be no assurance that the benefits of the
Treaty will be available to the Fund. See "Taxation--Czech Republic Taxes."
The Fund intends to elect, when eligible, to "pass-through" to the Fund's
shareholders, as a deduction or credit, the amount of foreign taxes paid by the
Fund. The taxes passed through to shareholders will be included in each
shareholder's income. Certain shareholders, including some non-U.S.
shareholders, will not be entitled to the benefit of a deduction or credit with
respect to foreign taxes paid by the Fund. Even if a shareholder is eligible
and elects to credit foreign taxes, such credit is subject to limitations
which, in particular, may affect the ability to credit capital gains taxes.
Other foreign taxes, such as transfer taxes, may be imposed on the Fund, but
would not give rise to a credit, or be eligible to be passed through to
shareholders.
Net Asset Value Discount
Shares of closed-end investment companies have in the past frequently
traded at a discount from their net asset values and initial offering price.
This characteristic of shares of a closed-end fund is a risk separate and
distinct from the risk that a fund's net asset value will decrease. The Fund
cannot predict whether its own shares will trade at, below or above net asset
value.
Non-Diversification
The Fund is classified as a non-diversified investment company under
the 1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the 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" and
"Investment Restrictions."
Anti-Takeover Provisions
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 holders of Common Stock to sell their shares at a
<PAGE>
premium over prevailing market prices. The Fund's Board of Directors has
determined that these provisions are in the best interests of shareholders
generally.
Operating Expenses
The Fund's annual operating expenses are higher than those of most
other U.S. investment companies, primarily because of additional time and
expense required of the Investment Manager, the Investment Adviser and the
Regional Adviser in pursuing the Fund's objective of long-term capital
appreciation through investing primarily in securities of Czech Issuers. The
operating expenses are, however, believed by the Investment Manager, the
Investment Adviser and the Regional Adviser to be comparable to expenses of
other closed-end management investment companies that invest primarily in the
securities of foreign issuers.
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The names of the directors and principal officers of the Fund are set
forth below, together with their positions and their principal occupations
during the past five years and, in the case of the directors, their positions
with certain other international organizations and publicly held companies.
<TABLE>
<CAPTION>
Principal Occupations
Name and Address Position with Fund Age and Other Affiliations
- ---------------- ------------------ --- ----------------------
<S> <C> <C> <C>
<F1>Alan H. Rappaport Chairman of the Board 42 Executive Vice President,
Advantage Advisers, Inc. of Directors Oppenheimer & Co., Inc. (1994- present);
Oppenheimer Tower Managing Director, Oppenheimer & Co., Inc.
One World Financial Center (1986-1994); President and Director,
200 Liberty Street Advantage Advisers, Inc. (1993-present);
New York, NY 10281 Executive Vice President, Advantage
Advisers, Inc. (1990-1993); Chairman of
the Board, President and Director, The
India Fund, Inc. and The Mexico Equity and
Income Fund, Inc.; Chairman of the Board
and Director, The Asia Tigers Fund, Inc.,
The Emerging Markets Income Fund II Inc.
and The Emerging Markets Floating Rate
Fund Inc., President and Director, Global
Partners Income Fund Inc. and The Emerging
Markets Income Fund Inc; Director,
Xiosinvest Management Co., S.A.; Member,
New York Stock Exchange Advisory Committee
on International Capital Markets.
<F1>Robert I. Kleinberg Director, President and 58 General Counsel (1980-present), Secretary
Advantage Advisers, Inc. Secretary (1981-present) and Executive Vice
Oppenheimer Tower President (1982-present), Oppenheimer &
One World Financial Center Co., Inc.; Director and Secretary,
200 Liberty Street Advantage Advisers, Inc. and Municipal
New York, NY 10281 Advantage Fund, Inc.; Secretary, The Asia
Tigers Fund, Inc. and The India Fund,
Inc.; Assistant Secretary, Municipal
Partners Fund Inc. and Municipal Partners
Fund II Inc.
<PAGE>
Paul Belica Director 74 Director, Deck House, Inc. (1976-present);
359 Cedar Drive West Director, Senior Vice President and
Briarcliff Manor, N.Y. 10510 Managing Director, Smith Barney, Harris
Upham & Co. (1977-1988); Director and
Treasurer, Isabela Home Inc., Isabela
Housing Company Inc., and Isabela Nursing
Home Inc. (1976-1987); Executive Director,
New York State Housing Finance Agency, New
York State Medical Care Facilities Finance
Agency, New York State Municipal Bond Bank
Agency, New York State Project Finance
Agency and Chairman, State of New York
Mortgage Agency (1961-1976); President,
Paul Belica and Company, Inc. (1976-1977);
Director, Dreyfus Tax Exempt Bond Fund,
Inc. (1976-1977) and Union Dime Savings
Bank (1976-1982); Project Manager Walsh
Construction Company (1951-1961); Member,
Ministry of Foreign Affairs of
Czechoslovakia in Prague and Czechoslovak
Embassy in Vienna (1945-1949).
Leslie H. Gelb Director 58 President, The Council on Foreign
The Council on Foreign Relations (1993-Present); Columnist (1991-
Relations 1993), Deputy Editorial Page Editor (1986-
58 East 68th Street 1990), and Editor, Op-Ed Page (1988-1990),
New York, New York 10021 The New York Times; Assistant Secretary of
State, Department of State (1977-1979);
Director of Policy Planning and Arms
Control, International Security Affairs,
Department of Defense (1967-1969);
Director, The Asia Tigers Fund, Inc., The
India Fund, Inc., The Emerging Markets
Income Fund Inc, The Emerging Markets
Income Fund II Inc, The Emerging Markets
Floating Rate Fund Inc. and Global
Partners Income Fund Inc.; Trustee, The
Carnegie Endowment for International
Peace; Trustee, The Carnegie Endowment for
International Peace; Trustee, Tufts
University; Board Member, Columbia
University School of International and
Public Affairs; Member, International
Institute for Strategic Studies, Advisory
Board Member, Center on Press, Politics
and Public Policy, Harvard University John
F. Kennedy School.
<PAGE>
Luis Rubio Director 40 President, Centro do Investigacion Para el
Centro de Investigacion Para el Desarrolo, A.C. (1981- present);
Desarrollo, A.C. Director, The Mexico Equity and Income
Jaime Balmes No. 11, D-2 Fund, Inc.; Planning Director, Citibank,
Los Morales Polanco N.A., Mexico (1979-1981); Advisor to
Mexico D.F. 11510 Secretary of the Treasury of Mexico (1980-
1981); President of the Association of
Political Risk Analysts, New York (1989-
1990); Adjunct Fellow, Center for
Strategic and International Studies,
Washington D.C. (1991-present); Member of
the Advisory Board of National Council of
Science and Technology of Mexico (1990-
present).
Wendy W. Luers Director 55 President, The Foundation for a Civil
Foundation for a Civil Society Society (a non-profit foundation which
1270 Avenue of the Americas sponsors various organizations and
Suite 609 programs in the Czech and the
New York, New York 10020 Slovak Republics) (1990-present); Director
of Special Projects at Human Rights Watch
(1987-1989); Member, National Council on
the Arts, and Board of the National
Endowment for the Arts (1988-present).
Dennis E. Feeney Treasurer 43 Executive Vice President (1995-present),
Oppenheimer & Co., Inc. Chief Financial Officer (1994-present) and
Oppenheimer Tower Controller (1986-1994), Oppenheimer & Co.,
One World Financial Center Inc.; Treasurer, The Asia Tigers Fund,
200 Liberty Street Inc., The India Fund, Inc. and The Mexico
New York, NY 10281 Equity and Income Fund, Inc.
Robert A. Blum Assistant Secretary 35 Managing Director, Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc. (1994-present); Senior Vice President,
Oppenheimer Tower Oppenheimer & Co., Inc. (1991-1994); Vice
One World Financial Center President, Oppenheimer & Co., Inc. (1989-
200 Liberty Street 1991); Associate, Fulbright & Jaworski
New York, NY 10281 (1984-1989); Director and Assistant
Secretary, The India Fund, Inc.;
Secretary, The Mexico Equity and Income
Fund, Inc; Assistant Secretary, The Asia
Tigers Fund, Inc. and Municipal Advantage
Fund Inc.
_______________
<FN>
<F1> Director who is an "interested person" of the Fund within the meaning
of the 1940 Act.
</TABLE>
<PAGE>
Directors who are not "interested persons" (as defined in the 1940
Act) of the Investment Manager, the Investment Adviser or the Regional Adviser
are paid a fee of $5,000 per year, plus up to $700 for every meeting of the
Board attended. All directors are reimbursed for travel and out-of-pocket
expenses incurred in connection with meetings of the Board of Directors.
The following table provides information concerning the approximate
compensation paid during the year ended August 31, 1995 to each director of the
Fund. The Fund does not provide any pension or retirement benefits to
directors. In addition, no remuneration was paid during the year ended
August 31, 1995 by the Fund to Messrs. Rappaport and Kleinberg, who as
employees of Advantage Advisers, Inc. and Oppenheimer & Co., Inc. are
interested persons as defined under the 1940 Act.
<TABLE>
<CAPTION>
Total Compensation Total Compensation
Aggregate from Other Funds from Other Funds Total Compensation
Compensation Co-Advised by Advised by from Other Funds
Name of Nominee from Fund Advantage and Quest Advantage Advised by Quest Total Compensation
- ------------------------ ------------ ------------------ ------------------ ------------------ ------------------
Directorships <F1> Directorships <F1> Directorships <F1> Directorships <F1>
<S> <C> <C> <C> <C> <C>
Leslie H. Gelb $6,650 $0 $24,148(6) $0 $30,798(7)
Wendy W. Luers 4,600 0 0 0 4,600(1)
Luis Rubio 6,750 0 9,500(1) 0 16,250(2)
Paul Belica 6,750 0 0 0 6,750(1)
_________________
<FN>
<F1> The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
</TABLE>
The officers of the Fund conduct and supervise the daily business
operations of the Fund, while the directors, in addition to their functions set
forth elsewhere under "Management of the Fund," review such actions and decide
on general policy.
The Fund's Board of Directors has an Executive Committee, which may
exercise the powers of the Board to conduct the current and ordinary business
of the Fund while the Board is not in session. The current members of the
Executive Committee are Alan H. Rappaport, Robert I. Kleinberg and any one of
Paul Belica, Leslie H. Gelb, Luis Rubio and Wendy W. Luers. The Fund also has
an Audit Committee composed currently of Paul Belica, Leslie H. Gelb, Luis
Rubio and Wendy W. Luers.
<PAGE>
Commencing with the first annual meeting of shareholders, the Board of
Directors will be divided into three classes, having terms of one, two and
three years, respectively. At the annual meeting of stockholders in each year
thereafter, the term of one class will expire and directors will be elected to
serve in that class for terms of three years.
The Articles of Incorporation and By-Laws of the Fund provide that the
Fund will indemnify its directors and officers and may indemnify employees or
agents of the Fund against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the Fund
to the fullest extent permitted by law. In addition, the Fund's Articles of
Incorporation provide that the Fund's directors and officers will not be liable
to shareholders for money damages, except in limited instances. However,
nothing in the Articles of Incorporation or 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 willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
At _________, 1995, directors and officers of the Fund as a group
owned beneficially and of record less than 1% of the outstanding shares of the
Fund. To the knowledge of the management of the Fund, no person owned of
record, or to the knowledge of management owned beneficially, more than 5% of
the Fund's outstanding shares at that date, except that Cede, a nominee for
participants in DTC, held of record ___________ shares, equal to ___% of the
outstanding shares of the Fund.
Investment Manager and Advisers
The Investment Manager is Advantage Advisers, Inc., the
Investment Adviser is Quest for Value Advisors and the Regional Adviser is BAI
Fondsberatung GmbH. Pursuant to a management agreement (the "Management
Agreement") between the Fund and the Investment Manager, the Investment Manager
supervises the Fund's investment program, including advising and consulting
with the Investment Adviser regarding the Fund's overall investment strategy,
and advising the Fund and the Investment Adviser regarding the Fund's use of
leveraging techniques, including the extent and timing of the Fund's use of
such techniques. In addition, the Investment Manager consults with the
Investment Adviser on a regular basis regarding the Investment Adviser's
decisions concerning the purchase, sale or holding of particular securities.
The Investment Manager also provides and procures provision of research and
statistical data to the Fund. In addition to the foregoing, the Investment
Manager monitors the performance of the Fund's outside service providers. The
Investment Manager pays the reasonable salaries and expenses of such of the
Fund's officers and employees and any fees and expenses of such of the Fund's
directors who are directors, officers or employees of the Investment Manager,
except that the Fund bears travel expenses or an appropriate portion thereof of
directors and officers of the Fund who are directors, officers or employees of
the Investment Manager, the Investment Adviser or the Regional Adviser to the
extent that such expenses relate to attendance at meetings of the Board of
Directors or any committees thereof.
Pursuant to an investment advisory agreement (the "Advisory
Agreement") among the Investment Manager, the Investment Adviser and, with
<PAGE>
respect to certain provisions, the Fund, the Investment Adviser will act,
pursuant to delegated authority, as an investment adviser of the Fund and is
responsible on a day-to-day basis for investing the Fund's portfolio in
accordance with its investment objective and policies. The Investment Adviser
has discretion over investment decisions for the Fund and, in that connection,
initiates purchase and sale orders for the Fund's portfolio securities. Mr.
Pierre Daviron is responsible for the day-to-day management of the Fund's
portfolio and is primarily responsible for investment decisions. Mr. Daviron
is a Senior Portfolio Manager of Quest for Value Advisors and is the portfolio
manager of the Quest for Value Global Equity Fund. Since 1993, Mr. Daviron has
been President and Chief Investment Officer of Oppenheimer Capital
International. From 1990 to 1992, Mr. Daviron was Chairman and Chief Executive
Officer of Indosuez Gartmore Asset Management. Prior thereto, Mr. Daviron was
affiliated with J.P. Morgan and Company, Inc. for 24 years, in such capacities
as head of international research, head of U.S. research and, most recently,
Managing Director of Mergers and Acquisitions, with responsibility for Europe.
In addition, the Investment Adviser makes available research and statistical
data to the Fund. The Investment Adviser pays the reasonable salaries and
expenses of such of the Fund's officers and employees who are directors,
officers or employees of the Investment Adviser.
Pursuant to an advisory agreement (the "Regional Advisory
Agreement") between the Investment Manager and the Regional Adviser, the
Regional Adviser acts, pursuant to delegated authority, as an adviser to the
Investment Adviser with respect to the Fund and furnishes advice and makes
recommendations to the Investment Adviser regarding the purchase, sale or
holding of particular Czech and other Central European securities and provides
research and statistical data to the Investment Adviser. The Regional Adviser
is responsible, nor has discretionary authority, for the actual investment
decisions of the Fund.
Investment Manager. The Investment Manager is a subsidiary of
Oppenheimer & Co., Inc., which has been engaged in the management of investment
funds for more than 36 years. The Investment Manager serves as investment
manager or investment adviser for eleven registered investment companies with
aggregate assets of approximately $___ billion as of September 30, 1995. The
Investment Manager is a registered investment adviser under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). Oppenheimer & Co., Inc.
is an indirect wholly owned subsidiary of Oppenheimer Group, Inc. The business
address of the Investment Manager is Oppenheimer Tower, One World Financial
Center, 200 Liberty Street-38th Floor, New York, New York 10281.
Advisers. The Investment Adviser is an affiliate of
Oppenheimer & Co., Inc. The Investment Adviser serves as investment adviser or
sub-adviser for 38 registered investment company portfolios offered under the
Quest for Value name with aggregate assets of approximately $6.6 billion as of
September 30, 1995. The Investment Adviser is the investment company
management subsidiary of Oppenheimer Capital, which has been involved in
investment management for more than 26 years and which serves as investment
adviser for accounts with assets of approximately $37 billion (including the
assets under management by the Investment Adviser). The Investment Adviser is
a registered investment adviser under the Advisers Act. The Investment Adviser
is a general partnership of which Oppenheimer Capital, an investment management
<PAGE>
firm, holds a 99% interest and Oppenheimer Financial Corp., a holding company,
holds a 1% interest. Oppenheimer Financial Corp. holds a 33% interest in
Oppenheimer Capital, a registered investment adviser, and Oppenheimer Capital,
L.P., a Delaware limited partnership whose units are traded on the New York
Stock Exchange and of which Oppenheimer Financial Corp. is the sole general
partner, owns the remaining 67% interest. The business address of the
Investment Adviser is Oppenheimer Tower, One World Financial Center, 200
Liberty Street, New York, New York 10281.
BAI Fondsberatung GmbH is a subsidiary of Bank Austria
Investment Bank AG which is, in turn, a majority-owned subsidiary of Bank
Austria Aktiengesellschaft. BAI Fondsberatung GmbH is a corporation organized
under the laws of Austria. Bank Austria Aktiengesellschaft is the largest bank
in Austria and, as of December 31, 1994, had total assets of approximately $___
billion. The principal businesses of Bank Austria Investment Bank AG are
investment banking, securities research, securities trading and investment
management. As of December 31, 1994, Bank Austria Aktiengesellschaft and its
affiliates had approximately $__ billion in assets under management. The
Regional Adviser is registered as an investment adviser under the Advisers Act.
The Regional Adviser had not previously served as an investment adviser to an
investment company registered under the 1940 Act. The Regional Adviser is a
wholly owned subsidiary of Bank Austria Investment Bank AG. Bank Austria
Aktiengesellschaft, Grazer Wechselseitige Versicherungs AG and Wiener
Staedtische Versicherungs AG own 71%, 10% and 5%, respectively, of the shares
of Bank Austria Investment Bank AG. An internal reorganization is contemplated
under which a portion of the outstanding shares of Bank Austria Investment Bank
AG would be transferred to an entity under common control with Bank Austria
Investment Bank AG. Bank Austria Aktiengesellschaft would remain the largest
shareholder of Bank Austria Investment Bank AG, and the reorganization would
not result in a change in the management of Bank Austria Investment Bank AG or
the Regional Adviser. Anteilsverwaltung-Zentralsparkasse, the Republic of
Austria and Wiener Staedtische Versicherungs AG own 45.6%, 20.4% and 8.5%,
respectively, of the shares of Bank Austria Aktiengesellschaft. The business
address of the Regional Adviser is Burgring 3, 1010 Vienna, Austria.
Compensation and Expenses
As compensation for their services, the Investment Manager
receives from the Fund monthly fees at an annual rate of 1.00% of the Fund's
average weekly net assets and the Investment Adviser and the Regional Adviser
each receive from the Investment Manager monthly fees at an annual rate of
0.40% and 0.20%, respectively, of the Fund's average weekly net assets. For
the period from the Fund's commencement of investment operations on September
30, 1994 to __________, 1995, the Investment Manager earned a fee of
$_________, which was payable by the Fund, of which the Investment Manager paid
$_______ to the Investment Adviser and $_______ to the Regional Adviser. The
Fund pays or causes to be paid all of its expenses, except for the expenses
borne by the Investment Manager pursuant to the Management Agreement, the
Investment Adviser pursuant to the Advisory Agreement and the Regional Adviser
pursuant to the Regional Advisory Agreement, respectively, including, among
other things: organizational and offering expenses (which includes
out-of-pocket expenses, but not overhead or employee costs, of the Investment
Manager, the Investment Adviser and the Regional Adviser); expenses for legal,
<PAGE>
accounting and auditing services; taxes and governmental fees; dues and
expenses incurred in connection with membership in investment company
organizations; fees and expenses incurred in connection with listing the Fund's
shares on any stock exchange; costs of printing and distributing shareholder
reports, proxy materials, prospectuses, stock certificates and distributions of
dividends; charges of the Fund's custodians, sub-custodians, registrars,
transfer agents, dividend disbursing agents and dividend reinvestment plan
agents; payment for portfolio pricing services to a pricing agent, if any;
registration and filing fees of the U.S. Securities and Exchange Commission
(the "SEC"); expenses of registering or qualifying securities of the Fund for
sale in the various states; freight and other charges in connection with the
shipment of the Fund's portfolio securities; fees and expenses of
non-interested directors or non-interested members of any advisory or
investment board, committee or panel of the Fund; salaries of shareholder
relations personnel; costs of shareholders meetings; insurance; interest;
brokerage costs; and litigation and other extraordinary or nonrecurring
expenses.
The Fund's annual operating expenses are higher than those of
most other U.S. investment companies, primarily because of additional time and
expense required of the Investment Manager, the Investment Adviser and the
Regional Adviser in pursuing the Fund's objective of long-term capital
appreciation through investing primarily in securities of Czech Issuers. The
operating expenses are, however, believed by the Investment Manager, the
Investment Adviser and the Regional Adviser to be comparable to expenses of
other closed-end management investment companies that invest primarily in the
securities of foreign issuers. Expenses of the Offer will be charged to
capital. For the period from the Fund's commencement of investment operations
on September 30, 1994 to __________, 1995, the Fund's expenses (exclusive of
amortization of organization expenses) were $______.
Duration and Termination; Non-Exclusive Services
Unless earlier terminated as described below, each of the
Management Agreement, the Advisory Agreement and the Regional Advisory
Agreement will remain in effect until September 22, 1996, and from year to year
thereafter if approved annually (i) by a majority of the non-interested
directors of the Fund and (ii) by the Board of Directors of the Fund or by a
majority of the outstanding voting securities of the Fund. The Management
Agreement may be terminated without penalty by the Fund's Board of Directors or
by vote of a majority of the outstanding voting securities of the Fund or upon
60 days' written notice by the Investment Manager and will terminate in the
event it is assigned (as defined in the 1940 Act). The Advisory Agreement may
be terminated without penalty by the Fund's Board of Directors or by vote of a
majority of the outstanding voting securities of the Fund or upon 60 days'
written notice by the Investment Manager or the Investment Adviser and will
terminate in the event it is assigned (as defined in the 1940 Act). The
Regional Advisory Agreement may be terminated without penalty by the Fund's
Board of Directors or by a vote of a majority of the outstanding voting
securities of the Fund or upon 60 days' written notice by the Investment
Manager or the Regional Adviser and will terminate in the event it is assigned
(as defined in the 1940 Act).
<PAGE>
The services of the Investment Manager, the Investment Adviser
and the Regional Adviser are not deemed to be exclusive, and nothing in the
relevant service agreements prevents any of them or their affiliates from
providing similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those
of the Fund) or from engaging in other activities.
Administrator
Oppenheimer & Co., Inc. serves as the Fund's administrator
(the "Administrator") pursuant to an agreement with the Fund (the
"Administration Agreement"). As compensation for its services, the
Administrator receives from the Fund monthly fees at an annual rate of 0.20% of
the Fund's average weekly net assets. For the period from the Fund's
commencement of investment operations on September 30, 1994 to __________,
1995, the Administrator earned a fee of $_________, which was payable by the
Fund. The Administrator's business address is Oppenheimer Tower, One World
Financial Center, 200 Liberty Street, New York, New York 10281.
The Administrator performs various administrative services,
including providing the Fund with the services of persons to perform
administrative and clerical functions, maintenance of the Fund's books and
records, preparation of various filings, reports, statements and returns filed
with government authorities, and preparation of financial information for the
Fund's proxy statements and semiannual and annual reports to shareholders. The
Administrator subcontracts certain of these services to PFPC Inc.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any brokers or dealers
in the execution of transactions in portfolio securities. Subject to policies
established by the Fund's Board of Directors, the Investment Adviser is
primarily responsible for the Fund's portfolio decisions and the initiation of
the Fund's portfolio transactions.
In placing orders, it is the policy of the Fund to obtain the
best results taking into account the general execution and operational
facilities of the broker or dealer, the type of transaction involved and other
factors such as the risk of the broker or dealer in positioning the securities
involved. While generally the best price is sought in placing orders, the Fund
may not necessarily be paying the lowest price available. Securities firms
which provide supplemental research to the Investment Adviser or the Regional
Adviser may receive orders for transactions by the Fund. With respect to
brokerage transactions (but not principal transactions), as contemplated by
Section 28(e) of the U.S. Securities Exchange Act of 1934, the commissions paid
may be higher than those which the Fund might otherwise have paid to another
broker if those services had not been provided. Information so received will
be in addition to and not in lieu of the services required to be performed by
the Investment Adviser under the Advisory Agreement and the Regional Adviser
under the Regional Advisory Agreement, and the expenses of the Investment
Adviser or the Regional Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. Research services furnished to
the Investment Adviser or the Regional Adviser by brokers who effect securities
transactions for the Fund may be used by the Investment Adviser or the Regional
<PAGE>
Adviser in servicing other investment companies and accounts which they manage.
Similarly, research services furnished to the Investment Adviser or the
Regional Adviser by brokers who effect securities transactions for other
investment companies and accounts which the Investment Adviser or the Regional
Adviser manage may be used in servicing the Fund. Not all of these research
services are used by the Investment Adviser or Regional Adviser in managing any
particular account, including the Fund.
The Fund anticipates that, in connection with the execution of
portfolio transactions on its behalf, certain Underwriters may from time to
time act as a broker or dealer. In addition, affiliated persons (as such term
is defined in the 1940 Act) of the Fund, or affiliated persons of such persons,
may from time to time be selected to perform brokerage services for the Fund,
subject to the considerations discussed above, but are prohibited by the 1940
Act from dealing with the Fund as principal in the purchase or sale of
securities. In order for such an affiliated person to be permitted to effect
any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by such affiliated person must be reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. This standard would allow such an affiliated person to receive no more
than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. The Fund is generally
prohibited by the 1940 Act from purchasing securities in offerings in which
Oppenheimer & Co., Inc. or Bank Austria Investment Bank AG or any of their
respective affiliates acts as an underwriter.
Investment decisions or recommendations for the Fund are made
independently from those for other funds and accounts advised or managed by the
Investment Adviser or the Regional Adviser. Such other funds and accounts may
also invest in the same securities as the Fund. If those funds or accounts are
prepared to invest in, or desire to dispose of, the same security at the same
time as the Fund, however, transactions in such securities will be made,
insofar as feasible, for the respective funds and accounts in a manner deemed
equitable to all. In some cases, this procedure may adversely affect the size
of the position obtained for or disposed of by the Fund or the price paid or
received by the Fund. In addition, because of different investment objectives,
a particular security may be purchased for one or more funds or accounts when
one or more funds or accounts are selling the same security.
Although the Advisory Agreement does not contain any
restrictions on portfolio turnover, it is not the Fund's policy to engage in
transactions with the objective of seeking profits from short-term trading. It
is expected that the annual portfolio turnover rate of the Fund will not exceed
100%. The portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities by the average monthly value of the
Fund's portfolio securities. For purposes of this calculation, portfolio
securities exclude all securities having a maturity when purchased of one year
or less. Higher portfolio turnover involves correspondingly higher transaction
costs and may impact the ability of the Fund to comply with the requirements of
Subchapter M of the Code. The Fund's portfolio turnover rate for the fiscal
year ended August 31, 1995 was ___%. See "Taxation -- The Fund."
<PAGE>
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
The Fund intends to distribute annually to shareholders
substantially all of its net investment income, and to distribute any net
realized capital gains at least annually. Net investment income for this
purpose is income other than net realized long- and short-term capital gains
net of expenses.
Pursuant to the Plan, shareholders whose shares of Common
Stock are registered in their own names will be deemed to have elected to have
all distributions automatically reinvested by State Street Bank and Trust
Company (the "Plan Agent") in Fund shares pursuant to the Plan, unless such
shareholders elect to receive distributions in cash. Shareholders who elect to
receive distributions in cash will receive all distributions in cash paid by
check in dollars mailed directly to the shareholders by State Street Bank and
Trust Company as dividend paying agent. In the case of shareholders, such as
banks, brokers or nominees, that hold shares for others who are beneficial
owners, the Plan Agent administers the Plan on the basis of the number of
shares certified from time to time by the shareholders as representing the
total amount registered in such shareholders' names and held for the account of
beneficial owners that have not elected to receive distributions in cash.
Investors that own shares registered in the name of a bank, broker or other
nominee should consult with such nominee as to participation in the Plan
through such nominee, and may be required to have their shares registered in
their own names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in
administering the Plan. If the directors of the Fund declare an income
dividend or a capital gains distribution payable either in the Fund's Common
Stock or in cash, nonparticipants in the Plan will receive cash and
participants in the Plan will receive Common Stock, to be issued by the Fund or
purchased by the Plan Agent in the open market, as provided below. If the
market price per share on the valuation date equals or exceeds net asset value
per share on that date, the Fund will issue new shares to participants at net
asset value; provided, however, if the net asset value is less than 95% of the
market price on the valuation date, then such shares will be issued at 95% of
the market price. The valuation date will be the dividend or distribution
payment date or, if that date is not a New York Stock Exchange trading day, the
next preceding trading day. If net asset value exceeds the market price of
Fund shares at such time, or if the Fund should declare an income dividend or
capital gains distribution payable only in cash, the Plan Agent will, as agent
for the participants, buy Fund shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts on, or shortly after, the
payment date. If, before the Plan Agent has completed its purchases, the
market price exceeds the net asset value of a Fund share, the average per share
purchase price paid by the Plan Agent may exceed the net asset value of the
Fund's shares, resulting in the acquisition of fewer shares than if the
distribution had been paid in shares issued by the Fund on the dividend payment
date. Because of the foregoing difficulty with respect to open-market
purchases, the Plan provides that if the Plan Agent is unable to invest the
full dividend amount in open-market purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period, the
<PAGE>
Plan Agent will cease making open-market purchases and will receive the
uninvested portion of the dividend amount in newly issued shares at the close
of business on the last purchase date.
Participants have the option of making additional cash
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 such funds
received from participants to purchase Fund shares in the open market on or
about September 15. Any voluntary cash payment received more than 30 days
prior to this date will be returned by the Plan Agent, and interest will not be
paid on any uninvested cash payment. 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 an applicable purchase date
specified above. A participant may withdraw a voluntary cash payment by
written notice, if the notice is received by the Plan Agent not less than 48
hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan
and furnishes written confirmations of all transactions in an account,
including information needed by shareholders for personal and tax records.
Shares in the account of each Plan participant will be held by the Plan Agent
in the name of the participant, and each shareholder's proxy will include those
shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends
or capital gains distributions or voluntary cash payments. The Plan Agent's
fees for the reinvestment of dividends and capital gains distributions and
voluntary cash payments will be paid by the Fund. There will be no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable either in stock or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends and capital gains distributions and
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 receipt of dividends and distributions under the Plan will
not relieve participants of any income tax which may be payable on such
dividends or distributions. See "Taxation -- Shareholders."
Experience under the Plan may indicate that changes in the
Plan are desirable. Accordingly, the Fund and the Plan Agent reserve the right
to terminate the Plan as applied to any voluntary cash payments made and any
dividend or distribution paid subsequent to notice of the termination sent to
members of the Plan at least 30 days before the record date for such dividend
or distribution. The Plan also may be amended by the Fund or the Plan Agent,
but (except when necessary or appropriate to comply with applicable law, rules
or policies of a regulatory authority) only by at least 30 days' written notice
to participants in the Plan. All correspondence concerning the Plan should be
directed to the Plan Agent at P.O. Box 8209, Boston, Massachusetts 02266-8209.
<PAGE>
TAXATION
The following is a general summary of certain U.S. federal
income tax considerations affecting the Fund and U.S. shareholders. No attempt
is made to present a detailed explanation of all federal, state, local and
foreign income tax considerations, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are
urged to consult their own tax advisors regarding an investment in the Fund.
The Fund
The Fund intends to qualify and elect to be treated as a
"regulated investment company" for federal income tax purposes under the Code.
In order to so qualify, the Fund must, among other things, (a) derive in each
taxable year at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities, gains from the sale or other
disposition of stock or securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies (including, but not limited to, gains from options, futures or
forward contracts); (b) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of any of the following that are held
for less than three months (the "30% limitation"): (i) stock or securities,
(ii) options, futures or forward contracts, or (iii) foreign currencies (or
foreign currency options, futures or forward contracts) that are not directly
related to its principal business of investing in stock or securities (or
options and futures with respect to stocks or securities); and (c) diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Fund's assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies,
and other securities which, with respect to any one issuer, do not represent
more than 5% of the value of the Fund's assets nor more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of the
Fund's assets is invested in the securities of any issuer (other than U.S.
Government securities or the securities of other regulated investment
companies).
If the Fund qualifies as a regulated investment company and
distributes to its shareholders at least 90% of its investment company taxable
income (including any short-term capital gain but not net capital gain, which
is the excess of net long-term capital gains over net short-term capital
losses), then the Fund will not be subject to federal income tax on the income
so distributed. However, the Fund would be subject to corporate income tax at
a rate of 35% on any undistributed income. If in any year the Fund should fail
to qualify as a regulated investment company, the Fund would be subject to
federal tax in the same manner as an ordinary corporation, and distributions to
shareholders would be taxable to such holders as ordinary income to the extent
of the earnings and profits of the Fund. Distributions in excess of earnings
and profits will be treated as a tax-free return of capital, to the extent of a
holder's basis in its shares, and any excess, as a long- or short-term capital
gain. In addition, the Fund will be subject to a nondeductible 4% excise tax
on the amount by which the aggregate income it distributes in any calendar year
is less than the sum of: (a) 98% of the Fund's ordinary income for such
calendar year; (b) 98% of the excess of capital gains over capital losses for
<PAGE>
the one- year period ending on October 31 of each year; and (c) 100% of the
undistributed ordinary income and gains from prior years.
The Fund intends to distribute sufficient income so as to
avoid both corporate income tax and the excise tax.
The Fund may engage in hedging or derivatives transactions
involving foreign currencies, forward contracts, options and futures contracts
(including options and futures contracts of foreign currencies). See
"Additional Investment Activities -- Hedging and Derivatives." Such
transactions 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
(that is, may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund and defer recognition of certain
of the Fund's losses. These rules could therefore affect the character, amount
and timing of distributions to shareholders. In addition, these provisions (1)
will require the Fund to "mark-to-market" certain types of positions in its
portfolio (that is, treat them as if they were closed out) and (2) may cause
the Fund to recognize income without receiving cash with which to pay dividends
or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. The extent to which the
Fund may be able to use such hedging techniques and continue to qualify as a
regulated investment company may be limited by the 30% limitation discussed
above. The Fund intends to monitor its transactions, will make the appropriate
tax elections and will make the appropriate entries in its books and records
when it acquires any forward contract, option, futures contract, or hedged
investment in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
The Fund maintains accounts and calculates income by reference
to the U.S. Dollar for U.S. federal income tax purposes. Investments generally
will be maintained and income therefrom calculated by reference to certain
foreign currencies and such calculations will not necessarily correspond to the
Fund's distributable income and capital gains for U.S. federal income tax
purposes as a result of fluctuations in currency exchange rates.
Furthermore, exchange control regulations may, in certain
circumstances, restrict the ability of the Fund to repatriate investment income
or the proceeds of sales of securities. These restrictions and limitations may
limit the Fund's ability to make sufficient distributions to satisfy the 90%
distribution requirement and avoid the 4% excise tax.
The tax treatment of certain investments of the Fund is not
free from doubt and it is possible that an Internal Revenue Service (the "IRS")
examination of the issuers of such securities or of the Fund could result in
adjustments to the income of the Fund. An upward adjustment by the IRS to the
income of the Fund may result in the failure of the Fund to satisfy the 90%
distribution requirement described herein necessary for the Fund to maintain
its status as a regulated investment company under the Code. In such event,
the Fund may be able to make a "deficiency dividend" distribution to its
shareholders with respect to the year under examination to satisfy this
requirement. Such distribution will be taxable as a dividend to the
shareholders receiving the distribution (whether or not the Fund has sufficient
current or accumulated earnings and profits for the year in which such
<PAGE>
distribution is made) in the taxable year in which such dividends are received.
A downward adjustment by the IRS to the income of the Fund may cause a portion
of the previously made distribution with respect to the year under examination
not to be treated as a dividend. In such event, the portion of distributions
to each shareholder not treated as a dividend would be recharacterized as a
return of capital and reduce the shareholder's basis in the shares held at the
time of the previously made distributions. Accordingly, this reduction in
basis could cause a shareholder to recognize additional gain upon the sale of
such shareholder's shares.
The Fund intends to make investments which may, for federal
income tax purposes, constitute investments in shares of foreign corporations.
If the Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFICs"), the Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of the shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either the Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If the Fund were to
invest in a PFIC and (if the Fund received the necessary information available
from the PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and
calendar year distribution requirements described above.
Legislation pending in the U.S. Congress would unify and, in
certain cases, modify the anti-deferral rules contained in various provisions
of the Code, including the provisions dealing with PFICs, related to the
taxation of U.S. shareholders of foreign corporations. In the case of a
passive foreign company, as defined in the proposed legislation ("PFC"), having
"marketable stock," the proposed legislation would require U.S. shareholders,
such as the Fund, owning less than 25% of a PFC that is not U.S.-controlled to
mark-to-market the PFC stock annually, unless the shareholders elected to
include in income currently their proportionate shares of the PFC's income and
gain. Otherwise, U.S. shareholders would be treated substantially the same as
under current law. Special rules applicable to mutual funds would classify as
"marketable stock" all stock in PFCs held by the Fund; however, the Fund would
not be liable for tax on income from PFCs that is distributed to its
shareholders. It is unclear if or when the proposed legislation will become
law and if it is enacted, the form it will take. Moreover, on April 1, 1992
proposed regulations of the IRS were published providing a mark-to-market
election for regulated investment companies that would have effects similar to
the proposed legislation. The IRS subsequently issued a notice indicating that
final regulations will provide that regulated investment companies may elect
the mark-to-market election for tax years ending after March 31, 1992 and
before April 1, 1993. Whether and to what extent the notice will apply to
taxable years of the Fund is unclear.
<PAGE>
U.S. Shareholders
Distributions. Distributions to shareholders of net
investment income will be taxable as ordinary income whether paid in cash or
reinvested in additional shares. It is not anticipated that such dividends, if
any, will qualify for the dividends-received deduction generally available for
corporate shareholders under the Code. Shareholders receiving distributions
from the Fund in the form of additional shares pursuant to the dividend
reinvestment plan will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the additional
shares on the date of such a distribution. Consequently, if the number of
Shares distributed reflects a market premium, the amount distributed to
shareholders participating in the plan would exceed the amount of the cash
distributed to nonparticipating shareholders.
Distributions to shareholders of net capital gain that are
designated by the Fund as "capital gains dividends" will be taxable as
long-term capital gains, whether paid in cash or additional shares, regardless
of how long the shares have been held by such shareholders. Capital gain
dividends will not be eligible for the dividends-received deduction. The
current maximum federal income tax rate imposed on individuals with respect to
long-term capital gains is limited to 28%, whereas the current maximum federal
income tax rate imposed on individuals with respect to ordinary income (and
short-term capital gains, which are taxed at the same rates as ordinary income)
is 39.6%. With respect to corporate taxpayers, long-term capital gains are
currently taxed at the same federal income tax rates as ordinary income and
short-term capital gains.
Dividends and distributions by the Fund are generally taxable
to the shareholders at the time the dividend or distribution is made (even if
paid or reinvested in additional shares). Any dividend declared by the Fund in
October, November or December of any calendar year, however, which is payable
to shareholders of record on a specified date in such a month and which is not
paid on or before December 31 of such year will be treated as received by the
shareholders as of December 31 of such year, provided that the dividend is paid
during January of the following year.
A notice detailing the tax status of dividends and
distributions paid by the Fund will be mailed annually to the shareholders of
the Fund.
Dispositions and Repurchases. Gain or loss, if any,
recognized on the sale or other disposition of shares of the Fund will be taxed
as capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or
loss if the shares have been held for more than one year. If a shareholder
sells or otherwise disposes of a share of the Fund before holding it for more
than six months, any loss on the sale or other disposition of such share shall
be treated as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder with respect to such share. A loss
realized on a sale or exchange of shares may be disallowed if other shares are
acquired (whether under the Plan or otherwise) within a 61-day period beginning
30 days before and ending 30 days after the date that the shares are disposed
of.
<PAGE>
A repurchase by the Fund of shares generally will be treated
as a sale of the shares by a shareholder provided that after the repurchase the
shareholder does not own, either directly or by attribution under Section 318
of the Code, any shares. If, after a repurchase a shareholder continues to
own, directly or by attribution, any shares, it is possible that any amounts
received in the repurchase by such shareholder will be taxable as a dividend to
such shareholder, and there is a risk that shareholders 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.
Foreign Taxes. The Fund may be subject to withholding and
other taxes imposed by Central European countries with respect to dividends,
interest, capital gains and other income. If the Fund qualifies as a regulated
investment company, if certain distribution requirements are satisfied and if
more than 50% in 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 governmental issuers, the
Fund may elect to treat any foreign income taxes paid by it that can be treated
as income taxes under U.S. income tax principles as paid by its shareholders.
The Fund expects to qualify for and may make this election. For any year that
the Fund makes such an election, an amount equal to the foreign income taxes
paid by the Fund that can be treated as income taxes under U.S. income tax
principles will be included in the income of its shareholders and each
shareholder will be entitled (subject to certain limitations) to credit the
amount included in his income against his U.S. tax liabilities, if any, or to
deduct such amount from his U.S. taxable income, if any. Shortly after any
year for which it makes such an election, the Fund will report to its
shareholders, in writing, the amount per share of such foreign income taxes
that must be included in each shareholder's gross income and the amount that
will be available for deductions or credit. In general, a shareholder may
elect each year whether to claim deductions or credits for foreign taxes. No
deductions for foreign taxes may be claimed, however, by non-corporate
shareholders (including certain foreign shareholders as described below) who do
not itemize deductions. If a shareholder elects to credit foreign taxes, the
amount of credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken that the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income.
Generally, for this purpose, capital gains will not be treated as foreign
source income and thus, the credit may not be available for capital gains taxes
unless the shareholder has other foreign source income. This limitation must
be applied separately to certain categories of income and the related foreign
taxes.
`
Backup Withholding. The Fund may be required to withhold
federal income tax at a rate of 31% ("backup withholding") from dividends and
redemption proceeds paid to non-corporate shareholders. This tax may be
withheld from dividends if (i) the shareholder fails to furnish the Fund with
the shareholder's correct taxpayer identification number, (ii) the IRS notifies
the Fund that the shareholder has failed to report properly certain interest
and dividend income to the IRS and to respond to notices to that effect, or
(iii) when required to do so, the shareholder fails to certify that he or she
<PAGE>
is not subject to backup withholding. Redemption proceeds may be subject to
withholding under the circumstances described in (i) above. 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.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the United States,
is a non-resident alien individual, a foreign trust or estate, a foreign
corporation, or a foreign partnership ("foreign shareholder"), depends on
whether the income from the Fund is "effectively connected" with a U.S. trade
or business carried on by such shareholder. Ordinarily, income from the Fund
will not be treated as so "effectively connected."
Income not Effectively Connected. If the income from the Fund
is not "effectively connected" with a U.S. trade or business carried on by the
foreign shareholder, distributions of investment company taxable income will be
subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions. Furthermore, foreign shareholders may be
subject to U.S. tax at the rate of 30% (or lower treaty rate) of the income
resulting from the Fund's election to treat any foreign taxes paid by it as
paid by its shareholders, but will not be able to claim a credit or deduction
for the foreign taxes as having been paid by them.
Distributions of capital gain dividends to a non-resident
alien who is present in the United States for fewer than one hundred
eighty-three days during the taxable year will not be subject to the 30% U.S.
withholding tax. An alien individual who is physically present in the United
States for more than one hundred eighty-two days during the taxable year
generally is treated as a resident for U.S. federal income tax purposes, in
which case he or she will be subject to U.S. federal income tax on his or her
worldwide income including ordinary income and capital gain dividends at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S.
withholding tax. In the case of a foreign shareholder who is a non-resident
alien individual, the Fund may be required to withhold U.S. federal income tax
at a rate of 31% of distributions of capital gain dividends under the backup
withholding system unless the foreign shareholder makes required certifications
to the Fund on a properly completed U.S. Internal Revenue Service Form W-8.
The amount so withheld could be applied as a credit against any U.S. tax due
from the shareholder or, if no tax is due, refunded pursuant to a claim
therefor properly filed on an income tax return.
Income Effectively Connected. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a foreign
shareholder, then distributions of investment company taxable income and net
capital gains, and any gains realized upon the sale of Shares or the Fund, will
be subject to U.S. federal income tax at the graduated rates applicable to U.S.
citizens, residents and domestic corporations. Such shareholders may also be
subject to the 30% branch profits tax.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are advised to consult their own tax
<PAGE>
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
Czech Republic Taxes
The tax treaty entered into between the United States and the
Czech Republic (the "Treaty") provides protection from Czech taxation in
certain circumstances. The benefits allowed under the Treaty will apply,
without limitation, if the Fund is a tax resident in the United States, does
not have a permanent establishment in the Czech Republic and, with respect to
the Fund's shares, there is "substantial and regular trading on a recognized
securities exchange."
In relevant part, the following benefits are provided under
the Treaty:
(i) dividends received from Czech securities will be
generally subject to a withholding tax at a rate of 15%, and at a
lesser rate of 5% if the holder has a beneficial ownership interest of
10% or more of the voting shares of the issuer;
(ii) interest received from such investments will not be
subject to withholding taxes in the Czech Republic;
(iii) capital gains of the Fund from Czech securities will
not be taxed in the Czech Republic.
Based upon current circumstances, the Fund believes it is
entitled to the benefits of the Treaty and accordingly recognizes withholding
taxes based upon applicable Treaty rates. However, there is no history of
regulatory or legal interpretation of the Treaty by Czech authorities and there
can be no assurance the benefits of the Treaty will be available to the Fund.
If the benefits of the Treaty were not available to the Fund, the Fund would be
subject to tax under Czech domestic tax law which provides that the sale of
shares and securities in Czech corporations is subject to Czech taxation at the
rate of 41%. In addition, the Fund would be subject to withholding of 25% on
dividend and interest payments received with respect to Czech investments.
NET ASSET VALUE
Net asset value is determined no less frequently than weekly,
on the last business day of each week and at such other times as the Board of
Directors may determine, by dividing the value of the net assets of the Fund
(the value of its assets less its liabilities including borrowings, exclusive
of capital stock and surplus) by the total number of shares of Common Stock
outstanding. In valuing the Fund's assets, all securities for which market
quotations are readily available are valued (i) at the last sale price prior to
the time of determination if there was a sale on the date of determination,
(ii) at the mean between the last current bid and asked prices if there was no
sales price on such date and bid and asked quotations are available, and (iii)
at the bid price if there was no sales price on such date and only bid
quotations are available. In instances where a price determined above is
deemed not to represent fair market value, the price is determined in such
manner as the Board of Directors may prescribe. Securities may be valued by
independent pricing services which use prices provided by market-makers or
<PAGE>
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term investments having a
maturity of 60 days or less are valued at amortized cost, unless the Board of
Directors determines that such valuation does not constitute fair value. In
valuing assets, prices denominated in foreign currencies are converted to U.S.
dollar equivalents at the current exchange rate. Securities for which reliable
quotations or pricing services are not readily available and all other
securities and assets are valued at fair value as determined in good faith by,
or under procedures established by, the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
Common Stock
The authorized capital stock of the Fund is 100,000,000 shares
of Common Stock ($.001 par value). The Common Stock, when issued, will be
fully paid and nonassessable. All shares of Common Stock are equal as to
dividends, distributions and voting privileges. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each
share of Common Stock is entitled to its proportion of the Fund's assets after
debts and expenses. There are no cumulative voting rights for the election of
directors.
Set forth below is information with respect to the Common
Stock as of _____________, 1995:
<TABLE>
<CAPTION>
Amount Held by the
Title of Issue Authorized Outstanding Fund or For its Account
-------------- ----------- ----------- ------------------------
<S> <C> <C> <C>
Common Stock, $.001 par
value per share . . . . . . . 100,000,000 shares 4,407,134 shares 0
</TABLE>
The Fund has no present intention of offering additional
shares of its Common Stock other than pursuant to the Offer. Other offerings
of its Common Stock, if made, will require approval of the Fund's Board of
Directors. Any additional offering will be subject to the requirements of the
1940 Act that shares of Common Stock may not be sold at a price below the then
current net asset value (exclusive of underwriting discounts and commissions)
except in connection with an offering to existing shareholders or with the
consent of a majority of the Fund's outstanding Common Stock. The Board of
Directors has authorized the officers of the Fund in their discretion, subject
to compliance with the 1940 Act and other applicable law, to purchase in the
open market up to 5% of the outstanding Common Stock in the event that the
Common Stock trades at a discount to net asset value. There is no assurance
that any such open market purchases will be made and such authorization may be
terminated at any time.
<PAGE>
Preferred Stock
The Fund's Articles of Incorporation provide that the Board of
Directors may classify or reclassify any authorized but unissued shares of
capital stock into one or more additional or other classes or series, with
rights as determined by the Board of Directors, by action by the Board of
Directors without the approval of the holders of Common Stock. Holders of
Common Stock have no preemptive right to purchase any shares of preferred stock
that might be issued. The terms of any preferred stock, including its dividend
rate, liquidation preference and redemption provisions will be determined by
the Board of Directors (subject to applicable law and the Fund's Articles of
Incorporation). The Fund has no present intention of offering shares of
preferred stock.
Future Actions Relating to a Discount in the Price of the Fund's Shares of
Common Stock
Shares of closed-end investment companies frequently trade at
discounts from net asset value. The Fund cannot predict whether its shares of
Common Stock will trade above, at or below net asset value. The market price
of the Fund's shares of Common Stock will be determined by, among other things,
the supply and demand for the Fund's shares, the Fund's investment performance
and investor perception of the Fund's overall attractiveness as an investment
as compared with alternative investments. If, at any time after September
1996, shares of the Fund's Common Stock publicly trade for a substantial period
of time at a substantial discount from the Fund's then current net asset value
per share, the Fund's Board of Directors will consider, at its next regularly
scheduled meeting, authorizing various actions designed to eliminate the
discount. The actions considered by the Board of Directors may include
periodic repurchases of shares or recommending to shareholders amendments to
the Fund's Articles of Incorporation to convert the Fund to an open-end
investment company. The Board of Directors would consider all relevant factors
in determining whether to take any such actions, including the effect of such
actions on the Fund's status as a regulated investment company under the Code
and the availability of cash to finance these repurchases in view of the
restrictions on the Fund's ability to borrow. No assurance can be given that
the Fund will convert to an open-end investment company or that share
repurchases will be made or that, if made, they will reduce or eliminate market
discount. Should any such repurchases be made in the future, it is expected
that they would be made at prices at or below the current net asset value per
share. Any such repurchases would cause the Fund's net assets to decrease,
which may have the effect of increasing the Fund's expense ratio.
In considering whether to recommend to shareholders the
conversion of the Fund to an open-end investment company, the Fund's Board of
Directors would consider a number of factors including whether the Fund's
ability to operate in accordance with its investment policies, such as its
authority to invest in illiquid securities, may be impaired as a result. In
light of the position of the SEC that illiquid securities may not exceed 15% of
the total assets of a registered open-end investment company, an attempt to
convert the Fund to such a company would have to take into account the
percentage of such securities in the Fund's portfolio at the time, and other
factors. The Fund cannot predict whether on this basis it would be able to
<PAGE>
effect any such conversion or whether relief from the SEC's position, if
sought, could be obtained. Under certain circumstances, a shareholder vote may
be required to authorize periodic repurchases of the Fund's shares of Common
Stock. In considering whether to recommend to shareholders such authorization,
the Board of Directors similarly would consider a number of factors including
limitations that may be placed on the Fund's investment policies as a
consequence of such repurchase policy.
Any amendment to the Fund's Articles of Incorporation that
would convert the Fund to an open-end investment company would require the
approval of the holders of the outstanding Common Stock. See "Description of
Capital Stock -- Special Voting Provisions" for a discussion of voting
requirements applicable to conversion of the Fund to an open-end investment
company. If the Fund converted to an open-end investment company, it could be
required to liquidate its portfolio investments to meet requests for
redemption, and the Common Stock would no longer be listed on the New York
Stock Exchange or the Osaka Securities Exchange. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at the
net asset value, less such redemption charge, if any, as might be in effect at
the time of redemption.
Special Voting Provisions
The Fund presently has provisions in its Charter and By-Laws
(commonly referred to as "anti-takeover" provisions) which may have the effect
of limiting the ability of other entities or persons to acquire control of the
Fund, to cause it to engage in certain transactions or to modify its structure.
First, a director may be removed from office only for cause by
vote of the holders of at least 75% of the votes entitled to be cast for the
election of directors. Second, the affirmative vote of 75% of the entire Board
of Directors is required to authorize the conversion of the Fund from a
closed-end to an open-end investment company. The conversion also requires the
affirmative vote of holders of at least 75% of the Common Stock unless it is
approved by a vote of 75% of the Continuing Directors (as defined below), in
which event such conversion requires the approval of the holders of a majority
of the Common Stock. A "Continuing Director" is any member of the Board of
Directors of the Fund who (i) is not a person or affiliate of a person who
enters or proposed to enter into a Business Combination (as defined below) with
the Fund (an "Interested Party") and (ii) who has been a member of the Board of
Directors for a period of at least 12 months, or has been a member of the board
of directors since August 22, 1994, or is a successor of a Continuing Director
who is unaffiliated with an Interested Party and is recommended to succeed a
Continuing Director by a majority of the Continuing Directors then on the Board
of Directors of the Fund.
Third, at the Fund's first annual stockholders meeting, the
Board of Directors will be classified into three classes, each with a term of
three years with only one class of directors standing for election in any year.
Such classification may prevent replacement of a majority of the directors for
up to a two year period. The affirmative vote of at least 75% of the Shares
will be required to amend the Charter or By-Laws to change any of the
provisions in the preceding two paragraphs.
<PAGE>
Additionally, the affirmative vote of 75% of the entire Board
of Directors and the holders of at least (i) 80% of the Common Stock and (ii)
in the case of a Business Combination (as defined below), 66 2/3% of the Common
Stock other than Common Stock held by an Interested Party who is (or whose
affiliate is) a party to a Business Combination (as defined below) or an
affiliate or associate of the Interested Party, are required to authorize any
of the following transactions:
(i) merger, consolidation or statutory share exchange of
the Fund with or into any other person;
(ii) issuance or transfer by the Fund (in one or a series
of transactions in any 12 month period) of any securities of the Fund
to any person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of
$1,000,000 or more, excluding issuances or transfers of debt
securities of the Fund, sales of securities of the Fund in connection
with a public offering, issuances of securities of the Fund pursuant
to a dividend reinvestment plan adopted by the Fund, issuances of
securities of the Fund upon the exercise of any stock subscription
rights distributed by the Fund, transfers by the Fund of securities or
other property to a corporation, trust, partnership or other entity
which is wholly-owned by the Fund and portfolio transactions effected
by the Fund in the ordinary course of its business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or
other disposition by the Fund (in one or a series of transactions in
any 12 month period) to or with any person or entity of any assets of
the Fund having an aggregate fair market value of $1,000,000 or more,
excluding sales, exchanges, transfers or other dispositions by the
Fund to any person or entity which is wholly-owned by the Fund, and
except for portfolio transactions (including pledges of portfolio
securities in connection with borrowings) effected by the Fund in the
ordinary course of its business (transactions within clauses (i), (ii)
and (iii) above being known individually as a "Business Combination");
(iv) the voluntary liquidation or dissolution of the Fund,
or an amendment to the Fund's Charter to terminate the Fund's
existence; or
(v) unless the 1940 Act or federal law requires a lesser
vote, any stockholder proposal as to specific investment decisions
made or to be made with respect to the Fund's assets as to which
stockholder approval is required under federal or Maryland law.
However, the stockholder vote described above will not be
required with respect to the foregoing transactions (other than those set forth
in (v) above) if they are approved by a vote of 75% of the Continuing
Directors. In that case, the affirmative vote of such number of votes entitled
to be cast thereon as is required to approve the matter under applicable law
shall be necessary, assuming that a vote is required under applicable law. The
Fund's By-Laws contain provisions the effect of which is to prevent matters,
including nominations of directors, from being considered at a stockholders'
meeting where the Fund has not received notice of the matters at least 60 days
<PAGE>
prior to the meeting (or 10 days following the date notice of such meeting is
given by the Fund if less than 70 days' notice of such meeting is given by the
Fund).
Reference is made to the Articles of Incorporation and By-Laws
of the Fund, on file with the Commission, for the full text of these
provisions. See "Further Information." The percentage of votes required under
these provisions, which are greater than the minimum requirements under
Maryland law absent the elections described above or in the 1940 Act, will make
more difficult a change in the Fund's business or management and may have the
effect of depriving stockholders of an opportunity to sell shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The
Fund's Board of Directors, however, has considered these anti-takeover
provisions and believes they are in the best interests of stockholders.
In addition, in the opinion of the Investment Manager and the
Investment Adviser, these provisions offer several advantages. They may
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.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, acts as custodian for the Fund's assets and
employs foreign sub-custodians approved by the Board of Directors of the Fund
in accordance with the 1940 Act. State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, acts as the transfer agent,
dividend paying agent and registrar for the Fund's Common Stock.
The Mitsui Trust and Banking Company, Limited, 1-21,
Shimomeguro 6-chome, Meguro-ku, Tokyo, Japan, acts as the Fund's dividend
paying agent and shareholder service agent for the Fund's Common Stock
beneficially owned by investors in Japan.
DISTRIBUTION ARRANGEMENTS
Oppenheimer & Co., Inc., a broker-dealer and member of the
National Association of Securities Dealers, Inc., will act as Dealer Manager
for the Offer. Under the terms and subject to the conditions contained in a
Dealer Manager Agreement dated the date of this Prospectus, the Dealer Manager
will provide financial advisory services in connection with the Offer. In
addition, the Dealer Manager has agreed with the Fund to form and manage a
group of securities dealers ("Selling Group Members") to (a) solicit the
exercise of Rights and (b) sell to the public Shares purchased by the Dealer
Manager from the Fund as a result of purchases and exercise of Rights by the
Dealer Manager.
The Fund has agreed to pay the Dealer Manager a fee for its
financial advisory services in an amount equal to ____% of the aggregate
Subscription Price for the Shares. The Fund has also agreed to reimburse the
<PAGE>
Dealer Manager for up to $_______ partial reimbursement for its reasonable
expenses incurred in connection with the Offer.
In addition, the Fund will indemnify the Dealer Manager and
each Soliciting Dealer with respect to certain liabilities, including
liabilities under the U.S. Securities Act of 1933, as amended (the "Securities
Act"). Oppenheimer & Co., Inc. also serves as the Administrator of the Fund
and is the parent company of the Investment Manager and an affiliate of the
Investment Adviser. Messrs. Blum, Feeney, Kleinberg and Rappaport, directors
and/or officers of the Fund, are affiliated with Oppenheimer & Co., Inc.
Pursuant to the Dealer Manager Agreement, the Fund has agreed
to pay fees equal to __% of the Subscription Price per Share to the Dealer
Manager and each Selling Group Member for each Share either issued upon the
exercise of Rights as a result of their soliciting efforts or sold to the
public, and to the Dealer Manager for each Share issued upon the exercise of
Rights but for which no dealer designation was made on the related Subscription
Certificate.
The Fund has also agreed that, with respect to Rights
exercised not as a result of the selling efforts of the Selling Group Members,
the Fund will pay a soliciting dealer fee equal ____% of the Subscription Price
per Share to any securities dealer who is not a Selling Group Member but who is
a member of the National Association of Securities Dealers, Inc. and who has
executed and delivered a Soliciting Dealer Agreement and solicited the exercise
of such Rights.
From the date of this Prospectus, the Dealer Manager and
Selling Group Members may offer and sell shares of Common Stock at prices set
by the Dealer Manager from time to time, which prices may be higher or lower
than the Subscription Price. Prior to the Expiration Date, each of those
prices when set will not exceed the higher of the last sale price or current
asked price of the Common Stock on the New York Stock Exchange, plus, in each
case, an amount equal to an exchange commission, and any offering price set on
any calendar day will not be increased more than once during that day. Any
offering by the Dealer Manager or any Selling Group Member may include Shares
acquired through the exercise of Rights. As a result of these offerings, the
Dealer Manager and Selling Group Members may realize profits or losses
independent of the Dealer Manager's financial advisory fee and any Selling
Group Member fee received by them.
Under applicable law, during the Subscription Period, the
Dealer Manager may bid for and purchase Rights for certain purposes. Those
purchases will be subject to certain price and volume solicitations when the
Common Stock is being stabilized by the Dealer Manager or when the Dealer
Manager owns Rights without an offsetting short position in the Common Stock.
Those limitations provide, among other things, that subject to certain
exceptions, not more than one bid to purchase Rights may be maintained in any
one market at the same price at the same time and that the initial bid for or
purchase of Rights may not be made at a price higher than the highest current
independent bid price on the New York Stock Exchange. Any bid price may not be
increased, subject to certain exceptions, unless the Dealer Manager has not
purchased any Rights for a full Business Day or the independent bid price for
<PAGE>
those Rights on the New York Stock Exchange has exceeded the bid price for a
full Business Day.
EXPERTS
The financial statements of the Fund included in the Fund's
Annual Report to Stockholders as of August 31, 1995 have been incorporated by
reference in this Prospectus in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. Price Waterhouse LLP is located at 1177 Avenue of the
Americas, New York, New York 10036.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on
for the Fund by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York, and certain legal matters will
be passed upon for the Dealer Manager by Willkie Farr & Gallagher, New York,
New York. Counsel for the Fund and the Dealer Manager will rely, as to matters
of Maryland law, on Piper & Marbury, Baltimore, Maryland. Certain legal
matters concerning Czech law will be passed upon by Bakes & Sekyra, Prague, the
Czech Republic.
It is likely that foreign persons, such as the Regional
Adviser and foreign or non-resident directors 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. As a result it may be difficult for U.S. investors to
effect service of process upon these persons within the United States and 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 Regional Adviser has irrevocably appointed an agent in the
United States for service of process in any action, suit or proceeding under
the provisions of the U.S. securities laws. Dr. Luis Rubio, a non-resident
director, has not appointed an agent in the United States for service of
process in any action, suit or proceeding under the provisions of the U.S.
securities laws.
OFFICIAL DOCUMENTS
Certain of the tabular and other statistical information set
forth herein is based on or derived from public official documents of the
Government of the Czech Republic and its ministries, and the PSE.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the Commission. Such reports,
proxy statements and other information filed by the Fund can be inspected and
copied at public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; Seven World Trade Center, 13th Floor, New
York, New York 10048; and 500 West Madison Street, Chicago, Illinois 60661.
<PAGE>
The Fund's Common Stock is listed on the New York Stock Exchange. Reports,
proxy statements and other information concerning the Fund can be inspected and
copied at the Library of the New York Stock Exchange at 20 Broad Street, New
York, New York 10005.
This Prospectus constitutes a part of a registration statement
on Form N-2 (together with all the exhibits and the appendices thereto, the
"Registration Statement") filed by the Fund with the Commission under the
Securities Act and the 1940 Act. This Prospectus does not contain all of the
information set forth in the Registration Statement. Reference is hereby made
to the Registration Statement and related exhibits for further information with
respect to the Fund and the Shares offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended August 31,
1995 (the "Annual Report"), which either accompanies this Prospectus or has
previously been provided to the person to whom this Prospectus is being sent,
is incorporated herein by reference with respect to all information other than
the information set forth in the Letter to Stockholders included therein. The
Fund will furnish, without charge, a copy of its Annual Report, upon request to
Boston Financial Data Services, [phone number].
<PAGE>
APPENDIX A
GENERAL CHARACTERISTICS AND RISKS OF HEDGING AND DERIVATIVES
A detailed discussion of the Hedging and Derivatives (as
defined below) that may be done by the Investment Adviser on behalf of the Fund
follows below. The Fund will not be obligated, however, to do any Hedging and
Derivatives and makes no representation as to the availability of these
techniques at this time or at any time in the future. "Hedging and
Derivatives," as used in this Appendix A, refers to entering into interest
rate, currency or stock index futures contracts, currency forward contracts and
currency swaps, the purchase and sale (or writing) of exchange listed and
over-the-counter ("OTC") put and call options on debt and equity securities,
currencies, interest rate, currency or stock index futures and fixed income and
stock indices and other financial instruments, entering into various interest
rate and equity transactions such as swaps, caps, floors, collars or trading in
other types of derivatives.
The Fund's ability to pursue certain of these strategies may
be limited by the U.S. Commodity Exchange Act, as amended, applicable
regulations of the U.S. Commodity Futures Trading Commission ("CFTC")
thereunder and the federal income tax requirements applicable to regulated
investment companies which are not operated as commodity pools.
Put and Call Options on Securities and Indices
The Fund may purchase and sell put and call options on debt
and equity securities and indices based upon the prices of debt or equity
securities. A put option on a security gives the purchaser of the option the
right to sell and the writer the obligation to buy the underlying security at
the exercise price during the option period. The Fund may also purchase and
sell options on indices based upon the prices of debt or equity securities
("index options"). Index options are similar to options on securities except
that, rather than taking or making delivery of securities underlying the option
at a specified price upon exercise, an index option gives the holder the right
to receive cash upon exercise of the option if the level of the index upon
which the option is based is greater, in the case of a call, or less in the
case of a put, than the exercise price of the option. The purchase of a put
option on a security would be designed to protect against a substantial decline
in the market value of a security held by the Fund. A call option on a security
gives the purchaser of the option the right to buy and the writer the
obligation to sell the underlying security at the exercise price during the
option period. The purchase of a call option on a security would be intended to
protect the Fund against an increase in the price of a security that it
intended to purchase in the future. In the case of either put or call options
that it has purchased, if the option expires without being sold or exercised,
the Fund will experience a loss in the amount of the option premium plus any
related commissions. When the Fund sells put and call options, it receives a
premium as the seller of the option. The premium that the Fund receives for
writing the option will serve as a partial hedge, in the amount of the option
premium, against changes in the value of the securities in its portfolio.
During the term of the option, however, a covered call seller has, in return
for the premium on the option, given up the opportunity for capital
appreciation above the exercise price of the option if the value of the
<PAGE>
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium received on
the sale of the option. The Fund is authorized to purchase and sell exchange
listed options and OTC options which are privately negotiated with the
counterparty to such contract. Listed options in the United States are issued
by the Options Clearing Corporation ("OCC"), which guarantees the performance
of the obligations of the parties to such options.
All such call options sold (written) by the Fund will be
"covered" as long as the call is outstanding (i.e., the Fund will own the
instrument subject to the call or other securities or assets acceptable under
applicable segregation and coverage rules). All such put options sold (written)
by the Fund will be secured by segregated assets consisting of cash or liquid
high grade debt securities having a value not less than the exercise price.
The Fund's ability to close out its position as a purchaser or
seller of an exchange listed put or call option is dependent upon the existence
of a liquid secondary market. Among the possible reasons for the absence of a
liquid secondary market on an exchange are: (i) insufficient trading interest
in certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or the OCC to handle current trading volume; or (vi)
a decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been listed by the OCC
as a result of trades on that exchange would generally continue to be
exercisable in accordance with their terms. OTC options are purchased from or
sold to dealers, financial institutions or other counterparties which have
entered into direct agreements with the Fund. With OTC options, such variables
as expiration date, exercise price and premium will be agreed upon between the
Fund and the counterparty, without the intermediation of a third party such as
the OCC. If the counterparty fails to make or take delivery of the securities
underlying an option it has written, or otherwise settle the transaction in
accordance with the terms of that option as written, the Fund would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. As the Fund must rely on the credit quality of the counterparty
rather than the guarantee of the OCC, it will only enter into OTC options with
counterparties with the highest long-term credit ratings, and with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York.
The hours of trading for options on securities may not conform
to the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
<PAGE>
Futures Contracts and Options on Futures Contracts
Characteristics. The Fund may purchase and sell futures
contracts on interest rates and indices of debt and equity securities and
purchase and sell (write) put and call options on such futures contracts traded
on recognized domestic exchanges as a hedge against anticipated interest rate
changes or movements in equity markets. The sale of a futures contract creates
an obligation by the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specified future time for a
specified price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
(a long position if the option is a call and a short position if the option is
a put).
Margin Requirements. At the time a futures contract is
purchased or sold, the Fund must allocate cash or securities as a deposit
payment ("initial margin"). It is expected that the initial margin that the
Fund will pay may range from approximately 1% to approximately 5% of the value
of the instruments underlying the contract. In certain circumstances, however,
such as during periods of high volatility, the Fund may be required by an
exchange to increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased in the future pursuant to
regulatory action. An outstanding futures contract is valued daily and the
payment in cash of "variation margin" may be required, a process known as
"marking to the market." Transactions in listed options and futures are usually
settled by entering into an offsetting transaction, and are subject to the risk
that the position may not be able to be closed if no offsetting transaction can
be arranged.
Limitations on Use of Futures Contracts and Options on Futures
Contracts. The Fund's use of futures contracts and options on futures
contracts will in all cases be consistent with applicable regulatory
requirements and in particular, the rules and regulations of the CFTC. In
addition, the Fund may not sell futures contracts if the value of such futures
contracts exceeds the total market value of the Fund's portfolio securities.
The Fund will not engage in transactions in futures contracts
or options thereon for speculative purposes but only as a hedge against changes
resulting from market conditions in the values of securities in its portfolio;
provided, however, that the Fund may enter into futures contracts or options
thereon for purposes other than bona fide hedging if, immediately thereafter,
the sum of the amount of its initial margin and premiums on such open contracts
and options would not exceed 5% of the liquidation value of the Fund's
portfolio; provided, further, that in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Also, when required, a segregated
account of cash or cash equivalents will be maintained and marked to market in
an amount equal to the market value of the contract. The Investment Adviser
reserves the right to comply with such different standards as may be
established from time to time by CFTC rules and regulations with respect to the
purchase and sale of futures contracts and options thereon.
<PAGE>
Currency Transactions
The Fund may engage in currency transactions with
counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value. Currency
transactions include currency forward contracts, exchange listed currency
futures contracts, exchange listed and OTC options on currencies and currency
swaps. A forward currency contract involves a privately negotiated obligation
to purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with counterparties that have received (or the guarantors of the
obligations of that have received) a credit rating of P-1 or A-1 by Moody's or
S&P, respectively, or that have an equivalent rating from a U.S. nationally
recognized statistical rating organization or (except for OTC currency options)
are determined to be of equivalent credit quality by the Investment Adviser.
The Fund's dealings in forward currency contracts and other
currency transactions such as futures contracts, options, options on futures
contracts and swaps will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the
Fund, which will generally arise in connection with the purchase or sale of the
Fund's portfolio securities or the receipt of income from them. Position
hedging is entering into a currency transaction with respect to portfolio
security positions denominated or generally quoted in that currency. The Fund
will not enter into a transaction to hedge currency exposure to an extent
greater, after netting all transactions intended wholly or partially to offset
other transactions, than the aggregate market value (at the time of entering
into the transaction) of the securities held in the Fund's portfolio that are
denominated or generally quoted in or currently convertible into the currency,
other than with respect to proxy hedging as described below.
The Fund may cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in which
the Fund expects to have portfolio exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of portfolio
securities, the Fund may also engage in proxy hedging. Proxy hedging is often
used when the currency to which the Fund's portfolio is exposed is difficult to
hedge or to hedge against the dollar. Proxy hedging entails entering into a
forward contract to sell a currency, the changes in the value of which are
generally considered to be linked to a currency or currencies in which some or
all of the Fund's portfolio securities are or are expected to be denominated,
and to buy dollars. The amount of the contract would not exceed the value of
the Fund's securities denominated in linked currencies. Currency hedging
involves some of the same risks and considerations as other transactions with
similar instruments. Currency transactions can result in losses to the Fund if
the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, the risk exists that the perceived linkage
<PAGE>
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
Currency transactions are subject to risks different from
those of other portfolio transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
adversely affected by government exchange controls, limitations or restrictions
on repatriation of currency, and manipulations or exchange restrictions imposed
by governments. These forms of governmental actions can result in losses to the
Fund if it is unable to deliver or receive currency or monies in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks
that apply to the use of futures generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures is relatively new,
and the ability to establish and close out positions on these options is
subject to the maintenance of a liquid market that may not always be available.
Currency exchange rates may fluctuate based on factors extrinsic to that
country's economy.
Interest Rate and Equity Swaps and Related Transactions
The Fund may enter into interest rate and equity swaps and may
purchase or sell interest rate and equity caps, floors and collars. Interest
rate and equity swaps are agreements to exchange cash flows based on a notional
principal amount. The purchaser of an interest rate or equity cap receives
payments from the seller to the extent that the selected interest rate or
equity index rises above a predetermined level. The purchaser of an interest
rate or equity floor receives payments to the extent that the selected interest
rate or equity index falls below a predetermined level. A collar is a
combination of a cap and a cap which preserves a certain return within a
predetermined range of values. The Fund would enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio, to manage the duration of its portfolio or to protect against
an increase in the price of the securities the Fund anticipates purchasing at a
later date. The Fund's use of swaps, caps, floors and collars is subject to
segregation and cover requirements which are similar to those to which it is
subject upon writing uncovered options. The Fund will not sell interest rate or
equity caps or floors that it does not own.
The Fund may enter into interest rate and equity swaps, caps
and floors on either an asset-based or liability-based basis, depending on
whether it is hedging its assets or liabilities, and will usually enter into
interest rate and equity 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 interest rate or equity swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto
is rated in the highest rating category of at least one nationally recognized
<PAGE>
rating organization at the time of entering into such transaction. If there is
a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps.
Risks of Hedging and Derivatives
Hedging and Derivatives involve special risks, including
possible default by the other party to the transaction, illiquidity and, to the
extent the Investment Adviser's view as to certain market movements is
incorrect, the risk that the use of Hedging and Derivatives could result in
losses greater than if such investment strategies had not been used. Use of put
and call options could result in losses to the Fund, force the sale or purchase
of portfolio securities at an inopportune time or for prices higher than (in
the case of put options) or lower than (in the case of call options) current
market values, or cause the Fund to hold a security it might otherwise sell.
The use of currency transactions could result in the Fund's incurring losses as
a result of the imposition of exchange controls, suspension of settlements, or
the inability to deliver or receive a specified currency. The use of options
and futures transactions entails certain special risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of the Fund could create the
possibility that losses on the hedging instrument are greater than gains in the
value of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain over-the-counter options could have
no markets. As a result, in certain markets, the Fund might not be able to
close out a position without incurring substantial losses. Although the Fund's
use of futures and options transactions for hedging purposes should tend to
minimize the risk of loss due to a decline in the value of the hedged position
at the same time it will tend to limit any potential gain to the Fund that
might result from an increase in value of the position. Finally, the daily
variation margin requirements for futures contracts create a greater ongoing
potential financial risk than would purchases of options, in which case the
exposure is united to the cost of the initial premium and transaction costs.
Losses resulting from Hedging and Derivatives will reduce the Fund's net asset
value, and possibly income, and the losses can be greater than if the Hedging
and Derivatives had not been used.
When conducted outside the United States, Hedging and
Derivatives may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Derivatives also could be adversely affected by:
(1) other complex foreign political, legal and economic factors; (2) lesser
availability of data on which to make trading decisions than in the United
States; (3) delays in the Fund's ability to act upon economic events occurring
in foreign markets during non-business hours in the United States; (4) the
imposition of different exercise and settlement terms and procedures and margin
<PAGE>
requirements than in the United States; and (5) lower trading volume and
liquidity.
Segregation and Cover Requirements
Much of the Hedging and Derivatives which may be entered into
by the Fund is subject to segregation and coverage requirements established by
either the CFTC or the SEC, with the result that, if the Fund does not hold the
instrument underlying the futures contract or option, the Fund will be required
to segregate on an ongoing basis with its custodian, cash, U.S. Government
securities, or other liquid high grade debt obligations in an amount at least
equal to the Fund's obligations with respect to such instruments. Such amounts
will fluctuate as the market value of the obligations increases or decreases.
The segregation requirement can result in the Fund maintaining positions it
would otherwise liquidate and consequently segregating assets with respect
thereto at a time when it might be disadvantageous to do so. In addition, with
respect to futures contracts purchased by the Fund, the Fund will also be
subject to the segregation requirements with respect to the value of the
instruments underlying the futures contract. The Fund will accrue the net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each swap on a daily basis and will segregate with a custodian
an amount of cash, U.S. Government securities, or other liquid high grade debt
obligations or liquid securities having an aggregate net asset value at least
equal the accrued excess.
Other Limitations
The degree of the Fund's use of Hedging and Derivatives may be
limited by certain provisions of the Code. See "Taxation" herein.
<PAGE>
APPENDIX B
THE CZECH REPUBLIC
The information set forth in this Appendix B has been
extracted from various governmental and private sources. The Fund, its Board of
Directors, the Investment Manager, the Investment Adviser and the Regional
Adviser make no representation as to the accuracy of the information, nor has
the Fund or its Board of Directors attempted to verify the statistical
information presented in this Appendix B. Statistical data may vary from source
to source as a result of differences in the underlying assumptions or
methodology used. Furthermore, as a result of significant political, economic
and other structural changes in the Czech Republic in recent years, historical
information presented herein may not be indicative of future developments. In
addition, no representation is made that any correlation will exist between the
Czech Republic or its economy in general and the performance of the Fund.
The Country
Geography
The Czech Republic is situated in the middle of Central Europe
and has an area of approximately 30,448 square miles. The country is bordered
by Germany to the west, Poland to the northeast, Slovakia to the southeast and
Austria to the south.
Population
A 1991 census estimated the population of the Czech Republic
at 10,302,215. Most people live in urban areas, particularly in Prague, Brno
and Ostrava, the three largest cities in the Czech Republic. The official
language is Czech, which is closely related to Slovak and belongs to the Slavic
group of the Indo-European languages.
Government and Constitution
History
The independent Republic of Czechoslovakia was established in
1918, following the collapse of the Austro-Hungarian Empire, and was comprised
of the Czech lands, Moravia and Slovakia. From 1918 to 1939 a stable democratic
system of government flourished in Czechoslovakia and the country's economy was
considered to be one of the most industrialized and prosperous in Europe. In
1939, German forces invaded the Czech lands and Moravia, and occupied the
territories until 1945. Slovakia formed a separate state which was under Nazi
control during this period. German forces were expelled in 1945 and, in 1948, a
Communist People's Republic was established under the Soviet Union's influence.
Subsequently, the country was aligned with the Soviet-led Eastern European
bloc, joining the Council of Mutual Economic Assistance (COMECON) in 1949 and
the Warsaw Pact in 1955. By 1950, substantially all industrial concerns in
Czechoslovakia were nationalized and agriculture was collectivized. In the
1960's, certain reforms were implemented in order to provide greater freedom of
expression, more genuine elections and greater separation of the Communist
<PAGE>
Party from the State. However, these reformist policies were regarded by other
members of the Eastern European bloc and, in particular, the Soviet Union, as
endangering the unity of the Eastern bloc. In 1968, Warsaw Pact forces invaded
Czechoslovakia to replace the reformist elements of the Communist Party. A 1969
amendment to the 1960 constitution established Czechoslovakia as a federation
of the Czech Socialist Republic (comprising the Czech lands and Moravia) and
the Slovak Socialist Republic (comprising Slovakia).
In the late 1980's, a broad opposition political movement
emerged as Communist control in many Eastern European countries weakened and a
series of demonstrations occurred in Czechoslovakia. In November 1989,
government suppression of a demonstration in Czechoslovakia sparked a popularly
supported, non-violent change in government referred to as the "Velvet
Revolution." In December 1989, Vaclav Havel was named President and in June
1990, the first free elections since 1946 were held. These elections led to the
establishment of a new federal government with an announced commitment to
promoting economic and political reform in the country. Czechoslovakia became
known as the Czech and Slovak Federal Republic (CSFR).
After 1989, there was increasing political debate regarding
the question of whether the Czech Republic and the Slovak Republic should
remain in a united CSFR. In June 1992, there were general elections for the
federal parliament as well as the Czech and Slovak parliaments, which gave an
increased impetus to the movement for separation. Pursuant to an act of the
federal parliament adopted on November 25, 1992 in accordance with the
constitution, on January 1, 1993 the CSFR was dissolved into two separate
states, the Czech Republic and the Slovak Republic (also referred to as
Slovakia).
Constitutional Structure
In December 1992, the Czech Republic adopted a new
constitution which provides for the separation of executive, legislative and
judicial powers. The Czech Republic is a parliamentary republic with universal
direct suffrage. The representation of the political parties in parliament is
based upon the percentage of total votes obtained in parliamentary elections.
The National Government
The Czech constitution provides for a bicameral legislature.
The Chamber of Deputies, which is the lower house, has 200 members who were
formerly members of the Czech National Council, the legislature responsible for
the Czech Republic's affairs in the CSFR. The following political parties are
currently represented in the Chamber of Deputies following the 1992 general
elections:
Number
Party of Seats
- ----- --------
Government Coalition Parties:
The coalition of the Civic Democratic Party and Christian
Democratic Party . . . . . . . . . . . . . . . . . . . . . 76
<PAGE>
Christian and Democratic Union -- the Czechoslovak People's
Party . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Civic Democratic Alliance . . . . . . . . . . . . . . . . . . . . 14
Opposition Parties:
Left Bloc Coalition (the Communist Party of Bohemia and Moravia
and the Democratic Left CSFR) . . . . . . . . . . . . . . 35
Czechoslovak Social Democracy . . . . . . . . . . . . . . . . . . 16
Association for the Republic -- Republican Party of
Czechoslovakia . . . . . . . . . . . . . . . . . . . . . . 14
Movement for Autonomous Democracy -- Society for Moravia
and Silesia . . . . . . . . . . . . . . . . . . . . . . . 14
Other (comprised of former members of the Liberal Social Union) . 16
_______________
Source: Czech Statistical Office
The Civic Democratic Party, headed by Prime Minister Vaclav
Klaus, leads the coalition government. The consistent focus of the Klaus
government has been the implementation of a sound legal framework upon which a
free market economic system can be developed. The next elections for the Czech
Parliament are scheduled for 1996.
The constitution also provides for an upper house -- an 81
seat Senate. No elections have taken place for the Senate and the initial
composition of the Senate has not been determined. The government is currently
debating whether to hold elections for the Senate in conjunction with municipal
elections scheduled to be held in the fall of 1994.
The executive branch is headed by the president of the
country, Vaclav Havel, who was elected the first president of the Czech
Republic by the Czech Parliament on January 26, 1993. Mr. Havel is not a member
of any political party. The next presidential elections are scheduled for 1998.
The highest appellate court is the Supreme Court in Prague.
The constitution also provides for a Constitutional Court with specialized
powers. Western-style civil and commercial codes, which form the center of a
comprehensive legal reform program, were adopted within one year of the
formation of the CSFR. The Czech Republic adopted these laws upon the
dissolution of the CSFR.
Local Government
There is currently a two-tier system of local government in
the Czech Republic, consisting of 8 districts and over 5,500 municipalities.
Local government has the authority to impose local levies within parameters
established by law, and shares responsibility with the national government for
roads, schools, utilities and public health. Fundamental changes in the system
of local government are currently being considered by the Czech Parliament in
advance of the Fall 1994 municipal elections.
Politics
Domestic
As reflected in the composition of the parliament, there are
currently a number of active political parties in the Czech Republic. Although
these parties represent a variety of interests and reflect a number of
<PAGE>
different views, the political environment in the Czech Republic is currently
stable. This is so for a variety of reasons, including the peaceful division of
the CSFR, the implementation of comprehensive economic reforms, the social,
cultural and ethnic homogeneity in the country and the improving economic
outlook.
International Relations
The Czech Republic has established diplomatic relations with
most of the countries with which the CSFR had diplomatic relations. The Czech
Republic is a member of a number of international organizations, including the
United Nations (and most of its specialized agencies) and the General Agreement
on Tariffs and Trade (GATT). It also participates in the Bank for International
Settlements and has been accepted for membership in the International Monetary
Fund (IMF), the World Bank and the European Bank for Reconstruction and
Development (EBRD). In addition, the Czech Republic participates in a program
of the Organization for Economic Cooperation and Development (OECD) for
economies in transition. The Czech Republic has applied for membership in the
OECD, although acceptance is not expected to occur within the next few years.
The Czech Republic was granted associate status in the European Union (EU) in
1993. On March 10, 1994, the Czech Republic became a party to the Partnership
for Peace program, a diplomatic initiative designed to draw former Communist
countries into closer cooperation with the North Atlantic Treaty Organization
(NATO).
The Czech Republic, Hungary, Poland and Slovakia have formed a
regional trade alliance known as the "Visegrad" group. In September 1993, the
Visegrad group entered into the Central European Free Trade Agreement, which
provides for the phase-out of all tariffs among the four countries.
The Czech Economy
Overview
The collapse of Communist governments across Central and
Eastern Europe during the period from 1988 to 1990 and the disbanding of the
COMECON trading alliance of Communist countries caused significant economic
dislocation in the CSFR. Beginning in 1991, the government of the CSFR adopted
an aggressive program of economic reform with the aim of transforming the
country's economy from a centrally planned socialist economy to a free market
economy. This program, which was subsequently pursued by the successor
government of the Czech Republic, involved, among other things, (i) mass
privatization of state-owned enterprises, (ii) disciplined monetary and fiscal
policies, including the successful adoption of a balanced budget and the
pegging of the koruna to a basket of hard currencies, and (iii) deregulation of
the economy and the promotion of competition.
Since 1990, the Czech Republic has experienced periods of
inflation and declines in gross domestic product adjusted for inflation
("GDP"). As part of the movement to a market-based economy, the government of
the CSFR removed most price controls in January 1991, which resulted in a steep
rise in inflation. In 1991, the consumer price index rose by 52%. In seeking to
limit inflationary pressures, the government imposed strict monetary and fiscal
policies concurrently with the removal of price controls. In 1992, the consumer
<PAGE>
price index rose by 12.7%. In 1993, the consumer price index rose by 18.2%. The
government estimates that approximately 8% of the increase in general price
levels was attributable to the introduction of a value-added tax (the "VAT") in
January 1993. The consumer price index increased by 4.0% in the first half of
1994. GDP fell by 14.2% in 1991 and a further 6.6% in 1992, as a result of a
combination of factors, including strict monetary and fiscal policies, a
decline in trading with former COMECON countries, price deregulation and a
decline in domestic demand. The change in GDP for 1993 was -0.3%.
The collapse of the Soviet Union in 1991 (previously
Czechoslovakia's largest trading partner) and the disbanding of COMECON were
largely responsible for a decline in exports from the Czech Republic of
approximately 12.5% in 1991 as compared to 1990 (as measured in current U.S.
dollars). However, the Czech Republic has been more than able to offset this
decline by expanding its presence in other export markets, particularly in
Western Europe. The value of exports from the Czech Republic (as measured in
current U.S. dollars) rose by approximately 10.6% in 1992 over 1991 and 16.5%
in 1993 over 1992, excluding exports to Slovakia which began in 1993 due to the
dissolution of the CSFR. A similar shift in orientation has occurred in the
Czech Republic's imports of goods, with the exception of imports of certain raw
materials such as oil. See "The Czech Economy -- Balance of Payments."
The following table sets forth selected economic data for the
Czech Republic for the periods indicated below:
Selected Economic Data
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
--------------- ------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Real GDP growth ($ per annum)<F1><F4> . . (1.2) (14.2) (6.6) (0.3)
GDP (U.S.$billion)<F2><F3> . . . . . . . 31.6 24.3 28.4 31.7
Gross External Debt at year end
(U.S.$ billion) <F4> . . . . . . . . . 8.1<F5> 9.3<F5> 6.9 8.7
Current Balance (U.S. $billion)<F4> . . . (1.1)<F5> 0.3<F5> 0.1<F6> 0.6
Change in Consumer Price Index (%)<F3> . 17.5 52 12.7 18.2 4.0<F7>
Unemployment Rate at year end (%)<F4> . . .8 4.1 2.6 3.5 3.1<F8>
Koruna per U.S.$ (average for period) . . 17.95<F3> 29.49<F3> 28.29<F4> 29.16<F4> 29.59<F4><F7>
____________________
<FN>
<F1> Based on constant prices Kcs/Kc
<F2> Based on current prices in Kcs/Kc converted at the average exchange
rates for the periods listed in this table
<F3> Source: Czech Statistical Office
<F4> Source: Czech National Bank
<F5> Data for CSFR and therefore includes Slovakia
<PAGE>
<F6> Estimated portion of data for CSFR which is attributable to the Czech
Republic
<F7> Data through June 30, 1994
<F8> Data for the second quarter of 1994
</TABLE>
Privatization
Privatization of both small- and large-scale enterprises has
been central to the Czech Republic's economic reform program. As the
privatization program has been implemented, the proportion of the Czech
Republic's GDP attributable to private sector activity has increased markedly.
Under the small scale component of the privatization program,
targeted at the privatization of small- and medium-sized firms and conducted
primarily through auctions, approximately 24,000 businesses were sold through
September 1993, generating an estimated equivalent of U.S. $1 billion in
revenues. Among the types of firms privatized under the small scale component
of the privatization program were certain retail stores, restaurants, hotels
and service businesses.
The privatization program has also contained a large scale
component, which to date has been conducted primarily through the distribution
of vouchers, direct sales by the government, public tenders and auctions. The
total book value of property which is intended to be privatized in the large
scale component of the government's privatization program is approximately Kc
1,100 billion to 1,200 billion (approximately U.S. $39.3 billion to $42.8
billion). The property comprising the first wave of large scale privatization,
which was commenced in 1990 and ended in early 1993, had a book value of
approximately Kc 550 billion to 650 billion (approximately U.S. $19.6 billion
to $23.2 billion), and the property comprising the second wave of large scale
privatization, which officially commenced in October 1993 through the
distribution of vouchers to the population is estimated to have a book value of
up to Kc 550 billion (approximately U.S. $19.6 billion).
Under the voucher component of the large scale privatization
program, Czech citizens over the age of 18 receive vouchers for a nominal fee
with which they are entitled to bid in a series of auctions for interests in
state-owned enterprises. Approximately 6 million citizens of the CSFR (in
excess of 80% of the adult population) acquired vouchers in the first wave of
the large scale privatization and thus became, either directly or indirectly,
shareholders in one or more companies included in the voucher scheme. Under the
first wave of voucher privatization, shares in over 900 state-owned companies
with an estimated book value of approximately Kc 220 billion (approximately
U.S. $7.9 billion) were distributed at nominal cost to private investors. The
shares of voucher-privatized companies currently account for the bulk of all of
the shares traded on the Prague Stock Exchange. Because the first wave of
voucher privatization took place prior to the break-up of the CSFR, it did not
include any restrictions on Czech citizens bidding on Slovak companies or
Slovak citizens bidding on Czech companies. As a result, many Slovak citizens
and Slovak investment funds now own shares in Czech companies and vice versa.
Under the second wave of large scale voucher privatization,
the Czech government has indicated that approximately 850 additional Czech
<PAGE>
companies are to be privatized during 1994 and early 1995. Approximately 6.1
million Czech citizens (in excess of 80% of the adult population) acquired
vouchers in the second wave of the large scale voucher privatization. The
estimated book value of the companies included in the voucher component of the
second wave of large scale privatization is expected to be approximately Kc 148
billion (approximately U.S. $5.3 billion). Unlike in the first wave of voucher
privatization, which included Slovak citizens, the second round of
privatization was offered only to Czech citizens and involves only Czech
companies.
In connection with the privatization program, the government
created the National Property Fund (the "NPF"), a special purpose entity
through which the government effects state property transfers to private hands.
Through the NPF, the government continues to hold controlling interests in
certain companies in which the state has a national interest, such as utilities
and telecommunications, as well as residual holdings in a number of other
companies in which the controlling interest has been privatized. These
shareholdings may be retained by the NPF for an indefinite period of time.
Investment Funds
Soon after the voucher privatization scheme began, a number of
banks and other private entities formed investment privatization funds
("voucher funds") which received licenses to operate on behalf of voucher
holders. Voucher funds enabled Czech voucher holders to convert their vouchers
into interests in managed portfolios of a number of Czech companies. Voucher
holders were permitted to exchange some or all of their vouchers for shares in
one or more of the voucher funds. Many of the voucher funds, through trading
activities, consolidated their holdings and built up stakes in certain Czech
companies. To date, voucher funds have been structured in a closed-end format.
In the first wave of voucher privatization, approximately 73%
of all voucher points were invested in voucher funds. As a result, a number of
the voucher funds became large shareholders in numerous enterprises and control
a substantial portion of Czech industry on behalf of individual investors. The
Czech Investment Companies and Investment Funds Act, which regulates investment
funds incorporated in the Czech Republic, limits an individual investment fund
to holding no more than 20% of the securities of a single issuer and investing
no more than 10% of its assets in the publicly traded securities of a single
issuer. In the second wave of voucher privatization, approximately 63% of all
vouchers were invested in voucher funds as of March 18, 1994. See "Appendix C
- -- The Czech Securities Market."
In the first wave of voucher privatization, ten voucher funds
acquired approximately 40% of all vouchers tendered.
In 1990 the Czech Republic began a restitution program with
the aim of returning certain assets which were nationalized or expropriated
after 1948 to private individuals. Claims to be resolved under the 1990 program
had been substantially satisfied by the end of 1993, although the program did
not seek to address all claims in respect of nationalized or expropriated
assets.
<PAGE>
Gross Domestic Product
The Czech Republic's GDP fell by 14.2% in 1991 and by 6.6% in
1992, as a result of a combination of factors, including strict monetary and
fiscal policies, a decline in trading with former COMECON countries, price
deregulation and a decline in domestic demand. The change in GDP for 1993 was
- -0.3%.
The decline in GDP from 1990 to 1992 affected all sectors of
the economy except tourism.
Inflation
The removal of most price controls in January 1991 resulted in
a steep rise in inflation. In 1991, the consumer price index rose at an annual
rate of 52%. In seeking to limit inflationary pressures, the government imposed
strict monetary and fiscal policies. In 1992, the consumer price index rose
12.7%. In 1993, the consumer price index rose 18.2%. The government estimates
that approximately 8% of the increase in general price levels was attributable
to the introduction of a value-added tax (the "VAT") in January 1993. For a
discussion of the VAT, see "Fiscal Policy" below. The consumer price index
increased by 4.0% in the first half of 1994.
Although the majority of price controls have been lifted, some
key prices remain substantially below free market levels, particularly in the
areas of housing rents, energy and public transportation. The easing or
elimination of any remaining price controls could result in additional
increases in the consumer price index.
The Czech Statistical Office has not revised the basket of
goods and services comprising the consumer price index for several years, and
the composition of the basket may not reflect accurately the components of the
cost of living in the Czech Republic.
Employment and Wages
Despite concerns about excessive unemployment in the Czech
Republic as a result of the economic reform program, the actual rate of
unemployment in the Czech Republic has remained relatively low and has not
fluctuated widely. The Czech Republic has experienced lower unemployment rates
than those of other Central European countries as a result of a number of
factors, including the strength of the Czech Republic's industrial base
relative to those of other Central European countries, the low level of
bankruptcies, and the growth of the private sector, particularly in services.
During the second quarter of 1994, the official unemployment
rate was 3.1%. The following table sets forth the rate of unemployment during
the periods indicated below:
<PAGE>
Unemployment in the Czech Republic
<TABLE>
<CAPTION>
Year Quarter Rate
- ---- ------- -----
<S> <C> <C>
1991 I 1.7%
II 2.6%
III 3.8%
IV 4.1%
1992 I 3.7%
II 2.7%
III 2.6%
IV 2.6%
1993 I 2.9%
II 2.6%
III 3.2%
IV 3.5%
1994 I 3.5%
II 3.1%
____________________
<FN>
Source: For 1991 and 1992: OECD; For 1993 and 1994: Czech National Bank.
</TABLE>
According to the Czechoslovak State Bank (the predecessor to
the Czech National Bank), there was still evidence of excess employees retained
by business enterprises in 1992 (estimated at approximately 350,000 workers)
despite the fact that real wages rose by approximately 9%. If these workers had
been dismissed in 1992, the unemployment rate would have increased by
approximately 4%.
The implementation of the 1991 bankruptcy law, which was
amended in March 1993, may lead to an increase in 1994 in the number of
bankruptcies and a rise in the unemployment rate. This increase is expected to
be more pronounced in 1994 and beyond as more bankruptcies, including
bankruptcies of larger companies, move through the court system towards
resolution.
The low unemployment figures partly reflect the fact that many
newly unemployed Czechs have been able to find jobs in the private sector,
particularly in the service sector. In addition, government-supported
retraining programs have been implemented in an attempt to lessen the impact of
industrial restructuring on the labor market.
The following table sets forth average monthly nominal wages
in the manufacturing sector for the Czech Republic:
<PAGE>
Average Monthly Nominal Wages
(expressed in U.S. Dollars)
<TABLE>
<CAPTION>
1990 1991 1992 1993
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$181 $129 $165 $200
____________________
<FN>
Source: Czech Statistical Office
</TABLE>
Generally Czech enterprises employing more than 24 employees
are prohibited from increasing employee wages for any quarterly period by more
than 5% over the average Czech consumer price index published by the Czech
Statistical Office for such period. Employers failing to comply are subject to
monetary penalties.
Legislation has been recently passed by the Czech Parliament
which provides for a legal and regulatory framework for the establishment of
pension funds, the purpose of which is to allow individuals to obtain
additional retirement income based upon their own decisions. The legislation
provides that both foreign and domestic persons and legal entities may be
founders of a pension fund, which such funds must take the form of a joint
stock company. It is expected that the development of the pension funds will
create additional market activity which in turn will further increase liquidity
in the market. For the protection of the investor, pensions funds are limited
to "safe property" investment vehicles, including bonds issued by the state,
banks and publicly marketable bonds issued by commercial companies and publicly
marketable shares and trading on the Prague Stock Exchange.
Fiscal Policy
One of the principal goals of the Czech government has been to
maintain a balanced budget as a key component of its economic stabilization
process. In 1993 the Czech Republic had a budget surplus of approximately Kc
1.1 billion. Limiting state expenditures, especially subsidies, and adopting a
package of tax reforms have been the principal tools for the achievement of
fiscal stability. For 1993, public expenditure accounted for approximately 47%
of GDP.
Tax reform was implemented on January 1, 1993 in an effort to
improve tax collection methods and make the tax system in the Czech Republic
more compatible with the needs of a market economy. The Czech Republic also
introduced a value added tax (VAT) designed to widen the tax base and shift the
tax burden away from enterprises. There are two VAT tax rates: 23% generally
applicable to goods (with certain significant exceptions, such as food and
goods considered to be necessities, which are subject to a lesser rate of 5%)
<PAGE>
and 5% generally applicable to services (with certain exceptions, such as
certain services considered to be non-essential, which are subject to the 23%
rate). The government estimates that the VAT was responsible for an 8% increase
in general price levels when it was introduced at the beginning of 1993. In
connection with the implementation of tax reform, corporate tax rates were
reduced to 45% in 1993 with a further decrease to 42% in 1994.
The following table sets forth certain information regarding
the state budget of the Czech Republic for 1993 and 1994:
State Budget
Kc billion
<TABLE>
<CAPTION>
1993 1994
------------------------------ ------------------------------
Budget Actual Budget Actual<F1>
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . 342.2 358.0 381.8 186.8
Total Expenditures . . . . . . . . . . . . . . . . . . . . . 342.2 356.9 381.8 177.1
____________________
<FN>
<F1> Data through June 30, 1994
Source: Budget: Czech State Budget; Actual 1993; Czech National Bank; Actual
1994: Czech Statistical Office
</TABLE>
Monetary Policy
The January 1, 1993 division of the CSFR into two independent
republics was accompanied by the creation of an independent Czech National Bank
(the "CNB") as sole central bank of the Czech Republic. The CNB was established
as an independent institution with the primary objective of ensuring the
stability of the Czech national currency. The independent status of the CNB is
provided for in the constitution of the Czech Republic. The CNB is responsible
for formulating and implementing monetary and foreign exchange policy. It also
controls the money supply and administers the official monetary and gold
reserves.
Monetary policy, aimed primarily at maintaining the exchange
rate of the koruna and controlling inflation, has been performed through
indirect instruments (e.g., through changes in the discount rate, the Lombard
rate (the rate charged by the CNB on certain short-term secured loans to Czech
commercial banks), and reserve requirement amounts, refinancings of bank
credits and open-market operations) since October 1992. Monetary policy has
ranged from partially restrictive, when there have been fears of inflation, to
neutral, when inflation has been less of a concern. Monetary policy during the
first part of 1993 was slightly restrictive, due to the balancing of negative
influences on GDP as a result of the splitting of the country and a decline in
trade with Slovakia, with inflationary pressures resulting from the
introduction of the VAT. The inflationary pressures eased by mid-1993, which
<PAGE>
created room for a gradual easing of monetary policy and more of a focus on
achieving increased liquidity in the banking sector and lower interest rates.
Balance of Payments
Foreign Trade
Exports accounted for approximately 26.4% of Czechoslovakian
GDP in 1990, as measured at the official exchange rates. Much of this trade
volume was with Eastern bloc countries and not for hard currency. The collapse
of the Soviet Union in 1991 (previously Czechoslovakia's largest trading
partner) and the disbanding of COMECON severely disrupted the Czech Republic's
foreign trade relationships, as reflected in a decline (as measured in current
U.S. dollars) in exports from the Czech Republic of approximately 12.5% in 1991
compared to 1990, although the Czech Statistical Office has indicated that the
1990 and 1991 numbers used to calculate such decline are not entirely
compatible. Simultaneously, as a result of the institution of economic reforms,
the importance of foreign trade for the overall economy further increased
because of GDP decline, foreign trade volume growth, exchange rate devaluations
in 1990 and the split of the CSFR.
Since 1991, the Czech Republic has been more than able to
offset the decline in exports to former COMECON countries by expanding its
presence in other export markets. Exports from the Czech Republic rose (as
measured in current U.S. dollars) by approximately 10.6% in 1992 over 1991 and
16.5% in 1993 over 1992, excluding exports to Slovakia which began in 1993 due
to the dissolution of the CSFR. A similar shift in orientation has occurred in
the Czech Republic's imports of goods, with the exception of imports of certain
raw materials such as oil.
The following table shows the total quantity of Czech imports
and exports and the quantity by selected trading partners:
<PAGE>
Foreign Trade, by Selected Trading Partners:
Kcs/Kc million
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994<F2>
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Exports
EC . . . . . . . . . . . . . . . . . . 51,007 101,136 130,828 162,487 93,498
Germany . . . . . . . . . . . . . . 29,512 63,947 81,460 100,137 55,983
Austria . . . . . . . . . . . . . . . 8,139 13,589 17,910 22,916 15,429
Former USSR . . . . . . . . . . . . . 40,728 40,841 22,126 22,388 10,087
Slovakia . . . . . . . . . . . . . . . - - - 74,628 30,879
Other . . . . . . . . . . . . . . . . 62,573 78,028 76,986 89,882 45,172
Total . . . . . . . . . . . . . . . . 162,447 23,594 247,850 372,301<F1> 195,065
Imports
EC . . . . . . . . . . . . . . . . . . 56,193 83,058 137,427 154,988 81,362
Germany . . . . . . . . . . . . . . 39,211 51,965 78,427 92,121 45,667
Austria . . . . . . . . . . . . . . . 12,148 17,200 26,549 28,312 14,341
Former USSR . . . . . . . . . . . . . 42,882 48,812 52,636 42,186 21,378
Slovakia . . . . . . . . . . . . . . . - - - 65,017 30,930
Other . . . . . . . . . . . . . . . . 64,963 59,711 73,876 75,856 41,391
Total . . . . . . . . . . . . . . . . 176,186 208,781 290,488 366,359<F1> 189,402
Balance . . . . . . . . . . . . . . . . . (13,739) 24,813 (42,638) 5,942 5,663
____________________
<FN>
<F1> Includes trade with Slovakia
<F2> Preliminary data through June 30, 1994
Source: Czech Statistical Office
</TABLE>
Tourism and the service sector generally account for a
significant percentage of the current account balance. According to CNB
estimates, the receipts from tourism (including tourism-related services)
amounted to the equivalent of U.S. $1.13 billion in 1992 and U.S. $1.4 billion
in 1993. Among the primary goods exported by the Czech Republic are
manufactured goods, machinery and equipment, and chemicals. Among the primary
imports into the Czech Republic are oil and natural gas, machinery and
equipment, and chemicals.
In 1993, the balance of trade recorded a surplus of Kc 5.9
billion. Exports totalled Kc 372.3 billion (approximately 40% of GDP) and
imports were Kc 366.4 billion. In 1993, the current account of the balance of
payments, which includes the value of services as well as goods, recorded a
surplus of the equivalent of approximately U.S. $580 million.
The following table sets forth the balance of payments of the
Czech Republic for the periods presented:
<PAGE>
Balance of Payments
U.S. Dollars million
<TABLE>
<CAPTION>
1990<F3> 1991<F3> 1992<F4> 1993 1994<F5>
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current Account Surplus (Deficit) . . . . . . (1,104.5)<F1> 356.5<F1> 52.9 <F2> 580<F2> 663.5<F2>
Capital Account Surplus (Deficit) . . . . . . 326.1 <F1> 46.9<F1> (6.1)<F2> 2,496<F2>
____________________
<FN>
<F1> Source: CSFR Statistics from Czech Statistical Office
<F2> Source: Czech National Bank
<F3> Data for CSFR and therefore includes Slovakia
<F4> Estimated portion of data for CSFR which is attributable to the Czech
Republic
<F5> Preliminary data through June 30, 1994
</TABLE>
Foreign Investment
The Czech government generally imposes no restrictions on
foreign investment. One notable exception, however, applies to foreign equity
investment in Czech banks. The current Czech banking law prohibits foreigners
from acquiring any shares of a Czech bank without the prior approval of the
CNB. In assessing an application, the CNB, among other things, examines the
source of capital to be used for the proposed investment and whether the
investment is a portfolio investment or a speculative investment.
The aggregate amount of foreign direct investment in the Czech
Republic from 1990 to 1993 totalled approximately U.S. $2.1 billion. The Czech
Republic is attractive to foreign investors because of its skilled but
relatively inexpensive labor pool and proximity to markets in the European
Community and Western Europe in general. The Czech Republic shares borders with
Germany and Austria.
The following table sets forth information regarding the
volume of foreign direct investment in the Czech Republic for the periods
indicated:
<PAGE>
Direct Foreign Investment
<TABLE>
<CAPTION>
Kc U.S.$
Year million million
- ----- ----------------------- -----------------------
<S> <C> <C>
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,007 112
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,560 494
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,379 1,003
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,552 568
------ -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,499 2,177
____________________
<FN>
Source: Czech National Bank
</TABLE>
The Czech Republic has signed treaties preventing double
taxation on income and profit with most OECD countries. A double-taxation
treaty between the Czech Republic and the United States became effective in
February 1, 1994 with respect to taxes withheld on dividends, interest and
royalties. With respect to other taxes, the treaty is effective retroactively
to tax years beginning on or after January 1, 1993.
External Debt and Reserves
The Czech Republic has one of the lowest per-capita debt
levels of the Central and Eastern European countries, in addition to having
substantial foreign currency and other reserves. Foreign debt was approximately
U.S. $8.7 billion at the end of 1993, or approximately 27% of GDP. At the end
of the second quarter of 1994, foreign currency reserves totalled approximately
U.S. $7.6 billion, of which almost U.S. $5.2 billion were held by the CNB. In
mid-August 1994, it was reported in the financial press that the Czech
government had announced plans to repay in full $471 million in outstanding
credits from the International Monetary Fund two years prior to maturity,
resulting in a savings of up to $30 million in debt servicing expenditures.
The following table sets forth the foreign exchange reserves
of the Czech Republic:
<PAGE>
Foreign Exchange Reserves
U.S. Dollars million
<TABLE>
<CAPTION>
January 1, December 31, June 30,
1993 1993 1994<F1>
------------------- ------------------- -------------------
<S> <C> <C> <C>
Official CNB Reserves . . . . . . . . . . . . . . . . . . . . . 842.5 3,872 5,170
Foreign Exchange Reserves of Commercial Banks . . . . . . . . . 2,739.0 2,373 2,482
-------- ----- -----
Total Foreign Exchange Reserves . . . . . . . . . . . . . . . . 3,581.5 6,245 7,625
____________________
<FN>
<F1> Preliminary data through June 30, 1994
Source: June 30, 1994 data from Czech Statistical Office, other data from
Czech National Bank
</TABLE>
Foreign Exchange
Currency
The Czech crown, or koruna ceska (Kc), was introduced on
February 8, 1993 upon the dissolution of the Czech Republic's monetary union
with Slovakia and the corresponding elimination of the Czechoslovak crown. The
Czech crown was introduced at a rate of 1:1 parity with the Czechoslovak crown.
Exchange Rates
During the first year of the economic reform, the State Bank
of Czechoslovakia devalued the Czechoslovak crown several times, from 14.62 Kcs
per U.S. dollar in January 1990 to 28 Kcs per U.S. dollar on December 28, 1990.
On January 1, 1991, the crown became partially convertible. Since this date,
the Czechoslovak and Czech currency remained relatively stable as a result of
the Czechoslovak State Bank and the CNB pegging exchange rates to a basket of
foreign currencies. Currently, the CNB pegs the exchange rate to a basket
composed 65% of the German deutsche mark and 35% of the U.S. dollar. The use of
a pegged nominal exchange rate has led to a substantial appreciation of the Kc.
in real terms since inflation rates in the Czech Republic have been well above
those of the Czech Republic's primary trading partners.
The exchange rate of the Czech koruna is established by the
CNB on a daily basis based on the exchange rate fluctuation of the basket of
currencies to which the Czech currency is pegged. "Purchase," "Sell" and
"Middle" rates are quoted for foreign currency purchases, sales and foreign
exchange settlements, respectively.
<PAGE>
Exchange Controls
The internal convertibility system for Czech persons
differentiates strictly between commercial foreign-exchange transactions
conducted by entrepreneurs (both corporate and individual) and non-commercial
foreign-exchange transactions. In general, the system provides full
convertibility for purposes of commercial transactions by Czech entrepreneurs
in exchange for the entrepreneurs converting all of their hard currency
receivables into Czech korunas. Recently, entrepreneurs have been permitted to
keep hard currency receivables in hard currency but deposited within the Czech
Republic, subject to complying with certain filing requirements with the CNB.
In contrast, the convertibility of the Czech crown for Czech residents in
non-commercial foreign exchange transactions is subject to annual limits on the
number of crowns that may be converted, although restrictions on amounts of
foreign currency which can be purchased are gradually being lifted. The maximum
annual amount of foreign currency which can be purchased by Czech citizens with
crowns was 12,000 Kc as of January 5, 1994.
Subject to certain exceptions under the Czech Foreign Exchange
Act, foreigners are not permitted to directly acquire real estate in the Czech
Republic or to deal in the Czech currency (other than for the purpose of
acquiring an investment in the Czech Republic). Repatriation of investments and
profits thereon is regulated by the Czech Foreign Exchange Act, unless exempted
under an applicable international treaty for the promotion and protection of
investment.
Investments in the Czech Republic by U.S. investors are not
subject to foreign exchange restrictions, except with respect to the real
estate and currency speculation restrictions described above. The U.S./Czech
treaty for the promotion and protection of investment supercedes the Czech
Foreign Exchange Act with respect to the repatriation of investments and
profits thereon and permits the repatriation of such investments and profits
thereon.
Industry
The Czech region has been an industrialized area since the
coming of the industrial revolution to Central Europe in the 19th century. The
Czech lands became an industrial center of the Austro-Hungarian Empire during
the 19th century as a result of an abundant supply of iron ore, forests and
coal. From these beginnings, the Czech region became one of the most
industrialized and developed areas in the world, with the world's seventh
highest GDP per capita in 1938. Following 1948, all industry was nationalized,
and government policy dictated the creation of larger factories and more heavy
industry. During the period from 1948 until 1990, Czech industry gradually lost
its leading position in the world. Compared to Western industrial standards,
Czech industry has experienced insufficient capital investment.
In 1993, industrial production was estimated to account for
approximately 50.1% of GDP. Employment in the Czech industrial sector in 1992
represented just over 1.5 million employees producing an output of Kc 977.9
billion. Manufacturing is the largest sector of the industry, representing 76%
of all industrial output, 85% of industrial employment and 95% of industrial
exports in 1992.
<PAGE>
Natural Resources
Coal
The Czech Republic has extensive coal reserves, and
historically has been able to satisfy substantially all of its coal
requirements from domestic sources. However, a high percentage of Czech coal is
lignite with a high content of sulphur, ash and certain toxic elements. The use
of lignite in thermal power stations results in significant environmental
problems. Certain pollution control measures have been introduced to address
these issues.
Oil and Natural Gas
Czech production of oil and natural gas is negligible. The
economy is heavily dependent on oil and natural gas imported from Russia via a
pipeline through the Ukraine and Slovakia. Political or economic turmoil in any
of these nations which would result in a reduction in oil or natural gas
supplies to the Czech Republic could lead to an energy crisis. Negotiations
regarding the construction of an alternative pipeline which will connect major
Czech refineries with Ingolstadt in Germany have recently been completed, but
there can be no assurance that the pipeline will be constructed in accordance
with plans, which currently anticipate operation in 1996.
Infrastructure
Railways
In 1992 Czech State Railways had a route length of
approximately 5,865 miles, of which approximately 1,612 miles were electrified.
There is a metro and tram/light rail system in Prague, and tram/light rail
networks in Brno, Liberec, Most, Olomouc, Ostrava and Plzen.
Air Transport
Most domestic air transport is run by Czechoslovak Airlines,
a.s., which took over from the former Czechoslovak Airlines upon the
dissolution of the CSFR. Czechoslovak Airlines, a.s., also provides
international service. The main airports are located in Prague (Ruzyne) and
Brno (Cernovice).
Telecommunications
Most telecommunications services (including telephone, TV and
radio broadcasting) are regulated by the state and the state has to date
retained control of telecommunications companies. The Czech telephone network
is in need of modernization. In 1994, the first privately owned television
channel commenced broadcasting operations in the Czech Republic.
Banking and Finance
Commercial Banks
The CNB acts as the Czech Republic's regulator of commercial
banking. Decentralization of the banking system, which began in 1991, led to
the emergence of the private commercial banking sector in the Czech Republic.
<PAGE>
As of December 31, 1993, a total of 57 banking licenses had been issued by the
CNB, including licenses for foreign bank branch offices. As of September 30,
1993, 47 banks licensed by the CNB had commenced activities. As of December 31,
1993, the structure of the Czech banking sector consisted of the following:
Commercial banks, wholly Czech owned . . . . . . . . . . 24
Commercial banks, partially foreign owned . . . . . . . 12
Commercial banks, wholly foreign owned . . . . . . . . . 10
Foreign commercial bank branches . . . . . . . . . . . . 10
State financial institution (the Consolidation Bank) . . 1
_________________
Source: Czech National Bank
In addition, a total of 41 foreign bank representative offices
presently perform various banking activities in the Czech Republic.
Unlike in the United States, a full banking license in the
Czech Republic entitles the holder to engage in a wide range of activities,
including the underwriting of securities, lending and broker-dealer activities.
In 1993, certain Czech commercial banks experienced liquidity
problems due primarily to nonperforming loans. In three cases these problems
led the CNB to assume receivership of the troubled institutions pending their
reorganization. In response to these problems, the CNB has proposed the
adoption of new regulations to require the reclassification of, and
establishment of reserves for, troubled loans, and has instituted mandatory
deposit insurance requirements.
Credit Allocation
The allocation of credit through the Czech banking system is
affected by the CNB's monetary policies. The CNB implements monetary policy
through, among other things, changes in discount rates, Lombard rates (i.e.,
the rate charged by the CNB on certain short-term secured loans to Czech
commercial banks) and reserve requirement amounts (i.e., the amount of reserves
Czech banks are required to maintain with respect to term and demand deposits).
See "-- Monetary Policy."
<PAGE>
APPENDIX C
THE CZECH SECURITIES MARKET
The information set forth in this Appendix C has been
extracted from various government and private publications, including
publications issued by the government of the Czech Republic and the Prague
Stock Exchange. Information was also gathered from academic literature and
interviews of government officials, stock exchange officials and Czech
securities market participants and professionals. Certain statistical
information regarding the Czech securities market has been prepared by the
Regional Adviser based upon information derived from the foregoing sources. The
Fund, its Board of Directors, the Investment Manager, the Investment Adviser
and the Regional Adviser make no representation as to the accuracy of the
information, nor has the Fund or its Board of Directors attempted to verify the
statistical information presented in this Appendix C.
History
An exchange for trading securities and commodities was
established in Prague in 1871 on the basis of an authorization from the
Austrian Ministry of Finance. Trading was suspended in 1938 on the eve of the
Second World War. Operations did not resume after the War, and the exchange was
officially abolished in 1952 in connection with the nationalization of all
industry by the Communist government of Czechoslovakia and the abolition of
private ownership of shares in business enterprises.
The Reemergence of the Czech Securities Market
In 1990, the newly constituted democratic government of
Czechoslovakia introduced a program of economic reforms intended to transform
the state-controlled economy into a market economy. As a component of this
transformation, the government began to plan for the privatization of Czech
industry. See "The Czech Economy -- Privatization" in Appendix B hereto. In
anticipation of the reintroduction of privately held securities, the
Czechoslovak State Bank (the predecessor to the CNB) initiated a revival of the
Prague Stock Exchange (the "PSE") by forming a planning committee of eight
banks. After receiving approval from the Ministry of Finance, the Prague Stock
Exchange Corporation was incorporated on November 24, 1992. The PSE reopened on
April 6, 1993 and trading of shares of newly privatized companies began in June
1993. Both equity and debt securities are traded on the PSE. See "The Prague
Stock Exchange" below.
In addition to the reopening of the PSE, a computerized
over-the-counter trading market, known as the "RM System," was established in
1992, in response to the Czech voucher privatization program. The RM System is
operated by RM System, a.s., a privately owned joint stock company. Trading
through the RM System began in April 1993. Both equity and debt securities are
traded through the RM System, and securities traded through the RM System
include securities traded on the PSE. These private securities transactions are
not publicly reported, although estimates as to the proportion of trading
volume in Czech securities that occurs outside the PSE and the RM System range
from 60% to 90%. See "The RM System" below.
<PAGE>
In addition to trading on the PSE and through the RM System, a
substantial proportion of secondary market transactions in Czech securities is
privately negotiated between market participants, even if the securities to be
traded are also traded on the PSE or through the RM System. See "Private
Securities Transactions" below.
CAPITAL STRUCTURE
Pursuant to the Czech Commercial Code, two types of companies
may be formed: limited liability companies and joint stock companies. A limited
liability company is limited to 50 members and may not be publicly traded. A
joint stock company is an enterprise with shares which may be publicly traded.
Additionally, business enterprises may conduct their activities in the form of
a general commercial partnership, pursuant to which each partner has unlimited
liability for the debts of the partnership and the business actions of the
other partners, or in the form of a limited partnership with general partners
having unlimited liability and limited partners having liability limited to
their investment in the partnership. Partnerships may not be publicly traded.
The Czech Commercial Code regulates the business activities of
companies and other enterprises with respect to their management, and with
respect to activities with shareholders and creditors. The Czech Act on
Accounting came into effect on January 1, 1993 and regulates the financial
statements of all enterprises. The Act provides a legislative framework which
attempts to be compatible with the aims of the European Commission, including
conformity with generally accepted international accounting principles.
Equity Securities
A joint stock company may issue shares of different classes
with different rights and values attached thereto. Shares may be either in
registered form in the name of the shareholder or in bearer form. Joint stock
companies may also issue preferred shares with preferential divided rights to
the extent that the total nominal value of such shares does not exceed 50% of
the capital stock of such company. These shares may also be limited as to
voting rights. Additionally, a joint stock company may issue employee shares
which may have preference rights attached to them. The total nominal value of
employee shares may not exceed 5% of the capital stock and may be transferred
only among current and retired employees.
Debt Securities
Pursuant to the Czech Commercial Code, a company may issue
bonds or debentures in a principal amount up to a maximum of 50% of a company's
capital account for convertible debentures. The debt securities may be issued
in the form of debentures convertible into common shares. The issuance of any
bond or debenture, regardless of whether it is publicly traded, must be
approved by the CNB and the Ministry of Finance. There are no credit rating
agencies currently operating in the Czech Republic.
The following table describes corporate, government and
municipal bond issuances in the Czech capital market from 1990 to 1994:
<PAGE>
BONDS
<TABLE>
<CAPTION>
Corporate State and Municipal<F1>
---------------------------------- ----------------------------------
Aggregate Aggregate
Principal Principal
Amount Amount
Number of In Million Number of In Million
Year Issuances Kc Issuances Kc
----- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1990 . . . . . . . . . . . . . . . . . . . . . . . 5 2,025 1 4,500
1991 . . . . . . . . . . . . . . . . . . . . . . . 6 1,645 0 0
1992 . . . . . . . . . . . . . . . . . . . . . . . 4 330 2 4,800
1993 . . . . . . . . . . . . . . . . . . . . . . . 11 6,780 5 11,580
1994<F2> . . . . . . . . . . . . . . . . . . . . . 7 8,300 4 10,300
____________________
<FN>
<F1> Includes one issuance of the Czechoslovak Federal Ministry of Finance in
1990 (Kc 4.5 billion principal amount) and 3 issuances of the Ministry
of Finance of the Slovak Republic in 1992 and 1993 (Kc 9.826 billion in
aggregate principal amount).
<F2> Through March 18, 1994.
</TABLE>
The maturities of the corporate bonds included in the table
above are generally 5 years or under and interest coupon rates range from 7% to
24%. The maturities of the governmental and municipal bonds included in the
table above range from 2 to 5 years and interest coupon rates range from 7% to
10%.
Since February 1992, treasury bills denominated in Czech
crowns have been issued by the Ministry of Finance, the Czechoslovak State Bank
(the predecessor to the CNB), the CNB and the Czech National Property Fund. As
of August 8, 1994, approximately Kc 31 billion (approximately U.S. $1.11
billion) in treasury bills issued by the Ministry of Finance, approximately Kc
80 billion (approximately U.S. $2.86 billion) in treasury bills issued by the
CNB, and approximately Kc 16 billion (approximately U.S. $571 million) in
treasury bills issued by the Czech National Property Fund were outstanding.
Foreign Issuances
In 1991, the Czechoslovak State Bank issued U.S. $200 million
principal amount of Eurobonds maturing in 1994 and issued (Yen)10 billion
principal amount of bonds in the Japanese market maturing in 1997. In 1993, the
CNB issued U.S. $375 million principal amount of Eurobonds maturing in 1996 and
(Yen)35 billion principal amount of bonds in the Japanese market maturing in
2000. The CNB $375 million Eurobonds due 1996 were assigned investment grade
ratings of Baa3 by Moody's Investors Service, Inc. ("Moody's") in April 1993
and BBB by Standard and Poor's Rating Group ("S&P") in June 1993. The Moody's
<PAGE>
rating was upgraded to Baa2 on May 25, 1994, and the S&P rating was upgraded to
BBB+ on July 18, 1994. To date, no other country in Central Europe, other than
Austria, has received an investment grade rating on government debt.
The Prague Stock Exchange
The PSE is the only securities exchange in the Czech Republic.
Following the successful beginning of the country's voucher privatization
program, the PSE reopened on April 6, 1993 and trading of the shares of newly
privatized companies began in June 1993. Prior to the opening of the PSE in
April 1993, the Czechoslovak State Bank and several Czech commercial banks
operated an interim securities market on which both shares and bonds were
traded pending the establishment of a stock exchange. As of July 31, 1994, 15
equity securities and six debt securities were listed on the PSE. The issuers
of listed securities are required to satisfy certain capitalization standards
and disclosure requirements. See "Listing and Trading Eligibility Standards"
below. Securities are not required to be listed in order to trade on the PSE,
however, and as of July 31, 1994, approximately 954 equity securities and 14
debt securities were eligible to be traded on the PSE. As of July 31, 1994, the
aggregate market capitalization of equity securities of companies eligible for
trading on the PSE was approximately U.S. $14.1 billion (Kc 395 billion).
Currently, there is no options or futures market in the Czech
Republic.
Organization and Governance
The Prague Stock Exchange Corporation (Burza Cennych Papiru
Praha, a.s., or "PSEC") was incorporated on November 24, 1992. Its founding
members and shareholders were several Czech and Slovak banks and brokerage
firms. Additional members were subsequently admitted. Companies which are more
than 50% foreign-owned may, in the aggregate, acquire no more than one-third of
the outstanding shares of the PSEC.
The highest governing body of the PSE is the General Assembly
of Shareholders of the PSEC. The Assembly elects and recalls members of the
"Chamber of the Stock Exchange" and performs other functions in accordance with
the Czech Commercial Code. The Chamber, consisting of 16 members, directs the
operation of the PSE. In addition, a "Supervisory Board" of 5 members exercises
control over the activities of the PSE and ensures that these activities are in
full compliance with statutory and regulatory requirements and in accord with
decisions of the General Assembly.
A General Secretary of the PSE implements the decisions of the
Chamber and is responsible for the day-to-day operation of the PSE and its
staff.
The stock exchange has established three standing committees:
a committee on membership, a committee on listing, which grants permission for
securities to be listed or traded on the exchange, and a committee on trades,
which has responsibility for market development and violations of PSE
regulations.
The PSE has established a Court of Arbitration to resolve
disputes arising from exchange transactions. The members of the PSE have agreed
<PAGE>
that the decisions of this neutral body will be binding on them. The rulings of
the Court of Arbitration are final and irrevocable.
Listing and Trading Eligibility Standards
Listing Eligibility Standards. Decisions regarding the
listing of a security on the PSE are made by the committee on listing. In order
to be approved for listing on the PSE, an issuer must meet the following
conditions:
(1) the issuer must have a registered share capital of not
less than Kc 1 million which must be fully paid up;
(2) the minimum issue value earmarked for public offer must be
Kc 100 million;
(3) the minimum percentage of the issue made through the
public offer must be 20%;
(4) effective commencing in 1994, the issuer must have been in
existence for at least two years;
(5) the securities must be fully paid-up and tradeable without
any limitation; and
(6) a prospectus describing the business activities and
financial standing of the issuer must be published.
The committee on listing may allow exceptions to the foregoing
listing requirements. Bonds issued by CNB on behalf of the government or those
guaranteed by the Czech Republic or the CNB are listed automatically.
In order to obtain a listing with the PSE, the issuer is
required, on an ongoing basis, to publish and notify the PSE of certain changes
in its financial position, including (a) any change in the value of the
issuer's net assets, provided the change exceeds 10%, (b) any disputes that
concern over 5% of the value of the company's assets or (c) the initiation of
bankruptcy proceedings against the company. Companies whose shares are listed
are also required by law to publish annual audited financial statements.
As of March 15, 1994, 15 equity securities and six debt
securities were listed on the PSE. The balance of the approximately 954 equity
securities and 14 debt securities which are eligible for trading on the PSE are
unlisted. See "Trading Eligibility Standards" below.
Trading Eligibility Standards. Securities may be traded on
the PSE without being listed on the PSE. The PSE's listing requirements do not
apply to unlisted securities which are traded on the PSE and, consequently,
less financial and other information is available regarding such securities.
The PSE requires only basic data on the identity of the issued security and the
issuer. The issuer is required, however, to file a prospectus with the Czech
Ministry of Finance.
<PAGE>
Liquidity
Trading in equity securities on the PSE is concentrated in
approximately one third of shares eligible to be traded. Share ownership is
also concentrated, primarily in investment funds, with only a limited portion
of many companies' shares actually owned directly by the public. See
"Institutional Investors" below.
The following table sets forth the aggregate debt and equity
trading value on the PSE for the periods indicated:
PSE Debt and Equity Trading Value
<TABLE>
<CAPTION>
Value Traded in
Million Kc
--------------------
<S> <C>
1993
April . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
May . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
June . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
July . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
August . . . . . . . . . . . . . . . . . . . . . . . . . . 320
September . . . . . . . . . . . . . . . . . . . . . . . . . 705
October . . . . . . . . . . . . . . . . . . . . . . . . . . 1,695
November . . . . . . . . . . . . . . . . . . . . . . . . . 3,056
December . . . . . . . . . . . . . . . . . . . . . . . . . 3,164
1994
January . . . . . . . . . . . . . . . . . . . . . . . . . . 3,398
February . . . . . . . . . . . . . . . . . . . . . . . . . 7,044
March . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,580
April . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,674
May . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,826
June . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,115
July . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,748
</TABLE>
As illustrated in the table above, trading volume on the PSE
posted sizable gains during the fourth quarter of 1993 and continued to expand
in 1994. The expansion in trading volume on the PSE during the fourth quarter
of 1993 and beginning of 1994 has been attributed in large part to a
significant inflow of foreign funds invested in the Czech equity market.
The following table sets forth the trading value of the 10
most actively traded equity securities on the PSE for July 1994 (excluding
investment funds) ranked by traded value.
<PAGE>
The Ten Most Actively Traded Equities in
July 1994 on the PSE<F1>
<TABLE>
<CAPTION>
% of Total Market % of Total
Value of Capitalization Market
Equity as of Capitalization
Value Traded Securities July 28, 1994 as of
Company Sector In Million Kc Traded In Million Kc July 28, 1994
--------------------------------- ---------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
CEZ a.s. . . . . . . . . . . . . . . . . . utilities 170.29 10.64% 85,366.04 21.61%
Zivnostenka banka a.s. . . . . . . . . . . banking 51.43 3.21% 5,577.68 1.41%
Komercni banka a.s. . . . . . . . . . . . . banking 49.57 3.10% 54,354.09 13.76%
Cokoladovny Praha a.s. . . . . . . . . . . food processing 34.07 2.13% 14,700.19 3.72%
construction,
MSA a.s. . . . . . . . . . . . . . . . . . fittings 30.47 1.90% 1,260.05 0.32%
refractory
Calofrig Borovany a.s. . . . . . . . . . . materials 26.17 1.63% 898.78 0.23%
IPS Praha a.s. . . . . . . . . . . . . . . construction 23.88 1.50% 1,486.65 0.38%
financial
Creditanstalt IPF . . . . . . . . . . . . . services 21.47 1.34% -- --
Ceska Sporitelna a.s. . . . . . . . . . . . banking 20.66 1.29% 28,000.00 7.09%
Moravia Frost a.s. . . . . . . . . . . . . food processing 17.04 1.06% 111.00 0.03%
____________________
<FN>
<F1> Information based upon official PSE prices
</TABLE>
As of July 28, 1994, the five largest companies traded on the
PSE, in terms of market capitalization, represented approximately 56% of the
total equity market capitalization of the PSE.
The following table sets forth the trading value of the five
most actively traded debt securities on the PSE for July 1994 ranked by trading
value.
<PAGE>
The Five Most Actively Traded Debt Securities
on the PSE
in July 1994<F1>
<TABLE>
<CAPTION>
% of
Total Monthly
Value Traded Value of Debt
Issuer Sector In Million Kc Securities Traded
------------------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
EZ 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . electric utility 327.26 51.94%
EZ 2 (14-3/8%) . . . . . . . . . . . . . . . . . . . . . . . electric utility 276.22 43.84%
St. dluhopis 14% . . . . . . . . . . . . . . . . . . . . . . Czech government 75.95 12.05%
St. dluhopis 8.75% . . . . . . . . . . . . . . . . . . . . . Czech government 52.01 8.25%
St. dluhopis 10% . . . . . . . . . . . . . . . . . . . . . . Czech government 46.55 7.39%
____________________
<FN>
<F1> Excludes trading in Czech government treasury bills; information based
on official PSE prices.
</TABLE>
Regulation of Price Movements on the PSE
In seeking to limit market volatility, the PSE imposes
limitations on the amount the price of a security can change, upward or
downward during a single trading session. Under the PSE's regulations, the
price of a security traded through the PSE's Automated Trading System, as
described below under "PSE Trading Mechanics," may increase or decrease by no
more than 5% during a trading session from the price established during the
prior trading session. Prices on direct trades through the PSE, however, may
fluctuate from one session to the next by up to 25%. Securities may reach the
trading limit during several consecutive trading sessions. As a result of these
limitations, different prices may be obtained for certain securities off the
PSE and trading of such a security on the PSE may cease. See "Privately
Negotiated Transactions" below.
Stock Market Indices
Prior to April 5, 1994, the PSE did not publish an official
performance index. The H N Wood Index, an index privately compiled by the local
brokerage firm of Wood & Co. and published in the Prague newspaper Hospodaske
Noviny, has tracked the performance of the 30 largest stocks on the PSE since
September 1993. The H N Wood Index began at a level of 1000 at its inception on
September 9, 1993 and had reached a level of 3805 on February 1, 1994,
representing an increase of approximately 280% between these two dates. At June
7, 1994, the H N Wood Index stood at a level of 1836, representing a decrease
of approximately 52% from the level at February 1, 1994. On September 15, 1994,
the H N Wood Index stood at 2048. The following graph shows the performance of
the H N Wood Index since its inception:
<PAGE>
On April 5, 1994, the PSE introduced an official index, called
the PX 50, which tracks the performance of 50 stocks traded on the PSE. The PX
50 is calculated in accordance with the International Financial Corporation's
methodology for construction of emerging country stock market indices, which
assigns to each stock a weight determined by market capitalization. Stocks are
selected based upon market capitalization, trading volume and other factors.
The following graph shows the performance of the PX 50 since its inception:
<PAGE>
The H N Wood Index and the PX 50 Index do not reflect changes
in market value of the underlying securities as indicated by trading activity
off the PSE. This trading may occur at prices which vary significantly from the
official price quoted on the PSE. This variation in prices may occur due to,
among other things, limitations imposed on fluctuations in prices on the PSE
and limited trading days and hours on the PSE. As a consequence, for some
securities better prices and timing of execution may be obtained off the PSE.
PSE Trading Mechanics
The PSE is fully computerized with software similar to that
used on the Lyons, France exchange. Trading of shares on the PSE can be done
either through the PSE's Automated Trading System ("ATS") or in direct dealings
concluded between members of the PSE outside the ATS but which are subject to
settlement through the PSE ("Block Trades"). According to the Czech National
Bank approximately 80% of PSE trading in 1993 occurred in Block Trades outside
the ATS.
Trading through the ATS is currently done exclusively via
terminals located in the PSE building. The ATS is based on concentration of
supply and demand for securities at a specific time. Quotation of prices and
matching of orders is done by computer. On the basis of pre-defined algorithms,
the price of individual securities is computed automatically. Orders placed
through the ATS must contain a specification of the type of order (purchase or
sale), an identification of the type, number and issuer of the securities, and
an identification of the PSE member. An order may also contain a "limit price,"
meaning the maximum price in the case of a purchase or the minimum price in the
case of a sale, or indicate that it is at the "market price," meaning the order
will be realized at the set market price.
Each PSE trading session begins at 8:00 a.m., Prague time, and
ends at 1:00 p.m. Except as described below, orders to be effected on a given
<PAGE>
PSE trading day must be placed no later than the beginning of the trading
session. Based upon the orders submitted prior to the beginning of a trading
session, a market price for each security is established in the manner
described above. There is currently a single price established by the ATS
system for each security traded during a given trading session and there is one
trading session per day. The price for each security is posted by the PSE
during the trading session at 11:00 a.m. Based upon the price established,
orders may either be fully or partly executed, or remain unexecuted. From 12:00
p.m. until 1:00 p.m., market participants have the opportunity to execute
unfulfilled orders at the prices fixed during the trading session. The PSE
publishes the price for securities traded during a session at 4:00 p.m. after
the conclusion of the session.
In contrast to trades conducted through the ATS, Block Trades
are conducted at prices negotiated directly by the market participants off of
the PSE. The identity of the securities sold and prices paid are reported to
the PSE on the same day, and the trades are settled through the PSE's
Securities Register. See "Custody and Settlement Procedures" below.
Trading on the PSE occurs in sessions held on each weekday.
Prior to March 14, 1994, trading had occurred on two days each week and, prior
to September 19, 1994, trading had occured on three days each week. The PSE is
exploring the possibility of instituting additional trading sessions on each
trading day and instituting a continuous trading system during each session,
although this may not occur in the near future.
A protest against a price established during a PSE trading
session may be submitted to the Stock Exchange Chamber within three days, and
the Chamber must respond within three days.
Brokerage commissions for transactions conducted on the PSE
are negotiated.
The RM System
The RM System, a computerized over-the-counter trading market,
is operated by RM System, a.s., a privately owned joint stock company. Trading
through the RM system began in April 1993. Both equity and debt securities are
traded through the RM System, and securities traded through the RM System
include securities traded on the PSE. Trades through the RM System may be
placed either by securities brokers or directly by the investors.
The RM System was developed in connection with the Czech
government's voucher privatization program. Since it did not appear feasible
that all privatized companies would be listed on the PSE in the foreseeable
future, the RM System was created to provide an alternative trading system for
unlisted shares.
The RM System operates by conducting periodic automated
trading rounds. Trading orders for the RM System must be submitted prior to the
trading round at which the order is to be executed. There may be a period of up
to four weeks, or longer, between trading rounds, although the RM System has
announced plans to implement more frequent trading beginning in September,
1994. Orders may be submitted either at designated locations or via direct
<PAGE>
online connections into the system. Orders may specify a variety of parameters
as to price and quantity. During each trading round, the RM System employs an
algorithm to determine an "auction price" at which transactions will be
effected. The resulting auction price may not lead to the satisfaction of all
orders. In satisfying orders, preference is given to orders submitted earlier
rather than orders submitted later, and to basic orders providing for execution
at whatever auction price results rather than orders which contain more
detailed specification as to acceptable prices and quantities. Following a
trading round, buyers are instructed where to transfer the purchase price,
which is specified by the sellers in their orders. Securities are transferred
at the Securities Center, as discussed under "Custody and Settlement
Procedures." Significant settlement delays may occur. If a broker is used to
effect transactions through the RM System, the commission is negotiable. The RM
System itself imposes transaction costs on satisfied orders, however, based
upon their monetary value.
Privately Negotiated Transactions
In addition to trading on the PSE and through the RM System, a
substantial proportion of secondary market transactions in Czech Securities is
privately negotiated between market participants, even if the securities to be
traded are eligible to be traded on the PSE or through the RM System. This
over-the-counter market is unregulated and, in particular, is not subject to
the trading limits described above. In addition, over-the-counter trading is
not limited as to time of day or number of trading sessions. On a particular
day and for a given security, the portion of trades occurring in the
over-the-counter market versus the PSE may range from between 60% and 90% and
may tend to be toward the upper end of this range, although accurate data is
not available. Traders in this market generally are institutional traders such
as the investment funds. As stated above, prices for securities traded
over-the-counter may vary, perhaps substantially, from the prices quoted in the
PSE. Because over-the-counter trading prices are not required to be reported to
the PSE or other Czech regulatory body, these prices cannot be used for the
purpose of valuing the Fund's portfolio holdings notwithstanding that they may
more accurately reflect market values for certain securities. Privately
negotiated trades involving Czech securities may be conducted both within and
outside the Czech Republic. Legislation may be proposed in late 1994 to
restrict private trading in the Czech Republic of securities quoted on the
official stock exchange markets, although there can be no assurance that such
legislation will be enacted or effectively enforced.
Institutional Investors
In connection with the first round of voucher privatization,
almost 75% of all vouchers were invested in voucher funds. As a result, a high
proportion of the shares of companies traded on the PSE are held by a limited
number of investment funds and other institutional investors. These
institutional investors frequently trade their portfolio securities in
privately negotiated transactions outside the PSE and the RM System, as
described above.
<PAGE>
Custody and Settlement Procedures in the Czech Republic
Settling and Clearing Trades
Settlement of all trades implemented through the PSE's ATS are
managed and administered by the Securities Register, a subsidiary of PSEC. The
PSE's procedures provide for settlement through the Securities Register three
days after the trade date, although delays have been reported. Settlement by
the Securities Register is conducted on the basis of the delivery of securities
against payment. Over-the-counter trades may also be settled through the
Securities Register. The instruction must be given on a trading day and the
transaction is then settled as if it were part of the ATS. Transactions placed
through the RM System are settled as described above under "The RM System."
Transactions outside the PSE and the RM System may be settled directly. The
parties arrange cash transfers between themselves and give instructions for the
transfer of shares directly to the Securities Center.
Many Czech securities brokers have established a procedure of
requiring confirmation with the Securities Center, prior to placing a sale
order on behalf of a client, that the client is the registered owner of the
securities to be sold. It may take several days for the Securities Center to
provide such confirmation, during which time the client will be unable to
dispose of the security and the price of the security may change. Czech
securities brokers do not generally require such a confirmation, however, with
respect to regular institutional clients.
Custody
Since May 1993, the Czech Ministry of Finance has operated a
Securities Center, which is a computerized book entry register for Czech
securities. All shares issued under the Czech voucher privatization program,
including all of the shares of Czech companies eligible for trading on the PSE,
are maintained in book entry form through the Czech Securities Center, and are
required by law to be so maintained for three years from the date of issuance.
Shares of other Czech securities are permitted to be maintained in either book
entry or physical form.
In addition to its registration duties, the duties of the
Securities Center include the custody of physical securities and the
compilation of information on owners, issuers, traders, organizers of OTC
markets, and others. The Securities Center maintains two master files: a
shareholders' file that lists every shareholder's holdings and an issuers' file
that lists all issuers of securities and the securities issued.
Custody arrangements can be made directly by the security
holder by opening an account at the Securities Center, or through a custodian
who holds securities on behalf of the owner.
The information stored in the registers of the Securities
Center is confidential; however, state authorities may gain access in
exceptional cases. Such cases, enumerated in the Securities Act, include the
state's interest in monitoring the legality of securities trading, a court's
need for information in a civil case, and inquiries as part of criminal and tax
investigations.
<PAGE>
Regulatory Structure
Introduction
In the Czech Republic, there are three separate bodies of law
which regulate the securities markets. The Securities Act regulates the
issuance of securities and the organization of the securities markets. The
Stock Exchange Act provides a legal framework for the establishment of stock
exchanges in the Czech Republic, which include the listing and trading of
securities on an exchange. The Investment Companies and Investment Funds Act
provides the mechanism for the regulation of the activities of investment
companies and investment funds.
Publicly Traded Securities
Pursuant to the Securities Act, securities which are to be
traded in a public market must first have a prospectus approved by the Ministry
of Finance. Approval is granted on the basis of an application and a prospectus
must be published within six months of such approval. The prospectus must
contain information about the issuer, including financial information for the
past three years, information about the issuer's business activities and
information about the securities to be issued.
International Offerings
Any offering of corporate securities outside the Czech
Republic requires the prior approval of the Ministry of Finance and the foreign
exchange authority (generally, the CNB).
Investor Protection Regulation
Czech securities laws contain certain provisions which address
the protection of investors. However, it is important to note that investor
protection provisions are substantially more limited than in countries with
more developed capital markets. The Czech Ministry of Finance functions as a
supervisory body with respect to publicly traded securities and the Chamber of
the PSE and the General Secretary of the PSE function as supervisory bodies
with respect to trades effected through the PSE. However, since the capital
markets in the Czech Republic have been established only recently the
effectiveness of the protections that are provided to investors in Czech
securities cannot be determined. In particular, mechanisms to monitor such
trading practices as front-running and trading on material inside information
are not in place, although such practices may be widespread.
The Czech Commercial Code requires that issuers of securities,
whether or not publicly traded, annually publish summary audited financial
statements. The PSE Rules require all issuers of listed securities to furnish
full audited annual financial statements and quarterly unaudited financial
statements to the PSE. The Securities Act (with respect to all publicly traded
securities) and the PSE Rules (with respect to listed securities) provide for
ongoing disclosure obligations upon the occurrence of certain situations which
may cause substantial movements in the price of the security issued or which
may materially adversely affect the issuer's ability to meet the obligations
arising from the issue of the security. Furthermore, under the Securities Act,
issuers may be liable to investors for damages caused by the offering of
<PAGE>
securities by means of a prospectus containing false or misleading information
or omitting facts important to the investment decisions of investors. In
addition, under the Securities Act, securities dealers are prohibited from
giving preference to their own accounts in dealing with securities.
The Securities Act provides for a general prohibition on the
use of insider information. The Act defines insider information as well as who
an insider is and contains liability provisions based upon relevant provisions
of the Czech Commercial Code. The Stock Exchange Act prohibits stock exchange
trading by specified parties based upon inside information. Under the Stock
Exchange Act, in stock exchange trades, which only include trades on the PSE,
all participants must have access to the same information about the facts which
are important in the development of the price of a security, and cannot
consummate trades that will cause damage to third parties and are prohibited
from trading on inside information that may affect the price of a security. The
Stock Exchange Act authorizes specific sanctions for violators, including
monetary penalties, the exclusion of violators from trading on the PSE and the
securities from trading on the PSE. Finally, under the Czech Criminal Code
there are certain criminal penalties, including imprisonment for a term of 3 to
15 years, authorized for the improper use of insider information.
Pursuant to the Order of the Exchange of the PSE, members of
the Exchange are prohibited from disseminating false or misleading information
for the purposes of causing damage to third parties. The Order provides for
sanctions against violators, including fines and suspension from the Exchange.
The Investment Companies and Investment Funds Act regulate
investment funds, including voucher funds. Investment companies and investment
funds are prohibited from using false or misleading information and may not
conceal facts important to holders of or future participants in such investment
vehicles. Investment funds and investment companies violating these rules are
subject to fines of up to 1,000,000 Kc, to suspension of the disposal of assets
of the fund or company and to suspension of further sales of shares of such
fund or company.
Regulation of Market Participants
Securities dealers, brokers and organizers of over-the-counter
markets must obtain authorization by the Ministry of Finance to engage in the
relevant activities. Requirements for approval are limited and do not require,
as a condition for approval, minimal capitalization. Examinations for
stockbrokers and continuing education requirements generally are substantially
less stringent than in countries with more developed securities markets.
<PAGE>
APPENDIX D
RATINGS
A description of the rating policies of Moody's and S&P with
respect to bonds and debentures appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality and carry the smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
qualities and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
a desirable investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
<PAGE>
Ca -- Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to
certain of its rating classifications. The modifier "1" indicates that the
security ranks in the higher end of its generic rating category; the modifier
"2" indicates a mid-range ranking; and the modifier "3" indicates that the
issues ranks in the lower end of its generic rating category.
Standard & Poor's Corporate Bond Ratings
AAA -- This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong capacity to repay
principal and pay interest.
AA -- Bonds rated AA also qualify as high quality debt
obligations. Capacity to pay principal and interest is very strong, and differ
from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to repay principal
and pay interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate
capacity to repay principal and pay interest. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay principal
and pay interest for bonds in this category than for higher rated categories.
BB-B-CCC-CC-C -- Bonds rated BB, B, CCC, CC and C are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligations. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI -- Bonds rated CI are income bonds on which no interest is
being paid.
D -- Bonds rated D are in default. The D category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired unless S&P believes that such
payments will be made during such grace period. The D rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of
a plus or minus to show relative standing within the major rating categories.
<PAGE>
Moody's Investors Service's Commercial Paper Ratings
Prime-1 -- Issuers (or related supporting institutions) rated
Prime-1 have a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by many of the
following characteristics: leading market positions in well-established
industries, high rates of return on funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 -- Issuers (or related supporting institutions) rated
Prime-2 have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
Prime-3 -- Issuers (or related supporting institutions) rated
Prime-3 have an acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is maintained.
Not Prime -- Issuers rated Not Prime do not fall within any of
the Prime rating categories.
Standard & Poor's Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. The four categories
are as follows:
A-1 -- This highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 -- Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity
for timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B -- Issues rated "B" are regarded as having only speculative
capacity for timely payment.
<PAGE>
C -- This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
D -- Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are not made on
the date due, event if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
<PAGE>
APPENDIX E
[Form of Subscription Certificate]
BY MAIL: BY OVERNIGHT COURIER: BY HAND:
Boston Financial Data Boston Financial Data Boston Financial Data
Services, Inc. Services, Inc. Services, Inc.
P.O. Box 9061 Corporate Reorganization 225 Franklin Street
Boston, MA 02205-8686 Department Concourse Level
Two Heritage Drive Boston, MA 02110
North Quincy, MA 02171 or
61 Broadway
Concourse Level
New York, NY 10006
THE CZECH REPUBLIC FUND, INC.
SUBSCRIPTION RIGHT FOR SHARES OF COMMON STOCK
This Subscription Certificate represents the number of Rights set
forth on the reverse side. The registered holder hereof (the "Holder") is
entitled to acquire one (1) Share of the Common Stock of The Czech
Republic Fund, Inc. (the "Fund") for each three (3) Rights held pursuant
to the Primary Subscription upon the terms and conditions and at the
Subscription Price for each share of Common Stock as specified in the
Fund's Prospectus dated ___________, 1995 (the "Prospectus"). The terms
and conditions of the rights offering (the "Offer") set forth in the
Prospectus are incorporated herein by reference.
To subscribe for Shares of Common Stock, the Holder must present to
Boston Financial Data Services, Inc. (the "Subscription Agent"), prior to
5:00 p.m., New York time, on the Expiration Date, either:
(1) a properly completed and executed Subscription Certificate
and a money order or check drawn on a bank located in the United
States of America and payable to The Czech Republic Fund, Inc. for an
amount equal to the number of Shares subscribed for under the Primary
Subscription (and, if such Holder is electing to exercise the
Over-Subscription Privilege, under the Over-Subscription Privilege)
multiplied by the Subscription Price; or (2) a Notice of Guaranteed
Delivery guaranteeing delivery of (i) a properly completed and
executed Subscription Certificate and (ii) a money order or check
drawn on a bank located in the United States of America and payable
to The Czech Republic Fund, Inc. for an amount equal to the number of
Shares subscribed for under the Primary Subscription (and, if such
Holder is electing to exercise the Over-Subscription Privilege, under
the Over-Subscription Privilege) multiplied by the Subscription Price
(which certificate and money order or check must then be delivered by
the close of business on the third Business Day after the Expiration
Date) (the "Protect Period").
If the Holder of this certificate is entitled to subscribe for
additional shares pursuant to the Over-Subscription Privilege, Part B of
<PAGE>
the Subscription Certificate must be completed to indicate the maximum
number of Shares for which such privilege is being exercised.
No later than seven Business Days following the Protect Period, the
Subscription Agent will send to each Exercising Rights Holder (or, if the
Fund's shares are held by Cede or any other depository or nominee, to Cede
or such other depository or nominee), the share certificates representing
the Shares purchased pursuant to the Primary Subscription and, if
applicable, the Over-Subscription Privilege, along with a letter
explaining the allocation of Shares pursuant to the Over-Subscription
Privilege. Any excess payment to be refunded by the Fund to an Exercising
Rights Holder who is not allocated the full amount of Shares subscribed
for pursuant to the Over-Subscription Privilege will be mailed by the
Subscription Agent. An Exercising Rights Holder will have no right to
rescind a purchase after the Subscription Agent has received a completed
Subscription Certificate or a Notice of Guaranteed Delivery. Any excess
payment to be refunded by the Fund to a Rights Holder will be mailed by
the Subscription Agent to him as promptly as practicable.
If the Holder does not make payment of any amounts due in respect of
Shares subscribed for, the Fund and the Subscription Agent reserve the
right to (i) find other stockholders for the subscribed and unpaid for
Shares; (ii) apply any payment actually received by it toward the purchase
of the greatest whole number of Shares which could be acquired by such
holder upon exercise of the Primary Subscription and/or Over-Subscription
Privilege, and/or (iii) exercise any and all other rights and/or remedies
to which it may be entitled, including, without limitation, the right to
set-off against payments actually received by it with respect to such
subscribed Shares.
This Subscription Certificate may be transferred, in the same manner
and with the same effect as in the case of a negotiable instrument payable
to specific persons, by duly completing and signing the assignment on the
reverse side hereof. Capitalized terms used but not defined in this
Subscription Certificate shall have the meanings assigned to them in the
Prospectus, dated _____ __, 1995, relating to the Rights.
THE CZECH REPUBLIC FUND, INC.
By:___________________________
Alan H. Rappaport
Chairman
THIS SUBSCRIPTION RIGHT IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED
(BUT ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE NUMBER OF
RIGHTS) AT THE OFFICE OF THE SUBSCRIPTION AGENT
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Information Agent,
Shareholder Communications Corporation
toll-free at (800) _______, ext. ___, or collect at ___________
<PAGE>
SUBSCRIPTION CERTIFICATE
NUMBER:_______________________________
NUMBER OF RIGHTS:_____________________
CUSIP NO: ____________________________
EXPIRATION DATE: _________________, 1995
PLEASE COMPLETE ALL APPLICABLE INFORMATION
SECTION I: TO SUBSCRIBE: I hereby irrevocably subscribe for the dollar
amount of Common Stock indicated as the total of A and B and C below upon
the terms and conditions specified in the Prospectus related hereto,
receipt of which is acknowledged.
TO SELL: If I have checked either the box on line D or the box on
line E, I authorize the sale of Rights by the Dealer Manager according to
the procedures described in the Prospectus. The check for the proceeds of
sale will be mailed to the address of record.
Please check ('X') below:
/ / A. Primary Subscription
_____________ / 3 = _____________ X $___________ = $_________
(Rights Exercised) (Full Shares of (Subscription (Amount
Common Stock Price) Required)
Requested)
/ / B. Primary Over-Subscription
_____________ / 3 = _____________ X $___________ = $_________(*)
Privilege (Full Shares of (Subscription (Amount
Common Stock Price) Required)
Requested)
_____________
(*) The Primary Over-Subscription Privilege may be exercised only by
Record Date Stockholders who exercise all of the Rights issued to
them, as described in the Prospectus.
/ / C. Primary Over-Subscription
_____________ / 3 = _____________ X $___________ = $_________(**)
Privilege (Full Shares of (Subscription (Amount
Common Stock Price) Required)
Requested)
<PAGE>
Amount of Check or Money Order Enclosed (Total of A + B + C) = $
Make check payable to "The Czech Republic Fund, Inc."
_____________
(**) The Secondary Over-Subscription Privilege may be exercised by
any Exercising Rights Holders, as described in the Prospectus.
/ / D. Sell any remaining unexercised Rights
/ / E. Sell all of my Rights
F. The following Broker-Dealer is hereby designated as
having been instrumental in the exercise of the Rights:
/ / Oppenheimer & Co., Inc. Account #
/ / Other Firm: Account #
_________________________ Please provide Day ( ) ________
Signature of Subscriber(s)/ your telephone Evening ( ) ________
Holder(s) number
<PAGE>
SECTION II: TO TRANSFER RIGHTS: (except pursuant to D and E above)
For value received, __________ of the Rights represented by this
Subscription Certificate are assigned to:
___________________________________________ __________________
Social Security Number or Tax ID of Assignee (Print Full Name of
Assignee)
____________________________ ________________________________________
Signature(s) of Assignee(s) (Print Full Address including postal Zip
Code)
The signature(s) must correspond with the name(s) as written upon the
face of this Subscription Certificate, in every particular, without
alteration.
IMPORTANT: For Transfer, a Signature Guarantee must be provided by
an eligible financial institution as defined in Rule 17 Ad-15 of the
Securities Exchange Act of 1934, as amended, subject to the standards and
procedures adopted by the issuer.
SIGNATURE GUARANTEED BY:
____________________________________________
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF
U.S. TAXES UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION
NUMBER (OR CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE
SUBSCRIPTION AGENT AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP
WITHHOLDING.
/ / CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE
DATE HEREOF AND COMPLETE THE FOLLOWING:
NAME(S) OF REGISTERED OWNER(S):
WINDOW TICKET NUMBER (IF ANY):
DATE OF EXECUTION OF NOTICE OF GUARANTEED DELIVERY:
NAME OF INSTITUTION WHICH GUARANTEED DELIVERY:
<PAGE>
APPENDIX F
[Form of Notice of Guaranteed Delivery]
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF COMMON STOCK OF
THE CZECH REPUBLIC FUND, INC.
SUBSCRIBED FOR UNDER PRIMARY SUBSCRIPTION AND THE
OVER-SUBSCRIPTION PRIVILEGE
As set forth in the Prospectus under "The Offer--Payment for Shares,"
this form or one substantially equivalent hereto may be used as a means of
effecting subscription and payment for all Shares of The Czech Republic
Fund, Inc. Common Stock subscribed for under the Primary Subscription and
the Over-Subscription Privilege. Such form may be delivered by hand or
sent by facsimile transmission, overnight courier or mail to the
Subscription Agent.
The Subscription Agent is:
BY MAIL: BY OVERNIGHT COURIER: BY HAND:
Boston Financial Data Boston Financial Data Boston Financial Data
Services, Inc. Services, Inc. Services, Inc.
P.O. Box 9061 Corporate Reorganization 225 Franklin Street
Boston, MA 02205-8686 Department Concourse Level
Two Heritage Drive Boston, MA 02110
North Quincy, MA 02171 or
61 Broadway
Concourse Level
New York, NY 10006
BY FACSIMILE:
(617) 774-4519
Confirm by Telephone:
(617) 774-4511
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN
AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY
The New York Stock Exchange member firm or bank or trust company
which completes this form must communicate the guarantee and the number of
Shares subscribed for (under both the Primary Subscription and the
Over-Subscription Privilege) to the Subscription Agent and must deliver
this Notice of Guaranteed Delivery, guaranteeing delivery of (i) payment
in full for all subscribed Shares and (ii) a properly completed and
executed Subscription Certificate (which certificate and check must then
be delivered by the close of business on the third business day after the
Expiration Date) to the Subscription Agent prior to 5:00 p.m., New York
<PAGE>
time, on the Expiration Date ____________, 1995 unless extended). Failure
to do so will result in a forfeiture of the Rights.
<PAGE>
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or
a bank or trust company, guarantees delivery to the Subscription Agent by
the close of business (5:00 p.m., New York City time) on the third
business day after the Expiration Date (_______________, 1995 unless
extended) of (A) a properly completed and executed Subscription
Certificate and (B) payment of the full Subscription Price for Shares
subscribed for in the Primary Subscription and pursuant to the
Over-Subscription Privilege, as subscription for such Shares is indicated
herein or in the Subscription Certificate.
Number of Shares subscribed for in
the Primary Subscription
for which you are
guaranteeing delivery of ________________________________
Rights and payment:
Number of Shares subscribed for
pursuant to the Primary
Over-Subscription Privilege
for which you are
guaranteeing delivery of ________________________________
Rights and payment:
Number of Shares subscribed for
pursuant to the Secondary
Over-Subscription Privilege
for which you are
guaranteeing delivery of ________________________________
Rights and payment:
Number of Rights to be delivered: ________________________________
Total Subscription Price payment to
be delivered: ________________________________
Method of Delivery [circle one]: A. Through DTC*
B. Direct to Corporation
Please note that if you are guaranteeing for over-subscription
Shares and are a DTC participant, you must also execute and forward to PNC
Bank, National Association a Form.
<PAGE>
___________________________________ __________________________________
Name of Firm Authorized Signature
___________________________________ __________________________________
Address Title
___________________________________ __________________________________
Zip Code Name (Please Type or Print)
___________________________________ __________________________________
Name of Registered Holder DTC Participant Number
(If Applicable)
___________________________________ __________________________________
Telephone Number Date
* IF THE RIGHTS ARE TO BE DELIVERED THROUGH DTC, A
REPRESENTATIVE OF THE FUND WILL PHONE YOU WITH A PROTECT
IDENTIFICATION NUMBER, WHICH NEEDS TO BE COMMUNICATED BY
YOU TO DTC.
<PAGE>
APPENDIX G
[Form of Nominee Holder Over-Subscription Form]
THE CZECH REPUBLIC FUND, INC.
RIGHTS OFFERING
NOMINEE HOLDER OVER-SUBSCRIPTION FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION
BY MAIL: BY OVERNIGHT COURIER: BY HAND:
Boston Financial Data Boston Financial Data Boston Financial Data
Services, Inc. Services, Inc. Services, Inc.
P.O. Box 9061 Corporate Reorganization 225 Franklin Street
Boston, MA 02205-8686 Department Concourse Level
Two Heritage Drive Boston, MA 02110
North Quincy, MA 02171 or
61 Broadway
Concourse Level
New York, NY 10006
BY FACSIMILE:
(617) 774-4519
Confirm by Telephone:
(617) 774-4511
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE
OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE
PRIMARY SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE
FACILITIES OF A COMMON DEPOSITORY. ALL OTHER EXERCISES OF
OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF THE
SUBSCRIPTION CERTIFICATES.
_________________________
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN
THE FUND'S PROSPECTUS DATED __________________, 1995 (THE "PROSPECTUS")
AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE
AVAILABLE UPON REQUEST FROM THE FUND.
_________________________
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN
FULL BY 5:00 PM, NEW YORK TIME, ON ___________________, 1995 UNLESS
EXTENDED BY THE FUND (THE "EXPIRATION DATE").
_________________________
1. The undersigned hereby certifies to the Subscription
Agent that it is a participant in ________________________ [Name of
<PAGE>
Depository] (the "Depository") and that it has either (i) exercised the
Primary Subscription Privilege in respect of Rights and delivered such
exercised Rights to the Subscription Agent by means of transfer to the
Depository Account of the Fund or (ii) delivered to the Subscription Agent
a Notice of Guaranteed Delivery in respect of the exercise of the Primary
Subscription Privilege and will deliver the Rights called for in such
Notice of Guaranteed Delivery to the Subscription Agent by means of
transfer to such Depository Account of the Fund.
2. With respect to Record Date Stockholders, the undersigned
hereby exercises the Primary Over-Subscription Privilege to purchase, to
the extent available, _____ shares of Common Stock and certifies to the
Subscription Agent that such Primary Over-Subscription Privilege is being
exercised for the account or accounts of persons (which may include the
undersigned) on whose behalf all primary subscription rights have been
exercised.(*)
3. With respect to any Exercising Rights Holders, the
undersigned hereby exercises the Secondary Over-Subscription Privilege to
purchase, to the extent available, _____ shares of Common Stock.
4. The undersigned understands that payment of the
Subscription Price of $__________ per share of each share of Common Stock
subscribed for pursuant to the Over-Subscription Privilege must be
received by the Subscription Agent at or before 5:00 p.m. New York time on
the Expiration Date and represents that such payment, in the aggregate
amount of $__________________ , either (check appropriate box):
/ / has been or is being delivered to the Subscription Agent pursuant
to the Notice of Guaranteed Delivery referred to above,
or
/ / is being delivered to the Subscription Agent herewith,
or
/ / has been delivered separately to the Subscription Agent; and, in
the case of funds not delivered pursuant to a Notice of
Guaranteed Delivery, is or was delivered in the manner set forth
below (check appropriate box and complete information relating
thereto):
/ / uncertified check
/ / certified check
/ / bank draft
Primary Subscription Confirmation Number ________________________________
Name of Nominee Holder __________________________________________________
Depository Participant Number ___________________________________________
<PAGE>
Address _________________________________________________________________
City ____________________________________________________________________
State ___________________________________________________________________
Zip Code ________________________________________________________________
By: _____________________________________________________________________
Name: ___________________________________ FUND, INC., a Maryland
corporation (the "Company"), does hereby make, constitute and appoint Alan H.
Rappaport and Robert I. Kleinberg, and each of them, attorneys-in-fact and
agents of the undersigned with full power and authority of substitution and
resubstitution, in any and all capacities, to execute for and on behalf of the
undersigned the Registration Statement on Form N-2 relating to the shares of
the Company, and any and all amendments (including post-effective amendments)
to the foregoing Registration Statement and any other documents and instruments
incidental thereto, and to deliver and file the same, with all exhibits
thereto, and all documents and instruments in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing that said attorneys-in-fact and agents, and each of them,
deem advisable or necessary to enable the Company to effectuate the intents and
purposes hereof, and the undersigned hereby fully ratifies and confirms all
that said attorneys-in-fact and agents, or any of them, or their or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
<PAGE>
IN WITNESS HEREOF, the undersigned has subscribed his name, this 4th
day of October, 1995.
/s/ Luis Rubio
--------------------------
Luis Rubio
Director
