<PAGE> 1
THE CZECH REPUBLIC FUND, INC.
SUPPLEMENT DATED FEBRUARY 2, 1996 TO PROSPECTUS DATED JANUARY 29, 1996
The Subscription Period as described in the Prospectus has been extended by the
Fund and the Dealer Manager until 5:00 p.m. on February 20, 1996, unless
further extended. The Confirmation Date will be March 5, 1996, unless the
Subscription Period is further extended.
<PAGE> 2
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 January 29, 1996 (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 February 8, 1996
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 $11.25.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, on February 15, 1996
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
12, 1995. The net asset value per share of Common Stock at the close of business
on October 6, 1995 and on January 25, 1996 was $13.88 and $13.52, respectively,
and the last reported sale price of a share of the Fund's Common Stock on the
New York Stock Exchange on October 12, 1995 and January 26, 1996 was $13.50 and
$14.125, 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(1) PROCEEDS TO FUND(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $11.25(3) $0.39 $10.86
- -----------------------------------------------------------------------------------------------------------
Total....................................... $18,000,000 $630,000 $17,370,000(4)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes on the following page)
------------------------
OPPENHEIMER & CO., INC.
------------------------
The date of this Prospectus is January 29, 1996
<PAGE> 3
(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.
OpCap Advisors (formerly known as Quest for Value Advisors), an affiliate of
Oppenheimer & Co., Inc., and BAI Fondsberatung GmbH, an affiliate of Bank
Austria Aktiengesellschaft and GiroCredit Bank 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 1-(800) 221-5724, ext. 327, or collect at (212) 805-7000.
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 will likely occur as a result of the Offer because
the Subscription Price per Share will likely 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)
(1) 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 2.50% 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 0.50% 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 1.00% 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.
(2) Before deduction of offering expenses incurred by the Fund, estimated at
$269,881, including up to $50,000 payable to the Dealer Manager as partial
reimbursement for its expenses.
(3) Represents the subscription price per Share payable by holders of Rights.
Sales of Shares may be made during the Subscription Period by the Dealer
Manager and other Selling Group Members at prices set by the Dealer Manager
from time to time. See "Distribution Arrangements."
(4) 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," "Kc" and "CZK" are to the lawful currency of the Czech
Republic and to "Kcs" are to the lawful currency of the former Czechoslovakia.
On January 24, 1996, the U.S. Dollar value of the koruna was Kc27.29= U.S. $1.00
as reported in The Wall Street Journal on January 25, 1996. 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> 4
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 January
29, 1996 (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 February 8, 1996 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 January 31, 1996 and ends at 5:00 p.m., New York time, on February 15, 1996,
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."
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."
3
<PAGE> 5
SUBSCRIPTION PRICE
The Subscription Price per Share is $11.25. The Subscription Price is
approximately a 17% discount to the Fund's net asset value per share on January
25, 1996 and approximately a 20% discount to the last reported sale price per
share of Common Stock on the New York Stock Exchange on January 26, 1996. 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 State Street Bank and Trust Company (the
"Subscription Agent"), by mail to P.O. Box 9061, Boston, Massachusetts
02205-8686, by overnight courier to Corporate Reorganization Department, Two
Heritage Drive, North Quincy, Massachusetts 02171, or by hand to 225 Franklin
Street, Concourse Level, Boston, Massachusetts 02110 or 61 Broadway, Concourse
Level, New York, New York 10006. 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 sold
directly by a Rights Holder, or may be sold through the Subscription Agent if
delivered to the Subscription Agent on or before February 12, 1996. Trading of
the Rights on the New York Stock Exchange will be conducted on a when-issued
basis commencing on January 30, 1996, and on a regular-way basis from January
31, 1996 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 2.50% 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 0.50% of the Subscription Price per Share. The
4
<PAGE> 6
Fund will pay to the Dealer Manager a fee equal to 1.00% 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 $50,000. 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 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 20% 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 an array of attractive investment opportunities. 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 January 25, 1996, the Fund had net assets of $59,591,225. 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. 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
$11.25 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 $17,100,119, after deducting offering expenses payable by the Fund
estimated to be approximately $269,881. 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.
5
<PAGE> 7
INFORMATION AGENT
The Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street
New York, New York 10004
Toll Free: 1-(800) 221-5724, ext. 327
or
Call Collect: (212) 805-7000
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
------------------------------------------------- --------------------------------------
<S> <C>
Record Date...................................... January 29, 1996
Subscription Period.............................. January 31, 1996 to February 15, 1996
(unless extended)
Expiration Date.................................. February 15, 1996
Payment for Shares or Notices of Guaranteed
Delivery Due................................... February 15, 1996
Subscription Certificates and Payment for Shares
Due pursuant to Notices of Guaranteed
Delivery....................................... February 21, 1996
Confirmation Date................................ March 6, 1996
</TABLE>
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 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
6
<PAGE> 8
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 4,407,134 shares of Common Stock outstanding. The
Common Stock is listed and traded on the New York Stock Exchange under the
symbol "CRF" and on the Osaka Securities Exchange under the symbol "8684". See
"Description of Capital Stock." As of January 25, 1996, the net assets of the
Fund were $59,591,225. As of January 25, 1996, approximately 83% of the Fund's
assets were invested in equity and debt securities of Czech Issuers and 17% 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
OpCap Advisors, an affiliate of Oppenheimer & Co., Inc. (the "Investment
Adviser"), and the Regional Adviser is BAI Fondsberatung GmbH, an affiliate of
Bank Austria Aktiengesellschaft and GiroCredit Bank 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 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
7
<PAGE> 9
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 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 normally 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 will likely occur as a result of the Offer
because the Subscription Price per Share will likely 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 $11.25 is 17%
below the Fund's net asset value of $13.52 per share as of January 25, 1996, 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
$0.75. 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."
8
<PAGE> 10
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 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 and 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. In addition,
minority shareholders in companies, such as the Fund, have limited rights
against actions taken by controlling parties, and those actions may adversely
affect the value of the Fund's holdings. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading value.
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.
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
9
<PAGE> 11
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 nonsubordinated 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 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
judgment 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). 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
10
<PAGE> 12
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 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 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."
11
<PAGE> 13
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 annualized 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 annualized operating expense
ratio of the Fund for the period ended August 31, 1995 was 2.39%. See
"Management of the Fund."
12
<PAGE> 14
FEE TABLE
<TABLE>
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Sales Load (as a percentage of offering price)(1)(2)............................... 3.50%
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS):
Management Fees.................................................................... 1.00%
Other Expenses(2).................................................................. 1.39%
Total Annual Expenses.............................................................. 2.39%
</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>
$ 58 $ 106 $ 157 $295
</TABLE>
- ---------------
(1) The Fund has agreed to pay to the Dealer Manager and each other Selling
Group Member a fee equal to 2.50% 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 0.50% 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 1.00% 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.
(2) 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 $269,881. See "Management of the
Fund" for additional information.
(3) The Example reflects the deduction of the Sales Load of 3.50%.
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 2.39%. 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.
13
<PAGE> 15
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 State Street Bank and Trust Company, 1-(800) 426-5523, and
which is incorporated by reference into this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD SEPTEMBER 30,
1994* THROUGH AUGUST 31, 1995
-----------------------------
(FOR A SHARE OUTSTANDING
THROUGH THE PERIOD)
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................................ $ 13.77**
------
Net investment income............................................. 0.29
Net realized and unrealized losses on investments, foreign
currency holdings, and translation of other assets and
liabilities denominated in foreign currencies.................. (0.83)
------
Net decrease from investment operations............................. (0.54)
------
Less distributions:
Dividends from net investment income.............................. (0.10)
------
Total dividends and distributions................................. (0.10)
------
Net asset value, end of period...................................... $ 13.13
======
Per share market value, end of period............................... $12.125
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE***.................... (12.80)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)................................ $57,880
Ratio of expenses to average net assets............................. 2.39%****
Ratio of net investment income to average net assets................ 2.41%****
Portfolio turnover.................................................. 20.39%
</TABLE>
- ---------------
* Commencement of Operations.
** Initial public offering price of $15.00 per share less underwriting
discount of $0.98 per share and offering expenses of $0.25 per share.
*** 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 Fund's dividend reinvestment plan. Total investment
return does not reflect brokerage commissions or sales charges and is not
annualized.
**** Annualized.
14
<PAGE> 16
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. 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)
NET ASSET AS % OF NET
MARKET PRICE(1) VALUE(2) ASSET VALUE
---------------- ---------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------------------------------------- ------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
November 30, 1994.......................... 15.125 11.250 13.750 13.500 10.00 (16.67)
February 28, 1995.......................... 12.375 10.375 13.540 12.890 (8.60) (19.51)
May 31, 1995............................... 12.750 10.125 12.570 12.820 1.43 (21.02)
August 31, 1995............................ 12.625 11.500 12.940 13.180 (2.43) (12.75)
November 30, 1995.......................... 13.875 12.000 13.880 13.190 (0.04) (9.02)
December 1, 1995 through January 25,
1996..................................... 15.125 12.625 13.890 13.270 8.89 (4.86)
</TABLE>
- ---------------
(1) As provided by PFPC Inc., the Fund's Sub-Administrator.
(2) Based on the Fund's computations.
The last reported sale price, net asset value per share and percentage
premium to net asset value of the Common Stock on January 25, 1996 were $14.125,
$13.52, and 4.47%, respectively.
15
<PAGE> 17
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 January 29, 1996 (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 February 8, 1996 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 January 31, 1996 and
ends at 5:00 p.m., New York time, on February 15, 1996, 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 January 31,
1996 and ends at 5:00 p.m., New York time, on February 15, 1996, 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
January 31, 1996 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 "-- 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
February 12, 1996. 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."
16
<PAGE> 18
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 an array of attractive investment opportunities. 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
January 25, 1996, the Fund had net assets of $59,591,225. 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.
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 of, among
other factors, the second wave of privatizations by the Czech government which
was completed in early 1995, 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 $68,400, $68,400, $34,200 and $34,200,
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.
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<PAGE> 19
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 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 $11.25. 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 12, 1995. The net asset value per share of Common
Stock at the close of business on October 6, 1995 and on January 25, 1996 was
$13.88 and $13.52, respectively, and the last reported sales price of a share of
the Common Stock on the New York Stock Exchange on October 12, 1995 and January
26, 1996 was $13.50 and $14.125, respectively. The Subscription Price of $11.25
is approximately a 17% discount to the Fund's net asset value per share on
January 25, 1996 and approximately a 20% discount to the last reported sale
price of a share of Common Stock on the New York Stock Exchange on January 26,
1996.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on February 15, 1996,
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 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 $10,000, as well as
reimbursement for all out-of-pocket expenses related to the Offer which are
expected to be $5,000. Questions regarding
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<PAGE> 20
Subscription Certificates should be directed to State Street Bank and Trust
Company (telephone 1-(800) 426-5523); stockholders may also consult their
brokers or nominees. Signed Subscription Certificates (see Appendix E) should be
sent to State Street Bank and Trust Company, by mail to P.O. Box 9061, Boston,
Massachusetts 02205-8686, by overnight courier to Corporate Reorganization
Department, Two Heritage Drive, North Quincy, Massachusetts 02171, or by hand to
225 Franklin Street, Concourse Level, Boston, Massachusetts 02110 or 61
Broadway, Concourse level, New York, New York 10006. 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: 1-(800) 221-5724, ext. 327
or
Call Collect (212) 805-7000
The Information Agent will receive a fee of $5,000, as well as
reimbursement for all out-of-pocket expenses related to the Offer which are
expected to be $11,000.
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 February 12, 1996. 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 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
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<PAGE> 21
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 or 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 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
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<PAGE> 22
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
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 $11.25 per Share. A subscription
will be accepted when payment, together with the properly
completed and executed Subscription Certificate, is received by
the Subscription Agent; 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 Subscription Agent by the close of
business on the third Business Day after the Expiration Date (the
"Protect Period").
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<PAGE> 23
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 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
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<PAGE> 24
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 20% of the shares of Common Stock, will be sold by
the Subscription Agent or otherwise on behalf of such Foreign Record Date
Stockholders.
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.
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<PAGE> 25
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."
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 January 26, 1996 (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
noncompliance, Plans should consult with their counsel regarding the
consequences of their exercise or transfer of Rights under ERISA and the Code.
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<PAGE> 26
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 4,407,134 shares of Common Stock outstanding. The
Common Stock is 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 January 25, 1996, the net assets of the
Fund were $59,591,225. 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 $11.25 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 $17,100,119, 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 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. Determina-
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<PAGE> 27
tions 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 January 25, 1996, approximately 83% of the Funds's assets were
invested in equity and debt securities of Czech Issuers and 17% 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 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
26
<PAGE> 28
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.
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 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
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<PAGE> 29
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
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.
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<PAGE> 30
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 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."
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<PAGE> 31
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 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
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."
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<PAGE> 32
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 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;
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<PAGE> 33
(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 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.
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<PAGE> 34
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 will likely occur as a result of the Offer
because the Subscription Price will likely 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 $11.25 is 17%
below the Fund's net asset value of $13.52 per share as of January 25, 1996, the
Fund's net asset value per share would be reduced approximately $0.75. 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.
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.
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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. Parliamentary elections are scheduled in the
Czech Republic for June 1996, and there can be no assurance that the present
ruling Government coalition will be in place following such elections. Certain
other Central European countries have recently held or will shortly hold
elections in which Socialist 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, including regulations to require banks to meet certain
capital adequacy standards. 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 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.
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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 accurate
market quotations 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 and less liquid and significantly
more volatile than the securities market in the United States. As of December
15, 1995, 68 equity securities and 20 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 December 15, 1995, approximately 1,716 equity securities and 48 debt
securities were traded on the PSE. As of December 15, 1995, the aggregate market
capitalization of equity securities of companies eligible for trading on the PSE
was approximately U.S. $18.5 billion (Kc. 481 billion). For the period from
January 1, 1995 through December 15, 1995, the average monthly equity trading
value of companies traded on the PSE was approximately U.S. $392.11 million (Kc.
10.19 billion), resulting in an aggregate trading value for the period of
approximately U.S. $4.71 billion (Kc. 122.34 billion). For December 1995, the
equity trading value on the PSE was approximately U.S. $855.2 million (Kc. 22.24
billion). In addition, the equity trading value on the PSE was at its lowest
point in 1995 during the month of January at U.S. $83.9 million (Kc. 2.2
billion) and at its highest point in 1995 during the month of November at U.S.
$1.02 billion (Kc. 26.7 billion). By comparison, for the year ended December 31,
1995, the average daily equity trading value on the New York Stock Exchange was
U.S. $12.2 billion and the aggregate trading value for the period was U.S. $3.08
trillion. On December 31, 1995, the market capitalization of the New York Stock
Exchange was U.S. $6.01 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
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<PAGE> 37
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. In addition, minority shareholders in companies, such as the
Fund, have limited rights against actions taken by controlling parties, and
those actions may adversely affect the value of the Fund's holdings. A limited
number of issuers represent a disproportionately large percentage of market
capitalization and 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.
For example, on January 6, 1994, the PX-50, the official index of the PSE which
tracks the performance of 50 stocks traded on the PSE, closed at 846.17; on
February 1, 1994 it closed at 1353.92; and on December 16, 1994 it closed at
557.20. On December 15, 1995, the PX-50 closed at 425.90.
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 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 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,
particularly minority shareholders, adequately and furthermore, the
administration of laws and regulations by government agencies may be subject to
considerable discretion. There is a low level of monitoring and regulation of
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
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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 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 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
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<PAGE> 39
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 "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
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<PAGE> 40
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 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 considerations associated
with Hedging and Derivatives appears in Appendix A hereto.
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<PAGE> 41
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.
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
was adopted on February 1, 1994 and since then there has been very limited 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
40
<PAGE> 42
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. The Fund's shares have generally traded at a discount to 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 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. The annualized operating expense ratio of the
Fund for the period ended August 31, 1995 was 2.39%.
41
<PAGE> 43
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>
*Alan H. Rappaport Chairman of the Board of 42 Executive Vice President,
Advantage Advisers, Inc. Directors Oppenheimer & Co., Inc.
Oppenheimer Tower (1994-present); Managing Director,
One World Financial Center Oppenheimer & Co., Inc.
200 Liberty Street (1986-1994); President and
New York, NY 10281 Director, Advantage Advisers, Inc.
(1993-present); 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.
*Robert I. Kleinberg Director, President and 58 General Counsel (1980-present),
Advantage Advisers, Inc. Secretary Secretary (1981-present) and
Oppenheimer Tower Executive Vice President
One World Financial Center (1982-present), Oppenheimer & Co.,
200 Liberty Street Inc.; Director and Secretary,
New York, NY 10281 Advantage Advisers, Inc. and
Municipal 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.
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
Principal Occupations
Name and Address Position with Fund Age and Other Affiliations
<S> <C> <C> <C>
Paul Belica Director 74 Director, Deck House, Inc.
359 Cedar Drive West (1976-present); Director, Senior
Briarcliff Manor, N.Y. 10510 Vice President and 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).
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
Principal Occupations
Name and Address Position with Fund Age and Other Affiliations
<S> <C> <C> <C>
Leslie H. Gelb Director 58 President, The Council on Foreign
The Council on Foreign Relations (1993-Present); Columnist
Relations (1991-1993), Deputy Editorial Page
58 East 68th Street Editor (1986-1990), and Editor, Op-
New York, New York 10021 Ed Page (1988-1990), 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, 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.
Luis Rubio Director 40 President, Centro de Investigacion
Centro de Investigacion Para Para el Desarrolo, A.C.
el Desarrollo, A.C. (1981-present); Director, The
Jaime Balmes No. 11, D-2 Mexico Equity and Income Fund,
Los Morales Polanco Inc.; Planning Director, Citibank,
Mexico D.F. 11510 N.A., Mexico (1979-1981); Advisor
to 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).
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
Principal Occupations
Name and Address Position with Fund Age and Other Affiliations
<S> <C> <C> <C>
Wendy W. Luers Director 55 Founder and President, The
The Foundation for a Civil Foundation for a Civil Society, New
Society York, Prague, Bratislava;
1270 Avenue of the Americas Contributing Editor, Vanity Fair
Suite 609 (1989-1995); Director of Special
New York, New York 10020 Projects, Human Rights Watch, New
York City (1987-1989); Director of
Special Projects, Amnesty
International, USA (1975-1979);
Professional lecturer and
commentator for IBM, Smithsonian,
MacNeil/Lehrer Report, NPR, CBS,
NBC, CNN; Member, Council on
Foreign Relations; Member, National
Council on the Arts; Founder and
President, Friends of Art and
Preservation in Embassies; Program
Committee Member; The American
Ditchey Foundation; Public
Delegate, CSCE (now OSCE) Budapest,
Hungary (1994); Member, Women's
Foreign Policy Group.
Dennis E. Feeney Treasurer 44 Executive Vice President
Oppenheimer & Co., Inc. (1995-present), Chief Financial
Oppenheimer Tower Officer (1994-present) and
One World Financial Center Controller (1986-1994), Oppenheimer
200 Liberty Street & Co., Inc.; Treasurer, The Asia
New York, NY 10281 Tigers Fund, Inc., The India Fund,
Inc. and The Mexico Equity and
Income Fund, Inc.
Robert A. Blum Assistant Secretary 35 Managing Director, Oppenheimer &
Oppenheimer & Co., Inc. Co., Inc. (1994-present); Senior
Oppenheimer Tower Vice President, Oppenheimer & Co.,
One World Financial Center Inc. (1991-1994); Vice President,
200 Liberty Street Oppenheimer & Co., Inc.
New York, NY 10281 (1989-1991); Associate, Fulbright &
Jaworski (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.
</TABLE>
- ---------------
* Director who is an "interested person" of the Fund within the meaning of the
1940 Act.
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.
45
<PAGE> 47
The following table provides information concerning the approximate
compensation paid during the year ended August 31, 1995 to each director who
receives compensation from the Fund, as well as the total compensation paid by
the Fund and other funds advised by the Investment Manager or the Investment
Adviser. 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 DIRECTORS FROM FUND ADVANTAGE AND OPCAP ADVANTAGE ADVISED BY OPCAP TOTAL COMPENSATION
- ----------------- ------------ -------------------- ------------------ ------------------ ------------------
DIRECTORSHIPS (A) DIRECTORSHIPS (A) DIRECTORSHIPS (A) DIRECTORSHIPS (A)
<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)
</TABLE>
- ---------------
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
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.
The Board of Directors is divided into three classes, having terms of one,
two and three years, respectively. At each annual meeting of stockholders, the
term of one class expires and directors are 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 January 25, 1996, 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 4,288,394 shares, equal to 97% of the outstanding shares of
the Fund.
INVESTMENT MANAGER AND ADVISERS
The Investment Manager is Advantage Advisers, Inc., the Investment Adviser
is OpCap 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.
46
<PAGE> 48
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 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 OpCap Advisors and is the portfolio manager of the
Oppenheimer Quest Global Value Fund. Since 1993, Mr. Daviron has been President
and Chief Investment Officer of Oppenheimer Capital International, a division of
the Investment Adviser. 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. Ms. Elisa A. Mazen assists Mr. Daviron with respect to the day-to-day
management of the Fund's portfolio and investment decisions for the Fund. Since
September 1994, Ms. Mazen has been Vice President of Oppenheimer Capital
International. From 1990 to 1994 she was a portfolio manager at Clemente Capital
managing international equities and an equity analyst with respect to the United
States, Canada, Turkey and Israel. Prior to 1990, she was a vice president at
Mitchell Hutchins Asset Management. 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 not 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 twelve registered investment companies with aggregate
assets of approximately $2 billion as of December 31, 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 32
registered investment company portfolios offered under the Quest for Value and
Oppenheimer names with aggregate assets of approximately $6.3 billion as of
December 31, 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 $37.7 billion (including the assets under
47
<PAGE> 49
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 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.
The Regional Adviser is a subsidiary of BA-GC Investmentbank Austria
Aktiengesellschaft (formerly Bank Austria Investment Bank Aktiengesellschaft)
which is a publicly owned Austrian company whose shares are held directly 38.8%
by Bank Austria Aktiengesellschaft, 38.8% by GiroCredit Bank Aktiengesellschaft
der Sparkassen, 7.6% by Grazer Wechselseitige Versicherung Aktiengesellschaft
and 4.1% by Wiener Stadtische Allgemeine Versicherung Aktiengesellschaft. BA-GC
Investmentbank Austria Aktiengesellschaft is unaware of the existence of any
other owner of 5% or more of any class of its equity securities. The principal
businesses of BA-GC Investmentbank Austria Aktiengesellschaft are investment
banking, securities research, securities trading and investment 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.
Bank Austria Aktiengesellschaft is the largest bank in Austria, and it is
estimated that as of December 31, 1995 it had total assets of approximately $66
billion. Bank Austria Aktiengesellschaft is a publicly owned Austrian company
whose shares are held 45.03% (representing 51.78% of the voting rights) by
Anteilsverwaltung-Zentralsparkasse, 19.61% (representing 22.55% of the voting
rights) by the Republic of Austria and 8.42% (representing 7.11% of the voting
rights) by Wiener Stadtische Allgemeine Versicherung Aktiengesellschaft. Bank
Austria Aktiengesellschaft's securities are in bearer and registered form, and
Bank Austria Aktiengesellschaft is unaware of the existence of any other owner
of 5% or more of any class of its equity securities.
GiroCredit Bank Aktiengesellschaft der Sparkassen (formerly Girozentrale
und Bank der osterreichischen Sparkassen Aktiengesellschaft) is the third
largest bank in Austria and it is estimated that, as of December 31, 1995, it
had total assets of approximately $32.5 billion. GiroCredit Bank
Aktiengesellschaft der Sparkassen is a publicly owned Austrian company whose
shares are held 55.14% by Anteilsverwaltung-Zentralsparkasse ("AVZ"), 14.56% by
DIE ERSTE Unternehmensbeteiligung Aktiengesellschaft and 7.77% by DIE ERSTE
osterreichische Spar-Casse-Bank Aktiengesellschaft. GiroCredit Bank
Aktiengesellschaft der Sparkassen is unaware of the existence of any other owner
of 5% or more of any class of its equity securities.
As of December 31, 1995, it is estimated that Bank Austria
Aktiengesellschaft and GiroCredit Bank Aktiengesellschaft der Sparkassen and
their affiliates had approximately $8.5 billion in assets under management. 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 August 31,
1995, the Investment Manager earned a fee of $530,369, which was payable by the
Fund, of which the Investment Manager paid $212,147 to the Investment Adviser
and $106,074 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, accounting and auditing services; taxes and
48
<PAGE> 50
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 August 31, 1995, the Fund's expenses (exclusive of
amortization of organization expenses) were $1,219,071.
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).
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 August 31, 1995, the Administrator earned a fee of
$106,074, 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
49
<PAGE> 51
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 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 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 BA-GC
Investmentbank Austria Aktiengesellschaft 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
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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. For the fiscal period ended August 31, 1995, the Fund paid
$339,348 in brokerage commissions for the execution of portfolio transactions.
No portion of such commissions were paid to the Investment Manager, the
Investment Adviser, the Regional Adviser or their affiliates. The Fund's
portfolio turnover rate for the fiscal period ended August 31, 1995 was 20.39%.
See "Taxation -- The Fund."
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 normally 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 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
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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.
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 has qualified and intends to continue 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
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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 (other than U.S. Government securities or
the securities of other regulated investment companies) of any one issuer or of
any two or more issuers that the Fund controls and that are determined to be
engaged in the same business or similar or related businesses.
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 would 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 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 on 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, to make the appropriate tax elections and to 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.
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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 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.
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 dividends or distributions from the Fund
in the form of additional shares pursuant to the dividend reinvestment plan
should be treated for federal income tax purposes as receiving a distribution in
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an amount equal to the amount of money that the shareholders receiving cash
dividends or distributions will receive, and should have a cost basis in the
shares received equal to such amount.
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.
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 any shares, either directly or by attribution under Section 318 of
the Code. 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 intends to 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
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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 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) on the income resulting from
the Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but may 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, to the extent the
withheld amount exceeds any tax due, be 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 advisers with
respect to the particular tax consequences to them of an investment in the Fund.
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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 certain sales of shares and
securities in Czech corporations are subject to Czech taxation at the rate of
39%. 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 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.
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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
January 25, 1996:
<TABLE>
<CAPTION>
AMOUNT HELD
BY THE
FUND OR FOR
TITLE OF ISSUE AUTHORIZED OUTSTANDING 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.
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
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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 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.
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
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<PAGE> 61
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 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.
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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 1.00% of the aggregate Subscription
Price for the Shares. The Fund has also agreed to reimburse the Dealer Manager
for up to $50,000 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 2.50% 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 0.50% 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
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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
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 L.L.P., Baltimore, Maryland. Certain legal matters concerning
Czech law will be passed upon by Bakes & partneri, 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. 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.
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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 period 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 State
Street Bank and Trust Company at 1-(800) 426-5523.
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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
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
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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.
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
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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.
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 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
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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 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
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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 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.
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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 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
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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:
<TABLE>
<CAPTION>
NUMBER
PARTY OF SEATS
- ------------------------------------------------------------------------------------ --------
<S> <C>
Government Coalition Parties:
The coalition of the Civic Democratic Party and Christian Democratic Party........ 76
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
</TABLE>
- ---------------
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 May 31, 1996 and June 1, 1996.
The constitution also provides for an upper house -- an 81 seat Senate. No
elections have taken place to date for the Senate and the initial composition of
the Senate has not been determined. The first elections for the Senate are
scheduled for November 15, 1996 and November 16, 1996.
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
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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.
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 different views, the
political environment in the Czech Republic is currently relatively 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). On
November 28, 1995, the Czech Republic signed an agreement with the Organization
for Economic Cooperation and Development (OECD). 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 Association, which provides
for the gradual phase-out of 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 on January 1, 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 price
index rose by 12.7%. In 1993, the consumer price index rose by 18.2%. The
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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 10.2% in 1994 and by 7.9% in
1995. 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. GDP fell again in 1993 by 0.9% but there was an increase in GDP
of 2.6% in 1994. Through the first nine months of 1995 GDP increased by 4.8%.
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. In
1994, the current account of the balance of payments, which is composed of the
trade account and the services account, recorded a surplus of approximately U.S.
$298.0 million. Through September 30, 1995, the current account recorded a
deficit of approximately U.S. $(579.6) million. This decrease in the current
account was caused by significant negative growth in the balance of the trade
account in 1995, i.e. imports exceeded exports in 1995. While total exports of
goods continued to grow in the Czech Republic during the first eleven months of
1995 by approximately 10.7%, compared to the first eleven months of 1994, total
imports of goods grew by 29.6% during the first eleven months of 1995 compared
with the first eleven months of 1994. See "The Czech Economy -- Balance of
Payments."
The following table sets forth selected economic data for the Czech
Republic for the periods indicated below:
SELECTED ECONOMIC DATA
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995(7)
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Real GDP growth ($ per annum)(1)(4)... (1.2) (14.2) (6.6) (0.9) 2.6 4.8(8)
GDP (U.S.$ billion)(2)(3)............. 31.6 24.3 28.4 31.2 36 21.8(9)
Gross External Debt at year end (U.S.$
billion)(4)......................... 8.1(5) 9.3(5) 6.9 8.5 10.7 14.0(10)
Current Balance (U.S.$ billion)(4).... (1.1)(5) 0.3(5) (0.3)(6) 0.4 0.3 (0.6)(10)
Change in Consumer Price Index
(%)(3).............................. 17.5 52 12.7 18.2 10.2 7.9(11)
Unemployment Rate at year end
(%)(4).............................. .8 4.1 2.6 3.5 3.2 3.0(10)
Koruna per U.S.$ (average for
period)............................. 17.95(3) 29.49(3) 28.29(4) 29.15(4) 28.78(4)(7) 26.58(4)(10)
</TABLE>
- ---------------
(1) Based on constant prices Kcs/Kc
(2) Based on current prices in Kcs/Kc converted at the average exchange rates
for the periods listed in this table
(3) Source: Czech Statistical Office
(4) Source: Czech National Bank
(5) Data for CSFR and therefore includes Slovakia
(6) Estimated portion of data for CSFR which is attributable to the Czech
Republic
(7) Preliminary data
(8) As compared with the same nine month period of 1994
(9) Data through June 30, 1995
(10) Data through September 30, 1995
(11) Reflects revised consumer goods basket effective January 1, 1995
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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 and ended in early 1995 is estimated to have had 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 received vouchers for a nominal fee with which they
were 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, approximately
850 additional Czech companies were 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 approximate book value of the companies included in the
voucher component of the second wave of large scale privatization was 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 involved 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
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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 both a closed-end and open-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 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. The scope
of the restitution was recently expanded to a limited degree by the ruling of
the Constitutional Court of the Czech Republic which allowed the restitution of
property to Czech citizens residing permanently abroad.
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. GDP fell again in 1993 by 0.9% but there was
an increase in GDP of 2.6% in 1994. For the first nine months of 1995 GDP
increased by 4.8%.
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 rose 10.2% in
1994 and 7.9% in 1995.
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. In addition, any changes in the exchange rate of the CZK,
which is currently fixed to a basket of foreign currencies, may cause the
consumer price index to increase or decrease. For further discussion, the
"Foreign Exchange" below.
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.
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The following table sets forth the rate of unemployment during the periods
indicated below:
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 %
III 3.2 %
IV 3.1 %
1995 I 3.1 %
II 2.8 %
III 3.0 %(1)
IV 2.9 %(1)
</TABLE>
- ---------------
(1) Preliminary data
Source: For 1991 and 1992: OECD; For 1993, 1994 and 1995 (except third and
fourth quarters 1995): Czech Statistical Office; For third and fourth quarters
1995: Czech National Bank.
The implementation of the 1991 bankruptcy law which was amended in 1993 may
lead to an increase in the number of bankruptcies and a rise in the unemployment
rate as more bankruptcies, including bankruptcies of larger companies, move
through the court system.
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, though the effects of these programs are
unclear.
The following table sets forth average monthly nominal wages in the
manufacturing sector for the Czech Republic:
AVERAGE MONTHLY NOMINAL WAGES
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995(1)
- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
$181 $129 $165 $200 $240 $ 292
</TABLE>
- ---------------
(1) Data through September 30, 1995; preliminary data
Source: Czech Statistical Office
Legislation was 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
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<PAGE> 77
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 funds must take the form of a joint stock company. On October 1,
1994, the first Czech pension funds were established. It is expected that the
development of pension funds may gradually 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 1994, public expenditure accounted for approximately 36.8% 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, including compatibility with the EU. 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: 22% 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%) and 5% generally applicable to services (with certain
exceptions, such as certain services considered to be non-essential, which are
subject to the 22% 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, to 42% in 1994, to 41% in 1995
and to 39% in 1996.
The following table sets forth certain information regarding the state
budget of the Czech Republic for the periods indicated:
STATE BUDGET
KC BILLION
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- -------------------
BUDGET ACTUAL BUDGET ACTUAL BUDGET ACTUAL(1)
------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues...................... 342.2 358.0 381.8 390.5 411.7 211.1
Total Expenditures.................. 342.2 356.9 381.8 380.1 411.7 200.7
</TABLE>
- ---------------
(1) Data through June 30, 1995
Source: Budget: Czech State Budget; Actual 1993 and 1994: Czech National Bank;
Actual 1995: Czech Statistical Office
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
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<PAGE> 78
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 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.
Historically, the balance of payments statistical data were collected
separately for convertible and non-convertible currencies. Since 1991, the
importance of the balance of payments in convertible currencies has grown in
importance as the Czech Republic progressed in its reorientation towards western
markets. Unless indicated otherwise, statistical data regarding the balance of
payments of the Czech Republic presented in this prospectus include only
transactions in convertible currencies.
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<PAGE> 79
The following table shows the percentage of Czech imports and exports by
selected trading partners:
FOREIGN TRADE, BY SELECTED TRADING PARTNERS:
<TABLE>
<CAPTION>
1993(1) 1994 1995(6)
------- ----- -----
<S> <C> <C> <C>
a) Export.................................................. 100.0% 100.0% 100.0%
including:
Advanced Market Economies of which:........................ 69.2 59.8 61.8
EU(2).................................................... 53.9 54.1 56.6
EFTA(2).................................................. 10.8 1.7 1.8
Developing Countries....................................... 10.8 7.3 5.7
Economies in Transition of which:.......................... 9.2 32.1(3) 31.9
CEFTA(4)................................................. -- 22.9 23.4
Slovakia................................................. -- 16.4 16.3
Former USSR................................................ 8.1 -- --
State Economies(5)......................................... 2.8 0.7 0.6
b) Import.................................................. 100.0% 100.0% 100.0%
including:
Advanced Market Economies of which:........................ 69.8 64.6 65.2
EU....................................................... 47.7 55.7 56.2
EFTA(2).................................................. 13.7 2.6 2.5
Developing Countries....................................... 5.7 5.4 4.9
Economies in Transition of which:.......................... 5.9 29.3 29.0
CEFTA(4)................................................. -- 18.5 17.3
Slovakia................................................. -- 14.2 13.1
Former USSR................................................ 17.9 -- --
State Economies(5)......................................... 0.6 0.7 0.9
</TABLE>
- ---------------
(1) Data for 1993 exclude trade with Slovakia.
(2) On January 1, 1995, the former EFTA countries of Austria, Finland and Sweden
joined the EU.
(3) Beginning in 1994, the former USSR is included into economies in transition.
(4) Includes trade with Hungary and Poland.
(5) Includes trade with North Korea, Laos, China, Cuba, Vietnam, Mongolia.
(6) Data through June 30, 1995.
EU -- The European Union, EFTA -- The European Free Trade Association,
CEFTA -- The Central European Free Trade Association.
Source: Czech Statistical Office
The service sector generally accounts for a significant percentage of the
current account balance. In 1994, the current account of the balance of
payments, which is composed of the trade account and the services account,
recorded a surplus of U.S. $298.0 million. Through September 30, 1995, the
current account recorded a deficit of U.S. $(579.6) million. This decrease in
the current account was caused by significant negative growth in the balance of
the trade account in 1995, i.e. imports exceeded exports in 1995. While total
exports of goods continued to grow in the Czech Republic during the first eleven
months of 1995 by approximately 10.7%, compared to the first eleven months of
1994, total imports of goods grew by 29.6% during the first eleven months of
1995 compared with the first eleven months of 1994.
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 aggregate balance of trade recorded a surplus of Kc 10.1
billion. Exports totalled Kc 385.0 billion and imports were Kc 374.9 billion. In
1993, the current
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<PAGE> 80
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. $433.1
million.
The following table sets forth the balance of payments of the Czech
Republic for the periods presented:
BALANCE OF PAYMENTS
U.S. DOLLARS MILLION
<TABLE>
<CAPTION>
1990(3) 1991(3) 1992(4) 1993 1994 1995(5)
-------- ----- ---- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Account Surplus
(Deficit).................... (1,104.5)(1) 356.5(1) 52.9(2) 433.1(2) 298.0(2) (579.6)(2)
Capital Account Surplus
(Deficit).................... 326.1(1) 46.9(1) (6.1)(2) 2,639.0(2) 2,105.9(2) 5,159.1(2)
</TABLE>
- ---------------
(1) Source: CSFR Statistics from Czech Statistical Office
(2) Source: Czech National Bank
(3) Data for CSFR and therefore includes Slovakia
(4) Estimated portion of data for CSFR which is attributable to the Czech
Republic
(5) Preliminary data through September 30, 1995
In contrast to 1993 and 1994, the current account balance of the Czech
Republic recorded a deficit of approximately U.S. $0.6 billion in the first
three quarters of 1995. The underlying imbalance between the dynamics of exports
and imports of goods may continue and may cause the negative balance of both the
trade account and the current account to grow. Significant deficits in the
current account may not be sustainable by the Czech Republic in the long term
and may have adverse effects on the economy as a whole.
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. In 1993, direct
foreign investment into the Czech Republic (excluding portfolio and short-term
investment) totalled U.S. $567.8 million. In 1994, the total was U.S. $862.4
million. According to preliminary CNB estimates, in the nine months ended
September 30, 1995, additional U.S. $1.9842 billion flowed into the Czech
Republic in the form of direct investment, of which approximately U.S. $1.3
billion was a one-time payment for a 27% stake in the Czech state telephone
company, SPT Telecom, a.s., which was sold to foreign direct investors as part
of the privatization of the Czech telecommunications industry. The Czech
Republic is attractive to foreign investors because of its skilled but
relatively inexpensive labor pool and proximity to markets in the European
Community and Western Europe in general. The Czech Republic shares borders with,
among other countries, Germany and Austria.
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<PAGE> 81
The following table sets forth information regarding the volume of foreign
direct investment in the Czech Republic for the periods indicated:
DIRECT FOREIGN INVESTMENT
<TABLE>
<CAPTION>
KC U.S.$
YEAR MILLION MILLION
------------------------- ------- -------
<S> <C> <C>
1990..................... 2,007 112
1991..................... 14,560 494
1992..................... 28,379 1,003
1993..................... 16,552 568
1994..................... 24,819 862
------ -----
Total.................... 86,317 3,039
</TABLE>
- ---------------
Source: Czech National Bank
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 on 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. $8.5
billion at the end of 1993, U.S. $10.7 billion at the end of 1994 and U.S. $14.0
billion at September 30, 1995. At the end of the second quarter of 1995, foreign
currency reserves totalled approximately U.S. $14.7 billion, of which almost
U.S. $11.9 billion were held by the CNB.
The following table sets forth the foreign exchange reserves of the Czech
Republic:
FOREIGN EXCHANGE RESERVES
U.S. DOLLARS MILLION
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 31,
1993 1993 1994
---------- ------------ ------------
<S> <C> <C> <C>
Official CNB Reserves.................... 842.5 3,872 6,243
Foreign Exchange Reserves of Commercial
Banks.................................. 2,739.0 2,373 2,649
------- ----- -----
Total Foreign Exchange Reserves.......... 3,581.5 6,245 8,892
</TABLE>
- ---------------
Source: June 30, 1994 data from Czech Statistical Office; other data from Czech
National Bank
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
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<PAGE> 82
Czechoslovak and Czech currency remained 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 maintenance of the fixed exchange rate
has led to inflationary pressures as foreign capital flowed into the Czech
Republic in anticipation of the revaluation of the currency. In August of 1995,
the CNB adopted a set of administrative measures affecting certain activities of
Czech commercial banks, aimed at preventing foreign short-term capital inflows
into the Czech Republic. There can be no assurances, however, that the
Government will keep in place current mechanisms, such as the pegging to the
basket of foreign currencies, which prevent the CZK from floating freely as
against other fully convertible currencies.
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.
Exchange Controls
On September 26, 1995, the Czech Parliament adopted a new foreign exchange
act (the "Act") which came into effect on October 1, 1995. The Act provides for
full external convertibility of the CZK for current account purposes in both
commercial and non-commercial transactions. Certain restrictions continue to
apply for capital investments of Czech residents abroad, such as investments in
foreign securities, certain foreign derivative instruments and loans to foreign
residents. Subject to certain exceptions, foreign residents are not permitted to
directly acquire real estate in the Czech Republic. The Act provides for
repatriation of investments and profits thereon abroad. Repatriation of
investments and profits thereon in the hands of U.S. investors is also
guaranteed by the U.S./Czech treaty on the promotion and protection of
investments, which supersedes the Act. The Act further increased the authority
of the CNB by granting the CNB the power to temporarily suspend or alter certain
provisions of the Act in its discretion in case of fiscal or economic crisis.
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.
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. Construction of an alternative
pipeline, which connected the Czech refineries
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<PAGE> 83
with Ingolstads in Germany, was completed in late 1995. It is anticipated that
the pipeline will be fully operational in early 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 Czech Airlines, a.s., which took over
from the former Czechoslovak Airlines upon the dissolution of the CSFR. Czech
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, which is currently in process as the Czech state telephone
company, SPT Telecom, a.s., was partially privatized in late 1995 and the
strategic partner selected in the privatization, TelSource, a consortium
consisting of the Dutch and Swiss land-line telephone companies, is in the
process of implementing network improvements. 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. As of
January 1, 1996, a total of 55 banks licensed by the CNB were operating in the
Czech Republic, including those licensed as foreign bank branch offices. As of
January 1, 1996, the structure of the Czech banking sector consisted of the
following:
<TABLE>
<S> <C>
Commercial banks, wholly Czech owned............................................ 14
Commercial banks, partially foreign owned....................................... 19
Commercial banks, wholly foreign owned.......................................... 12
Foreign commercial bank branches................................................ 9
State financial institution (the Consolidation Bank)............................ 1
</TABLE>
- ---------------
Source: Czech National Bank
In addition, certain banks have had their licenses revoked or are under
forced administration, including Kreditni a prumyalova banka, a.s., whose
banking license was revoked in 1993, Banka Bohemia, a.s., which was placed under
forced administration in 1994 and is currently in liquidation, AB banka, a.s.,
whose banking license was revoked in 1994, Ceski banka, a.s., whose banking
license was revoked in 1995, and Ekoagrobanka, a.s., which was placed under
forced administration on January 16, 1996.
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.
Commencing 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, in two additional
cases the CNB moved to revoke the banking license of the troubled institutions.
Despite attempts to reorganize the troubled banks, all but one, Ekoagrobanka,
a.s., which was placed under forced administration on January 16, 1996, entered
into liquidation subsequent to their license being revoked
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<PAGE> 84
or CNB receivership instituted. Although new regulations were passed in 1994
requiring the reclassification of, and establishment of reserves for, troubled
loans, and instituting mandatory deposit insurance requirements, two of the
above-mentioned five cases occurred in 1995 and 1996 which may be perceived as
the impetus for the CNB's current policy aimed at the consolidation of the
market among small and mid-size banks. Under such policy, troubled banks will be
required to increase their share capital to reduce the risks of problem loans,
which is expected to encourage mergers and strategic foreign as well as domestic
investment. In the case of Ekoagrobanka, a.s., the CNB also undertook to play a
more active role in the reorganization of the bank by offering it a bridge loan
in the initial amount of Kc 3 billion, until a suitable investor can be found.
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."
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<PAGE> 85
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.
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
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<PAGE> 86
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 dividend 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:
BONDS
<TABLE>
<CAPTION>
CORPORATE STATE AND MUNICIPAL(1)
------------------------ ------------------------
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(2)......................................... 7 8,300 4 10,300
</TABLE>
- ---------------
(1) 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).
(2) Through March 18, 1994.
The maturities of the corporate bonds included in the table above are
generally 5 years or under and interest coupon rates range from 8.5% to 21%. 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 approximately
15%.
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<PAGE> 87
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.
FOREIGN ISSUANCES
In 1991, the Czechoslovak State Bank issued U.S. $200 million principal
amount of Eurobonds maturing in 1994 and issued Y10 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 Y35 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 rating was upgraded to Baa2 on
May 25, 1994, and further raised to Baa1 on September 18, 1995. In addition, the
S&P rating of long-term sovereign debt of the Czech Republic was upgraded to A
on November 6, 1995. As for the other Central European countries, this year
Poland, Hungary, Austria and Slovakia each received investment grade ratings on
government debt from either Moody's or S&P.
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 December 15, 1995, 62 equity securities
and 20 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
December 15, 1995, approximately 1,716 equity securities and 48 debt securities
were eligible to be traded on the PSE. As of December 15, 1995, the aggregate
market capitalization of equity securities of companies eligible for trading on
the PSE was approximately U.S. $18.5 billion (Kc 481 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.
C-3
<PAGE> 88
The PSE has established a Court of Arbitration to resolve disputes arising
from exchange transactions. The members of the PSE have agreed 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 200
million;
(3) the minimum percentage of the issue made through the public offer
must be 20%;
(4) the issuer must have been in existence for at least two years;
(5) the securities must be fully paid-up, non-assessable 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 the 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, (c) the initiation of bankruptcy proceedings
against the company or (d) changes in control and new issuances of securities.
Companies whose shares are listed are also required by law to publish annual
audited financial statements and quarterly and semi-annual unaudited results.
As of December 15, 1995, 62 equity securities and 20 debt securities were
listed on the PSE. The balance of the approximately 1,716 equity securities and
48 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 any of the PSE, the ancillary market or unlisted
markets 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.
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.
C-4
<PAGE> 89
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........................................................... 6,939
April........................................................... 3,593
May............................................................. 3,826
June............................................................ 4,115
July............................................................ 1,600
August.......................................................... 2,674
September....................................................... 6,793
October......................................................... 6,413
November........................................................ 5,777
December........................................................ 9,852
1995
January......................................................... 6,612
February........................................................ 4,941
March........................................................... 13,386
</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 and
1995. The expansion in trading volume on the PSE has been attributed in large
part to a significant inflow of foreign funds invested in the Czech equity
market and the introduction onto the PSE of the shares of companies privatized
or partially privatized in the second wave of voucher privatization. The
expansion of trading volume due to the increase in the number of issues trading
does not necessarily mean that individual stock liquidity has improved.
C-5
<PAGE> 90
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.
THE TEN MOST ACTIVELY TRADED EQUITIES IN
DECEMBER 1995 ON THE PSE(1)
<TABLE>
<CAPTION>
% OF TOTAL MARKET % OF TOTAL
VALUE OF CAPITALIZATION MARKET
EQUITY AS OF CAPITALIZATION
VALUE TRADED SECURITIES DECEMBER 15, 1995 AS OF
COMPANY SECTOR IN MILLION KC TRADED IN MILLION KC DECEMBER 15, 1995
- ----------------------- ---------------- -------------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
SPT Telecom............ telecom 129,899 8.95 59251.7 12.38
CEZ.................... utility 91,041 6.28 49657.1 10.47
Komercni Banka......... banking 86,239 5.94 27272.1 5.70
RIF.................... investment fund 31,289 2.16 4216.5 0.88
Komercni Banka IF...... investment fund 30,011 2.07 6530.0 1.36
Sber. Surov. Praha..... waste treatment 27,820 1.92 1350.3 0.28
IPB.................... banking 27,684 1.91 9253.7 1.93
2. Sporit. Privat.
IF................... investment fund 26,795 1.85 1292.7 0.27
SPIF Cesky............. investment fund 24,190 1.67 5937.0 1.24
Ceska Sporitelna....... banking 18,861 1.30 11338.0 2.37
</TABLE>
- ---------------
(1) Information based upon official PSE prices
As of December 15, 1995, the five largest companies traded on the PSE, in
terms of market capitalization, represented approximately 33% 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.
THE FIVE MOST ACTIVELY TRADED DEBT SECURITIES
ON THE PSE
IN DECEMBER 1995(1)
<TABLE>
<CAPTION>
% OF
TOTAL MONTHLY
VALUE TRADED VALUE OF DEBT
ISSUER SECTOR IN MILLION KC SECURITIES TRADED
---------------------------------------------- -------- -------------- -----------------
<S> <C> <C> <C>
IPB 11.125 /98................................ banking 2247.6 25.87
KB 11.1 /98................................... banking 1423.6 16.39
CEZ 14 3/8 /01................................ utility 899.4 10.35
Glavunion 8.5 /00............................. glass 713.0 8.21
CEZ 11.3 /05.................................. utility 629.3 7.24
</TABLE>
- ---------------
(1) Excludes trading in Czech government treasury bills; information based on
official PSE prices.
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.
C-6
<PAGE> 91
STOCK MARKET INDICES
Prior to April 5, 1994, the PSE did not publish an official performance
index. The HN Wood Index, an index privately compiled by the local brokerage
firm of Wood & Co. and published in the Prague newspaper Hospodayske Noviny, has
tracked the performance of the 30 largest stocks on the PSE since September
1993. The HN 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 November 30, 1995,
the HN Wood Index stood at a level of 1228, representing a decrease of
approximately 68% from the level at February 1, 1994. The following graph shows
the performance of the HN Wood Index since its inception:
HN WOOD INDEX
<TABLE>
<CAPTION>
DATE VALUE
- -------- -------
<S> <C>
9/10/93 1000.00
9/17/93 L992.00
9/24/93 1003.00
10/ 1/93 1023.00
10/ 8/93 1042.00
10/15/93 1144.00
10/22/93 1229.00
10/29/93 1339.00
11/ 5/93 1650.00
11/12/93 1910.00
11/19/93 1961.00
11/26/93 1979.00
12/ 3/93 2023.00
12/10/93 2089.00
12/17/93 2246.00
12/24/93
12/31/93
1/ 7/94 2399.00
1/14/94 2622.00
1/21/94 2961.00
1/28/94 3695.00
2/ 4/94 H3717.00
2/11/94 3513.00
2/18/94 3594.00
2/25/94 3698.00
3/ 4/94 3576.00
3/11/94 3520.00
3/18/94 3372.00
3/25/94 3050.00
4/ 1/94 2992.00
4/ 8/94 2947.00
4/15/94 2849.00
4/22/94 2621.00
4/29/94 2511.00
5/ 6/94 2455.00
5/13/94 2375.00
5/20/94 2283.00
5/27/94 2191.00
6/ 3/94 1926.00
6/10/94 1838.00
6/17/94 1965.00
6/24/94 2145.00
7/ 1/94 1950.00
7/ 8/94 1987.00
7/15/94 2009.00
7/22/94 2007.00
7/29/94 2036.00
8/ 5/94 2023.00
8/12/94 2056.00
8/19/94 2066.00
8/26/94 2047.00
9/ 2/94 2044.00
9/ 9/94 2066.00
9/16/94 2048.00
9/23/94 1988.00
9/30/94 1945.00
10/ 7/94 1894.00
10/14/94 1844.00
10/21/94 1834.00
10/28/94 1770.00
11/ 4/94 1698.00
11/11/94 1538.00
11/18/94 1625.00
11/25/94 1564.00
12/ 2/94 1580.00
12/ 9/94 1527.00
12/16/94 1530.00
12/23/94
12/30/94
1/ 6/95 1652.00
1/13/95 1603.00
1/20/95 1560.00
1/27/95 1448.00
2/ 3/95 1386.00
2/10/95 1423.00
2/17/95 1408.00
2/24/95 1392.00
3/ 3/95 1340.00
3/10/95 1217.00
3/17/95 1244.00
3/24/95 1236.00
3/31/95 1224.00
4/ 7/95 1209.00
4/14/95 1215.00
4/21/95 1203.00
4/28/95 1202.00
5/ 5/95 1203.00
5/12/95 1189.00
5/19/95 1211.00
5/26/95 1199.00
6/ 2/95 1181.00
6/ 9/95 1165.00
6/16/95 1156.00
6/23/95 1143.00
6/30/95 1123.00
7/ 7/95 1125.00
7/14/95 1136.00
7/21/95 1156.00
7/28/95 1162.00
8/ 4/95 1164.00
8/11/95 1168.00
8/18/95 1190.00
8/25/95 1238.00
9/ 1/95 1242.00
9/ 8/95 1266.00
9/15/95 1293.00
9/22/95 1327.00
9/29/95 1338.00
10/ 6/95 1317.00
10/13/95 1293.00
10/20/95 1275.00
10/27/95 1290.00
11/ 3/95 1295.00
11/10/95 1274.00
11/17/95 1223.00
11/24/95 1189.00
12/ 1/95 1235.00
12/ 8/95 1250.00
12/15/95 1260.00
12/22/95
12/29/95
1/ 5/96
1/12/96 1319.00
1/19/96 1307.00
</TABLE>
C-7
<PAGE> 92
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:
PX 50 INDEX
<TABLE>
<CAPTION>
DATE PX-50
- ---- -----
<S> <C>
4/ 5/94 1000.00
4/ 7/94 1002.40
4/11/94 999.00
4/12/94 991.40
4/14/94 975.00
4/16/94 943.10
4/19/94 918.30
4/21/94 897.70
4/25/94 829.90
4/26/94 864.00
4/29/94 859.40
5/ 2/94 855.80
5/ 3/94 849.90
5/ 5/94 842.50
5/ 9/94 842.70
5/10/94 829.80
5/12/94 817.20
5/16/94 816.70
5/17/94 800.50
5/19/94 785.70
5/23/94 783.70
5/24/94 770.20
5/28/94 756.90
5/30/94 736.20
5/31/94 707.10
6/ 2/94 667.80
6/ 6/94 642.80
6/ 7/94 639.00
6/ 9/94 638.60
6/13/94 657.80
6/14/94 673.30
6/16/94 688.50
6/20/94 718.30
6/21/94 747.50
6/23/94 750.90
6/27/94 744.70
6/28/94 719.10
6/30/94 679.80
7/ 7/94 692.80
7/11/94 711.80
7/12/94 704.30
7/14/94 706.60
7/18/94 706.90
7/19/94 703.70
7/21/94 702.40
7/25/94 897.40
7/26/94 699.80
7/28/94 714.30
8/ 1/94 714.70
8/ 2/94 714.10
8/ 4/94 715.30
8/ 8/94 719.90
8/ 9/94 726.40
8/11/94 724.80
8/15/94 727.10
8/16/94 727.30
8/16/94 728.10
8/22/94 730.90
8/23/94 722.00
8/25/94 721.80
8/29/94 717.10
8/30/94 718.70
9/ 1/94 721.00
9/ 5/94 725.20
9/ 6/94 723.70
9/ 8/94 728.20
9/12/94 731.20
9/13/94 732.10
9/15/94 724.70
9/19/94 727.70
9/20/94 726.00
9/21/94 722.60
9/22/94 718.90
9/23/94 710.80
9/26/94 709.00
9/27/94 701.80
9/28/94 703.50
9/29/94 702.50
9/30/94 694.30
10/ 3/94 695.40
10/ 4/94 690.60
10/ 5/94 685.60
10/ 6/94 681.00
10/ 7/94 680.40
10/10/94 677.70
10/11/94 668.00
10/12/94 667.40
10/13/94 662.10
10/14/94 661.20
10/17/94 653.90
10/18/94 660.80
10/19/94 661.20
10/20/94 658.70
10/21/94 665.10
10/24/94 654.70
10/25/94 650.30
10/25/94 641.80
10/27/94 633.00
10/31/94 627.70
11/ 1/94 628.30
11/ 2/94 621.30
11/ 3/94 612.60
11/ 4/94 602.70
11/ 7/94 597.20
11/ 8/94 587.00
11/ 9/94 572.40
11/10/94 584.20
11/11/94 554.10
11/14/94 550.00
11/15/94 553.20
11/16/94 554.30
11/17/94 598.30
11/18/94 588.50
11/21/94 606.60
11/22/94 610.20
11/23/94 593.30
11/24/94 574.70
11/26/94 585.70
11/28/94 557.40
11/29/94 557.70
11/30/94 557.60
12/ 1/94 570.00
12/ 2/94 570.90
12/ 5/94 567.90
12/ 6/94 564.40
12/ 7/94 560.30
12/ 8/94 557.80
12/ 9/94 550.80
12/12/94 546.10
12/13/94 541.10
12/14/94 541.40
12/15/94 549.40
12/16/94 557.20
1/ 5/95 570.10
1/ 6/95 579.30
1/ 9/95 586.60
1/10/95 584.30
1/11/95 574.50
1/12/95 568.90
1/13/95 562.00
1/16/95 560.20
1/17/95 557.70
1/18/95 554.50
1/19/95 562.20
1/20/95 547.90
1/23/95 543.50
1/24/95 539.60
1/25/95 535.60
1/26/95 522.70
1/27/95 510.10
1/30/95 504.00
1/31/95 495.10
2/ 1/95 485.80
2/ 2/95 482.50
2/ 3/95 485.90
2/ 6/95 492.80
2/ 7/95 502.20
2/ 8/95 514.70
2/ 9/95 504.30
2/10/95 496.80
2/14/95 492.90
2/24/95 487.10
2/27/95 482.10
2/28/95 479.00
3/ 1/95 473.10
3/ 2/95 471.40
3/ 3/95 486.00
3/ 6/95 459.00
3/ 7/95 454.90
3/ 8/95 440.90
3/ 9/95 432.60
3/10/95 420.30
3/13/95 414.90
3/14/95 413.20
3/15/95 423.00
3/16/95 433.10
3/17/95 438.50
3/20/95 436.60
3/21/95 435.10
3/22/95 430.90
3/23/95 426.80
3/24/95 423.00
3/27/95 425.50
3/26/95 427.20
3/29/95 421.90
3/30/95 422.50
3/31/95 422.90
4/ 3/95 423.10
4/ 4/95 422.00
4/ 5/95 421.10
4/ 6/95 420.20
4/ 7/95 420.40
4/10/95 421.70
4/11/95 423.90
4/12/95 422.60
4/13/95 421.80
4/14/95 420.60
4/18/95 420.10
4/19/95 418.90
4/20/95 417.50
4/21/95 416.20
4/24/95 413.90
4/25/95 413.90
4/26/95 414.00
4/27/95 414.00
4/28/95 418.70
5/ 2/95 418.20
5/ 3/95 418.30
5/ 4/95 414.80
5/ 5/95 414.90
5/ 9/95 411.70
5/10/95 414.80
5/11/95 412.20
5/12/95 410.50
5/15/95 410.90
5/16/95 412.00
5/17/95 414.20
5/18/95 415.70
5/19/95 418.40
5/22/95 418.70
5/23/95 419.20
5/24/95 419.50
5/25/95 418.20
5/28/95 415.50
5/29/95 414.30
5/30/95 413.70
5/31/95 413.40
6/ 1/95 410.90
6/ 2/95 408.40
6/ 5/95 408.70
6/ 6/95 408.50
6/ 7/95 408.90
6/ 8/95 405.00
6/ 9/95 408.80
6/12/95 407.30
6/13/95 403.80
6/14/95 403.00
6/15/95 403.30
6/19/95 403.30
6/20/95 403.30
6/21/95 403.30
6/22/95 401.90
6/23/95 398.30
6/25/95 394.51
6/26/95 393.30
6/27/95 392.90
6/28/95 388.70
6/29/95 387.20
6/30/95 389.00
7/ 3/95 389.60
7/ 4/95 389.30
7/10/95 389.30
7/11/95 394.70
7/12/95 395.70
7/13/95 397.40
7/14/95 398.20
7/17/95 399.90
7/18/95 401.30
7/19/95 399.90
7/20/95 401.10
7/21/95 402.00
7/24/95 402.90
7/25/95 402.90
7/26/95 402.00
7/27/95 402.50
7/28/95 404.50
7/31/95 405.10
8/ 1/95 404.20
8/ 2/95 403.30
8/ 3/95 403.60
8/ 4/95 403.70
8/ 7/95 403.50
8/ 8/95 403.90
8/ 9/95 403.40
8/10/95 404.60
8/11/95 405.40
8/14/95 406.10
8/15/95 407.80
8/16/95 408.90
8/17/95 409.90
8/18/95 411.70
8/21/95 412.20
8/22/95 415.50
8/23/95 417.90
8/24/95 421.00
8/25/95 426.10
8/28/95 428.00
8/29/95 427.10
8/30/95 425.80
8/31/95 428.20
9/ 1/95 428.40
9/ 4/95 429.80
9/ 5/95 430.40
9/ 6/95 432.20
9/ 6/95 432.20
9/ 7/95 432.30
9/ 8/95 436.20
9/11/95 437.20
9/12/95 437.60
9/13/95 439.40
9/14/95 443.00
9/15/95 445.20
9/18/95 446.30
9/19/95 448.50
9/20/95 447.10
9/21/95 450.80
9/22/95 453.00
9/25/95 453.40
9/26/95 450.40
9/27/95 451.00
9/29/95 453.80
10/ 2/95 450.60
10/ 3/95 451.40
10/ 4/95 450.80
10/ 5/95 448.40
10/ 6/95 447.90
10/ 9/95 445.50
10/10/95 442.90
10/11/95 441.90
10/12/95 442.00
10/13/95 442.30
10/16/95 443.10
10/17/95 441.70
10/18/95 438.90
10/19/95 438.90
10/20/95 436.60
10/23/95 436.80
10/24/95 439.00
10/25/95 439.40
10/26/95 440.40
10/27/95 442.20
10/30/95 441.10
10/31/95 442.60
11/ 1/95 439.90
11/ 2/95 436.50
11/ 3/95 441.30
11/ 6/95 436.20
11/ 7/95 434.10
11/ 8/95 435.80
11/10/95 434.10
11/13/95 433.20
11/14/95 427.80
11/15/95 428.00
11/16/95 419.40
11/17/95 415.90
11/20/95 413.60
11/21/95 411.70
11/22/95 408.70
11/23/95 405.60
11/24/95 405.60
11/27/95 408.20
11/28/95 410.10
11/29/95 412.80
11/30/95 417.70
12/ 1/95 419.90
12/ 4/95 421.50
12/ 5/95 423.50
12/ 6/95 424.10
12/ 7/95 425.40
12/ 8/95 424.70
12/11/95 423.80
12/12/95 423.00
12/13/95 422.70
12/14/95 418.70
12/15/95 425.90
1/ 8/96 437.90
1/ 9/96 450.30
1/10/95 449.50
1/11/96 449.60
1/12/96 449.00
1/15/96 449.30
1/16/96 449.50
1/17/96 448.30
1/18/96 441.90
1/19/96 445.80
1/22/96 444.10
1/23/96 442.80
</TABLE>
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 74% of PSE trading in 1994 and approximately 80% of PSE trading in
the first quarter of 1995 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 PSE trading day
must be placed no later than the beginning of the
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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. The PSE is
currently exploring the possibility of instituting a continuous trading system
during each session.
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. Orders may be submitted either at designated
locations or via direct 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
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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.
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.
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. Block 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.
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. Other Czech
securities are permitted to be maintained in either book entry or physical form.
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.
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<PAGE> 95
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. In addition, bonds and the issuance thereof are regulated by
the Czech Bond Act and certain aspects of equity securities are regulated by the
Czech Commercial Code.
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
In general, any offering of securities made by a Czech issuer outside the
Czech Republic requires the prior approval of the Ministry of Finance and the
foreign exchange authority (generally, the CNB). Any offering of securities made
by a foreign issuer in the Czech Republic requires the prior approval of the
Ministry of Finance and/or the relevant 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 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
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<PAGE> 96
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, 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 require a relatively low
minimal capitalization. Examinations for stockbrokers and continuing education
requirements generally are substantially less stringent than in countries with
more developed securities markets.
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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.
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.
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<PAGE> 98
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.
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.
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<PAGE> 99
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.
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.
D-3
<PAGE> 100
APPENDIX E
[FORM OF SUBSCRIPTION CERTIFICATE]
SUBSCRIPTION CERTIFICATE NUMBER:
NUMBER OF RIGHTS:
CUSIP NO:
EXPIRATION DATE: February 15, 1996, unless extended
THE CZECH REPUBLIC FUND, INC.
SUBSCRIPTION RIGHT FOR SHARES OF COMMON STOCK
This Subscription Certificate represents the number of Rights set forth
above. 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 January 29, 1996 (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 State
Street Bank and Trust Company (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 in U.S. dollars 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 in U.S. dollars 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 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 within seven business days following
the Protect Period. 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 or Rights Holders 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
January 29, 1996, relating to the Rights.
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) 221-5724, ext. 327, or collect at (212) 805-7000
THE CZECH REPUBLIC FUND, INC.
By:
Alan H. Rappaport
Chairman
STATE STREET BANK AND TRUST COMPANY
By:
Charles V. Rossi
Senior Vice President
E-1
<PAGE> 101
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT COURIER: BY HAND:
State Street Bank and Trust Company State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 9061 Corporate Reorganization Department 225 Franklin Street
Boston, MA 02205-8686 Two Heritage Drive Concourse Level
North Quincy, MA 02171 Boston, MA 02110
or
61 Broadway
Concourse Level
New York, NY 10006
</TABLE>
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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
/ / A. Primary Subscription / 3 = X $11.25 = $
---------------- -------------- --------------- ---------------
(Rights Exercised) (Full Shares of (Subscription (Amount Required)
Common Stock Price)
Requested)
/ / B. Primary Over-Subscription Privilege X $11.25 = $ (*)
-------------- --------------- -----------------
(Full Shares of (Subscription (Amount Required)
Common Stock Price)
Requested)
</TABLE>
- ---------------
(*) 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
/ / C. Secondary Over-Subscription Privilege X $11.25 = $ (**)
--------------- ------------ ---------------
(Full Shares of (Subscription (Amount Required)
Common Stock Price)
Requested)
</TABLE>
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.
<TABLE>
<S> <C> <C>
/ / 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 # ------------------------------
</TABLE>
I hereby agree that if I fail to pay in full for the Shares for which I have
subscribed, the Fund may exercise any of the remedies provided for in the
Prospectus.
<TABLE>
<S> <C> <C> <C>
Please provide Day ( ) ---------------------------
- --------------------------------------------- your telephone Evening ( ) ---------------------------
Signature of Subscriber(s)/Holder(s) number
</TABLE>
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:
<TABLE>
<S> <C>
- ------------------------------------------------------- -------------------------------------------------------
Social Security Number or Tax ID of Assignee (Print Full Name of Assignee)
- ------------------------------------------------------- -------------------------------------------------------
(Print Full Address including postal Zip Code)
- -------------------------------------------------------
Signature(s) of Assignee(s)
</TABLE>
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:
E-2
<PAGE> 102
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:
State Street Bank and Trust Company
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
P.O. Box 9061 Corporate 225 Franklin Street
Boston, MA 02205-8686 Reorganization Concourse Level
Department Boston, MA 02110
Two Heritage Drive or
North Quincy, MA 02171 61 Broadway
Concourse Level
New York, NY 10006
</TABLE>
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 time, on the Expiration Date (February 15, 1996 unless
extended). Failure to do so will result in a forfeiture of the Rights.
F-1
<PAGE> 103
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 (February 15, 1996 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.
<TABLE>
<S> <C>
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
</TABLE>
Please note that if you are guaranteeing for over-subscription Shares and
are a DTC participant, you must also execute and forward to State Street Bank
and Trust Company a Beneficial Owner Certification Form.
<TABLE>
<S> <C>
- ----------------------------------------- -------------------------------
NAME OF FIRM AUTHORIZED SIGNATURE
- ----------------------------------------- -------------------------------
ADDRESS TITLE
- ----------------------------------------- -------------------------------
ZIP CODE NAME (PLEASE TYPE OR PRINT)
- ----------------------------------------- -------------------------------
NAME OF REGISTERED HOLDER (IF APPLICABLE) DTC PARTICIPANT NUMBER
- ----------------------------------------- -------------------------------
TELEPHONE NUMBER DATE
</TABLE>
* 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.
F-2
<PAGE> 104
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
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT COURIER: BY HAND:
State Street Bank and Trust Company State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 9061 Corporate Reorganization Department 225 Franklin Street
Boston, MA 02205-8686 Two Heritage Drive Concourse Level
North Quincy, MA 02171 Boston, MA 02110
or
61 Broadway
Concourse Level
New York, NY 10006
</TABLE>
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 JANUARY 29, 1996 (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 FEBRUARY 15, 1996 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 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 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):
<TABLE>
<S> <C>
/ / 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 Address
City State Zip Code
By:
Name: Title:
Contact Name:
Phone Number:
Dated: , 1996
</TABLE>
(*) PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE SHARE
POSITION, THE NUMBER OF PRIMARY SHARES SUBSCRIBED FOR AND THE NUMBER OF
SHARES REQUESTED IN THE PRIMARY OVERSUBSCRIPTION AND THE SECONDARY
OVERSUBSCRIPTION, IF APPLICABLE, BY EACH SUCH OWNER.
G-1
<PAGE> 105
THE CZECH REPUBLIC FUND, INC.
BENEFICIAL OWNER CERTIFICATION
The undersigned, a bank, broker or other nominee holder of Rights
("Rights") to purchase shares of Common Stock, $.001 par value ("Common Stock"),
of The Czech Republic Fund, Inc. (the "Fund") pursuant to the Rights offering
(the "Offer") described and provided for in the Fund's Prospectus dated January
29, 1996 (the "Prospectus"), hereby certifies to the Fund and to State Street
Bank and Trust Company as Subscription Agent for such Offer, that for each
numbered line filled in below the undersigned has exercised, on behalf of the
beneficial owner thereof (which may be the undersigned), the number of Rights
specified on such line pursuant to the Primary Subscription (as defined in the
Prospectus) and such beneficial owner wishes to subscribe for the purchase of
additional shares of Common Stock pursuant to the Over-Subscription Privilege
(as defined in the Prospectus), in the amount set forth in the third and fourth
column of such line:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
NUMBER OF RIGHTS REQUESTED PURSUANT REQUESTED PURSUANT
EXERCISED PURSUANT TO PRIMARY OVER- TO SECONDARY OVER-
TO PRIMARY SUBSCRIPTION SUBSCRIPTION
RECORD DATE SHARES SUBSCRIPTION PRIVILEGE PRIVILEGE
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
1)
------------------ ------------------ ------------------ ------------------
2)
------------------ ------------------ ------------------ ------------------
3)
------------------ ------------------ ------------------ ------------------
4)
------------------ ------------------ ------------------ ------------------
5)
------------------ ------------------ ------------------ ------------------
6)
------------------ ------------------ ------------------ ------------------
7)
------------------ ------------------ ------------------ ------------------
8)
------------------ ------------------ ------------------ ------------------
9)
------------------ ------------------ ------------------ ------------------
10)
------------------ ------------------ ------------------ ------------------
</TABLE>
Name of Nominee Holder
By:
Name:
Title:
Dated: , 1996
Provide the following information if applicable:
<TABLE>
<S> <C>
Name of Broker:
- --------------------------------------------- ---------------------------------------------
Depository Trust Corporation ("DTC")
Participant Number
Address:
- --------------------------------------------- ---------------------------------------------
DTC Primary Subscription Confirmation
Number(s)
</TABLE>
G-2
<PAGE> 106
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE HEREIN, IN
CONNECTION WITH THIS OFFER, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS
REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE SUPPLEMENTED OR AMENDED
ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary....................... 3
Fee Table................................ 13
Financial Highlights..................... 14
Market and Net Asset Value Information... 15
The Offer................................ 16
The Fund................................. 25
Use of Proceeds.......................... 25
Investment Objective and Policies........ 25
Additional Investment Activities......... 29
Investment Restrictions.................. 31
Risk Factors............................. 33
Management of the Fund................... 42
Portfolio Transactions................... 50
Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan.... 51
Taxation................................. 52
Net Asset Value.......................... 57
Description of Capital Stock............. 58
Custodian, Transfer Agent, Dividend
Paying Agent and Registrar............. 61
Distribution Arrangements................ 61
Experts.................................. 62
Legal Matters............................ 62
Official Documents....................... 62
Further Information...................... 62
Financial Statements..................... 63
Appendix A: General Characteristics and
Risks of Hedging and Derivatives....... A-1
Appendix B: The Czech Republic........... B-1
Appendix C: The Czech Securities
Market................................. C-1
Appendix D: Ratings...................... D-1
Appendix E: Form of Subscription
Certificate............................ E-1
Appendix F: Form of Notice of Guaranteed
Delivery............................... F-1
Appendix G: Form of Nominee Holder
Over-Subscription Form................. G-1
</TABLE>
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,600,000 SHARES
THE CZECH REPUBLIC
FUND, INC.
COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SUCH SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
OPPENHEIMER & CO., INC.
JANUARY 29, 1996
- ------------------------------------------------------
- ------------------------------------------------------
