<PAGE>
As filed with the Securities and Exchange Commission on May 30, 1997
Registration Nos. 33-83822
811-8760
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. 3 / /
----
Post-Effective Amendment No. 1 /X/
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 4 /X/
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(Check appropriate box or boxes)
CVO GREATER CHINA FUND, INC.
(Exact name of Registrant as specified in charter)
125 West 55th Street, 11th Floor
New York, NY 10019
(Address of Principal Executive Offices Zip Code)
Registrant's Telephone Number, including Area Code: (800) 618-9510
Wallace Mathai-Davis
Secretary and Treasurer
CVO Greater China Fund, Inc.
520 Madison Avenue
New York, NY 10022
(Name and Address of Agent for Service)
WITH A COPY TO:
Bartley C. Deamer
McCutchen, Doyle, Brown & Enersen, L.L.P.
3 Embarcadero Center
San Francisco, California 94111
(415) 393-2168
It is proposed that this filing will become effective:
___X__ immediately upon filing pursuant to Rule 485(b)
______ on , 1997 pursuant to Rule 485(b)
______ 60 days after filing pursuant to Rule 485(a)
______ on , 1997 pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite number of shares of Capital Stock, $.001 par value
per share, of all series of the Registrant, now existing or hereafter created.
Registrant intends to file its Rule 24f-2 Notice on or before December 30, 1997.
<PAGE>
CVO GREATER CHINA FUND, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Under the Securities Act of 1933
N-1A Item No. Location
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Part A Prospectus Caption
------ ------------------
Item 1. Cover Page . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . Shareholder and Fund
Expenses
Item 3. Condensed Financial
Information. . . . . . . . . . Financial Highlights
Item 4. General Description of Prospectus Summary;
Registrant . . . . . . . . . . The Fund's Investment
Objectives and
Policies; The Fund's
Investments in the
Greater China Region;
Risks Associated with
the Fund; Management
of the Fund;
Additional Information
Item 5. Management of the Fund . . . Management of the Fund
Item 5A. Management Discussion of Fund Not Applicable
Performance. . . . . . . . .
Item 6. Capital Stock and Other Redemption of Shares;
Securities . . . . . . . . . Shareholder Services;
Management of the
Fund; Additional
Information
Item 7. Purchase of Securities Management of the
Being Offered . . . . . . . . Fund; Purchase of
Shares; Calculation of
Net Asset Value
Item 8. Redemption or Repurchase . . . Redemption of Shares;
Shareholder Services
Item 9. Legal Proceedings. . . . . . . Not Applicable
Statement of
Part B Additional
Information Caption
Item 10. Cover Page . . . . . . . . . . Cover Page
ii
<PAGE>
Item 11. Table of Contents . . . . . . Table of Contents
Item 12. General Information and
History. . . . . . . . . . . . Not Applicable
Item 13. Investment Objectives and
Policies . . . . . . . . . . . Additional Information
on Portfolio
Instruments; Hedging
and Other Strategic
Transactions
Item 14. Management of the
Registrant . . . . . . . . . . Management of the Fund
Item 15. Control Persons and Principal Management of the
Holders of Securities . . . . Fund; General
Information
Item 16. Investment Advisory and Other Management of the Fund
Services
Item 17. Brokerage Allocation . . . . Not Applicable
Item 18. Capital Stock and Other General Information
Securities . . . .
Item 19. Purchase, Redemption and
Pricing of Securities Being Management of the
Offered . . . . . . . . . . . Fund; Purchase of
Shares; Redemption of
Shares; Shareholder
Services
Item 20. Tax Status . . . . . . . . . . Additional Information
Concerning Dividends,
Distributions and
Taxes
Item 21. Underwriters . . . . . . . . . Not Applicable
Item 22. Calculation of Performance Performance
Data . . . . . . . . . . . . . Calculations
Item 23. Financial Statements . . . . . Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
iii
<PAGE>
CVO GREATER CHINA FUND
FUNDAMENTAL INVESTING IN SECURITIES OF CHINA, HONG KONG, SINGAPORE AND TAIWAN
PROSPECTUS
MAY 30, 1997
A JOINT VENTURE OF CHINAVEST AND OFFITBANK
<PAGE>
CVO GREATER CHINA FUND, INC.
CLASS I AND CLASS II SHARES
THIS PROSPECTUS DESCRIBES THE CLASS I AND CLASS II SHARES OF CVO GREATER
CHINA FUND, INC. (THE "FUND"), A MUTUAL FUND SEEKING CAPITAL APPRECIATION AND
INCOME GENERATION THROUGH INVESTMENT IN PUBLICLY-TRADED EQUITY SECURITIES OF
COMPANIES WHICH, IN THE OPINION OF THE INVESTMENT ADVISER, WILL BENEFIT FROM THE
ECONOMIC DEVELOPMENT AND GROWTH OF THE PEOPLE'S REPUBLIC OF CHINA, HONG KONG,
TAIWAN AND SINGAPORE (THE "GREATER CHINA REGION"). The Fund is a
non-diversified, no-load, open-end, management investment company. Under normal
market conditions and subject to temporary defensive investments, at least 65%
of the Fund's total assets will be invested in equity securities (i) traded in
securities markets located in the Greater China Region, or (ii) issued by
companies whose business significantly relates to the Greater China Region (as
measured by assets, revenues or profit). Initially, it is anticipated that a
majority of the Fund's portfolio will be listed in Hong Kong, Singapore and
Taiwan. The Fund's investments are considered speculative and subject to certain
risks. (See "The Fund's Investment Objectives and Policies" and "Risks
Associated with the Fund" for further details.) There can be no assurance that
the Fund's investment objectives will be achieved.
CVO Greater China Partners, L.P., a Delaware limited partnership, serves as
the Fund's investment adviser (the "Adviser"). The general partners of the
Adviser are OFFITBANK Greater China, Inc. ("OGC") and ChinaVest Public Equities,
LLC. OGC is a New York corporation organized by OFFITBANK, a New York State
chartered trust company which currently manages in excess of $7 billion in
assets. INVESTORS ARE ADVISED THAT SHARES OF THE FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. ChinaVest Public Equities, LLC is a California
limited liability corporation organized by the ChinaVest investment management
group of Hong Kong which specializes in the management of investments in the
People's Republic of China and other areas of the Greater China Region and
currently manages in excess of $225 million in assets. The address of the Fund
is 125 West 55th Street, 11th Floor, New York, New York, 10019. See "Management
of the Fund" for further details.
This Prospectus is designed to provide you with information you should know
before investing in the Fund. Please read and retain this document for future
reference. A Statement of Additional Information dated May 30, 1997, as
supplemented from time to time, for the Fund has been filed with the Securities
and Exchange Commission and is incorporated entirely by reference into this
Prospectus. The Statement of Additional Information is available without charge
by calling 1-800-618-9510.
----------------------------
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.
----------------------------
Prospectus dated May 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder and Fund Expenses............................... 4
Financial Highlights........................................ 5
The Fund's Investment Objectives and Policies............... 6
The Fund's Investments in the Greater China Region.......... 9
Risks Associated with the Fund.............................. 15
Special Investment Techniques............................... 23
Management of the Fund...................................... 29
Dividends and Distributions................................. 31
Purchase of Shares.......................................... 32
Redemption of Shares........................................ 33
Shareholder Services........................................ 35
Calculation of Net Asset Values............................. 35
Tax Information............................................. 36
Backup Withholding.......................................... 39
Performance Information..................................... 40
Additional Information...................................... 41
Reports to Shareholders..................................... 41
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
THE FUND. CVO Greater China Fund, Inc. (the "Fund") is a Maryland corporation
organized as a non-diversified, no-load, open-end, management investment
company. The Fund offers two classes of shares: Class I Shares, which are
offered to institutional investors, and Class II Shares, which are offered to
non-institutional investors. Class I and Class II Shares are collectively
referred to as "Shares" in this Prospectus. The Shares represent interests in
the same investment portfolio and differ only in the allocation of certain
expenses. Class II Shares are expected to bear higher expenses than Class I
Shares that will, when applicable, result in lower dividends for Class II
Shares. See "Shareholder and Fund Expenses" and "Additional Information."
INVESTMENT OBJECTIVE. The Fund's investment objective is to achieve capital
appreciation and income generation from investment in publicly-traded equity
securities of companies which, in the opinion of the Adviser, will benefit from
the economic development and growth of the People's Republic of China, Hong
Kong, Taiwan and Singapore (collectively, the "Greater China Region"). More
specifically, under normal market conditions and subject to temporary defensive
investments, at least 65% of the Fund's assets will be invested in equity
securities (i) traded in securities markets located in the Greater China Region,
or (ii) issued by companies whose business significantly relates to the Greater
China Region (as measured by assets, revenues or profit). See "The Fund's
Investment Objectives and Policies."
RISK FACTORS. The Fund's investments are considered speculative and are subject
to certain risks, including investment risks associated with making investments
in countries operating in the Greater China Region. The Fund may engage in
currency hedging transactions which are subject to risks that are different from
risks related to other portfolio transactions. See "Risks Associated with the
Fund."
THE INVESTMENT ADVISER. CVO Greater China Partners, L.P. (the "Adviser") serves
as the Fund's investment adviser pursuant to an Investment Advisory Agreement
which generally provides for the Adviser to supervise all aspects of the Fund's
operations. The Adviser receives a fee based on the Fund's average daily net
assets. See "Management of the Fund."
PURCHASING SHARES. Shares of the Fund are offered at net asset value. See
"Purchase of Shares." The minimum initial investment for Class I Shares is
$1,000,000 and for Class II Shares, $250,000. The Fund may reduce or waive the
minimum initial investment amount in its sole discretion. Additional investments
must be in an amount of at least $10,000. The distributor of the Shares is OFFIT
Funds Distributor, Inc., a wholly-owned subsidiary of Furman Selz LLC.
REDEEMING SHARES. Shareholders may redeem all or a portion of their Shares at
net asset value at any time and without charge, except that an early redemption
charge will be levied on investors who hold shares for less than 9 months. The
early redemption charge will be 2% of the net asset value, at the redemption
date, of shares redeemed within 9 months of their acquisition. This early
redemption charge will be paid to the Fund. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS. The Fund intends to declare and pay dividends from
net investment income, if any, on an annual basis. In addition, the Fund may
make distributions of realized capital gains, if any, on an annual basis.
Dividends and distributions of the Fund may be paid directly to investors by
check, or reinvested in additional Shares of the Fund. See "Dividends and
Distributions."
3
<PAGE>
SHAREHOLDER AND FUND EXPENSES
<TABLE>
<CAPTION>
CLASS I CLASS II
----------- ------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(1)
Maximum Sales Charge Imposed on Purchases.................................................... None None
Sales Charges Imposed on Reinvested Dividends................................................ None None
Redemption Fees(2)........................................................................... 2.00 % 2.00 %
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets, after fee waivers)
Advisory Fees................................................................................ 1.25 % 1.25 %
Rule 12b-1 Fees(3)........................................................................... 0 0
Other Expenses (estimated, after waivers)(4)................................................. 0.75 % 1.00 %
Total Operating Expenses (after waivers)(4).............................................. 2.00 % 2.25 %
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- ----------------------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (a) 5% annual return and
(b) redemption at the end of each time period:(1)
Class I Shares................................................................................. $ 20 $ 63
Class II Shares................................................................................ $ 23 $ 70
</TABLE>
- --------------
(1) The purpose of the table and example is to assist investors in understanding
the various costs and expenses that investors in the Fund will bear directly
or indirectly. See "Management of the Fund," "Purchase of Shares" and
"Redemptions of Shares." The advisory fee is higher than that paid by most
other investment companies, but is consistent with advisory fees paid by
most funds investing in the Greater China Region. THE FOREGOING SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RATE OF RETURN,
AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN AND THE ANNUAL
RATE OF RETURN MAY BE MORE OR LESS THAN 5%.
(2) An early redemption fee of 2% will only be charged in cases where shares are
redeemed within 9 months of purchase. This fee will be paid to the Fund.
(3) The Fund is authorized to spend up to 0.25% of its net assets annually in
accordance with its Plan of Distribution to compensate its distributor for
activities primarily intended to result in the sale of Class II Shares, but
will not do so for a period of at least one year following the commencement
of operations of the Fund and thereafter, until further action is taken by
the Board of Directors. See "Management of the Fund--Distributor."
(4) As of the date of this Prospectus, the Fund had not commenced investment
operations. The amounts set forth for "Other Expenses" are therefore based
on estimates for the current fiscal year, after giving effect to voluntary
waivers of administration fees, which will be in effect for a period of at
least one year from the date of this Prospectus. Without the waiver of
administrative fees, "Other Expenses" would be 0.825% for Class I Shares,
and 1.075% for Class II Shares and "Total Operating Expenses" would be
2.075% for Class I Shares and 2.325% for Class II Shares (which does not
include the Rule 12b-1 fee applicable to Class II Shares which will not be
in effect for at least one year from the date of this Prospectus). "Other
Expenses" will include (i) a 0.25% shareholder servicing fee based on the
Fund's assets attributable to Class II Shares (which will be paid by Class
II Shares only), (ii) a 0.075% administrative fee based on the average daily
net assets of the Fund (which includes a partial waiver of such fee), and
(iii) audit, accounting, custody, legal, registration, transfer agency and
miscellaneous other charges. See "Management of the Fund" for further
details.
The foregoing table has not been audited by the Fund's independent accountants.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by rules of the National Association of
Securities Dealers, Inc.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(UNAUDITED)
The table below sets forth certain information for the period ended April
30, 1997 concerning the investment results the CVO Greater China Fund (the
"Fund"). This information should be read in conjunction with the financial
statements and notes thereto which are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
NOVEMBER 19, 1996*
THROUGH APRIL 30,
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGH THE PERIOD: 1997
- -------------------------------------------------------------------------------------------- --------------------
<S> <C>
CLASS I SHARES:
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........................................................ $ 10.00
------
Net investment income..................................................................... 0.00
Net realized and unrealized gains......................................................... 0.13
------
Total from investment operations.......................................................... 0.13
------
NET ASSET VALUE, END OF PERIOD.............................................................. $ 10.13
------
------
TOTAL INVESTMENT RETURN+.................................................................... 1.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................................. $ 8,157
Ratios to average net assets:
Expenses.................................................................................. 2.00%(1)(2)
Net investment income..................................................................... (0.14)%(1)
PORTFOLIO TURNOVER RATE..................................................................... 0.04%
CLASS II SHARES:
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD........................................................ $ 10.00
------
Net investment income..................................................................... 0.00
Net realized and unrealized gains......................................................... 0.12
------
Total from investment operations.......................................................... 0.12
------
NET ASSET VALUE, END OF PERIOD.............................................................. $ 10.12
------
------
TOTAL INVESTMENT RETURN+.................................................................... 1.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................................................. $ 51
Ratios to average net assets:
Expenses.................................................................................. 2.00%(1)(2)
Net investment income..................................................................... (0.14)%(1)
PORTFOLIO TURNOVER RATE..................................................................... 0.04%
</TABLE>
- --------------
* Commencement of operations.
(1) Annualized.
(2) If the Fund had borne all expenses that were assumed or waived by
the Adviser and Administrator, the above expense ratio would have
been 5.35% (annualized).
+ Not annualized. Total return is based on the change in net assets
value during the period and assumes reinvestment of all dividends
and distributions.
5
<PAGE>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES
CVO GREATER CHINA FUND, INC. (THE "FUND") IS A NON-DIVERSIFIED, NO-LOAD,
OPEN-END, MANAGEMENT INVESTMENT COMPANY. THE FUND'S INVESTMENT OBJECTIVE IS TO
ACHIEVE CAPITAL APPRECIATION AND INCOME GENERATION FROM INVESTMENT IN
PUBLICLY-TRADED EQUITY SECURITIES OF COMPANIES WHICH, IN THE OPINION OF THE
ADVISER, WILL BENEFIT FROM THE ECONOMIC DEVELOPMENT AND GROWTH OF THE PEOPLE'S
REPUBLIC OF CHINA, HONG KONG, TAIWAN AND SINGAPORE (COLLECTIVELY, THE "GREATER
CHINA REGION"). More specifically, under normal market conditions and subject to
temporary defensive investments (as defined below), at least 65% of the Fund's
assets will be invested in equity securities (i) traded in securities markets
located in the Greater China Region, or (ii) issued by companies whose business
significantly relates to the Greater China Region (as measured by assets,
revenues or profit). The securities issued by such companies may be listed on
stock markets in countries outside the Greater China Region. The investment
objective of the Fund is fundamental and may not be changed without the
affirmative vote of a majority of the Shares of the Fund. See "Management of the
Fund" for further information. In addition, investments in issuers doing
business in the Greater China Region involve possible risks not typically
associated with issuers in the United States. See "Risks Associated with the
Fund" for further information. There is no assurance that the investment
objective of the Fund will be achieved.
The Fund seeks to achieve its investment objective through investing in a
selected and managed portfolio consisting primarily of publicly-traded equity
securities of companies that operate in the Greater China Region. The decisions
of the Adviser as to which specific publicly-traded securities will be acquired
by the Fund will be based on a general strategy of selecting those issuers which
it believes will show a high rate of capital appreciation in future years. See
"Risks Associated with the Fund."
The Fund will, under normal market conditions and subject to temporary
defensive investments (as defined below), invest at least 65% of its total
assets in publicly-traded equity securities issued by companies (a) whose
securities are principally traded in a Greater China Region country, or (b)
having at least 50% of their assets in one or more Greater China Region
countries or (c) that have derived at least 50% of their gross revenues or
profits from providing goods or services to or from within one or more Greater
China Region countries. Such securities are referred to in this Prospectus as
"Greater China Investments." Greater China Investments are typically, but not
necessarily, listed on stock exchanges or traded in the over-the-counter market
in countries in the Greater China Region. The principal offices of the issuers
of Greater China Investments may be located outside the Greater China Region.
The Fund may invest up to 90% of its total assets in the securities of issuers
whose equity securities are either (i) traded in securities markets located in a
single country in the Greater China Region, or (ii) issued by companies whose
business principally relates to, a single country in the Greater China Region.
During the first six months of the Fund's operations, the Fund may not achieve
its investment objective. The Fund expects during the first 18 months of its
operations to invest more than 50% of its total assets in issuers whose equity
securities are listed in Hong Kong, Singapore and Taiwan, but has not identified
any other market in which it currently intends to invest to this extent. After
the Fund's initial investments in the Greater China Region are established, the
Fund will not invest more than 10% of its total assets in any country outside
the Greater China Region, except for temporary defensive investment purposes and
investments in obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities. The Fund expects to achieve its 65%
investment objective within six months after the Fund commences operations.
Equity securities, for purposes of the 65% policy, will be limited to common
and preferred stocks; direct equity interests in trusts, partnerships, joint
ventures and other unincorporated entities or enterprises; special classes of
shares available only to foreign persons in such markets as restrict the
ownership of certain classes of equity to nationals or residents of the country;
convertible preferred stocks; depository receipts for any of the foregoing;
listed country funds, i.e., investment funds investing in publicly-traded stock,
where the investment fund is either open-ended or itself trades in public
markets; stock options and warrants to purchase stock; stock index futures; and
convertible debt instruments. Within the confines of the 65% investment policy,
stock options and warrants to purchase stock may not comprise more than 5% of
such investment.
6
<PAGE>
Equity securities will be considered "publicly-traded" for purposes of the
65% policy if the exchanges or over-the-counter markets on which the Fund may
purchase securities in the Greater China Region provide sufficiently liquid
markets so that the securities acquired by the Fund on such markets need not be
considered illiquid securities. Such exchanges currently include: People's
Republic of China--The Shanghai Securities Exchange and The Shenzhen Stock
Exchange; Hong Kong--The Stock Exchange of Hong Kong Limited; Taiwan--The Taiwan
Stock Exchange Corp.; and Singapore--The Singapore Stock Exchange, Stock
Exchange of Singapore Dealing and Automated Quotations Board ("SESDAQ") and
Central Limit Order Board International ("CLOB"). As of the date of this
Prospectus, the People's Republic of China is planning to establish a new stock
exchange in Beijing.
In addition to its investments in equity securities, the Portfolio may
invest up to 35% of its net assets in other types of transactions described
below under "Special Investment Techniques." These types of transactions will be
used for hedging and other secondary and supplemental investment objectives,
including income generation. See "Special Investment Techniques."
In general, the Fund's board of directors have established as a
nonfundamental policy that the Fund may not purchase the securities of any one
issuer (other than obligations issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities) if, as a result of such purchase (a)
more than 25% of the total assets of the Fund (taken at current value) would be
invested in the securities of such issuer, or (b) the Fund would hold more than
10% of the outstanding voting securities of such issuer. It is a fundamental
policy that the Fund may not purchase any security if, as a result of such
purchase, 25% or more of the total assets of the Fund (taken at current value)
would be invested in the securities of issuers having their principal business
activities in the same industry (the electric, gas and telephone utility
industries being treated as separate industries for the purpose of this
restriction); provided that there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities.
It is a fundamental policy of the Fund that it will not invest more than 5%
of its total assets in any listed country fund, nor more than 10% of its total
assets in all listed country funds taken together; and that the Fund's
investment in any listed country fund will not exceed 3% of that fund's total
assets. Listed country funds are intended to be used primarily for
Taiwan-related investments, until Taiwanese foreign investment restrictions are
liberalized. The Fund's investments in listed country funds will be subject to
advisory and other fees set by its sponsor, in addition to the advisory and
other fees payable by the Fund.
It is a fundamental policy of the Fund that it will not invest more than 5%
of its net assets in convertible debt securities which are less than investment
grade. A security is investment grade if it is rated BBB or above by Standard &
Poor's Corporation or Baa or above by Moody's Investors Service, Inc. or
determined to be of comparable quality in the sole discretion of the Adviser.
Securities rated BBB or Baa have speculative characteristics. The Fund will
dispose of any security or instrument that, subsequent to its acquisition by the
Fund, is rated (or determined by the Adviser to be of comparable quality to)
below investment grade in an orderly manner, if the Fund's total holdings in
below investment grade debt would otherwise exceed 5% of its net assets. The
Fund's primary purpose in investing in convertible debt, whether or not
investment grade, will be to participate in the value of the equity security
underlying the conversion right.
Other fundamental and nonfundamental investment limitation policies of the
Fund are described in "Investment Limitations" in the Statement of Additional
Information.
DEPOSITORY RECEIPTS
In achieving the 65% investment policy, the Fund may hold equity securities
of foreign issuers in the form of sponsored or unsponsored American Depository
Receipts ("ADRs"), American Depository Shares ("ADSs") and Global Depository
Receipts ("GDRs"), or other securities convertible into securities of eligible
issuers. ADRs and ADSs typically are issued by an American bank or trust company
which evidences ownership of underlying securities issued by a foreign
corporation. Unsponsored depository receipts may not present material
information to potential investors because such information is unavailable. GDRs
are
7
<PAGE>
receipts issued by foreign banks and trust companies that evidence ownership of
either foreign or U.S. securities. Generally, ADRs and ADSs in registered form
are designed for use in U.S. securities markets and GDRs in bearer form are
designed for use in securities markets outside the U.S.
Depository receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted. The value of an
ADR, ADS and GDR will fluctuate with the value of the underlying security and
changes in exchange rates, and involve risks associated with investing in
foreign securities. There may be less information available about foreign
issuers of an unsponsored ADR, ADS or GDR.
For purposes of the Fund's investment policies, the Fund's investments in
ADRs, ADSs, and GDRs will be deemed to be investments in the underlying equity
securities representing securities of foreign issuers into which they may be
converted.
CONVERTIBLE DEBT INSTRUMENTS
The 65% investment policy also includes debt instruments convertible into
equity securities. Although the Fund will purchase such convertible debt
securities primarily on account of the underlying equity securities, the value
of the Fund's holding could also be significantly affected by changes in market
interest rates and the issuer's credit standing. A significant portion of any
convertible debt holdings are expected to consist of instruments originally
issued in the Euroconvertible market. Euroconvertibles may be denominated in
U.S. dollars, but may also be denominated in European or other currencies. If a
Euroconvertible is denominated in a non-U.S. currency, the value of the Fund's
holding, expressed in U.S. dollars, could also be significantly affected by
changes in currency conversion rates.
ILLIQUID INVESTMENTS
The Fund will not invest more than 15% of the value of its net assets in
illiquid investments. Illiquid investments are assets which may not be sold or
disposed of by the Fund in the ordinary course of business within seven days at
approximately the value that the Fund has valued the investment. See "Risks
Associated with the Fund--Special Risks of Certain Fund Investments." Securities
that can be sold within seven days of their acquisition are generally not deemed
illiquid for purposes of this limitation, irrespective of any legal or
contractual restrictions on resale. See "Risks Associated with the Fund--Special
Risks of Certain Fund Investments--Illiquid and Restricted Securities."
REPURCHASE AGREEMENTS
Under a repurchase agreement, the Fund buys a security from a bank or
broker-dealer at one price and simultaneously promises to sell that same
security back to the seller at a higher price. The repurchase date is usually
within seven days of the original purchase date. The Fund may enter into
repurchase agreements with respect to its permitted investments with
counterparties that it deems creditworthy. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement at not less than the repurchase price. Default by the seller would
expose the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations. For purposes of
the 15% limitation that applies to illiquid investments, repurchase agreements
which mature in more than seven days will be considered illiquid securities.
Repurchase agreements are deemed to be loans under the Investment Company Act of
1940, as amended (the "1940 Act").
TEMPORARY DEFENSIVE INVESTMENTS
The Fund's policy is that it may, for temporary defensive purposes and
during the initial structuring of the Fund's portfolio, invest up to 100% of its
total assets in debt securities of foreign companies (including companies that
are not operating in the Greater China Region), United States companies, foreign
governments and the U.S. Government (and their respective agencies,
instrumentalities, political subdivisions and authorities), as well as in money
market instruments denominated in U.S. dollars or a foreign currency. These
money market instruments include, but are not limited to, negotiable or
short-term deposits with domestic or foreign banks with net worth of at least
$50 million; high quality commercial paper; and repurchase agreements maturing
within seven days with domestic or foreign dealers, banks and other financial
institutions deemed to be creditworthy under guidelines approved by the Board of
Directors of the
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Fund. The commercial paper in which the Fund may invest will, at the time of
purchase, be rated P-1 or better by Moody's or A-1 or better by S&P or, if
unrated, will be of comparable high quality as determined by the Adviser.
OTHER INVESTMENTS
For descriptions about other types of investments that the Fund may invest
in and the risks related to those investments, see "Special Investment
Techniques," "Risks Associated with the Fund--Special Risks of Certain Fund
Investments" and "Additional Information on Portfolio Instruments" in the
Statement of Additional Information.
PORTFOLIO TURNOVER
It is the policy of the Fund to seek capital appreciation. The Fund will
effect portfolio transactions without regard to its holding period if, in the
judgment of the Adviser, such transactions are advisable. It is anticipated that
the turnover rate will be under 300% during the first fiscal year which will
reflect initial structuring of the Fund's portfolio and that, thereafter, the
annual rate for Greater China Investments and other investments is generally
expected to be under 100%, consistent with the turnover rates of similar funds.
In the event that the turnover rate exceeds 100%, there is an increased
likelihood of short term capital gains and losses and increased transaction
costs for the Fund.
THE FUND'S INVESTMENTS IN THE GREATER CHINA REGION
THE FOLLOWING IS A GENERAL DISCUSSION OF THE ECONOMICS AND SECURITIES
MARKETS IN WHICH THE FUND WILL PRINCIPALLY INVEST. There can be no assurance
that the Fund will be able to capitalize on the factors described herein.
Securities markets in the Greater China Region are smaller and offer fewer
investment alternatives than the equity securities markets in Europe and the
United States. Opinions expressed herein are the good faith opinions of the
Adviser. Unless otherwise indicated, all amounts are expressed in United States
dollars.
PEOPLE'S REPUBLIC OF CHINA
For many centuries, China's economy was largely closed, by geography as well
as by government policy, to the outside world. (As used in this section, "China"
refers to the People's Republic of China.) Large-scale foreign involvement in
China's economy began during the middle of the 19th century and was curtailed
after 1949 when the Communist government barred foreign investment. China's
trade with foreign nations began to develop rapidly again after 1978 when Deng
Xiaoping launched the process of economic reform and modernization. By 1995,
total foreign capital committed to investments in China reached US$91 billion
and China's total trade approached $281 billion, making China one of the world's
largest trading economies.
Economic reform in China, designed to replace Communist-style central
planning with the market mechanism, has proceeded largely by trial and error
aimed at achieving the fastest possible change with the minimum social
dislocation. Two forces drive these policy initiatives. The first is the need to
create jobs for a workforce that is expanding by 30-50 million a year, according
to some estimates. The second is the need to restructure money-losing state
industries and to pump capital into those enterprises that have the potential to
be internationally competitive.
The reform process has not always been even. The general direction, however,
has tended to be towards greater openness and increased decentralization of
economic decision-making. As a result, according to some estimates, as much as
two-thirds of the economy is now outside direct state ownership and control,
which compares favorably with a number of western European economies.
China's broad economic policy is currently set out, more in terms of
ambition than of prescription, in two overlapping plans, the 20-Year Plan
(1981-2000) and the current Five-Year Economic Plan (1996-2000). The 20-Year
Plan calls for an average 7% growth in GNP over the entire 20-year period. In
the 1980's, China's growth rates averaged 9.4%. The previous Five-Year Economic
Plan envisaged 6% annual growth starting in 1991; this, however, was surpassed
with 10.5% growth being achieved between 1991 and 1995. China's GDP grew by
13.2% in 1992, 13.4% in 1993, 11.8% in 1994 and 10.2% in 1995. By contrast, in
Hong
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Kong and Taiwan real GDP grew by 4.6% and 6.3%, respectively, in 1995.) To put
this into perspective, in 1993 the World Bank projected that given these growth
rates for China, on a purchasing power parity basis China would overtake the
United States as the world's largest economy early in the next century.
China's program of economic reforms has evolved under the leadership of Deng
Xiaoping and his political allies. While there is a broad base of support for
these reforms within the country's political elite, China lacks a tested
institutionalized framework for political succession and, thus, the possibility
exists that the political transition upon Deng's death could bring significant
changes in economic, trade and investment policies.
FOREIGN INVESTMENT IN CHINA
To attract foreign investment, China set up four Special Economic Zones in
1978 (Shenzhen, Shantou and Zhuhai in Guangdong Province, and Xiamen in Fujian
Province). Hainan Island, which itself is a province, became the fifth Special
Economic Zone in 1988. Each zone was created to provide special investment
incentives and tax concessions to foreign investors. Other areas of China near
coastal cities and border zones have been designated as eligible for investment
incentives. These policies reflect a consensus in China's government that China
should continue to open its economy to the world economy.
The contracted value of foreign investment in China was approximately US$91
billion in 1995, an increase of 10% from 1994. Hong Kong, which invested $68
billion by the end of June 1995, accounted for around 60% of this total. Exports
from China continue to rise strongly, although, like other developing countries,
China's economy remains vulnerable to global economic conditions as well as the
potential for trade friction over market access, protection of intellectual
property and human rights. Imports into China are also expected to rise. See
"Risks Associated with the Fund--Foreign Investment Restrictions."
SECURITIES MARKETS
Two stock exchanges are officially recognized in China--The Shanghai
Securities Exchange which opened in December 1990 and The Shenzhen Stock
Exchange which opened in July 1991. Two types of shares are traded on both
exchanges: 'A' shares which can be traded only by resident Chinese and 'B'
shares which can be traded only by individuals and corporations not resident in
China. As of the date of this Prospectus, a new Beijing stock exchange was being
planned by the Chinese government, although there is no assurance that such an
exchange will ever be established.
On the Shanghai exchange, all "B" Shares are denominated in Chinese renminbi
("RMB") but all transactions in "B" Shares must be settled in U.S. dollars, and
all distributions made on "B" Shares are payable in U.S. dollars (the exchange
rate being the weighted average exchange rate for the U.S. dollar as published
by the Shanghai Foreign Exchange Adjustment Centre).
On the Shenzhen exchange, the purchase and sale prices for "B" Shares are
quoted in Hong Kong dollars. Dividends and other lawful revenue derived from "B"
Shares are calculated in RMB and are payable in Hong Kong dollars, the rate of
exchange being the average rate published by the Shenzhen Foreign Exchange
Adjustment Centre.
Although the Chinese authorities have stated that full convertibility of the
RMB will occur by the year 2000, RMB are not freely convertible now. The
exchange rate of RMB against foreign currencies is regulated and published daily
by the State Administration of Exchange Control ("SAEC"). Over the last decade,
the RMB has been steadily revalued downward relative to the U.S. dollar, with
major adjustments made in the past few years including a devaluation of more
than 30% to RMB8.7 to US$1.0 in January 1994. In 1986, to address the foreign
exchange problems of foreign investors, China began establishing Foreign
Exchange Adjustment Centres, also referred to as "swap centers." These swap
centers provide an official forum where foreign investment enterprises may
engage in mutual adjustment of their foreign exchange surpluses and shortfalls
under the supervision and control of SAEC. Trading of RMB and foreign currencies
at the swap centers is conducted at a rate determined by supply and demand
rather than at an official exchange rate. Such market exchange rates can be
highly volatile and are subject to sharp fluctuations depending on market
conditions.
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No exchange control approval is required for the Fund to acquire "B" shares
listed on stock exchanges. Dividends and capital gains from the sale of
securities purchased by the Fund in listed companies in China's securities
markets may be remitted outside China, subject to payment of any relevant taxes.
See "Tax Information" for more details.
Laws relating to companies limited by shares and regulations regarding the
issuing of shares by equity joint ventures have not yet been developed on a
national basis, although a provisional code of regulations was promulgated by
the national government in April 1993. The Shenzhen municipality issued
regulations in April 1993 relating to joint stock companies, and since then the
Shanghai municipality has also issued similar regulations. Regulations governing
the trading of securities on both the Shenzhen and the Shanghai stock exchanges
have been issued by each municipality. The China Securities Regulatory
Commission, a national agency, also participates in the regulatory development
process. Future national legislation, including a proposed permanent securities
law to replace the provisional code of regulations, may materially affect trade
policy and the operation of China's securities markets.
As of February 29, 1996, there were 188 companies listed on The Shanghai
Securities Exchange, of which 36 were "B" Shares. The total market
capitalization of the "B" Shares at that date (which includes equities and
bonds) was approximately US$1,474 million.
As of February 29, 1996, there were 130 companies listed on The Shenzhen
Stock Exchange, of which 34 were "B" Shares. The total market capitalization of
the "B" Shares at that date was approximately US$869 million.
Certain market and market capitalization risks related to investments in the
stock exchanges in China are described in "Risks Associated with the Fund." See
Appendix A for more information about economic performance results and the
historical performance of stock markets in China.
HONG KONG
Hong Kong's economy has been linked to China's since the establishment of
the colony in 1841. Hong Kong is China's largest trade partner. In the first
eight months of 1995, visible trade between Hong Kong and China amounted to
HK$640 billion, an 18% increase from 1994.
The structure of Hong Kong's economy has changed significantly over the last
two decades as the service sector outpaced manufacturing. During the 1980s this
process gained momentum. With land and labor costs rising, Hong Kong
manufacturers began shifting production out of the Territory into southern China
such that by the early 1990s, according to some estimates, more than 90% of
manufacturing companies had China operations. As a result, roughly half of the
jobs in the Hong Kong manufacturing sector were lost, with the slack being taken
up by the burgeoning service sector. Estimates now put the number employed in
China by Hong Kong manufacturers at more than 3 million. A second consequence of
this transition was the growth in scale and sophistication of Hong Kong
manufacturers as compared to the 1970s or early 1980s.
CHINA'S INVESTMENTS IN HONG KONG
There has been considerable growth in investment from China into Hong Kong
during the last five years. Chinese investment in Hong Kong typically involves
the purchase of stakes in existing companies. This has traditionally been in the
banking and import/export sectors, but investment in property, manufacturing and
infrastructure projects has also increased. As China has become the
manufacturing capital for Hong Kong companies, Hong Kong is the primary funding
center for the development of China through direct investment, syndicated loans,
commercial paper and share issuances in Hong Kong by Chinese companies.
CHINA'S RESUMPTION OF SOVEREIGNTY
The United Kingdom and China signed the Joint Declaration in 1984 which
provides that sovereignty over Hong Kong will be transferred from the United
Kingdom to China on June 30, 1997, at which time Hong Kong will become a Special
Administrative Region ("SAR") of China. Under the Joint Declaration and the
China law implementing certain commitments (the "Basic Law"), the current social
and economic systems in Hong Kong are to remain unchanged for at least 50 years,
and Hong Kong is to enjoy a high degree of autonomy except in foreign and
defense affairs. The SAR will be vested with executive, legislative
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<PAGE>
and judicial power. Laws currently in force, as amended by the SAR Legislature,
are to remain in force except to the extent they contravene the Basic Law or
China constitutional law. China may not levy taxes on the SAR, the Hong Kong
dollar is to remain fully convertible, and Hong Kong is to remain a free port.
Under the Basic Law, Hong Kong's current social freedoms, including freedoms of
speech, press, assembly, travel and religion, are not to be affected. It cannot
be predicted how future developments in Hong Kong and China may affect the
implementation of the Basic Law after the transfer of sovereignty in 1997.
Relations between the United Kingdom and China over Hong Kong have been
uneven over the past five years and this pattern is likely to continue through
1997. Fundamental differences exist in the perception of priorities. Where the
British have been inclined to see a need for political change, the Chinese
emphasize continuity and stability. Relations deteriorated after October 1992
when the Hong Kong Governor proposed wide-ranging electoral changes for Hong
Kong's Legislature. The Chinese understood these proposals to be a violation of
previous British agreements. Cooperation slowed on economic issues relating to
the transition in government on June 30, 1997, to which Chinese consent is
deemed essential, including approval of the financing package for the
Territory's proposed new airport. Although the Governor's proposals were
eventually enacted in mid-1994, the Chinese moved to improve cooperation in
order to reach key decisions on major infrastructure projects. The Legislative
Council ("Legco") election in September 1995 was won by the Democratic Party and
its allies, which have been campaigning for a more democratic Hong Kong. This
victory was not regarded favorably by the Chinese leadership and in response,
the Chinese leadership reiterated their determination to abolish the elected
Legco after the handover of Hong Kong in June 1997.
SECURITIES MARKETS
The Stock Exchange of Hong Kong Ltd. ("HKSE") was formed by merging four
existing Hong Kong stock exchanges and commenced trading in April 1986. The HKSE
is now the second largest stock market in Asia as measured by market
capitalization. As of January 31, 1996, 543 companies and 1,010 securities were
listed on the HKSE. Market capitalization as of the same date was approximately
HK$2,677,394 million, an increase of approximately 14% from December 31, 1995.
The HKSE is regulated by the Hong Kong Securities and Futures Commission
("HKSFC"), which was established in May 1989 as an autonomous statutory body
external to the civil service. The HKSFC administers securities laws and
ordinances governing the protection of investors, disclosure of interests and
insider transactions. In addition, the HKSE promulgates its own rules governing
share trading and disclosure of information to shareholders and investors.
Companies listed on the HKSE must enter into an agreement with the exchange to
provide interim and annual accountings to their shareholders.
The total number of listed companies on the HKSE as of January 31, 1996 was
543, compared to 529 at the beginning of 1995. Average daily turnover on the
HKSE for January 1996 was HK$7,086 million compared with HK$3,424 million from
July 1995 to December 1995, and HK$3,268 million from January 1995 to June 1995.
Hong Kong has no regulations governing foreign investment or exchange
control within its borders. Investors in Hong Kong markets therefore have great
flexibility in the repatriation of profits and deployment of capital.
Certain market and market capitalization risks related to investments in the
Hong Kong stock market are described in "Risks Associated with the Fund." See
Appendix A for more information about economic performance results and
historical performance of stock markets in Hong Kong.
TAIWAN
Taiwan has one of the world's largest foreign exchange reserves with $90
billion as at February 29, 1996. Between 1960 and 1995, Taiwan's GNP grew from
less than $2 billion to $264 billion. This economic growth has been accompanied
by a transformation of domestic production from labor intensive to capital
intensive industries during the past two decades. As was the case with Hong
Kong, rising land and labor costs during the 1980s gradually compelled more
Taiwan manufacturers to look abroad for resources. The effective relaxation at
the end of the decade of the barriers to doing business in China brought a
dramatic increase in investment flows, and in 1995, official Taiwanese
government figures showed direct investment in China of
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$1.09 billion, while unofficial investment is estimated to be five times higher.
Taiwanese companies should continue to be attracted to invest in China because
of the links of language and culture, the comparatively low costs of land and
labor and the less rigid environmental rules.
Although relations between China and Taiwan began improving during the
1980s, significant problems persist and are likely to continue to prove
disruptive. Taiwan has nonetheless become a significant investor in China and
trade between China and Taiwan totaled $21 billion in 1995. The Taiwan
government has announced that it will have proposals for direct cross-straits
communications prepared in one year. The primary obstacle to greater investment
between the two countries has been the prohibition by the Taiwanese authorities
of direct investment in China.
Relations between China and Taiwan deteriorated beginning in 1995, as a
result of increasing political sentiment among Taiwan voters in favor of
renouncing any claim to the mainland and declaring Taiwan a fully independent
nation, and as a result of the United States' decision to grant the President of
Taiwan, Lee Teng-Hsui, a visa to visit the United States. Chinese missile tests
and other military exercises near Taiwan during Taiwan's Presidential election
in early 1996 reflect the increased level of tensions between Taiwan and China.
SECURITIES MARKETS
The Taiwan Stock Exchange (the "TSE"), the sole stock exchange in Taiwan, is
owned by government-controlled enterprises and private banks. Many listed
companies on the TSE invest indirectly in China, primarily in the textiles, food
and rubber industries. Currently, a company cannot apply for listing on the TSE
unless it has conducted business in Taiwan for a minimum of five years.
In 1968, the Securities and Exchange Law was enacted and the TSE has been
regulated since that time by the Taiwan Securities and Exchange Commission (the
"TSEC") which is supervised by the Ministry of Finance. The Central Bank of
China is also responsible for supervising certain aspects of the Taiwan
securities market. Certain risks related to market volatility in Taiwan and
market capitalization in Taiwan are described in "Risks Associated with the
Fund."
After falling 79.5% from 12,450 to 2,750 between February and October, 1990,
the TSE Index then stabilized between 3,000 and 6,000 for the next two years,
before rising from 3,130 to 7,184 over the course of the two years ending on
December 31, 1994. Since then, the Index has fallen back to approximately 4,500,
primarily due to the effect of increased tension between Taiwan and China on
investor confidence. The effect of this sharp fall and the strong growth in the
earnings of export-related companies, particularly electronics and
petrochemicals, has been to reduce the valuation of the market from over 35
times earnings in 1991-92 to a forecast 11.5 times for 1996. This is the lowest
valuation that the TSE Index has reached since 1988.
FOREIGN INVESTMENT RESTRICTIONS
Foreign investors were not permitted to invest directly in securities listed
on the TSE until 1990. Currently, qualified foreign institutional investors
(QFIIs) must meet certain guidelines promulgated by the TSEC and must be
approved by the TSEC, the Ministry of Finance and the Central Bank of China to
be permitted to invest in TSE listed securities. QFIIs must meet the following
conditions (among others):
a) Banks must be ranked amongst the top 1,000 banks in the free world (in
terms of total assets);
b) Insurance companies must have been in business for last least three years
with total funds under management of at least $300 million;
c) Fund management companies must also have been in business for at least
three years with at least $200 million under management;
d) Securities firms must have a net worth of over $100 million and be
experienced in international securities.
The Managers are taking action to enable the Fund to invest directly in TSE
listed companies, either as a QFII or as a non-QFII using a registered
securities brokerage house. The Fund intends to make Taiwan-
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related investments in global depository receipts ("GDRs"), Euro-Convertible
Bonds ("ECBs") and listed beneficiary certificates ("LBCs") that represent, or
are convertible into, shares of Taiwan-based corporations. GDRs are generally
described under "The Fund's Investment Objectives and Policies--Depository
Receipts." Since 1992, fifteen TSE-listed companies have offered their shares in
the form of GDRs to foreign investors. Euro-Convertible Bonds and Preferred
Shares are described under "The Fund's Investment Objectives--Euro-Convertible
Bonds." Since 1989, thirty-three TSE-listed companies have issued ECBs, which
have been convertible into underlying shares since July 1995. The TSEC has also
agreed to permit the listing on the TSE of Taiwan Depository Receipts which will
represent the shares of foreign issuers. There are no Taiwan registration
requirements that apply to foreign investors who seek to make direct investments
in GDRs or ECBs offered by TSE-listed companies.
LBCs are certificates which represent the shares of closed-end funds which,
subject to TSEC and TSE approval, may be listed on the TSE. LBCs are issued only
by 15 securities investment trust companies in Taiwan for purposes of investing
in securities listed on the TSE. LBCs are traded on the TSE in the same manner
as other TSE-listed securities. As of September 30, 1994, there were 21
closed-end funds for which LBCs are traded. Each closed-end fund may invest in
the securities of issuers who are engaged in various types of businesses or
industries in Taiwan. Certain registration requirements apply before foreign
investors may invest in LBCs. The Fund is currently pursuing registration in
Taiwan to qualify for trading in LBCs that are listed on the TSE. If the Fund
qualifies for trading in LBCs, such trading would be included within the Fund's
65% investment policy. See "The Fund's Investment Objectives and Policies." The
Fund's purchase of LBCs will result in the duplication of management fees and
certain other expenses.
On February 29, 1996, the Taiwan government's cabinet approved a stock
market liberalization measure allowing foreign individual investors to
participate in the Taiwanese domestic stock market, effective March 8, 1996. The
maximum investment by all foreign investors in any listed firm would be
increased to 20% of the firm's total listed shares from the existing 15%.
Over time, the restrictions on investment in Taiwan may ease further to
permit greater and more flexible investment in securities listed on the TSE.
Certain market and market capitalization risks related to investments in the TSE
are described in "Risks Associated with the Fund." See Appendix A for more
information about economic performance results of Taiwan and the historical
performance of the TSE.
SINGAPORE
Singapore became an island colony of Great Britain in the early 1800s and
achieved independence in 1960. Its population of 3 million is comprised of 77.5%
Chinese, 14.2% Malay and 8.3% Indian and other groups. With foreign exchange
reserves of $66.8 billion (September 1995), Singapore has the highest level of
foreign exchange reserves per capita in the world. As the regional trading
center for the South East Asian region, Singapore has enjoyed a period of strong
growth over the last five years, averaging 8.6% annual compound growth in gross
domestic product (GDP), with the result that GDP per capita is estimated to have
exceeded $27,000 at the end of 1995, classifying Singapore as an "advanced
developing nation" under the OECD classification scheme.
Singapore has used its large foreign exchange reserves to invest in various
regional projects, including a number in China, where its $2 billion in pledged
investment in 1995 made it the fifth largest foreign investor. Its Suzhou
industrial township near Shanghai has already attracted $1.4 billion of
investment.
SECURITIES MARKETS
Formal trading of investment securities began in the late nineteenth century
and the Singapore Stockbrokers' Association was incorporated in 1930. The Stock
Exchange of Singapore (SES) was incorporated in 1973. The SES is now the seventh
largest stock market in Asia, after Japan, Hong Kong, Malaysia, Thailand, Korea
and Taiwan, with a market capitalization at January 31, 1996, of S$226.3
billion, an increase of approximately 10% from the previous year. From January
1, 1995 to December 31, 1995, there were 20 new listings of companies on the
SES. Average monthly turnover on the SES for 1995 was S$83,866 million, compared
with S$123,520 million in 1994. As of December 31, 1995, 248 companies were
listed on the SES
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(212 Singaporean and 36 foreign), and a total of 495 securities. Another 46 were
listed on the second market, known as the Stock Exchange of Singapore Dealing
and Automated Quotations Board (SESDAQ), which had a market capitalization of
S$4.18 billion at December 31, 1995.
There is also the Central Limit Order Board International (CLOB), an
electronic over-the-counter order matching system which was established after
the separation of the Singapore and Kuala Lumpur Stock Exchanges on 2nd January,
1990, primarily to enable Malaysian shares to continue to be traded freely in
Singapore. As of December 31, 1995, there were 10 Hong Kong, 112 Malaysian and 7
other international stocks traded on CLOB.
Foreign investors in Singapore are restricted by ministerial limitations
from owning more than 49% of any strategic Singaporean company, or more than 40%
of any Singaporean bank. This has led to a two tier share holding structure,
with domestic and foreign registered shares, trading at different prices, with a
premium for foreign registered shares. There are no restrictions on investment
and remittances and no foreign exchange controls, although 27% corporate tax is
deducted from the gross dividends payable.
HISTORY
Singapore was a British colony until it obtained internal self-government in
1959. In 1963, it joined the federation of Malaya, Sabah and Sarawak to form
Malaysia. It became a fully independent and sovereign state on August 9, 1965
when it separated from Malaysia.
The post World War II history of Singapore until independence in 1965 was
marked by a growing anticolonial movement, struggles between the communists and
non-communists within this movement to shape the future of the island's merger
with Malaysia, and the political and communal problems which were associated
with it and the confrontation with Indonesia (1963-66).
The non-communists in the People's Action Party (PAP), led by Lee Kuan Yew,
were able to prevail over the communists and their supporters by 1963, and the
government was able to focus on the tasks of economic and social development and
nation-building.
Singapore's racially mixed population reflects its key strategic location in
the Straits of Johore, which provided the base flow of traffic for Singapore's
initial shipping and entrepot businesses. Today's modern service-based and
high-technology economy can be traced back to the vision of Lee Kuan Yew, who as
Prime Minister (1959-91) and Senior Minister (1991 onwards) implemented a
process of encouraging inbound investment and upgrading the skills base of the
population, which has resulted in Singapore achieving "advanced developing
nation" status.
RISKS ASSOCIATED WITH THE FUND
THE FUND IS INTENDED FOR LONG-TERM INVESTORS WHO CAN ACCEPT THE RISKS
ASSOCIATED WITH INVESTING PRIMARILY IN GREATER CHINA INVESTMENTS AS WELL AS THE
SPECULATIVE RISKS ASSOCIATED WITH INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES.
The Fund's net asset value will fluctuate as the market value of its portfolio
positions and its net currency exposure changes. In addition, certain of the
Fund's potential investment and management techniques entail special risks.
These techniques include Hedging and Other Strategic Transactions and other
investments which are described below in "Special Investment Techniques" and
"Additional Information on Portfolio Instruments" and "Hedging and Other
Strategic Transactions" in the Statement of Additional Information. There is no
assurance that the Fund will achieve any of its investment objectives.
1. CURRENCY FLUCTUATION.
Since the Fund will invest a substantial portion of its assets in the
securities of foreign issuers which are denominated in foreign currencies or the
currency of a single foreign country, the strength or weakness of the U.S.
dollar against such foreign currencies will account for part of the Fund's
investment performance. More than 50% of the Fund's total assets, adjusted to
reflect currency transactions and positions, may be denominated in any single
currency. A decline in the value of a particular foreign currency against the
U.S.
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dollar will cause a decline in the U.S. dollar value of the Fund's holding of
securities denominated in such currency and may cause an overall decline in the
Fund's net asset value and any net investment income and capital gains to be
distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by many factors including the supply and demand for particular
currencies, central bank efforts to support currencies, the movement of interest
rates and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund may do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference ("spread") between the prices at which they purchase and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
sell the same currency to the same dealer.
2. FOREIGN SECURITIES.
The Fund will invest in securities of foreign issuers. Investing in
securities issued by foreign companies involves considerations and possible
risks not typically associated with investing in securities issued by U.S.
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in this country or abroad) or changed circumstances in
dealings between nations. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions, and for
funds holding foreign securities, the custodial fees are generally higher than
for funds holding domestic securities, and foreign securities markets may be
less liquid, more volatile and less subject to governmental supervision than in
the United States. Investments in foreign issuers could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, currency blockage, lack of uniform accounting and auditing standards,
less publicly available information about the foreign issuer and potential
difficulties in enforcing contractual obligations and judgments. Transactions in
foreign securities markets (including Greater China Region markets) are subject
to settlement and delivery risks and delays that are greater than those in U.S.
markets. The failure by a counterparty in a foreign securities market (including
Greater China Region markets) to pay for or deliver securities purchased or sold
by the Fund in a timely manner may result in financial loss to the Fund. See
"People's Republic of China--Securities Markets," "Hong Kong--Securities
Markets," "Taiwan--Securities Markets" and "Singapore--Securities Markets" under
the previous section entitled "The Fund's Investments in the Greater China
Region."
3. SECURITIES MARKETS IN THE GREATER CHINA REGION ARE VOLATILE.
Since the Fund will invest at least 65% of its total assets in Greater China
Investments, its investment performance will be especially affected by events
affecting companies that issue Greater China Investments. The value and
liquidity of Greater China Investments may be affected favorably or unfavorably
by political, economic, fiscal, regulatory or other developments in the Greater
China Region or neighboring regions. The extent of economic development,
political stability and market depth of different countries in the Greater China
Region varies widely. In general, fewer securities are available for trading and
the trading volume on stock exchanges in the Greater China Region are lighter
than for stock exchanges in the U.S. and the market capitalization of individual
issuers and the market as a whole is smaller. Moreover, foreigners investing in
Greater China Region securities markets, such as the Fund, may be subject to
investment restrictions that restrict the availability of securities to
foreigners in such markets, which can lead to higher investment costs for
foreigners.
China is comparatively underdeveloped when compared to other countries in
the Greater China Region. Greater China Investments typically involve greater
potential for gain or loss than investments in securities of issuers in
developed countries. In comparison to the United States and other developed
countries, developing countries may have relatively unstable governments and
economies based on only a
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few industries. Given the Fund's investments, the Fund will likely be
particularly sensitive to changes in China's economy as the result of a reversal
of economic liberalization, political unrest or changes in China's trading
status.
The securities markets in the Greater China Region are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the number
of shares available for investment by the Fund. A limited number of issuers in
the Greater China Region securities markets may represent a disproportionately
large percentage of market capitalization and trading value compared to United
States securities markets. The limited liquidity of securities markets in the
Greater China Region may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so. Accordingly, during periods
of rising securities prices in the more illiquid Greater China Regions
securities markets, the Fund's ability to participate fully in such price
increases may be limited because the Fund cannot invest more than 15% of its net
assets in illiquid securities. Conversely, the Fund's inability to dispose fully
and promptly of positions in declining markets may cause the Fund's net asset
value to decline as the value of the unsold positions is marked to lower prices.
In addition, Greater China Region securities markets are susceptible to being
influenced by large investors trading significant blocks of securities.
The Chinese, Hong Kong, Taiwan and Singapore stock markets are undergoing a
period of growth and change which may result in trading volatility and
difficulties in the settlement and recording of transactions, and in
interpreting and applying the relevant law and regulations. In particular, the
securities industry in China is not well developed. China has no securities laws
of national applicability. The existing national code of regulations is new, and
provisional only. The municipal securities regulations adopted by Shanghai and
Shenzhen municipalities are also new, as are their respective securities
exchanges. The regulatory roles of the China Securities Regulatory Commission
and the two municipal governments are not well-established. Given the
still-developing nature of China's securities markets, changes in regulatory
policy can materially affect securities prices. In addition, Chinese
stockbrokers and other intermediaries may not perform as well as their
counterparts in the United States and other more developed securities markets.
The prices at which the Fund may acquire investments may be affected by trading
by persons with material non-public information and by securities transactions
by brokers in anticipation of transactions by the Fund in particular securities.
At this time, moreover, the Fund is not able to acquire possession of
securities listed on stock exchanges in China directly because it is not
possible to arrange for physical custody of such securities with the Fund's
custodian outside China.
4. THE GREATER CHINA REGION IS EXPERIENCING IMPORTANT ECONOMIC AND
POLITICAL EVOLUTION.
The Fund will invest in Greater China Region countries with emerging
economies and securities markets. Political and economic structures in many of
such countries may be undergoing significant evolution and rapid development,
and such countries may lack the social, political and economic stability
characteristic of the United States. Certain of such countries may have in the
past failed to recognize private property rights and have at times nationalized
or expropriated the assets of private companies. As a result, the risks
described above, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of the Fund's investments in those countries
and the availability to the Fund of additional investments in those countries.
ECONOMIES OF COUNTRIES IN THE GREATER CHINA REGION MAY DIFFER FAVORABLY OR
UNFAVORABLY FROM THE U.S. ECONOMY IN SUCH RESPECTS AS RATE OF GROWTH OF GROSS
NATIONAL PRODUCT, RATE OF INFLATION, CAPITAL REINVESTMENT, RESOURCE
SELF-SUFFICIENCY AND BALANCE OF PAYMENTS POSITION. As export-driven economies,
the economies of countries in the Greater China Region are affected by
developments in the economies of their principal trading partners. Revocation by
the United States of China's "Most Favored Nation" trading status, which the
U.S. President and Congress have reconsidered annually, would adversely affect
the trade and economic
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development of China and Hong Kong. In addition, Hong Kong, Taiwan and Singapore
have limited natural resources, resulting in dependence on foreign sources for
certain raw materials and economic vulnerability to global fluctuations of price
and supply.
5. CHINA'S LEGAL SYSTEM IS NOT WELL DEVELOPED.
Governmental actions in China can have a significant effect on the economic
conditions in the Greater China Region, which could adversely affect the value
and liquidity of the Fund's investments. Although the Chinese government has
recently begun to institute economic reform policies, there can be no assurances
that it will continue to pursue such policies or, if it does, that such policies
will succeed. China does not have a comprehensive system of laws, although
substantial changes have occurred in this regard in recent years. The corporate
form of organization has only recently been permitted in China and national
regulations governing corporations were introduced only in May 1992. Prior to
the introduction of such regulations Shanghai had adopted a set of corporate
regulations applicable to corporations located or listed in Shanghai, and the
relationship between the two sets of regulations is not clear. Consequently,
until a firmer legal basis is provided, even such fundamental corporate law
principles as the limited liability status of Chinese issuers and their
authority to issue shares remain open to question.
Laws regarding fiduciary duties of officers and directors and the protection
of shareholders are not well developed. China's judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher-than-usual
degree of uncertainty as to the outcome of any litigation. Even where adequate
law exists in China, it may be impossible to obtain swift and equitable
enforcement of such law, or to obtain enforcement of the judgment by a court of
another jurisdiction. The bankruptcy laws pertaining to state enterprises have
rarely been used and are untried in regard to an enterprise with foreign
shareholders, and there can be no assurance that such shareholders, including
the Fund, would be able to realize the value of the assets of the enterprise or
receive payment in convertible currency. As the Chinese legal system develops,
the promulgation of new laws, changes to existing laws and the preemption of
local laws by national laws may adversely affect foreign investors, including
the Fund. The uncertainties faced by foreign investors in China are exacerbated
by the fact that many laws, regulations and decrees of China are not publicly
available, but merely circulated internally.
The Communist Party in China has in the past refused to recognize private
property rights and has nationalized or expropriated the assets of private
companies. However, during the 1990's the Chinese government has increasingly
encouraged private ownership of property and has recognized foreign ownership of
certain property located in China. In addition, although China does not
currently place limitations on repatriation of profits or currency with respect
to the acquisition or sale of "B" shares listed on its stock exchanges (subject
to the payment of any relevant taxes), any such limitations on repatriation may
result in a downward market trend in China that could adversely effect the
Fund's portfolio.
6. FOREIGN INVESTMENT RESTRICTIONS
Securities markets in the Greater China Region are smaller and offer fewer
investment alternatives than the equity securities markets in Europe and the
United States. Certain countries in the Greater China Region prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. For example, certain
countries require governmental approval prior to investments by foreign persons,
or limit the amount of investment by foreign persons in a particular company, or
limit the investment by foreign persons to only a specific class of securities
of a company that may have less advantageous terms than securities of the
company available for purchase by nationals.
Taiwan restricts foreign ownership of the shares of publicly-listed
companies to 10% and also requires that foreign investment institutions have
conducted business for at least 3 years and have under its management at least
$300 million in assets prior to being eligible to acquire ownership of
TSE-traded shares. See "The Fund's Investments in the Greater China
Region--Taiwan--Foreign Investment Restrictions." Taiwan has limited
repatriation of profits by private companies. For example, ROC companies are
allowed to
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repatriate up to $3 billion raised abroad from issues of GDRs and overseas
corporate bonds. Moreover, the national policies of Taiwan may restrict
investment opportunities in issuers or industries deemed sensitive to national
interests.
Taiwan requires governmental approval for the repatriation of investment
income, capital or the proceeds of securities sales by foreign investors. The
Fund could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investments.
7. NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION
Foreign companies are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from those
applicable to U.S. companies. In particular, the assets, liabilities and profits
appearing on the financial statements of such a company may not reflect its
financial position or results of operations in the way they would be reflected
had such financial statements been prepared in accordance with U.S. generally
accepted accounting principles. Most of the securities held by the Fund will not
be registered with the Securities and Exchange Commission ("SEC"), nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Fund than is available concerning U.S. issuers. In addition, where public
information is available, it may be less reliable than such information
regarding U.S. issuers. In instances where the financial statements of an issuer
are not deemed to reflect accurately the financial situation of the issuer, the
Adviser will take appropriate steps to evaluate the proposed investment, which
may include interviews with its management and consultations with accountants,
bankers and other specialists.
8. TAX ISSUES
The Fund's investment income from foreign issuers may be subject to non-U.S.
withholding taxes, thereby reducing the Fund's net investment income. See "Tax
Information" and "Additional Information Concerning Taxes" in the Statement of
Additional Information.
Under Section 988 ("Section 988") of the Internal Revenue Code of 1986, as
amended (the "Code"), special rules are provided for certain transactions in a
foreign currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from forward contracts, from futures contracts
that are not "regulated futures contracts" and from unlisted options will be
treated as ordinary income or loss under Section 988. Also, certain foreign
exchange gains or losses derived with respect to foreign fixed-income securities
are also subject to Section 988 treatment. In general, therefore, Section 988
gains or losses will increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. Additionally, if Section 988 losses exceed other investment
company taxable income during a taxable year, the Fund may not be able to make
any ordinary dividend distributions and distributions paid during the year may
be characterized for tax purposes as a return of capital.
The Fund's transactions, if any, in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) may be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the Fund
(i.e., may affect whether gains or losses are ordinary or capital), accelerated
recognition of income to the Fund and defer Fund losses. These Code rules could
therefore affect the character, amount and timing of distributions to
shareholders. These rules also (a) could require the Fund to mark to market
certain types of positions in its portfolio (i.e., treat them as they were
closed out), and (b) 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 Fund may make investments which, for federal income tax purposes,
constitute investments in shares of foreign corporations. If the Fund purchases
shares in certain foreign passive investment entities described in the Code as
passive foreign investment companies ("PFIC"), the Fund will be subject to U.S.
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federal income tax on a portion of any "excess distribution" (the Fund's ratable
share of distributions in any year that exceeds 125% of the average annual
distribution received by the Fund in the three preceding years or the Fund's
holding period, if shorter, and any gain from the disposition of such shares),
even if such income is distributed as a taxable dividend by the Fund to its
shareholders. Additional charges in the nature of interest may be imposed on the
Fund for deferred taxes arising from such "excess distributions." If the Fund
were to invest in a PFIC and elect to treat the PFIC as a "qualified electing
fund" under the Code (and if the PFIC were to comply with certain reporting
requirements), in lieu of the foregoing requirements the Fund would be required
to include in income each year its pro rata share of the PFIC's ordinary
earnings and net realized capital gains, whether or not such amounts were
actually distributed to the Fund. Such amount would be subject to the 90% and
calendar year distribution requirements described above.
For more information about tax risks related to the Fund, see "Tax
Considerations" and "Additional Information Concerning Dividends, Distributions
and Taxes" in the Statement of Additional Information.
9. PORTFOLIO TURNOVER
The Fund will not trade in securities with the intention of generating
short-term profits, but may effect portfolio transactions without regard to the
length of time a security is held if, in the judgment of the Adviser, such
transactions are advisable in light of a change in circumstances of a particular
company or within a particular industry, or in general market, economic or
political conditions. Accordingly, the Fund may engage in short-term trading
under such circumstances. After the initial structuring of the Fund is
completed, it is anticipated that the annual portfolio turnover rate will be
under 100%. (An annual turnover rate of 100% occurs, for example, when all of
such securities held by the Fund are replaced in a period of one year.) A high
rate of portfolio turnover (100% or more) involves correspondingly greater
expenses than a lower rate, which expenses must be borne directly by the Fund,
and indirectly by the Fund and its shareholders. However, short-term trading may
cause the portfolio turnover rate to exceed the 100% target. High portfolio
turnover also may result in the realization of substantial net short-term
capital gains. To the extent net capital gains are realized, any distributions
derived from such gains on securities held for less than one year are taxable at
ordinary income rates for federal income tax purposes. See "Distributions and
Taxes." In order for the Fund to continue to qualify as a regulated investment
company for Federal tax purposes, no more than 30% of the annual gross income of
the Fund may be derived from the sale of securities (including its share of
gains from the sale of securities held by the Fund) held for less than three
months.
10. CERTAIN INVESTMENT POLICIES
The Fund has adopted certain fundamental investment restrictions and
policies which are explained in "The Fund's Investment Objective and Policies"
and "Investment Limitations" in the Statement of Additional Information which,
as described more fully in those sections, may not be changed unless authorized
by a shareholder vote and as permitted by law. These investment restrictions may
prevent the Fund from broadening its portfolio to include other types of
investments in the Greater China Region that may generate greater total returns.
Among these fundamental restrictions, the Fund may not (1) borrow money except
from banks or through reverse repurchase agreements and in an amount not
exceeding 10% of its total assets; or (2) invest more than 25% of its total
assets in the securities of any one issuer, other than U.S. Government
securities or, in the case of the Fund, interests in the Fund's portfolio, or
acquire more than 10% of the outstanding voting securities of any one issuer.
Except with respect to the Fund's borrowing limitation, investment restrictions
are considered at the time of acquisition of assets; the sale of portfolio
assets is not required in the event of a subsequent change in circumstances. As
a matter of fundamental policy the Fund will invest less than 25% of its total
assets in the securities, other than U.S. Government securities, of issuers in
any one industry. However, the Fund is permitted to invest 50% or more of its
total assets in (i) the securities of issuers located in the People's Republic
of China, Hong Kong, Taiwan or Singapore and (ii) assets denominated in the
currency of any one country.
Except for the nonfundamental investment restrictions and policies
identified above and in the Statement of Additional Information, the investment
objectives and policies of the Fund are fundamental and accordingly may not be
changed by the Board of Directors of the Fund without obtaining the majority
approval of the shareholders of the Fund. See "Management of the Fund" for
further information. If any
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such changes were made, the Fund might have investment objectives different from
the objectives which an investor considered appropriate at the time the investor
became a shareholder in the Fund. As a matter of fundamental policy, the Fund
will not (i) borrow for leverage purposes or purchase any securities if, at the
time of such purchase, permitted borrowing exceed 10% of the value of the Fund's
total assets, as the case may be, (ii) invest more than 15% of its net assets in
unmarketable securities, over-the-counter options (and the segregated assets
required to cover such options are illiquid while such options are owned by the
Fund), repurchase agreements maturing in more than seven days and other illiquid
securities, or (iii) enter into a futures contract or option thereon for
purposes other than bona fide hedging if, immediately thereafter, the sum of the
amount of its initial margin and premiums required to maintain permissible
speculative positions in futures contracts or options thereon would exceed 5% of
the liquidation value of the Fund's net assets; however, 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. See "Special Investment
Techniques" for more information about futures contracts and options.
11. SPECIAL RISKS OF CERTAIN FUND INVESTMENTS
LENDING OF FUND SECURITIES
The Fund may seek to earn income by lending portfolio securities to
broker-dealers or other institutional borrowers. Such loans will be against
collateral consisting of cash or securities which is equal at all times to at
least 100% of the value of the securities loaned. During the existence of a
loan, the Fund will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and will also receive a
fee, on all or a portion of the interest on investment of the collateral, if
any. However, the Fund may at the same time pay a transaction fee to such
borrowers. Opportunities to engage in the lending of equity securities listed in
Greater China Region securities markets are restricted. For example, Hong Kong
permits such lending subject to a 14 day limit on the lending period. As with
other extensions of credit there are risks of delay in recovery or even loss of
rights in the securities loaned if the borrower of the securities fails
financially. However, the loans will be made only to organizations deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned from securities loans of this type justifies
the attendant risk. The financial condition of the borrower will be monitored by
the Adviser on an ongoing basis. If the Adviser decides to make securities
loans, it is intended that the value of the securities loaned would not exceed
one-third of the Fund's total assets.
ILLIQUID AND RESTRICTED SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven days. See
"The Fund's Investment Objectives and Policies." Generally, the Fund's Board of
Directors has the ultimate responsibility for determining whether specific
securities (including, without limitation, Rule 144A securities as described
below) are liquid or illiquid. The Board has delegated the function of making
day to day determinations of liquidity to the Adviser, pursuant to guidelines
reviewed by the Board. The Board's guidelines take into account a number of
factors in reaching liquidity decisions, including, but not limited to: (i) the
frequency of trading in the security; (ii) the number of dealers who make quotes
for the security; (iii) the number of dealers who have undertaken to make a
market in the security, (iv) the number of other potential purchasers; and (v)
the nature of the security and how trading is effected (e.g., the time needed to
sell the security, how offers are solicited and the mechanics of transfer). The
Adviser will monitor the liquidity of securities in each Fund's portfolio and
report periodically on such decisions to the Board of Directors.
As one of many potential types of illiquid investments, the Fund may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Act"), which can be sold to qualified institutional buyers in
accordance with Rule 144A under the Act ("Rule 144A securities"). Investing in
Rule 144A securities could have the effect of increasing the Fund's illiquidity
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities. If a particular investment in Rule
144A securities is not determined to have a readily available trading market,
such investment will be
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included within the 15% limitation on investment in illiquid securities. The
maximum percentage of Fund assets that may be invested in liquid Rule 144A
securities (i.e., those not included within the 15% limitation) at any time is
20%.
The sale of restricted securities generally requires more time and may
result in higher brokerage charges or dealer discounts and other selling
expenses than the sale of securities eligible for trading on securities
exchanges or in the over-the-counter markets. Restricted securities often sell
at a price lower than similar securities that are not subject to restrictions on
resale.
HEDGING AND OTHER STRATEGIC TRANSACTIONS
Within the Greater China Region as well as domestic and other foreign
markets, the Fund may be authorized to use a variety of Hedging and Other
Strategic Transactions as described in "Special Investment Techniques" and
"Hedging and Other Strategic Transactions" in the Statement of Additional
Information. These investment strategies are used by the Fund to hedge various
market risks (such as currency exchange rates, interest rates, and broad or
specific market movements) to seek to reduce the volatility of the Fund's
portfolio or to seek to increase the Fund's income. No more than 35% of the
Fund's net assets (taking into account the Fund's net position in a specific
investment) may be used in connection with these types of transactions.
Subject to the limitations described above, the Fund may purchase and sell
(or write) Hedging and Other Strategic Transactions in its attempts to protect
against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities markets or currency exchange
rate fluctuations, or to protect the Fund's unrealized gains in the value of its
securities. The Fund may use any or all types of Hedging and Other Strategic
Transactions which it is authorized to use at any time, and such use will based
on many variables, including market conditions. Such transactions are subject to
political, economic and legal risks similar to those applicable to investment in
foreign securities described under "Foreign Securities" above.
The ability of the Fund to use Hedging and Other Strategic Transactions
successfully will depend on, in addition to the factors described above, the
Adviser's ability to predict pertinent market movements, and the accuracy of
such predictions cannot be assured. The skills needed to accurately predict such
market movements are different from those needed to select the Fund's
securities. Moreover, the use of options and futures by the Fund may fail as
hedging techniques in cases where the price movements of the securities
underlying the options and futures do not follow the price movements of the
portfolio securities subject to the hedge. Other risks associated with Hedging
and Other Strategic Transactions are described in "Hedging and Other Strategic
Transactions" in the Statement of Additional Information.
Hedging and Other Strategic Transactions have special risks associated with
them which are different from the risks associated with investments in
securities, including possible default by the counterparty to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used.
Currency hedging 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. Currency
transactions are also subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and
manipulations or exchange restrictions imposed by governments. These forms of
governmental actions can result in losses to the Fund if it is unable to deliver
or receive currency or monies in settlement of obligations and could also cause
hedges it has entered into to be rendered without value, resulting in full
currency exposure as well as incurring transaction costs. Buyers and sellers of
currency futures contracts are subject to the same risks that apply to the use
of futures contracts 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
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options on currency futures contracts 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.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities 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 general, these
transactions involve: (1) liquidity risk that contractual positions cannot be
easily closed out in the event of market changes, (2) correlation risk that
changes in the value of hedging positions may not match the securities market
and foreign currency fluctuations intended to be hedged, (3) market risk that an
incorrect prediction of securities prices or exchange rates may cause the Fund
to perform less well than if such positions had not been entered into, and (4)
skills different from those needed to select Fund securities. The Fund's use of
put and call options could result in losses to the Fund, force the sale of
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.
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 transaction without incurring
substantial losses. Although the Fund's use of futures and options transactions
for hedging 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 limited to the cost of the initial
premium.
Losses resulting from the use of Hedging and Other Strategic Transactions
will reduce the Fund's net asset value, and possibly income, and the losses can
be greater than if Hedging and Other Strategic Transactions had not been used.
RISKS OF HEDGING AND OTHER STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging and Other Strategic
Transactions 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. In China, the use of Hedging and
Other Strategic Transactions is in the early stages of development and these
transactions are not well regulated, exposing investors to greater risk of loss
than other types of securities investments in China. The value of positions
taken as part of non-U.S. Hedging and Other Strategic Transactions 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.
See "Additional Information on Portfolio Instruments" in the Statement of
Additional Information for a discussion of risks associated with other
investments of the Fund.
SPECIAL INVESTMENT TECHNIQUES
IN ADDITION TO ITS INVESTMENTS IN EQUITY SECURITIES, THE FUND INTENDS TO USE
ACTIVE MANAGEMENT TECHNIQUES IN SELECTING OTHER FORMS OF INVESTMENTS. The Fund
will be authorized to use a variety of investment strategies within the U.S. and
the Greater China Region for hedging and other purposes, including income
generation. These investment strategies include the writing and the purchase and
sale of options on securities and indices, futures contracts and options on
futures, warrants, forward foreign currency exchange contracts, short sales,
options on currency, and currency swaps (collectively, these transactions are
referred to herein as "Hedging and Other Strategic Transactions"). The Fund may
invest up to 35% of its total assets
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in Hedging and Other Strategic Transactions and no more than 35% of the Fund's
total assets will be at risk with respect to such transactions. This limit is
not a fundamental policy of the Fund and may be changed by the Fund's Board of
Directors without shareholder approval. When Hedging and Other Strategic
Transactions are conducted outside the U.S., these transactions will operate in
a similar manner as in U.S. securities markets but with greater risk. See "Risks
Associated with the Fund--Risks of Hedging and Other Strategic Transactions
Outside the United States." For general information about risks associated with
Hedging and Other Strategic Transactions, see "Risks Associated with the
Fund--Special Risks of Certain Fund Investments" above and "Hedging and Other
Strategic Transactions" in the Statement of Additional Information.
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 and options thereon,
exchange-listed 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. The Fund may enter into currency transactions only with
counterparties that are deemed creditworthy by the Adviser.
Generally, 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 and other non-speculative
purposes, including transaction hedging and position hedging. 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 securities 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 by the Fund 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 increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, the Fund may also
engage in proxy hedging (i.e. using a hedging vehicle relating to a currency
whose fluctuations are tied closely to the currency to be hedged).
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risks Associated with the Fund--Special
Risks of Certain Fund Investments." If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below under "Special Investment Techniques--Use of Segregated and
Other Special Accounts." See "Hedging and Other Strategic Transactions" in the
Statement of Additional Information for information about other types of
currency transactions that the Fund may engage in.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase up to 10% of its net assets in 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 and yield. 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 the value of the security prior to delivery. Purchasing a
security on a when-issued or delayed delivery basis may involve the 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
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settlement date if it is deemed advisable. The Fund 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.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may purchase and sell options that are traded on United States and
foreign markets. The ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. The Fund will treat purchased over-the-counter options and assets
used to cover written over-the-counter options as illiquid securities until such
time as the staff of the Securities and Exchange Commission changes its current
position on such treatment.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. In the event of unanticipated
changes in securities prices, the Fund may recognize a loss of the premium on an
option it has purchased to the extent that the option cannot be profitably
exercised before its expiration. The successful use of options for hedging
purposes depends in part on the ability of the Adviser to predict future price
fluctuations and the degree of correlation between the options and securities
markets. The Fund pays brokerage commissions or spreads in connection with its
options transactions. The writing of options could significantly increase the
Fund's portfolio turnover rate.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular exchange-traded option or at any particular time.
If the Fund is unable to effect a closing purchase transaction with respect to
covered options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many transactions involving options require
segregation of Fund assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts." The maximum percentage of Fund assets
that may be invested in futures and/or options at any time is 10%.
A put option gives the purchaser of the Option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, currency or other instrument at the exercise price. The
Fund's purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial futures contract, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase the instrument. An "American" type put or call option may
be exercised at any time during the option period, whereas a "European" style
put or call option may be exercised only upon expiration or during a fixed
period prior to expiration.
Exchange-listed options are typically issued by a regulated intermediary.
Exchange-listed options, with certain exceptions, generally settle by physical
delivery of the underlying security or currency. In the future,
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cash settlement may become available. Frequently, rather than taking or making
delivery of the underlying instrument through the process of exercising the
option, listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
The Fund's inability to close out its position as a purchaser or seller of
an exchange-listed put or call option is dependent, in part, upon the liquidity
of the particular option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (1) insufficient trading interest on
certain options, (2) restrictions on transactions imposed by the exchange, (3)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities, including
reaching daily price limits, (4) interruption of the normal operations of the
exchange, (5) inadequacy of the facilities of an exchange to handle current
trading volume, or (6) 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 relevant market for that option on that exchange would cease to exist,
although any such outstanding options on that exchange would continue to be
exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains. The Fund may purchase and sell call options on securities that are
traded on U.S. and foreign securities exchanges, and on securities indices,
currencies and futures contracts. All call options sold by the Fund must be
"covered," that is, the Fund must own the securities subject to the call, must
own an offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
a loss, a call sold by the Fund will expose the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument that it might otherwise have sold.
The Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
The Fund may purchase and sell put options on securities (whether or not it
holds the securities in its portfolio), securities indices, currencies and
futures contracts. In selling put options, the Fund faces the risk that it may
be required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may trade financial futures contracts or purchase or sell put and
call options on those contracts as a hedge against anticipated interest rate,
currency or market changes, for duration management and for permissible
non-hedging purposes. Futures contracts are generally bought and sold on the
commodities exchanges on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). 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 and
obligates the seller to deliver that position.
The Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and generally will be entered
into only for BONA FIDE hedging, risk management (including duration management)
or other permissible non-hedging purposes. Maintaining a futures contract or
selling an option on a futures contract will typically require the Fund to
deposit with a financial intermediary, as security for its obligations, an
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amount of cash or other specified assets ("initial margin") that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
The Fund will not enter into a futures contract or option thereon for
purposes other than bona fide hedging if, immediately thereafter, the sum of the
amount of its initial margin and premiums required to maintain permissible
non-hedging positions in futures contract and options thereon would exceed 5% of
the liquidation value of the Fund's net assets; however, 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 segregation requirements
with respect to futures contracts and options thereon are described below under
"Use of Segregated and Other Special Accounts."
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions
when, in the judgment of the Adviser, it is in the best interests of the Fund to
do so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
will normally be entered into by the Fund based on the Adviser's judgment that
the combined strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the combination will
instead increase the risks or hinder achievement of the portfolio management
objective.
SHORT SALES "AGAINST THE BOX"
The Fund may from time to time sell securities short "against the box." If
the Fund enters into a short sale against the box, it will be required to set
aside securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities if the conversion or
exchange occurs without the payment of any additional consideration) and will be
required to hold such securities while the short sale is outstanding. The Fund
will incur transaction costs, including interest expense, in connection with
opening, maintaining and closing short sales against the box. If the Fund
engages in any short sales against the box, it will incur the risk that the
security sold short will appreciate in value after the sale, with the result
that the Fund will lose the benefit of any such appreciation.
SHORT SALES
The Fund may enter into short sales with respect to stocks underlying its
security holdings. For example, if the Adviser anticipates a decline in the
price of the stock underlying a security that the Fund holds, it may sell the
stock short. If the stock price subsequently declines, the proceeds of the short
sale could be expected to offset all or a portion of the effect of the stock's
decline in value.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of up to 10% of the Fund's net asset value in cash, U.S. government
securities or other liquid high grade debt obligations. In addition, the Fund
will place up to 10% of the Fund's net asset value in a segregated account with
its custodian, or designated subcustodian, an amount of cash, U.S. government
securities or other liquid high grade debt obligations equal to the difference,
if any, between (a) the market value of the securities sold at the time that
they were sold short, and (b) any cash, U.S. government securities or other
liquid high grade debt obligations deposited as collateral with the broker in
connection with such short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, the Fund will maintain the segregated
account daily at a level so that (i) the amount deposited in the account plus
the amount deposited with the broker (not including the
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proceeds of the short sale) will equal 100% of the current market value of the
securities sold short, and (ii) the amount deposited in the account plus the
amount deposited with the broker (not including the proceeds from the short
sale) will not be less than the market value of the securities at the time that
they were sold short. A lesser amount of assets may be set aside by the Fund if
it owns certain types of instruments, such as a call option, on the securities
sold short that would effectively cover the short sale.
Short sales by the Fund involve certain special risk consideration from
purchase of a security because losses from short sales may be unlimited, whereas
losses from purchases are limited to the total amount invested.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
The use of many Hedging and Other Strategic Transactions by the Fund will
require, among other things, that the Fund segregate cash, liquid high grade
debt obligations or other assets with its custodian, or a designated
sub-custodian, to the extent the Fund's obligations are not otherwise "covered"
through ownership of the underlying security, financial instrument or currency.
In general, the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the entire amount the Fund has at risk must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by the Fund,
for example, will require the Fund to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A put option on a
security written by the Fund will require the Fund to segregate liquid high
grade debt obligations equal to the exercise price. Except when the Fund enters
into a forward contract in connection with the purchase or sale of a security
denominated in a foreign currency or for other non-speculative purposes, which
requires no segregation, a currency contract that obligates the Fund to buy or
sell a foreign currency will generally require the Fund to hold an amount of
that currency, liquid securities denominated in that currency equal to the
Fund's obligations or to segregate liquid high grade debt obligations equal to
the amount of the Fund's obligations.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt or equity securities or other acceptable
assets. The Fund will only enter into swaps on a gross basis, unless the swap
contract provides otherwise. The Fund will accrue the net amount of the excess,
if any, of its obligations relating to swaps over its entitlements with respect
to each swap on a daily basis and will segregate with its custodian, or
designated sub-custodian, an amount of cash or liquid high grade debt
obligations having an aggregate value equal to at least the accrued excess.
Hedging and Other Strategic Transactions may be covered by means other than
those described above when consistent with applicable regulatory policies. The
Fund may also enter into offsetting transactions so that its combined position,
coupled with any segregated assets, equals its net outstanding obligation in
related options and Hedging and Other Strategic Transactions. The Fund could
purchase a put option, for example, if the strike price of that option is the
same or higher than the strike price of a put option sold by the Fund. Moreover,
instead of segregating assets if it holds a futures contract or forward
contract, the Fund could purchase a put option on the same futures contract or
forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging and Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it terminates
prior to that time, assets equal to any remaining obligation would need to be
segregated.
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The Fund will engage in transactions in futures contracts and options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended, for maintaining the qualification of
the Fund as a regulated investment company for Federal income tax purposes.
WARRANTS OR RIGHTS
Warrants or rights may be acquired by the Fund in connection with other
securities or separately, and provide the Fund with the right to purchase at a
later date other securities of the issuer. Unless they become detached and
traded, warrants or rights acquired by the Fund in units or attached to
securities will be deemed to be without value for purposes of the 35%
restriction on the Fund's investments in Hedging and Other Strategic
Transactions.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the general direction
and supervision of the Fund's Board of Directors. The Fund's directors are
elected annually by shareholders of the Fund. The Fund's day-to-day operations
are handled by the Fund's officers. See "Management of the Fund" in the
Statement of Additional Information for more information about the directors and
officers of the Fund.
INVESTMENT ADVISER
CVO Greater China Partners, L.P. (the "Adviser") provides day-to-day
management of the Fund's portfolio and renders investment advisory services to
the Fund pursuant to an Advisory Agreement with the Fund (the "Advisory
Agreement"). Subject to such policies as the Fund's Board of Directors may
determine, the Adviser makes investment decisions for the Fund. The Fund does
not have an operating history, and the Adviser has not had any prior experience
advising an investment company. The Advisory Agreement provides that, as
compensation for services, the Adviser is entitled to receive from the Fund a
monthly fee at the annual rate of 1.25% of the average daily net assets of the
Fund.
The Adviser is a Delaware limited partnership formed in September 1994 to
serve as the investment adviser to the Fund. The Adviser's key investment team
consists of experienced investment professionals based in San Francisco. The
Adviser's principal business is the rendering of discretionary investment
management services to the Fund. The Adviser's principal business address is 520
Madison Avenue, New York, NY 10022.
CONTROL OF THE ADVISER. The Adviser is controlled by its two general
partners: OFFITBANK Greater China, Inc., a New York corporation established in
August 1994 as a wholly-owned subsidiary of OFFITBANK, a New York State
chartered trust company ("OFFITBANK"), and ChinaVest Public Equities, LLC, a
California limited liability corporation established in January 1995 as a
wholly-owned subsidiary of ChinaVest Financial Services, Ltd., a Cayman Islands
corporation ("ChinaVest Ltd.").
Under its charter, OFFITBANK may neither accept deposits nor make loans
except for deposits or loans arising directly from its exercise of the fiduciary
powers granted it under the New York Banking Law. OFFITBANK's principal business
is the rendering of discretionary investment management services to high net
worth individuals and family groups, foundations, endowments and corporations.
OFFITBANK specializes in global fixed income asset management and offers its
clients a complete range of fixed income investments in capital markets
throughout the world. OFFITBANK currently manages in excess of $7 billion in
assets and serves as investment adviser to sixteen registered investment
companies (or portfolios thereof). The principal business address of OFFITBANK
is 520 Madison Avenue, New York, New York 10022.
The ChinaVest investment management group based in Hong Kong (the "ChinaVest
Group") was organized in 1985. The ChinaVest Group has ten years of experience
in managing private equity investments and shares certain common control persons
with ChinaVest Public Equities, LLC. The ChinaVest Group currently manages in
excess of $225 million in assets. The ChinaVest Group and ChinaVest Public
Equities, LLC have no previous experience as investment adviser to a registered
investment company. The ChinaVest Group is represented by ChinaVest, Inc., whose
principal business address is 160 Sansome Street, 18th Floor, San Francisco,
California 94104.
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See "Management of the Fund" in the Statement of Additional Information for
more information about the directors and officers of the general partners of the
Adviser.
PORTFOLIO MANAGERS
The Fund's portfolio managers are Gavin B. Graham and John C. Wong, who have
held such responsibilities since March 1, 1996. From 1993 to 1995 Mr. Graham was
the Senior Investment Officer for Citibank Global Asset Management (Asia) Ltd.
in Hong Kong. Prior to that, from 1991 to 1993, he was the Investment Director
and a shareholder of Connaught Investments Ltd., also based in Hong Kong. From
1994 to 1996, Mr. Wong was with Crosby Securities marketing and selling Asian
securities to North American institutions. From 1992 to 1994 Mr. Wong was with
Lehman Brothers in its mortgage-backed securities department. Both Mr. Graham
and Mr. Wong are principals of the Fund.
ADMINISTRATOR, SHAREHOLDER SERVICING AGENT, TRANSFER AGENT AND CUSTODIAN
BISYS Fund Services ("BISYS") serves as the Fund's administrator and assists
the Fund in all aspects of its administration and operation. BISYS Fund
Services, Inc., an affiliate of BISYS, has entered into separate agreements with
the Fund for the provision of transfer agency and dividend disbursing services
for the Fund. Pursuant to the Transfer Agency Agreement and the provision of
Fund accounting services, pursuant to the Fund Accounting Agreement
The fees paid to BISYS as administrator of the Fund are based on the Fund's
assets and include the reimbursement of out-of-pocket expenses. BISYS receives
(i) a monthly administrator's fee computed at an annual rate of 0.15% of the
average daily net assets of the Fund, and (ii) an annual fund accounting fee of
$30,000. The principal business address of BISYS and BISYS Fund Services, Inc.
is 3435 Stelzer Road, Columbus, Ohio 43219.
The fees paid to the shareholder servicing agent are based on the Fund's net
assets attributable to the Class II Shares, reflecting the higher cost of
servicing the holders of said shares. The monthly shareholder servicing fee is
computed at an annual rate of 0.25% of the average daily net assets of the Fund
attributable to the Class II Shares. This fee is allocated to Class II Shares
only, as payment for answering inquiries and requests for Fund information by
Class II shareholders.
Investors Bank & Trust Company serves as custodian of the assets of the
Fund. The principal business address of the custodian is 89 South Street,
Boston, MA 02111.
Except for the shareholder servicing fee, all of the foregoing fees and
expenses are allocated to both classes of Shares on a pro rata basis.
A further discussion of the terms of the Fund's administrative, shareholder
servicing, custody and transfer agency arrangements is contained in the
Statement of Additional Information.
DISTRIBUTOR
Class I Shares of the Fund are sold to institutional investors and Class II
Shares are sold to non-institutional investors. Such sales will be made on a
continuous basis by the Fund's distributor, OFFIT Funds Distributor, Inc. (the
"Distributor"), is a wholly-owned subsidiary of BISYS. The Distributor's
principal offices are located at 3435 Stelzer Road, Columbus, Ohio 43219.
The Fund has adopted a Plan of Distribution under the 1940 Act (the "Plan")
pursuant to which the Fund is authorized to spend up to 0.25% of the aggregate
average daily net assets of the Fund solely attributable to Class II Shares for
the purpose of compensating the Distributor for activities primarily intended to
result in the sales of Class II Shares. Payments under the Plan will bear no
relationship to expenses actually incurred by the Fund and such payments may
exceed actual expenses incurred by the Fund for such activities. The Fund will
not finance any amounts under the Plan for a period of at least one year
following the commencement of operations of the Fund. In the future, the Board
of Directors of the Fund may put the Plan into effect if the distribution costs
associated with Class II Shares exceed certain levels.
The Advisor will finance from of its own resources all distribution and
sales related expenses, which may include the development and implementation of
direct mail promotions and advertising for the Fund and the
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preparation, printing and distribution of prospectuses for the Fund to
recipients other than existing shareholders. The Advisor will also make payments
to qualifying broker-dealers and financial institutions that provide such
services. Any salesperson or any other person entitled to receive compensation
for selling or distributing the Fund shares may receive different compensation
with respect to one class of shares over the other class of shares in the Fund.
The Plan, together with a distribution agreement between the Fund and OFFIT
Funds Distributor, Inc., will both continue in effect with respect to the Fund
from year to year (although the Fund may continue not to make any payments under
the Plan) if such continuance is approved at least annually by the Fund's Board
of Directors and by a majority of the Directors who have no direct or indirect
financial interest in the operation of the Plan or in any agreement related to
the Plan ("Qualified Directors") and who are not "interested persons" (as
defined in the 1940 Act) of any party by votes cast in person at a meeting
called for such purpose. In approving the continuance of the Plan and the
Distribution Agreement, the Directors must determine that the Plan is in the
best interest of the shareholders of the Fund.
Rule 12b-1 also requires that the selection and nomination of Directors who
are not "interested persons" of the Company be made by such Qualified Directors.
REGULATORY MATTERS
One of the general partners of the Investment Adviser, OFFITBANK Greater
China, Inc., ("OGC") is a wholly-owned subsidiary of OFFITBANK, a New York State
chartered trust company ("OFFITBANK"). As the subsidiary of a trust company
chartered under the New York Banking Law, OGC will be supervised and examined
thereunder by the New York Banking Department. OFFITBANK is prohibited by its
charter from accepting deposits or loans other than deposits or loans arising
directly from its exercise of the fiduciary powers granted under the New York
Banking Law. Neither OFFITBANK nor OGC is an insured depository institution for
purposes of the Federal Deposit Insurance Act or any other banking law or
regulation.
OTHER INFORMATION CONCERNING FEES AND EXPENSES
All or part of the fees payable by the Fund to the organizations retained to
provide services for the Fund may be waived from time to time in order to
increase the Fund's net investment income available for distribution to
shareholders.
Except as noted below, the Advisor and the Administrator bear all expenses
in connection with the performance of their advisory and administrative
services. Organization costs of the Fund are not expected to exceed $221,000 for
the Fund's first fiscal year and will be deferred and amortized by the Fund on a
straight-line basis over a 60-month period from the date the Fund commences
operations. Organization expenses, including fees for counsel and independent
accountants, fees payable to the Securities and Exchange Commission ("SEC"),
state securities qualification fees, and costs of preparing and printing
prospectuses for regulatory purposes, are not expected to exceed $221,000. The
Fund will bear the expenses incurred in its operations, including: taxes;
interest; fees (including fees paid to its directors and Investment Advisory
Board members); fees payable to the SEC; state securities qualification fees;
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders; advisory and administration fees; charges
of its custodian and transfer agent; certain insurance costs; expenses of
independent accountants and attorneys; fees of independent pricing services;
costs of shareholder reports and shareholder meetings; and any extraordinary
expenses. The Fund also pays for brokerage fees and commissions, if any, in
connection with the purchase of portfolio securities.
The Fund is not currently financing any distribution expenses in connection
with the solicitation of new investors in Class I or Class II Shares. The
Advisor will finance all such expenses out of its own resources. See "Management
of the Fund--Distributor."
DIVIDENDS AND DISTRIBUTIONS
The Fund will declare and pay dividends of substantially all of its net
income annually. The Fund intends to distribute all of its net investment income
and net capital gains, if any, at least once per year. The Fund
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may, however, determine either to distribute or retain all or part of any net
long-term capital gains in any year for reinvestment, to the extent such
retention will not cause tax disqualification. The Fund will inform shareholders
of the amount and nature of all such income or gains.
All dividends and any capital gains distributions will be paid in additional
shares of the Fund and automatically credited to the shareholder's account
without issuance of a share certificate, unless the shareholder of record has
elected in writing prior to the date of distribution that all dividends be paid
in cash. Such election, or any revocation thereof, must be made in writing to
the Fund's transfer agent and will become effective with respect to dividends
paid after its receipt. Dividends that are otherwise taxable are taxable to
investors whether received in cash or in additional shares of the Fund.
Any dividend or distribution paid by the Fund has the effect of reducing the
net asset value per share on the ex-dividend date by the amount of the dividend
or distribution. Therefore, a dividend or distribution declared shortly after a
purchase of shares by an investor would represent, in substance, a return of
capital to the shareholder with respect to such shares even though it would be
subject to income taxes. See "Additional Information Concerning Dividends,
Distributions and Taxes" in the Statement of Additional Information.
The ability of the Fund to distribute net investment income or the proceeds
from the sale of its investments to its shareholders may be restricted or
limited due to changes in the exchange control regulations in any or all of the
Greater China Region countries. Any such restriction or limitation could impact
the Fund's ability to meet the distribution requirements described above and
therefore its qualification as a registered investment company under the
Internal Revenue Code of 1986, as amended.
PURCHASE OF SHARES
THE INITIAL MINIMUM INVESTMENT IS $1,000,000 FOR CLASS I SHARES AND $250,000
FOR CLASS II SHARES. The Fund reserves the right, in its sole discretion, to
accept initial investments in the Fund from institutional investors of less than
$1,000,000. SHAREHOLDERS MAY MAKE ADDITIONAL INVESTMENTS AT ANY TIME FOR AS
LITTLE AS $10,000. Shares of the Fund may be purchased at the net asset value
per share next determined after the later of receipt of payment or receipt of a
completed account information form from a potential purchaser. As described
below, the net asset value of the Fund's equity securities is determined as of
3:00 p.m., Shanghai time. See "Calculation of Net Asset Value." Due to the 12
hour time difference between Shanghai time and New York time, investors whose
purchase orders are received after 3:00 a.m. New York time (with adjustment for
daylight savings time) will get a net asset value determined as of the next
business day in the Greater China Region. For example, an order received by the
Fund at noon Wednesday, New York time, will receive a net asset value determined
as of 3:00 a.m. Thursday morning, New York time. That net asset value will be
reported in Friday's business publications.
INITIAL INVESTMENT BY WIRE
Subject to acceptance by the Fund, shares of the Fund may be purchased by
Federal wire. A completed Account Registration Form should be forwarded to the
Fund at CVO Greater China Fund, Inc. c/o BISYS Fund Services, Inc., 3435 Stelzer
Road, Columbus, Ohio 43219-8021. Notification must be given to the Fund at
1-800-618-9510 prior to 4:00 p.m., Eastern Time, of the wire date. Federal funds
purchases will be accepted only on a day on which the Fund, the Distributor and
Huntington National Bank are all open for business. Funds should be wired
through the Federal Reserve of New York as follows:
Huntington National Bank
41 South High Street
Columbus, Ohio
ABA # 044000024
Account # 1899607163
F/B/O CVO Greater China Fund, Inc.
Ref. (Fund Name and Account Number)
Federal Funds purchases will be accepted only on a day on which the Fund and
the custodian bank are open for business.
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INITIAL INVESTMENTS BY MAIL
Subject to acceptance by the Fund, an account may be opened by completing
and signing an account information form (provided at the end of the Prospectus),
and mailing it to the Fund at the address noted below, together with a check
payable to CVO Greater China Fund, Inc.:
CVO Greater China Fund, Inc.
P.O. Box 182493
Columbus, Ohio 43218-2493
Subject to acceptance by the Fund, payment for the purchase of shares
received by mail will be credited to your account at the net asset value per
share of the Fund next determined after the later of receipt of payment or
receipt of the Account Registration Form. Such payment need not be converted
into Federal Funds (monies credited to the Fund's custodian bank by a Federal
Reserve Bank) before acceptance by the Fund. If payment is received by the Fund
without a completed Account Registration Form, such funds will be returned
promptly to the investor. Please note that purchases made by check in the Fund
are not permitted to be redeemed until payment of the purchase has been
collected, which may take up to fifteen business days after purchase.
ADDITIONAL INVESTMENTS
Additional investments may be made at any time (minimum investment $10,000)
by purchasing shares of the Fund at net asset value by mailing a check to the
Fund at the address noted under "Initial Investments by Mail" (payable to CVO
Greater China Fund, Inc.), or by wiring monies to the custodian bank as outlined
above. Notification must be given to the Fund at 1-800-618-9510 prior to 4:00
p.m., Eastern Time, of the wire date.
OTHER PURCHASE INFORMATION
The Fund reserves the right, in its sole discretion, to suspend the offering
of Shares of the Fund or to reject purchase orders when, in the judgment of
management, such suspension or rejection is in the best interests of the Fund.
Purchases of Shares will be made in full and fractional shares of the
relevant class of the Fund calculated to three decimal places. In the interest
of economy and convenience, certificates for shares will not be issued except at
the written request of the shareholder. Certificates for fractional shares,
however, will not be issued.
Shares in the Fund may also be sold to corporations or other institutions
such as trusts, foundations or broker-dealers purchasing for the accounts of
others ("Shareholder Organizations"). Investors purchasing and redeeming shares
of the Fund through a Shareholder Organization may be charged a
transaction-based fee or other fee by the Shareholder Organization for its
services. Each Shareholder Organization is responsible for transmitting to its
customers a schedule of any such fees and information regarding any additional
or different conditions regarding purchases and redemptions. Customers of
Shareholder Organizations should read this Prospectus in light of the terms
governing accounts with their organization. The Fund does not pay to or receive
compensation from Shareholder Organizations for the sale of Fund shares. The
Fund's officers are authorized to waive the minimum initial and subsequent
investment requirements.
After an investor makes an initial purchase of Fund shares, the Fund's
Transfer Agent will set up an account for the investor on the Fund's records.
This account will contain a complete record of all transactions between the
investor and the Fund and will show the balance of shares owned by such
investor. The Fund will not issue share certificates except upon request. Each
time a transaction occurs in a shareholders' account, the shareholder will
receive a statement showing details of the transaction.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by mail, or, if authorized, by telephone.
No charge is made for redemptions, except for the early redemption charge
described below. The value of shares redeemed may be more or less than the
purchase price, depending on the market value of the investment securities held
by the
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Fund. An early redemption charge will be levied on investors who hold Fund
shares for less than nine months. The charge will be equal to two percent (2%)
of the net asset value, at the redemption date, of shares redeemed within nine
months of their purchase. (For this purpose, investors will be deemed to redeem
their earliest-purchased shares unless the investor specifies otherwise.) The
charge will be paid to the Fund.
As described below, the net asset value of the Fund's equity securities is
determined as of 3:00 p.m., Shanghai time. See "Calculation of Net Asset Value."
Due to the 12 hour time difference between Shanghai time and New York time,
investors whose purchase orders are received after 3:00 a.m. New York time (with
adjustment for daylight savings time) will get a net asset value determined as
of the next business day in the Greater China Region. For example, an order
received by the Fund at noon Wednesday, New York time, will receive a net asset
value determined as of 3:00 a.m. Thursday morning, New York time. That net asset
value will be reported in Friday's business publications.
SYSTEMATIC WITHDRAWAL PLAN
A holder of $100,000 or more of Class I Shares or $10,000 or more of Class
II Shares may elect to have periodic redemptions from such holder's account paid
on a monthly, quarterly or annual basis. The minimum periodic payment is $100. A
sufficient number of shares to make the scheduled redemption will normally be
redeemed on the date selected by the shareholder. Depending on the size of the
payment requested and fluctuation in the net asset value, if any, of the shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the account. A shareholder may request that these payments be sent to a
predesignated bank or other designated party.
BY MAIL
The Fund will redeem its shares at the net asset value next determined after
the request is received in "good order". The net asset values per share of the
Fund are determined as of 4:00 p.m., Eastern Time, on each day that the New York
Stock Exchange, Inc. (the "NYSE"), and the Fund are open for business. See
"Calculation of Net Asset Value" below for details about the valuation of the
Fund's shares. Requests should be addressed to CVO Greater China Fund, Inc.,
P.O. Box 182493, Columbus, Ohio 43218-2493. Requests in "good order" must
include the following documentation: (a) the share certificates, if issues; (b)
a letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered or their
duly authorized agents; (c) any required signature guarantees (see "Signature
Guarantees" below); and (d) other supporting legal documents, if required, in
the case of estates, trusts, guardianships, custodianships, corporations,
pension and profit sharing plans and other organizations.
SIGNATURE GUARANTEES
To protect shareholder accounts, the Fund and the Administrator from fraud,
signature guarantees are required to enable the Fund to verify the identity of
the person who has authorized a redemption from an account. Signature guarantees
are required for (1) redemptions where the proceeds are to be sent to someone
other than the registered shareholder(s) and the registered address, (2) a
redemption of $25,000 or more, and (3) share transfer requests. Signature
guarantees may be obtained from certain eligible financial institutions,
including but not limited to, the following: banks, trust companies, credit
unions, securities brokers and dealers, savings and loan associations and
participants in the Securities and Transfer Association Medallion Program
("STAMP"), the Stock Exchange Medallion Program ("SEMP") or the New York Stock
Exchange Medallion Signature Program ("MSP"). Shareholders may contact the Fund
at 1-800-618-9510 for further details.
BY TELEPHONE
Provided the Telephone Redemption Option has been authorized, a redemption
of shares may be requested by calling the Fund at 1-800-618-9510 and requesting
that the redemption proceeds be mailed to the primary registration address or
wired per the authorized instructions. Shares cannot be redeemed by telephone if
share certificates are held for those shares. The Company and its transfer agent
may act on telephone instructions from any person representing himself or
herself to be a shareholder and believed by the Company or its transfer agent to
be genuine. The Fund will use reasonable procedures to confirm that
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instructions communicated by telephone are genuine, and may be liable for any
losses due to unauthorized instructions to the extent such procedures are not
followed. The procedures employed by the Company in connection with transactions
initiated by telephone include tape recording of telephone instructions and
requiring some form of personal identification prior to acting upon instructions
received by telephone.
FURTHER REDEMPTION INFORMATION
Redemption proceeds for shares of the Fund recently purchased by check may
not be distributed until payment for the purchase has been collected, which may
take up to eight business days. Such funds are invested during this holding
period. Redemption proceeds may only be delayed for up to 15 days from the
purchase date when a check has not cleared. Such proceeds must be released upon
the earlier of the expiration of the 15-day period or clearance of the check.
Shareholders can avoid this delay by utilizing the wire purchase option.
Payment of the redemption proceeds, reduced by the amount of any applicable
Federal income tax required to be withheld, will ordinarily be made within seven
business days after tender is completed for a request for redemption.
The Fund may suspend the right of redemption or postpone the date at times
when the NYSE is closed or under any emergency circumstances as determined by
the SEC.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment wholly
or partly in cash, the Fund may pay the redemption proceeds in whole or in part
by a distribution in kind of readily marketable securities held by a Fund in
lieu of cash in conformity with applicable rules of the SEC. The Fund does not
intend to make distributions in kind at this time. Investors generally will
incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.
Due to the high cost of maintaining small accounts, the Fund reserves the
right to redeem (i) Class I Share accounts with balances less than $10,000, and
(ii) Class II Share accounts with balances less than $1,000. Prior to such
redemption, the shareholder will be notified in writing and will be allowed 60
days to make additional purchases to bring the account up to such amount.
However, no such redemption would be required by the Fund if the cause of the
low account balance was a reduction in the net asset value of Fund shares.
Redemptions of Fund shares are taxable events on which you may realize a
gain or a loss. Such gain or loss will be long-term capital gain or loss if the
shares are a capital asset in the hands of the investor and have been held for
tax purposes for more than one year. See "Tax Information" for more information
about tax consequences resulting from investment in the Fund.
SHAREHOLDER SERVICES
The Fund offers the following additional services to investors:
ACCOUNT INFORMATION. Each Investor will be provided with account
information upon written request at any time to the Fund.
TRANSFER OF REGISTRATION. The registration of Fund shares may be
transferred by writing to the Fund at P.O. Box 182493, Columbus, Ohio
43218-2493. As in the case of redemptions, the written request must be received
in "good order" as defined above. See "Shareholder Services" in the Statement of
Additional Information. Any inquiries regarding the Fund should be addressed to
the Fund at P.O. Box 182493, Columbus, Ohio 43218-2493 (1-800-618-9510).
CALCULATION OF NET ASSET VALUE
Net asset value will be determined by dividing the value of the net assets
attributable to each class of the Fund (the value of its assets less its
liabilities) by the total number of shares of each class of common stock
outstanding. Fund securities will be valued by various methods depending on the
primary market or exchange on which they trade.
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Equity securities for which the primary market is outside the U.S. will be
valued using the closing price or the last sale price in the principal market
where they are traded. If the last sale price on the local exchange is
unavailable, the last available quote or last bid price normally will be used.
Securities and other assets for which market quotations are not readily
available are valued at fair value determined in good faith by or under the
direction of the Fund's Board of Directors, as delegated to the Pricing
Committee of the Board.
Foreign security prices are typically furnished by independent brokers or
quotation services which express the value of securities in their local
currency. Securities quoted in foreign currencies initially will be valued in
the currency in which they are denominated and then will be translated into U.S.
dollars at the foreign exchange rate in effect on each date that net asset value
is calculated. 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.
Forward contracts and related instruments will be valued on a daily basis by a
pricing service that utilizes (i) dealer-supplied valuations for such
obligations that mature in less than 30 days, and (ii) electronic data
processing pricing techniques for all other obligations. Any changes in the
value of forward contracts due to exchange rate fluctuations and days to
maturity are included in the calculation of net asset value. If an extraordinary
event that is expected to materially affect the value of a Fund security occurs
after the close of an exchange on which that security is traded, then the
security will be valued as determined in good faith by or under the direction of
the Fund's Board of Directors. Otherwise, the closing price of a security on
such exchange will be used.
Short-term obligations which have maturities of 60 days or less are valued
at amortized cost as reflecting fair value, and if applicable, adjusted for
foreign exchange translation.
Equity securities for which the primary market is the U.S. will be valued at
the last sale price quoted on the relevant securities exchange, or if no such
price is available, at the closing bid price. The use of other pricing services
will be determined by the Board of Directors.
The net asset value of the Fund's equity securities will be determined once
on each day on which any securities exchange within the Greater China Region on
which securities in which the Fund has invested is open as of 3:00 p.m.,
Shanghai time. Due to the 12 hour time difference, 3:00 p.m., Shanghai time
corresponds to 3:00 a.m. New York time (with adjustments for daylight savings
time). Accordingly, orders received for the Fund shares after 3:00 a.m., New
York time (with adjustments for daylight savings time) will receive the offering
price determined on the next business day in the Greater China Region.
TAX INFORMATION
TAXATION OF THE FUND
The Fund intends to qualify for taxation as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If so qualified, the Fund will not be subject to federal income taxes
with respect to net investment income and net realized long-term capital gains,
if any, that are distributed to its shareholders. It is the Fund's policy to
distribute to shareholders all of its investment income (net of expenses) and
any capital gains (net of capital losses) in accordance with the timing
requirements imposed by the Code, so that the Fund will satisfy the distribution
requirement of Subchapter M and not be subject to Federal income taxes or the 4%
excise tax under the Code.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH IN THIS PROSPECTUS IS A
SUMMARY INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE
INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT
ITS OWN TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES APPLICABLE TO
ITS PARTICIPATION IN THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF
FEDERAL, STATE, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECT OF CHANGES IN
SUCH LAWS.
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SHAREHOLDER TAXATION IN THE UNITED STATES
Because the Fund intends to distribute all of its net investment income and
net short-term capital gains to shareholders and otherwise continue to qualify
as a regulated investment company under Subchapter M of the Code, it is not
expected that the Fund will be required to pay any federal income tax on any
such income and capital gains, other than any tax resulting from investing in
passive foreign investment companies as described below.
The Fund intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of a non-deductible 4% federal excise
tax. To do so, the Fund intends to distribute an amount at least equal to (i)
98% of its calendar year ordinary income, (ii) 98% of its capital gains net
income (the excess of short and long-term capital gain over short and long-term
capital loss) for the one-year period ending October 31, and (iii) 100% of any
undistributed ordinary or capital gain net income from the prior calendar year.
Shareholders of the Fund will normally have to pay federal income taxes, and
any state and local income taxes, on the dividends and distributions they
receive from the Fund. Distributions by the Fund which are derived from net
short-term capital gains and certain foreign exchange gains are taxable to
shareholders as ordinary income, whether received in cash or reinvested in
additional shares of the Fund. Dividends, received either in cash or reinvested
in shares, paid by a Fund from net investment income will also be taxable to
shareholders as ordinary income.
Whether paid in cash or additional shares of the Fund, and regardless of the
length of time the shares in the Fund have been owned by the shareholder,
distributions from long-term capital gains are taxable to shareholders as such.
Exchanges and redemptions of shares in the Fund are generally taxable events
for federal income tax purposes. Individual shareholders may also be subject to
state and local taxes on such exchanges and redemptions. The Fund's
distributions will generally not qualify for the dividends-received deduction
for corporate shareholders. Capital gains distributions are not eligible for the
corporate dividends received deduction. The amount, timing and character of the
Fund's distributions to shareholders may be affected by special tax rules
governing the Fund's activities in options, futures and forward foreign currency
exchange transactions or certain other investments.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, each shareholder must furnish to the Fund and certify as to
accuracy his, her or its taxpayer identification number.
Shareholders will receive annually one or more Forms 1099 to assist in
reporting on their Federal and state income tax returns the prior calendar
year's distributions, proceeds from the redemption or exchange of Fund shares,
and Federal income tax, if any, withheld by the Fund's Transfer Agent.
Capital gains on the sale of holdings in passive foreign investment
companies may be deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition, the Fund may be subject to income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains were distributed to
shareholders. For more information, see "Additional Information Concerning
Dividends, Distributions and Taxes--Passive Foreign Investment Companies" in the
Statement of Additional Information.
FOREIGN TAX CREDITS
Dividends, interest and gains received by the Fund from foreign sources may
give rise to withholding and other taxes imposed by foreign countries. If the
Fund qualifies as a regulated investment company, if certain distribution
requirements are satisfied and if more than 50% of the value of the Fund's total
assets at the close of any taxable year consists of stocks or securities of
foreign corporations, the Fund may make an election for U.S. Federal income tax
purposes, to treat any Chinese or other foreign country's income or withholding
taxes paid by the Fund that can be treated as taxes on income under U.S. income
tax principles,
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as paid by its shareholders. In the absence of such an election, the Fund would
deduct such foreign taxes in computing the amount of its distributable income.
The Fund intends to make such election for the fiscal year ended May 31, 1997.
The amount of Chinese or other foreign taxes that may be credited against a
shareholder's U.S. Federal income tax liability generally will be limited to an
amount equal to the shareholder's U.S. Federal income tax rate multiplied by its
foreign source taxable income. For this purpose, the Fund expects that the
capital gains it distributes, whether as dividend or capital gains
distributions, will not be treated as foreign source taxable income. In
addition, this limitation must be applied separately to certain categories of
foreign source income, one of which is foreign source "passive income," which
includes dividends, interest, capital gains and certain foreign currency gains.
As a result, certain shareholders may not be able to claim a foreign tax credit
for the full amount of their proportionate share of foreign taxes paid by the
Fund. The Fund will report annually to its shareholders the amount per share of
taxes that will enable shareholders to claim U.S. foreign tax credits or
deductions with respect to such taxes.
TAXES IMPOSED BY CHINA
INCOME TAXES. Under the Income Tax Law of the People's Republic of China
Concerning Foreign Investment Enterprises and Foreign Enterprises, which took
effect on July 1, 1991, the Fund's income from dividends and profit
distributions of companies in China will be subject to a 20% income tax.
Pursuant to regulations issued by the State Council in 1984, the income tax rate
is reduced to 10% on income received from sources in Shanghai, Shenzhen, Zhuhai,
Xiamen, Shantou and the 14 special coastal port cities. Accordingly, if the "B"
shares listed on the Shanghai or Shenzhen stock exchanges are issued by
companies established in Shanghai, Shenzhen, Zhuhai, Xiamen, Shantou or the 14
special coastal port cities, the income tax levied on income earned by overseas
investors (who have not set up offices in China) from such sources will be
reduced to 10%. Effective August 1, 1993, dividends from "B" shares of companies
are temporarily exempt from income tax.
Any gains (whether of a capital or trading nature) realized by the Fund from
the sale of any "B" shares are temporarily not subject to any income tax in
China based on tax regulations issued in August 1993.
TRANSFER TAXES AND FEES. The acquisition or sale by the Fund of "B" shares
in a Chinese company listed on the Shenzhen Stock Exchange is subject to a 0.3%
stamp tax and up to a 0.7% broker's commission on both the buyer and seller. The
0.7% broker's commission will be reduced to 0.5% and 0.4%, respectively, if the
transaction value exceeds RMB 500,000 and RMB 5,000,000, respectively. For the
Shenzhen Stock Exchange, a purchaser of "B" shares is also subject to a transfer
registration fee levied at 0.3% of the transaction amount of the "B" shares
traded. For the Shanghai Stock Exchange, a transaction fee of 0.1% of the actual
transaction amount is levied. Clearing fees are handled in accordance with the
relevant regulations of the clearing bank based upon the actual amount cleared.
As of August 1, 1994, bank clearance charges were approximately US$42 in
Shanghai, and ranged from HK$185 to HK$625 in Shenzhen.
TAXES IMPOSED BY HONG KONG
TAXATION OF THE FUND. The Fund will be subject to Hong Kong profits tax if
(i) it carries on business in Hong Kong, and (ii) its profits are derived from a
Hong Kong source. Profits or capital gains derived from the sale of shares or
other securities of, or dividends received from, companies listed on stock
exchanges outside Hong Kong are not subject to Hong Kong profits tax.
Transfers of shares of Hong Kong companies require the payment of a stamp
duty of 0.3% on the amount of the transfer, comprised of a 0.15% stamp duty on
the purchaser and a 0.15% stamp duty on the seller.
TAXATION OF SHAREHOLDERS. There is no tax in Hong Kong on capital gains
arising from the sale by an investor of shares of the Fund. However, for certain
investors (principally share traders, financial institutions and insurance
companies carrying on business in Hong Kong), such gains may be considered to be
part of the investor's normal business profits and in such circumstances will be
subject to Hong Kong profits tax at the rate of 16.5% for corporations and 15%
for individuals as of August 1, 1994.
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Dividends which the Fund pays to its shareholders are not taxable in Hong
Kong (whether through withholding or otherwise) under current legislation and
practice.
TAXES IMPOSED BY TAIWAN
Under the Income Tax Law of Taiwan, dividend and interest income received by
the Fund from sources within Taiwan will be subject to income withholding tax.
The rate of withholding tax applicable to interest payments to a non-Taiwan
resident recipient is 20%. The rates of withholding tax applicable to dividend
payments to a non-Taiwan individual and a non-Taiwan corporate entity are 35%
and 25%, respectively. However, the rate of withholding tax applicable to
dividend payments to a qualified foreign institutional investor approved by the
TSEC or a non-resident investor approved by the Investment Commission of the
Ministry of Economic Affairs is 20%. Stock dividends are subject to an income
tax which is payable on receipt or, in certain cases, on disposal of the stock
dividends. Securities received as stock dividends will be treated for the
purposes of the capital gains income tax described below in the same way as
other securities held. Transactions in securities are not currently subject to
any capital gains tax, but there can be no assurance that a capital gains tax
will not be imposed in the future or that the Fund will continue to be exempt
from such tax.
Profits on sales of Fund shares effected by non-resident foreigners wholly
outside Taiwan will not be subject to Taiwan income tax. However, on any sale of
stock effected in Taiwan, a securities transaction tax is payable by the seller
of such stock at the rate of 0.3% of the transaction stock price.
TAXES IMPOSED BY SINGAPORE
The corporate income tax rate in Singapore is currently 26%. Under the
Income Tax Law of Singapore, dividends received by the Fund from sources in
Singapore are not subject to withholding tax, but interest received by the Fund
will be subject to a 15% withholding tax.
There is no tax on capital gains. Where there is a series of transactions,
the tax authorities may take the view that a business is being carried on and
may attempt to assess the gains as trading profits of the corporation. However,
the government of Singapore has incentives for securities companies, trust
companies and fund managers, which include tax exemptions or concessionary tax
rates of 10% for qualifying income.
OTHER TAXATION
Distributions from the Fund may be subject to additional state, local and
foreign taxes depending on each shareholder's particular circumstances.
See "Additional Information Concerning Dividends, Distributions and Taxes"
in the Statement of Additional Information for more details about tax
consequences related to investment in the Fund.
BACKUP WITHHOLDING
PROCEEDS OF DISTRIBUTIONS SUBJECT TO WITHHOLDING
It is required under Federal income tax laws that taxable distributions and
proceeds of redemptions and exchanges be reported to the Internal Revenue
Service ("IRS"). It is also required that 31% of taxable distributions and
certain proceeds of redemption requests received directly from shareholders and
of redemptions under any exchange privilege be withheld if (i) a correct and
certified Taxpayer Identification Number (TIN) is not provided for your account,
(ii) you fail to certify that you have not been notified by the IRS that you
underreported taxable interest or dividend payments, or (iii) the Fund is
notified by the IRS (or a broker) that the TIN provided is incorrect or you are
otherwise subject to backup withholding. Amounts withheld and forwarded to the
IRS can be credited as a payment of tax when completing your Federal income tax
return.
For most individual taxpayers, the TIN is their social security number. An
investor may furnish the Transfer Agent with such number and the required
certifications by completing and sending to the Transfer
39
<PAGE>
Agent either the Fund's Account Application Form at the back of this Prospectus
or IRS Form W-9. Special rules apply for certain accounts. For example, for an
account established under the Uniform Gift to Minors Act, the TIN of the minor
should be furnished.
TO APPLY FOR A TIN
If you do not have a TIN or do not know your number, you may apply for one
by submitting Form SS-5, "Application for a Social Security Card" or Form SS-4,
"Application for Employer Identification Number" to the Administrator or the
IRS. We will forward a certification form to you which you should use to notify
us of your number. Withholding may apply to payments made to your account before
we receive your certified number.
EXEMPT RECIPIENTS AND FOREIGN PAYEES
Exempt recipients should provide their TIN and underline 2(a) in the TIN
section of the application to avoid possible erroneous withholding. A partial
listing of exempt classes of investors follows: corporations, financial
institutions, IRAs, the U.S. Government, a state or possession of the U.S., a
foreign government, international organizations, and 501(a) exempt entities such
as colleges, churches and charitable organizations. If you are a nonresident
alien, check the appropriate box on the application. Nonresident aliens and
foreign entities may be subject to nonresident alien withholding of up to 30%
(instead of backup withholding of 31%) on certain distributions received from
the Fund and will be required to provide certain certifications on IRS Form W-8
to avoid 31% backup withholding with respect to other payments. For further
information, see Code Sections 1441, 1442 and 3406 and consult your tax adviser.
PERFORMANCE INFORMATION
As discussed in this Prospectus, from time to time the Fund may quote its
"total return" in advertisements and sales literature. The Fund may present
standardized and non-standardized total return by class in advertisements or
other written material. Standardized total return is calculated in accordance
with the SEC's formula, by multiplying a hypothetical initial purchase order of
$1,000 by the average annual total return for the stated period and annualizing
the result. The Fund's "average annual total return" represents an annualization
of the Fund's total return over a particular period and is computed by finding
the annual percentage rate which will result in the ending redeemable value of a
hypothetical $1,000 investment made at the beginning of a one, five or ten year
period, or for the period from the date of commencement of the Fund's
operations, if shorter than any of the foregoing periods. For the purpose of
this calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing the average annual total return involves a
percentage obtained by dividing the ending redeemable value by the amount of the
initial investment, taking a root of the quotient (where the root is equivalent
to the number of years in the period) and subtracting 1 from the result. See
"Performance Calculations--Total Return" in the Statement of Additional
Information for a more detailed discussion of the formula.
Nonstandardized total return differs from the standardized total return only
in that it may be related to a nonstandard period or is presented in the form of
aggregate, average, year-by-year or other types of total return figures rather
than as an annual average. The Fund may advertise the growth of hypothetical
investments of $10,000, $50,000 and $100,000 in shares of either class or both
classes of the Fund by adding 1 to the Fund's total aggregate total return to
date (expressed as a decimal) and multiplying by $10,000, $50,000 or $100,000 as
the case may be.
In addition, the Fund may compute its aggregate total return for specified
periods by determining the aggregate percentage rate which will result in the
ending value of a hypothetical $1,000 investment made at the beginning of the
period. For the purpose of this calculation, it is assumed that all dividends
and distributions are reinvested. The formula for computing aggregate total
return involves a percentage obtained by dividing the ending value by the
initial $1,000 investment and subtracting 1 from the result.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indices compiled by independent services and
organizations.
40
<PAGE>
THE FUND'S PERFORMANCE INFORMATION IS HISTORICAL, WILL FLUCTUATE OVER TIME
AND SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF FUTURE RESULTS IN ANY FUTURE
PERIOD. The SEC's formulas for calculating performance are described under
"Performance Calculations" in the Statement of Additional Information.
ADDITIONAL INFORMATION
ORGANIZATION AND CAPITAL STOCK
The Fund was incorporated under the laws of the State of Maryland on
September 2, 1994. The Fund operates as an open-end investment company and is
not authorized to engage in the business of banking. The authorized capital
stock of the Fund consists of 10,000,000,000 shares having a par value of $.001
per share. The Fund's Articles of Amendment and Restatement currently authorize
the issuance of two classes of shares, Class I and Class II. The Fund's Board of
Directors may, in the future, authorize the issuance of additional classes of
capital stock representing interests in the Fund or in other portfolios held by
the Fund.
Holders of the Fund's shares will vote in the aggregate on all matters and
will vote in the aggregate with shareholders of the Fund's other current and
future portfolios except where otherwise required by law or where the matter
involved affects only that class or portfolio. Under the corporate law of
Maryland and the Fund's By-Laws (except as required under the 1940 Act), the
Fund is not required and does not currently intend to hold meetings of
shareholders for the election of directors. Shareholders, however, do have the
right to call for a meeting to consider the removal of one or more of the Fund's
directors if such a request is made, in writing, by the holders of at least 10%
of the Fund's outstanding voting securities. A more complete statement of the
voting rights of shareholders is contained in the Statement of Additional
Information.
All shares of the Fund, when issued, will be fully paid and nonassessable.
COUNSEL
McCutchen, Doyle Brown & Enersen, San Francisco, California, serves as
counsel to the Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the independent accountants for the Fund.
REPORTS TO SHAREHOLDERS
The Fund will send to shareholders a semi-annual report which will include
listings of investment securities held by the Fund at the end of the period
covered. An annual report containing financial statements audited by independent
accountants will be sent to shareholders each year.
41
<PAGE>
APPENDIX A
CVO GREATER CHINA FUND, INC.
APPENDIX A TO PROSPECTUS--GREATER CHINA REGION COUNTRIES
This Appendix describes certain economic and political developments related
to the operation of the securities markets in the People's Republic of China
("China") Hong Kong, Taiwan and Singapore. The information set forth in this
Appendix has been extracted from various government and private publications.
The Fund and the Fund's Board of Directors make no representation as to the
accuracy of the information, nor has the Fund or the Fund's Board of Directors
attempted to verify any of it.
PEOPLE'S REPUBLIC OF CHINA
DEMOGRAPHICS AND GOVERNMENT
China's population, estimated at 1.2 billion, is the highest of any country
in the world and represents one-fifth of the human race. The most populated
sections of China are located in the north eastern half of the country where
flatter terrain and proximity to the coast and major river basins provide more
abundant resources for the cultivation of the land. The country is divided in 23
provinces, three municipalities (Beijing, Shanghai and Tianjin) and five
autonomous regions. The capital and political center of China is Beijing.
Shanghai is the largest city and is also the main commercial and financial hub.
The Chinese state originated as far back as the second millennium B.C.
Although initially quasi-feudal in nature, gradually a highly centralized,
bureaucratic system evolved, which came to characterize the Chinese political
structure and which still influences the nature and style of administration
today. In the traditional Chinese polity, the emperor was the font of authority
and sovereignty. A succession of indigenous and invader dynasties reigned until
1911 when the last dynasty collapsed. A period of political instability and
civil war ensued as the Kuomintang (Nationalist Party) first attempted to wrest
control over the country from regional warlords, then battled the emerging
Chinese Communist Party. Although this conflict eased in the face of Japanese
invasion in the 1930s, the Chinese Community Party was better able to move into
the vacuum created by Japan's surrender in 1945. Over the next four years the
Communists defeated the Kuomintang forces, who subsequently fled to Taiwan. The
Communist Party established the People's Republic of China in 1949.
For much of the next three decades the Communist government tended to veer
back and forth from rather pragmatic state socialist plans of the Russian style
to grandiose crash programs, such as the "Great Leap Forward," which not only
fell far short of its goal of jump-starting the economy into modernity but cost
millions of lives in the resulting famine. In 1966 the "Cultural Revolution"
began as a limited campaign within the party leadership but soon mushroomed out
of control, at times disrupting the economy and occasionally breaking into
virtual civil war. Quite apart from the economic damage and human suffering, the
Cultural Revolution undermined the prestige and, therefore, the authority of the
Communist Party, which has had an impact on the formulation and authority of
policy ever since.
Two years after the official end of the Cultural Revolution in 1976, the
surviving members of the Party establishment led by Deng Xiaoping, launched the
country on the path to economic reform. Although the resulting economic
transition has not always been even or free of social dislocations--as evidence
by the student demonstrations in 1986 and 1989--reform has begun to deliver
rising living standards and a better quality of life to large parts of the
country. Despite the forceful suppression of political dissent in 1989 at
Tiananmen Square, the government has not backed away from continued economic
reform, but instead has steadily expanded the horizon to include the
establishment of securities markets, privatization of state enterprises, reform
of the banking sector and a progressive opening of the economy to foreign
investment.
China currently has diplomatic ties with approximately 140 nations. It is a
charter member of the United Nations and is seeking admission to the World Trade
Organization.
THE CHINESE ECONOMY
China established a centrally planned economy in 1949. In 1978 the
government implemented an economic reform program to create a more mixed economy
by opening it to limited foreign investment. Currently these economic reforms
allow managers of enterprises in China more autonomy in carrying on business,
including the planning of production, marketing, use of funds and employment of
staff.
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The current economy in China consists of three sectors: state, cooperative,
and private. The state sector, though decreasing from 76% of GNP in 1980 to
approximately 50% in 1991, continues to constitute the largest share of the
economy. In recent years, however, the economy has been significantly
restructured through the abolition of the commune system in rural areas and the
relaxing of government authority in the day-to-day operations in both
agricultural and industrial enterprises. Although there has been a progressive
lifting of price controls, the government still sets the prices for a number of
essential goods which it controls and distributes; but any goods produced by
suppliers of government-controlled goods above the quotas that are set by the
state may be sold at floating prices, negotiated prices or free prices. As the
government assumes more of a regulatory and supervisory role and less of a
direct management role, market forces have been allowed to operate. This has
resulted in increased productivity and rising incomes.
Over the past decade, China has achieved annual growth in real gross
national product (GNP) averaging 9%. GNP in 1991 had increased to over 2.5 times
the GNP in 1980. However, as is to be expected in such a high growth
environment, there have been wide swings in the annual growth rates, with major
booms in 1984 and 1988, for example; and "growth recessions" in 1981 and 1989.
In 1988, the Chinese Government instituted an austerity program which slowed the
Chinese economy in the following year. However, growth rates increased after
1989, achieving 5.2% in 1990 and 7% in 1991, as compared to only 3.9% in 1989.
China's economic policy is set out in two overlapping plans, the 20-Year
Plan (1981-2000) and the current Five-Year Economic Plan (1996-2000). China's
first Five-Year Economic Plan was set forth in 1953 to stimulate economic growth
and development. Currently, China is in its third year of its eighth Five-Year
Economic Plan.
The 20-Year Plan calls for an average 7% growth in GNP over the entire
20-year period; the initial decade was to be a period of reorganization, with
the second decade one of rapid economic progress. The 7% mark was exceeded in
the initial decade, with growth rates averaging 9.4%. The second decade growth,
thus far, is in step with the desired growth of the 20-Year Plan. The previous
Five-Year Economic Plan called for 6% annual growth, starting in 1991; this
however, was surpassed with 10.5% growth being achieved between 1991 and 1995.
The following table sets forth selected data regarding the Chinese economy.
MAJOR ECONOMIC INDICATORS
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Domestic Product (% annual real growth).......... 4.3 3.9 8.0 13.6 13.4 11.8 10.2
Per Capita GNP (U.S. $)................................ 300.0 298.0 312.0 379.0 N/A 447 534
Industrial Production (% annual growth)................ 6.8 6.0 14.2 20.4 23.6 17.5 14
Inflation (retail price index, % annual growth)........ 17.8 2.1 3.0 6.2 13.4 21.7 14.8
Money Supply (M2, % annual growth)..................... 18.7 28.9 27.6 29.5 N/A 34.4 29.5
Government Budget Surplus/Deficit (U.S. $ billion)..... (1.9) (2.7) (3.9) (7.8) (2.37) (66.9) (66.8)
Exports (U.S. $ billion)............................... 52.5 62.1 71.9 85.1 92.0 121 148.8
(% annual growth).................................... 10.2 17.9 15.8 18.3 8.0 31.9 23.1
Imports (U.S. $ billion)............................... 59.1 53.3 68.8 80.8 104.0 115.7 132.1
(% annual growth).................................... 6.8 (9.8) 191.5 26.6 29.0 11.3 14.2
Trade Balance (U.S. $ billion)......................... (6.6) 8.6 8.1 4.3 (12.0) 5.3 16.7
Exchange Rate (RMB/U.S. $)............................. 4.72 5.22 5.43 9.84 8.59 8.8 8.3
</TABLE>
- --------------
* Translated at the respective exchange rate for each year shown in the table.
N/A--Not Available
Sources: China Statistical Yearbook, State Statistical Bureau of the People's
Republic of China, Baring Securities.
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FINANCIAL REGULATION
The Ministry of Finance is responsible for overseeing state finances and the
collection of revenue and taxation. The banking system is managed by China's
central bank, the People's Bank of China ("PBOC"). The PBOC, like the Ministry
of Finance, is a state administrative body under the leadership of the State
Council. Its primary functions include the formulation of national financial
regulations and policies; the issuance of currency and regulation of its
circulation; the coordination and implementation of credit plans; overseeing the
establishment and operation of financial institutions and financial markets,
including stock exchanges; administration of China's foreign exchange and gold
reserves and adjustment of exchange rates against foreign currencies; and
administration of China's securities markets.
FOREIGN TRADE
As a result of the economic reforms commenced in 1978, China's foreign trade
has grown considerably in value, range of products and number of trading
partners. A major goal of China's trade policy is to increase the percentage of
manufactured goods in the country's total exports. Gradual progress has been
made in recent years with the aid of the imported foreign technology. China's
trade balance has fluctuated over the last five years. In 1995 China's foreign
trade yielded a foreign trade surplus of U.S. $16.7 billion, with exports of
U.S. $148.8 billion in 1995 representing an increase of 22.9% over 1994. Exports
were U.S. $121.0 billion in 1994, an increase of 31.9% over that of 1993.
Imports reached U.S. $132.1 billion by the end of 1995, representing a 14.2%
increase over 1994. For 1994, imports stood at U.S. $115.7 billion, an increase
of 11.2% over the 1993 figure.
Total trade for 1995 was approximately U.S. $280.9 billion, representing an
18.6% increase over 1994. In 1994 total trade stood at U.S. $236.7 billion, up
20.9% over 1995. From 1990 through 1992 and 1994 to 1995, China experienced
trade surpluses. In contrast, the country experienced trade deficits of $7.8
billion and $6.6 billion, respectively, in 1988 and 1989.
Hong Kong is the leading destination for Chinese exports, accounting for
over 40% of total export volume. Hong Kong is also a major re-export center for
Chinese goods. Other large export markets for China include Japan, the United
States, and Germany. Over the past few years, China's imports have continued to
expand and diversify. Hong Kong, Japan and the United States are China's top
three suppliers. Other major suppliers include Germany and Italy.
The following table lists China's top ten trading partners, along with the
U.S. dollar value of the trade between China and each country for the years
1992, 1993 and 1994.
MAJOR TRADING PARTNERS
(U.S. $ MILLION)
<TABLE>
<CAPTION>
TOTAL TRADE EXPORTS FROM CHINA IMPORTS TO CHINA
------------------------------- ------------------------------- -------------------------------
1992 1993 1994 1992 1993 1994 1992 1993 1994
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hong Kong..................... 58,050 32,496 41,821 37,512 22,050 32,364 20,538 10,446 9,457
Japan......................... 25,380 39,065 47,894 11,699 15,777 21,573 13,681 23,289 26,321
United States................. 17,494 27,652 35,432 8,594 16,965 21,461 8,900 10,687 13,970
Germany....................... 6,471 10,008 11,898 2,448 3,968 4,762 4,023 6,041 7,137
U.S.S.R/Russia................ 5,862 7,673 5,077 2,336 2,692 1,581 3,526 4,981 3,496
Singapore..................... 3,267 4,891 5,040 2,031 2,245 2,558 1,236 2,646 2,482
Italy......................... 2,843 4,042 4,659 1,095 1,305 1,591 1,748 2,738 3,068
France........................ 2,260 2,931 3,363 764 1,290 1,424 1,496 1,641 1,939
Australia..................... 2,332 3,010 3,940 661 1,061 1,488 1,671 1,949 2,452
United Kingdom................ 1,936 3,588 4,184 923 1,924 2,414 1,014 1,664 1,770
</TABLE>
EXCHANGE RATE AND FOREIGN EXCHANGE CONTROL
There is centralized control and unified management of foreign exchange in
China. The State Administration of Exchange Control (the "SAEC") is responsible
for matters relating to foreign exchange administration, while the Bank of China
(the "BOC") is in charge of foreign exchange operations. Cooperating closely
with the BOC, the SAEC fixes the official daily exchange rate of RMB against
major foreign currencies.
A-3
<PAGE>
There is only one type of monetary instrument in China today, the RMB. In
the past, a second type of instrument, called a Foreign Exchange Certificate
("FE") was also used, but has been withdrawn from circulation by the government.
The RMB is the official currency in China and is currently not convertible into
foreign exchange unless converted with express written authorization from the
SAEC.
While foreign investment enterprises are able to remit from China any
profits earned in foreign exchange, RMB earnings within China cannot be freely
converted into foreign exchange except at the foreign exchange adjustment
("swap") centers established by the SAEC. In order to provide some relief from
the controls imposed by the earlier foreign exchange legislation, the State
Council promulgated on January 15, 1986 the "Regulations Concerning the Balance
of Foreign Exchange Income and Expenditure of Chinese-Foreign Equity Joint
Ventures," which provide for a number of mechanisms to allow foreign investment
enterprises to balance their foreign exchange income and expenditure. These
mechanisms include the sale of joint venture products within China for foreign
exchange, the export of products purchased with RMB from Chinese enterprises to
generate foreign exchange, short-term loans and the swapping of RMB for foreign
exchange with other foreign investment enterprises and Chinese enterprises,
among others.
The exchange rate fluctuates from time to time and from swap center to swap
center depending on supply and demand. The RMB has been devalued progressively
in recent years, depreciating by almost 70% against the U.S. dollar between 1981
and 1990. During the 1990s, this general trend of depreciation has continued.
SECURITIES MARKETS
Prior to 1949, China had established rudimentary forms of securities
exchanges in Beijing, Shanghai and Tianjin. When the Chinese communist party
assumed power in 1949, China's securities markets were closed and all securities
were abolished. The Beijing, Shanghai and Tianjin securities exchanges reopened
briefly in 1950 and 1949, respectively, but were closed again in 1952.
Securities markets were nonexistent in China until the early 1980s when they
reemerged in various cities following initiation of China's economic reform
program in 1978. There currently are two officially recognized exchanges in
China, the Shanghai Securities Exchange ("SHSE"), which commenced trading on
December 19, 1990, and the Shenzhen Stock Exchange ("SZSE"), which commenced
trading on July 3, 1991. A number of organized securities markets exist in other
cities in China, but these are primarily over-the-counter markets. Initially,
shares on both exchanges were made available only to Chinese investors and were
traded only in RMB, thus avoiding the issues of repatriation of profits and the
remittance of foreign currency that would arise with the participation of
foreign investors in the market. Recently, however, these issues have been
addressed in legislation concerning a special class of shares, commonly referred
to as "B" shares, which are denominated in RMB and are offered exclusively for
investment by foreign investors and such other investors as the authorities may
approve. The first issues of "B" shares were listed and traded on the SHSE on
February 21, 1992, and on the SZSE on February 28, 1992.
REGULATION AND OPERATION OF THE CHINESE SECURITIES MARKETS
Prior to the establishment of the SHSE and SZSE, trading of securities in
China was conducted in over-the-counter ("OTC") markets in a number of major
cities, including Shanghai, Chongqing, Wuhan, Guangzhou and Shenyang. The OTC
markets have no fixed location for trading; transactions are negotiated by
telephone or similar means. The SHSE and SZSE confine trading of listed shares
to the two exchanges, while unlisted stocks continue to be traded in the OTC
markets. In addition to the two exchanges and the OTC markets, a nationwide
computer system for trading of treasury bills and bonds, the Securities Trading
Automated Quotations System ("STAQ"), commenced operations on December 5, 1990
and currently links 54 licensed trading corporations in 16 cities.
Currently, trading of treasury bills constitutes the majority of the
activity in the Chinese securities markets, while trading of equity securities
constitutes only a small portion of the trading activity. The OTC markets trade
only treasury bills and equity securities that are not listed on the SHSE or the
SZSE. The SHSE and the SZSE trade both treasury bills and shares of listed
companies. Shares are divided into four types based on the type of entity
holding them: (1) State shares held by designated State entities on behalf of
the State; (2) shares held by Chinese corporations; (3) shares held by Chinese
individuals; and (4) shares held by foreign investors. The first three
categories are generally referred to as "A" shares. The fourth
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<PAGE>
category is referred to as "B" shares. State shares cannot be sold or
transferred without the approval of the State asset administrative departments.
"A" shares are quoted and traded in RMB, while "B" shares are quoted in RMB but
traded in foreign currencies (currently Hong Kong dollars and U.S. dollars).
China has not yet promulgated a national securities law. Although the State
Council has promulgated interim Regulations for Administration of Enterprise
Bonds, these regulations apply only to bonds issued by State-owned enterprises.
At the local level, however, many cities and provinces have promulgated
securities rules and regulations.
The People's Bank of China (the "PBOC"), China's central bank, is authorized
to regulate stocks, bonds and other negotiable instruments and administer
China's financial markets, and it exercises this authority through its local
branches. The State Commission for Restructuring the Economic System has, in
practice, assumed the principal role of formulating policies for the development
of the securities markets. In addition, the Stock Exchange Executive Council, a
nongovernmental organization, plays an important advisory role in the
formulation of a regulatory framework for the national securities markets.
CORPORATE LAW IN CHINA
There is no national legislative framework in China providing for
regulations governing joint stock companies. However, there have been in force
in Shenzhen since February 1992 the Provisional Rules for Joint Stock Companies
in Shenzhen (the "Shenzhen Provisional Rules"). The Shenzhen Provisional Rules
include provisions governing the formation of Shenzhen joint stock companies,
issuance of shares and debentures, ownership and dealings in shares, reduction
of capital, shareholders' rights and obligations, meetings and resolutions,
directors, financial accounting, distribution and liquidation. More recently,
the Provisional Regulations for Shanghai Municipality Joint Stock Limited
Companies came into force on June 1, 1992, covering broadly the same areas as
the Shenzhen Provisional Rules.
SHENZHEN STOCK EXCHANGE
The SZSE was established in April 1991, and officially opened in July 1991.
As of February 29, 1996, 130 companies had shares listed on the SZSE, of which
34 also had "B" shares listed. Prices of "A" shares were subject to a price
fluctuation limit, but all such limits have been removed except for the Shenzhen
Champaign Company. The Shenzhen authorities have established a regulatory fund,
funded from proceeds of new issues of "A" shares, to buy and sell shares on the
open market in an attempt to minimize fluctuations of the prices of "A" shares.
In the issuance of "A" shares by the first company to which this regulatory fund
was introduced, an amount equal to 5% of the aggregate "A" share premium was
required to be paid into the fund. It is expected that a similar percentage will
be required for future new issues.
MARKET INDEX. The performance of the "B" shares on SZSE is measured by the
Shenzhen Stock Exchange B Index. This Index stood at 111.87 on December 31,
1992, and at 141.44 on December 31, 1993. Since December 31, 1993, the Index has
declined to 86.66 on December 31, 1994, and 59.48 on December 31, 1995. This
fluctuation reflects the volatility of the market accentuated by the credit
tightening policy in China and the illiquidity of the market.
MEMBERSHIP. The SZSE operates on a membership system. Membership is
restricted to securities institutions approved by PBOC. As of February 29, 1996,
there were 554 members admitted to SZSE and on December 31, 1994 there were 550
members, consisting of banks, finance companies, securities companies, insurance
companies and trust and investment companies. All are either Shenzhen local
companies or Shenzhen branches of national companies. Securities institutions in
Shenzhen may join the Joint Meeting of Shenzhen Securities Institutions, whether
or not they are members of the SZSE. This self-governing organization was formed
in August of 1990 to facilitate communication among securities institutions and
to strengthen self-discipline among members.
REGULATION. The SZSE is regulated by the PBOC, Shenzhen Special Economic
Zone Branch and the local government in Shenzhen. The Shenzhen Municipal
People's Government promulgated the Provisional Measures of Shenzhen
Municipality for Administration of the Issue and Trading of Shares (the "SZSE
Measures"), which became effective on June 15, 1991 and govern the establishment
of the SZSE and the issuance and trading of shares in Shenzhen. The issuance and
trading of "B" shares in Shenzhen are governed by the Provisional Measures of
Shenzhen Municipality for Administration of Special Renminbi-denominated Shares,
which became effective on December 16, 1991. These measures are supplemented by
a
A-5
<PAGE>
set of Detailed Implementing Rules which also became effective on December 16,
1991. In addition, Provisional Rules of Shenzhen Municipality for Registration
of Special Renminbi-denominated Shares were promulgated by the Shenzhen
Securities Registrars Co., Ltd. on January 29, 1992, and Operating Rules of the
Shenzhen Securities Exchange for Trading and Clearing of "B" shares were
promulgated by the SZSE on January 31 1992. These rules provide detailed
regulations relating to the issuance, trading, settlement and registration of
"B" shares.
NEW ISSUES AND LISTING CRITERIA. Shares of local Shenzhen companies may
either be listed on the SZSE or traded on the OTC markets. In accordance with
the SZSE Measures and the Shenzhen Provisional Rules, an issuer must meet the
following requirements when making a public share issue: (i) it must have
obtained prior approval from the relevant authorities to be and have been
established as or converted into a joint stock company; (ii) its production and
operations must comply with Shenzhen's industrial policies; (iii) it must have a
good financial and business record and net assets of at least RMB 10 million;
(iv) for the year prior to applying for authorization to issue shares, the value
of its net tangible assets must have accounted to no less than 25% of its gross
tangible assets; (v) its promoters must subscribe for at least RMB 5 million
worth of shares, representing no less than 35% of its total share capital; (vi)
the number of shares to be issued to the public, i.e., investors other than
specially designated individuals, must be equal to at least 25% of its total
share capital; (vii) it must have a minimum of 800 shareholders following the
issue; (viii) within three years prior to the proposed issue neither the company
nor its promoters may have any record of illegal activities or activities
counter to the public interest; and (ix) the shares subscribed by the employees
of the company cannot exceed 10% of the shares issued to the public and such
shares are not assignable for a period of one year, thereafter, assignment of
such shares may not exceed 10% of the shareholder's holding during any half year
period.
All public share issues must be handled by securities distributors. Issues
of over RMB 30 million must be distributed by a syndicate made up of at least
three members. Issues of over RMB 50 million must be distributed by a syndicate
made up of at least five members.
In order to qualify for listing on the SZSE, companies must meet additional
requirements which are more stringent than those for public share issues. Such
additional requirements include: (i) the total par value of shares of common
stock actually issued must be more than RMB 20 million; (ii) there must have
been a minimum return on capital of more than 10% in the year preceding listing
and more than 8% over the two years prior to the year preceding the listing;
(iii) the number of registered shareholders must exceed 1,000, and the total
number of shares held by shareholders holding less than 0.5% of the company's
shares must account for more than 25% of the total paid-up share capital; (iv)
the company must have a continuous record of making profits and must have a
business record of more than three years; and (v) for the year prior to applying
for listing, the value of the net tangible assets must have accounted for more
than 38% of its gross tangible assets and there must be no accumulated losses.
Application for a public share issue must be made to the PBOC, Shenzhen
Special Economic Zone Branch. Application for listing on the SZSE must be made
to the PBOC, Shenzhen Special Economic Zone Branch and the SZSE. A company's
prospectus for initial share issue must be published in a newspaper or other
publication approved by the PBOC, Shenzhen Special Economic Zone Branch, ten
days prior to the scheduled issuance date, which must include: (i) the name and
domicile of the company; (ii) the scope of the company's production and
business; (iii) resumes of the promoters or directors and the managers; (iv) the
reason for and purpose of the share issue; (v) the total amount, class(es) and
number of shares to be issued, and the par value and selling price of each
share; (vi) the method of issue; (vii) the investors to whom the issue is
marketed; (viii) the name(s) of the securities distributor(s), the total value
of the shares to be distributed and the method of distribution; (ix) details of
the company's history and conditions for future development, its main business
and financial situation, and the total amount and composition of its assets and
liabilities; and (x) a certified profit forecast.
A company applying for a further issue of shares must satisfy the relevant
authorities that the following conditions have been met: (i) its business record
since the time of the last issue must have been good, and its utilization of
capital must be above average in its line of business; (ii) not less than one
year must have elapsed since its last share issue; (iii) the amount of shares it
is applying to issue must not exceed the amount of its existing shares; (iv) its
application of the proceeds of the issue must conform to the industrial Policies
of
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<PAGE>
Shenzhen; and (v) the issue will be beneficial to the healthy development of the
Shenzhen securities markets. Applications for approval to issue shares for the
purpose of attracting foreign investment are not bound by (ii) and (iii).
For a discussion of recent developments in the securities markets in China,
see "The Fund's Investments in the Greater China Region--People's Republic of
China--Securities Markets" in the Prospectus.
NEW ISSUES CRITERIA FOR "B" SHARES IN SHENZHEN. A company wishing to issue
"B" shares in Shenzhen must comply with the following requirements: (i) it must
fulfill the issue requirements specified in the SZSE Measures, (ii) it must
obtain written consent from the relevant department of the State to utilize
foreign investment or to transform into a foreign investment enterprise, and its
use of proceeds from the "B" share issue must conform to the laws and
regulations of the State concerning the administration of foreign investment;
(iii) it must have a stable, adequate source of foreign exchange revenue
(sufficient to pay out the "B" share dividends and bonuses for each year); (iv)
the percentage of "B" shares (including promoters' share holdings) to the total
shares of the company must not exceed the upper limit set by the PBOC, Shenzhen
Special Economic Zone Branch; and (v) the company must have a business record of
three years or more, or have received special permission from the PBOC, Shenzhen
Special Economic Zone Branch. (Companies in high technology industries or other
special industries are not bound by this restriction.)
Subscription for "B" shares is carried out through authorized securities
institutions within Shenzhen Municipality. These institutions may arrange for
the participation of overseas securities institutions approved by the PBOC,
Shenzhen Special Economic Zone Branch. The holding by any foreign investor of
"B" shares of a joint stock company accounting for more than 5% of such
company's total shares must be reported to the PBOC, Shenzhen Special Economic
Zone Branch. Domestic securities institutions are not allowed to trade "B"
shares for their own accounts unless approved BY the PBOC, Shenzhen Special
Economic Zone Branch.
The issuance of "B" shares through a syndicate underwriting on behalf of the
issuer must be managed by at least one authorized domestic securities
institution. The issue price of "B" shares may not be lower than the issue price
of "A" shares of the same company. During the distribution period, distributors
must sell the shares at the same pre-determined price.
An issuer may request private placement of its "B" shares with institutions
outside China with which it has close business connections, provided that such
institutions are approved by the PBOC, Shenzhen Special Economic Zone Branch and
the number of shares privately placed with them does not exceed 15% of the total
number of "B" shares in such issue.
REPORTING REQUIREMENTS. Within 60 days following the end of each half of
the fiscal year, an issuer is required to submit an interim financial report,
reviewed and approved by an accounting firm, or its annual financial report,
audited by an accounting firm, to the PBOC, Shenzhen Special Economic Zone
Branch and to publish the same in a newspaper or other publication approved by
the PBOC, Shenzhen Special Economic Zone Branch. Such financial reports must
also be submitted to the SZSE if the issuer's securities are already listed on
the SZSE.
INSIDER TRADING RESTRICTIONS. All persons are prohibited from using insider
information when engaging in the purchase or sale of securities.
SHANGHAI SECURITIES EXCHANGE
The SHSE was established on November 26, 1990 and officially opened on
December 19, 1990. Trading began on the SHSE during the later part of 1991.
Prior to the establishment of SHSE, an active OTC market in local stocks and
bonds existed in Shanghai.
MARKET INDEX. The performance of the "B" shares on the SHSE is measured by
the Shanghai Stock Exchange B Index. This Index stood at 66.22 on December 31,
1992, and at 103.15 on December 31, 1993, before falling to 62.80 on December
31, 1994 and 47.69 on December 31, 1995. This fall reflects volatility of the
market accentuated by the credit tightening policy in China and the illiquidity
of the market.
MEMBERSHIP. The SHSE operates on a membership system. Membership is
restricted to securities institutions approved by the PBOC. As of February 29,
1996, there were 553 members admitted to the SHSE,
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<PAGE>
60 of which are foreign institutions. The SHSE members are comprised of
securities companies, insurance companies, trust and investment companies and
open credit cooperatives. Members of the SHSE must join the Securities Trade
Association, which is a self-governing trade organization whose articles of
association specify such matters as the purpose, nature, conditions for
membership, rights and obligations of members and accounting of the Association.
The SHSE members may be classified as (1) members who trade for others'
accounts; (2) members who trade for their own accounts only; or (3) members who
trade both for their clients and for their own accounts. No member may buy or
sell any listed securities outside the SHSE without permission.
REGULATION. The SHSE is regulated by the local branch of the PBOC and the
local government in Shanghai. The Shanghai Municipal People's Government adopted
the Measures of Shanghai Municipality for Administration of the Trading of
Securities (the "SHSE Measures"), which came into effect on December 1, 1990 and
govern the establishment of the SHSE and the issuance and trading of securities
in Shanghai. In November of 1991, special regulations contained in the Measures
of Shanghai Municipality for the Administration of Special Renminbi-denominated
Shares and their Detailed Implementing Rules were promulgated by the PBOC and
the Shanghai Municipal People's Government relating to the issue of "B" shares
in Shanghai. Special rules for the trading and settlement of "B" shares were
also enacted in February 1992.
NEW ISSUES AND LISTED CRITERIA. To issue new securities, an issuer must
file an application with the PBOC, Shanghai Branch, along with the issuer's
articles of association, a prospectus to be used in offering the securities
which meets the requirements of the SHSE Measures and other related documents.
Issues of shares, or bonds of a value of RMB 10 million or more, must be
distributed by a securities institution, unless otherwise provided by the State
or placed privately. Issues with a total distribution value of RMB 30 million or
more must be jointly distributed by a distribution syndicate formed and led by a
securities company. Distribution of securities includes the underwriting of
securities and the placement of securities by an agent.
Under the SHSE Measures, an issuer which intends to issue its shares must
submit: (i) the consent from the relevant authorities as to the establishment or
restructuring of the enterprise as a joint stock company; (ii) in the case of a
newly-established joint stock company, an investment certificate evidencing that
its organizers have subscribed for not less than 30% of the total amount of
shares; (iii) in the case of State-owned enterprise being restructured as a
joint stock company, a confirmation of asset valuation issued by the
Administration for State Assets with a report on the conclusions from the asset
valuation issued by the relevant asset valuation agency, or, in the case of a
non-State-owned enterprise being restructured as a joint stock company, a report
on the conclusions from the asset valuation issued by an accounting firm and a
registered accountant of that firm; (iv) in the case of an existing joint stock
company issuing shares in order to increase its capital, financial statements of
continuous profits during at least the preceding two years and the preceding
quarter of the current year, certified by an accounting firm and a certified
accountant of that firm, and a shareholders' resolution authorizing the issue;
and (v) an application for share issue to the PBOC, Shanghai Branch, along with
its articles of association, the prospectus to be used for the share issue, a
distribution contract entered into with a securities distributor and, if the
shares are to be issued to raise funds for fixed asset investment, the approval
document(s) from the relevant administrative department(s). In addition, where
the issuer also intends to list shares on the SHSE, it must submit (i) an
application for the listing of and permission to deal in securities; (ii) a
report on the listing of the securities; (iii) consent from at least one
securities house to assist in the trading of the securities; and (iv) financial
statements of continuous profits for at least two years, certified by an
accounting firm and a registered accountant of that firm.
For a discussion of recent developments in the securities markets in China,
see "The Fund's Investments in the Greater China Region--People's Republic of
China--Securities Markets" in the Prospectus.
NEW ISSUES AND LISTING CRITERIA FOR "B" SHARES ON THE SHSE. A company
wishing to issue "B" shares to be listed on the SHSE must comply with the
following requirements: (i) it must be an approved joint stock company which has
been registered with the relevant State authority or whose establishment has
been approved and has met all the listing requirements set forth in the SHSE
Measures; (ii) the proceeds from the issuance of the "B" shares must be used in
accordance with State policies and regulations on the administration of foreign
investment; (iii) it must have a stable, adequate source of foreign exchange
revenue (I.E.
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<PAGE>
sufficient to pay out the "B" share dividends); and (iv) the percentage of "B"
shares among the total shares of a former state-owned enterprise reorganized as
a joint stock company must not exceed the upper limit set by the PBOC, Shanghai
Branch.
Subscription for "B" shares is carried out through approved securities
institutions. Approved domestic securities institutions may arrange for
participation by foreign securities institutions approved by the PBOC, Shanghai
Branch. Approval by the Shanghai Branch of the PBOC is required for the
subscription by a single investor for "B" shares which exceed 5% of the total
issued share capital of a company. In addition, "B" share trading must be
carried out by approved securities institutions and be processed through a
domestic securities house which is in the business of dealing in "B" shares.
Every investor dealing in "B" shares must open a "B" share securities account
with the SHSE. Domestic securities dealing organizations may open such "B" share
securities accounts on behalf of individuals and institutional investors outside
of China. Domestic securities institutions may not engage in "B" share business
for their own account.
The issuance of "B" shares in Shanghai may be through a public offering or a
private placement. A public offering must be conducted on behalf of the issuer
by an approved securities institution. The issuance of "B" shares through a
distribution syndicate must be managed by a domestic securities institution. The
prospectus for an issue of "B" shares must be published in a newspaper or other
publication approved by and on dates designated by the PBOC, Shanghai Branch.
REPORTING REQUIREMENTS. Once securities are approved for listing on the
SHSE, the issuer must publish the report on the listing of the securities and
certified financial statements showing continuous profits for at least two years
preceding the listing. Issuers of listed securities are required to submit
interim financial reports to the PBOC, Shanghai Branch in the middle of each
fiscal year. Issuers of securities traded on the OTC markets or the SHSE are
required to submit certified financial reports at the end of each fiscal year.
Such reports are required to be submitted within 45 days after the end of the
relevant period.
Within 15 days after the occurrence of any of the following situations, an
issuer of securities must submit a status report to the PBOC, Shanghai Branch,
and the SHSE if the securities of such issuer are listed on the SHSE: (i) the
conclusion with another party of a contract or agreement that will have a
material effect on the assets or liabilities of the enterprise or the rights and
interests of its shareholders; (ii) a major change in the business items or
forms of business of the enterprise; (iii) the making of a decision on a major
or relatively long-term investment; (iv) the incurring of major debts or losses;
(v) major losses of the assets of the enterprise; (vi) a major change in the
production or business environment; (vii) a change in the members of the board
of directors or senior management personnel; (viii) a change in the share
holdings of shareholders who hold 5% or more of the total amount of shares or a
change in the share holdings in the company of the members of the board of
directors or senior management personnel; (ix) involvement in a major lawsuit;
(x) the making of such major policy decisions as on merger, consolidation, etc.;
and (xi) commencement of liquidation or bankruptcy reorganization.
The trading and registration of transfer of registered shares will be
suspended 10 days before each announced date for payment of dividends or bonuses
or the issuance of new shares. Under the SHSE Measures, if the transfer
registration procedures are not completed within the specified time limits, the
dividends, bonuses and newly issued shares will be issued to the persons in
whose name the securities were registered at the time of such distribution or
issuance.
INSIDER TRADING RESTRICTIONS. Certain persons involved in the issuance of
shares, such as relevant personnel of the PBOC, Shanghai Branch, who are
involved in securities administration, management personnel of the SHSE,
personnel of a securities house who are directly connected with the issue and
trading of shares and other insiders connected with the issue and trading of
shares are prohibited from trading, directly or indirectly, for their own
account.
TRADING AND REGULATION OF SHARES
TRADING OF "B" SHARES ON THE SZSE. Trading on the SZSE is conducted in
blocks of 2,000 shares. Trading in "B" shares may only be conducted between
non-Chinese investors. Investors outside China must trade "B" Shares through
approved foreign brokers who in turn instruct approved Shenzhen brokers who
actually effect trades on the SZSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed. Trading on the SZSE is carried
out through a computerized automatic matching
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<PAGE>
system which effects each transaction based on price and time priority.
Investors subscribing for or buying "B" shares are required to produce their
individual or corporate identification documents, while individual investors
must also pay a deposit equal to 60% of the market price of the shares to be
bought.
Commissions for transactions in B shares are fixed at 0.6% of the purchase
price. A stamp duty of 0.3% of the purchase price is also payable. In addition,
the SZSE imposes a transaction levy of 01% of the actual transaction amount. A
share transfer registration fee of 0.3% of the face value of the "B" shares
transferred is also payable by the buyer to the Official registrar of the "B"
shares. Certain other fees may also be payable to the clearing and settlement
bank and foreign brokers for their services.
Any single investor holding "B" shares amounting to more than 5% of the
total share capital of an issuer must rep on such holding to the PBOC, Shenzhen
Special Economic Zone Branch. Short selling of "B" shares is prohibited. Newly
purchased "B" shares may not be sold before the settlement and registration
procedures for their purchase are completed.
TRADING OF "B" SHARES ON THE SHSE. In Shanghai, "B" shares are traded in
blocks having a total face value of RMB 1,000. "B" shares may only be traded
between non-Chinese investors. Investors outside of China must trade "B" shares
through approved foreign brokers who instruct approved Shanghai brokers who then
actually effect trades on the SHSE. All trades must be transacted on the trading
floor; no off-market transactions are allowed.
Brokerage commissions for "B" share transactions are fixed at 0.6% of the
total amount of the transaction, with reduced rates of 0.5%, for transactions
with a value of RMB 500,000 and 0.4% with a value exceeding RMB 5,000,000. A
stamp duty of 0.3% of the amount of the transaction is also charged. The SHSE
also levies a transaction fee on securities dealers equal to 0.03% of the amount
of the transaction. A transfer fee of 0.1% of the face value of the shares
transferred is also payable by the investor. Certain other fees may also be
payable to the banks appointed to coordinate primary and secondary clearing and
settlement and to foreign brokers for their services. Fees are calculated in
renminbi and payable in U.S. dollars.
Any single investor (individual or institutional) purchasing "B" shares of
an amount exceeding 5% of the issuer's total share capital must obtain approval
for such purchase from the PBOC. Newly purchased "B" shares cannot be sold
before the transfer procedures for their purchase are completed.
Trading in "B" shares is executed using an automatic book-entry transfer
system. Orders are matched automatically by computer by price and time priority.
Market and trading information is transmitted through telecommunication links by
an international information agency from the SHSE to overseas countries on a
real time basis.
CLEARING AND SETTLEMENT OF "B" SHARES. In both Shenzhen and Shanghai,
clearing and settlement of "B" share transactions are effected on the third day
after the trade date. All clearing and settlement of "B" shares are effected in
a scrip less manner, through a book-entry clearinghouse system. No such
certificates are issued to investors. Cash settlement is effected on a broker to
broker, transaction by transaction basis.
All "B" share prices and all dividends, bonuses and other income on "B"
shares are calculated in RMB but paid in foreign currency (Hong Kong dollars or
U.S. dollars). RMB amounts are converted to Hong Kong dollars or U.S.A. dollars
at the weekly weighted average conversion rate as quoted by the Shanghai Foreign
Exchange Transaction Center or the Shenzhen Foreign Exchange Adjustment Center
(with the exception of share sale prices in Shenzhen which are converted at the
prior working day's Conversion rate).
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<PAGE>
HONG KONG
Hong Kong became an island colony of Great Britain in 1841. Since that time,
Hong Kong remains China's largest trade partner and its leading foreign
investor. In 1995, the value of trade between Hong Kong and China exceeded
HK$1,239 billion, representing a 15% increase over 1994. In 1994, visible trade
between Hong Kong and China exceeded HK$1,077 billion, representing a 15%
increase over 1993.
The structure of Hong Kong's economy has changed significantly over the last
two decades as the services sector outpaced manufacturing. Large numbers of Hong
Kong based companies have set up factories in the southern province of China,
where it is estimated that Hong Kong companies employ up to 3 million resident
Chinese workers.
CHINA'S INVESTMENTS IN HONG KONG
There has been considerable growth in Chinese investment in Hong Kong in the
last five years. Chinese investment in Hong Kong typically involves the purchase
of stakes in existing companies. Most of Hong Kong's manufacturing investment
has been in Guangdong Province, and more than 3 million workers are now
estimated to be employed in the Province by Hong Kong companies. 1992 figures
reflect the extent to which Southeast China, and Guangdong Province in
particular, is ahead of the rest of the country in economic performance. Its
industrial output grew by over 32% during 1994; exports increased by more than
73% during 1994 following a 46% growth in 1993. In 1994 Guangdong Province
accounted for some 39% of total exports and for more than 9.4% of GDP although
having only 5.5% of the population.
In an effort to accommodate the colony's infrastructure to the sustained 15%
annual trade growth with southern China, the Hong Kong government in 1989
unveiled PADS, the Port and Airport Development Strategy. The project, initially
estimated to cost $21 billion, is designed to allow Hong Kong's cargo handling
capacity to increase by four times between 1988 and 2011 and its air traffic
handling capacity to increase from 15 million passengers in 1988 to 50 million
in 2011. In September 1991, Hong Kong and China concluded the Sino-British
Memorandum of Understanding, providing a framework for the PADS project. The
project is currently scheduled to be completed by 1999.
FOREIGN INVESTMENT RESTRICTIONS
There are no regulations governing foreign investment in Hong Kong. There
are no exchange control regulations and investors have total flexibility in the
movement of capital and the repatriation of profits. Funds invested in Hong Kong
can be repatriated at will; dividends and interest are freely remittable.
HONG KONG SECURITIES MARKETS
Formal trading of investment securities was established in Hong Kong in 1891
when the Association of Stockbrokers in Hong Kong was formed. It was renamed the
Hong Kong Stock Exchange in 1914. In 1969, the Far East Exchange was formed,
followed by the Kam Ngan Stock Exchange in 1971 and the Kowloon Stock Exchange
in 1972. These four exchanges merged to form The Stock Exchange of Hong Kong
Ltd. ("Hong Kong Stock Exchange" or "HKSE"), which commenced trading on April 2,
1986.
The HKSE is now the second largest stock market in Asia, behind only that of
Japan. As of December 31, 1995, 542 companies and 1,033 securities (including
warrants and other derivative instruments) were listed on the HKSE. Market
capitalization as of the same date was approximately HK$2,348,310 million, an
increase of approximately 13% from the previous year. Average daily turnover on
the HKSE for January 1996 was HK$7,086 million compared with HK$3,424 million
from July 1995 to December 1995, and HK$3,268 million from January 1995 to June
1995.
In addition to an active stock market, Hong Kong has an active foreign
exchange market, an interbank money market, a large gold bullion market and a
futures exchange. Hong Kong is also one of the major Asian centers to venture
capital businesses, many of such businesses having their Asian head office in
Hong Kong.
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<PAGE>
The table below sets out selected data on the Hong Kong Stock Exchange to
each year since 1986, including the value to securities traded during each year,
and the number of companies and securities listed and the total market
capitalization as of December 31 of each year.
SELECTED DATA ON THE HKSE
<TABLE>
<CAPTION>
VALUE OF SECURITIES TRADED DECEMBER 31 MARKET CAPITALIZATION
------------------------------------ ----------------------------------
(H.K. $ (U.S. $ LISTED LISTED (H.K. $ (U.S. $
YEAR MILLION) MILLION) COMPANIES SECURITIES MILLION) MILLION)
- ------------------------------------------ ---------- --------- ------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1986...................................... 123,128 15,786 253 335 419,281 53,754
1987...................................... 371,406 47,616 276 412 419,612 53,796
1988...................................... 199,481 25,574 304 479 580,378 74,446
1989...................................... 299,147 38,352 298 479 605,010 77,565
1990...................................... 288,715 37,015 299 520 650,410 83,386
1991...................................... 334,104 42,834 357 597 1,052,012 134,873
1992...................................... 700,577 90,569 413 749 1,332,184 172,221
1993...................................... 1,222,675 156,753 477 891 2,975,379 381,459
1994...................................... 1,137,414 145,822 529 1,006 2,085,182 267,331
1995...................................... 826,801 106,000 542 1,033 2,348,310 301,065
</TABLE>
- --------------
Source: HKSE.
MARKET PERFORMANCE. The Hang Seng Index is the most widely followed
indicator of stock price performance in Hong Kong. The Hang Seng Index is an
arithmetic index based on the securities of 33 companies, weighted by their
respective market capitalizations, and is thus strongly influenced by large
capitalization stocks.
The following table sets out high, low and end of year close for the Hang
Seng Index for each year since 1986.
HANG SENG INDEX
<TABLE>
<CAPTION>
% CHANGE FROM
PRIOR
YEAR HIGH LOW YEAR-END PERIOD-END
- -------------------------------------------------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
1986.................................................... 2,568.3 1,559.4 2,568.3 --
1987.................................................... 3,949.7 1,894.7 2,302.8 (10.3)
1988.................................................... 2,772.5 2,223.0 2,687.4 16.7
1989.................................................... 3,309.6 2,093.6 2,836.5 5.5
1990.................................................... 3,559.9 2,736.6 3,024.6 6.6
1991.................................................... 4,297.3 2,984.0 4,297.3 42.1
1992.................................................... 6,447.1 4,301.8 5,512.4 28.3
1993.................................................... 11,888.4 5,437.0 11,888.4 115.7
1994.................................................... 12,201.1 7,702.8 8,191.0 (31.1)
1995.................................................... 10,073.4 6,967.9 10,073.4 23.0
</TABLE>
- --------------
Source: HKSE.
The Hong Kong stock market can be volatile and is sensitive both to
developments in China and to the strength of other world markets. As an example,
in 1989, the Hang Seng Index rose to 3,310 in May from its previous year-end
level of 2,687, but fell to 2,094 in early June following the events at
Tiananmen Square. The Hang Seng Index gradually climbed in subsequent months,
but fell by 181 points on October 13, 1989 (approximately 6.5%) following a
substantial fall in the U.S. stock market, and at the year end closed at a level
of 2,837. The Hang Seng Index rose by 116% in 1993 amidst the bull market run in
Asia that year, but declined by 31% in 1994.
TRADING. Trading on the HKSE is conducted through a computerized system to
convey bid and asked prices for securities. Trades are then effected on a
matched trade basis directly between buyers and sellers. All securities are
traded in board lots. The HKSE utilizes the Central Clearing Automated
Settlement
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System for 90% of the settlement of its executed trades. The remaining 10% of
trade settlement is settled by the delivery of physical stock certificates. For
most companies a board lot is 1,000 shares, although board lots can vary in size
from 100 to 5,000 shares. Odd lots are traded separately, usually at a small
discount to the board lot prices. Share certificates in board lots, together
with transfer deed, must be delivered on the day following the transaction.
Payment is due against delivery. As of June 1995, a brokerage commission of not
less than 0.25% (with a minimum of H.K. $50) is standard, and trades are subject
to a transaction levy of 0.013% payable equally to the HKSE and the Hong Kong
Securities and Futures Commission (the "SFC") and a special levy of 0.03%. The
Hong Kong government charges (i) an ad valorum stamp duty of H.K. $1.50 per HK
$1,000 value of transaction, and (ii) a transfer deed stamp duty of HK$5,
payable by the seller on each new transfer deed issued in connection with
securities sold. A transfer fee of HK$2 per board lot of shares is payable by
the purchaser of securities for each new certificate issued. Finally, effective
July 1, 1994, a trade tariff of HK$0.50 is levied on each HKSE transaction.
REGULATION AND SUPERVISION. The SFC was established by the Hong Kong
government in May 1989 as an autonomous statutory body outside the civil service
which provides a general regulatory framework for the securities and futures
industries. The SFC administers certain elements of Hong Kong securities law
including those ordinances governing the protection of investors, disclosure of
interests and insider dealing.
The governing authority of the Hong Kong Stock Exchange is its Council,
which is comprised of 30 members. The Council is responsible for formulating
policies and oversees the operations of the HKSE through standing committees.
Eighteen Council members are representatives of the brokerage firms in Hong
Kong, nine are representatives of investment and merchant banking firms and two
are appointed by the Hong Kong government. The chief executive officer of the
HKSE serves on the Council on an ex-officio basis.
The HKSE promulgates its own rules governing share trading and disclosure of
information to shareholders and investors. Companies listed on the HKSE enter
into a listing agreement with the exchange which includes provisions requiring
that listed companies send interim and annual accounts to shareholders. In
addition, the Hong Kong Code on Takeovers and Mergers (used by the SFC) provides
guidelines for companies and their advisers contemplating, or becoming involved
in, takeovers and mergers.
TAIWAN
DEMOGRAPHICS AND GOVERNMENT.
Taiwan is located approximately 90 miles east of the People's Republic of
China (for purposes of this section only, the "PRC"), 340 miles northeast of
Hong Kong. The island encompasses an area of approximately 13,900 square miles
with a total population estimated at 20.9 million as of December 31, 1993. With
an average of approximately 1,498 people per square mile, Taiwan is among the
most densely populated countries in the world. The largest cities are Taipei, in
the north, with over 2.7 million people, and Kaohsiung, in the south, with over
1.37 million people. Mandarin is the official language.
The Republic of China ("ROC") was established in 1912 by the Kuomintang
(Nationalist Party) (the "KMT") in mainland China and remained there until 1949
when General Chiang Kai-Shek, the elected president at that time, moved the ROC
administration to Taiwan. Since that time, the ROC has maintained that it is the
sole legitimate government of all of mainland China, Taiwan and Mongolia, while
the PRC has also asserted the same claim.
The KMT is currently headed by Lee Teng-Hui, who was elected President and
Chairman in 1988. He was reelected in March 1990 and again in March 1996 for
another term as President. Taiwan maintains formal diplomatic relations with 30
countries. Taiwan is not a member of the United Nations and various other
international organizations, but is a member of the Asian Development Bank.
Taiwan has applied to rejoin the General Agreement of Tariffs and Trade
("GATT"), from which it withdrew in 1950. Taiwan joined the Asia-Pacific
Economic Cooperation group ("APEC") in November 1991. In August 1993,
disaffected members of the KMT created a new political party called the Chinese
New Party which seeks to return Taiwan to full membership in the international
community. Opposing political parties whose platforms are consistent with the
ROC constitution are officially recognized in Taiwan.
A-13
<PAGE>
The United States Congress passed the Taiwan Relations Act in 1979 to
establish a new framework for U.S./Taiwan relations and since that time the U.S.
remains Taiwan's largest trading partner. Taiwan enjoyed a cumulative trade
surplus of US $7.9 billion and US $6.3 billion with the U.S. in 1993 and 1994,
respectively.
ECONOMIC DEVELOPMENT. Taiwan's economic growth has been strong from 1984 to
1994, never falling below 5% during that period. In the 1990's, GNP growth rates
were 7.2%, 6.2%, 6.0%, 6.1% and 5.9% in 1991, 1992, 1993, 1994 and 1995,
respectively. Domestic demand has increased in recent years, although Taiwan's
exports also continue to grow, reaching 10.3% in 1993 and 8.6% in 1994.
The following table provides details of the overall economic performance of
Taiwan from 1987 to 1995.
<TABLE>
<CAPTION>
EXCHANGE TSE
RATE AV. US GDP GROWTH TRADE SURPLUS YEAR-END
$ (%) CPI (US $ BILL.) P/E CLOSING
----------- ----------- --- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1987....................................... 31.85 12.7 0.5 18.7 28.7 2,339
1988....................................... 28.57 7.8 1.3 11.0 68.9 5,119
1989....................................... 26.41 8.2 4.4 14.0 92.0 9,624
1990....................................... 26.39 5.4 4.1 12.5 33.0 4,530
1991....................................... 25.50 7.6 3.6 13.3 28.0 4,601
1992....................................... 25.20 6.8 4.5 9.5 30.1 3,377
1993....................................... 26.50 6.3 2.9 7.9 39.7 6,071
1994....................................... 26.45 6.5 4.1 11.9 33.5 7,125
1995....................................... 26.44 6.1 3.7 11.0 19.5 5,159
<CAPTION>
TSE MARKET
CAPITAL (US
$ BILL.)
-----------
<S> <C>
1987....................................... 48.45
1988....................................... 120.1
1989....................................... 240.0
1990....................................... 112.4
1991....................................... 123.7
1992....................................... 100.1
1993....................................... 194.1
1994....................................... 247.0
1995....................................... 192.0
</TABLE>
The major sources of Gross Domestic Product ("GDP") have been manufacturing,
commerce, finance, insurance, real estate and business services and government
services, which together accounted for roughly 76% of GDP in 1994. During the
past decade, the most significant trends in the composition of GDP have been (1)
the decline in the agricultural and construction sectors as percentages of the
total economy, and (2) the growth until 1989 in the relative importance of
manufacturing and services.
The New Taiwan Dollar ("NT") is the official currency in China. Taiwan's
favorable trade balance and increased foreign exchange reserves since 1984 have
caused appreciation of the NT. In 1987, the NT appreciated approximately 24.4%
against the U.S. Dollar, and further appreciated by 8.1% between 1988 and 1994.
Taiwan's exports to the U.S. have continued at high levels during this period,
in part because the appreciation of the NT has been at relatively lower levels
than the appreciation of the Japanese yen against the U.S. Dollar.
Unemployment in Taiwan remained low in the 1990's, with an average rate of
approximately 1.5%, 1.6% and 1.8% in 1992, 1993, and 1994 respectively.
In 1994, the Taiwan government began exerting all efforts toward the
development of the "Ten Emerging industries": telecommunications, information,
consumer electronics, semiconductors, precision machinery and automation,
aerospace, advanced materials, fine chemicals and pharmaceutical, health care,
and pollution control. The production value of these 10 industries in projected
to rise from US $27.3 billion in 1992 to US $94.2 billion in 2000. These 10
industries accounted for 15.5% of all industrial production in 1992 and are
projected to reach 29.4% in 2000.
In 1995, the Taiwan government offered a blueprint for Asia-Pacific Regional
Operations Center. Development plans have been set for six specific operations
centers, including manufacturing center, sea transportation center, air
transportation center, financial center, telecommunications center and media
center. The key areas of macroeconomic adjustments to reach these goals include:
(1) liberalizing trade and investment to lower tariffs, remove non-tariff trade
barriers, and open up the service industry; (2) reducing entry and exit
restrictions on personnel to allow foreign professionals and specialists to
engage in short-term stay and work in Taiwan; (3) easing restrictions on capital
movement to liberalize foreign exchange control in stages; and (4) establishing
a modern legal environment for the information society. This includes allowing
free circulation of information and the use of government information,
protecting intellectual property rights, and preventing computer crimes.
A-14
<PAGE>
TAIWAN'S INVESTMENTS IN MAINLAND CHINA AND HONG KONG
Indirect trade between Taiwan and mainland China has increased significantly
during the 1990s, despite Taiwan's policy of no official contact with the PRC.
In 1991, trade between Taiwan and PRC (primarily through Hong Kong) increased
44% from the previous year, to US $14.4 billion. In 1992, there was a 19.4%
increase over the 1991 figure, and in 1993, trade increased 14.8% to
approximately US $20.2 billion. In 1994, trade increased 15.2% over the 1993
figure. In 1991, Taiwan established new procedures pursuant to which Taiwan
investors may register proposed investments in the mainland with the Ministry of
Economic Affairs, thereby making such Taiwan investments legally recognized in
China.
TAIWAN SECURITIES MARKETS
The TSE, Taiwan's only stock exchange, is a corporation owned 61% by private
banks and enterprises and 39% by government-operated banks and enterprises.
Selection of the TSE's top management is influenced by Taiwan Securities and
Exchange Commission ("Taiwan SEC"), which also monitors the TSE's operations.
The TSE commenced operations in 1962 with 18 listed companies. At December 31,
1993, the aggregate market value of listed equity securities was approximately
US $223.2 billion with 313 listed companies. Debt securities are traded in the
TSE but remain small in terms of trading volume. Currently, there are no foreign
companies listed on the TSE.
Under current regulations applicable to foreign investment funds, the Fund
is not permitted to invest directly in any securities listed on the TSE. The
Fund intends to invest in Taiwan corporations by obtaining ownership interests
in global depository receipts and listed beneficiary certificates representing
shares in such corporations.
NEW SECURITIES INSTRUMENTS. The instruments traded on the Taiwan securities
market have primarily been limited to common stock and bonds. However, recent
legislative revisions and the present attitude of the Taiwan SEC regarding
liberalization of the securities regulations have encouraged some innovation.
For example, in February 1988, a TSE-listed company issued bonds exchangeable
into shares of another TSE-listed company in which it owned common shares . This
was the first offering of a convertible security by a company listed on the TSE.
The same company has made an offering of preferred shares which are convertible
into common shares. As of June 30, 1995, 28 additional TSE-listed companies have
issued similar convertible Eurobonds. The Taiwan SEC is revising the relevant
laws to expedite the process for converting Eurodollar bonds into common shares
of the issuer in the future. Sixteen TSE-listed companies have issued domestic
convertible bonds and the government is now considering revising the relevant
laws to expedite the process for converting Eurodollar bonds into shares of the
issuer. Another example of innovation is the use of Global Depository Receipts
("GDRs") in raising capital. (For a general discussion of GDRs, see "The Fund's
Investment Objectives and Policies--Depository Receipts" in the Prospectus.) The
Taiwan SEC has also agreed to permit the listing on the TSE of depositary
receipts which would represent shares of foreign issuers. Nine TSE-listed
companies had issued GDRs before 1994. Thirteen TSE-listed companies are
scheduling to issue GDRs in 1995. In addition, the Taiwan SEC established a
domestic futures market in 1994, but the trading volume is relatively small now.
LISTED BENEFICIARY CERTIFICATES. Listed Beneficiary Certificates ("LBCs")
are certificates which represent the shares of closed-end funds which, subject
to Taiwan SEC and TSE approval, may be listed on the TSE. LBCs are issued only
by 15 securities investment trust companies in Taiwan for purposes of investing
in securities listed on the TSE. Two new securities investment trust companies
had been approved by the Taiwan SEC in 1995, and two other new securities
investment trust companies are applying for approval by the Taiwan SEC now. LBCs
are traded on the TSE in the same manner as other TSE-listed securities. As of
August 31, 1995, there were 18 closed-end funds for which LBCs are traded.
Almost all of the domestic closed-end funds are currently trading at discounts.
As of August 31, 1995, 56 open-end funds were issued by the 15 securities
investment trust companies.
OVER-THE-COUNTER MARKET. The Taiwan SEC helped to establish an
over-the-counter market in Taiwan in September 1982. The Fund does not intend to
invest in this market.
MECHANICS OF TRADING ON THE TSE
PRICE AND VOLUME LIMITS. In order to reduce market volatility, the TSE has
placed limits on large volume transactions and on the range of daily price
movements. Complex restrictions are imposed on
A-15
<PAGE>
transactions which include 500 trading lots or more. These restrictions are not
expected to have a substantial impact on the Fund. Currently, fluctuations in
price are restricted to 7% above and below the previous day's closing price in
the case of stocks and 5% in the case of bonds. Over the last few years, the
restriction on stock price movements has fluctuated, moving from 5% to 3%
following the 1987 market crash, then back to 5% and finally, in September 1989,
from 5% to the current level of 7%. Authorities have mentioned that the limits
on stock price movements may be further relaxed or abolished entirely.
Delivery and settlement are handled by the computerized TSE Clearing
Department. Sales of stock by brokers and traders are offset by purchases of the
same issue on the same day so that only net balances of stock are delivered and
only net balances of cash are computed and paid. The TSE has introduced a
certificate depositary system, operated by Taiwan Central Depositary Co., Ltd.,
which was established in November 1989.
COMMISSIONS AND TRANSACTION TAX. On July 1, 1990, brokerage commissions for
stocks were reduced by 0.0075% to 0.1425%. The TSE takes 5% of the commissions
earned by brokerage firms on stock transactions. Commissions on bond
transactions remain at 0.1%. A securities transaction tax of 0.3% of the
transaction price for stocks an 0.1% for bonds and LBCs is levied on the seller.
REGULATORY ENVIRONMENT
In 1983, the first fund permitting foreigners to invest in Taiwan securities
was approved. In 1986, approval was granted to three additional foreign funds
which raised a total of approximately US $75 million. At August 31, 1995, there
were also 18 closed-end and 56 open-end domestic funds in Taiwan, six of which
are dedicated to investment outside Taiwan.
A major amendment (the "Amendment") of the Securities and Exchange Law was
enacted in January 1988 and resulted in significant changes to practices in the
securities industry. The Amendment was part of a government effort to make
securities supervision in Taiwan similar to that of advanced financial markets
and to modernize the securities markets to meet the growing need of investors.
The securities transactions tax was lowered on February 1, 1993 and
securities transactions are now taxed at a rate of 0.3% for stocks and 0.1% for
bonds and listed mutual fund shares, in both cases payable by the seller. The
Ministry of Finance announced in December 1993 that it was considering the
possibility of reimposing the capital gains tax but has not changed its position
as of August 31, 1995. Any reimposition is subject to legislative approval and
it cannot be predicted when or whether the Legislature will grant such approval.
On December 28, 1990, the Executive Yuan of Taiwan approved guidelines
drafted by the Taiwan SEC which allow direct investment in Taiwan securities by
certain qualified foreign institutional investors, subject to certain
restrictions. For a discussion of these guidelines, see "The Fund's Investments
in the Greater China Region--Taiwan--Foreign Investment Restrictions." At August
31, 1995, QFII had bought over NT$100 billion of Taiwan SEC listed securities.
In April 1992, the Taiwan SEC promulgated regulations permitting Taiwan
listed companies, upon approval by the Taiwan SEC, to sponsor the issue and sale
to foreigners of depositary receipts evidencing shares of such companies. The
approval by the Taiwan SEC will be granted in respect of a fixed number of
depositary receipts which, except in connection with stock dividends and
distributions and the exercise of pre-emptive rights by existing depositary
receipt holders in the event of capital increases for cash, may not be increased
without separate Taiwan SEC approval. The Taiwan SEC has also agreed to permit
the listing on the TSE of Taiwan depositary receipts which would represent
shares of foreign issuers. No TDR is listed in any Taiwan security market as of
August 30, 1995.
FINANCIAL REPORTING
Since 1983, the Taiwan SEC, which administers the financial reporting
system, and the TSE have taken steps to improve the quality of financial
reporting and of internal financial controls in Taiwan-based companies.
The Securities and Exchange Law imposes criminal liability on accountants
who are knowingly involved in the preparation of fraudulent financial reports.
The Taiwan SEC promulgated regulations in July 1983
A-16
<PAGE>
requiring that financial reports of listed companies be audited by accounting
firms consisting of at least three certified public accountants and be signed by
at least two certified public accountants, and establishing standards for audit
and budget systems of listed companies.
The Amendment, in an effort to improve further financial reporting
standards, established a new financial reporting system for corporate issuers.
Under this system, issuers are subject to more extensive disclosure requirements
than they have been in the past. For example, companies listed on the TSE are
required to submit audited semi-annual and annual financial reports and first
and third quarter financial reports that have significant impact on the
financial condition of the issuer.
SINGAPORE
Singapore had a population of only a few hundred Malays in 1819 when Sir
Thomas Stamford Raffles obtained a grant of land from the local Malay chief to
establish a new port. In 1826, Singapore was joined with Penang and Malacca to
form the Straits Settlements, which were ruled as a part of British India until
1867, when they became a separate colony. The city grew in importance and
prosperity and was chosen as the main stronghold of British power in the Far
East in 1922. A large naval base was built on the north side of the island,
partly to protect Malaya. However, the Japanese invasion of Malaya in 1941 came
overland and the surrender of Singapore to the Japanese in February, 1942 was
one of the greatest defeats of allied arms during the Second World War.
Singapore was occupied by the Japanese until August, 1945.
Singapore became an island colony of Great Britain in the early 1800s and
achieved independence in 1960. Its population of 3 million is comprised of 77.5%
Chinese, 14.2% Malay and 8.3% Indian and other groups. With foreign exchange
reserves of $66.8 billion (September 1995), Singapore has the highest level of
foreign exchange reserves per capita in the world. As the regional trading
center for the South East Asian region, Singapore has enjoyed a period of strong
growth over the last five years, averaging 8.6% annual compound growth in gross
domestic product (GDP), with the result that GDP per capita is estimated to have
exceeded $27,000 at the end of 1995, classifying Singapore as an "advanced
developing nation" under the OECD classification scheme.
Singapore has used its large foreign exchange reserves to invest in various
regional projects, including a number in China, where its $2 billion in pledged
investment in 1995 made it the fifth largest foreign investor. Its Suzhou
industrial township near Shanghai has already attracted $1.4 billion of
investment.
SECURITIES MARKETS
Formal trading of investment securities began in the late nineteenth century
and the Singapore Stockbrokers' Association was incorporated in 1930. The Stock
Exchange of Singapore (SES) was incorporated in 1973. The SES is now the seventh
largest stock market in Asia, after Japan, Hong Kong, Malaysia, Thailand, Korea
and Taiwan, with a market capitalization at January 31, 1996, of S$226.3
billion, an increase of approximately 10% from the previous year. From January
1, 1995 to December 31, 1995, there were 20 new listings of companies on the
SES. Average monthly turnover on the SES for 1995 was S$83,866 million, compared
with S$123,520 million in 1994. As of December 31, 1995, 248 companies were
listed on the SES (212 Singaporean and 36 foreign), and a total of 495
securities. Another 46 were listed on the second market, known as the Stock
Exchange of Singapore Dealing and Automated Quotations Board (SESDAQ), which had
a market capitalization of S$4.18 billion at December 31, 1995.
There is also the Central Limit Order Board International (CLOB), an
electronic over-the-counter order matching system which was established after
the separation of the Singapore and Kuala Lumpur Stock Exchanges on 2nd January,
1990, primarily to enable Malaysian shares to continue to be traded freely in
Singapore. As of December 31, 1995, there were 10 Hong Kong, 112 Malaysian and 7
other international stocks traded on CLOB.
FOREIGN INVESTMENT RESTRICTIONS
Foreign investors in Singapore are restricted by ministerial limitations
from owning more than 49% of any strategic Singaporean company, or more than 40%
of any Singaporean bank. This has led to a two tier share holding structure,
with domestic and foreign registered shares, trading at different prices, with a
premium for foreign registered shares. There are no restrictions on investment
and remittances and no foreign exchange controls, although 27% corporate tax is
deducted from the gross dividends payable.
A-17
<PAGE>
SINGAPORE SECURITIES MARKET
Formal trading of investment securities began in the late nineteenth century
and the Singapore Stockbrokers' Association was incorporated in 1930. The Stock
Exchange of Singapore (SES) was incorporated on the 24th May, 1973. The SES is
now the seventh largest stock market in Asia, after Japan, Hong Kong, Malaysia,
Thailand, Korea and Taiwan, with a market capitalization at the 31st January,
1996, of S$226.3 billion, an increase of approximately 10% from the previous
year. From January 1st, 1995 to December 31st, 1995, there were 20 new listings
of companies on the SES. Average monthly turnover on the SES for 1995 was
S$83,866 million, compared with S$123,520 million in 1994. As of 31st December,
1995, 248 companies were listed on the SSE (212 Singaporean and 36 foreign), and
a total of 495 securities, and another 46 on the second market, known as the
Stock Exchange of Singapore Dealing and Automated Quotations Board (SESDAQ),
which had a market capitalization of S$4.18 billion at 31st December, 1995.
There is also the Central Limit Order Board International (CLOB), an
electronic over the counter order matching system which was established after
the separation of the Singapore and Kuala Lumpur Stock Exchanges on 2nd January,
1990, primarily to enable Malaysian shares to continue to be traded freely in
Singapore. As at 31st December, 1995, there were 10 Hong Kong, 112 Malaysian and
7 other international stocks traded on CLOB.
The table below sets out selected data on the Singapore Stock Exchange in
each year since 1990, including the value of securities traded during each year,
and the number of companies listed and the total market capitalization as of
December 31st each year and January 31, 1996.
SELECT STATISTICS
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
NO. OF COMPANIES LISTED.............. 172 183 188 205 238 248 248
Market Capitalization (S$bn)......... 59.8 77.7 80.3 213.4 195.5 209.4 226.3
Turnover Volume (m).................. 18,487 15,557 13,904 66,398 45,540 33,919 5,286
Value (S$m).......................... 36,756 30,549 29,444 127,797 123,520 83,866 12,867
EPS Growth (OCBC).................... (5.7) 1.2 3.8 21.9 14.8 13.1 16.5
SESDAQ Market Cap (S$m).............. 409.2 528.8 1,032.4 3,833.0 3,228.3 4,178.9 1,167.6
SES Turnover Volume (m).............. 116.9 167.9 526.1 2,304.7 1,704.0 5,323.3 388.8
Value (S$m).......................... 209.4 157.5 359.9 2,405.4 2,145.0 4,763.6 365.3
</TABLE>
MARKET PERFORMANCE
The Straits Times Index (STI) is the most widely followed indicator of stock
price performance in Singapore. The STI is an arithmetic index based on 30
companies, weighted by their respective market capitalizations, and is thus
strongly influenced by large capitalization stocks.
The movements of the STI and other indices over the last six years (December
31 for all years through 1995, January 31 for 1996) are as follows:
MARKET PERFORMANCE
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STI Index
High...................... 1,607.12 1,565.58 1,545.92 2,426.85 2,471.90 2,287.58 2,449.15
Low....................... 1,101.77 1,149.08 1,310.95 1,531.11 2,036.80 1,903.80 2,255.82
Close..................... 1,154.48 1,490.70 1,524.40 2,425.68 2,239.56 2,266.54 2,449.15
OCBC 30..................... 362.48 464.37 452.56 638.53 552.07 585.17 635.76
DBS 50...................... 343.40 432.22 420.26 623.22 534.25 560.98 607.22
SESDAQ Index................ 69.36 61.74 53.17 154.15 80.30 100.26 99.99
</TABLE>
TRADING
Trading on the SES is conducted through a computerized book based system to
convey bid and offer prices for securities affected by changes in book entries
in securities accounts that shareholders maintain with the Central Depositary
Pte Ltd., the SES' automated electronic central depositary. Trades are then
effected on a matched basis between buyers and sellers. Payment is against
delivery, and must be settled
A-18
<PAGE>
within 5 business days of the transaction. Brokerage commission is on a sliding
scale, starting at 1.00% for bargains of less than $250,000, and falling
gradually to 0.30% for those above S$1,500,000. Brokerage on the CLOB
International is negotiable subject to a minimum of 0.5%. In addition, trades
are subject to a transaction levy of 0.5% payable to the SES, subject to a
maximum of S$100. Finally, the Singaporean government charges a stamp duty of
.05% of the transaction price, and there is a Goods and Services Tax (GST) of 3%
on brokerage and clearing fees.
The SES is regulated by the Securities Industry Act of 1986 and supervised
through a set of rules and regulations enforced by the 9-member Stock Exchange
Committee.
A-19
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CVO GREATER CHINA FUND, INC.
237 PARK AVENUE, SUITE 910
NEW YORK, NEW YORK 10017
MAY 30, 1997
CVO Greater China Fund, Inc. (the "Fund") is a non-diversified, no-load,
open-end, management investment company that has issued two classes of shares:
Class I and Class II. Class I Shares are offered to institutional investors and
Class II Shares are offered to non-institutional investors. Under normal market
conditions and subject to temporary defensive investments, 65% of the Fund's
assets will be invested in equity securities (i) traded in securities markets
located in the Greater China Region, or (ii) issued by companies whose business
significantly relates to the Greater China Region (as measured by assets,
revenues or profit). This Statement of Additional Information sets forth
information about the Fund.
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Fund's
Prospectus dated May 30, 1997 (the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Fund at the
address and telephone number set forth above.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
Additional Information on Portfolio Instruments. . . . . . . . . . . . 2
Hedging and Other Strategic
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . 6
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . 9
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Administration, Shareholder Servicing, Custody and Transfer Agency
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . 13
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 14
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . 15
Additional Information Concerning Dividends, Distributions and Taxes . 16
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . 21
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . 22
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 24
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . 27
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
REVERSE REPURCHASE AGREEMENTS
The Fund may for temporary financing and investment purposes invest up to
5% of its net assets in reverse repurchase agreements. A reverse repurchase
agreement is a borrowing transaction in which the Fund transfers possession of a
security to another party, such as a bank or broker/dealer, in return for cash,
and agrees to repurchase the security in the future at an agreed upon price,
which includes an interest component. A reverse repurchase agreement involves
the risk that the market value of the portfolio securities sold by the Fund may
decline below the price of the securities the Fund is obligated to repurchase,
which price is fixed at the time that the Fund enters into such agreement.
Whenever the Fund enters into reverse repurchase agreements as described in the
Prospectus, it will place in a segregated custodian account liquid assets having
a value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure such equivalent value is maintained.
Reverse repurchase agreements are considered to be borrowings by the Fund under
the Investment Company Act of 1940 (the "1940 Act").
2
<PAGE>
LENDING OF PORTFOLIO SECURITIES
For the purposes of realizing income, the Fund may make secured loans of
portfolio securities amounting to not more than one-third of its total assets.
Securities loans are made to broker/dealers or institutional investors pursuant
to agreements requiring that the loans continuously be secured by collateral at
least equal at all times to the value of the securities lent plus any accrued
interest, "marked to market" on a daily basis. The collateral received will
consist of cash, U.S. short-term government securities, bank letters of credit
or such other collateral as may be permitted under the Fund's investment program
and by regulatory agencies and approved by the Fund's board of directors. Any
cash or other liquid collateral will be invested only in similar types of liquid
securities. While the securities loan is outstanding, the Fund will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice. To the extent applicable, the Fund
will not have the right to vote equity securities while they are being lent, but
it will call in a loan in anticipation of any important vote. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the
borrower fail financially. Loans only will be made to firms deemed by the
Adviser to be of good standing and will not be made unless, in the judgment of
the Adviser, the consideration to be earned from such loans would justify the
risk.
UNITED STATES GOVERNMENT OBLIGATIONS
Securities issued or guaranteed by the U.S. government or by its agencies
or instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of bills,
notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by agencies
or instrumentalities established or sponsored by the U.S. government.
In addition to the U.S. Treasury obligations described above, the Fund may
invest in other types of securities issued or guaranteed by the U.S. Treasury.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith,
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the case
of obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
Subject to the investment limitations described under "Investment Limitations,"
bank obligations that may be purchased by the Fund include certificates of
deposit, bankers' acceptances and fixed time
3
<PAGE>
deposits. A certificate of deposit is a short-term negotiable certificate issued
by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A banker's acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.
Banks are subject to extensive governmental regulations that may limit both
the amounts and types of loans and other financial commitments that may be made
and the interest rates and fees that may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations. Bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligations or
by government regulations.
Investors should also be aware that securities of foreign banks and foreign
branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by the
Fund, the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by the Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.
The Fund will not purchase such bank securities which the Adviser believes, at
the time of purchase, will be subject to exchange controls or foreign
withholding taxes; however, there can be no assurance that such laws may not
become applicable to certain of the Fund's investments. In the event unforeseen
exchange controls or foreign withholding taxes are imposed with respect to the
Fund's investments, the effect may be to reduce the income received by the Fund
on such investments.
BORROWING
The Fund is authorized to borrow money from banks for temporary or
emergency purposes, denominated in any currency in an amount of up to 10% of its
total assets (including the amount borrowed).
EURODOLLAR OBLIGATIONS
The Fund may make investments in Eurodollar instruments, which are
typically U.S. dollar-denominated futures contracts or options on those
contracts, that are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency denominated Eurodollar instruments may be available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and allow sellers to obtain a fixed rate for
borrowings. The Fund may also use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
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<PAGE>
HEDGING AND OTHER STRATEGIC TRANSACTIONS
As described in the Prospectus under "Special Investment Techniques," the
Fund may be authorized to use a variety of investment strategies to hedge
various market risks (such as currency exchange rates, interest rates, and broad
or specific market movements) to seek to reduce the volatility of the Fund's
portfolio or to seek to increase the Fund's income or gain (such investment
strategies and transactions are referred to herein as "Hedging and Other
Strategic Transactions"). The description in the Prospectus and "Additional
Information on Portfolio Instruments" indicates which, if any, of these types of
transactions may be used by the Fund.
As a supplement to the discussion in the Prospectus under "Special
Investment Techniques," certain types of Hedging and Other Strategic
Transactions are described below. The Fund will not be obligated, however, to
pursue any of such strategies and the Fund makes no representation as to the
availability of these techniques at this time or at any time in the future. In
addition, the Fund's ability to pursue certain of these strategies may be
limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools. See "Additional Information
Concerning Dividends, Distributions and Taxes" below. See "Risks Associated
with the Fund -- Special Risks of Certain Fund Investments" in the Prospectus
for a discussion of the risks related to Hedging and Other Strategic
Transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts. A
forward foreign currency exchange contract is a contract individually negotiated
and privately traded by currency traders and their customers. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to lock in the U.S.
dollar price of the security ("transaction hedge"). The Fund may engage in
"cross-hedging" by using forward contracts in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
the Adviser determines that there is an established historical pattern of
correlation between the two currencies. The purpose of entering into these
contracts is to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. In addition, the
Fund may purchase forward contracts for nonhedging purposes when the Fund
anticipates that the foreign currency will appreciate in value, but securities
denominated in that foreign currency do not present attractive investment
opportunities. However, forward contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into forward foreign
currency exchange contracts.
CURRENCY SWAPS
The Fund may enter into currency swaps on a gross basis, unless the swap
contract provides otherwise, for hedging and other purposes (including income
generation). Currency swaps involve the exchange of rights to make or receive
payments in specified currencies. Since currency swaps are individually
negotiated, the Fund expects to achieve an acceptable degree of correlation
between its Fund investments and its currency swap positions. Currency swaps
usually involve the delivery of the entire principal value of one designated
currency in exchange for the other designated currency. Therefore, the net gain
of a currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations.
5
<PAGE>
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values and currency exchange rates, the investment performance of the
Fund would be less favorable than it would have been if this investment
technique were not used.
OPTIONS ON CURRENCIES
The Fund may purchase and sell (write) put and call options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of foreign portfolio securities and anticipated dividends on such
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. The Fund may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against changes
in exchange rates for a different currency, if there is a pattern of correlation
between the two currencies. As with other kinds of option transactions,
however, the writing of an option on foreign currency will constitute only a
partial hedge, up to the amount of the premium received. The Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses on the hedge. The purchase of an option on
foreign currency may constitute an effective hedge against exchange rate
fluctuations; however, in the event of exchange rate movements adverse to the
Fund's hedge position, the Fund may lose the entire amount of the premium plus
related transaction costs. In addition, the Fund may purchase call or put
options on currency for speculative purposes when the Adviser anticipates that
the currency will appreciate or depreciate in value, but the securities
denominated in that currency do not present attractive investment opportunities.
Options on foreign currencies to be written or purchased by the Fund will be
traded on U.S. and foreign exchanges or over-the-counter. See "Risks Associated
with the Fund -- Hedging and Other Strategic Transactions" in the Prospectus for
a discussion of the liquidity and other risks associated with options
transactions.
INVESTMENT LIMITATIONS
In addition to the restrictions described under "The Fund's Investment
Objectives and Policies" in the Prospectus, the Fund may not:
(1) Purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options on foreign currencies and may otherwise engage in
transactions in foreign currencies;
(2) Make loans, except that the Fund may (a)(i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in
loans and participations, both in accordance with its investment
objectives and policies, (b) make loans of portfolio securities and
(c) enter into repurchase agreements with respect to portfolio
securities;
(3) Underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Fund's
investment program may be deemed to be an underwriting;
(4) Purchase real estate 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);
6
<PAGE>
(5) Make short sales of securities or maintain a short position, unless at
all times when a short position is open, the Fund either owns an equal
amount of such securities or owns securities convertible into or
exchangeable, without the payment of any additional consideration, for
securities of the same issue as, and equal in amount to, the
securities sold short;
(6) Purchase securities on margin (except for delayed delivery or when-
issued transactions or such short-term credits as are necessary for
the clearance of transactions, and except for initial and variation
margin payments in connection with the use of options, futures
contracts, options thereon or forward currency contracts; the Fund may
also make deposits of margin in connection with futures and forward
contracts and options thereon);
(7) Issue senior securities (as defined in the 1940 Act);
(8) Borrow money, except that the Fund may borrow (i) from banks for
temporary or emergency purposes, or (ii) by entering into reverse
repurchase agreements; provided that, immediately after any such
borrowing, the aggregate amount of all borrowings is not to exceed 10%
of its gross assets taken at market value. In the event that asset
valuations of the Fund cause all borrowings of the Fund to exceed such
10%, the Fund will not enter into any purchases of securities until
the aggregate amount of all borrowings is reduced below 5%. Any such
borrowings may be secured or unsecured. The Fund may issue securities
(including senior securities) appropriate to evidence such
indebtedness, including reverse repurchase agreements;
(9) Purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of
the Fund's net assets in the case of any one other investment company
and 10% of such net assets in the case of all other investment
companies in the aggregate. Such purchases shall be made in the open
market, with no commission or profit to a sponsor or dealer other than
the customary broker's commission. This restriction shall not apply
to investment company securities received or acquired by the Fund
pursuant to a merger or plan of reorganization, and in the event of
such merger or reorganization, when applicable, the Fund will comply
with the NASAA Guidelines for Registration of Master Fund/Feeder
Funds;
(10) Invest for the purpose of exercising control over management of any
company, except investment in investment company securities received
or acquired by the Fund pursuant to a merger or plan of
reorganization;
(11) Invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases, or purchase partnership
interests in any such programs or leases;
(12) Pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings in accordance with investment
restriction (8) above;
(13) Invest in Hedging and Other Strategic Transactions (as defined in
"Special Investment Techniques" in the Prospectus) and warrants
(valued at the lower of cost or market) if, as a result of such
purchases, more than 35% of the Fund's net assets (taken at current
value) would be invested in such instruments. The value of such
warrants may not exceed 2% of the Fund's net assets. This restriction
does not apply to warrants acquired by the Fund in units or attached
to securities, inasmuch as such warrants are deemed to be without
value.
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<PAGE>
Included within the 35% limitation, but not to exceed 2% of the value
of the Fund's net assets, may be warrants that are not publicly
traded;
(14) Invest more than 10% of the Fund's net assets (taken at current value)
in stock option transactions (including, without limitation, puts,
call, straddles or spreads and any combination thereof);
(15) Purchase or retain securities of an issuer if those officers or
Directors of the Fund or its investment adviser owning more than 1/2
of 1% of such securities together own more than 5% of such securities;
and
(16) Invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous operation.
Percentage restrictions on investment or use of assets as set forth above
are at the time a transaction is effected; later changes in percentages
(excluding the borrowing limitations) resulting from changing values will not be
considered a violation.
Investment restrictions (1) through (8) described above are fundamental
policies of the Fund which may be changed only when permitted by law and
approved by the holders of a majority of the Fund's Shares. Restrictions (9)
through (16) are nonfundamental policies of the Fund, and may be changed by a
vote of the Fund's Board of Directors.
In connection with investment restrictions (6), (7) and (8), arrangements
made by the Fund with respect to its transactions in all types of Hedging and
Other Strategic Transactions shall not be considered to be (i) a borrowing of
money, (ii) the issuance of securities by the Fund, (iii) a pledge of assets or
(iv) the purchase of a security on margin.
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<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the
Fund (and any positions held with affiliated persons of the Fund) for the past
five years are listed below.
Position(s) Held Principal Occupation(s)
Name and Address With the Fund Past 5 Years
- ---------------- ------------- -----------------------
Morris W. Offit* President, Chief President and Director,
OFFITBANK Executive Officer and OFFITBANK (1983-present).
520 Madison Avenue Director
New York, NY 10022
Age: 59 years
Robert A. Theleen* Director Group Chairman, ChinaVest
ChinaVest Limited Partnerships (1980-
19/F, 11 Duddell Street present); Director,
Central, Hong Kong ChinaVest Management
Age: 51 Years Ltd., Wah Ming Hong
Holdings Ltd., ZIC
Holdings and Tait
Holdings Ltd.; Former
Director, Luks Industrial
Co. Ltd..
John W. Glynn, Jr. Director President, Glynn Capital
Glynn Capital Management Management (1983 -
Building 4, Suite 235 present).
3000 Sand Hill Road
Menlo Park, Ca 94025
Age: 56 Years
Edward J. Landau Director Member, Lowenthal,
Lowenthal, Landau, Landau, Fischer & Bring,
Fischer & Bring, P.C. P.C. (1960-Present);
250 Park Avenue Director, Revlon Group
New York, NY 10177 Inc., Revlon Consumer
Age: 66 Years Products Inc., Pittsburgh
Annealing Box and Clad
Metals Inc.
- ---------------
* "Interested person" as defined in the 1940 Act.
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<PAGE>
The Very Reverend James Director Retired; formerly Dean of
Parks Morton Cathedral of St. John the
Cathedral of St. John Divine (1972 - 1996).
the Divine
1047 Amsterdam Avenue
New York, NY 10025
Age: 67 Years
Wallace Mathai-Davis* Secretary and Treasurer Managing Director,
OFFITBANK OFFITBANK (1986 -
520 Madison Avenue present).
New York, NY 10022
Age: 51 Years
Stephen Brent Wells Assistant Treasurer Managing Director,
OFFITBANK OFFITBANK (1994 to
230 Madison Avenue present).
New York, NY 10169
Age: 52 Years
Vincent M. Rella Assistant Treasurer Controller, OFFITBANK
OFFITBANK (1986 to present).
230 Madison Avenue
New York, NY 10169
Age: 45 Years
Michael Sakala Assistant Treasurer Vice President of BISYS
BISYS Fund Services Fund Services (April 1996
125 West 55th Street to present).
New York, NY 10019
Age: 31 Years
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<PAGE>
Kristine Kelly Assistant Secretary Manager of BISYS Fund
BISYS Fund Services Services (January 1997 to
125 West 55th Street present). Previously,
New York, NY 10019 Associate Director at
Age: 28 Years Furman Selz LLC,
(December 1994 to
December 1996); Senior
Accountant, The Bank of
New York, (June 1992 to
December 1994).
Alaina Metz Assistant Secretary Chief Administrative
BISYS Fund Services Officer of BISYS Fund
3435 Stelzer Road Services, (June 1995 to
Columbus, OH 43219 present). Previously,
Age: 30 Years Supervisor of Blue Sky
Department, Alliance
Capital Management, L.P.
(May 1989 to June 1995).
Bruce Treff Assistant Secretary Counsel of BISYS Fund
BISYS Fund Services Services, (September 1995
3435 Stelzer Road to present). Previously,
Columbus, OH 43219 Manager, Alliance Capital
Age: 30 Years Management, L.P.
* "Interested person" as defined in the 1940 Act.
The following table contains information regarding the aggregate
remuneration paid from November 19, 1996 (commencemnet of operations) through
April 30, 1997 to each of the three most highly compensated officers and all
directors of the Fund:
COMPENSATION TABLE
AGGREGATE
COMPENSATION
NAME OF PERSON, POSITION FROM THE FUND
------------------------ -------------
Morris W. Offit, President, Chief Executive Officer and Director $0
Robert A. Theleen, Director $0
John W. Glynn, Jr., Director $1,853.26
Edward J. Landau, Director $2,353.26
The Very Reverend James Parks Morton, Director $2,353.26
Wallace Mathai-Davis, Secretary and Treasurer $0
John J. Pileggi, Assistant Treasurer $0
11
<PAGE>
The Fund has no pension or retirement plan and pays no pension or
retirement benefits to its officers or directors.
The Fund pays each Director who is not also an officer or affiliated person
an annual fee of $3,000 and a fee of $500 for each Board of Directors and Board
committee meeting attended and Directors are reimbursed for all out-of-pocket
expenses relating to attendance at meetings. Directors who are affiliated with
the Adviser do not receive compensation from the Fund but are reimbursed for all
out-of-pocket expenses relating to attendance at meetings.
Officers and Trustees of the Fund, as a group, own less than 1% of the
outstanding shares of the Fund.
INVESTMENT ADVISER
The Fund has retained CVO Greater China Partners, L.P., a Delaware limited
partnership, to act as its investment adviser (the "Adviser"). The Adviser has
two general partners, OFFITBANK Greater China, Inc., a New York corporation
established in August 1994 as a wholly-owned subsidiary of OFFITBANK, a New York
State chartered trust company, and ChinaVest Public Equities, LLC, a California
limited liability corporation established in January 1995 as a wholly-owned
subsidiary of ChinaVest Financial Services, Ltd., a Cayman Islands corporation.
See "Management of the Fund" in the Prospectus.
The advisory agreement (the "Advisory Agreement") between the Adviser and
the Fund provides that the Adviser shall manage the operations of the Fund,
subject to policy established by the Board of Directors of the Fund. Pursuant
to the Advisory Agreement, the Adviser manages the Fund's investment portfolios,
directs purchases and sales of the portfolio securities and reports thereon to
the Fund's officers and directors regularly. The Adviser also furnishes office
space and certain facilities reasonably necessary for the performance of its
services under the Advisory Agreement, and provides the office space,
facilities, equipment and personnel necessary to perform the following services
for the Fund: Securities and Exchange Commission ("Commission") compliance,
including record keeping, reporting requirements and registration statements and
proxies; supervision of Fund operations, including custodian, accountants and
counsel and other parties performing services or operational functions for the
Fund. In addition, the Adviser pays the compensation of the Fund's officers,
employees and directors affiliated with the Adviser. The Fund bears all other
costs of its operations, including the compensation of its directors not
affiliated with the Adviser.
For its services under the Advisory Agreement, the Adviser receives from
the Fund an advisory fee. The fee is payable monthly at an annual rate of 1.25%
of the Fund's average daily net assets. The Adviser may waive all or part of
its fee from time to time in order to increase the Fund's net investment income
available for distribution to shareholders. The Fund will not be required to
reimburse the Adviser for any advisory fees waived.
The Advisory Agreement was approved by the Fund's Board of Directors on
October 27, 1994 and by the Fund's initial shareholder, Furman Selz LLC ("FSI"),
on June 1, 1995.
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<PAGE>
The Advisory Agreement will continue in effect with respect to the Fund until
December 31, 1997, and from year to year thereafter if such continuance is
approved at least annually by the Fund's Board of Directors or by a vote of
majority (as defined under "General Information -- Capital Stock") of the
outstanding Shares of the Fund, and, in either case, by a majority of the
directors who are not parties to the contract or "interested persons" (as
defined in the 1940 Act) of any party by votes cast in person at a meeting
called for such purpose. The Advisory Agreement may be terminated by the Fund
or the Adviser on 60 days' written notice, and will terminate immediately in the
event of its assignment.
DISTRIBUTOR
OFFIT Funds Distributor, Inc. (the "Distributor"), a wholly-owned
subsidiary of BISYS Fund Services Limited Partnership, d/b/a BISYS Fund Services
("BISYS"), with its principal office at 3435 Stelzer Road, Columbus, Ohio 43219,
distributes the Shares of the Fund. Under a distribution agreement with the
Fund (the "Distribution Agreement"), the Distributor, as agent of the Fund, acts
as sole distributor of the Fund's Shares. The distribution expenses incurred by
the Distributor in activities primarily intended to result in sales of Class I
and Class II Shares will be paid by the Adviser out of its own resources.
Solely for the purpose of reimbursing the Distributor for its expenses
incurred in certain activities primarily intended to result in the sale of
Class II Shares, the Fund has adopted a Plan of Distribution (the "Plan") under
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. Under the Plan and
Distribution Agreement, the Fund is authorized to spend for the account of Class
II Shares up to 0.25% of its average daily net assets attributable to Class II
Shares annually, to reimburse the Distributor for its activities primarily
intended to result in the sale of Class II Shares. The Fund will not reimburse
the Distributor for such distribution activities for a period of at least one
year following the commencement of the Fund's operations, and thereafter until
the Board of Directors of the Fund takes further action. During such period,
the Adviser will finance from its own resources all distribution activities in
connection with the solicitation of new investors in Class I and Class II
Shares. Other provisions of the Plan and the Distribution Agreement are
summarized in "Management of the Fund -- Distributor" in the Prospectus.
The Plan, together with the Distribution Agreement, will continue in effect
with respect to a particular Fund from year to year if such continuance is
approved at least annually by the Fund's Board of Directors and separately
approved by a majority of the Directors who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan
("Qualified Directors") and who are not an "interested person" (as defined in
the 1940 Act) of any party by votes cast in person at a meeting called for such
purpose. In approving the continuance of the Plan and the Distribution
Agreement, the Directors (and the Qualified Directors voting separately) must
determine that the Plan is in the best interest of the shareholders of the Fund.
The Plan requires that, at least quarterly, the Board of Directors must
review a written report enumerating the amounts expended and purposes therefor
under the Plan. Rule 12b-1 also requires that the selection and nomination of
Directors who are not "interested persons" of the Fund be made by such Qualified
Directors.
The Plan was approved by the Fund's Board of Directors on December 12,
1996.
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<PAGE>
ADMINISTRATION, SHAREHOLDER SERVICING, CUSTODY AND
TRANSFER AGENCY SERVICES
Effective January 1, 1997, BISYS became the successor Administrator to FSI
pursuant to an Administration Agreement dated January 1, 1997. BISYS Fund
Services, Inc. became the successor Transfer Agent and Fund Accounting Agent to
FSI pursuant to separate agreements each dated January 1, 1997, i.e. Fund
Accounting Agreement and Transfer Agency Agreement. The services provided by and
the fees payable to BISYS and BISYS Fund Services, Inc., respectively, for such
services are the same as those of FSI as described in the Prospectus. Pursuant
to the Administration Agreement, BISYS performs certain administrative and
clerical services. The Administration Agreement continues in effect until
December 31, 1997 and from year to year thereafter if such continuance is
approved at least annually by the Fund's Board of Directors and by a majority of
the Directors who are not parties to such Agreement or "interested persons" (as
defined in the 1940 Act).
BISYS Fund Services, Inc. serves as the Fund's Transfer Agent and Dividend
Disbursing Agent pursuant to a transfer agency agreement (the "Transfer Agency
Agreement") with the Fund. Under the Transfer Agency Agreement, BISYS Fund
Services, Inc. has agreed, among other things, to: (i) issue and redeem Shares
of the Fund; (ii) transmit all communications by the Fund to its shareholders of
record, including reports to shareholders, dividend and distribution notices and
proxy materials for meetings of shareholders; (iii) respond to correspondence by
security brokers and others relating to its duties; (iv) maintain shareholder
accounts; and (v) make periodic reports to the Board of Directors concerning the
Fund's operations. Under the Transfer Agency Agreement, BISYS Fund Services,
Inc. is entitled to a fee of $15 per account. Pursuant to the Fund Accounting
Agreement, BISYS Fund Services, Inc. performs certain accounting services,
including calculation of the Fund's net asset value.
Each of the Transfer Agency Agreement and Fund Accounting Agreement
continues in effect until December 31, 1997 and from year to year thereafter if
such continuance is approved at least annually by the Fund's Board of Directors
and by a majority of the Directors who are not parties to such Agreements or
"interested persons" (as defined in the 1940 Act) of any party, and such
Agreements may be terminated by either party on 60 days' written notice.
The fees paid to the Distributor as shareholder servicing agent are based
on the Fund's net assets attributable to the Class II Shares, reflecting the
higher cost of servicing the holders of said shares. The Distributor receives a
monthly shareholder servicing fee computed at an annual rate of 0.25% of the
average daily net assets of the Fund attributable to the Class II Shares. This
fee is allocated to Class II Shares only.
Investors Bank & Trust Company (the "Custodian") serves as the Fund's
custodian pursuant to a custodian agreement (the "Custodian Agreement") with the
Fund. The Custodian is located at 89 South Street, Boston, Massachusetts
02111. Under the Custodian Agreement, the Custodian has agreed to (i) maintain
a separate account or accounts in the name of the Fund; (ii) hold and disburse
portfolio securities on account of the Fund; (iii) collect and receive all
income and other payments and distributions on account of the Fund's portfolio
securities; (iv) respond to correspondence by security
14
<PAGE>
brokers and others relating to its duties; and (v) make periodic reports to the
Fund's Board of Directors concerning the Fund's operations. The Custodian is
authorized under the Custodian Agreement to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Fund, provided that the
Custodian remains responsible for the performance of all of its duties under the
Custodian Agreement. The Custodian is entitled to receive a fee under the
Custodian Agreement of 0.164% of the aggregate average daily net assets of the
Fund.
Except for the shareholders servicing fee, all of the foregoing fees and
expenses are allocated to both classes of Shares on a pro rata basis.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policy
established by the Fund's Board of Directors, the Adviser is primarily
responsible for the Fund's portfolio decisions and the placing of the Fund's
portfolio transactions.
Purchases and sales of securities on a stock exchange are effected through
brokers who charge a commission. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of the security usually
includes a profit to the dealer. In placing orders, it is the policy of the
Fund to obtain the best results taking into account the dealer's general
execution and operational facilities, the type of transactions involved and
other factors such as the dealer's risk in positioning the securities involved.
While the Adviser generally seeks the best price in placing the orders, the Fund
may not necessarily be paying the lowest price available.
Under the 1940 Act, persons affiliated with the Fund are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Commission. Affiliated persons of the Fund, or affiliated persons of such
persons, may from time to time be selected to execute portfolio transactions for
the Fund as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, 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. 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 agency
transaction.
PURCHASE OF SHARES
For information pertaining to the manner in which Shares are offered to the
public, see "Purchase of Shares" in the Prospectus. The Fund reserves the
right, in its sole discretion, to (i) suspend the offering of Shares, and (ii)
reject purchase orders when, in the judgment of management, such suspension or
rejection is in the best interest of the Fund. THE OFFICERS OF THE FUND IN
THEIR SOLE DISCRETION MAY, FROM TIME TO TIME, WAIVE THE MINIMUM INITIAL AND
SUBSEQUENT INVESTMENT REQUIREMENTS.
15
<PAGE>
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange (the "NYSE") or the bond
market is closed, or trading on the NYSE is restricted as determined by the
Commission, (ii) during any period when an emergency exists as defined by the
rules of the Commission as a result of which it is not reasonably practicable
for the Fund to dispose of securities owned by it, or fairly to determine the
value of its assets, and (iii) for such other periods as the Commission may
permit.
Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of the Fund, the Fund may pay the
redemption price, in whole or in part, by a distribution in kind.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part in investment securities or in cash, as the Board of
Directors may deem advisable; however, payment will be made wholly in cash
unless the Board of Directors believes that economic or market conditions exist
which would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be valued
as set forth in the Fund's Prospectus under "Calculation of Net Asset Value" and
redeeming shareholders would normally incur brokerage expense if they converted
these securities to cash.
No charge is made by the Fund for redemptions, except for the early
redemption charge as set forth in the Fund's Prospectus under "Redemption of
Shares." Redemption proceeds may be more or less than the shareholder's cost
depending on the market value of the securities held by the Fund.
PERFORMANCE CALCULATIONS
The Fund may from time to time quote various performance figures which will
be calculated separately for Class I and Class II Shares to illustrate the past
performance of the Fund. Performance quotations by investment companies are
subject to rules adopted by the Commission, which require the use of
standardized performance quotations or, alternatively, that every non-
standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the
Commission. An explanation of the Commission methods for computing performance
follows.
TOTAL RETURN
The Fund's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5 and 10 year periods (or, if shorter,
the period since inception of the Fund) that would equate an initial
hypothetical $1,000 investment in Class I or Class II Shares to its ending
redeemable value. The calculation assumes that all dividends and distributions
are reinvested when paid. The quotation assumes the invested amount was
completely redeemed at the end of each 1, 5 and 10 year period (or, if shorter,
the period since inception of the Fund) and the deduction of all applicable Fund
expenses on an annual basis. Average annual total return is calculated
according to the following formula:
n
P (1+T) = ERV
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<PAGE>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the stated period
For the period November 19, 1996 (inception date of the Funds) through
April 30, 1997 the total non-annualized return for the Class I and Class II
Shares of the Fund were 1.30% and 1.30%, respectively.
The Fund may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:
Aggregate Total Return = ERV - 1
---
P
In addition to total return, the Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the Commission and can be expressed as follows:
6
Yield = 2 [(a - b + 1) - 1]
-----
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by the Fund at a discount or
premium, the formula generally calls for amortizations of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.
The performance of the Fund may be compared to data prepared by independent
services which monitor the performance of investment companies, and may be
quoted in advertising in terms of their rankings in each applicable universe.
In addition, the Fund may use performance data reported in independent financial
and industry publications.
ADDITIONAL INFORMATION CONCERNING
DIVIDENDS, DISTRIBUTIONS AND TAXES
17
<PAGE>
The following discussion is only a brief summary of certain additional
dividend, distribution and tax considerations effecting the Fund, the Fund and
its shareholders. No attempt is made to present a detailed explanation of all
federal, state and local tax concerns, and the discussion set forth here and in
the Prospectus is not intended as a substitute for careful tax planning.
Investors are urged to consult their own tax advisers with specific questions
relating to federal, state or local taxes.
TAXATION OF DIVIDENDS AND DISTRIBUTIONS
Shareholders in the Fund will normally be required to pay federal and state
income taxes on the dividends and distributions they receive from the Fund.
Such dividends and distributions, to the extent derived from net investment
income or short-term capital gains, are taxable to the shareholder as ordinary
income regardless of whether the shareholder receives such payments in
additional Shares or in cash. Any dividends declared in the last quarter of any
year which are paid in the following year prior to February 1 will be deemed
received by the shareholder in the prior year.
As discussed in the Prospectus under "Dividend and Distributions," the Fund
will determine either to distribute or to retain all or part of any net long-
term capital gains in any year for reinvestment. If any such gains are
retained, the Fund will pay federal income tax thereon, and the shareholders (i)
will include such undistributed gains in determining their taxable income, (ii)
will be able to claim their share of the tax paid by the Fund as a credit
against their individual federal income tax, and (iii) will be entitled to a
basis adjustment of 65% of the amount of the gain allocated to the Shares.
Any dividend or capital gains distribution received by a shareholder from
any investment company will have the effect of reducing the net asset value of
the shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal income taxes. If the net asset value of the
Shares should be reduced below a shareholder's cost as a result of the payment
of dividends or the distribution of realized long-term capital gains, such
payment or distribution would be in part a return of the shareholder's
investment to the extent of such reduction below the shareholder's cost, but
nonetheless would be fully taxable. Therefore, an investor should consider the
tax implications of purchasing Shares immediately prior to a distribution record
date. Although the price of Shares purchased at that time may reflect the
amount of the forthcoming distribution, those purchasing just prior to a
distribution will receive a distribution which will nevertheless be taxable to
them.
Gain or loss, if any, on the shareholder's sale or other disposition of
Shares will generally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
Shares have been held by the shareholder for more than one year. However,
distributions of net long-term capital gains by the Fund, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Shares and regardless of whether the distribution is received in
additional Shares or in cash. In all other sales or dispositions of Shares, 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.
Currently, the maximum federal income tax rate imposed on individuals with
respect to net realized long-term capital gains is limited to 28%, whereas the
maximum federal income tax rate imposed on individuals with respect to net
realized short-term capital gains (which are taxed at the same rates as ordinary
income) is 39.6%.
Distributions in excess of the Fund's current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of
capital, to the extent of a shareholder's basis in his Shares, and as a capital
gain thereafter (if the shareholder held his or her Shares as capital assets).
18
<PAGE>
Shareholders receiving dividends or distributions in the form of additional
Shares should be treated for U.S. federal income tax purposes as receiving a
distribution in an amount equal to the amount of money that the shareholders
receiving cash dividends or distributions will receive and should have a cost
basis in the Shares received equal to such amount.
Any loss realized on the redemption by a shareholder of his Shares will be
disallowed to the extent the Shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains distributions
in the Fund, within a period (of 61 days) beginning 30 days before and ending
30 days after the disposition of the Shares. In such a case, the basis of the
Shares acquired will be increased to reflect the disallowed loss. Any loss
realized by a shareholder on the sale of a fund share held by the shareholder
for six months or less will be treated for United States income tax purposes as
a long-term capital loss to the extent of any distributions or deemed
distributions of long-term capital gains received by the shareholder with
respect to such share.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund intends to qualify as a regulated investment company (a "RIC")
under Subchapter M of the Internal Revenue Code (the "Code") and to continue to
so qualify. If so qualified, the Fund will not be subject to federal income tax
on its net investment income and net short-term capital gains, if any, realized
during any fiscal year to the extent that it distributes such income and capital
gains to its shareholders, other than any tax resulting from investing in
passive foreign investment companies, as discussed below. In addition, the Fund
intends to distribute to its shareholders each calendar year a sufficient amount
of ordinary income and capital gains to avoid the imposition of a 4% excise tax.
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stocks or securities, (b) derive
less than 30% of its gross income in each taxable year from the sale or other
disposition of any of the following held for less than three months: (i) stock
or securities, (ii) options, futures, or forward contracts, or (iii) foreign
currencies (or foreign currency options, futures or forward contracts) that are
not directly related to its principal business of investing in stock or
securities (or options and futures with respect to stocks or securities) (the
"30% limitation"); and (c) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the market 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 with
such other securities limited, in respect of any issuer, to an amount not
greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities (other than U.S. government securities or
the securities of other regulated investment companies) of any one issuer.
CERTAIN SPECIAL INVESTMENT TECHNIQUES
The Fund's investments in options, futures contracts and forward contracts,
options on futures contracts and stock indices and certain other securities,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or short-
term capital gain or loss upon exercise, lapse or closing out of the option or
sale of the underlying stock or security. By contrast, the Fund's treatment of
certain other options, futures and forward contracts entered into by the Fund is
generally governed by Section 1256 of the
19
<PAGE>
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Portfolio's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or short-
term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that they otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund Shares. In these ways, any or all of these rules may affect the amount,
character and timing of income earned and in turn distributed to shareholders by
the Fund.
When the Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
As a regulated investment company, the Fund is also subject to the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months ("short-short income"). This requirement may limit the
Fund's ability to engage in options, spreads, straddles, hedging transactions,
forward or futures contracts or options on any of these positions because these
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities reduce the holding periods of certain
securities within the Fund, resulting in additional short-short income for the
Fund.
The Fund will monitor its transactions in such options and contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
The tax treatment of certain securities in which the Fund may invest is not
free from doubt and it is possible that an Internal Revenue Service ("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 in the Prospectus 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). 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
20
<PAGE>
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.
FOREIGN CURRENCY TRANSACTIONS
In general, gains from foreign currencies and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies are currently
considered to be qualifying income for purposes of determining whether the Fund
qualifies as a regulated investment company. It is currently unclear, however,
who will be treated as the issuer of certain foreign currency instruments or how
foreign currency options, futures, or forward foreign currency contracts will be
valued for purposes of the regulated investment company diversification
requirements applicable to the Fund. The Fund may request a private letter
ruling from the Internal Revenue Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from forward contracts, from futures
contracts that are not "regulated futures contracts," and from unlisted options
will be treated as ordinary income or loss under Code Section 988. Also,
certain foreign exchange gains or losses derived with respect to foreign fixed-
income securities are also subject to Section 988 treatment. In general,
therefore, Code Section 988 gains or losses will increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Fund may not
be able to make any ordinary dividend distributions and distributions paid
during the year may be characterized for tax purposes as a return of capital.
Exchange control regulations may restrict repatriations of investment
income and capital or the proceeds of securities sales by foreign investors such
as the Fund and may limit the Fund's ability to pay sufficient dividends and to
make sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
The Fund's transactions, if any, in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) may be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the Fund
(i.e., may affect whether gains or losses are ordinary or capital), accelerated
recognition of income to the Fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These rules also (a) could require the Fund to mark to market
certain types of the positions in its portfolio (i.e., treat them as they were
closed out) and (b) 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.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
Certain of the Fund's investments may, for federal income tax purposes,
constitute investments in Shares of foreign corporations. In the event 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
21
<PAGE>
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.
On March 31, 1992, the IRS released proposed regulations providing a mark-
to-market election for regulated investment companies that would allow
investment companies investing in PFICS to avoid most, if not all, of the
difficulties posed by the PFIC rules. If approved, these regulations would be
effective for taxable years ending after promulgation of the regulations as
final regulations. The Fund may elect to mark to market stock in PFICs under
proposed regulations by the IRS. The Fund will attempt to minimize its holdings
in PFICs.
FOREIGN TAXES
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to dividends, capital gains and interest income. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Shareholders may be entitled to claim U.S. foreign tax
credits with respect to such taxes, subject to certain provisions and
limitations contained in the Code.
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 file with the
IRS an election pursuant to which shareholders of the Fund will be required to
(i) include in their respective pro rata portions of such withholding taxes in
their U.S. income tax returns as gross income, (ii) treat such respective pro
rata portions as taxes paid by them, and (iii) deduct such respective pro rata
portions in computing their taxable incomes or alternatively use them as foreign
tax credits against their U.S. income taxes. The Fund expects to make this
election in the near future. Shortly after any year for which it makes such an
election, the Fund will report to its shareholders, in writing, the amount per
share of such foreign income taxes that must be included in each shareholder's
gross income and the amount that will be available for deductions or credit.
In general, a shareholder may elect each year whether to claim deductions
or credits for foreign taxes. No deductions for foreign taxes may be claimed,
however, by non-corporate shareholders (including certain foreign shareholders
as described below) who do not itemize deductions. If a shareholder elects to
credit foreign taxes, the amount of credit that may be claimed in any year may
not exceed the same proportion of the U.S. tax against which such credit is
taken that the shareholder's taxable income from foreign sources (but not in
excess of the shareholder's entire taxable income) bears to his entire taxable
income. If the Fund makes this election, a shareholder will be treated as
receiving foreign source income in an amount equal to the sum of his
proportionate share of foreign income taxes paid by the Fund and the portion of
dividends paid by the Fund representing income earned from foreign sources.
This limitation may 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
22
<PAGE>
be withheld from dividends if (i) the payee fails to furnish the Fund with the
payee's correct taxpayer identification number, (ii) the Internal Revenue
Service notifies the Fund that the payee has failed to report properly certain
interest and dividend income to the Internal Revenue Service and to respond to
notices to that effect, or (iii) when required to do so, the payee fails to
certify that he or she is not subject to backup withholding.
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING SPECIFIC
QUESTIONS AS TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
OWNERSHIP OF SHARES IN ANY OF THE FUND.
SHAREHOLDER SERVICES
The following supplements the shareholder services set forth in the Fund's
Prospectus:
TRANSFER OF SHARES
Shareholders may transfer Shares of the Fund to another person by written
request to the Fund at the address noted above. The request should clearly
identify the account and number of Shares to be transferred and include the
signature of all registered owners and all share certificates, if any, which are
subject to the transfer. The signature on the letter of request, the share
certificate or any stock power must be guaranteed in the same manner as
described under "Redemption of Shares" in the Prospectus. As in the case of
redemptions, the written request must be received in good order before any
transfer can be made.
GENERAL INFORMATION
CAPITAL STOCK
All Shares of the Fund have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law.
Class I and Class II Shares of the Fund will vote separately in approving the
Fund's distribution plan and any shareholder servicing plan.
As used in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from all shareholders of the Fund
in connection with general matters affecting the Fund, means the vote of the
lesser of (i) 67% of the Fund's Shares represented at a meeting if the holders
of more than 50% of the outstanding Shares are present in person or by proxy or
(ii) more than 50% of the Fund's outstanding Shares. The term "majority," when
referring to the approvals to be obtained from shareholders in connection with
matters affecting the Fund or any other single Fund (e.g., approval of Advisory
Agreements), means the vote of the lesser of (i) 67% of the Shares of the Fund
represented at a meeting if the holders of more than 50% of the outstanding
Shares of the Fund are present in person or by proxy or (ii) more than 50% of
the outstanding Shares of the Fund. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional Shares held.
Class I Shares of the Fund are entitled to such dividends and distributions
out of the income earned on the assets attributable to Class I Shares as are
declared in the discretion of the Fund's Board of Directors. Class II Shares of
the Fund are entitled to such dividends and distributions out of the income
earned on the assets attributable to Class II Shares as are declared in the
discretion of the Fund's Board of Directors. In the event of the liquidation or
dissolution of the Fund, each class of Shares of the Fund is entitled to receive
the assets allocable to such class of Shares which are available for
distribution. Dividends declared by the Fund for each class of Shares will be
the same, except that dividends to
23
<PAGE>
Class II Shares will be less than dividends to Class I Shares due to the effect
of higher fees and expenses that will be assessed to Class II Shares.
Shareholders of the Fund are not entitled to any preemptive rights. All
Shares, when issued, will be fully paid, non-assessable, fully transferable and
redeemable at the option of the holder.
As of May 15, 1997, no person owned of record, or to the knowledge of
management, beneficially owned five percent or more of the outstanding shares of
the respective Fund or classes except as set forth below:
Cvo Greater China Fund - Class I Shares Owned Percentage Owned
- -------------------------------- ------------ ----------------
David I. Margolis 74,299.949 9.196%
147 E. 48th Street
New York, NY 10017-1223
Greenberg Family Fund LLC 125,000.000 15.471%
P.O. Box 2902
Southampton, NY 11969
Laureine Knight Greenbaum 43,816.943 5.423%
C/o David R. Greenbaum
330 Madison Avenue
New York, NY 10017-5001
Marvin H. Schein 50,505.051 6.251%
Cobble Court Crescent Beach Road
Glen Cove, NY 11542
Sheldon H. Solow 100,502.513 12.439%
9 West 57th Street
New York, NY 10019-2602
Mall Investment LP 100,000.000 12.377%
215 Keo Way
Des Moines, IA 50309-1726
Ulrich E. Meyer TTEE 50,000.000 6.188%
Ulrich R. Meyer Revocable Trust
4950 Chicago Beach Drive
Chicago, IL 60615-3207
As of the date of this Statement of Additional information, BISYS Fund
Services was the sole record and beneficial owner of all of the outstanding
Class II of Shares of the Fund's common stock and thus was deemed to "control"
the Class II Shares as that term is defined in the 1940 Act. The Shares held by
BISYS Fund Services are intended to enable the Fund to meet an initial
capitalization requirement imposed under the 1940 act. BISYS Fund Services has
represented that the Shares were purchased for investment purposes only and that
they will be
24
<PAGE>
sold only pursuant to a registration statement under the Securities Act of 1933,
as amended, or an applicable exemption from the registration requirements
thereof.
The Fund does not know the extent to which other holders of record were
beneficial owners of shares indicated.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the independent accountants for the Fund. The independent
accountants are responsible for auditing the annual financial statements of the
Fund.
REPORTS TO SHAREHOLDERS
The Fund will send to shareholders, at least semi-annually, reports showing
the Fund's portfolio and other information. An annual report containing
financial statements audited by independent accountants will be sent to
shareholders each year.
The Fund's fiscal year ends on the last day of October. The financial
statements of the Fund must be audited at least once a year by independent
accountants whose selection is made annually by the Fund's Board of Directors.
COUNSEL
McCutchen, Doyle, Brown & Enersen, L.L.P., 3 Embarcadero Center, San
Francisco, California 94111, serves as counsel to the Fund.
EXPERTS
The Statement of Assets and Liabilities of the Fund included in this
Statement of Additional Information and incorporated by reference in the
Prospectus has been so included and incorporated by reference in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information included in the Registration Statement filed with the
Commission under the Securities Act of 1933, as amended, with respect to the
securities offered by the Prospectus. Certain portions of the Registration
Statement have been omitted from the Prospectus and this Statement of Additional
Information pursuant to the rules and regulations of the Commission. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The financial statements for the period ended April 30, 1997 set forth below are
unaudited.
25
<PAGE>
CVO GREATER CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 15, 1996
ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Deferred organizational expenses
(Note 1). . . . . . . . . . . . . . . . . . . . . . $221,000
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . $321,000
------------
LIABILITIES:
Organizational expenses payable to
Adviser (Note 1) . . . . . . . . . . . . . . . . . $221,000
------------
Total Liabilities. . . . . . . . . . . . . . . . . . . $221,000
------------
COMMITMENTS (Notes 1 and 2). . . . . . . . . . . . . . --
NET ASSETS: $100,000
------------
------------
CVO Greater China Fund, Inc. - 5,000 shares
Class I, par value $.001 per share issued and
outstanding; 5 billion shares $50,000
authorized. . . . . . .
------------
------------
CVO Greater China Fund, Inc. - 5,000 shares
Class II, par value $.001 per share issued and
outstanding; 5 billion shares $50,000
authorized. . . . . . .
------------
------------
Net Asset Value Per Share (Class I and Class II) . . . $10.00
------
------
See accompanying Notes to Financial Statement
NOTES TO FINANCIAL STATEMENT
NOTE 1
26
<PAGE>
CVO Greater China Fund, Inc. (the "Fund") was incorporated in Maryland on
September 2, 1994. The Fund has had no operations other than those relating to
organizational matters and the issuance of 5,000 Class I and 5,000 Class II
Common Shares to Furman Selz LLC ("FSI"). The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and consists of two
classes of Shares, Class I and Class II. The Fund operates as a
non-diversified, open-end, management investment company. In the event that, at
any time during the five year period beginning with the effective date of the
Registration Statement, the initial shares acquired by FSI prior to such date
are redeemed by any holder thereof, the redemption proceeds payable in respect
of such shares will be reduced by the pro rata share (based on the proportionate
share of the initial shares redeemed to the total number of initial shares
outstanding at the time of such redemption) of the then unamortized
organizational expenses as of the date of such redemption. In the event that
the Fund liquidates before the deferred organizational expenses are fully
amortized, FSI shall bear such unamortized deferred organizational expenses.
NOTE 2
The Fund has entered into an investment advisory agreement (the "Investment
Advisory Agreement") with CVO Greater China Partners, L.P., a Delaware limited
partnership (the "Adviser"). The Investment Advisory Agreement provides for the
Fund to pay the Adviser an investment advisory fee calculated and accrued daily
and paid quarterly at the annual rate of 1.25% of the Fund's average daily net
assets. The Adviser will provide portfolio management and certain
administrative, clerical and bookkeeping services for the Fund.
The Fund has entered into a fund administration agreement (the
"Administration Agreement") with FSI in order to provide the Fund with
administrative, fund accounting, dividend disbursing and transfer agency
services. The services under the Administration Agreement are subject to the
supervision of the Fund's Board of Directors and officers and include day-to-day
administration of matters related to the corporate existence of the Fund,
maintenance of its records, preparation of reports, supervision of the Fund's
arrangement with its custodian and assistance in the preparation of the Fund's
Registration Statements under federal and state laws. Pursuant to the
Administration Agreement, the Fund will pay FSI the following fees for its
services: (i) a monthly administrator's fee computed at an annual rate of
0.15% of the average daily net assets of the Fund, (ii) an annual fund
accounting fee of $30,000, and (iii) a 0.25% shareholder servicing fee based on
the Fund's assets attributable to Class II Shares. The shareholder servicing
fee will be paid by Class II shareholders only. Certain officers and/or
directors of the Fund are officers and/or directors of the Administrator. The
Fund has retained the Administrator to manage the Fund's business affairs,
supervise the overall day-to-day operations of the Fund (other than rendering
investment advice) and provide all administrative services to the Fund. Under
the terms of the Fund Administration Agreement, the Administrator also maintains
certain of the Fund's books and furnishes, at its own expense, such office
space, facilities, equipment, supplies, clerical help and bookkeeping and legal
services as the Fund may reasonably require in the operation of its business.
The Fund has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. (the "Distributor"), a
wholly-owned subsidiary of Furman Selz Holding Corporation. Under the
Distribution Agreement, the Distributor, as agent of the Fund, has agreed to use
its best efforts as sole distributor of the Fund's Shares. Under the Plan of
Distribution, the Fund is authorized to spend up to 0.25% of the average daily
net assets of the Fund solely attributable to Class II shares to reimburse the
Distributor for its services.
27
<PAGE>
The Distribution Agreement provides that the Fund will bear the costs of
the registration of its Shares with the Securities and Exchange Commission and
various states and the printing of its prospectuses, statements of additional
information and reports to shareholders.
NOTE 3
The Fund's Articles of Amendment and Restatement authorize the issuance of
two classes of common Shares. The Fund's Board of Directors may, in the future,
authorize the issuance of additional classes of capital stock representing
Shares in the same or additional investment portfolios.
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of CVO Greater China Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of CVO Greater China
Fund, Inc. (the "Fund") at May 15, 1996 in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Fund's management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial
statement in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 17, 1996
29
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
APRIL 30, 1997
MARKET
SHARES VALUE
- --------------------------------------------------------------------------------
EQUITY SECURITIES (81.49%)
AUTOMOTIVE (1.60%)
HONG KONG
Qingling Motors Co............................. 240,000 (a) $ 131,672
---------
BANKING & FINANCIAL SERVICES (6.68%)
HONG KONG
Dao Heng Bank Group Ltd........................ 26,000 (a) 123,514
JCG Holdings Ltd............................... 128,000 (a) 102,446
Manhattan Card Company, Ltd.................... 244,000 (a) 75,595
SINGAPORE
Oversea Chinese Banking Corp................... 11,000 (b) 128,533
Overseas Union Bank Ltd........................ 18,000 (b) 118,231
---------
548,319
---------
BUILDING MATERIALS (1.68%)
TAIWAN
Pacific Construction Co........................ 130,000 (c) 137,708
---------
COMMERCIAL SERVICES (1.16%)
HONG KONG
Cosco Pacific Ltd.............................. 68,000 (a) 95,243
---------
COMPUTERS (9.47%)
HONG KONG
ASM Pacific Technology Ltd..................... 144,000 (a) 102,240
Founder Hong Kong Ltd.......................... 296,000 (a) 189,143
SINGAPORE
Acer Computer International Ltd................ 70,000 120,400
CSA Holding Ltd................................ 168,000 (b) 160,296
Elec & Eltek International Company, Ltd........ 36,000 205,200
---------
777,279
---------
CONTAINERS & PACKING (2.67%)
HONG KONG
Sinocan Holdings Ltd........................... 552,000 (a) 219,118
---------
DISTRIBUTION (5.18%)
HONG KONG
China Hong Kong Photo Products Holdings, Ltd... 320,000 (a) 100,174
Guangnan Holdings Ltd.......................... 124,000 (a) 178,480
Guangnan Holdings Ltd. - Warrant
(expiration 08/31/98)......................... 17,714 (a) 9,833
Li & Fung Ltd.................................. 136,000 (a) 136,939
---------
425,426
---------
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)(CONTINUED)
APRIL 30, 1997
MARKET
SHARES VALUE
- -------------------------------------------------------------------------------
EQUITY SECURITIES (CONTINUED)
DIVERSIFIED (12.65%)
HONG KONG
Cheung Kong (Holdings) Ltd..................... 12,000 (a) $ 105,338
China Resources Enterprises Ltd................ 60,000 (a) 165,752
Citic Pacific Ltd.............................. 20,000 (a) 108,178
First Pacific Company Ltd...................... 133,000 (a) 158,813
Guangdong Investment Co........................ 170,000 (a) 159,104
Hutchison Whampoa Ltd.......................... 15,000 (a) 111,340
Jardine Matheson Holdings Ltd.................. 18,000 99,000
Swire Pacific Ltd.............................. 17,000 (a) 131,123
---------
1,038,648
---------
ELECTRICAL EQUIPMENT (3.47%)
SINGAPORE
Clipsal Industries Ltd......................... 41,000 160,720
GP Batteries International Ltd................. 42,000 123,900
---------
284,620
---------
ELECTRONICS (4.57%)
HONG KONG
Varitronix International Ltd................... 68,000 (a) 94,804
VTech Holdings Ltd............................. 75,000 (a) 125,863
SINGAPORE
Thakral Corporation Ltd........................ 165,000 154,275
---------
374,942
---------
FOOD (6.25%)
HONG KONG
Tingyi (Cayman Islands) Holdings Co............ 720,000 (a) 175,666
SINGAPORE
Delifrance Asia Ltd............................ 164,000 (b)(3) 170,087
Want Want Holdings Ltd......................... 50,000 (3) 167,000
---------
512,753
---------
GAS (2.00%)
HONG KONG
Hong Kong & China Gas Company Ltd.............. 103,400 (a) 164,180
---------
HOME FURNISHINGS (1.38%)
SINGAPORE
Roly International Holdings Ltd................ 261,000 113,535
---------
IRON/STEEL (1.96%)
TAIWAN
China Steel ADS (144A)......................... 7,000 (1)(2) 161,000
---------
MEDICAL SUPPLIES (0.69%)
HONG KONG
China Pharmaceutical Enterprises &
Investment Corp................................ 291,000 (a) 56,348
---------
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)(CONTINUED)
APRIL 30, 1997
SHARES/
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------
EQUITY SECURITIES (CONTINUED)
PAPER PRODUCTS (1.46%)
HONG KONG
Climax International Co........................ 900,000 (a) $ 119,667
---------
PLASTICS (1.62%)
TAIWAN
China Synthetic Rubber Co...................... 75,000 (c) 132,863
---------
POWER ELECTRIC & UTILITIES (1.96%)
USA
Shandong Huaneng Power Co., Ltd. ADS........... 14,000 (2) 161,000
---------
REAL ESTATE (1.60%)
SINGAPORE
Keppel Land Ltd................................ 51,000 (b)(3) 131,174
---------
RETAIL (7.67%)
HONG KONG
Esprit Asia Holdings Ltd....................... 330,000 (a) 151,229
Giordano International Ltd..................... 132,000 (a) 71,568
Glorious Sun Enterprises....................... 300,000 (a)(3) 149,099
Goldlion Holdings Ltd.......................... 192,000 (a) 113,393
Jusco Stores (HK) Co........................... 580,000 (a) 144,504
---------
629,793
---------
TRANSPORTATION (5.77%)
HONG KONG
Guangshen Railway Co. Ltd...................... 338,000 (a) 161,440
New World Infrastructure Ltd................... 63,000 (a)(3) 178,106
Shenzhen Expressway Co......................... 406,000 (a)(3) 133,647
---------
473,193
---------
TOTAL EQUITY SECURITIES............................. 6,688,481
---------
CORPORATE BONDS (4.43%)
INDUSTRIAL GOODS & SERVICES (3.05%)
TAIWAN
Compal Electronics Convertible Bonds 1.00%,
11/21/03 (144A)................................ $100,000 (1) 140,500
Formosa Chemical & Fibre Corp. Convertible
Bonds 1.75%, 07/19/01 (144A)................... 100,000 (1) 109,500
---------
250,000
---------
TRANSPORTATION (1.38%)
TAIWAN
Yang Ming Marine Transport Convertible Bonds
2.00%, 10/06/01 (144A)......................... 100,000 (1) 113,250
---------
TOTAL CORPORATE BONDS............................... 363,250
---------
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)(CONTINUED)
APRIL 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM OBLIGATIONS (10.83%)
Investors Bank & Trust Co. Repurchase Agreement, 4.93%, 05/01/97 (dated 04/30/97,
proceeds $889,194, collateralized by $931,049 Federal Home Loan Mortgage
Corp. Pool# C00209, 7.50%, due 02/01/23, valued at $933,760). . . . . . . . . . $889,072 $ 889,072
----------
TOTAL INVESTMENTS ($7,859,586) (96.75%) . . . . . . . . . . . . . . . . . . . . . . . 7,940,803
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES (3.25%). . . . . . . . . . . . . . . . 266,886
----------
TOTAL NET ASSETS (100.00%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,207,689
----------
----------
</TABLE>
- ---------------------------------------------------
Principal denominated in the following currencies:
(a) Hong Kong Dollar (b) Singapore Dollar (c) Taiwan Dollar
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(2) American Depository Shares.
(3) Non-Income Producing.
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
CVO GREATER CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
APRIL 30, 1997
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at market value (cost $7,859,586) (Note 1a) . . . . . . . . . . . . . . . . . . . . $7,940,803
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257,668
Receivable from Adviser (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,652
Dividend and interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,624
Deferred organization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,209
Prepaid insurance expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,333
----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,432,289
LIABILITIES:
Organization expense payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,715
Other payables and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,885
----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,600
----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,207,689
----------
----------
NET ASSETS CONSIST OF:
Shares of capital stock, $0.001 par value per share, 810,569 issued and outstanding
(Note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 811
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,128,830
Accumulated net investment loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,846)
Undistributed net realized gain on investments and foreign currency transactions . . . . . . . . 677
Net unrealized appreciation on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,217
----------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,207,689
----------
----------
CLASS I SHARES:
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,157,111
----------
----------
SHARES OF CAPITAL STOCK OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805,569
----------
----------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.13
----------
----------
CLASS II SHARES:
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,578
----------
----------
SHARES OF CAPITAL STOCK OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
----------
----------
NET ASSET VALUE PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.12
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
CVO GREATER CHINA FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 19, 1996* THROUGH APRIL 30, 1997
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,350
Dividend income (net of foreign tax withholding of $1,282) . . . . . . . . . . . . . . . . . . . 24,726
-------
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,076
EXPENSES:
Advisory (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,196
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,174
Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,290
Amortization of organization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,506
Fund accounting (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,335
Professional. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,060
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,917
Administrative services (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,010
Printing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,235
Transfer and shareholder servicing agent (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . 2,817
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,240
-------
Total expenses before waivers/reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . 142,780
Less expenses waived/reimbursed (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,858)
--------
Net expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,922
--------
NET INVESTMENT LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,846)
--------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823
Net realized loss on foreign currency transactions. . . . . . . . . . . . . . . . . . . . . . . . (146)
Net unrealized appreciation on investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,217
-------
Net realized and unrealized gain on investments and foreign currency transactions. . . . . . . . 81,894
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . $ 78,048
--------
--------
</TABLE>
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
CVO GREATER CHINA FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 19, 1996* THROUGH APRIL 30, 1997
<TABLE>
- ----------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM:
OPERATIONS
<S> <C>
Net investment loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,846)
Net realized gain on investments and foreign currency transactions . . . . . 677
Net unrealized appreciation on investments . . . . . . . . . . . . . . . . . 81,217
----------
Net increase in net assets resulting from operations . . . . . . . . . . . . 78,048
----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase in net assets from capital share transactions . . . . . . . . . 8,029,611
----------
Total increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . 8,107,659
NET ASSETS
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,030
----------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,207,689
----------
----------
</TABLE>
* Commencement of operations.
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
CVO GREATER CHINA FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 19, 1996* THROUGH APRIL 30, 1997
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK
OUTSTANDING THROUGH THE PERIOD:
<TABLE>
- ------------------------------------------------------------------------------------
<S> <C>
CLASS I SHARES:
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $10.00
------
Net investment incomeq . . . . . . . . . . . . . . . 0.00
Net realized and unrealized gains. . . . . . . . . . 0.13
------
Total from investment operations . . . . . . . . . . 0.13
------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $10.13
------
------
TOTAL INVESTMENT RETURN**. . . . . . . . . . . . . . . 1.30%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) . . . . . . $8,157
Ratios to average net assets:
Expenses . . . . . . . . . . . . . . . . . . . . . . 2.00% (1) (2)
Net investment income. . . . . . . . . . . . . . . . (0.14)% (1)
PORTFOLIO TURNOVER RATE. . . . . . . . . . . . . . . . 0.04%
AVERAGE COMMISSION RATE +. . . . . . . . . . . . . . . $0.004
CLASS II SHARES:
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $10.00
------
Net investment income. . . . . . . . . . . . . . . . 0.00
Net realized and unrealized gains. . . . . . . . . . 0.12
------
Total from investment operations . . . . . . . . . . 0.12
------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $10.12
------
------
TOTAL INVESTMENT RETURN**. . . . . . . . . . . . . . . 1.30%
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) . . . . . . $51
Ratios to average net assets:
Expenses . . . . . . . . . . . . . . . . . . . . . . 2.00% (1) (2)
Net investment income. . . . . . . . . . . . . . . . (0.14)% (1)
PORTFOLIO TURNOVER RATE. . . . . . . . . . . . . . . . 0.04%
AVERAGE COMMISSION RATE +. . . . . . . . . . . . . . . $0.004
</TABLE>
- ---------------------
*Commencement of operations.
** Not annualized. Total return is based on the change in net asset value
during the period and assumes reinvestment of all dividends and
distributions.
(1) Annualized.
(2) If the Fund had borne all expenses that were assumed or waived by the
Adviser and Administrator, the above expense ratio would have been 5.33%
(annualized).
+ A fund is required to disclose its average commission rate per
share for security trades on which commissions are charged. This amount
may vary from period to period and fund to fund depending on the mix of
trades executed in various markets where trading practices and commission
rate structures may differ.
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES. CVO Greater China Fund, Inc. (the "Fund")
was incorporated in Maryland on September 2, 1994. The Fund is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
operates as a non-diversified, no-load, open-end, management investment company
and offers two classes of shares: Class I Shares, which are offered to
institutional investors, and Class II Shares, which are offered to
non-institutional investors. Each class of shares outstanding bears the same
voting, dividend, liquidation and other rights and conditions, except that Class
II Shares are expected to bear additional shareholder servicing expenses.
The following are significant accounting policies followed by the Fund in the
preparation of its financial statements:
a. VALUATION OF SECURITIES. Equity securities for which the primary market is
outside the U.S. are valued using the closing price or the last sale price.
Equity securities for which the primary market is the U.S. are valued at the
last sale price. Short-term obligations having maturities of 60 days or less
are valued at amortized cost as reflecting fair value, and if applicable,
adjusted for foreign exchange translation. Securities for which market
quotations are not readily available are valued at fair value determined in good
faith by or under the direction of the Fund's Board of Directors. Securities
quoted in foreign currencies initially are valued in the currency in which they
are denominated and then are translated into U.S. dollars at the prevailing
foreign exchange rate. 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.
b. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Fund are
maintained in U.S. dollars. Assets and liabilities denominated in foreign
currencies are translated as follows:
i. market value of investment securities and other assets and
liabilities - at the exchange rate on the valuation date;
ii. purchases and sales of investment securities, income and expenses - at
the exchange rate prevailing on the respective date of such
transactions.
The resultant foreign exchange gains and losses are included in the Statement of
Operations. The Fund does not isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market price of
securities.
c. ORGANIZATIONAL EXPENSES. Costs incurred in connection with the organization
and initial registration of the Fund have been deferred and are being amortized
over a sixty-month period, beginning with the Fund's commencement of operations.
d. DETERMINATION OF NET ASSET VALUE AND ALLOCATION OF EXPENSES. In calculating
net asset value per share of each class, investment income, realized and
unrealized gains and losses and expenses other than class specific expenses, are
allocated daily to each class of shares based upon the proportion of net assets
of each class at the beginning of each day. Shareholder servicing fees are
solely borne by Class II Shares.
e. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex dividend date and interest income, including, where
applicable, amortization of premium and accretion of discount on investments, is
accrued daily.
f. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income and distributions of net realized gains are declared and paid at least
annually by the Fund. The Fund records dividends and distributions to
shareholders on the ex dividend date.
38
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
- --------------------------------------------------------------------------------
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either temporary or permanent in nature, and to
the extent such differences are permanent in nature, these amounts are
reclassified within the capital acounts based on their federal tax-basis
treatment; temporary differences do not require a reclassification. Dividends
and distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
g. FEDERAL INCOME TAXES. The Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and
distributes all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
h. USE OF ESTIMATES. Estimates and assumptions are required to be made
regarding assets, liabilities, and changes in net assets resulting from
operations when financial statements are prepared in accordance with generally
accepted accounting principles. Actual results could differ from these amounts.
2. INVESTMENT ADVISORY, ADMINISTRATION AND DISTRIBUTION AGREEMENTS. The Fund
has entered into an investment advisory agreement (the "Investment Advisory
Agreement") with CVO Greater China Partners, L.P. (the "Adviser"). The
Investment Advisory Agreement provides that the Fund pays the Adviser an
investment advisory fee that is calculated daily and paid monthly on the average
daily net assets of the Fund at the annual rate of 1.25%. The Adviser provides
portfolio management and certain administrative, clerical and bookkeeping
services for the Fund. For the period ended April 30, 1997, the Adviser earned
and waived fees of $33,196.
Prior to January 1, 1997, Furman Selz LLC ("Furman Selz") provided the Fund with
administrative, fund accounting, shareholder servicing, dividend disbursing and
transfer agency services pursuant to an administration agreement (the
"Administration Agreement"). The services under the Administration Agreement
were subject to the supervision of the Fund's Board of Directors and officers
and included the day-to-day administration of matters related to the corporate
existence of the Fund, maintenance of its records, preparation of reports,
supervision of the Fund's arrangements with its custodian and assistance in the
preparation of the Fund's registration statements under federal and state laws.
Pursuant to the Administration Agreement, the Fund paid Furman Selz a monthly
fee for its services which on an annualized basis did not exceed 0.15% of the
average daily net assets of the Fund. From November 19, 1996 to December 31,
1996, Furman Selz earned and waived fees of $798.
As Administrator, Furman Selz provided the Fund with fund accounting and related
services. For these services Furman Selz was paid a fee of $2,500 per month.
From November 19, 1996 to December 31, 1996, Furman Selz earned fees, including
reimbursement of out of pocket expenses, of $3,939.
Furman Selz served as Shareholder Servicing Agent for the Fund. The fees paid
to Furman Selz were based on the Fund's net assets attributable to the Class II
Shares, reflecting the higher cost of servicing the holders of said shares.
Furman Selz received a monthly shareholder servicing fee computed at an annual
rate of 0.25% of the average daily net assets of the Fund attributable to the
Class II Shares. This fee was allocated to Class II Shares only, as payment for
answering inquiries and requests for Fund information by Class II shareholders.
From November 19, 1996 to December 31, 1996, no shareholder servicing fees were
incurred.
Furman Selz acted as Transfer Agent for the Fund and received reimbursement of
certain expenses plus a per account fee of $15 per year. From November 19, 1996
to December 31, 1996, Furman Selz earned fees of $2,146.
39
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
- --------------------------------------------------------------------------------
The Fund has entered into a distribution agreement (the "Distribution
Agreement") with OFFIT Funds Distributor, Inc. Under the Distribution
Agreement, the Distributor, as agent of the Fund, agrees to use its best efforts
as sole distributor of the Fund's shares. Under the Plan of Distribution, the
Fund is authorized to spend up to 0.25% of its average daily net assets of the
Fund solely attributable to Class II Shares for the purpose of compensating the
Distributor for activities primarily intended to result in the sales of Class II
Shares. The Distribution Agreement provides that the Fund will bear the costs
of the registration of its shares with the Commission and various states and the
printing of its prospectuses, statements of additional information and reports
to shareholders. For the period ended April 30, 1997, no distribution costs
were incurred.
On October 1, 1996, the Fund entered into agreements with BISYS Fund Services
("BISYS") pursuant to which BISYS performs the administrative, accounting,
shareholder servicing and transfer agency services described above on
substantially similar terms. BISYS also acquired from Furman Selz its interest
in OFFIT Funds Distributor, Inc. The agreements became effective on January 1,
1997.
From January 1, 1997 to April 30, 1997, BISYS earned administrative services
fees, fund accounting fees and transfer agent fees, amounting to $3,212, $11,396
and $671, respectively. During the same period, BISYS waived the administrative
services fees for the Fund. No shareholder servicing fees were incurred.
The Adviser has voluntarily agreed to limit the expense ratio for the Fund at
2.00%. In order to maintain this ratio, the Adviser has waived its advisory fee
and has agreed to reimburse the Fund $51,652.
3. INVESTMENTS. Purchase and sales of securities for the period ended April
30, 1997, other than short-term securities, amounted to $6,970,606 and $1,715,
respectively for the Fund. The cost of securities is substantially the same for
Federal income tax purposes as it is for financial reporting purposes.
FUND
------
Aggregate cost . . . . . . . . . . . . . . . $7,859,586
----------
----------
Gross unrealized appreciation $593,464
Gross unrealized depreciation (512,247)
----------
Net unrealized appreciation $81,217
----------
----------
The Fund may purchase instruments from financial institutions, such as banks and
broker-dealers, subject to the seller's agreement to repurchase them at an
agreed upon time and price ("repurchase agreements"). The seller under a
repurchase agreement is required to maintain the value of the securities
subject to the agreement at not less than the repurchase price. Default by the
seller would, however, expose the relevant Fund to possible loss because of
adverse market action or delay in connection with the disposition of the
underlying obligations.
40
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
- --------------------------------------------------------------------------------
4. CAPITAL STOCK TRANSACTIONS. The Fund's Articles of Incorporation permit the
Fund to issue ten billion shares (par value $0.001). Transactions in shares of
common stock for the period ended April 30, 1997, were as follows:
CLASS I SHARES
------------------------------
SHARES AMOUNT
---------- ----------
Shares sold. . . . . . . . . . . . . . 800,837 $8,032,337
Shares issued in
reinvestment of dividends
and distributions . . . . . . . . . . 0 0
Shares redeemed. . . . . . . . . . . . (271) (2,726)
------- -----------
Net increase . . . . . . . . . . . . . 800,566 $8,029,611
------- -----------
------- -----------
5. OTHER MATTERS. The Fund invests primarily in the Greater China Region which
consists of the People's Republic of China, Hong Kong, Taiwan and Singapore.
Investments are made in obligations of foreign entities and securities
denominated in foreign currencies involve risk not typically involved in
domestic investments. Such risks include fluctuations in the foreign exchange
rates, ability to convert proceeds into U.S. dollars, application of foreign tax
laws, foreign investments restrictions, less publically available information
about foreign financial instruments, less liquidity resulting from substantially
less trading volume, more volatile prices and generally less government
supervision of foreign markets and issuers.
41
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Financial Statements included in Part A of this Registration
Statement:
1. Financial Highlights for the Period Ended April 30, 1997
(unaudited)
Financial Statements included in Part B of this Registration
Statement:
1. Schedule of Portfolio Investments (unaudited)
2. Statement of Changes in Net Assets for the Period Ended April
30, 1997 (unaudited)
3. Statement of Assets and Liabilities dated April 30, 1997
(unaudited)
4. Statement of Operations for the Period ended April 30, 1997
(unaudited)
5. Financial Highlights for the Period ended April 30, 1997
(unaudited)
6. Notes to Financial Statements dated April 30, 1997
(unaudited)
7. Statement of Assets and Liabilities and Notes Thereto as of
May 15, 1996
8. Report of Independent Accountants
(b) Exhibits
Exhibit Description
Number -----------
-------
1 -- Registrant's Articles of Amendment and Restatement.*
2 -- Registrant's By-Laws.*
3 -- None.
4(a) -- Form of Stock Certificate for shares of Class I
Stock.*
4(b) -- Form of Stock Certificate for shares of Class II
Stock.*
5 -- Form of Advisory Agreement between Registrant and
CVO Greater China Partners, L.P.*
C-1
<PAGE>
6 -- Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc.**
7 -- None.
8 -- Form of Custodian Agreement between Registrant and
Investors Bank & Trust Company.*
9(a) -- Administration Agreement between Registrant and
BISYS Fund Services.**
9(b) -- Transfer Agency Agreement between Registrant and
BISYS Fund Services.**
9(c) -- Form of Dealer and Selling Group Agreement.**
9(d) -- Fund Accounting Agreement between Registrant and
BISYS Fund Services.**
10 -- Opinion and Consent of Piper and Marbury.*
11(a) -- Consent of Price Waterhouse LLP.**
12 -- None.
13 -- Form of Share Purchase Agreement between Registrant
and OFFIT Funds Distributor, Inc.*
14 -- None.
15 -- Form of Rule 12b-1Plan of Distribution.*
16 -- Schedule of Computation of Performance
Calculation**.
17 -- Financial Data Schedule**.
18 -- None.
__________________
* Previously filed on April 17, 1996 as part of Pre-Effective Amendment
Number Two and incorporated by reference herein.
** Filed with this Post Effective Amendment Number One on May 30, 1997.
Item 25. PERSONS CONTROLLED BY OR UNDER
COMMON CONTROL WITH REGISTRANT.
Registrant is controlled by its Board of Directors.
C-2
<PAGE>
Item 26. NUMBER OF HOLDERS OF SECURITIES.
Title of Class Number of Record
-------------- Holders at April 30, 1997
CVO Greater China Fund, Inc. - Class I
par value $.001 per share. . . . . 30
CVO Greater China Fund, Inc. - Class II,
par value $.001 per share. . . . . 1
Item 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Amendment and
Restatement (Exhibit 1 hereto), Article IV of Registrant's By-laws (Exhibit 2
hereto) and Section 4 of the Form of Distribution Agreement between Registrant
and OFFIT Funds Distributor, Inc. (Exhibit 6 hereto).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser provides asset management services solely to the Fund. The
general partners of the Adviser provide investment management services to
individuals, institutions and retirement benefits plans.
To the knowledge of Registrant, none of the directors or executive
officers of the general partners of the Adviser except those described below,
are or have been, at any time during the past two years, engaged in any other
business, profession, vocation or employment of a substantial nature.
Position with
OFFITBANK Principal Occupation or Other
Greater Employment of a Substantial
Name China, Inc.. Nature During the Past Two Years
---- ------------ --------------------------------
C-3
<PAGE>
Morris W. Offit President and President and Director, OFFITBANK
Chairman (1983 - present)
of the Board
Wallace Mathai-Davis Secretary, Managing Director, OFFITBANK
Treasurer (1986 - present)
and Director
Position with
ChinaVest Principal Occupation or Other
Public Employment of a Substantial Nature
Name Equities, LLC During the Past Two Years
---- ------------- ------------------
Edward C. Collins Manager Attorney, McCutchen, Doyle, Brown
& Enersen (1988 - January 1995):
Managing Director, ChinaVest,
Inc., a California corporation
(January 1995 - present)
Jenny H. Theleen Manager Managing Director, ChinaVest
Ltd. (1985 - present); Secretary-
Treasurer, ChinaVest, Inc.
(January 1995 - present)
Item 29. PRINCIPAL UNDERWRITER.
(a) In addition to the Registrant, OFFIT Funds Distributor, Inc. (a
wholly-owned subsidiary of BISYS Fund Services) currently acts as distributor to
CVO Greater China Fund, Inc. OFFIT Funds Distributor, Inc. is registered with
the Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc..
(b) The information required by this Item 29(b) with respect to each
director, officer or partner of OFFIT Funds Distributor, Inc. is incorporated by
reference to Schedule A of Form BD filed by OFFIT Funds Distributor, Inc.
pursuant to the Securities and Exchange Act of 1934, as amended (SEC File No.
801-12425).
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other records relating to the Fund that are
required to be maintained by Section 31(a) of the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules thereunder will be maintained
at the offices of the Fund's administrator, BISYS Fund Services, 3435 Stelzer
Road, Columbus, Ohio 43219.
Item 31. MANAGEMENT SERVICES.
Not applicable.
Item 32. UNDERTAKINGS.
C-4
<PAGE>
(a) Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of one or more of Registrant's
directors when requested in writing to do so by the holders of at least 10% of
Registrant's outstanding shares of common stock and, in connection with such
meeting, to assist in communications with other shareholders in this regard, as
provided under Section 16(c) of the 1940 Act.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485 (b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of New York and State of New York on the
30th day of May, 1997.
CVO GREATER CHINA FUND, INC.
By: /s/ Morris W. Offit
-------------------------------
Morris W. Offit, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on the 30th day of May, 1997.
Signature Title
--------- -----
/s/ MORRIS W. OFFIT
------------------------------------
Morris W. Offit President, Chief Executive
Officer and Director (Principal
Executive Officer)
/s/ ROBERT A. THELEEN
------------------------------------
Robert A. Theleen Director
/s/ EDWARD J. LANDAU
------------------------------------
Edward J. Landau Director
/s/ JAMES PARKS MORTON
------------------------------------
The Very Reverend James Parks Morton Director
/s/ JOHN W. GLYNN, JR.
------------------------------------
John W. Glynn, Jr. Director
/s/ WALLACE MATHAI-DAVIS
------------------------------------
Wallace Mathai-Davis Secretary and Treasurer
(Principal Financial and
Accounting Officer)
C-6
<PAGE>
1 -- Registrant's Articles of Amendment and Restatement.*
2 -- Registrant's By-Laws.*
4(a) -- Form of Stock Certificate for shares of Class I Stock.*
4(b) -- Form of Stock Certificate for shares of Class II Stock.*
5 -- Form of Advisory Agreement between Registrant and CVO Greater
China Partners, L.P.*
6 -- Distribution Agreement between Registrant and OFFIT Funds
Distributor, Inc.**
8 -- Form of Custodian Agreement between Registrant and Investors
Bank & Trust Company.*
9(a) -- Fund Administration Agreement between Registrant and BISYS Fund
Services, Inc.**
9(b) -- Transfer Agency Agreement between Registrant and BISYS Fund
Services, Inc.**
9(c) -- Form of Dealer and Selling Group Agreement.**
9(d) -- Fund Accounting Agreement between Registrant and BISYS Fund
Services, Inc.**
10 -- Opinion and Consent of Piper and Marbury.*
11(a) -- Consent of Price Waterhouse LLP.**
13 -- Form of Share Purchase Agreement between Registrant and OFFIT
Funds Distributor, Inc.*
15 -- Form of Rule 12b-1 Plan of Distribution.*
16 -- Schedule of Computation of Performance Calculation.**
17 -- Financial Data Schedules.**
C-7
<PAGE>
_________________
* Previously filed on April 17, 1996 as part of Pre-Effective
Amendment Number Two.
** Filed on May 30, 1997 as part of Post Effective Amendment Number
One.
C-8
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of January, 1997, between CVO GREATER CHINA
FUND, INC. (the "Company"), a Maryland corporation, and OFFIT FUNDS DISTRIBUTOR,
INC. ("Distributor"), a Delaware corporation.
WHEREAS, the Company is an open-end management investment company,
organized as a Maryland corporation and registered with the Securities and
Exchange Commission (the "Commission") under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, it is intended that Distributor act as the distributor of the
units of beneficial interest ("Shares") of each of the investment portfolios of
the Company (such portfolios being referred to individually as a "Fund" and
collectively as the "Funds").
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AS DISTRIBUTOR; CONVERSION TO THE SERVICES.
1.1 Distributor will act as agent for the distribution of the Shares
covered by the registration statement and prospectus of the Company then in
effect under the Securities Act of 1933, as amended (the "Securities Act"). As
used in this Agreement, the term "registration statement" shall mean Parts A
(the prospectus), B (the Statement of Additional Information) and C of each
registration statement that is filed on Form N-1A, or any successor thereto,
with the Commission, together with any amendments thereto. The term
"prospectus" shall mean each form of prospectus and Statement of Additional
Information used by the Funds for delivery to shareholders and prospective
shareholders after the effective dates of the above-referenced registration
statements, together with any amendments and supplements thereto.
1.2 Distributor agrees to use appropriate efforts to solicit orders
for the sale of the Shares and will undertake such advertising and promotion as
it believes reasonable in connection with such solicitation. The Company
understands that Distributor is now and may in the future be the distributor of
the shares of several investment companies or series (together, "Investment
Companies") including Companies having investment objectives similar to those of
the Company. The Company further understands that investors and potential
investors in the Company may invest in shares of such other Investment
Companies. The Company agrees that Distributor's duties to such Investment
Companies shall not be deemed in conflict with its duties to the Company under
this paragraph 1.2.
Distributor shall, at its own expense, finance appropriate
activities which it deems reasonable, which are primarily intended to result in
the sale of the Shares, including, but not limited to, advertising, compensation
of underwriters, dealers and sales personnel, the printing and
<PAGE>
mailing of prospectuses to other than current Shareholders, and the printing and
mailing of sales literature.
1.3 In its capacity as distributor of the Shares, all activities of
Distributor and its partners, agents, and employees shall comply with all
applicable laws, rules and regulations, including, without limitation, the 1940
Act, all rules and regulations promulgated by the Commission thereunder and all
rules and regulations adopted by any securities association registered under the
Securities Exchange Act of 1934.
1.4 Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Company.
1.5 Distributor will transmit any orders received by it for purchase
or redemption of the Shares to the transfer agent and custodian for the Funds.
1.6 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Company's officers may decline to accept any orders for, or make any
sales of, the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7 Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others.
1.8 The Company agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
1.9 The Company shall furnish from time to time, for use in
connection with the sale of the Shares, such information with respect to the
Funds and the Shares as Distributor may reasonably request; and the Company
warrants that the statements contained in any such information shall fairly show
or represent what they purport to show or represent. The Company shall also
furnish Distributor upon request with: (a) unaudited semi-annual statements of
the Funds' books and accounts prepared by the Company, (b) a monthly itemized
list of the securities in the Funds, (c) monthly balance sheets as soon as
practicable after the end of each month, and (d) from time to time such
additional information regarding the financial condition of the Funds as
Distributor may reasonably request.
1.10 The Company represents to Distributor that, with respect to the
Shares, all registration statements and prospectuses filed by the Company with
the Commission under the Securities Act have been carefully prepared in
conformity with requirements of said Act and rules and regulations of the
Commission thereunder. The registration statement and prospectus contain all
statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission and all statements of fact contained in
any such registration statement and
2
<PAGE>
prospectus are true and correct. Furthermore, neither any registration
statement nor any prospectus includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading to a purchaser of the Shares. The
Company may, but shall not be obligated to, propose from time to time such
amendment or amendments to any registration statement and such supplement or
supplements to any prospectus as, in the light of future developments, may, in
the opinion of the Company's counsel, be necessary or advisable. If the
Company's counsel shall determine that such amendment/amendments or
supplement/supplements is/are necessary or advisable and the Company shall not
propose such amendment or amendments and/or supplement or supplements within
fifteen days after receipt by the Company of a written request from Distributor
to do so, Distributor may, at its option, terminate this Agreement. The Company
shall not file any amendment to any registration statement or supplement to any
prospectus without giving Distributor reasonable notice thereof in advance;
provided, however, that nothing contained in this Agreement shall in any way
limit the Company's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus, of whatever
character, as the Company may deem advisable, such right being in all respects
absolute and unconditional.
1.11 The Company authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Company agrees to indemnify, defend and hold Distributor,
its several partners and employees, and any person who controls Distributor
within the meaning of Section 15 of the Securities Act free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which Distributor, its partners
and employees, or any such controlling person, may incur under the Securities
Act or under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in any
registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to state a material fact required to be stated in
either any registration statement or any prospectus or necessary to make the
statements in either thereof not misleading; provided, however, that the
Company's agreement to indemnify Distributor, its partners or employees, and any
such controlling person shall not be deemed to cover any claims, demands,
liabilities or expenses arising out of any statements or representations as are
contained in any prospectus and in such financial and other statements as are
furnished in writing to the Company by Distributor and used in the answers to
the registration statement or in the corresponding statements made in the
prospectus, or arising out of or based upon any omission or alleged omission to
state a material fact in connection with the giving of such information required
to be stated in such answers or necessary to make the answers not misleading;
and further provided that the Company's agreement to indemnify Distributor and
the Company's representations and warranties hereinbefore set forth in paragraph
1.10 shall not be deemed to cover any liability to the Company or its
Shareholders to which Distributor would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of Distributor's reckless disregard of its obligations and
duties under this Agreement. The Company's agreement to indemnify Distributor,
its partners and employees and any such controlling person, as aforesaid, is
expressly conditioned upon the Company being notified of any action
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<PAGE>
brought against Distributor, its partners or employees, or any such controlling
person, such notification to be given by letter or by telegram addressed to the
Company at its principal office in Columbus, Ohio and sent to the Company by the
person against whom such action is brought, within 10 days after the summons or
other first legal process shall have been served. The failure to so notify the
Company of any such action shall not relieve the Company from any liability
which the Company may have to the person against whom such action is brought by
reason of any such untrue, or allegedly untrue, statement or omission, or
alleged omission, otherwise than on account of the Company's indemnity agreement
contained in this paragraph 1.11. The Company will be entitled to assume the
defense of any suit brought to enforce any such claim, demand or liability, but,
in such case, such defense shall be conducted by counsel of good standing chosen
by the Company and approved by Distributor, which approval shall not be
unreasonably withheld. In the event the Company elects to assume the defense of
any such suit and retain counsel of good standing approved by Distributor, the
defendant or defendants in such suit shall bear the fees and expenses of any
additional counsel retained by any of them; but in case the Company does not
elect to assume the defense of any such suit, or in case Distributor reasonably
does not approve of counsel chosen by the Company, the Company will reimburse
Distributor, its partners and employees, or the controlling person or persons
named as defendant or defendants in such suit, for the fees and expenses of any
counsel retained by Distributor or them. The Company's indemnification
agreement contained in this paragraph 1.11 and the Company's representations and
warranties in this Agreement shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of Distributor, its
partners and employees, or any controlling person, and shall survive the
delivery of any Shares.
This Agreement of indemnity will inure exclusively to
Distributor's benefit, to the benefit of its several partners and employees, and
their respective estates, and to the benefit of the controlling persons and
their successors. The Company agrees promptly to notify Distributor of the
commencement of any litigation or proceedings against the Company or any of its
officers or Directors in connection with the issue and sale of any Shares.
1.12 Distributor agrees to indemnify, defend and hold the Company, its
several officers and Directors and any person who controls the Company within
the meaning of Section 15 of the Securities Act free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
costs of investigating or defending such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) which the Company, its officers
or Directors or any such controlling person, may incur under the Securities Act
or under common law or otherwise, but only to the extent that such liability or
expense incurred by the Company, its officers or Directors or such controlling
person resulting from such claims or demands, shall arise out of or be based
upon any untrue, or alleged untrue, statement of a material fact contained in
information furnished in writing by Distributor to the Company and used in the
answers to any of the items of the registration statement or in the
corresponding statements made in the prospectus, or shall arise out of or be
based upon any omission, or alleged omission, to state a material fact in
connection with such information furnished in writing by Distributor to the
Company required to be stated in such answers or necessary to make such
information not misleading. Distributor's agreement to indemnify the
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<PAGE>
Company, its officers and Directors, and any such controlling person, as
aforesaid, is expressly conditioned upon Distributor being notified of any
action brought against the Company, its officers or Directors, or any such
controlling person, such notification to be given by letter or telegram
addressed to Distributor at its principal office in Columbus, Ohio, and sent to
Distributor by the person against whom such action is brought, within 10 days
after the summons or other first legal process shall have been served.
Distributor shall have the right of first control of the defense of such action,
with counsel of its own choosing, satisfactory to the Company, if such action is
based solely upon such alleged misstatement or omission on Distributor's part,
and in any other event the Company, its officers or Directors or such
controlling person shall each have the right to participate in the defense or
preparation of the defense of any such action. The failure to so notify
Distributor of any such action shall not relieve Distributor from any liability
which Distributor may have to the Company, its officers or Directors, or to such
controlling person by reason of any such untrue or alleged untrue statement, or
omission or alleged omission, otherwise than on account of Distributor's
indemnity agreement contained in this paragraph 1.12.
1.13 No Shares shall be offered by either Distributor or the Company
under any of the provisions of this Agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Company if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act or if and so long as a current prospectus as required by Section
10(b)(2) of said Act is not on file with the Commission; provided, however, that
nothing contained in this paragraph 1.13 shall in any way restrict or have an
application to or bearing upon the Company's obligation to repurchase Shares
from any Shareholder in accordance with the provisions of the Company's
prospectus, Articles of Incorporation, or Bylaws.
1.14 The Company agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Commission for amendments to the
registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Commission of any stop
order suspending the effectiveness of the registration
statement or prospectus then in effect or the initiation by
service of process on the Company of any proceeding for that
purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration
statement or prospectus then in effect or which requires the
making of a change in such registration statement or
prospectus in order to make the statements therein not
misleading; and
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<PAGE>
(d) of all action of the Commission with respect to any
amendment to any registration statement or prospectus which
may from time to time be filed with the Commission.
For purposes of this section, informal requests by or acts of the
Staff of the Commission shall not be deemed actions of or requests by the
Commission.
1.15 Distributor agrees on behalf of itself and its partners and
employees to treat confidentially and as proprietary information of the Company
all records and other information relative to the Company and its prior, present
or potential Shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except, after prior notification to and approval in writing by the Company,
which approval shall not be unreasonably withheld and may not be withheld where
Distributor may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Company.
1.16 This Agreement shall be governed by the laws of the State of New
York.
2. FEE.
Distributor shall receive from the Funds identified in the
Distribution and Shareholder Service Plan attached as Schedule A hereto (the
"Distribution Plan Funds") a distribution fee at the rate and upon the terms and
conditions set forth in such Plan. The distribution fee shall be accrued daily
and shall be paid on the first business day of each month, or at such time(s) as
the Distributor shall reasonably request.
3. SALE AND PAYMENT.
Shares of a Fund may be subject to a sales load and may be subject to
the imposition of a distribution fee pursuant to the Distribution and
Shareholder Service Plan referred to above. To the extent that Shares of a Fund
are sold at an offering price which includes a sales load or at net asset value
subject to a contingent deferred sales load with respect to certain redemptions
(either within a single class of Shares or pursuant to two or more classes of
Shares), such Shares shall hereinafter be referred to collectively as "Load
Shares" (in the case of Shares that are sold with a front-end sales load or
Shares that are sold subject to a contingent deferred sales load), "Front-End
Load Shares" or "CDSL Shares" and individually as a "Load Share," a "Front-End
Load Share" or a "CDSL Share." A Fund that contains Front-End Load Shares shall
hereinafter be referred to collectively as "Load Funds" or "Front-End Load
Funds" and individually as a "Load Fund" or a "Front-end Load Fund." A Fund
that contains CDSL Shares shall hereinafter be referred to collectively as "Load
Funds" or "CDSL Funds" and individually as a "Load Fund" or a "CDSL Fund."
Under this Agreement, the following provisions shall apply with respect to the
sale of, and payment for, Load Shares.
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<PAGE>
3.1 Distributor shall have the right to purchase Load Shares at their
net asset value and to sell such Load Shares to the public against orders
therefor at the applicable public offering price, as defined in Section 4
hereof. Distributor shall also have the right to sell Load Shares to dealers
against orders therefor at the public offering price less a concession
determined by Distributor, which concession shall not exceed the amount of the
sales charge or underwriting discount, if any, referred to in Section 4 below.
3.2 Prior to the time of delivery of any Load Shares by a Load Fund
to, or on the order of, Distributor, Distributor shall pay or cause to be paid
to the Load Fund or to its order an amount in Boston or New York clearing house
funds equal to the applicable net asset value of such Shares. Distributor may
retain so much of any sales charge or underwriting discount as is not allowed by
Distributor as a concession to dealers.
4. PUBLIC OFFERING PRICE.
The public offering price of a Load Share shall be the net asset value
of such Load Share, plus any applicable sales charge, all as set forth in the
current prospectus of the Load Fund. The net asset value of Shares shall be
determined in accordance with the provisions of the Articles of Incorporation
and Bylaws of the Company and the then-current prospectus of the Load Fund.
5. ISSUANCE OF SHARES.
The Company reserves the right to issue, transfer or sell Load Shares
at net asset value (a) in connection with the merger or consolidation of the
Company or the Load Fund(s) with any other investment company or the acquisition
by the Company or the Load Fund(s) of all or substantially all of the assets or
of the outstanding Shares of any other investment company; (b) in connection
with a pro rata distribution directly to the holders of Shares in the nature of
a stock dividend or split; (c) upon the exercise of subscription rights granted
to the holders of Shares on a pro rata basis; (d) in connection with the
issuance of Load Shares pursuant to any exchange and reinvestment privileges
described in any then-current prospectus of the Load Fund; and (e) otherwise in
accordance with any then-current prospectus of the Load Fund.
6. TERM, DURATION AND TERMINATION.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the date this Agreement is executed by both parties and
ending on December 31, 1997. Thereafter, if not terminated, this Agreement
shall continue with respect to a particular Fund automatically for successive
one-year terms, provided that such continuance is specifically approved at least
annually by (a) the vote of a majority of those members of the Company's Board
of Directors who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting for the purpose of voting on such
approval, and (b) the vote of the Company's Board of Directors or the vote of a
majority of the outstanding voting securities of such Fund. This Agreement is
terminable without penalty, on not less than sixty days' prior written notice,
by the
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<PAGE>
Company's Board of Directors, by vote of a majority of the outstanding voting
securities of the Company or by the Distributor. This Agreement will also
terminate automatically in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and assignment" shall have the same meanings as ascribed to
such terms in the 1940 Act.)
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first written
above.
CVO GREATER CHINA FUND, INC. OFFIT FUNDS DISTRIBUTOR, INC.
By: /s/ Illegible By: /s/ George O. Martinez
--------------------------------- ------------------------------
Title: Assistant Treasurer Title: Senior Vice President
------------------------------- --------------------------
Date: December 31, 1996 Date: January 22, 1997
------------------------------- --------------------------
8
<PAGE>
Dated: January 1, 1997
SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
BETWEEN
CVO GREATER CHINA FUND, INC.
AND
OFFIT FUNDS DISTRIBUTOR, INC.
DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
<PAGE>
ADMINISTRATION AGREEMENT
THIS AGREEMENT is made as of this 1st day of January, 1997, by and between
CVO GREATER CHINA FUND, INC., a Maryland corporation (the "Company"), and BISYS
FUND SERVICES LIMITED PARTNERSHIP, d/b/a BISYS FUND SERVICES (the
"Administrator"), an Ohio limited partnership.
WHEREAS, the Company is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), consisting of several series of shares of common stock ("Shares"); and
WHEREAS, the Company desires the Administrator to provide, and the
Administrator is willing to provide, management and administrative services to
such series of the Company as the Company and the Administrator may agree on
("Portfolios") and as listed on Schedule A attached hereto and made a part of
this Agreement, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Company and the Administrator hereby agree as
follows:
ARTICLE 1. RETENTION OF THE ADMINISTRATOR. The Company hereby engages
the Administrator to act as the administrator of the Portfolios and to furnish
the Portfolios with the management and administrative services as set forth in
Article 2 below. The Administrator hereby accepts such engagement and agrees to
perform the duties set forth below.
The Administrator shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Company in any way and shall
not be deemed an agent of the Company.
ARTICLE 2. ADMINISTRATIVE SERVICES. The Administrator shall perform or
supervise the performance by others of administrative services in connection
with the operations of the Portfolios, and, on behalf of the Company, will
investigate, assist in the selection of and conduct relations with custodians,
depositories, accountants, legal counsel, underwriters, brokers and dealers,
corporate fiduciaries, insurers, banks and persons in any other capacity deemed
to be necessary or desirable for the Portfolios' operations. The Administrator
shall provide the Directors of the Company with such reports regarding
investment performance as they may reasonably request but shall have no
responsibility for supervising the performance by any investment adviser or
sub-adviser of its responsibilities.
The Administrator shall provide the Company with regulatory reporting, all
necessary office space, equipment, personnel, compensation and facilities
(including facilities for meetings of shareholders ("Shareholders") and
directors of the Company) for handling the affairs of the Portfolios and such
other services as the Administrator shall, from time to time, determine to be
<PAGE>
necessary to perform its obligations under this Agreement. In addition, at the
request of the Board of Directors, the Administrator shall make reports to the
Company's Directors concerning the performance of its obligations hereunder.
Without limiting the generality of the foregoing, the Administrator shall:
(a) calculate contractual Company expenses and control all disbursements
for the Company, and as appropriate compute the Company's yields,
total return, expense ratios, portfolio turnover rate and, if
required, portfolio average dollar-weighted maturity;
(b) prepare and file with the SEC Post-Effective Amendments to the
Company's Registration Statement, Notices of Annual or Special
Meetings of Shareholders and Proxy materials relating to such
meetings; accumulate information for and, subject to the approval by
the Company's Treasurer, prepare reports to the Company's shareholders
of record and the SEC including, but not necessarily limited to, the
preparation and filing of (i) Semi-Annual Reports on Form N-SAR and
(ii) Notices pursuant to Rule 24f-2;
(c) prepare such reports, applications and documents (including reports
regarding the sale and redemption of Shares as may be required in
order to comply with Federal and state securities law) as may be
necessary or desirable to register the Company's Shares with state
securities authorities, monitor the sale of Company Shares for
compliance with state securities laws, and file with the appropriate
state securities authorities the registration statements and reports
for the Company and the Company's Shares and all amendments thereto,
as may be necessary or convenient to register and keep effective the
Company and the Company's Shares with state securities authorities to
enable the Company to make a continuous offering of its Shares;
(d) review and provide advice and counsel on all sales literature (E.G.,
advertisements, brochures and shareholder communications) with respect
to each of the Portfolios;
(e) administer contracts on behalf of the Company with, among others, the
Company's investment adviser, distributor, custodian, transfer agent
and fund accountant;
(f) supervise the Company's transfer agent with respect to the payment of
dividends and other distributions to Shareholders;
(g) calculate performance data of the Portfolios for dissemination to
information services covering the investment company industry;
(h) coordinate and supervise the preparation and filing of the Company's
tax returns;
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<PAGE>
(i) examine and review the operations and performance of the various
organizations providing services to the Company or any Portfolio of
the Company, including, without limitation, the Company's investment
adviser, distributor, custodian, fund accountant, transfer agent,
outside legal counsel and independent public accountants, and at the
request of the Board of Directors, report to the Board on the
performance of organizations;
(j) assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and printing of the
Company's semi-annual and annual reports to Shareholders;
(k) assist with the design, development, and operation of the Portfolios,
including new classes, investment objectives, policies and structure;
(l) provide individuals reasonably acceptable to the Company's Board of
Directors to serve as officers of the Company, who will be responsible
for the management of certain of the Company's affairs as determined
by the Company's Board of Directors;
(m) advise the Company and its Board of Directors on matters concerning
the Company and its affairs;
(n) obtain and keep in effect fidelity bonds and directors and
officers/errors and omissions insurance policies for the Company in
accordance with the requirements of Rules 17g-1 and 17d-1(d)(7) under
the 1940 Act as such bonds and policies are approved by the Company's
Board of Directors;
(o) monitor and advise the Company and its Portfolios on their regulated
investment company status under the Internal Revenue Code of 1986, as
amended;
(p) perform all administrative services and functions of the Company and
each Portfolio to the extent administrative services and functions are
not provided to the Company or such Portfolio pursuant to the
Company's or such Portfolio's investment advisory agreement,
distribution agreement, custodian agreement, transfer agent agreement
and fund accounting agreement;
(q) furnish advice and recommendations with respect to other aspects of
the business and affairs of the Portfolios as the Company and the
Administrator shall determine desirable; and
(r) assist in monitoring and developing compliance procedures for each
Portfolio which will include, among other matters, procedures to
monitor compliance with each Portfolio's investment objective,
policies, restrictions, tax matters and applicable laws and
regulations;
3
<PAGE>
(s) monitor the Company's arrangements with respect to services provided
by financial institutions which are, or wish to become, shareholder
servicing agents for the Company ("Shareholder Servicing Agents").
With respect to Shareholder Servicing Agents, the Administrator shall
specifically monitor and review the services rendered by the
Shareholder Servicing Agents to their customers, who are the
beneficial owners of Shares, pursuant to agreements between the
Company and such Shareholder Servicing Agents ("Shareholder Servicing
Agreements"), including, among other things, reviewing the
qualifications of financial institutions wishing to be Shareholder
Servicing Agents, assisting in the execution and delivery of
Shareholder Servicing Agreements, reporting to the Board of Directors
with respect to the amounts paid or payable by the Company from time
to time under the Shareholder Servicing Agreements and the nature of
the services provided by Shareholder Servicing Agents, and maintaining
appropriate records in connection with its monitoring duties; and
(t) provide legal advice and counsel to the Company with respect to
regulatory matters including: monitoring regulatory and legislative
developments which may affect the Company and assisting in the
strategic response to such developments, counseling and assisting the
Company in routine regulatory examinations or investigations of the
Company, and working closely with outside counsel to the Company in
response to any litigation or non-routine regulatory matters.
In performing its duties as administrator of the Company, the Administrator
(i) will act in accordance with the Articles of Incorporation, By-Laws and
prospectuses of the Company and with the instructions and directions of the
Board of Directors of the Company and will conform to and comply with the
requirements of the 1940 Act and all other applicable federal or state laws and
regulations and (ii) will consult with legal counsel to the Company, as
necessary and appropriate.
The Administrator shall perform such other services for the Company that
are mutually agreed upon by the parties from time to time. Such services may
include performing internal audit examinations; mailing the annual reports of
the Portfolios; preparing an annual list of Shareholders; and mailing notices of
Shareholders' meetings, proxies and proxy statements, for all of which the
Company will pay the Administrator's out-of-pocket expenses.
ARTICLE 3. ALLOCATION OF CHARGES AND EXPENSES.
(A) THE ADMINISTRATOR. The Administrator shall furnish at its own expense
the executive, supervisory and clerical personnel necessary to perform its
obligations under this Agreement. The Administrator shall also provide the
items which it is obligated to provide under this Agreement, and shall pay all
compensation, if any, of officers of the Company as well as all Directors of the
Company who are affiliated persons of the Administrator or any affiliated
corporation of the Administrator; provided, however, that unless otherwise
specifically provided, the Administrator
4
<PAGE>
shall not be obligated to pay the compensation of any employee of the Company
retained by the Directors of the Company to perform services on behalf of the
Company.
(B) THE COMPANY. The Company assumes and shall pay or cause to be paid
all other expenses of the Company not otherwise allocated herein, including,
without limitation, taxes; interest; fees (including fees paid to its Directors
who are not affiliated with the investment adviser or any of its affiliates);
fees payable to the Securities and Exchange Commission; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing Shareholders; advisory and
administration fees; charges of the custodian and transfer agent; insurance
premiums; auditing and legal expenses; costs of shareholders' reports and
Shareholders' meetings; any extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or sale of portfolio
securities.
ARTICLE 4. COMPENSATION OF THE ADMINISTRATOR.
(A) ADMINISTRATION FEE. For the services to be rendered, the facilities
furnished and the expenses assumed by the Administrator pursuant to this
Agreement, the Company shall pay to the Administrator compensation at an annual
rate specified in Schedule A attached hereto. Such compensation shall be
calculated and accrued daily, and paid to the Administrator monthly.
If this Agreement becomes effective subsequent to the first day of a
month or termination of this Agreement occurs before the last day of a month,
the Administrator's compensation for that part of the month in which this
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fees as set forth above. Payment of the Administrator's
compensation for the preceding month shall be made promptly.
(B) SURVIVAL OF COMPENSATION RIGHTS. All rights of compensation under
this Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 5. LIMITATION OF LIABILITY OF THE ADMINISTRATOR. The duties of
the Administrator shall be confined to those expressly set forth herein, and no
implied duties are assumed by or may be asserted against the Administrator
hereunder. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any act or omission in carrying
out its duties hereunder, except a loss resulting from willful misfeasance, bad
faith or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties hereunder, except as may otherwise be
provided under provisions of applicable law which cannot be waived or modified
hereby. (As used in this Article 5, the term "Administrator" shall include
partners, officers, employees and other agents of the Administrator as well as
the Administrator itself.)
So long as the Administrator acts in good faith and with due diligence and
without negligence or reckless disregard of its obligations hereunder, the
Company assumes full responsibility and shall indemnify the Administrator and
hold it harmless from and against any and all actions, suits and claims, whether
groundless or otherwise, and from and against any and all
5
<PAGE>
losses, damages, costs, charges, reasonable counsel fees and disbursements,
payments, expenses and liabilities (including reasonable investigation expenses)
arising directly or indirectly out of the Administrator's actions taken or
nonactions with respect to the performance of services hereunder. The
Administrator agrees to indemnify and hold harmless the Company, its employees,
agents, Directors, officers and nominees from and against any and all actions,
suits and claims, whether groundless or otherwise, and from and against any and
all judgements, liabilities, losses, damages, costs, charges, reasonable counsel
fees and other expenses of every nature and character arising out of or in any
way relating to the Administrator's bad faith, willful misfeasance, negligence
or reckless disregard by it of its obligations and duties, with respect to the
performance of services under this Agreement. The indemnity and defense
provisions set forth herein shall indefinitely survive the termination of this
Agreement.
The rights hereunder shall include the right to reasonable advances of
defense expenses in the event of any pending or threatened litigation with
respect to which indemnification hereunder may ultimately be merited. In order
that the indemnification provision contained herein shall apply, however, it is
understood that if in any case the indemnifying party may be asked to indemnify
or hold the other party harmless, the indemnifying party shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the indemnified party will use all reasonable
care to identify and notify the indemnifying party promptly concerning any
situation which presents or appears likely to present the probability of such a
claim for indemnification against the indemnifying party, but failure to do so
in good faith shall not affect the rights hereunder.
The indemnifying party shall be entitled to participate at its own expense
or, if it so elects, to assume the defense of any suit brought to enforce any
claims subject to this indemnity provision. If the indemnifying party elects to
assume the defense of any such claim, the defense shall be conducted by counsel
chosen by the indemnifying party and satisfactory to the other party, whose
approval shall not be unreasonably withheld. In the event that the indemnifying
party elects to assume the defense of any suit and retain counsel, the
indemnified party shall bear the fees and expenses of any additional counsel
retained by it. If the indemnifying party does not elect to assume the defense
of a suit, it will reimburse the other party for the reasonable fees and
expenses of any counsel retained by the other party.
The Administrator may apply to the Company at any time for instructions and
may consult counsel for the Company or its own counsel and with accountants and
other experts with respect to any matter arising in connection with the
Administrator's duties, and the Administrator shall not be liable or accountable
for any action taken or omitted by it in good faith in accordance with such
instructions or with the opinion of such counsel, accountants or other experts.
Also, the Administrator shall be protected in acting upon any document
which it reasonably believes to be genuine and to have been signed or presented
by the proper person or persons. The Administrator will not be held to have
notice of any change of authority of any officers, employees or agents of the
Company until receipt of written notice thereof from the Company.
6
<PAGE>
ARTICLE 6. ACTIVITIES OF THE ADMINISTRATOR. The services of the
Administrator rendered to the Company are not to be deemed to be exclusive. The
Administrator is free to render such services to others and to have other
businesses and interests. It is understood that directors, officers, employees
and Shareholders are or may be or become interested in the Administrator, as
officers, employees or otherwise and that partners, officers and employees of
the Administrator and its counsel are or may be or become similarly interested
in the Company, and that the Administrator may be or become interested in the
Company as a Shareholder or otherwise.
ARTICLE 7. DURATION OF THIS AGREEMENT. The Term of this Agreement shall
be as specified in Schedule A hereto.
ARTICLE 8. ASSIGNMENT. This Agreement shall not be assignable by either
party without the written consent of the other party; provided, however, that
the Administrator may, at its expense, subcontract with any entity or person
concerning the provision of the services contemplated hereunder. The
Administrator shall not, however, be relieved of any of its obligations under
this Agreement by the appointment of such subcontractor and provided further,
that the Administrator shall be responsible, to the extent provided in Article 5
hereof, for all acts of such subcontractor as if such acts were its own. This
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
ARTICLE 9. AMENDMENTS. This Agreement may be amended by the parties
hereto only if such amendment is specifically approved (i) by the vote of a
majority of the Directors of the Company, and (ii) by the vote of a majority of
the Directors of the Company who are not parties to this Agreement or interested
persons of any such party, cast in person at a Board of Directors meeting called
for the purpose of voting on such approval.
For special cases, the parties hereto may amend such procedures set forth
herein as may be appropriate or practical under the circumstances, and the
Administrator may conclusively assume that any special procedure which has been
approved by the Company does not conflict with or violate any requirements of
its Articles of Incorporation or then current prospectuses, or any rule,
regulation or requirement of any regulatory body.
ARTICLE 10. CERTAIN RECORDS. The Administrator shall maintain customary
records in connection with its duties as specified in this Agreement. Any
records required to be maintained and preserved pursuant to Rules 31a-1 and
31a-2 under the 1940 Act which are prepared or maintained by the Administrator
on behalf of the Company shall be prepared and maintained at the expense of the
Administrator, but shall be the property of the Company and will be made
available to or surrendered promptly to the Company on request.
In case of any request or demand for the inspection of such records by
another party, the Administrator shall notify the Company and follow the
Company's instructions as to permitting or refusing such inspection; provided
that the Administrator may exhibit such records to any person in any case where
it is advised by its counsel that it may be held liable for failure to do so,
unless (in
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<PAGE>
cases involving potential exposure only to civil liability) the Company has
agreed to indemnify the Administrator against such liability.
ARTICLE 11. DEFINITIONS OF CERTAIN TERMS. The terms "interested person"
and "affiliated person," when used in this Agreement, shall have the respective
meanings specified in the 1940 Act and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission.
ARTICLE 12. NOTICE. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient if sent by registered or
certified mail, postage prepaid, addressed by the party giving notice to the
other party at the following address: if to the Administrator, to it at 3435
Stelzer Road, Suite 1000, Columbus, Ohio 43219; if to the Company, to it at
3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219, or at such other address
as such party may from time to time specify in writing to the other party
pursuant to this Section.
ARTICLE 13. GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of New York and the applicable provisions
of the 1940 Act. To the extent that the applicable laws of the State of New
York, or any of the provisions herein, conflict with the applicable provisions
of the 1940 Act, the latter shall control.
ARTICLE 14. MULTIPLE ORIGINALS. This Agreement may be executed in two or
more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
CVO GREATER CHINA FUND, INC.
By:
----------------------------------------
Title: Assistant Treasurer
---------------------------------------
BISYS FUND SERVICES LIMITED PARTNERSHIP
BY: BISYS FUND SERVICES, INC.,
GENERAL PARTNER
By:
----------------------------------------
Title: Executive Vice President
---------------------------------------
8
<PAGE>
SCHEDULE A
TO THE ADMINISTRATION AGREEMENT
DATED AS OF JANUARY 1, 1997
BETWEEN CVO GREATER CHINA FUND, INC.
AND
BISYS FUND SERVICES LIMITED PARTNERSHIP
Portfolios: This Agreement shall apply to all Portfolios of the Company,
either now or hereafter created (collectively, the "Portfolios").
The current portfolio of the Company is set forth below:
CVO Greater China Fund
Fees: Pursuant to Article 4, in consideration of services rendered and
expenses assumed pursuant to this Agreement, the Company will pay
the Administrator on the first business day of each month, or at
such time(s) as the Administrator shall request and the parties
hereto shall agree, a fee computed daily at the annual rate of:
Fifteen one-hundredths of one percent (.15%) of the
Company's average daily net assets.
The fee for the period from the day of the month this Agreement is
entered into until the end of that month shall be prorated according
to the proportion which such period bears to the full monthly period.
Upon any termination of this Agreement before the end of any month,
the fee for such part of a month shall be prorated according to the
proportion which such period bears to the full monthly period and
shall be payable upon the date of termination of this Agreement.
For purposes of determining the fees payable to the Administrator, the
value of the net assets of a particular Portfolio shall be computed in
the manner described in the Company's Articles of Incorporation or in
the Prospectus or Statement of Additional Information respecting that
Portfolio as from time to time is in effect for the computation of the
value of such net assets in connection with the determination of the
liquidating value of the shares of such Portfolio.
The parties hereby confirm that the fees payable hereunder shall be
applied to each Portfolio as a whole, and not to separate classes of
shares within the Portfolios.
Term: The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on January 1, 1997 and ending on December 31, 1997.
Thereafter, unless otherwise terminated as provided herein, this
Agreement shall be renewed automatically for successive one-year
periods ("Rollover Periods"). This Agreement
A-1
<PAGE>
may be terminated without penalty (i) by provision of 60 days advance
written notice of nonrenewal to the other party prior to the end of
the Initial Term or the then-current Rollover Period, (ii) by mutual
agreement of the parties, (iii) for "cause," as defined below, upon
the provision of 60 days advance written notice by the party alleging
cause, or (iv) by provision of 90 days advance written notice of
termination during a Rollover Period.
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on the
part of the party to be terminated with respect to its obligations and
duties set forth herein; (b) multiple negligent acts on the part of
the party to be terminated which in the aggregate constitute a serious
failure to perform satisfactorily that party's obligations hereunder;
(c) a material breach of this Agreement that has not been remedied for
45 days following receipt of written notice of such breach from the
nonbreaching party; or (d) a "service standard deficiency," as defined
below.
For purposes of this Agreement, a service standard deficiency shall be
defined as (i) any pattern of substandard performance over a 60-day
period with respect to such service standards as the parties shall
agree upon relating to the duties and obligations of the Administrator
herein or to the duties and obligations of the Administrator or an
affiliate of the Administrator pursuant to any other service agreement
with the Company ("Service Standards") or (ii) any "asset withdrawal,"
as defined below, by a Shareholder which, in the aggregate, exceeds $1
million, that can be reasonably attributed to a failure on the part of
the Administrator or an affiliate of the Administrator to meet one or
more Service Standards. For purposes of this Agreement, "asset
withdrawal" shall include any combination of (i) a redemption of
Company Shares and/or (ii) a withdrawal of assets from any non-mutual
fund account or other mutual fund account held by a Company
Shareholder that is advised by the Company's investment adviser or an
affiliate of such investment adviser. A copy of the current Service
Standards that have been agreed upon by the parties is attached hereto
and made a part hereof.
Notwithstanding the foregoing, after such termination, for so long as
the Administrator, with the written consent of the Company, in fact
continues to perform any one or more of the services contemplated by
this Agreement or any schedule or exhibit hereto, the provisions of
this Agreement, including without limitation the provisions dealing
with indemnification, shall continue in full force and effect.
Compensation due the Administrator and unpaid by the Company upon such
termination shall be immediately due and payable upon and
notwithstanding such termination.
If, during the first six months of the Initial Term, for any reason
other than cause, as defined herein, the Administrator is replaced as
fund manager and administrator,
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<PAGE>
or if a third party is added to perform all or a part of the services
provided by the Administrator under this Agreement (excluding any
sub-administrator appointed by the Administrator as provided in
Article 7 hereof), then the Company shall make a one-time cash
payment, as liquidated damages, to the Administrator equal to the
balance due the Administrator for the remainder of such Initial Term,
assuming for purposes of calculation of the payment that the asset
level of the Company on the date the Administrator is replaced, or a
third party is added, will remain constant for the balance of such
term.
If, during the second six months of the Initial Term, for any reason
other than cause, as defined herein, the Administrator is replaced as
fund manager and administrator, or if a third party is added to
perform all or a part of the services provided by the Administrator
under this Agreement (excluding any sub-administrator appointed by the
Administrator as provided in Article 7 hereof), then the Company shall
make a one-time cash payment, as liquidated damages to the
Administrator equal to one-half of the balance due the Administrator
for the remainder of such Initial Term, assuming for purposes of
calculation of the payment that the asset level of the Company on the
date the Administrator is replaced, or a third party is added, will
remain constant for the balance of such term.
A-3
<PAGE>
TRANSFER AGENCY AGREEMENT
AGREEMENT made this 1st day of January, 1997, between CVO GREATER CHINA
FUND, INC. (the "Company"), a Maryland corporation, and BISYS FUND SERVICES,
INC. ("BISYS"), a Delaware corporation.
WHEREAS, the Company desires that BISYS perform certain services for each
series of the Company (individually referred to herein as a "Fund" and
collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. RETENTION OF BISYS.
BISYS shall perform for the Company the transfer agent services set
forth in Schedule A hereto. BISYS also agrees to perform for the Company such
special services incidental to the performance of the services enumerated herein
as agreed to by the parties from time to time. BISYS shall perform such
additional services as are provided on an amendment to Schedule A hereof, in
consideration of such fees as the parties hereto may agree.
BISYS may, in its discretion, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the
Company (individually, a "Sub-transfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Sub-transfer Agent shall be the agent of BISYS and not the agent of the
Company or such Fund, and that BISYS shall be fully responsible for the acts of
such Sub-transfer Agent and shall not be relieved of any of its responsibilities
hereunder by the appointment of such Sub-transfer Agent.
2. FEES.
The Company shall pay BISYS for the services to be provided by BISYS
under this Agreement in accordance with, and in the manner set forth in,
Schedule B hereto. Fees for any additional services to be provided by BISYS
pursuant to an amendment to Schedule A hereto shall be subject to mutual
agreement at the time such amendment to Schedule A is proposed.
<PAGE>
3. REIMBURSEMENT OF EXPENSES.
In addition to paying BISYS the fees described in Section 2 hereof,
the Company agrees to reimburse BISYS for BISYS' out-of-pocket expenses in
providing services hereunder, including without limitation, the following:
(a) All freight and other delivery and bonding charges incurred by
BISYS in delivering materials to and from the Company and in
delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and telecopy or
other electronic transmission expenses incurred by BISYS in
communication with the Company, the Company's investment adviser
or custodian, dealers, shareholders or others as required for
BISYS to perform the services to be provided hereunder;
(c) Costs of postage, couriers, stock computer paper, statements,
labels, envelopes, checks, reports, letters, tax forms, proxies,
notices or other form of printed material which shall be required
by BISYS for the performance of the services to be provided
hereunder;
(d) The cost of microfilm or microfiche of records or other
materials; and
(e) Any expenses BISYS shall incur at the written direction of an
officer of the Company thereunto duly authorized.
4. EFFECTIVE DATE.
This Agreement shall become effective as of the date first written
above (the "Effective Date").
5. TERM.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the Effective Date and ending on December 31, 1997.
Thereafter, unless otherwise terminated as provided herein, this Agreement shall
be renewed automatically for successive one-year periods ("Rollover Periods").
This Agreement may be terminated without penalty (i) by provision of 60 days
advance written notice of nonrenewal to the other party prior to the end of the
Initial Term or the then-current Rollover Period, (ii) by mutual agreement of
the parties, (iii) for "cause," as defined below, upon the provision of 60 days
advance written notice by the party alleging cause, or (iv) by provision of 90
days advance written notice of termination during a Rollover Period.
2
<PAGE>
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on the part of
the party to be terminated with respect to its obligations and duties set forth
herein; (b) multiple negligent acts on the part of the party to be terminated
which in the aggregate constitute a serious failure to perform satisfactorily
that party's obligations hereunder; (c) a material breach of this Agreement that
has not been remedied for 45 days following receipt of written notice of such
breach from the nonbreaching party; or (d) a "service standard deficiency," as
defined below.
For purposes of this Agreement, a service standard deficiency shall be
defined as (i) any pattern of substandard performance over a 60-day period with
respect to such service standards as the parties shall agree upon relating to
the duties and obligations of BISYS herein or to the duties and obligations of
BISYS or an affiliate of BISYS pursuant to any other service agreement with the
Company ("Service Standards") or (ii) any "asset withdrawal," as defined below,
by a Shareholder which, in the aggregate, exceeds $1 million, that can be
reasonably attributed to a failure on the part of BISYS or an affiliate of BISYS
to meet one or more Service Standards. For purposes of this Agreement, "asset
withdrawal" shall include any combination of (i) a redemption of Company Shares
and/or (ii) a withdrawal of assets from any non-mutual fund account or other
mutual fund account held by a Company Shareholder that is advised by the
Company's investment adviser or an affiliate of such investment adviser. A copy
of the current Service Standards that have been agreed upon by the parties is
attached hereto and made a part hereof.
Notwithstanding the foregoing, after such termination, for so long as
BISYS, with the written consent of the Company, in fact continues to perform any
one or more of the services contemplated by this Agreement or any schedule or
exhibit hereto, the provisions of this Agreement, including without limitation
the provisions dealing with indemnification, shall continue in full force and
effect. Compensation due BISYS and unpaid by the Company upon such termination
shall be immediately due and payable upon and notwithstanding such termination.
If, during the first six months of the Initial Term, for any reason
other than cause, as defined herein, BISYS is replaced as transfer agent, or if
a third party is added to perform all or a part of the services provided by
BISYS under this Agreement (excluding any sub-transfer agent appointed by BISYS
as provided in Section 1 hereof), then the Company shall make a one-time cash
payment, as liquidated damages, to BISYS equal to the balance due BISYS for the
remainder of such Initial Term, assuming for purposes of calculation of the
payment that the asset level of the Company on the date BISYS is replaced, or a
third party is added, will remain constant for the balance of such term.
If, during the second six months of the Initial Term, for any reason
other than cause, as defined herein, BISYS is replaced as transfer agent, or if
a third party is added to perform all or a part of the services provided by
BISYS under this Agreement (excluding any sub-transfer agent appointed by BISYS
as provided in Section 1 hereof), then the Company shall make a one-time cash
payment, as liquidated damages to BISYS equal to one-half of the balance due
BISYS for the remainder of such Initial Term, assuming for purposes of
calculation of the payment that
3
<PAGE>
the asset level of the Company on the date BISYS is replaced, or a third party
is added, will remain constant for the balance of such term.
6. UNCONTROLLABLE EVENTS.
BISYS assumes no responsibility hereunder, and shall not be liable for
any damage, loss of data, delay or any other loss whatsoever caused by events
beyond its reasonable control.
7. LEGAL ADVICE.
BISYS shall notify the Company at any time BISYS believes that it is
in need of the advice of counsel (other than counsel in the regular employ of
BISYS or any affiliated companies) with regard to BISYS' responsibilities and
duties pursuant to this Agreement; and after so notifying the Company, BISYS, at
its discretion, shall be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Company or
Funds unless relating to a matter involving BISYS' willful misfeasance, bad
faith, gross negligence or reckless disregard with respect to BISYS'
responsibilities and duties hereunder and BISYS shall in no event be liable to
the Company or any Fund or any shareholder or beneficial owner of the Company
for any action reasonably taken pursuant to such advice.
8. INSTRUCTIONS.
Whenever BISYS is requested or authorized to take action hereunder
pursuant to instructions from a shareholder, or a properly authorized agent of a
shareholder ("shareholder's agent"), concerning an account in a Fund, BISYS
shall be entitled to rely upon any certificate, letter or other instrument or
communication, believed by BISYS to be genuine and to have been properly made,
signed or authorized by an officer or other authorized agent of the Company or
by the shareholder or shareholder's agent, as the case may be, and shall be
entitled to receive as conclusive proof of any fact or matter required to be
ascertained by it hereunder a certificate signed by an officer of the Company or
any other person authorized by the Company's Board of Directors or by the
shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS may rely
conclusively upon the terms of the Prospectuses and Statement of Additional
Information of the Company relating to the Funds to the extent that such
services are described therein unless BISYS receives written instructions to the
contrary in a timely manner from the Company.
9. STANDARD OF CARE; RELIANCE ON RECORDS AND INSTRUCTIONS;
INDEMNIFICATION.
BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Company
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. The Company agrees to indemnify and hold harmless BISYS, its employees,
4
<PAGE>
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whether groundless or otherwise, and from and
against any and all judgments, liabilities, losses, damages, costs, charges,
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' actions taken or nonactions with respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information, records, instructions or requests given or
made to BISYS by the Company, the investment adviser and on any records provided
by any fund accountant or custodian thereof; provided that this indemnification
shall not apply to actions or omissions of BISYS in cases of its own bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties; and further provided that prior to confessing any claim
against it which may be the subject of this indemnification, BISYS shall give
the Company written notice of and reasonable opportunity to defend against said
claim in its own name or in the name of BISYS.
BISYS agrees to indemnify and hold harmless the Company, its
employees, agents, Directors, officers and nominees from and against any and all
actions, suits and claims, whether groundless of otherwise, and from and against
any and all judgements, liabilities, losses, damages, costs, charges, reasonable
counsel fees and other expenses of every nature and character arising out of or
in any way relating to BISYS' bad faith, willful misfeasance, negligence or
reckless disregard by it of its obligations and duties, with respect to the
performance of services under this Agreement provided, that, prior to confessing
any claim against it which may be the subject of this indemnification, the
Company shall give BISYS written notice of and a reasonable opportunity to
defend against said claim in its own name or in the name of the Company.
10. RECORD RETENTION AND CONFIDENTIALITY.
BISYS shall keep and maintain on behalf of the Company all books and
records which the Company or BISYS is, or may be, required to keep and maintain
pursuant to any applicable statutes, rules and regulations, including without
limitation Rules 31a-1 and 31a-2 under the Investment Company Act of 1940, as
amended (the "1940 Act"), relating to the maintenance of books and records in
connection with the services to be provided hereunder. BISYS further agrees
that all such books and records shall be the property of the Company and to make
such books and records available for inspection by the Company or by the
Securities and Exchange Commission (the "Commission") at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Company and its shareholders, except when requested to divulge
such information by duly-constituted authorities or court process, or requested
by a shareholder or shareholder's agent with respect to information concerning
an account as to which such shareholder has either a legal or beneficial
interest or when requested by the Company, the shareholder, or shareholder's
agent, or the dealer of record as to such account.
11. REPORTS.
BISYS will furnish to the Company and to its properly-authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others
5
<PAGE>
designated by the Company in writing, such reports at such times as are
prescribed in Schedule C attached hereto, or as subsequently agreed upon by the
parties pursuant to an amendment to Schedule C.
12. RIGHTS OF OWNERSHIP.
All computer programs and procedures developed to perform services
required to be provided by BISYS under this Agreement are the property of BISYS.
All records and other data except such computer programs and procedures are the
exclusive property of the Company and all such other records and data will be
furnished to the Company in appropriate form as soon as practicable after
termination of this Agreement for any reason.
13. RETURN OF RECORDS.
BISYS may at its option at any time, and shall promptly upon the
Company's demand, turn over to the Company and cease to retain BISYS' files,
records and documents created and maintained by BISYS pursuant to this Agreement
which are no longer needed by BISYS in the performance of its services or for
its legal protection. If not so turned over to the Company, such documents and
records will be retained by BISYS for six years from the year of creation. At
the end of such six-year period, such records and documents will be turned over
to the Company unless the Company authorizes in writing the destruction of such
records and documents.
14. BANK ACCOUNTS.
The Company and the Funds shall establish and maintain such bank
accounts with such bank or banks as are selected by the Company, as are
necessary in order that BISYS may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
BISYS directly to disburse amounts for payment of dividends, redemption proceeds
or other purposes, the Company and Funds shall provide such bank or banks with
all instructions and authorizations necessary for BISYS to effect such
disbursements.
15. REPRESENTATIONS OF THE COMPANY.
The Company certifies to BISYS that: (a) as of the close of business
on the Effective Date, each Fund which is in existence as of the Effective Date
has authorized unlimited shares, and (b) by virtue of its Articles of
Incorporation, shares of each Fund which are redeemed by the Company may be sold
by the Company from its treasury, and (c) this Agreement has been duly
authorized by the Company and, when executed and delivered by the Company, will
constitute a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting the rights and remedies of creditors and secured parties.
6
<PAGE>
16. REPRESENTATIONS OF BISYS.
BISYS represents and warrants that: (a) BISYS has been in, and shall
continue to be in, substantial compliance with all provisions of law, including
Section 17A(c) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), required in connection with the performance of its duties under this
Agreement; and (b) the various procedures and systems which BISYS has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the blank checks, records, and other data of the
Company and BISYS' records, data, equipment, facilities and other property used
in the performance of its obligations hereunder are adequate and that it will
make such changes therein from time to time as are required for the secure
performance of its obligations hereunder.
17. INSURANCE.
BISYS shall notify the Company should its insurance coverage with
respect to professional liability or errors and omissions coverage be canceled
or reduced. Such notification shall include the date of change and the reasons
therefor. BISYS shall notify the Company of any material claims against it with
respect to services performed under this Agreement, whether or not they may be
covered by insurance, and shall notify the Company from time to time as may be
appropriate of the total outstanding claims made by BISYS under its insurance
coverage.
18. INFORMATION TO BE FURNISHED BY THE COMPANY AND FUNDS.
The Company has furnished to BISYS the following:
(a) Copies of the Articles of Incorporation of the Company and of any
amendments thereto, certified by the proper official of the state
in which such Declaration has been filed.
(b) Copies of the following documents:
1. The Company's By-Laws and any amendments thereto.
2. Certified copies of resolutions of the Board of Directors
covering the following matters:
A. Approval of this Agreement and authorization of a
specified officer of the Company to execute and deliver
this Agreement and authorization for specified officers
of the Company to instruct BISYS hereunder; and
B. Authorization of BISYS to act as Transfer Agent for the
Company on behalf of the Funds.
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<PAGE>
(c) A list of all officers of the Company, together with specimen
signatures of those officers, who are authorized to instruct
BISYS in all matters.
(d) Two copies of the following (if such documents are employed by
the Company):
1. Prospectuses and Statement of Additional Information;
2. Distribution Agreement; and
3. All other forms commonly used by the Company or its
Distributor with regard to their relationships and
transactions with shareholders of the Funds.
(e) A certificate as to shares of beneficial interest of the Company
authorized, issued, and outstanding as of the Effective Date of
BISYS' appointment as Transfer Agent (or as of the date on which
BISYS' services are commenced, whichever is the later date) and
as to receipt of full consideration by the Company for all shares
outstanding, such statement to be certified by the Treasurer of
the Company.
19. INFORMATION FURNISHED BY BISYS.
BISYS has furnished to the Company the following:
(a) BISYS' Articles of Incorporation.
(b) BISYS' By-Laws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the following
matters:
1. Approval of this Agreement, and authorization of a specified
officer of BISYS to execute and deliver this Agreement;
2. Authorization of BISYS to act as Transfer Agent for the
Company.
(d) A copy of the most recent independent accountants' report
relating to internal accounting control systems as filed with the
Commission pursuant to Rule 17Ad-13 under the Exchange Act.
20. AMENDMENTS TO DOCUMENTS.
The Company shall furnish BISYS written copies of any amendments to,
or changes in, any of the items referred to in Section 18 hereof forthwith upon
such amendments or changes
8
<PAGE>
becoming effective. In addition, the Company agrees that no amendments will be
made to the Prospectuses or Statement of Additional Information of the Company
which might have the effect of changing the procedures employed by BISYS in
providing the services agreed to hereunder or which amendment might affect the
duties of BISYS hereunder unless the Company first obtains BISYS' approval of
such amendments or changes.
21. RELIANCE ON AMENDMENTS.
BISYS may rely on any amendments to or changes in any of the documents
and other items to be provided by the Company pursuant to Sections 18 and 20 of
this Agreement and the Company hereby indemnifies and holds harmless BISYS from
and against any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and other expenses of every nature
and character which may result from actions or omissions on the part of BISYS in
reasonable reliance upon such amendments and/or changes. Although BISYS is
authorized to rely on the above-mentioned amendments to and changes in the
documents and other items to be provided pursuant to Sections 18 and 20 hereof,
BISYS shall be under no duty to comply with or take any action as a result of
any of such amendments or changes unless the Company first obtains BISYS'
written consent to and approval of such amendments or changes.
22. COMPLIANCE WITH LAW.
Except for the obligations of BISYS set forth in Section 10 hereof,
the Company assumes full responsibility for the preparation, contents, and
distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligation to take
cognizance of any laws relating to the sale of the Company's shares. The
Company represents and warrants that no shares of the Company will be offered to
the public until the Company's registration statement under the 1933 Act and the
1940 Act has been declared or becomes effective.
23. NOTICES.
Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such notice
at the following address: if to the Company, to it at 3435 Stelzer Road, Suite
1000, Columbus, Ohio 43219; if to BISYS, to it at 3435 Stelzer Road, Suite
1000, Columbus, Ohio 43219, or at such other address as such party may from time
to time specify in writing to the other party pursuant to this Section.
24. HEADINGS.
Paragraph headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
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25. ASSIGNMENT.
This Agreement and the rights and duties hereunder shall not be
assignable by either of the parties hereto except by the specific written
consent of the other party. This Section 25 shall not limit or in any way
affect BISYS' right to appoint a Sub-transfer Agent pursuant to Section 1
hereof. This Agreement shall be binding upon, and shall inure to the benefit
of, the parties hereto and their respective successors and permitted assigns.
26. GOVERNING LAW.
This Agreement shall be governed by and provisions shall be construed
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
CVO GREATER CHINA FUND, INC.
By:
--------------------------------
Title: Assistant Treasurer
------------------------------
BISYS FUND SERVICES, INC.
By:
--------------------------------
Title: Executive Vice President
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Dated: January 1, 1997
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
CVO GREATER CHINA FUND, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENCY SERVICES
1. SHAREHOLDER TRANSACTIONS
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option,
taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10 under the Securities
Exchange Act of 1934, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new shares,
through dividend reimbursement.
2. SHAREHOLDER INFORMATION SERVICES
a. Make information available to shareholder servicing unit and other
remote access units regarding trade date, share price, current
holdings, yields, and dividend information.
b. Produce detailed history of transactions through duplicate or special
order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements or marketing material to current
shareholders.
A-1
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3. COMPLIANCE REPORTING
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in which the
Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service forms for
corresponding Fund and shareholder income and capital gains.
c. Issue tax withholding reports to the Internal Revenue Service.
4. DEALER/LOAD PROCESSING (IF APPLICABLE)
a. Provide reports for tracking rights of accumulation and purchases made
under a Letter of Intent.
b. Account for separation of shareholder investments from transaction
sale charges for purchase of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and marketing
expenses.
d. Track sales and commission statistics by dealer and provide for
payment of commissions on direct shareholder purchases in a load Fund.
5. SHAREHOLDER ACCOUNT MAINTENANCE
a. Maintain all shareholder records for each account in the Company.
b. Issue customer statements on scheduled cycle, providing duplicate
second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
A-2
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SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
CVO GREATER CHINA FUND, INC.
AND
BISYS FUND SERVICES, INC.
TRANSFER AGENT FEES
The Transfer Agent shall receive an account maintenance fee of $15.00 per year
for each account which is in existence at any time during the month for which
payment is made, such fee to be paid in equal monthly installments. The
Transfer Agent shall be entitled to this account maintenance fee on all accounts
maintained in its records during the year, including those accounts which have a
zero balance during any portion of the year.
ADDITIONAL SERVICES:
Additional services such as IRA processing, development of interface
capabilities, servicing of 403(b) and 408(c) accounts, management of cash sweeps
between DDAs and mutual fund accounts and coordination of the printing and
distribution of prospectuses, annual reports and semi-annual reports are subject
to additional fees which will be quoted upon request. Programming costs or
database management fees for special reports or specialized processing will be
quoted upon request.
OUT-OF-POCKET EXPENSES:
BISYS shall be entitled to be reimbursed for all reasonable out-of-pocket
expenses including, but not limited to, the expenses set forth in Section 3 of
the Transfer Agency Agreement to which this Schedule B is attached.
B-1
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SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
CVO GREATER CHINA FUND, INC.
AND
BISYS FUND SERVICES, INC.
REPORTS
1. Daily Shareholder Activity Journal
2. Daily Fund Activity Summary Report
a. Beginning Balance
b. Dealer Transactions
c. Shareholder Transactions
d. Reinvested Dividends
e. Exchanges
f. Adjustments
g. Ending Balance
3. Daily Wire and Check Registers
4. Monthly Dealer Processing Reports
5. Monthly Dividend Reports
6. Sales Data Reports for Blue Sky Registration
7. Annual report by independent public accountants concerning BISYS'
shareholder system and internal accounting control systems to be filed with
the Securities and Exchange Commission pursuant to Rule 17Ad-13 of the
Securities Exchange Act of 1934, as amended.
C-1
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OFFIT FUNDS DISTRIBUTOR, INC.
DEALER AND SELLING GROUP AGREEMENT
The CVO Greater China Fund, Inc.
Gentlemen:
We have entered into a Distribution Agreement with the following open-ended
management investment company: The CVO Greater China Fund, Inc. (the "Fund") for
such serves either now, or hereafter to be created, under which we are appointed
agent for the sale of shares of common stock ("Shares"). As such agent, we
offer to sell to you as a member of a Selling Group, Shares of the Funds on the
terms set forth below. We are acting as an underwriter within the meaning of
Conduct Rule 2830 of the National Association of Securities Dealers, Inc.
1. You are to offer and sell Shares of the Funds only at the regular Net
Asset Value currently determined by each Fund (plus applicable sales charges, if
any) in the manner described in the Prospectus. This Agreement on your part
runs to us and to the Fund and is for the benefit of and enforceable by each.
2. You are hereby authorized (i) to place orders with us for Shares and
(ii) to tender Shares to us for redemption.
3. You have advised us that you are a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and a member of the National
Association of Securities Dealers, Inc. You agree to abide by the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. This Agreement
is in all respects subject to Conduct Rule 2830 of the National Association of
Securities Dealers, Inc. which shall control any provisions to the contrary.
4. We shall not accept from you any conditional orders for the Shares.
If payment for the Shares purchased is not received within five days, the sale
may be canceled forthwith without any responsibility or liability on our part or
on the part of the Funds (in which case you will be responsible for any loss,
including loss of profit suffered by the Funds resulting from your failure to
make payment as aforesaid), or, at our option, we may sell the Shares ordered
back to the Funds (in which case we may hold you responsible for any loss,
including loss of profit suffered by us resulting form your failure to make
payments as aforesaid). Any order by you for the purchase of Shares of the
Funds through us shall be executed pursuant to the terms and conditions
specified in the Prospectus for which an order is made unless rejected by us or
that Fund. In addition to the right to reject any order, each Fund has reserved
the right to withhold Shares from sale temporarily or permanently.
5. You will not offer or sell any of the Shares except under
circumstances
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that will result in compliance with the applicable Federal and state securities
law and in connection with sales and offers to sell Shares, you will furnish to
each person to whom any such sale or offer is made a copy of the applicable then
current prospectus. We shall be under no liability to you except for lack of
good faith and for obligations expressly assumed by us herein. Nothing herein
contained, however, shall be deemed to be a condition, stipulation or provision
binding any persons acquiring any security to waive compliance with any
provisions of the Securities Act of 1933, or of the Rules or Regulations of the
Securities and Exchange Commission or to relieve the parties hereto from any
liability arising under the Securities Act of 1933.
6. No person is authorized to make any representations concerning Shares
of the Funds except those contained in the then current prospectus and printed
information issued by each Fund or by us as information supplemental to each
prospectus. We shall supply prospectuses, reasonable quantities of supplemental
sales literature, sales bulletins, and additional information as issued. You
agree not to use other advertising or sales material relating to the Funds
unless approved in writing by us in advance of such use. Any printed
information furnished by us other than the then current prospectus for each
Fund, periodic reports and proxy solicitation materials are our sole
responsibility and not the responsibility of the Funds, and you agree that the
Funds shall have no liability or responsibility to you in these respects unless
expressly assumed in connection therewith.
7. You agree to respond to investor inquiries concerning the Fund to the
best of your ability and to contact all shareholders in the Funds to whom you
have sold Shares on a periodic basis to provide them with such information about
the Funds as we will reasonably provide to you.
8. You are obliged to date and time stamp all orders received by you and
promptly to transmit all orders to us in time to provide for processing at the
Net Asset Value next determined in accordance with the Fund's Prospectus. You
are not to withhold placing with us orders received from any customer for the
purchase of Shares so as to profit yourself as a result of such withholding.
You shall not purchase Shares through us except for the purpose of covering
purchase orders already received by you or for your bona fide investment.
9. You shall not, as principal, purchase any Shares of a Fund from a
record holder at a price lower than the net asset value next determined by
Shares of that Fund. You shall, however, be permitted to sell any Shares of
that Fund for the account of a record owner to that Fund at the net asset value
currently quoted by or for those particular Shares and may charge a fair service
fee for handling the transaction provided you disclose the fee to the record
owner.
10. In purchasing Shares of a Fund through us, you shall act only as
Principal for your own account. You shall purchase Shares of a Fund only
through us, except for repurchase of Shares incidental to redemption. In no
transaction (whether of purchase or sale) shall you have any authority to act as
agent for, partner of, or participant in a joint venture with us or with a Fund
or any other member of the selling group.
11. We act solely as agent for the Funds and are not responsible for
qualifying the Funds
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of their shares for sale in any jurisdiction. We also are not responsible for
the issuance, form, validity, enforceability or value of Shares of the Funds.
12. All communications to us should be sent to the address on the
following page. Any notice to you shall be duly given if mailed or telegraphed
to you at the address specified by you.
13. Either party to this Agreement may cancel this Agreement by giving
written notice to the other. Such notice shall be deemed to have been given on
the date on which it was either delivered personally to the other party of any
officer or member thereof, or was mailed post-paid or delivered to a telegraph
office for transmission to the other party at his or its address. This
Agreement may be amended by us at any time upon notice to you and your placing
of an order after the effective date of any such amendment shall constitute your
acceptance thereof.
14. This Agreement should be executed in duplicate, each of which shall be
deemed to be an original. One of the duplicate originals should be returned to
us for our file. The Agreement shall be effective as of the date of acceptance
by you, but only upon receipt by us of such duplicate original. The Agreement
shall be in cancellation of and in substitution for any and all previous Dealer
Agreements, but shall not terminate, cancel or release any rights or liabilities
accrued thereunder. This Agreement shall be construed in accordance with the
laws of the State of New York.
Very truly yours,
OFFIT FUNDS DISTRIBUTOR, INC.
Legal Address:
125 West 55th Avenue
New York, NY 10019
Mailing Address:
3435 Stelzer Road, Suite 1000
Columbus, OH 43219
By
-----------------------------------------
Date
---------------------------------------
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Accepted:
- --------------------------------------------
Firm
By
-----------------------------------------
Officer or Partner
- --------------------------------------------
Print Name
Address:
- --------------------------------------------
- --------------------------------------------
Date
---------------------------------------
4
<PAGE>
FUND ACCOUNTING AGREEMENT
AGREEMENT made this 1st day of January, 1997, between CVO GREATER CHINA
FUND, INC. (the "Company"), a Maryland corporation, and BISYS FUND SERVICES,
INC. ("Fund Accountant"), a corporation organized under the laws of the State of
Delaware.
WHEREAS, the Company desires that Fund Accountant perform certain fund
accounting services for each investment portfolio of the Company, all as now or
hereafter may be established from time to time (individually referred to herein
as the "Fund" and collectively as the "Funds"); and
WHEREAS, Fund Accountant is willing to perform such services on the terms
and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES AS FUND ACCOUNTANT.
(a) MAINTENANCE OF BOOKS AND RECORDS. Fund Accountant will keep and
maintain the following books and records of each Fund pursuant to
Rule 31a-1 under the Investment Company Act of 1940 (the "Rule"):
(i) Journals containing an itemized daily record in detail
of all purchases and sales of securities, all receipts
and disbursements of cash and all other debits and
credits, as required by subsection (b)(1) of the Rule;
(ii) General and auxiliary ledgers reflecting all asset,
liability, reserve, capital, income and expense
accounts, including interest accrued and interest
received, as required by subsection (b)(2)(I) of the
Rule;
(iii) Separate ledger accounts required by subsection
(b)(2)(ii) and (iii) of the Rule; and
(iv) A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8)
of the Rule.
(b) PERFORMANCE OF DAILY ACCOUNTING SERVICES. In addition to the
maintenance of the books and records specified above, Fund
Accountant shall perform the following accounting services daily
for each Fund:
(i) Calculate the net asset value per share utilizing
prices obtained from the sources described in
subsection 1(b)(ii) below;
<PAGE>
(ii) Obtain security prices from independent pricing
services, or if such quotes are unavailable, then
obtain such prices from each Fund's investment adviser
or its designee, as approved by the Company's Board of
Directors;
(iii) Verify and reconcile with the Fund's custodian all
daily trade activity;
(iv) Compute, as appropriate, each Fund's net income and
capital gains, dividend payables, dividend factors,
7-day yields, 7-day effective yields, 30-day yields,
and weighted average portfolio maturity;
(v) Review daily the net asset value calculation and
dividend factor (if any) for each Fund prior to release
to shareholders, check and confirm the net asset values
and dividend factors for reasonableness and deviations,
and distribute net asset values and yields to NASDAQ;
(vi) Report to the Company the daily market pricing of
securities in any money market Funds, with the
comparison to the amortized cost basis;
(vii) Determine unrealized appreciation and depreciation on
securities held in variable net asset value Funds;
(viii) Amortize premiums and accrete discounts on securities
purchased at a price other than face value, if
requested by the Company;
(ix) Update fund accounting system to reflect rate changes,
as received from a Fund's investment adviser, on
variable interest rate instruments;
(x) Post Fund transactions to appropriate categories;
(xi) Accrue expenses of each Fund according to instructions
received from the Company's Administrator;
(xii) Determine the outstanding receivables and payables for
all (1) security trades, (2) Fund share transactions
and (3) income and expense accounts;
(xiii) Provide accounting reports in connection with the
Company's regular annual audit and other audits and
examinations by regulatory agencies; and
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<PAGE>
(xiv) Provide such periodic reports as the parties shall
agree upon, as set forth in a separate schedule.
(c) SPECIAL REPORTS AND SERVICES.
(i) Fund Accountant may provide additional special reports
upon the request of the Company or a Fund's investment
adviser, which may result in an additional charge, the
amount of which shall be agreed upon between the
parties.
(ii) Fund Accountant may provide such other similar services
with respect to a Fund as may be reasonably requested
by the Company, which may result in an additional
charge, the amount of which shall be agreed upon
between the parties.
(d) ADDITIONAL ACCOUNTING SERVICES. Fund Accountant shall also
perform the following additional accounting services for each
Fund:
(i) Provide monthly a download (and hard copy thereof) of
the financial statements described below, upon request
of the Company. The download will include the
following items:
Statement of Assets and Liabilities,
Statement of Operations,
Statement of Changes in Net Assets, and
Condensed Financial Information;
(ii) Provide accounting information for the following:
(A) federal and state income tax returns and federal
excise tax returns;
(B) the Company's semi-annual reports with the
Securities and Exchange Commission ("SEC") on Form
N-SAR;
(C) the Company's annual, semi-annual and quarterly
(if any) shareholder reports;
(D) registration statements on Form N-1A and other
filings relating to the registration of Shares;
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(E) the Administrator's monitoring of the Company's
status as a regulated investment company under
Subchapter M of the Internal Revenue Code, as
amended;
(F) annual audit by the Company's auditors; and
(G) examinations performed by the SEC.
2. SUBCONTRACTING.
Fund Accountant may, at its expense, subcontract with any entity or
person concerning the provision of the services contemplated hereunder;
provided, however, that Fund Accountant shall not be relieved of any of its
obligations under this Agreement by the appointment of such subcontractor and
provided further, that Fund Accountant shall be responsible, to the extent
provided in Section 6 hereof, for all acts of such subcontractor as if such acts
were its own.
3. COMPENSATION.
The Company shall pay Fund Accountant for the services to be provided
by Fund Accountant under this Agreement in accordance with, and in the manner
set forth in, Schedule A hereto, as such Schedule may be amended from time to
time.
4. REIMBURSEMENT OF EXPENSES.
In addition to paying Fund Accountant the fees described in Section
3 hereof, the Company agrees to reimburse Fund Accountant for its
out-of-pocket expenses in providing services hereunder, including without
limitation the following:
(a) All direct telephone, telephone transmission and telecopy or other
electronic transmission expenses incurred by Fund Accountant in
communication with the Company, the Company's investment advisor or
custodian, dealers or others as required for Fund Accountant to
perform the services to be provided hereunder;
(b) The cost of obtaining security market quotes pursuant to Section
l(b)(ii) above;
(c) Any expenses Fund Accountant shall incur at the written direction of
an officer of the Company thereunto duly authorized; and
(d) Any additional expenses reasonably incurred by Fund Accountant, upon
receipt of prior approval from the Company, in the performance of its
duties and obligations under this Agreement.
4
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5. EFFECTIVE DATE.
This Agreement shall become effective with respect to a Fund as of the
date first written above (or, if a particular Fund is not in existence on that
date, on the date such Fund commences operation) (the "Effective Date").
6. TERM.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on the Effective Date and ending on December 31, 1997.
Thereafter, unless otherwise terminated as provided herein, this Agreement shall
be renewed automatically for successive one-year periods ("Rollover Periods").
This Agreement may be terminated without penalty (i) by provision of 60 days
advance written notice of nonrenewal to the other party prior to the end of the
Initial Term or the then-current Rollover Period, (ii) by mutual agreement of
the parties, (iii) for "cause," as defined below, upon the provision of 60 days
advance written notice by the party alleging cause, or (iv) by provision of 90
days advance written notice of termination during a Rollover Period.
For purposes of this Agreement, "cause" shall mean (a) willful
misfeasance, bad faith, gross negligence or reckless disregard on the part of
the party to be terminated with respect to its obligations and duties set forth
herein; (b) multiple negligent acts on the part of the party to be terminated
which in the aggregate constitute a serious failure to perform satisfactorily
that party's obligations hereunder; (c) a material breach of this Agreement that
has not been remedied for 45 days following receipt of written notice of such
breach from the nonbreaching party; or (d) a "service standard deficiency," as
defined below.
For purposes of this Agreement, a service standard deficiency shall be
defined as (i) any pattern of substandard performance over a 60-day period with
respect to such service standards as the parties shall agree upon relating to
the duties and obligations of Fund Accountant herein or to the duties and
obligations of Fund Accountant or an affiliate of Fund Accountant pursuant to
any other service agreement with the Company ("Service Standards") or (ii) any
"asset withdrawal," as defined below, by a Shareholder which, in the aggregate,
exceeds $1 million, that can be reasonably attributed to a failure on the part
of Fund Accountant or an affiliate of Fund Accountant to meet one or more
Service Standards. For purposes of this Agreement, "asset withdrawal" shall
include any combination of (i) a redemption of Company Shares and/or (ii) a
withdrawal of assets from any non-mutual fund account or other mutual fund
account held by a Company Shareholder that is advised by the Company's
investment adviser or an affiliate of such investment adviser.
Notwithstanding the foregoing, after such termination, for so long as
Fund Accountant, with the written consent of the Company, in fact continues to
perform any one or more of the services contemplated by this Agreement or any
schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall
5
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continue in full force and effect. Compensation due Fund Accountant and unpaid
by the Company upon such termination shall be immediately due and payable upon
and notwithstanding such termination.
If, during the first six months of the Initial Term, for any reason
other than cause, as defined herein, Fund Accountant is replaced as fund
accountant, or if a third party is added to perform all or a part of the
services provided by Fund Accountant under this Agreement (excluding any
sub-accountant appointed by Fund Accountant as provided in Section 2 hereof),
then the Company shall make a one-time cash payment, as liquidated damages, to
Fund Accountant equal to the balance due Fund Accountant for the remainder of
such Initial Term, assuming for purposes of calculation of the payment that the
asset level of the Company on the date Fund Accountant is replaced, or a third
party is added, will remain constant for the balance of such term.
If, during the second six months of the Initial Term, for any reason
other than cause, as defined herein, Fund Accountant is replaced as fund
accountant, or if a third party is added to perform all or a part of the
services provided by Fund Accountant under this Agreement (excluding any
sub-accountant appointed by Fund Accountant as provided in Section 2 hereof),
then the Company shall make a one-time cash payment, as liquidated damages to
Fund Accountant equal to one-half of the balance due Fund Accountant for the
remainder of such Initial Term, assuming for purposes of calculation of the
payment that the asset level of the Company on the date Fund Accountant is
replaced, or a third party is added, will remain constant for the balance of
such term.
7. STANDARD OF CARE; RELIANCE ON RECORDS AND INSTRUCTIONS;
INDEMNIFICATION.
Fund Accountant shall use its best efforts to insure the accuracy of
all services performed under this Agreement, but shall not be liable to the
Company for any action taken or omitted by Fund Accountant in the absence of bad
faith, willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties. A Fund agrees to indemnify and hold harmless Fund
Accountant, its employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Fund Accountant's actions
taken or nonactions with respect to the performance of services under this
Agreement with respect to such Fund or based, if applicable, upon reasonable
reliance on information, records, instructions or requests with respect to such
Fund given or made to Fund Accountant by a duly authorized representative of the
Company; provided that this indemnification shall not apply to actions or
omissions of Fund Accountant in cases of its own bad faith, willful misfeasance,
negligence or from reckless disregard by it of its obligations and duties, and
further provided that prior to confessing any claim against it which may be the
subject of this indemnification, Fund Accountant shall give the Company written
notice of and reasonable opportunity to defend against said claim in its own
name or in the name of Fund Accountant.
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Fund Accountant agrees to indemnify and hold harmless the Company, its
employees, agents, Directors, officers and nominees from and against any and all
actions, suits and claims, whether groundless or otherwise, and from and against
any and all judgements, liabilities, losses, damages, costs, charges, reasonable
counsel fees and other expenses of every nature and character arising out or in
any way relating to Fund Accountant's bad faith, willful misfeasance, negligence
or reckless disregard by it of its obligations and duties, with respect to the
performance of services under this Agreement; provided, that, prior to
confessing any claim against it which may be the subject of this
indemnification, the Company shall give Fund Accountant written notice of and a
reasonable opportunity to defend against said claim in its own name or in the
name of the Company.
8. RECORD RETENTION AND CONFIDENTIALITY.
Fund Accountant shall keep and maintain on behalf of the Company all
books and records which the Company and Fund Accountant is, or may be, required
to keep and maintain pursuant to any applicable statutes, rules and regulations,
including without limitation Rules 31a-1 and 31a-2 under the Investment Company
Act of 1940, as amended (the "1940 Act"), relating to the maintenance of books
and records in connection with the services to be provided hereunder. Fund
Accountant further agrees that all such books and records shall be the property
of the Company and to make such books and records available for inspection by
the Company or by the Securities and Exchange Commission at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Company and its shareholders; except when requested to divulge
such information by duly-constituted authorities or court process.
9. UNCONTROLLABLE EVENTS.
Fund Accountant assumes no responsibility hereunder, and shall not be
liable, for any damage, loss of data, delay or any other loss whatsoever caused
by events beyond its reasonable control.
10. REPORTS.
Fund Accountant will furnish to the Company and to its properly
authorized auditors, investment advisers, examiners, distributors, dealers,
underwriters, salesmen, insurance companies and others designated by the Company
in writing, such reports and at such times as are prescribed pursuant to the
terms and the conditions of this Agreement to be provided or completed by Fund
Accountant, or as subsequently agreed upon by the parties pursuant to an
amendment hereto.
11. RIGHTS OF OWNERSHIP.
All computer programs and procedures developed to perform services
required to be provided by Fund Accountant under this Agreement are the property
of Fund Accountant. All records and other data except such computer programs
and procedures are the exclusive property of
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<PAGE>
the Company and all such other records and data will be furnished to the
Company in appropriate form as soon as practicable after termination of this
Agreement for any reason.
12. RETURN OF RECORDS.
Fund Accountant may at its option at any time, and shall promptly upon
the Company's demand, turn over to the Company and cease to retain Fund
Accountant's files, records and documents created and maintained by Fund
Accountant pursuant to this Agreement which are no longer needed by Fund
Accountant in the performance of its services or for its legal protection. If
not so turned over to the Company, such documents and records will be retained
by Fund Accountant for six years from the year of creation. At the end of such
six-year period, such records and documents will be turned over to the Company
unless the Company authorizes in writing the destruction of such records and
documents.
13. REPRESENTATIONS OF THE COMPANY.
The Company certifies to Fund Accountant that: (1) as of the close of
business on the Effective Date, each Fund that is in existence as of the
Effective Date has authorized unlimited shares, and (2) this Agreement has been
duly authorized by the Company and, when executed and delivered by the Company,
will constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
14. REPRESENTATIONS OF FUND ACCOUNTANT.
Fund Accountant represents and warrants that: (1) the various
procedures and systems which Fund Accountant has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
the records, and other data of the Company and Fund Accountant's records, data,
equipment facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder, and (2) this Agreement has been duly authorized by Fund Accountant
and, when executed and delivered by Fund Accountant, will constitute a legal,
valid and binding obligation of Fund Accountant, enforceable against Fund
Accountant in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting the
rights and remedies of creditors and secured parties.
15. INSURANCE.
Fund Accountant shall notify the Company should any of its insurance
coverage be canceled or reduced. Such notification shall include the date of
change and the reasons therefor. Fund Accountant shall notify the Company of
any material claims against it with respect to services
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performed under this Agreement, whether or not they may be covered by insurance,
and shall notify the Company from time to time as may be appropriate of the
total outstanding claims made by Fund Accountant under its insurance coverage.
16. INFORMATION TO BE FURNISHED BY THE COMPANY AND FUNDS.
The Company has furnished to Fund Accountant the following:
(a) Copies of the Articles of Incorporation of the Company and of any
amendments thereto, certified by the proper official of the state
in which such document has been filed.
(b) Copies of the following documents:
(i) The Company's Bylaws and any amendments thereto; and
(ii) Certified copies of resolutions of the Board of
Directors covering the approval of this Agreement,
authorization of a specified officer of the Company to
execute and deliver this Agreement and authorization
for specified officers of the Company to instruct Fund
Accountant thereunder.
(c) A list of all the officers of the Company, together with specimen
signatures of those officers who are authorized to instruct Fund
Accountant in all matters.
(d) Two copies of the Prospectuses and Statements of Additional
Information for each Fund.
17. INFORMATION FURNISHED BY FUND ACCOUNTANT.
(a) Fund Accountant has furnished to the Company the following:
(i) Fund Accountant's Articles of Incorporation; and
(ii) Fund Accountant's Bylaws and any amendments thereto.
(b) Fund Accountant shall, upon request, furnish certified copies of
corporate actions covering the following matters:
(i) Approval of this Agreement, and authorization of a specified
officer of Fund Accountant to execute and deliver this
Agreement; and
9
<PAGE>
(ii) Authorization of Fund Accountant to act as fund accountant
for the Company and to provide accounting services for the
Company.
18. AMENDMENTS TO DOCUMENTS.
The Company shall furnish Fund Accountant written copies of any
amendments to, or changes in, any of the items referred to in Section 16 hereof
forthwith upon such amendments or changes becoming effective. In addition, the
Company agrees that no amendments will be made to the Prospectuses or Statements
of Additional Information of the Company which might have the effect of changing
the procedures employed by Fund Accountant in providing the services agreed to
hereunder or which amendment might affect the duties of Fund Accountant
hereunder unless the Company first obtains Fund Accountant's approval of such
amendments or changes.
19. COMPLIANCE WITH LAW.
Except for the obligations of Fund Accountant set forth in Section 8
hereof, the Company assumes full responsibility for the preparation, contents
and distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the 1940 Act and any other laws, rules and regulations of
governmental authorities having jurisdiction. Fund Accountant shall have no
obligation to take cognizance of any laws relating to the sale of the Company's
Shares. The Company represents and warrants that no Shares of the Company will
be offered to the public until the Company's registration statement under the
Securities Act and the 1940 Act has been declared or becomes effective.
20. NOTICES.
Any notice provided hereunder shall be sufficiently given when sent by
registered or certified mail to the party required to be served with such notice
at the following address: if to the Company, to it at 3435 Stelzer Road, Suite
1000, Columbus, Ohio 43219; if to BISYS, to it at 3435 Stelzer Road, Suite
1000, Columbus, Ohio 43219, or at such other address as such party may from time
to time specify in writing to the other party pursuant to this Section.
21. HEADINGS.
Paragraph headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
22. ASSIGNMENT.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to a Fund by either of the parties hereto except by the
specific written consent of the other
10
<PAGE>
party. This Agreement shall be binding upon, and shall inure to the benefit of,
the parties hereto and their respective successors and permitted assigns.
23. GOVERNING LAW.
This Agreement shall be governed by and provisions shall be construed
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
CVO GREATER CHINA FUND, INC.
By:
------------------------------------
Title: Assistant Treasurer
------------------------------------
BISYS FUND SERVICES, INC.
By:
------------------------------------
Title: Executive Vice President
------------------------------------
11
<PAGE>
Dated: January 1, 1997
SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN
CVO GREATER CHINA FUND, INC.
AND
BISYS FUND SERVICES, INC.
FEES
Fund Accountant shall be entitled to receive an annual fee of $30,000 from each
Fund.
CVO GREATER CHINA FUND, INC. BISYS FUND SERVICES, INC.
By: By:
---------------------------- ------------------------
A-1
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 1 to the registration
statement of Form N-1A (the "Registration Statement") of our report dated May
17, 1996, relating to the statement of assets and liabilities of CVO Greater
China Fund, Inc., which appears in such Statement ofAdditional Information. We
also consent to the references to us under the headings "Independent
Accountants" and "Experts" in such Statement of Additional Information and to
the reference to us under the heading "Independent Accountants" in the
Prospectus which constitutes part of this Registration Statement.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 27, 1997
<PAGE>
CVO GREATER CHINA FUND
CLASS I
EXHIBIT 16
TOTAL RETURN
AGGREGATE ANNUAL RETURNS
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: (11/19/96 TO 04/30/97):
(1,013.00 /1,000) - 1 = 1.30%
YEAR TO DATE: (12/31/96 TO 04/30/97:
(1,005.00 /1,000) - 1 = 0.50%
QUARTERLY: (01/30/97 TO 04/30/97):
(1,004.00 /1,000) - 1 = 0.40%
MONTHLY: (04/02/97 TO 04/30/97:
(1,030.50 /1,000) - 1 = 3.05%
<PAGE>
CVO GREATER CHINA FUND
CLASS II
EXHIBIT 16
TOTAL RETURN
AGGREGATE ANNUAL RETURNS
T=(ERV/P)-1
WHERE: T= TOTAL RETURN
ERV= REDEEMABLE VALUE AT THE END OF THE PERIOD OF A
HYPOTHETICAL $1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P= A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: ( 11/19/96 TO 04/30/97 ):
( 1,013.00 /1,000)-1= 1.30%
YEAR TO DATE: ( 12/31/96 TO 04/30/97 ):
( 1,005.00 /1,000)-1= 0.50%
QUARTERLY: ( 01/30/97 TO 04/30/97 ):
( 1,004.00 /1,000)-1= 0.40%
MONTHLY: ( 04/02/97 TO 04/30/97 ):
( 1,030.50 /1,000)-1= 3.05%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> CVO GREATER CHINA FUND, INC. CLASS I
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-19-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 7860
<INVESTMENTS-AT-VALUE> 7941
<RECEIVABLES> 68
<ASSETS-OTHER> 423
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8432
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224
<TOTAL-LIABILITIES> 224
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8130
<SHARES-COMMON-STOCK> 806
<SHARES-COMMON-PRIOR> 5
<ACCUMULATED-NII-CURRENT> (4)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81
<NET-ASSETS> 8208
<DIVIDEND-INCOME> 25
<INTEREST-INCOME> 25
<OTHER-INCOME> 0
<EXPENSES-NET> 54
<NET-INVESTMENT-INCOME> (4)
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 81
<NET-CHANGE-FROM-OPS> 78
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 801
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8108
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 143
<AVERAGE-NET-ASSETS> 5326
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0.13
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.13
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> CVO GREATER CHINA FUND, INC. CLASS II
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-19-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 7860
<INVESTMENTS-AT-VALUE> 7941
<RECEIVABLES> 68
<ASSETS-OTHER> 423
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8432
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 224
<TOTAL-LIABILITIES> 224
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8130
<SHARES-COMMON-STOCK> 5
<SHARES-COMMON-PRIOR> 5
<ACCUMULATED-NII-CURRENT> (4)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81
<NET-ASSETS> 8208
<DIVIDEND-INCOME> 25
<INTEREST-INCOME> 25
<OTHER-INCOME> 0
<EXPENSES-NET> 54
<NET-INVESTMENT-INCOME> (4)
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 81
<NET-CHANGE-FROM-OPS> 78
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 801
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8108
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 143
<AVERAGE-NET-ASSETS> 50
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0.12
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.12
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
