As Filed with the Securities and Exchange Commission on February 27, 1998
Registration Nos. 33-83822
811-8760
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 5 [x]
(Check appropriate box or boxes)
CVO GREATER CHINA FUND, INC.
(Exact name of Registrant as specified in charter)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Offices with Zip Code)
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Registrant's Telephone Number, including Area Code: (888) 428-3007
Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
__X____ immediately upon filing pursuant to paragraph (b)
_______ on (date) pursuant to paragraph (b) on (date)
_______ pursuant to paragraph (a)(i) 75 days after filing
_______ pursuant to paragraph (a)(ii) on (date) pursuant to
_______ paragraph (a)(ii) of rule 485
_______ 60 days after filing pursuant to paragraph (a)(i)
If appropriate, check the following box:
_______ this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment
<PAGE>
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<CAPTION>
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
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<S> <C> <C>
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 Registrant............. Prospectus Summary; 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's Discussion of Fund
Performance................................... Not Applicable
Item 6. Capital Stock and Other Securities............ Redemption of Shares; Shareholder
Services; Management of the Fund;
Additional Information
Item 7. Purchase of Securities Being Offered.......... Management of the 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
</TABLE>
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<TABLE>
<CAPTION>
Statement of Additional
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Part B Information Caption
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<S> <C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Table of Contents
Item 12. General Information and History............... Not Applicable
Item 13. Investment Objective 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 Holders
of Securities.................................
Management of the Fund;
General Information
Item 16. Investment Advisory and Other
Services...................................... Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered...................... Management of the 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 Data............... Performance Calculations
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
PART C
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Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
CVO GREATER CHINA FUND
FUNDAMENTAL INVESTING IN SECURITIES OF CHINA,
HONG KONG, SINGAPORE AND TAIWAN
PROSPECTUS
FEBRUARY 27, 1998
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). 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 $9.3 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 approximately $250 million in assets. The address of the Fund
is 3435 Stelzer Road, Columbus, Ohio 43219. 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 (the "SAI") dated
February 27, 1998, as supplemented from time to time, for the Fund has been
filed with the Securities and Exchange Commission (the "SEC") and is available,
along with other materials, on the SEC Internet Web Site (http://www.sec.gov).
The SAI is incorporated entirely by reference into this Prospectus. The
Statement of Additional Information is available without charge by calling
1-888-428-3007.
----------------------------
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 February 27, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
------
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.................................. 22
Management of the Fund......................................... 27
Dividends and Distributions.................................... 30
Purchase of Shares............................................. 30
Redemption of Shares........................................... 31
Shareholder Services........................................... 33
Calculation of Net Asset Values................................ 34
Tax Information................................................ 34
Backup Withholding............................................. 37
Performance Information........................................ 38
Additional Information......................................... 39
Reports to Shareholders........................................ 39
A-1
<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 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). 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
pursuant to which the Adviser provides day-to-day management of the Fund. 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 BISYS Fund Services
Limited Partnership.
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 declares and pays dividends from net
investment income, if any, on an annual basis. In addition, the Fund makes
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."
A-2
<PAGE>
SHAREHOLDER AND FUND EXPENSES
The purpose of the table and example is to assist investors in
understanding the various costs and expenses that investors in the CVO Greater
China Fund (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.
<TABLE>
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CLASS I CLASS II
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SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases........................... None None
Sales Charges Imposed on Reinvested Dividends....................... None None
Redemption Fee (shares redeemed within 9 months of purchase) (1) ... 2.00% 2.00%
Redemption Fee (shares redeemed more than 9 months after purchase) . None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees....................................................... 1.25% 1.25%
Rule 12b-1 Fees (after waiver) (2).................................. 0.00% 0.00%
Other Expenses (after waivers) (3).................................. 0.75% 1.00%
Total Operating Expenses (after waivers) (4) 2.00% 2.25%
</TABLE>
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(1) 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.
(2) Rule 12b-1 fees for Class II Shares of the Fund are being waived
indefinitely. Such waiver may be terminated at any time. If these fees
were imposed, the maximum annual amount would be 0.25% of the Fund's
average daily net assets attributable to Class II Shares.
(3) "Other Expenses" for Classes I & II of the CVO Greater China Fund have
been restated to reflect current expense limitation. "Other Expenses" for
each class of the Fund reflect current waivers of administration fees
and/or reimbursements by the Adviser of certain expenses to maintain the
Total Operating Expenses for each Fund at the level set forth above
through at least October 31, 1998. Such waivers may be terminated at any
time. "Other Expenses" include audit, administration, custody, legal
registration, transfer agency, and miscellaneous other charges for Class I
and II. For Class II shares only, a shareholder servicing fee of 0.25% is
also included in "Other Expenses". Absent the aforementioned waivers and
reimbursements, the ratio of "Other Expenses" to average net assets would
be 2.47% and 2.72% for the Class I and Class II shares, respectively.
(4) Absent the voluntary waivers and reimbursements referred to above, the
ratio of "Total Fund Operating Expenses" to average net assets would be
3.72% and 4.22% for Class I and Class II shares, respectively.
EXAMPLE
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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:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C>
Class I Shares............................. $20 $63 $108 $233
Class II Shares............................ $23 $70 $120 $258
</TABLE>
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%.
A-3
<PAGE>
Moreover, while the example assumes a 5% annual return, the Fund's actual
performance will vary and may result in actual returns that are greater or less
than 5%. The foregoing table has not been audited by the Fund's independent
accountants.
A-4
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth per-share data for a share of capital stock
outstanding for the CVO Greater China Fund (the "Fund") and other selected
information for the period November 19, 1996 (commencement of investment
operations) to October 31, 1997. The information presented below has been
audited by Price Waterhouse LLP, the Fund's independent accountants, whose
unqualified opinion thereon is included in the Fund's Annual Report, which is
available upon request and without charge. The information below should be read
in conjunction with the financial statements and related notes thereto, which
are also contained in the Annual Report and incorporated by reference in this
registration statement.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SELECTED RATIOS AND DATA FOR A SHARE OF CAPITAL STOCK NOVEMBER 19, 1996*
OUTSTANDING THROUGH THE PERIOD: THROUGH OCTOBER 31, 1997
- ------------------------------------------------------- ------------------------
CLASS I SHARES:
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................................... $ 10.00
-------
Net investment income............................................... 0.03
Net realized and unrealized loss.................................... (1.33)
------
Total from investment operations.................................... (1.30)
------
NET ASSET VALUE, END OF PERIOD.......................................... $ 8.70
=======
TOTAL RETURN............................................................ (13.00%) (a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............................ $ 21,885
Ratios to average net assets:
Expenses**.......................................................... 2.00% (b)
Net investment income............................................... 0.71% (b)
PORTFOLIO TURNOVER RATE (C)............................................. 8%
AVERAGE COMMISSION RATE (D)............................................. $ 0.00457
CLASS II SHARES:
NET ASSET VALUE, BEGINNING OF PERIOD.................................... $ 10.00
-------
Net investment income............................................... 0.05
Net realized and unrealized loss.................................... (1.36)
------
Total from investment operations.................................... (1.31)
-------
NET ASSET VALUE, END OF PERIOD.......................................... $ 8.69
=======
TOTAL RETURN............................................................ (13.10%) (a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............................ $ 43
Ratios to average net assets:
Expenses**.......................................................... 2.00% (b)
Net investment income............................................... 0.55% (b)
PORTFOLIO TURNOVER RATE (C)............................................. 8%
AVERAGE COMMISSION RATE (D)............................................. $ 0.00457
</TABLE>
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* Commencement of operations.
** During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursement had not occurred, the
ratios would have been 3.73% and 3.75%, annualized for Class I and Class II
Shares, respectively.
(a) Not Annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(d) Represents the dollar amount of commissions paid on portfolio transactions
divided by the total number of portfolio shares purchased and sold for which
commissions were charged and is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued.
A-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
total assets are 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, under normal market conditions and subject to temporary
defensive investments (as defined below), invests 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 of the 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 of the
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. The Fund, generally, 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.
Equity securities, for purposes of the 65% policy, are 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. Equity securities are 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 such that the Fund will be able to dispose of a security, in the
ordinary course of business, without taking a materially reduced price.
In addition to its investments in equity securities, the Portfolio may
invest up to 35% of its net assets in other types of transactions 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
A-6
<PAGE>
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, in an orderly manner, 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, 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 limitations 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 and evidence 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 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 are 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
A-7
<PAGE>
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 which, in the opinion of the Adviser based on guidelines
established by the Fund's Board of Directors, are deemed 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 are
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,
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 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. Under normal market
conditions the annual portfolio turnover rate 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. During
the Fund's first fiscal period (from November 19, 1996 through October 31,
1997), the portfolio turnover rate was 8% reflecting the initial structuring of
the Fund's portfolio.
THE FUND'S INVESTMENTS IN THE GREATER CHINA REGION
THE FOLLOWING IS A GENERAL DISCUSSION OF THE ECONOMIES IN WHICH THE FUND
PRINCIPALLY INVESTS. 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.
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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 1997, total foreign capital committed to investments in China
reached US$178 billion and China's total trade approached $325 billion, ranked
tenth in the world. 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% p.a.. This was surpassed between
1991 and 1995, when 10.5% growth p.a. was achieved. China's GDP, while still
rapid, has slowed for the last few years, falling from 11.8% in 1994, to 10.2%
(1995), 9.6% (1996) and 8.8% in 1997. 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, although the political transition upon Deng's death has been
relatively smooth, there could still be 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$178 billion in 1997, an increase of 34% from 1996. Hong Kong accounted for
around 50% of this total at the end of 1996. Exports from China continue to rise
strongly, with the 1997 total rising 20.9% to US$182.7 billion, 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."
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.
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
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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
On June 30, 1997, Hong Kong became a Special Administrative Region
("SAR") of China. Under the Joint Declaration and Chinese law implementing
certain accords (the "Basic Law"), the current social and economic systems in
Hong Kong will remain unchanged for at least 50 years, and Hong Kong enjoys a
high degree of autonomy except in foreign and defense affairs. The SAR, led by
the Chief Executive, CH Tung, who was selected by the Chinese appointed
Provisional legislature in late 1996, has been vested with executive,
legislative and judicial powers. Laws in force under British rule (pre-
handover) amended by the SAR legislature, remain in force except to the extent
that they contravene the Basic Law or Chinese constitutional law. China may not
levy taxes on the SAR, the Hong Kong dollar remains fully convertible and Hong
Kong remains a free port. Under the Basic Law, Hong Kong's current social
freedoms, including freedoms of speech, press and assembly, travel and religion,
are not to be affected.
The successful and peaceful transfer of Hong Kong to Chinese sovereignty
on June 30, 1997 accomplished a long- desired goal of the Chinese authorities,
and while there have been minor problems post handover, the SAR continues to be
ruled according to the precepts of the Basic Law. On July 1, 1997, the Chinese
leadership carried out the pledge made during their disagreement with the
previous British administration and disbanded the Legislative Council ("Legco")
which was comprised of a majority of popularly-elected Democratic Party
legislators. In their place, the Chinese leadership appointed hand-picked
legislators to the Legco. The Chinese leadership has made clear that its
intention is to replace the Chinese- selected legislators in May, 1998 with a
new council elected partially by geographic, and partially by functional
constituencies. Ultimately. the Chinese leadership's announced intention is to
have a majority of the legislators elected by popular voting by the time of the
third round of Legco elections in 2002.
TAIWAN
Occupied by the Japanese for fifty years (1895-1945), Taiwan was briefly
reunified with China after the end of the Second World War, and since 1949 has
been controlled by the Nationalist party, the Kuomintang (KMT), led initially by
Chiang Kai Shek. Following the death of his son, Chiang Ching Kuo in 1988, the
regime has experienced a rapid liberalization with the KMT now led by a native
Taiwanese, Lee Tung Hsui, who was elected as President in a democratic election
in November 1996 and with the opposition Democratic People's Party (DPP)
controlling the majority of the municipal authorities, including the capital,
Taipei, since elections in November 1997.
Between 1960 and 1997, Taiwan's GDP has grown from less than $2 billion
to $293.59 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
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Taiwanese government figures showed direct investment in China of $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 began deteriorating 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.
Since the reelection of Lee Teng-Hsui at the end of 1996, relations between the
two countries have stabilized, with indications in early 1998, that, following
the successful handover of Hong Kong to China in June 1997, a similar pattern of
"one country, two systems" would be followed by the new Chinese leadership led
by President Jaing Zemin.
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 $70.7 billion (December 1997), 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 $30,897 at the end of 1997, 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.
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 invests 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. 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.
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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.
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2. FOREIGN SECURITIES.
The Fund invests 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 changes
in 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 invests at least 65% of its total assets in Greater China
Investments, its investment performance is 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 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
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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.
For more information about securities markets in the Greater China
Region, including the limitations imposed upon foreign investors such as the
Fund, see "Greater China Region Securities Markets and Foreign Investment
Limitations" in the Statement of Additional Information.
4. THE GREATER CHINA REGION IS EXPERIENCING IMPORTANT ECONOMIC
AND POLITICAL EVOLUTION.
The Fund invests 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 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
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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 30% and also limits the total amount that may be invested in
Taiwanese securities to $5 million for individuals and $20 million for corporate
entities unless, the foreign investment institutions have conducted business for
at least 3 years and have under their 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 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
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special rules apply, currencies other than the U.S. dollar). In general, gain or
loss recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futurescontracts or non-equity options subject to Code section 1256
(unless a Fund elects otherwise), will be treated as ordinary income or loss. 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), accelerate 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
if 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 purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the Fund invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualifying electing
fund (a "QEF"), in which case it will each year have ordinary income equal to
its pro rata share of the PFIC's ordinary earnings for the year and long-term
capital gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, for tax years beginning after
December 31, 1997, the Fund may make a mark-to-market election with respect to
its PFIC stock. Pursuant to such an election, the Fund will include as ordinary
income any excess of the fair market value of such stock at the close of any
taxable year over its adjusted tax basis in the stock. If the adjusted tax basis
of the PFIC stock exceeds the fair market value of such stock at the end of a
given taxable year, such excess will be deductible as ordinary loss in the
amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Fund included in income in previous
years. The Fund's holding period with respect to its PFIC stock subject to the
election will commence on the first day of the following taxable year. If the
Fund makes the mark-to-market election in the first taxable year it holds PFIC
stock, it will not incur the tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF and does not make
a mark-to-market election, then, in general, (1) any gain recognized by the Fund
upon a sale or other disposition of its interest in the PFIC or any "excess
distribution" (as defined) received by the Fund from the PFIC will be allocated
ratably over the Fund's holding period in the PFIC stock, (2) the portion of
such gain or excess distribution so allocated to the year in which the gain is
recognized or the excess distribution is received shall be included in the
Fund's gross income for such year as ordinary income (and the distribution of
such portion by the Fund to shareholders will be taxable as an ordinary income
dividend, but such portion will not be subject to tax at the Fund level), (3)
the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate, as the
case may be) in effect for such prior year, plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received, at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Fund to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the Fund
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
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. Under normal market conditions, the annual portfolio
turnover rate is expected to 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."
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
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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, 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 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.
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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 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) 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") 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 moneys in settlement of obligations and could also cause
hedges it has entered into to be rendered without value, resulting in full
currency
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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 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 or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, or cause the Fund to hold a security it might otherwise sell.
Futures and options markets can be illiquid in some circumstances and
certain over-the-counter options can have no market. 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 is 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 Hedging and Other Strategic Transactions. The Fund may invest up to 35%
of its total assets 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
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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 above 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 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 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.
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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 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, 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
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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
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."
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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. Any gain realized
by the Fund on such sales will be recognized at the time the Fund enters into
the short sale.
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 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 considerations
different from the 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
requires, 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, requires the Fund to hold the securities subject to the call (or
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<PAGE>
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 requires 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 generally requires 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.
The Fund will engage in transactions in futures contracts and options
only to the extent such transactions are consistent with the requirements of the
Code 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
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 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.
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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 $9.3 billion in
assets and serves as investment adviser to twenty-one 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 approximately $250 million in assets. The ChinaVest Group is
represented by ChinaVest, Inc., whose principal business address is 160 Sansome
Street, 18th Floor, San Francisco, California 94104.
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 the inception of the Fund. 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 Adviser.
ADMINISTRATOR, FUND ACCOUNTANT, TRANSFER AGENT, SHAREHOLDER SERVICING AGENT AND
CUSTODIAN
BISYS Fund Services Limited Partnership ("BISYS") serves as the Fund's
administrator and generally assists the Fund in all aspects of its
administration and operation. BISYS is a wholly owned subsidiary of BISYS Group,
Inc., which is headquartered in Little Falls, New Jersey, and through its
subsidiaries support more than 5,000 financial institutions and corporate
clients through two strategic business units. BISYS Information Services Group
provides image and data processing outsourcing, and pricing analysis to more
than 600 banks nationwide. BISYS Investment Services Group designs, administers
and distributes over 300 families of proprietary mutual funds consisting of more
than 350 portfolios and provides 401(k) marketing support, administration, and
recordkeeping services in partnership with banking institutions and investment
management companies. 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 a monthly administrator's fee computed at an annual
rate of 0.15% of the average daily net assets of the Fund.
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. Pursuant to the Transfer Agency Agreement, BISYS Fund
Services, Inc. is entitled to receive a fee of $15 per account. Pursuant to the
Fund Accounting
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<PAGE>
Agreement, BISYS Fund Services, Inc. receives 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.
Pursuant to a Shareholder Servicing Plan and related Agreement, the Fund
has entered into a Shareholder Servicing Agreement with BISYS Fund Services,
Inc. to serve as the Fund's shareholder servicing agent. 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. BISYS Fund
Services, Inc. may use all or a portion of this fee to make payments to
broker-dealers which enter into sales agreements with BISYS Fund Services, Inc.
and which provide certain shareholder services to their clients who are Class II
shareholders.
The Bank of New York serves as custodian of the assets of the Fund. The
principal business address of The Bank of New York is 90 Washington Street, New
York, New York 10286.
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 AND DISTRIBUTION PLAN
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"), 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. No payments
have been made pursuant to the Plan as the Adviser has voluntarily agreed to
finance, indefinitely, from of its own resources all distribution and sales
related expenses of the Fund. The Adviser may discontinue such reimbursement at
any time. Distribution expenses may include the development and implementation
of direct mail promotions and advertising for the Fund and the preparation,
printing and distribution of prospectuses for the Fund to recipients other than
existing shareholders. Payments may also be made 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 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
the Distributor, 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 each is in the best
interest of the shareholders of the Fund.
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<PAGE>
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.
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 Adviser and the Administrator bear all
expenses in connection with the performance of their advisory and administrative
services. 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 Securities and Exchange Commission
(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.
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 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. Although 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, 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
Code.
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
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<PAGE>
$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
4:00 p.m., New York City time. See "Calculation of Net Asset Value." Investors
whose purchase orders are received prior to 4:00 p.m. New York City time will
acquire their shares at the net asset value set as of that day. An Investor
whose purchase order is received after 4:00 p.m. New York City time will acquire
shares at the net asset value set as of the next trading day.
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 1-888-428-3007 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 the Bank are all open for business. Federal Funds purchases will
be accepted only on a day on which the Fund and the custodian bank are open for
business. To obtain wire instructions, please call the Fund at 1-888-428-3007.
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 (moneys 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 moneys to the custodian bank as
outlined above. Notification must be given to the Fund at 1-888-428-3007 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
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<PAGE>
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 confirmation 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 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 4:00 p.m., New York City time. See "Calculation of Net Asset
Value." Investors whose purchase orders are received after 4:00 p.m. New York
City time will acquire shares at the net asset value set as of the next trading
day.
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 value per share of
the Fund is 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 may be 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 1-888-428-3007 for further details.
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BY TELEPHONE
Provided the Telephone Redemption Option has been authorized, a
redemption of shares may be requested by calling the Fund at 1-888-428-3007 and
requesting that the redemption proceeds be mailed to the primary registration
address or wired per the authorized instructions. 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 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 fifteen business days from the purchase date. Such funds are
invested during this holding period. 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. 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 (1-888-428-3007).
A-30
<PAGE>
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.
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.
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 under procedures established
and monitored by 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
as of 4:00 p.m., New York City time, on each day the New York Stock Exchange is
open. Exchange-traded portfolio securities will generally be valued at their
market value at the close of the primary exchange on which they are traded. As
the Fund will invest in securities traded on exchanges located in the Greater
China Region, the calculation of the Fund's net asset value will not occur
contemporaneously with the determination of the prices of certain of the
portfolio securities used in the calculation. If events materially affecting the
value of such securities occur during such period, then these securities, if
necessary, will be valued at their fair value as determined in good faith under
procedures established and monitored by the Fund's Board of Directors.
TAX INFORMATION
Taxation Of The Fund
The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Code, including the
requirements with respect to diversification of assets, distribution of income
and sources of income. It is the Fund's policy to distribute to its 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 tax or the 4% excise tax. If the Fund fails to
satisfy any of the Code requirements for qualification as a regulated investment
company, it will be taxed at regular corporate tax rates on all of its taxable
income (including capital gains) without any deduction for distributions to
shareholders, and distributions to shareholders will be taxable as ordinary
dividends (even if derived from the Fund's net long-term capital gains) to the
extent of the Fund's current and accumulated earnings and profits.
Distributions by the Fund of its net investment income and the excess,
if any, of its net short-term capital gain over its net long-term capital loss
are generally taxable to shareholders as ordinary income. These distributions,
whether paid in cash or additional shares of the Fund, are treated as dividends
for federal income tax purposes. Because it is anticipated that the investment
income of the Fund will not include dividends from domestic corporations, none
of theordinary income dividends paid by the Fund should qualify for the 70%
dividends-received deduction for corporate shareholders. Distributions by the
Fund of the excess, if any, of its net long-term capital gain over its net
short-term capital loss are designated as capital gain dividends and are taxable
to shareholders as long-term capital gains, without regard to the length of time
the Fund's shares were held.
Portions of the Fund's investment income may be subject to foreign
withholding and other taxes. The economic effect of such taxes on the total
return of the Fund cannot be predicted. The Fund may elect to "pass through" to
its shareholders these foreign taxes, in which event each shareholder will be
required to include its pro rata portion thereof in its gross income, but will
be able to deduct or (subject to various limitations) claim a foreign tax credit
for such amount.
Distributions by the Fund to shareholders will be treated in the same
manner for federal income tax purposes whether received in cash or reinvested in
additional shares of the Fund. In general, distributions by the Fund are taken
into account by the shareholders in the year in which they are made. However,
certain distributions made during January will be treated as having been paid by
the Fund and received by the shareholders on December 31 of the preceding year.
A statement setting forth the federal income tax status of all distributions
made or deemed made during the year, including any amount of foreign taxes
"passed through," will be sent to shareholders promptly after the end of each
year. A shareholder who purchases shares of the Fund just prior to the record
date will be taxed on the entire amount of the dividend received, even though
the net asset value per share on the date of such purchase may have reflected
the amount of such dividend.
A shareholder will recognize gain or loss upon the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
Any loss recognized upon a taxable disposition of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any capital gain dividends received on such shares. All or a portion
of any loss recognized upon a taxable disposition of shares of the Fund may be
disallowed if other shares of the Fund are purchased within 30 days before or
after such disposition.
Ordinary income dividends paid to non-resident alien or foreign entity
shareholders generally will be subject to United States withholding tax at a
rate of 30% (or lower rate under an applicable treaty). Foreign shareholders are
urged to consult their own tax advisers concerning the applicability of United
States withholding taxes.
BACKUP WITHHOLDING
Under the backup withholding rules of the Code, certain shareholders may
be subject to 31% backup withholding tax on ordinary income dividends, capital
gain dividends and redemption payments made by the Fund. In order to avoid this
backup withholding, a shareholder must provide the Fund with a correct taxpayer
identification number ("TIN") (which for an individual is usually his Social
Security number) or certify that the shareholder is a corporation or otherwise
exempt from or not subject to backup withholding (an "exempt recipient").
Nonresident aliens that are otherwise subject to backup withholding need only
provide a completed Form W-8.
If you do not have a TIN or do not know your number, you may apply for
one by submitting, for individuals, Form SS-5, "Application for a Social
Security Card" or, for non-individuals, Form SS-4, "Application for Employer
Identification Number" to the Internal Revenue Service. 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 prior to our receiving
your TIN.
The foregoing discussion of federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative, judicial or administrative action. As the
foregoing discussion is for general information only, a prospective shareholder
should also review the more detailed discussion of federal income tax
considerations relevant to the Fund that is contained in the Statement of
Additional Information. In addition, each prospective shareholder should consult
with his own tax adviser as to the tax consequences of investments in the Fund,
including the application of state, local and foreign taxes, which may differ
from the federal income tax consequences described above.
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. The Fund from time to time may also advertise its performance
relative to a market capitalization-weighted composite of the indices compiled
by independent services and organizations for the markets in which the Fund
invests.
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.
A-35
<PAGE>
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.
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.
A-36
1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CVO GREATER CHINA FUND, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
(888) 428-3007
FEBRUARY 27, 1998
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 February 26, 1998 (the "Prospectus"). This Statement of
Additional Information contains additional information to that set forth in the
Prospectus and should be read in
1
<PAGE>
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.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Additional Information on Portfolio Instruments........................................ 2
Hedging and Other Strategic Transactions............................................... 4
Greater China Region Securities Markets................................................ 5
Investment Limitations................................................................. 5
Management of the Fund................................................................. 10
Distributor............................................................................ 13
Administration, Transfer Agency, Fund Accounting, Shareholder Servicing and Custody
Services .............................................................................. 13
Portfolio Transactions................................................................. 15
Purchase of Shares..................................................................... 15
Redemption of Shares................................................................... 16
Performance Calculations............................................................... 16
Additional Information Concerning Dividends, Distributions and Taxes .................. 18
Shareholder Services................................................................... 22
General Information.................................................................... 22
Financial Statements................................................................... 24
Additional Information and Risk Factors with Respect to Greater China Region Countries
....................................................................................... A-1
</TABLE>
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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
2
<PAGE>
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").
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 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
3
<PAGE>
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.
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
4
<PAGE>
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.
5
<PAGE>
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.
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.
GREATER CHINA REGION SECURITIES MARKETS
---------------------------------------
CHINA
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6
<PAGE>
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.
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.
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.
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. Since then, reflecting the large
and growing trade surplus being accumulated by China, the exchange rate has
gradually appreciated, with RMB trading at 8.28 to US$1.00 as at the date of
this prospectus, on appreciation of almost 5% over the last four years.
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 January 23, 1998, there were 416 companies listed on The Shanghai
Securities Exchange, of which 50 were "B" Shares. The total market
capitalization of the "B" Shares at November 30, 1997 (which includes equities
and bonds) was approximately RMB17.99 billion (US$2.17 billion).
As of January 23, 1998, there were 306 companies listed on The Shenzhen
Stock Exchange, of which 49 were "B" Shares. The total market capitalization of
the "B" Shares at November 30, 1997 was approximately RMB18.17 billion (US$2.19
billion).
Certain market and market capitalization risks related to investments in the
stock exchanges in China are described in "Risks Associated with the Fund." See
"Additional Information and Risk Factors with Respect to Greater China Region
Countries" for more information about economic performance results and the
historical performance of stock markets in China.
HONG KONG
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 December 31, 1997, 658 companies and 1,533 securities were
listed on the HKSE. Market capitalization as of the same date was approximately
HK$3,203 billion, an decrease of approximately 7.85% from December 31, 1996.
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
7
<PAGE>
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 December 31, 1997 was
658, compared to 543 at the beginning of 1996. Average daily turnover on the
HKSE for 1997 was HK$15.5 billion compared with HK$5.6 billion from 1996.
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
- ------
The Taiwan Stock Exchange (the "TSE"), the principal stock exchange in
Taiwan, is owned by government-controlled enterprises and private banks. There
is also, since 1995, the Over-the-Counter market (the "OTC"), which has more
lenient listing regulations than the TSE. 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. The Index then declined to 4692 in March 1996 during the
height of the missile crisis, before rising sharply until mid 1997, driven by
strong earnings from the electronics sector, peaking at over 10,000 in August
1997. The decision by the Taiwanese authorities to allow a depreciation of the
Taiwanese dollar to offset the effects of the regional currency crisis saw a
fall in the index to the 8,000 level in early 1998.
TAIWAN - 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.
Subsequently, on March 1, 1996, the authorities approved a stock market
liberalization measure allowing foreign individual investors and companies known
as General Foreign Institutional Investors ("GFIIs") to participate in the
Taiwanese domestic stock market, subject to limits on total amounts invested of
US$5 million for individuals and US$20 million for GFIIs, compared to US$400
million for GFIIs.
8
<PAGE>
The Fund is a GFII and also invests in Taiwan-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."
Over time, the restrictions on investment in Taiwan may ease further to
permit greater and more flexible investment in securities listed on the TSE.
Since early 1996, the maximum investment by all foreign investors in the Taiwan
domestic stock market in any listed firm has been increased from 15% in stages
to 30% at the end of 1997. Certain market and market capitalization risks
related to investments in the TSE are described in "Risks Associated with the
Fund." See "Additional Information and Risk Factors with Respect to Greater
China Regions" for more information about economic performance results of Taiwan
and the historical performance of the TSE.
SINGAPORE
- ---------
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 fourth
largest stock market in Asia, after Japan, Hong Kong and Taiwan, with a market
capitalization at December, 1997, of S$329 billion. As of 1997, there were 20
new listings of companies on the SES. Average monthly turnover on the SES for
1997 was S$7,213 million, compared with S$5,141.63 million in 1996. As of
December 31, 1997, 294 companies were listed on the SES. Another 62 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$3.17
billion at December 1997.
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, 1997, there were 9 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.
9
<PAGE>
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);
(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;
10
<PAGE>
(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. 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.
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.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE FUND PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ------------------------------ ------------------------------------
<S> <C> <C>
Morris W. Offit* Chairman of the Board, President, President and Director, OFFITBANK
OFFITBANK (1983-present).
520 Madison Avenue and Director
New York, NY 10022
Age: 61 Years
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
Robert A. Theleen* Director Group Chairman, ChinaVest Partnerships
ChinaVest Limited (1980-present); Director, ChinaVest
19/F, 11 Duddell Street Management Ltd., Wah Ming Hong
Central, Hong Kong Holdings Ltd., ZIC Holdings and Tait
Age: 52 Years Holdings Ltd.; Former Director, Luks
Industrial Co. Ltd.
John W. Glynn, Jr. Director President, Glynn Capital Management
Glynn Capital Management (1983 -present).
Building 4, Suite 235
3000 Sand Hill Road
Menlo Park, CA 94025
Age: 57 Years
Edward J. Landau Director Of Counsel, Wolf, Block Schorr and Solis-
Wolf, Block Scorr and Solis-Cohen Cohen, LLP (2/1/98 - Present); Member,
LLP250 Park Avenue Lowenthal, Landau, Fischer & Bring, P.C.
New York, NY 10177 (1960-1/31/98); Director, Revlon Group
Age: 70 Years Inc., Revlon Consumer Products Inc.,
Pittsburgh Annealing Box and Clad Metals
Inc.
The Very Reverend James Parks Director President, Interfaith Center of New York
Morton (1/1/98- present); formerly Dean of
Interfaith Center of New York Cathedral of St. John the Divine (1972 -
570 Lexington Avenue 1996).
New York, New York 10022
Age: 73 Years
Dr. Wallace Mathai-Davis Secretary and Treasurer Managing Director, OFFITBANK (1986 -
OFFITBANK present).
520 Madison Avenue
New York, NY 10022
Age: 53 Years
Stephen Brent Wells Assistant Treasurer Managing Director, OFFITBANK (1994 to
OFFITBANK present).
520 Madison Avenue
New York, NY 10022
Age: 53 Years
Vincent M. Rella Assistant Treasurer Controller, OFFITBANK (1986 to present).
OFFITBANK
520 Madison Avenue
New York, NY 10022
Age: 45 Years
</TABLE>
12
<PAGE>
x
<TABLE>
<S> <C> <C>
Martin R. Dean Assistant Treasurer Regulatory and Compliance Officer,
BISYS Fund Services BISYS Fund Services (May 1994 to
3435 Stelzer Road present); Previously, Senior Manager,
Columbus, OH 43219 KPMG Peat Marwick, LLP.
Age: 34 Years
Matthew Constancio Assistant Secretary Manager, Client Legal Services, BISYS
BISYS Fund Services Fund Services (November 1996 to present);
3435 Stelzer Road Previously, Mutual Fund Administrator,
Columbus, OH 43219 Payden & Rygel Investment Group.
Age: 33 Years
Alaina Metz Assistant Secretary Chief Administrative Officer, BISYS Fund
BISYS Fund Services Services, (June 1995 to present);
3435 Stelzer Road Previously, Supervisor of Blue Sky
Columbus, OH 43219 Department, Alliance Capital Management,
Age: 30 Years L.P. (May 1989 to June 1995).
Ellen Stoutamire Assistant Secretary Vice President, Client Legal Services,
BISYS Fund Services BISYS Fund Services; Previously,
3435 Stelzer Road Associate Counsel, Franklin Templeton
Columbus, OH 43219 Mutual Funds; Vice President and General
Age: 49 Years Counsel, Pioneer Western Corporation.
</TABLE>
* "Interested person" of the Fund as defined in the 1940 Act.
The Board of Directors has designated an audit committee to advice the
full Board with respect to accounting, auditing and financial matters affecting
the Fund. The Audit Committee is comprised of Mr. Landau, The Very Reverend
Morton and Mr. Glynn and meets periodically.
13
<PAGE>
The following table shows the compensation paid by the Fund to the
Directors for the calendar year 1997:
<TABLE>
<CAPTION>
DIRECTOR COMPENSATION TABLE
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM REGISTRANT AND
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS FUND COMPLEX*
NAME OF DIRECTOR FROM THE REGISTRANT FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS
- ---------------- ------------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Morris W. Offit $0 $0 $0 $0
Robert A. Theleen $0 $0 $0 $0
John W. Glynn, Jr. $5,853.26 $0 $0 $5,853.26
Edward J. Landau $5,353.26 $0 $0 $28,853.26
The Very Reverend $5,853.26 $0 $0 $29,353.26
James Parks Morton
</TABLE>
* For this purpose, the "Fund Complex" consists of all other Regulated
Investment Companies advised by OFFITBANK.
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.
The Fund has no pension or retirement plan and pays no pension or retirement
benefits to its officers or directors.
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
14
<PAGE>
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. For the fiscal year ended
October 31, 1997, the Adviser earned and waived fees of $123,914.
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 ("Furman
Selz"), on June 1, 1995. 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 Agreement was approved
by the Fund's Board of Directors on October 27, 1997. 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. For the
fiscal year ended October 31, 1997, no distribution costs were incurred by the
Fund.
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.
ADMINISTRATION, TRANSFER AGENCY, FUND ACCOUNTING,
SHAREHOLDER SERVICING AND CUSTODY
SERVICES
15
<PAGE>
ADMINISTRATION
- --------------
BISYS Fund Services Limited Partnership ("BISYS") serves as
Administrator to the Fund pursuant to an Administration Agreement dated January
1, 1997 (the "Administration Agreement"). The Administration Agreement was
approved by the Fund's Board of Directors on December 19, 1996. 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). Pursuant
to the Administration Agreement, BISYS performs certain administrative and
clerical services. BISYS also furnishes office space and certain facilities
reasonably necessary for the performance of its services under the
Administration 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.
Pursuant to the Administration Agreement, the Fund pays BISYS a monthly fee
which on an annualized basis will not exceed .15% of the average daily net
assets of the Fund.
Prior to January 1, 1997, Furman Selz served as the Fund's
Administrator. For the period November 19, 1996 to December 31, 1996, Furman
Selz earned and waived administration fees of $798. For the period January 1,
1997 to October 31, 1997, BISYS earned and waived administration fees of
$14,072.
TRANSFER AGENCY
- ---------------
BISYS Fund Services, Inc. serves as the Fund's Transfer Agent and
Dividend Disbursing Agent pursuant to a Transfer Agency Agreement dated January
1, 1997 (the "Transfer Agency Agreement"). The Transfer Agency Agreement was
approved by the Fund's Board of Directors on December 19, 1996. The Transfer
Agency 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) of any
party, and such Agreements may be terminated by either party on 60 days' written
notice. 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.
FUND ACCOUNTING
- ---------------
BISYS Fund Services, Inc. serves as the Fund's Fund Accountant pursuant
to a Fund Accounting Agreement dated January 1, 1997 (the "Fund Accounting
Agreement"). The Fund Accounting Agreement was approved by the Fund's Board of
Directors on December 19, 1996. The 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 Agreement 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. Under
the Fund Accounting Agreement, BISYS Fund Services, Inc. maintains books and
records required under Rule 31a-1 under the Investment Company Act, including
journals containing an itemized daily record of purchases and sales of
securities and receipts and disbursements of cash; ledgers reflecting all
assets, liability and reserve accounts; and a monthly trial balance of all
ledger accounts. BISYS Fund Services, Inc. also calculates the Fund's net asset
value on a daily basis; obtains security prices from independent pricing
services; verifies and reconciles daily trade activities; posts Fund
transactions; provides accounting and periodic reports; and provides information
for the Fund's federal and state income tax returns, audits and securities
filings. Pursuant to the Fund Accounting Agreement, the Fund pays BISYS Fund
Services, Inc. the sum of $30,000 per year.
16
<PAGE>
Prior to January 1, 1997, Furman Selz served as the Fund's Fund
Accountant. For the period November 19, 1996 to December 31, 1996, Furman Selz
earned fund accounting fees of $3,939. For the period January 1, 1997 to October
31, 1997, BISYS Fund Services, Inc. earned fund accounting fees of $30,968.
SHAREHOLDER SERVICING
- ---------------------
Pursuant to a Shareholder Servicing Plan and related Agreement, the
Fund has entered into a Shareholder Servicing Agreement dated January 1, 1997
with BISYS Fund Services, Inc. (the "Shareholder Servicing Agreement") under
which BISYS Fund Services, Inc. serves as the Fund's shareholder servicing
agent. 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. BISYS Fund Services, Inc. may use all or a portion of
this fee to make payments to broker-dealers which enter into sales agreements
with BISYS Fund Services, Inc. and which provide certain shareholder services to
their clients who are Class II shareholders.
The Shareholder Servicing Agreement continues in effect until December
31, 1998 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) of any party, and such Agreements may be terminated by
either party on 60 days' written notice.
Prior to January 1, 1997, Furman Selz served as the Fund's Shareholder
Servicing Agent. For the period November 19, 1996 to December 31, 1996, Furman
Selz incurred no shareholder servicing fees. For the period January 1, 1997 to
October 31, 1997, BISYS Fund Services, Inc. earned and waived shareholder
servicing fees of $123.
CUSTODY
- -------
The Bank of New York (the "Custodian") serves as the Fund's Custodian
pursuant to a Custodian Agreement dated September 1, 1998(the "Custodian
Agreement"). The Custodian is located at 90 Washington Street, New York, New
York 10286. 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 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.
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.
17
<PAGE>
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.
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
18
<PAGE>
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:
P(l + T )n = ERV
where: P = a hypothetical initial payment of $1,000.
T = the average annual total return.
n = the number of years.
ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period.
For the period November 19, 1996 (inception date of the Fund) through
October 31, 1997, the non-annualized total return for the Class I and Class II
Shares of the Fund were (13.00)% and (13.10)%, 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:
YIELD = 2[(a - b + 1)6 - 1]
-----
cd
19
<PAGE>
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of any
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.
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by a Fund based on the market value of the obligation (including
actual accrued interest) at the close of business on the last day of each month,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest), (2) dividing that figure by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.
The Fund may also advertise its "risk adjusted return," which reflects
the total return of the Fund over time adjusted to reflect volatility of the
Fund.
The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc. or other 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 financial and industry publications, including
Barron's, Business Week, Forbes, Fortune, Institutional Investor, Money,
Morningstar, Mutual Fund Values, The Wall Street Journal, The New York Times and
U.S.A. Today.
The Fund may include in advertising or sales literature discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting), investment
management techniques, policies or investment suitability of a Fund, economic
and political conditions and the relationship between sectors of the economy and
the economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks and bonds. From time
to time advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well as
the views of the Adviser as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to the Fund. In addition,
selected indices may be used to illustrate historic performance of select asset
classes.
20
<PAGE>
ADDITIONAL INFORMATION CONCERNING
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code that are described below. Distributions by the Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and will, therefore, count towards the satisfaction of the
Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement").
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. In addition, gain will be recognized as a
result of certain constructive sales, including short sales "against the box".
However, gain recognized on the disposition of a debt obligation purchased by
the Fund at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code section 1256
(unless a Fund elects otherwise), will generally be treated as ordinary income
or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction and (2) the
capital interest on acquisition indebtedness under Code section 263(g). Built-in
losses will be preserved where the Fund has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed
through to the Fund's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short
21
<PAGE>
sale" (which includes for certain purposes the acquisition of a put option) or
is substantially identical to another asset so used, (2) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the- money) with respect
thereto) or (3) the asset is stock and the Fund grants an in-the-money qualified
covered call option with respect thereto. In addition, the Fund may be required
to defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.
Certain transactions that may be engaged in by the Fund (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. The Fund, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts.
The Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the Fund invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualifying electing
fund (a "QEF"), in which case it will each year have ordinary income equal to
its pro rata share of the PFIC's ordinary earnings for the year and long-term
capital gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, for tax years beginning after
December 31, 1997, the Fund may make a mark-to-market election with respect to
its PFIC stock. Pursuant to such an election, the Fund will include as ordinary
income any excess of the fair market value of such stock at the close of any
taxable year over its adjusted tax basis in the stock. If the adjusted tax basis
of the PFIC stock exceeds the fair market value of such stock at the end of a
given taxable year, such excess will be deductible as ordinary loss in the
amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Fund included in income in previous
years. The Fund's holding period with respect to its PFIC stock subject to the
election will commence on the first day of the following taxable year. If the
Fund makes the mark-to-market election in the first taxable year it holds PFIC
stock, it will not incur the tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF and does
not make a mark-to-market election, then, in general, (1) any gain recognized by
the Fund upon a sale or other disposition of its interest in the PFIC or any
"excess distribution" (as defined) received by the Fund from the PFIC will be
allocated ratably over the Fund's holding period in the PFIC stock, (2) the
portion of such gain or excess distribution so allocated to the year in which
the gain is recognized or the excess distribution is received shall be included
in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate, as
the case may be) in effect for such prior year, plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received, at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Fund to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the Fund
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part
22
<PAGE>
of any net capital loss, any net long-term capital loss or any net foreign
currency loss (including, to the extent provided in Treasury Regulations, losses
recognized pursuant to the PFIC mark-to-market election) incurred after October
31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and does not hold more than 10% of the outstanding voting
securities of such issuer), and no more than 25% of the value of its total
assets may be invested in the securities of any one issuer (other than U.S.
Government securities and securities of other regulated investment companies),
or in two or more issuers which the Fund controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put) with
respect to a security is treated as issued by the issuer of the security not the
issuer of the option.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
its ordinary income for such calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses and ordinary gains or losses arising as a
result of a PFIC mark-to-market election (or upon an actual disposition of the
PFIC stock subject to such election) incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes. Such dividends paid by the Fund generally will not qualify for the
70% dividends-received deduction for corporate shareholders.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
(58% for alternative minimum tax purposes) of the capital gain recognized upon
the Fund's disposition of domestic qualified "small business" stock will be
subject to tax.
23
<PAGE>
Conversely, if the Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If the Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
may entitle the Fund to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Fund's assets to be invested in various
countries is not known. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, the Fund may elect to "pass through" to the Fund's shareholders
the amount of foreign taxes paid by the Fund. If the Fund so elects, each
shareholder would be required to include in gross income, even though not
actually received, his pro rata share of the foreign taxes paid by the Fund, but
would be treated as having paid his pro rata share of such foreign taxes and
would therefore be allowed to either deduct such amount in computing taxable
income or use such amount (subject to various Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
tax credit limitation rules of the Code, each shareholder would treat as foreign
source income his pro rata share of such foreign taxes plus the portion of
dividends received from the Fund representing income derived from foreign
sources. No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should consult his
own tax adviser regarding the potential application of foreign tax credits.
Distributions by the Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund. Shareholders receiving a distribution in the form
of additional shares will be treated as receiving a distribution in an amount
equal to the fair market value of the shares received, determined as of the
reinvestment date. In addition, if the net asset value at the time a shareholder
purchases shares of the Fund reflects undistributed net investment income or
recognized capital gain net income, or unrealized appreciation in the value of
the assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in one of these months will be deemed
to have been received by the shareholders (and made by the Fund) on December 31
of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has failed
to provide a correct taxpayer identification number, (2) who is subject to
backup withholding for failure to properly report the receipt of interest or
dividend income, or (3) who has failed to certify to the Fund that it is not
subject to backup withholding or that it is a corporation or other "exempt
recipient."
24
<PAGE>
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. Long-term capital gain recognized by an individual
shareholder will be taxed at the lowest rate applicable to capital gains if the
holder has held such shares for more than 18 months at the time of the sale.
However, any capital loss arising from the sale or redemption of shares held for
six months or less will be treated as a long-term capital loss to the extent of
the amount of capital gain dividends received on such shares. For this purpose,
the special holding period rules of Code Section 246(c)(3) and (4) generally
will apply in determining the holding period of shares (these rules exclude from
the holding period any period during which the Fund has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock). Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate at least 11.6%
lower than the maximum rate applicable to ordinary income. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the
Fund, (2) disposes of such shares less than 91 days after they are acquired and
(3) subsequently acquires shares of the Fund or another fund at a reduced sales
load pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) upon the gross amount of the
dividend. Furthermore, such foreign shareholder may be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross income resulting from the Fund's election to treat any foreign taxes paid
by it as paid by its shareholders, but may not be allowed a deduction against
this gross income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of the Fund, capital gain
dividends and amounts retained by the Fund that are designated as undistributed
capital gains.
If the income from the Fund is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of a foreign shareholder other than a corporation, the Fund
may be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless such shareholder furnishes the Fund with proper
notification of his foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
Effect of Future Legislation; State, Local and Foreign Tax Considerations
25
<PAGE>
The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state,
local and foreign tax rules affecting investment in 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 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.
26
<PAGE>
As of February 2, 1998, to the knowledge of the Administrator, the Officers and
Directors of the Fund, as a group, own less than 1% of the outstanding shares of
the Fund. As of February 2, 1998, no person owned of record, or to the knowledge
of the Administrator, 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
- -------------------------------- ------------ ----------------
Greenberg Family Fund LLC 125,186.276 5.21%
P.O. Box 2902
Southampton, NY 11969
Sidney Kimmel 128,726.247 5.35%
191 Presidential Blvd.
Bala Cynwyd, PA 19004
Mendik Martial Trust 147,671.502 6.14%
330 Madison Avenue
New York, NY 10017
Grass Family Partnership 263,807.504 10.98%
4025 Crooked Hill Road
Harrisburg, PA 17110
Marvin H. Schein 343,434.377 14.29%
Cobble Court Crescent Beach Road
Glen Cove, NY 11542
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 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, located at 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, 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.
27
<PAGE>
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 audited financial statements for the Fund and the notes thereto
appearing in the most current fiscal year Annual Report to shareholders are
incorporated in this Statement of Additional Information by reference. No other
parts of the Annual Report are incorporated by reference herein. The financial
statements included in the Annual Report have been audited by the Fund's
independent accountants, Price Waterhouse LLP, whose report thereon dated
December 11, 1997, is also incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such report given upon
their authority as experts in accounting and auditing. Additional copies of the
Annual Report may be obtained at no charge by telephoning the Fund at the
telephone number appearing on the front page of this Statement of Additional
Information.
28
<PAGE>
ADDITIONAL INFORMATION AND RISK FACTORS WITH RESPECT TO
GREATER CHINA REGION COUNTRIES
The following information concerning 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 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.
In the 15th Communist Party Congress (CPC) in October 1997, China's new
leaders led by Jiang Zemin pledged to maintain economic reforms launched by Deng
Xiaoping, who died in February 1997. The banking sector, where currently
approximately 20% of its assets are non-performing is a key sector, which the
new leaders have already started to introduce reform measures. In January 1998,
the governor of the central bank of China, the People's Bank of China ("PBOC"),
announced a series of measures to improve the country's banking sector. This
included closing many of its provincial branches and setting up regional
headquarters to enhance its authority and supervision. These measures were aimed
to make the PBOC more like the Federal Reserve Bank in the United States, which
would make it more independent from the municipal and provincial government. In
addition, banks were also made more accountable for the loans they made, which
A-1
<PAGE>
was designed to improve their loan portfolio and ultimately reduce the
percentage of bad loans Chinese banks have in their loan books.
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.
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>
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Domestic Product (% annual real growth) 3.9 8.0 13.6 13.4 11.8 10.5 9.7 8.8
Per Capita GDP (U.S. $) 289.0 312.0 372.0 460.0 435.0 576.0 666.0 768
Industrial Production (% annual growth) 6.0 14.2 27.5 21.1 17.6 13.4 13.1 11.7
Inflation (retail price index, % annual growth) 2.1 3.0 5.4 13.2 21.7 14.8 6.1 0.7
Money Supply (M1, % annual growth) 28.9 27.6 30.3 21.6 26.8 16.8 18.9 22.0
Government Budget Surplus/Deficit (2.7) (3.9) (4.7) (5.1) (6.7) (7.0) (6.6) (6.4)
billion)
A-2
<PAGE>
Exports (U.S. $ billion) 62.1 71.9 85.1 92.0 121.0 148.8 151.1 182.7
(% annual growth) 17.9 15.8 18.3 8.0 31.9 22.9 1.5 21
Imports (U.S. $ billion) 53.3 68.8 80.6 104.0 115.6 132.1 138.8 142.3
(% annual growth) (9.8) 191.5 26.4 29.0 11.3 14.2 5.1 2.5
Trade Balance (U.S. $ billion) 8.6 8.1 4.4 (12.2) 5.3 16.7 12.2 40.4
Exchange Rate (average RMB/U.S. $) 5.22 5.43 5.75 5.76 8.62 8.35 8.31 8.33
</TABLE>
- ---------------
* Translated at the respective exchange rate for each year shown in the table.
Sources: China Statistical Yearbook, State Statistical Bureau of the People's
Republic of China, Baring Securities, ABN AMRO, HG Asia Securities.
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 considerable 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 1997 China's foreign
trade yielded a foreign trade surplus of US $40.4 billion, with exports of US
$182.7 billion in 1997 representing an increase of 21% over 1996. Exports were
US $151 billion in 1996, an increase of 1.5% over 1995. Imports reached US
$142.3 billion by the end of 1997, representing a 2.5% increase over 1996. For
1996, imports stood at US $138.8 billion, an increase of 5.1% over the 1995
figure.
Total trade for 1997 was approximately US $325 billion representing an
12.1% increase over 1996. In 1996 total trade stood at US $289.9 billion up 3.2%
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
A-3
<PAGE>
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.
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.
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.
A-4
<PAGE>
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 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.
During the 1990s, this general trend of depreciation has continued although in
late 1996 and 1997, the RMB actually appreciated against the US dollar.
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 December 31, 1997, 399 companies had shares listed on the SZSE, of which
35 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. The 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 98.97 on December 31, 1997 before rising to 145.48 on December 31,
1996 and subsequently fell again to 98.97 on December 31, 1997. This fluctuation
reflects the volatility of the market accentuated by the credit tightening
policy in China and its subsequent relaxation 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.
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<PAGE>
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 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.
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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 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 47.69 on December
31, 1995. It then rose to 67.03 on December 31, 1996 and subsequently fell again
to 55.88 on December
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<PAGE>
31, 1997. This fall reflects the volatility of the market accentuated by the
credit tightening policy in China and its relaxation 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 December 31,
1997, there were 422 members admitted to the SHSE, 50 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,
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<PAGE>
adequate source of foreign exchange revenue (I.E. 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 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.
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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).
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
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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. 1994
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 1998 and 2011 and its air traffic
handling capacity to increase from 15 million passengers in 1998 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 1998.
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, 1997, 658 companies and over 1,533 securities
(including warrants and other derivative instruments) were listed on the HKSE.
Market capitalization as of the same date was approximately HK$3,203 billion, an
decrease of approximately 7.85% from the previous year. Average daily turnover
on the HKSE for 1997 was HK$15.5 billion compared with HK$5.6 billion for 1996.
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.
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>
YEAR (H.K. $MILLION (U.S. $ LISTED LISTED (H.K. $MILLION) (U.S. $MILLION)
---- -------------- -------- ------- -------- -------------- ---------------
MILLION) COMPANIES SECURITIES
-------- --------- ----------
VALUE OF SECURITIES TRADED DECEMBER 31 MARKET CAPITALIZATION
-------------------------- ---------------------------------
<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
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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
1996 ................... 1,400,000 180,645 585 1,000 3,476,000 449,000,000
1997 ................... 3,875,000 500,000 658 1,533 3,203,000 414,000,000
</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.
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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
YEAR HIGH LOW YEAR-END % CHANGE
FROM PRIOR
PERIOD-END
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 ................... 10,173.4 6,967.9 10,173.4 23.0
1996 ................... 13,531.0 10,204.9 13,451.5 33.5
1997 ................... 16,673.3 9,059.9 10,722.8 (20.3)
- ---------------
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 to as high as 16,673 on August 7, 1997
following the handover of Hong Kong to China, but sank to as low as 8,121 on
January 12, 1998 as the Southeast Asian and Korean economic and financial crisis
shook confidence throughout the region.
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 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
A-13
<PAGE>
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.
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%, 5.9%, 5.7% and 6.17% in 1991, 1992, 1993, 1994, 1995,
1996 and 1997 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.
A-14
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE RATE GDP GROWTH CPI TRADE SURPLUS P/E TSE TSE MARKET
AV. US $ (%) (US $ BILL.) YEAR-END CAPITAL (US $
CLOSING BILL.)
<S> <C> <C> <C> <C> <C> <C> <C>
1987 ................ 31.85 12.7 0.5 18.7 28.7 2,339 48.45
1988 ................ 28.57 7.8 1.3 11.0 68.9 5,119 120.1
1989 ................ 26.41 8.2 4.4 14.0 92.0 9,624 240.0
1990 ................ 26.39 5.4 4.1 12.5 33.0 4,530 112.4
1991 ................ 25.50 7.6 3.6 13.3 28.0 4,601 123.7
1992 ................ 25.20 6.8 4.5 9.5 30.1 3,377 100.1
1993 ................ 26.50 6.3 2.9 7.9 39.7 6,071 194.1
1994 ................ 26.45 6.5 4.1 11.9 33.5 7,125 247.0
1995 ................ 26.44 6.1 3.7 11.0 19.5 5,159 192.0
1996 ................ 27.49 5.71 3.07 3.57 28.27 6933 266.35
1997 ................ 32.55 6.72 0.9 7.64 27.04 8187 300.98
</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 average rates below
2% in the early 1990's, before rising to almost 3% in 1996.
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 macroeconomics 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
A-15
<PAGE>
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.
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. 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. More than twenty 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. 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. LBC 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.
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.
A-16
<PAGE>
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 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.
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.
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
A-17
<PAGE>
reports. The Taiwan SEC promulgated regulations in July 1983 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 Stockbroker's Association was incorporated in 1930.
The Stock Exchange of Singapore (SES) was incorporated in 1973. The SES is now
the fourth largest stock market in Asia, after Japan, Hong Kong, Malaysia,
Thailand, Korea and Taiwan, with a market capitalization at December 1997 of
S$329 billion. Average monthly turnover on the SES for 1997 was S$7,213 million.
As of December 31, 1997, 294 companies were listed on the SES. Another 62 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$3.17 billion at December 1997.
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, 1997, there were 9 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-18
<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 fourth largest stock market in Asia, after Japan, Hong Kong
and Taiwan, with a market capitalization at December 31, 1997 of S$329 billion.
There were 20 new listings of companies on the main board and 15 new companies
listed on SESDAQ in 1997.
The table below sets out selected data on the Singapore Stock Exchange in
each year since 1990, including the average monthly value and volume of
securities traded during each year, and the number of companies listed and the
total market capitalization as of December 31st each year and December 31 and as
at May 30, 1997.
SELECT STATISTICS
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NO. OF COMPANIES LISTED 172 183 188 205 238 248 264 294
Market Capitalization (S$bn) 59.8 77.7 80.3 213.4 195.5 209.4 209.13 329
Turnover Volume (m) 18,487 15,557 13,904 66,398 45,540 33,919 68,244 47,136
Value (S$m)................ 36,756 30,549 29,444 127,797 123,520 83,866 61,699 110,448
SESDAQ Market Cap (S$m) 409.2 528.8 1,032.4 3,833.0 3,228.3 4,178.9 4,290.0 3166
SES Turnover Volume (m) 116.9 167.9 526.1 2,304.7 1,704.0 5,323.3 1,942.5 4,870
</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 eight years
(December 31) are as follows:
MARKET PERFORMANCE
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <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 2,493.71 2,271.88
A-19
<PAGE>
Low ............... 1,101.77 1,149.08 1,310.95 1,531.11 2,036.80 1,903.80 2,038.84 1497.03
Close ............. 1,154.48 1,490.70 1,524.40 2,425.68 2,239.56 2,266.54 2,216.79 1529.84
OCBC 30 .............. 362.48 464.37 452.56 638.53 552.07 585.17 584.62 493.78
DBS 50 ............... 434.40 432.22 420.26 623.22 534.25 560.98 555.09 467.44
SESDAQ Index ......... 69.36 61.74 53.17 154.15 80.30 100.26 92.35 62.95
</TABLE>
A-20
<PAGE>
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 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-21
<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 from November 19, 1996
through October 31, 1997 (Audited).
Financial Statements incorporated by reference in Part B of this
Registration Statement:
(1) Schedule of Portfolio Investments dated October 31, 1997
(Audited).*
(2) Statement of Assets and Liabilities dated October 31, 1997
(Audited).*
(3) Statement of Operations for the Period from November 19,
1996 through October 31, 1997 (Audited).*
(4) Statement of Changes in Net Assets for the Period from
November 19, 1996 through October 31, 1997 (Audited).*
(5) Financial Highlights for the Period from November 19, 1996
through October 31, 1997 (Audited).*
(6) Notes to Financial Statements dated October 31, 1997
(Audited).* (7) Report of Independent Accountants to the
Financial Statements for
the Period ended October 31, 1997.*
(B) EXHIBITS:
Exhibit
Number Description of Exhibits
------ -----------------------
1 -- Registrant's Articles of Amendment and Restatement.
(1)
2 -- Registrant's By-Laws.(1)
3 -- None.
4(a) -- Form of Stock Certificate for shares of Class I
Stock.(1)
4(b) -- Form of Stock Certificate for shares of
Class II Stock.(1)
5 -- Form of Advisory Agreement between Registrant and
CVO Greater China Partners, L.P.(1)
C-1
<PAGE>
6 -- Distribution Agreement between Registrant and OFFIT
Funds Distributor, Inc.(2)
7 -- None.
8(a) -- Form of Custodian Agreement between Registrant and
Investors Bank & Trust Company.(1)
8(b) -- Form of Custodian Agreement between Registrant and
the Bank of New York.(3)
9(a) -- Administration Agreement between Registrant and
BISYS Fund Services.(2)
9(b) -- Transfer Agency Agreement between Registrant and
BISYS Fund Services.(2)
9(c) -- Form of Dealer and Selling Group Agreement.(2)
9(d) -- Fund Accounting Agreement between Registrant and
BISYS Fund Services.(2)
9(e) -- Form of Shareholder Servicing Plan and Shareholder
Service Agreement.(3)
10(a) -- Opinion and Consent of Piper and Marbury.(1)
10(b) -- Opinion of McCutchen, Doyle, Brown & Enersen,
LLP.(1)
11(a) -- Consent of Price Waterhouse LLP.(4)
12 -- None.
13 -- Form of Share Purchase Agreement between Registrant
and OFFIT
Funds Distributor, Inc.(1)
14 -- None.
15 -- Form of Rule 12b-1 Plan of Distribution.(1)
16 -- Schedule of Computation of Performance Calculation.
(3)
27 -- Financial Data Schedule.(4)
18 -- None.
99.19 -- Power of Attorney.(4)
* Incorporated herein by reference to the Registrant's Annual Report filed
with the Securities and Exchange Commission on January 12, 1998.
(1) Exhibit is incorporated herein by reference to Pre-Effective Amendment
No. 2, filed April 17, 1996 to the Registration Statement.
(2) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 1, filed May 30, 1997 to the Registration Statement.
(3) To be filed by Amendment.
(4) Filed, herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-------------------------------------------------------------
Registrant is controlled by its Board of Directors.
<TABLE>
<CAPTION>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
Number of Recordholders
Title of Class at February 2, 1998
-------------- -------------------
Class I Shares of CVO Greater China Fund,
<S> <C>
par value $.001 per share................................. 70
Class II Shares of CVO Greater China Fund,
par value $.001 per share. . . . ......................... 1
</TABLE>
C-2
<PAGE>
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.
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with OFFITBANK or Employment of a Substantial Nature
Name CVO Greater China, Inc. During the Past Two Years
- ---- ----------------------- -------------------------
<S> <C> <C>
Morris W. Offit President, Chairman of the President and Director, OFFITBANK
Board and Director (1983 - present)
Dr. Wallace
Secretary-andiTreasurer Managing Director, OFFITBANK
(1986 - present)
Principal Occupation or Other
Name Position with ChinaVest Employment of a Substantial Nature
- ---- Public Equities, LLC During the Past Two Years
-------------------- -------------------------
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Attorney, McCutchen, Doyle, Brown
Edward C. Collins Manager & Enersen (1988 - January 1995);
Managing Director, ChinaVest,Inc.,
a California corporation (January
1995 - present)
Managing Director, ChinaVest Ltd.
Jenny H. Theleen Manager (1985 - present); Secretary-
Treasurer, ChinaVest, Inc.
(January 1995 - present)
</TABLE>
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.
C-4
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
---------------------------------
All accounts, books and other documents 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:
(1) CVO Greater China Fund, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
(records relating to the Company)
(2) CVO Greater China Partners, L.P. and OFFITBANK 520 Madison
Avenue New York, New York 10022 (advisory records)
(3) OFFIT Funds Distributor, Inc. 3435 Stelzer Road Columbus,
Ohio 43219 (records of principal underwriter)
ITEM 31. MANAGEMENT SERVICES.
--------------------
Not applicable.
ITEM 32. UNDERTAKINGS.
-------------
(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, the Registrant certifies
that it meets all the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under 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 26th day of February, 1998.
CVO GREATER CHINA FUND, INC.
By: /s/ Morris W. Offit
--------------------------
Morris W. Offit, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following persons in the capacities and on the 26th day of February, 1998.
SIGNATURE TITLE
- --------- -----
/s/ Morris W. Offit Director, Chairman of
Morris W. Offit the Board and President
(Principal Executive Director)
Robert A. Theleen * Director
Robert A. Theleen
Edward J. Landau * Director
Edward J. Landau
The Very Reverend James Parks Morton * Director
The Very Reverend James Parks Morton
John W. Glynn, Jr. * Director
John W. Glynn, Jr.
/s/ Dr. Wallace Mathai-Davis Treasurer and Secretary
Dr. Wallace Mathai-Davis (Principal Financial and
Accounting Officer)
/s/ Stephen B. Wells
Attorney-in-fact
CVO GREATER CHINA FUND, INC.
* Pursuant to Power of Attorney filed with Post-Effective Amendment No. 2
filed with the Securities and Exchange Commission on February 26, 1998.
<PAGE>
CVO GREATER CHINA FUND, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- --------------------------------------------------
11(a) -- Consent of Price Waterhouse LLP
16 -- Schedule of Computation of Performance Calculation
27 -- Financial Data Schedules
99.19 -- Power of Attorney
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting part of this Post-Effective
Amendment No. 2 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 11, 1997, relating to the financial
statements and financial highlights appearing in the October 31, 1997 Annual
Report to Shareholders of CVO Greater China Fund, Inc., which are also
incorporated by reference in the Registration Statement. We also consent to the
references to us under the headings "Financial Highlights" and "Independent
Accountants" in the Prospectus and under headinIndependent Accountants" and
"Financial Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 26, 1998
POWER OF ATTORNEY
We, the undersigned Directors and/or Officers of CVO Greater China
Fund, Inc. (the "Fund"), an open-end, non-diversified, management investment
company, organized as a Maryland Corporation, do hereby constitute and appoint
Stephen B. Wells, Vincent M. Rella, Ellen Stoutamire and Matthew Constancio and
each of them individually, our true and lawful attorneys and agents to take any
and all action and execute any and all instruments which said attorneys and
agents may deem necessary or advisable to enable the Fund to comply with:
(i) The Securities Act of 1933, as amended, and any rules, regulations,
orders or other requirements of the Securities and Exchange Commission
thereunder, in connection with the registration under such Securities Act of
1933, as amended, of shares of common stock of the Fund to be offered by the
Fund;
(ii) the Investment Company Act of 1940, as amended, and any rules,
regulations, orders or other requirements of the Securities and Exchange
Commission thereunder, in connection with the registration of the Fund under the
Investment Company Act of 1940, as amended; and
(iii) state securities laws and any rules, regulations, orders or other
requirements of state securities commissions, in connection with the
registration under state securities laws of the Fund and with the registration
under state securities laws of shares of common stock of the Fund to be offered
by Fund;
including specifically but without limitation of the foregoing, power
and authority to sign the name of the Fund in its behalf and to affix its seal,
and to sign the name of such Director in his or her behalf as such Director to
any amendment or supplement (including post-effective amendments) to the
registration statement or statements, and to execute any instruments or
documents filed or to be filed as a part of or in connection with compliance
with state securities laws, including, but not limited to, all state filings for
any purpose, state filings in connection with corporate organization or amending
corporate documentation, filings for purposes of amending corporate
documentation, filings for purposes of amending corporate documentation, filings
for purposes of state tax laws and filings in connection with blue sky
regulations; and the undersigned hereby ratifies and confirms all that said
attorneys and agents shall do or cause to be done by virtue hereof.
Page 1
<PAGE>
IN WITNESS WHEREOF, the undersigned place their hands as of the 26th
day of February, 1998.
/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/ John W. Glynn, Jr.
----------------------------------
John W. Glynn, Jr.
Director
/s/ Edward J. Landau
----------------------------------
Edward J. Landau
Director
/s/ James P. Morton
----------------------------------
The Very Reverend James P. Morton
Director
/s/ Wallaace Mathai-Davis
----------------------------------
Wallace Mathai-Davis
Secretary and Treasurer (Principal
Financial and Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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