As filed with the U.S. Securities and Exchange Commission on April 25, 1995
Securities Act File No. 33-84676
Investment Company Act File No. 811-8788
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM N-2
Registration Statement Under The Securities Act Of 1933 / /
Pre-Effective Amendment No. 3 / /
Post-Effective Amendment No. ___ / /
and/or
Registration Statement Under The Investment Company Act Of 1940 / /
Amendment No. 3
(Check Appropriate box or boxes)
----------------
Templeton Russia Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
700 Central Avenue
St. Petersburg, Florida 33701
(Address of Principal Executive Offices)
Registrant's Telephone number, including Area Code: (813) 823-8712
-----------------
Thomas M. Mistele, Esq.
Templeton Global Investors, Inc.
500 East Broward Boulevard
Ft. Lauderdale, Florida 33394
(Name and Address of Agent for Service)
------------------
With copies to:
Allan S. Mostoff, Esq. John A. MacKinnon, Esq.
Dechert Price & Rhoads Brown & Wood
1500 K Street, N.W. One World Trade Center
Washington, D.C. 20005 New York, New York 10048
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment
plan, check the following box. / /
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum Amount of
Title of Securities Amount Being Offering Price Per Aggregate Offering Registration
Being Registered Registered (1) Share(2) Price(2) Fee(3)
<S> <C> <C> <C> <C>
Common Stock,
$.01 Par Value .... 4,600,000 Shares $15 $69,000,000 $23,793.10
</TABLE>
(1) Includes 600,000 share subject to the Underwriters' over-allotment
option.
(2) Estimated solely for purpose of calculating the registration fee.
(3) $23,793.10 previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
<TABLE>
<CAPTION>
TEMPLETON RUSSIA FUND, INC.
CROSS-REFERENCE SHEET
Pursuant to Rule 481(a)
Item Number, Form N-2 Caption in Prospectus
--------------------- ---------------------
<S> <C>
1. Outside Front Cover Outside Front Cover
2. Inside Front and Outside Back Cover Page Inside Front and Outside Back Cover Page
3. Fee Table and Synopsis Fund Expenses; Prospectus Summary
4. Financial Highlights Not Applicable
5. Plan of Distribution Outside Front Cover, Underwriting
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of Registrant The Fund; Investment Objective and Policies;
Additional Investment Practices; Investment
Restrictions; Risk Factors and Special
Considerations; Common Stock
9. Management Management of the Fund; Directors and Officers; Custodian
and Transfer and Dividend Paying Agent
10. Capital Stock, Long-Term Debt, and
Other Securities Common Stock; Dividends and Distributions; Dividend
Reinvestment Plan; Taxation
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Not Applicable
14. Cover Page of Statement of Additional Information Not Applicable
15. Table of Contents Not Applicable
16. General Information and History Not Applicable
17. Investment Objectives and Policies Investment Objective and Policies; Investment
Rationale; Additional Investment Practices; Risk
Factors and Special Considerations
18. Management Directors and Officers
19. Control Persons and Principal Holders of Securities Not Applicable
20. Investment Advisory and Other Services Management of the Fund
21. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
22. Tax Status Taxation
23. Financial Statements Statement of Assets and Liabilities
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 25, 1995
PROSPECTUS
4,000,000 SHARES
TEMPLETON RUSSIA FUND, INC.
COMMON STOCK
-------------------
Templeton Russia Fund, Inc. (the "Fund") is a newly incorporated,
non-diversified, closed-end management investment company. The Fund's investment
objective is long-term capital appreciation. To achieve its objective, the Fund
intends to invest primarily in equity securities of Russia Companies. As used in
this Prospectus, the term "Russia Company" means a legal entity (i) that is
organized under the laws of, or with a principal office and domicile in, Russia,
(ii) for which the principal equity securities trading market is in Russia, or
(iii) that derives at least 50% of its revenues or profits from goods produced
or sold, investments made, or services performed, in Russia or that has at least
50% of its assets situated in Russia. In any event, under normal market
conditions, the Fund will invest at least 65% of its total assets in equity
securities of Russia Companies and, subject to a limit of 20% of total assets,
in debt securities issued by Russia Companies or issued or guaranteed by Russian
state entities which offer the potential for capital appreciation.
As used in this Prospectus, "Russia" refers to the Russian Federation, which
does not include other countries that formerly comprised the Soviet Union.
Investments in Russia Companies involve a high degree of risk and special
considerations not typically associated with investments in other more
established economies or securities markets, such as political, economic and
legal uncertainties, currency fluctuations, delays in settling portfolio
transactions and risks of loss arising out of Russia's system of share
registration. Additionally, the securities markets in Russia are emerging
markets characterized by a relatively small number of equity issues and
relatively little trading volume, resulting in substantially less liquidity and
greater price volatility. A substantial number of the securities in which the
Fund will invest will be illiquid. THESE ARE HIGHLY SPECULATIVE SECURITIES. AN
INVESTMENT IN THE FUND INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
RUSSIA'S SYSTEM OF SHARE REGISTRATION AND CUSTODY CREATES CERTAIN RISKS OF
LOSS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN OTHER SECURITIES
MARKETS. THESE RISKS ARE DISCUSSED MORE FULLY ON PAGES 21 AND 22 OF THIS
PROSPECTUS, AND INVESTORS SHOULD READ THIS SECTION IN DETAIL.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE FUND'S
SHARES. DURING AN INITIAL PERIOD WHICH IS NOT EXPECTED TO EXCEED THREE MONTHS
FROM THE DATE OF THIS PROSPECTUS, THE FUND'S SHARES WILL NOT BE LISTED ON ANY
SECURITIES EXCHANGE. DURING SUCH PERIOD, THE UNDERWRITERS DO NOT INTEND TO MAKE
A
(continued on next page)
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO PUBLIC SALES LOAD(1)(2) THE FUND(3)
<S> <C> <C> <C>
Per Share............ $15.00 $ $
Total(4)............. $60,000,000 $ $
</TABLE>
(footnotes on following page)
-------------------
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York, New York on or about , 1995.
-------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
-------------------
The date of this Prospectus is , 1995.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
MARKET IN THE FUND'S SHARES. CONSEQUENTLY, IT IS ANTICIPATED THAT AN INVESTMENT
IN THE FUND WILL BE ILLIQUID DURING SUCH PERIOD. THE FUND INTENDS TO APPLY FOR
LISTING ON THE NEW YORK STOCK EXCHANGE SO THAT TRADING ON SUCH EXCHANGE WILL
BEGIN NO LATER THAN THREE MONTHS FROM THE DATE OF THIS PROSPECTUS. SHARES OF
CLOSED-END INVESTMENT COMPANIES THAT INVEST PRIMARILY IN SECURITIES OF ISSUERS
IN FOREIGN COUNTRIES OR GEOGRAPHIC REGIONS HAVE IN THE PAST FREQUENTLY TRADED AT
DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL OFFERING PRICES. THE RISKS
ASSOCIATED WITH THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES MAY BE
GREATER FOR INVESTORS EXPECTING TO SELL SHARES OF A CLOSED-END INVESTMENT
COMPANY SOON AFTER THE COMPLETION OF AN INITIAL PUBLIC OFFERING OF THE COMPANY'S
SHARES.
Templeton Investment Management (Singapore) Pte. Ltd. will serve as
investment manager to the Fund.
This Prospectus sets forth concisely information about the Fund that a
prospective investor should know before purchasing Shares. Investors are advised
to read this Prospectus and retain it for future reference.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S COMMON
STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
(Footnotes from previous page)
(1) The Fund and the Investment Manager have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) The Investment Manager has agreed to pay Merrill Lynch, Pierce, Fenner &
Smith Incorporated additional amounts. See "Underwriting."
(3) Before deducting expenses payable by the Fund, estimated to be approximately
$ , which includes $250,000 to be paid to the Underwriters in partial
reimbursement of their expenses.
(4) The Underwriters have been granted an option, exercisable within 45 days of
the date of this Prospectus, to purchase up to 600,000 additional Shares to
cover over-allotments, if any. If all Shares are purchased, the total Price
to Public, Sales Load and Proceeds to the Fund will be $69,000,000, $
and $ , respectively. See "Underwriting."
-------------------
The address of the Fund is 700 Central Avenue, St. Petersburg, Florida
33701-3628. The Fund's telephone number is (813) 823-8712.
The information set forth in this Prospectus, including the Appendices,
regarding the economy of Russia has been extracted from various state and
private publications and other sources. The Fund and its Board of Directors make
no representations as to the accuracy of such information.
In this Prospectus, unless otherwise specified, all references to "U.S.
Dollars," "U.S. $," "dollars" and "$" are to United States dollars and to
"Rubles" and "Rbs." are to Russian Rubles. On April 21, 1995, the price on the
Moscow Interbank Currency Exchange for Rubles against the U.S. Dollar was Rbs.
5,064 = U.S. $1.00 as reported in the New York Times on April 22, 1995. The
Ruble has experienced significant depreciation against the U.S. Dollar. For
example, on September 30, 1994, such rate of exchange was Rbs. 2,633= U.S.
$1.00.
IN ADDITION TO THE RISKS DESCRIBED ABOVE, THE INVESTMENT POLICIES OF THE
FUND AUTHORIZE CERTAIN INVESTMENT PRACTICES NOT GENERALLY PERMITTED UNDER THE
SECURITIES LAWS OF CERTAIN STATES, INCLUDING ARKANSAS, MINNESOTA AND SOUTH
DAKOTA. IN PARTICULAR, THE FUND IS AUTHORIZED TO INVEST IN MORE THAN TEN PERCENT
OF THE EQUITY SECURITIES OF ANY ONE ISSUER, TO INVEST OVER FIVE PERCENT OF ITS
TOTAL ASSETS IN ANY ONE ISSUER AND TO INVEST OVER FIVE PERCENT OF ITS TOTAL
ASSETS IN RESTRICTED SECURITIES.
INVESTMENT IN THE FUND IS SUITABLE ONLY FOR INVESTORS WHO CAN ASSUME THE
RISKS DESCRIBED HEREIN. IN ADDITION, RESIDENTS OF ARKANSAS AND SOUTH DAKOTA MUST
SATISFY THE CONDITIONS SET FORTH UNDER "CERTAIN INVESTOR SUITABILITY STANDARDS"
ON PAGE 53.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
<TABLE>
<S> <C>
The Fund..................... The Fund is a newly organized, non-diversified, closed-end
management investment company that seeks long-term capital
appreciation by investing primarily in the equity securities
of Russia Companies. As used in this Prospectus, the term
"Russia Company" means a legal entity (i) that is organized
under the laws of, or with a principal office and domicile
in, Russia, (ii) for which the principal equity securities
trading market is in Russia, or (iii) that derives at least
50% of its revenues or profits from goods produced or sold,
investments made, or services performed in Russia or that
has at least 50% of its assets situated in Russia.
The Offering................. The Fund is offering 4,000,000 shares of Common Stock
("Shares"), par value $0.01 per Share, at an offering price
of $15 per Share. The Shares are being offered by
underwriters (the "Underwriters") represented by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), A.G. Edwards & Sons, Inc., Nomura Securities
International, Inc. and Prudential Securities Incorporated.
In addition, the Underwriters have been granted an option,
exercisable for 45 days from the date of this Prospectus, to
purchase up to 600,000 additional Shares to cover
over-allotments, if any. See "Underwriting."
Investment Objective and
Policies..................... The Fund's investment objective is long-term capital
appreciation. To achieve its objective, the Fund intends to
invest primarily in equity securities of Russia Companies.
As used herein, equity securities means common and preferred
stock (including convertible preferred stock); bonds, notes
and debentures convertible into common or preferred stock;
stock purchase warrants and rights; equity interests in
trusts, partnerships, joint ventures or similar enterprises;
and American or Global Depositary Receipts. Under normal
market conditions, the Fund will invest at least 65% of its
total assets in securities of Russia issuers, which will
include equity securities of Russia Companies (including
direct equity investments as discussed below) and may
include debt securities issued by Russia Companies or issued
or guaranteed by Russian state entities which offer the
potential for capital appreciation. The Fund will limit its
investment in debt securities, other than temporary
investments, to a maximum of 20% of its total assets.
Under normal market conditions, assets of the Fund not
invested in equity securities of Russia Companies will be
invested in (i) debt securities issued by Russia Companies
or issued or guaranteed by Russian state entities, as well
as debt securities of corporate and governmental issuers
outside Russia, (ii) equity securities of issuers outside
Russia that the Investment Manager believes will experience
growth in revenue from participation in the development of
the Russian economy, and (iii) short-term and medium-term
debt securities of the type described below under
"Investment Objective
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
and Policies--Temporary Investments." The Fund may invest in
debt securities when the Investment Manager believes that,
based upon factors such as relative interest rate levels and
foreign exchange rates, debt securities offer opportunities
for long-term capital appreciation.
The Fund may invest up to 35% of its total assets in direct
equity investments that the Fund's investment manager,
Templeton Investment Management (Singapore) Pte. Ltd. (the
"Investment Manager"), expects will provide for eventual
disposition either through listing or sale of the securities
to the issuer or another investor. The terms "direct
investments," and "direct equity investments," as used
herein, mean private investments in non-publicly traded
equity securities of Russia Companies. The Fund's direct
investments will involve certain high risks for invested
capital. See "Risk Factors and Special
Considerations--Direct Investments."
No assurance can be given that the Fund's investment
objective will be achieved. See "Investment Objective and
Policies."
Risk Factors and Special
Considerations............... Investing in Russia Companies involves a high degree of risk
and special considerations not typically associated with
investing in the United States securities markets, and
should be considered highly speculative. Such risks include:
(a) the risk of nationalization or expropriation of assets
or confiscatory taxation, which may involve the risk of
total loss; (b) greater social, economic and political
uncertainty (including regional conflict and the risk of
war); (c) delays in settling portfolio transactions and risk
of loss arising out of Russia's system of share registration
and custody; (d) risks in connection with the maintenance of
Fund portfolio securities and cash with foreign
subcustodians and securities depositories, including the
risk that appropriate sub-custody arrangements will not be
available to the Fund; (e) the risk that it may be
impossible or more difficult than in other countries to
obtain and/or enforce a judgment; (f) pervasiveness of
corruption and crime in the Russian economic system; (g)
greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities
markets in which the Fund will invest; (h) currency exchange
rate volatility and the lack of available currency hedging
instruments; (i) the use of derivative instruments, which
may include: forward foreign currency exchange contracts,
currency futures contracts and options thereon, put and call
options on securities, indices and foreign currencies, stock
index futures contracts and options thereon and interest
rate futures contracts and options thereon; (j) higher rates
of inflation (including the risk of social unrest associated
with periods of hyperinflation); (k) controls on foreign
investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits
and dividends, and on the Fund's ability to exchange local
currencies for U.S. dollars; (l) the risk that the
government of Russia or other executive or legislative
bodies may decide not to continue to support the economic
reform programs implemented since the dissolution of the
Soviet Union and
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
could follow radically different political and/or economic
policies to the detriment of investors, including
non-market-oriented policies such as the support of certain
industries at the expense of other sectors or investors or a
return to the completely centrally planned economy that
existed prior to the dissolution of the Soviet Union; (m)
the financial condition of Russia Companies, including large
amounts of inter-company debt which may create a payments
crisis on a national scale and the fact that Russia
Companies may be smaller, less seasoned and newly organized
companies; (n) the risk that dividends will be withheld at
the source; (o) dependency on exports and the corresponding
importance of international trade; (p) the difference in, or
lack of, auditing and financial reporting standards, which
may result in unavailability of material information about
issuers, particularly in Russia; (q) the risk that the
Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; (r)
the fact that statistical information regarding the economy
of Russia may be inaccurate or not comparable to statistical
information regarding the U.S. or other economies; (s) less
extensive regulation of the securities markets; (t) the
risks associated with the difficulties that may occur in
pricing the Fund's portfolio securities; and (u) possible
difficulty in identifying a purchaser of securities held by
the Fund due to the underdeveloped nature of the securities
markets.
Stock corporations are a relatively new concept in Russia.
Russia does not at present have a developed body of
securities laws or laws governing corporations or joint
stock companies. Most of the company and securities laws and
regulations of Russia are in their preliminary stages of
development. Laws regarding fiduciary duties of officers and
directors, and the protection of investors, including
foreign investors, are in the early stages of development
and existing laws do not cover all contingencies or are not
generally enforced.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are
privately negotiated outside of stock exchanges. The Fund's
holdings of equity securities of Russia Companies are
expected to represent a relatively significant portion of
the total float of such securities available for public
trading and, therefore, the size of the Fund's holdings in
specific securities relative to the trading volume in those
securities could adversely affect the prices at which the
securities are bought or sold and could lengthen the time
period during which buying and selling programs are
effected. Anticipation of the offering in the Russian
securities markets may increase the prices that would
otherwise be paid by the Fund for certain securities and
lengthen the time period required to fully invest the
proceeds of the offering in Russian securities. See "Risk
Factors and Special Considerations--Market Characteristics."
Russia and other of the countries in which the Fund may
invest may be subject to a greater degree of economic,
political and social instability than is the case in the
United States and Western European countries. Such
instability may result from, among other
</TABLE>
5
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<TABLE>
<S> <C>
things, the following: (i) authoritarian governments or
military involvement in political and economic
decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated
with demands for improved political, economic and social
conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and (v) ethnic,
religious and racial disaffection.
The Fund may invest up to 35% of its total assets in direct
equity investments that the Investment Manager expects will
provide for eventual disposition either through listing or
sale of the securities to the issuer or another investor.
Direct investments will consist of (i) the purchase from an
enterprise of an equity interest in the enterprise in the
form of shares of common stock or equity interests in
trusts, partnerships, joint ventures or similar enterprises,
and (ii) the purchase of such an equity interest in an
enterprise from an investor in the enterprise. Such
investments may involve a high degree of business and
financial risk. Due to the absence of a public trading
market for the Fund's direct investments, they will be less
liquid than listed securities. Although these investments
may, in some cases, be resold in privately negotiated
transactions, the prices realized from these sales could be
less than those originally paid by the Fund or less than
what may be considered the fair value of such securities and
in some cases it may not be possible to identify a buyer. If
such securities are required to be registered under the
securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of
registration. In addition, the Fund may be unable to dispose
of its direct investments at then-current market prices and
may have to dispose of such securities over extended periods
of time. Because of the absence of any trading market for
these investments, the Fund may take longer to liquidate
these positions than it would for listed securities. In
addition, securities in Russia, and particularly those that
are not publicly traded, are not subject to the disclosure
and other investor protection requirements that are
generally accepted as necessary in countries with developed
securities laws. See "Risk Factors and Special
Considerations--Direct Investments."
Because of the recent formation of the securities markets as
well as the underdeveloped state of the banking and
telecommunications systems, settlement, clearing and
registration of securities transactions are subject to
significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of
the U.S. Investment Company Act of 1940 (the "1940 Act")) is
defined according to entries in the company's share register
and normally evidenced by extracts from the register or by
formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not
necessarily subject to effective state supervision and it is
possible for the Fund to lose its registration through
fraud, negligence or even mere oversight. While the Fund
will endeavor to ensure that its interest continues to be
appropriately
</TABLE>
6
<PAGE>
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<S> <C>
recorded either itself or through a custodian or other agent
inspecting the share register and by obtaining extracts of
share registers through regular confirmations, these
extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act
may deprive the Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the
Fund to enforce any rights it may have against the registrar
or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by
law to contract out the maintenance of its shareholder
register to an independent entity that meets certain
criteria, in practice this regulation has not always been
strictly enforced. Because of this lack of independence,
management of a company may be able to exert considerable
influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to
record transactions in the share register. This practice may
prevent the Fund from investing in the securities of certain
Russia Companies deemed suitable by the Investment Manager.
Further, this also could cause a delay in the sale of Russia
company securities by the Fund if a potential purchaser is
deemed unsuitable, which may expose the Fund to potential
loss on the investment.
The Fund also is permitted to engage in foreign currency
hedging transactions and to enter into options and futures
transactions with respect to securities and indices, some or
all of which are commonly known as derivatives, and which
may involve the risk of loss in the event of adverse
movements in the value of the underlying instruments.
However, these strategies cannot at the present time be used
to a significant extent by the Fund in the markets in which
the Fund will principally invest. See "Additional Investment
Practices" and Appendix D to this Prospectus.
The Fund may invest up to 20% of its total assets in unrated
debt securities as well as debt securities that are rated in
any category by recognized statistical rating organizations
when consistent with the Fund's investment objective and
policies. Lower-rated debt securities (which are commonly
referred to as "junk bonds") generally involve greater
volatility of price and risk of loss of principal and income
than higher rated securities. Unrated debt securities in
which the Fund may invest generally involve risks equivalent
to those of lower-rated debt securities. A debt security
rated "D" by Standard & Poor's Corporation means that the
issuer is in payment default.
The operating expense ratio of the Fund can be expected to
be higher than that of investment companies investing in
more established securities markets since the expenses of
the Fund, including management and custodian fees, will
generally be higher than the expenses of such other funds.
See "Fund Expenses."
The Fund is classified as a "non-diversified" investment
company under the 1940 Act, which means that the Fund is not
limited by the
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7
<PAGE>
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<S> <C>
1940 Act in the proportion of its assets that may be
invested in the securities of a single issuer. As a
non-diversified investment company, the Fund may invest a
greater portion of its assets in the securities of a smaller
number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio
securities. However, the Fund intends to comply with the
diversification requirements imposed by the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. In
addition, the Board of Directors has adopted a
non-fundamental policy under which the Fund will not invest
more than 10% of its assets in the securities of any one
issuer (the Fund will treat Russian state issuers and their
corporate instrumentalities as separate issuers). See "Risk
Factors and Special Considerations--Net Asset Value
Discount; Non-Diversification" and "Taxation--U.S. Federal
Income Taxes."
The Fund's Articles of Incorporation contain certain
anti-takeover provisions that may have the effect of
inhibiting the Fund's possible conversion to open-end status
and limiting the ability of other persons to acquire control
of the Fund. In certain circumstances, these provisions may
also inhibit the ability of shareholders to sell their
Shares at a premium over prevailing market prices. The
Fund's Board of Directors has determined that these
provisions are in the best interests of shareholders
generally. See "Common Stock."
Shares of closed-end investment companies frequently trade
at a discount from net asset value. This characteristic is a
risk separate and distinct from the risk that the Fund's net
asset value will decrease as a result of its investment
activities and may be greater for investors expecting to
sell their Shares in a relatively short period following
completion of the Offering.
INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME
THE FOREGOING RISKS BEFORE MAKING AN INVESTMENT IN THE FUND.
AN INVESTMENT IN SHARES OF THE FUND SHOULD BE CONSIDERED
HIGHLY SPECULATIVE. THE FUND IS INTENDED FOR LONG-TERM
INVESTORS AND SHOULD NOT BE CONSIDERED A VEHICLE FOR TRADING
PURPOSES. AN INVESTMENT IN SHARES OF THE FUND SHOULD NOT BE
CONSIDERED A COMPLETE INVESTMENT PROGRAM AND WOULD NOT BE AN
APPROPRIATE INVESTMENT FOR ALL INVESTORS. SEE "RISK FACTORS
AND SPECIAL CONSIDERATIONS."
Investment Manager........... Templeton Investment Management (Singapore) Pte. Ltd. will
serve as Investment Manager of the Fund. The Investment
Manager and its affiliates serve as advisers for a wide
variety of public investment companies and private clients
in many nations. The Templeton organization, originating
with earlier advisers then owned by John M. Templeton, has
been investing globally over the past 52 years and provides
investment management and advisory services to a worldwide
client base, including approximately 900,000 mutual fund
shareholders, foundations and endowments, employee benefit
plans and individuals. As of March 31, 1995, the Templeton
organization managed approximately $43.5 billion in assets
worldwide. The Investment Manager is an indirect wholly
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owned subsidiary of Franklin Resources, Inc. ("Franklin").
As of March 31, 1995, the Franklin Templeton organization
managed over $118 billion in assets worldwide.
Dr. J. Mark Mobius, Director of the Investment Manager, will
be the Fund's principal portfolio manager. The Investment
Manager also serves as investment manager to Templeton
Vietnam Opportunities Fund, Inc., a closed-end management
investment company registered under the 1940 Act. In
addition, an affiliate of the Investment Manager serves as
investment manager to six other U.S. investment companies
and 18 other non-U.S. public and private funds that invest
primarily in equity securities of issuers in emerging
markets, with assets totaling $6 billion as of March 31,
1995. The six other U.S. investment companies, which are
registered under the 1940 Act, are Templeton Emerging
Markets Fund, Inc., Templeton China World Fund, Inc.,
Templeton Emerging Markets Appreciation Fund, Inc., and
Templeton Dragon Fund, Inc., closed-end management
investment companies, and Templeton Developing Markets Trust
and the Emerging Markets Series of Templeton Institutional
Funds, Inc., open-end management investment companies. Dr.
Mobius has lived in Asia, principally in Hong Kong, for over
30 years, focusing on investment in equity securities in
emerging market countries. In acting as principal portfolio
manager for the Fund, Dr. Mobius will be supported in the
Investment Manager's office in Singapore by two other
investment managers and a securities analyst. An affiliate
of the Investment Manager has established an office in
Moscow, which currently has a staff of two securities
analysts. The Investment Manager expects this office to
provide it with a valuable resource for research and
securities analysis with regard to securities of Russia
Companies. In the event that any of the portfolio managers
of the Investment Manager dies, resigns or otherwise becomes
unable to act on behalf of the Investment Manager, the
Investment Manager believes that it has adequate resources
and personnel to manage the Fund in accordance with its
investment objective and policies.
For its services, the Fund will pay the Investment Manager a
monthly fee, payable in arrears in U.S. dollars, at the
annual rate of 1.25% of the Fund's average weekly net
assets. This fee is higher than that paid by most other U.S.
investment companies, primarily because of the additional
time and expense required of the Investment Manager in
pursuing the Fund's policy of investing in Russia Companies.
It is expected, however, that the Fund's investment
management fee will be comparable to those of other U.S.
closed-end investment companies of comparable size that
invest primarily in securities of emerging market issuers.
Business Manager;
Sub-Administrator.......... Templeton Global Investors, Inc. (the "Business Manager"),
an indirect wholly owned subsidiary of Franklin, will
perform or arrange for the performance of certain
administrative functions as business manager for the Fund.
For its services, the Business Manager will receive a
monthly fee, payable in arrears in U.S. dollars, at an
annual rate of .25% of the Fund's average weekly net
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9
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assets. The Business Manager and the Fund will enter into a
sub-administration agreement with Princeton Administrators,
L.P. (the "Sub-Administrator"), an affiliate of Merrill
Lynch, under which the Sub-Administrator will perform,
subject to the Business Manager's supervision, various
administrative functions. For its services and facilities,
the Business Manager will pay the Sub-Administrator a
monthly fee at an annual rate of .20% of the Fund's average
weekly net assets. See "Management of the Fund-- Business
Manager; Sub-Administrator."
Fee Reduction................ The Investment Manager has undertaken to reduce its fee by
one-half during the fiscal quarter following any of the
first eight fiscal quarters of the Fund if the average
closing price of the Fund's Shares in the preceding quarter
is less than the $15.00 initial offering price. If this fee
reduction is operative, the Investment Manager's fee will be
reduced to an annual rate of .625% of the Fund's average
weekly net assets during the relevant period. The Fund
cannot predict whether its Shares will trade at, above or
below net asset value.
Listing...................... Prior to this offering, there has been no public market for
the Fund's Shares. During an initial period which is not
expected to exceed three months from the date of this
Prospectus, the Fund's Shares will not be listed on any
securities exchange. During such period, the Underwriters do
not intend to make a market in the Fund's Shares.
Consequently, it is anticipated that an investment in the
Fund will be illiquid during such period. The Fund intends
to apply for listing of its Shares on the New York Stock
Exchange so that trading on such Exchange will begin no
later than three months from the date of this Prospectus.
The Fund expects that it will meet the New York Stock
Exchange standards for listing. In the event the Fund's
Shares are not approved for listing on the New York Stock
Exchange at the end of the three-month period, the Fund
intends to apply either to have the Fund's Shares listed on
the American Stock Exchange or traded on the NASDAQ National
Market System. See "Underwriting."
Dividend Policy.............. The Fund intends to distribute to shareholders, at least
annually, substantially all of its net realized capital
gains and net investment income. The Fund has established a
dividend reinvestment plan pursuant to which all dividends
and distributions from the Fund will be automatically
reinvested in additional Shares of the Fund unless a
shareholder elects to receive cash. See "Dividends and
Distributions; Dividend Reinvestment Plan."
Custodian and Transfer and
Dividend Paying Agent........ The Chase Manhattan Bank, N.A. will act as custodian for the
Fund and may employ subcustodians outside the U.S. approved
by the Directors of the Fund in accordance with regulations
of the Securities and Exchange Commission. Chemical Mellon
Shareholder Services, Inc. will act as transfer and dividend
paying agent and registrar for the Fund. See "Risk Factors
and Special Considerations" and "Custodian and Transfer and
Dividend Paying Agent."
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10
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FUND EXPENSES
The following tables are intended to assist Fund investors in understanding
the various costs and expenses associated with investing in the Fund.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)...................... 6.0%
Dividend Reinvestment Plan Fees..................................... None*
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)**
Management Fees.................................................... 1.25%
Other Expenses (audit, legal, administrative, transfer agent and
custodian)......................................................... 1.66%
-----
Total Annual Expenses................................ 2.91%***
-----
-----
--------------------------
* The Fund and the Plan Agent impose no fee for participation in
the Dividend Reinvestment Plan (the "Plan"). However, a $5.00
fee is imposed for withdrawal from participation in the Plan.
In addition, each participant in the Plan will pay a pro rata
share of brokerage commissions incurred in connection with
open-market purchases of Fund Shares under the Plan.
** See "Management of the Fund" for additional information. "Other
Expenses" have been estimated for the current fiscal year and
are based on the estimated offering size of the Fund.
Therefore, "Other Expenses" and "Total Annual Expenses" could
change depending on the size of the Fund.
*** The Investment Manager will waive one-half of its fee during
the fiscal quarter following any of the first eight fiscal
quarters of the Fund if the average closing price of the
Fund's Shares in the preceding quarter is less than the $15.00
initial offering price. See "Management of the Fund" for
additional information.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment in the
Fund, assuming a 5% annual return:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- --------- ----------- ---------- ---------
$87 $ 144 $203 $ 361
The purpose of the above table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The above Example does not reflect offering costs in connection
with the public offering, estimated to be approximately $ , which will be
charged against the proceeds of the offering. The Example assumes that all
dividends and other distributions are reinvested at net asset value and that the
percentage amounts listed under Annual Expenses remain the same in the years
shown. The above table and the assumption in the Example of a 5% annual return
are required by regulations of the Securities and Exchange Commission (the
"Commission") applicable to all investment companies. The assumed 5% annual
return and annual expenses should not be considered a representation of actual
or expected Fund performance or expenses, both of which may be greater or lesser
than those shown. In addition, while the example assumes reinvestment of all
dividends and distributions at net asset value, participants in the Fund's
Dividend Reinvestment Plan may receive Shares issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan." For more complete descriptions of certain of the Fund's
costs and expenses, see "Management of the Fund."
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<PAGE>
THE FUND
Templeton Russia Fund, Inc. (the "Fund"), incorporated in Maryland on
September 30, 1994, is a newly organized, non-diversified, closed-end management
investment company registered under the U.S. Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's investment objective is long-term capital
appreciation. To achieve its objective the Fund intends to invest primarily in
equity securities of Russia Companies. As used in this Prospectus, the term
"Russia Company" means a company (i) that is organized under the laws of, or
with a principal office and domicile in, Russia, (ii) for which the principal
equity securities trading market is in Russia, or (iii) that derives at least
50% of its revenues or profits from goods produced or sold, investments made, or
services performed in Russia, or that has at least 50% of its assets situated in
Russia.
The address of the Fund is 700 Central Avenue, St. Petersburg, Florida
33701-3628. The Fund's telephone number is 813-823-8712.
USE OF PROCEEDS
The net proceeds of the Offering, after deduction of the sales load and
expenses payable by the Fund, are estimated to be $ (assuming no exercise
of the Underwriters' over-allotment option), and will be invested in accordance
with the policies set forth under "Investment Objective and Policies." The Fund
intends to invest primarily in equity securities of Russia Companies. Although
Russia has developing securities markets, as of the date of this Prospectus
there exist only a limited number of Russia Companies considered by the
Investment Manager to be suitable for investment by the Fund. Initially,
therefore, in addition to investments in Russia issuers, the Fund may invest
without percentage limitation in the securities of companies that do not qualify
as Russia Companies but which the Fund's Investment Manager believes will
experience growth in revenue or income from participation in the development of
the economy of Russia. If by June 1, 1997, however, at least 65% of the value of
the Fund's total assets are not invested in the securities of Russia issuers, as
described under "Investment Objective and Policies," the Fund's Board of
Directors will, at its next regularly scheduled meeting, consider whether it
would be in the best interests of the Fund's shareholders either to modify the
Fund's investment policies (and to change the name of the Fund) or to liquidate
the Fund's assets (i.e., convert them to cash) and distribute the proceeds,
exclusive of liabilities, to shareholders. During this initial investment period
ending June 1, 1997, (or such earlier date by which 65% of the Fund's assets are
invested in securities of Russia issuers), the Fund's Directors will, at each
quarterly meeting of the Board of Directors, monitor the Investment Manager's
progress in identifying suitable investments in Russia Companies and consider
whether continued accrual of the investment management fee at the level provided
for in the Investment Management Agreement remains appropriate. There can be no
assurance that the Fund will be able to invest at least 65% of the value of its
total assets in securities of Russia issuers by June 1, 1997.
During the Fund's initial investment period, to the extent not invested as
described above, the Fund's assets may be invested as described under
"Investment Objective and Policies--Temporary Investments."
INVESTMENT RATIONALE
The Fund's investment objective and policies reflect the Investment
Manager's opinion that attractive investment opportunities may result from the
continuing process of economic reform in Russia. Assets sold during the
beginning of Russia's privatization program, for example, were sold at a
fraction of their comparable price in Western countries, and large natural
resources, energy and telecommunications companies were sold at a fraction of
their values in the West. Furthermore, the third stage of the privatization
program, the implementation of investment tenders (a form of cash purchase which
includes the making of a non-returnable cash investment in the privatized
company) to
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<PAGE>
acquire additional stakes in Russian companies, is expected to attract much
needed foreign investment into Russia's manufacturing and extraction industries,
and to encourage Russian managers to restructure inefficiently run plants. These
investment tenders should permit large foreign investors, such as the Fund, to
acquire significant stakes in major Russian companies. There can be no assurance
that the Fund's investments will be successful.
Political and Economic Background. Since the first free parliamentary
elections in the Russian Federation and the passage of a new constitution in
December 1993, the political environment has become less volatile. President
Yeltsin has sought to strike a balance between the reformers and the centrists,
headed by Prime Minister Chernomyrdin, a moderate reformer who has sought to
continue economic reforms in a steady and pragmatic manner. The voucher
privatization program (discussed below), which was substantially completed, as
scheduled, in June 1994, resulted in the privatization of approximately 70% of
Russian enterprises. In May and June of 1994, President Yeltsin signed a package
of decrees designed to accelerate the next stage of economic reform.
Furthermore, the parliament succeeded early in the year in passing a 1995
budget, which provides for a decreased budget deficit and financing of the
deficit through non-inflationary means, such as borrowing from the International
Monetary Fund.
Russia continues to experience economic problems, particularly inflation and
reduced industrial production. The expected high cost of industrial
restructuring and continued pressure from the military and agricultural lobbies
could maintain pressure on government finances and it is expected to take
another two to three years before inflation decreases to an annual rate of 30%
to 40%. Inflation for 1994 is estimated to have been approximately 320%. The
monthly inflation rates for December, 1994 and January, 1995 were 16.4% and
17.8%, respectively. The monthly rates dropped, however, during February and
March, 1995 to 11.0% and 8.9%, respectively, and inflation for 1995 is estimated
by certain commentators to fall to an annual rate of 200%. One authority has
reported that inflation could be reduced to an annual rate of 100% by 1996. In
addition, reported unemployment at the end of 1994 has risen to 13.5% by
International Labor Organization criteria, and is expected to increase further
with the structural reforms of the Russian economy.
However, Russia has a sizeable skilled labor force, with comparatively low
wage rates, and significant natural resources. In addition, while industrial
production fell by 21% in real terms in 1994 in comparison with 1993, the
Investment Manager believes that this reduction does not accurately reflect
economic contraction, as much of the private sector activity is excluded from
measurement.
Privatization Program. In October 1992, Russia launched the largest mass
privatization program in history. Privatization vouchers were distributed at a
nominal cost to approximately 148 million eligible Russians. The vouchers
carried a face value of Rbs 10,000, which was the equivalent of approximately
$32. Voucher holders could bid for the shares of the 15,000 medium and large
companies that were being privatized or sell the vouchers in the newly developed
secondary market. The distribution of shares in these companies has involved
three stages: (i) distribution of shares to past and present employees on
preferential terms, (ii) offering shares to the public through voucher auctions,
and (iii) offering shares to the public through other methods, notably
investment tenders, commercial tenders, cash auctions and specialized auctions
for the sale of shares. During the first phase, most medium- and large-scale
enterprises could select their preferred privatization structure from three
alternatives. Thirty-four percent of Russian enterprises opted for the first
alternative, which allowed acquisition of a total of 40% of shares by management
and past and present employees on preferential terms. Sixty-four percent of
Russian enterprises opted for the second alternative, which allowed employees to
acquire 51% of the shares from the state at 1.7 times nominal value, with the
remaining shares held by the state and sold to the public. Only two percent of
Russian enterprises chose the third alternative, in which certain employees of
small enterprises were entitled to acquire a total of 20% of the shares at book
value one year after implementation of a pre-approved restructuring plan if the
terms of the plan were met. The sale of shares by means of closed subscriptions
to employees were performed by
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<PAGE>
most medium- and large- scale enterprises shortly after the transformation of
those enterprises into open joint stock companies.
According to a Presidential Decree dated July 1, 1992, this transformation
to open joint stock companies took place by October 1, 1992. Subsequent to the
closed subscriptions, the second phase of privatization commenced and 29% of the
remaining shares of each of these enterprises were sold by voucher auctions to
the public. Foreign investors were able to participate by purchasing vouchers
and bidding at the auctions. Shares were distributed after each auction
proportionately based on the number of vouchers offered. Vouchers could also
have been used by past and present employees to acquire shares on preferential
terms, or to invest in new special purpose Russian Voucher Funds established to
provide diversification and on-going investment management. Voucher prices
fluctuated from less than $5 in 1993 to $24 in June 1994. The voucher
privatization program, and consequently the voucher auctions, ended on June 30,
1994. It is estimated that 144.5 million vouchers were used to transform more
than 40 million Russians into shareholders.
The third phase of privatization, which has not yet been completed, consists
of investment tenders, commercial tenders, specialized auctions for the sale of
shares, and cash auctions. Following a Presidential Decree dated July 22, 1994,
the State Property Management Committee and Federal Property Fund began to
conduct investment tenders throughout Russia. The investment tenders are partly
intended to attract foreign investment and foreign expertise into the Russian
economy. An investment tender gives a single investor an opportunity to acquire
a package of shares. The investor must submit a "sealed" proposal as to the
amount of investment the investor is willing to make, subject to a minimum set
forth in the company's investment program, which is part of its privatization
plan. The person making the highest bid on the day bids are revealed is awarded
the tender and has the right to acquire the shares. Private sector foreign
companies are able to participate in both tenders and auctions with the
exception of sectors that are singled out by legislation as requiring consent to
foreign investment or which have limitations on the level of participation by
foreign investors.
A commercial tender is a tender in which the winner is required to fulfill
certain conditions in relation to the privatized company. The winner of the
tender is the bidder whose proposal most fully satisfies the requirements of the
tender and who offers the highest price.
Regulations detailing the sale of shares at cash auctions have not to date
been adopted. Regulations governing the procedure for holding specialized
auctions for the sale of shares on the other hand were adopted by the State
Property Management Committee on October 6, 1994. Specialized auctions for the
sale of shares are open offers in which investors participate by submitting an
application specifying the total sum to be paid and the number of shares to be
acquired.
Privatized companies are entitled to increase their charter capital by way
of supplementary share issues only after the appropriate property fund has
disposed of at least 90% of the company's shares and conducted the investment
tender, where applicable. The acceleration of investment tenders and specialized
auctions will allow more supplementary share issues, which will present new
opportunities for investors to acquire shares in privatized companies for cash.
Since the inception of the program, more than 100,000 enterprises have been
privatized, with approximately 15,000 of these being medium- and large-scale
enterprises. However, most of the market value is concentrated in a very small
number of companies. As of October, 1994, the ten largest companies had a total
market capitalization of approximately $16.5 billion.
Immediately after the launch of the privatization program, a secondary
market for shares and vouchers emerged, with at least twelve organized exchanges
and over 100 small exchanges. Since the vouchers ceased to be valid on June 30,
1994, such exchanges have focused on trading shares and bonds. Although
developing rapidly, even the largest of Russia's stock exchanges remain in a
relatively undeveloped state compared to Western stock exchanges. Little trading
is conducted on the exchanges and the majority of all trades are transacted on
the over-the-counter market between Russian licensed
14
<PAGE>
brokers. Average weekly trading volumes are estimated to be in excess of $35
million. Currently no central clearing and settlement capabilities exist
although attempts are currently being made to establish the first of such
systems.
Because ownership of shares is normally reflected by entries in a share
register, management often can illegally exert considerable influence over the
trading of shares by the control of or influence over the share register. A
Russian enterprise having 1,000 or more shareholders is required by law to
contract out the maintenance of its shareholder register to an independent
entity. In practice, however, this regulation has not always been strictly
enforced. It is expected that pressures from market forces will encourage
enterprises to entrust registration duties to commercial banks or other
independent service providers.
Foreign Investment. Privatization legislation generally does not limit the
extent to which foreigners are permitted to participate in the privatization
process. Participation in privatization by foreign investors in certain
enterprises (enterprises whose defense orders exceed 30% of production, the oil
and gas sector, the extraction and processing of the ore of strategic materials,
precious and semi-precious stones and precious metals, radioactive and rare
elements, and transport and communication enterprises) requires the consent of
either the Russian government or local governments of republics within the
Russian Federation. Following participation by the foreign investor,
notification must be sent to the Government of the Russian Federation and to the
Federal Counterintelligence Service, in which case the Government may decide to
prohibit an acquisition. Foreign investors may not participate in the
privatization of enterprises situated within closed territories except in cases
provided for by government edicts. Certain trade, food supply, consumer services
and small enterprises in the construction and industrial sector or
transportation sector require consent from local authorities to acquisitions by
foreign investors.
Rubles may not be exported from Russia and holdings of Rubles in Russia by
non-Russian residents are restricted. For the purposes of making investments and
receiving income on investments, a foreign investor is only entitled to make
payments through a type of Ruble account known as an I-type account. The types
of payments which may be credited to and the use of Rubles already held in such
accounts are heavily restricted. In opening an I-type Ruble account, a
non-resident is required to register with the Russian tax authorities. This
provides a mechanism for the tax authorities to use the I-type account in order
to withhold taxes and other duties payable by the I-type account holder. Sums
converted into foreign currency from an I-type account may be repatriated out of
Russia in the circumstances specified in applicable law. See "Risk Factors and
Special Considerations--Investment and Repatriation Restrictions."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital appreciation. To
achieve its objective, the Fund intends to invest primarily in equity securities
of Russia Companies. As used in this Prospectus, equity securities means common
or preferred stock (including convertible preferred stock); bonds, notes or
debentures convertible into common or preferred stock; stock purchase warrants
or rights; equity interests in trusts, partnerships, joint ventures or similar
enterprises; and American or Global Depositary Receipts. The extent to which the
Fund may invest in enterprises classified under U.S. tax law as partnerships or
trusts may be limited by considerations relating to the Fund's status as a
regulated investment company. In any event, under normal market conditions, the
Fund will invest at least 65% of its total assets in securities of Russia
issuers, which will include equity securities of Russia companies (including
direct equity investments as discussed below) and may include debt securities of
Russia Companies or issued or guaranteed by Russian state entities which offer
the potential for capital appreciation. The Fund will limit its investment in
debt securities, other than temporary investments, to a maximum of 20% of its
total assets. The Fund's investment objective, its policy of investing, under
normal market conditions, at least 65% of its total assets in securities of
Russia companies, and the
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investment restrictions set forth below under "Investment Restrictions" are
fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities. All other investment policies and
practices described in this Prospectus are not fundamental, meaning that the
Board of Directors may change them without the approval of shareholders. As used
herein, a "majority of the Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented, and (ii) more than 50% of the
outstanding shares. There is no assurance the Fund will be able to achieve its
investment objective.
The Fund may invest up to 35% of its total assets in direct equity
investments that the Investment Manager expects will provide for eventual
disposition either through listing or sale of the securities to the issuer or
another investor. As used in this Prospectus, the terms "direct investments" and
"direct equity investments" mean private investments in non-publicly traded
equity securities of Russia Companies. The Fund's direct investments will
involve certain high risks for invested capital. See "Risk Factors and Special
Consideration--Direct Investments."
The Fund intends to invest its assets over a broad economic spectrum of
Russia Companies including, as conditions warrant from time to time, oil and
gas, energy generation and distribution, communications, mineral extraction,
trade, financial and business services, transportation, manufacturing, real
estate, textiles, food processing and construction. The Fund is not permitted to
invest more than 25% of its assets in any one industry. In addition, the Board
of Directors has adopted a non-fundamental policy under which the Fund will not
invest more than 10% of its assets in any one issuer.
The Investment Manager's approach to selecting investments emphasizes
fundamental company-by-company analysis (rather than broader analyses of
specific industries or sectors of the economy). Although the Investment Manager
will consider historical value measures, such as price/earnings ratios,
operating profit margins and liquidation values, the primary factor in selecting
securities for investment by the Fund will be the company's current price
relative to its long-term earnings potential, or real book value, whichever is
appropriate. In addition, the Investment Manager will consider overall growth
prospects, competitive positions in export markets, technologies, research and
development, productivity, labor costs, raw material costs and sources, profit
margins, returns on investment, capital resources, state regulation, management
and other factors in comparison to other companies around the world which the
Investment Manager believes are comparable. Selection methods are subject to
change from time to time based on the Investment Manager's research and changes
in the securities markets.
The Fund's definition of Russia Company includes companies that have
characteristics and business relationships common to companies in a country or
countries other than Russia. As a result, the value of the securities of such
companies may reflect economic market forces applicable to other countries, as
well as to Russia. For example, the Fund may invest in companies organized and
located in countries other than Russia, including companies having their entire
production facilities outside of Russia, when securities of such companies meet
one or more elements of the Fund's definition of Russia Company.
The Fund is permitted to invest indirectly in securities through sponsored
or unsponsored American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs") and other types of Depositary Receipts (which, together with ADRs and
GDRs, are hereinafter collectively referred to as "Depositary Receipts"), to the
extent such Depositary Receipts become available. ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. GDRs and other types of
Depositary Receipts are typically issued by foreign banks or trust companies,
although they also may be issued by U.S. banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the
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securities underlying unsponsored Depositary Receipts are not obligated to
disclose material information in the United States and, therefore, there may be
less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. For purposes of the Fund's investment policies, the Fund's investments
in Depositary Receipts will be deemed to be investments in the underlying
securities.
Under normal market conditions, assets of the Fund not invested in equity
securities of Russia Companies will be invested in (i) debt securities issued by
Russia Companies or issued or guaranteed by the Russian Government or a Russian
governmental entity, as well as debt securities of corporate and governmental
issuers outside Russia, (ii) equity securities of issuers outside Russia which
the Investment Manager believes will experience growth in revenue from
participation in the development of the economy of Russia, and (iii) short-term
and medium-term debt securities of the type described below under "Investment
Objective and Policies--Temporary Investments." The Fund will limit its
investment in debt securities, other than temporary investments, to 20% of its
total assets. The Fund may invest in debt securities when the Investment Manager
believes that, based upon factors such as relative interest rate levels and
foreign exchange rates, debt securities offer opportunities for long-term
capital appreciation. It is likely that many of the debt securities in which the
Fund will invest will be unrated and, whether or not rated, the debt securities
may have speculative characteristics. Currently, the market in debt securities
of Russia Companies, and of Russian state entities, is extremely limited, except
with respect to Vnesheconombank bonds and certain securities issued by the
Ministry of Finance.
Included among the issuers of Russian debt securities in which the Fund may
invest are entities organized and operated solely for the purpose of
restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments and the
issuance by that entity of one or more classes of securities ("Structured
Investments") backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued Structured Investments to create securities with
different investment characteristics such as varying maturities, payment
priorities or interest rate provisions. The extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
the Fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments. Although the Fund's
purchase of subordinated Structured Investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leverage for purposes of the limitations placed on the
extent of the Fund's assets that may be used for borrowing activities. See
"Additional Investment Practices--Borrowing."
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Fund's investment in
these Structured Investments may be limited by the restrictions contained in the
1940 Act described below under "Additional Investment Practices-- Investment
Companies." Structured Investments are typically sold in private placement
transactions. There currently is no active trading market for Structured
Investments.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other equity securities. Warrants do not carry with them the right
to dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
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the issuer. As a result, warrants may be considered more speculative than other
types of equity investments.
The Fund intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade for short-term gain. Accordingly, it
is anticipated that the Fund's annual portfolio turnover rate normally will not
exceed 75%, although in any particular year, market conditions could necessitate
portfolio activity at a greater or lesser rate than anticipated. The portfolio
turnover rate for a year is calculated by dividing the lesser of sales or
purchases of portfolio securities during that year by the average monthly value
of the Fund's portfolio securities, excluding money market instruments. The rate
of portfolio turnover will not be a limiting factor when the Fund deems it
appropriate to purchase or sell securities for the Fund. However, the U.S.
federal tax requirement that the Fund derive less than 30% of its gross income
from the sale or disposition of securities held less than three months may limit
the Fund's ability to dispose of its securities. See "Taxation--U.S. Federal
Income Taxes."
The Fund may invest up to 35% of its total assets in direct equity
investments. Direct investments will consist of (i) the purchase from an
enterprise of an equity interest in the enterprise in the form of shares of
common stock or equity interests in trusts, partnerships, joint ventures or
similar enterprises, or (ii) the purchase of such an equity interest in an
enterprise from an investor in the enterprise. The Fund intends to make its
direct investments in such a manner as to avoid subjecting the Fund to unlimited
liability with respect to the investments. There can be no assurance that the
Fund's direct investments will become publicly traded, or that the Fund will be
able otherwise to sell any direct investment to the issuer or another investor.
Due to the absence of a trading market for the Fund's direct investments,
they will be less liquid than publicly traded securities. Although these
investments may, in some cases, be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund or less than what may be considered the fair value of such securities.
In addition, the Fund may be unable to dispose of its direct investments at
then-current market prices and may have to dispose of such securities over
extended periods of time. Further, securities in Russia, and particularly those
that are not publicly traded, are not subject to the disclosure and other
investor protection requirements that are generally accepted as necessary in
countries with developed securities laws. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration.
The extent to which the Fund may make direct investments may be limited by
considerations relating to its status as a regulated investment company.
During periods in which the Investment Manager believes changes in economic,
financial or political conditions make it advisable, the Fund may, for temporary
defensive purposes, reduce its holdings in equity securities and invest without
limit in certain short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) debt securities or hold
cash. The short-term and medium-term debt securities in which the Fund may
invest consist of (a) obligations of the U.S. or Russian governments, and their
respective agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or foreign banks denominated in any currency; (c) floating rate securities
and other instruments denominated in any currency issued by various governments
or international development agencies; (d) finance company and corporate
commercial paper and other short-term corporate debt obligations of U.S or
Russian corporations; and (e) repurchase agreements with banks and
broker-dealers with respect to such securities. The Fund intends to invest for
temporary defensive purposes only in short-term and medium-term debt securities
rated, at the time of investment, A or higher by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") or, if unrated by either
rating agency, of equivalent credit quality to securities so rated as determined
by the Investment Manager. For purposes of the Fund's investment restriction
prohibiting the investment of 25% or more of the total value of its assets in a
particular industry, a foreign government (but not the United States
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government) is deemed to be an "industry," and therefore investments in the
obligations of any one foreign government may not equal or exceed 25% of the
Fund's assets. In addition, supranational organizations are deemed to comprise
an industry, and therefore investments in the obligations of such organizations
may not, in the aggregate, equal or exceed 25% of the Fund's assets. See
"Investment Restrictions."
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed price
and date. Under a repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Investment Manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price including accrued interest. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in securities of Russia Companies
involves significant risks and special considerations, including those set forth
below, which are not typically associated with investing in United States
securities markets. The specific nature of such risks may vary according to the
country in which investments are made. The Fund is authorized to engage in
certain transactions involving derivative instruments which may involve special
risks. See "Hedging Transactions and Use of Derivative Instruments" and "Debt
Securities--High Yield, High Risk Securities" below.
POLITICAL AND ECONOMIC FACTORS
Since the breakup of the Soviet Union at the end of 1991, Russia has
experienced dramatic political and social change. The political system in Russia
is emerging from a long history of extensive state involvement in economic
affairs. The country is undergoing a rapid transition from a centrally
controlled command system to a market-oriented, democratic model. The Fund may
be affected unfavorably by political or diplomatic developments, social
instability, changes in government policies, taxation and interest rates,
currency repatriation restrictions and other political and economic developments
in the law or regulations in Russia and, in particular, the risks of
expropriation, nationalization and confiscation of assets and changes in
legislation relating to foreign ownership.
Russia experienced extreme political uncertainty during 1993 resulting from
continued clashes between the more reform-minded President Yeltsin and the more
conservative Supreme Soviet. The reform process came to a standstill, eventually
resulting in President Yeltsin issuing a decree to dissolve the Soviet. This led
to a two-week sit-in by members of the Soviet and climaxed in the bloodshed of
an attempted coup in October 1993. While the political environment has remained
relatively stable since the parliamentary elections and passage of a new
constitution in December 1993, there can be no assurances that this will
continue. Moreover, the upcoming presidential election, scheduled for mid-1996,
could result in further political and economic uncertainty. The recent civil war
in Chechnya has highlighted the political tensions that exist between the
central government in Moscow and some of the regions within the Russian
Federation. The war in Chechnya has contributed to political instability by
weakening confidence domestically and internationally in Yeltsin and the
reformist government. The risk exists that armed conflict in Chechnya will
continue, which could deter foreign investment and international aid and further
weaken the reformist government's control. The risk also exists that the
political tensions associated with the war in Chechnya will lead to attempts for
independence on the part of other regions within the Russian Federation.
Furthermore, the military could have a negative impact on Russia's political
and economic future. The declining stature of Russia as a world power could fuel
sentiment among military members to return to a militarily led, more autocratic
political structure. In addition, demobilization of troops, cuts
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in the military budget, and the growth of significant gaps in living standards
between the military and civilian sectors could lead to further political
unrest.
Moreover, it is uncertain whether Russia's privatization process will
continue with the current momentum or that it will not be curtailed or abandoned
altogether. It is also unclear whether reforms intended to liberalize prevailing
economic structures based on free market principles will be successful. In this
regard, certain Russian banks have recently instituted an initiative to curtail
sales of state-owned companies by the government to foreign investors at prices
below their fair values.
The planned economy of the former Soviet Union was run with qualitatively
different objectives and assumptions to those prevalent in a market system and
Russian businesses do not have any recent history of operating within a
market-oriented economy. In general, relative to companies operating in Western
economies, companies in Russia are characterized by a lack of (i) management
with experience of operating in a market economy, (ii) modern technology and
(iii) a sufficient capital base with which to develop and expand their
operations. It is unclear what will be the future effect on Russian companies,
if any, of Russia's continued attempts to move toward a more market-oriented
economy.
Russia has experienced an economic recession since 1990 and its economy is
currently characterized by high rates of inflation and decreasing gross domestic
product. Recent economic reforms have involved dislocation in various sectors of
the economy. Russian government officials and economic commentators have
identified a number of factors, including the following, that have contributed
to the current economic situation: continuing budget deficits and increased
levels of credit by the Russian central bank, both of which have contributed to
inflation and the instability of the ruble; high levels of inter-company debt;
and a taxation system requiring structural reforms, including reforms of
procedures for collection of tax revenues.
The increase in inter-company debt and increases in government borrowing
have caused particular economic ramifications. Inter-company debt has led to
non-payment by Russia Companies of company obligations and delay or non-payment
of workers' salaries. The Russian government has supported a large number of
Russia companies that are insolvent from a technical perspective. Government
subsidies to industry and agriculture increased during July, August and
September, 1994, which led to increased borrowings and credit from the Russian
central bank. These factors were responsible in part for the increase in
inflation in October 1994 and the 27% drop in the ruble on October 11, 1994.
Political consequences to economic and currency developments included removal of
several senior governmental officials and the subjection of the current
government to a no-confidence vote, which it survived, on October 21, 1994.
Following these developments, the Russian government has adopted a budget
for 1995 that calls for a reduction of the budget deficit and the elimination of
further borrowings from the central bank. The budget requires that the
government finance the deficit through non-inflationary means, such as borrowing
from the International Monetary Fund ("IMF"). In this regard, on April 11, 1995,
the IMF approved a $6.8 billion standby loan to Russia which provides for
monthly disbursements subject to certain conditions. The government is also
seeking to renegotiate its debt obligations to foreign governments and
commercial banks, which are estimated at a total of $90 billion. There can be no
assurance that the government will be able to achieve these objectives or obtain
disbursements under the IMF loan, that these measures will be effective in
improving economic conditions or that the transition to a market-oriented
economy will not be adversely affected by other economic factors.
Further, Russia presently receives significant financial assistance from a
number of countries through various programs. To the extent these programs are
reduced or eliminated in the future, Russian economic development may be
adversely impacted.
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MARKET CHARACTERISTICS
The Russian securities markets are substantially smaller, less liquid and
significantly more volatile than the securities markets in the United States. In
addition, there is little historical data on these securities markets because
they are of recent origin. A substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges and
over-the-counter markets. A limited number of issuers represent a
disproportionately large percentage of market capitalization and trading value.
The Fund's holdings of equity securities of Russia Companies are expected to
represent a relatively significant portion of the total float of such securities
available for public trading and, therefore, the size of the Fund's holdings in
specific securities relative to the trading volume in those securities could
adversely affect the prices at which the securities are bought or sold and could
lengthen the time period during which buying and selling programs are effected.
Anticipation of the offering in the Russian securities markets may increase the
prices that would otherwise be paid by the Fund for certain securities and
lengthen the time period required to fully invest the proceeds of the offering
in Russian securities.
Because of the current limited opportunities for investment in Russian
securities by the Fund as described above, there can be no assurance that the
Fund will have 65% of its assets invested in the securities of Russia Companies
by June 1, 1997. See "Use of Proceeds."
SETTLEMENT AND CUSTODY RISK
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject to significant
risks not normally associated with investments in the United States and other
more developed markets. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced by
extracts from the register or in certain limited cases by formal share
certificates. However, there is no central registration system and these
services are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision and it is possible for the Fund to lose its registration
through fraud, negligence or even mere oversight. The Fund will endeavor to
ensure that its interest continues to be appropriately recorded, either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular audits. However, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the Fund of its ownership rights.
In addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for the Fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration. Furthermore, while a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice, this regulation has not been strictly enforced.
Because of this lack of independence, management of a company may be able to
exert considerable influence over who can purchase and sell the company's shares
by illegally instructing the registrar to refuse to record transactions on the
share register. This practice may prevent the Fund from investing in the
securities of certain Russia Companies deemed suitable by the Investment
Manager. Further, this also could cause a delay in the sale of Russia company
securities by the Fund if a potential purchaser is deemed unsuitable, which may
expose the Fund to potential loss on the investment. Moreover, since the local
postal and banking systems may not meet the same standards as those of Western
countries, no guarantee can be given that all entitlements attaching to
securities acquired by the Fund, including those relating to dividends, can be
realized. There is the risk that payments of dividends or other
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distributions by bank wire or by check sent through the mail could be delayed or
lost. In addition, there is the risk of loss in connection with the insolvency
of an issuer's bank or transfer agent, particularly because these institutions
are not guaranteed by the state.
In light of the risks described above, the Board of Directors of the Fund
has approved certain procedures concerning the Fund's investments. Among these
procedures is a requirement that the Fund will not invest in the securities of a
Russia Company unless that issuer's registrar has entered into a contract with
the Fund's sub-custodian containing certain protective conditions, including,
among other things, the sub-custodian's right to conduct regular share
confirmations on behalf of the Fund. This requirement may have the effect of
precluding investments in certain Russia Companies that the Fund would otherwise
make. In accordance with procedures adopted by the Fund, the Fund's Russian sub-
custodian has undertaken to provide certain information on a periodic basis to
the Board of Directors concerning the share registration and custody
arrangements in Russia. If the Board of Directors determines that, over the long
term, investment in the securities of Russia Companies is no longer consistent
with the best interests of the Fund's shareholders, the Fund intends to call a
shareholder meeting for the purposes of considering whether to modify the Fund's
investment policies or to liquidate the Fund's assets and distribute the
proceeds to shareholders.
FOREIGN CURRENCY AND EXCHANGE RATES
The Fund's assets will be invested in securities denominated in rubles,
which are not externally convertible into other currencies outside Russia. The
value of the assets of the Fund and its income, as measured in U.S. dollars, may
be affected by fluctuations in currency rates and exchange control regulations.
The ruble has experienced significant devaluations relative to the U.S. dollar.
For example, during the period September 1, 1994 to April 18, 1995, the exchange
rate ranged from a low of Rbs. 2,156: $1 to a high of Rbs. 5,064: $1. Further,
such value experienced a one-day decline of 27% on October 11, 1994. Although
the Russian Central Bank has taken steps to stabilize the value of the Ruble,
including the use of foreign currency reserves, there can be no assurance that
such steps will be taken in the future or that such steps, if taken, will be
successful. Although the ruble is internally convertible within Russia, there
can be no guarantee of the liquidity or availability of such markets.
Accordingly, the Fund may experience significant delays in converting currency
in connection with its portfolio transactions. The Fund, as a non-resident of
Russia, is restricted in the operations in which it may engage involving rubles
since it may only hold rubles in an "I-type" investment account or a "T-type"
trading account within Russia which can only be used for certain defined
operations connected with investment management.
Additional information concerning movement in foreign exchange rates can be
found in Appendix A under "Currency and Foreign Exchange Information."
Currency devaluations may occur without warning and are beyond the control
of the Investment Manager. To the extent such instruments are available on terms
acceptable to the Fund, the Fund may attempt to mitigate the risks associated
with currency fluctuations at times by entering into forward, futures or options
contracts to purchase or sell the ruble. Currently, such instruments are
generally not available.
INFLATION
Russia's economy has been characterized by high rates of inflation. The
annual rate of inflation for 1994 was estimated at 320%. The monthly inflation
rates for December, 1994 and January, 1995 were 16.4% and 17.8%, respectively.
The monthly rates dropped during February and March, 1995 to 11.0% and 8.9%,
respectively. Commentators report that inflation could be reduced to an annual
rate of 100%
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by 1996. Nevertheless, the expected high cost of industrial restructuring and
continued pressure from the military and agricultural lobbies are expected to
continue inflationary pressure.
INVESTMENT AND REPATRIATION RESTRICTIONS
The laws and regulations affecting Western investment business continue to
evolve in an unpredictable manner. Laws and regulations, particularly those
involving taxation, foreign investment and trade, title to property or
securities, and transfer of title, applicable to the Fund's activities are
relatively new and can change quickly and unpredictably in a manner far more
volatile than in the United States or other developed market economies. Although
basic commercial laws are in place, they are often unclear or contradictory and
subject to varying interpretation, and may at any time be amended, modified,
repealed or replaced in a manner adverse to the interest of the Fund. There is
still lacking a cohesive body of law and precedents normally encountered in
business environments. Foreign investment in Russian companies is, in certain
cases, legally restricted. Sometimes these restrictions are contained in
constitutional documents of an enterprise which are not publicly available. The
Investment Manager does not believe that such investment restrictions currently
impose a material constraint on the Fund's ability to realize gains through
investments in Russia Companies. Russian foreign investment legislation
currently guarantees the right of foreign investors to transfer abroad income
received on investments such as profits, dividends and interest payments. This
right is subject to settlement of all applicable taxes and duties. However, more
recent legislation governing currency regulation and control guarantees the
right to export interest, dividends and other income on investments, but does
not expressly permit the repatriation of capital from the realization of
investments. Current practice is to recognize the right to repatriation of
capital. Authorities currently do not attempt to restrict repatriation beyond
the extent of the earlier law. No guarantee can be made, however, that amounts
representing realization of capital or income will be capable of being remitted.
If, for any reason, the Fund were unable to distribute an amount equal to
substantially all of its investment company taxable income (as defined for U.S.
tax purposes) within applicable time periods, the Fund would not qualify for the
favorable U.S. federal income tax treatment afforded to regulated investment
companies, or, even if it did so qualify, it might become liable for income and
excise taxes on undistributed income. In addition, the ability of the Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies and in making tax-related computations. Thus, if the Fund
were unable to obtain accurate information on a timely basis, it might be unable
to qualify as a regulated investment company or its tax computations might be
subject to revision (which could result in the imposition of taxes, interest and
penalties). See "Taxation."
Investment in Russia may require the procurement of a substantial number of
regulatory consents, certificates and approvals, including: licenses for the
Fund and Investment Manager to operate in Russia; consents to making investments
in particular companies or types of industries; certificates from tax
authorities; licenses for a Russian custodian; certificates required by banks;
approvals from the Ministry of Finance and State Anti-Monopoly Committee; and
consents required by local legislation. Although it is unlikely that all of
these documents will have been obtained by the closing of this offering, the
Investment Manager believes it will obtain all licenses, consents and approvals
necessary for the operation of the Fund as described herein. The inability to
obtain a particular license, consent or approval could adversely impact the
Fund's operations.
TAX SYSTEM
Economic commentators have noted the significant need for structural reform
of the Russian Tax System. The domestic tax burden is high and the discretion of
local authorities to create new forms of taxation has resulted in a
proliferation of taxes, in some cases imposed or interpreted retroactively. High
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tax rates have led to tax evasion and corruption; tax revenues have been 70%
below the government's budget. High tax rates and the unpredictability of the
tax laws have also deterred foreign investment and the repatriation to Russia of
flight capital, depriving the government of important sources of revenue. There
is no guarantee that these reforms will be implemented.
HEDGING TRANSACTIONS AND USE OF DERIVATIVE INSTRUMENTS
The Fund is authorized to engage in certain transactions involving the use
of derivative instruments, including forward foreign currency exchange
contracts, currency futures contracts and options thereon, put and call options
on securities, indices and foreign currencies, stock index futures contracts and
options thereon and interest rate futures contracts and options thereon.
The Fund may seek to protect the value of some or all of its portfolio
holdings against currency risks by engaging in hedging transactions. The Fund is
authorized to enter into forward currency exchange contracts and currency
futures contracts and options on such futures contracts, as well as to purchase
put or call options on foreign currencies, in U.S. or foreign markets, to the
extent available. In order to hedge against adverse market shifts, the Fund is
permitted to purchase put and call options on stocks, write covered call options
on stocks and enter into stock index futures contracts and related options. The
Fund also is authorized to hedge against interest rate fluctuations affecting
portfolio securities by entering into interest rate futures contracts and
options thereon. For a description of such hedging strategies, see "Additional
Investment Practices" and Appendix D to this Prospectus. Currently, there is no
market in which the Fund may engage in many of these hedging transactions;
therefore, there can be no assurance that instruments suitable for hedging
currency or market or interest rate shifts will be available at the time when
the Fund wishes to use them.
REPORTING STANDARDS
Accounting, auditing and financial reporting standards and requirements in
Russia are less stringent and less consistent than those applicable in many
major Western countries and often cannot be relied upon. Such accounts and
reports are not normally publicly available. Historically, accounting and
auditing has been carried out solely as a function of compliance with tax
legislation and need not be carried out by independent auditors. Less
information is available to investors investing in such securities than to
investors investing in securities of companies in many major Western countries
and the historic information which is available is not necessarily comparable or
relevant. The items appearing in the financial statements of a Russian Company,
even if prepared in accordance with international accounting standards, may not
reflect its financial position or the results of operations in the way that they
would be reflected had such financial statements been prepared in accordance
with generally accepted accounting principles in the United States or other
developed countries.
PARTICIPATION IN PRIVATIZATION
The purchase of securities of recently privatized companies involves special
risks. Many recently privatized companies have gone through an internal
reorganization of management in an attempt to better enable the enterprise to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. Moreover, the loss
of government support and protection in connection with privatization and sudden
subjection to market competition from which an enterprise was previously
protected, could have a negative effect on such enterprise. Further, unreliable
reporting standards, as discussed above, make the valuation of recently
privatized companies difficult. The Investment Manager will seek to assess the
long-term earnings potential and/or real book value of recently privatized
companies in light of historical value measures such as price/earnings ratios,
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operating profit margins and liquidation values. However, there can be no
assurance that accurate data in support of such assessment will be available.
Errors in valuing recently privatized companies, whether or not the result of
inaccurate or unavailable data, could result in the Fund overpaying for an
interest in such companies.
The transformation of medium- and large-scale state enterprises into open
joint stock companies and their subsequent privatization has been carried out by
the Russian State Property Committee and Federal Property Fund and their local
organs at an unprecedented rate. In doing this, much of the responsibility for
preparation of enterprises for privatization and compliance with much of the
privatization legislation was imposed on individuals at the enterprise concerned
rather than through strict control by state authorities. This enhances the risk
that there may be illegalities in the privatization that may lead to full or
partial invalidity of the privatization of the enterprise concerned or the
imposition of sanctions on that enterprise or individuals within its
administration. Alternatively, an enterprise may not have valid or full title to
all of the assets shown on its balance sheet and may be subject to obligations
arising from a period prior to its privatization. As an investor the Fund may
consequently lose all or a part of its investments in such privatized
enterprises.
The privatization process has also resulted in certain disputes between
management and shareholders, particularly foreign shareholders, of recently
privatized companies. For example, management of certain companies has resisted
recognizing purchases of equity interests by foreign investors. In addition,
incidents have been reported where foreign shareholders' ownership interests
have been diluted by management through the issuance of new securities to
limited groups of existing shareholders.
LIABILITY OF INVESTORS IN JOINT STOCK COMPANIES
The new Russian Civil Code generally provides that shareholders in a Russian
joint stock company are not liable for the obligations of the joint stock
company, and only bear the risk of loss of their investment. However, the Civil
Code provides that where one company has the opportunity to determine decisions
taken by another company (a "subsidiary"), whether as a result of its ownership
interest, under the terms of a contract between the companies, or in any other
way, then, if the first company gives obligatory directions to the second
company, it bears joint responsibility for transactions concluded by the latter
in fulfilling such directions. In addition, where a subsidiary becomes insolvent
or bankrupt as a result of the fault of the parent company then the parent
company is liable for the subsidiary's debts in so far as the subsidiary does
not have enough funds to cover the debts.
DIFFICULTIES IN PROTECTING AND ENFORCING RIGHTS
Russian courts lack experience in commercial dispute resolution and many of
the procedural remedies for enforcement and protection of legal rights typically
found in Western jurisdictions are not available in Russia. There remains
uncertainty as to the extent to which local parties and entities, including
Russian state authorities, will recognize the contractual and other rights of
the parties with which they deal. Accordingly, there will be difficulty and
uncertainty in the Fund's ability to protect and enforce its rights against
Russian state and private entities. There is also no assurance that the Russian
courts will recognize or acknowledge that the Fund has acquired title to any
property or securities in which the Fund invests, or that the Fund is the owner
of any property or security held in the name of a nominee which has acquired
such property or security on behalf of the Fund, because there is at present in
Russia no reliable system or legal framework regarding the registration of
titles. There can be no assurance that this difficulty in protecting and
enforcing rights in Russia will not have a material adverse effect on the Fund
and its operations. Difficulties are likely to be encountered enforcing
judgments of foreign courts within Russia or of Russian courts in foreign
jurisdictions due to the limited number of countries which have signed treaties
for mutual recognition of court judgments with Russia.
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Rights apparently granted to the Fund by legislation may be subject to
retroactive change or may be undermined by conflicting legislation, the failure
by a legislator to comply with the proper procedure for passing such legislation
or by changes or uncertainties in the relative priority of legislation passed by
different legislative bodies.
ENVIRONMENTAL RISKS
The lack of environmental controls in Russia has led to widespread pollution
of the air, ground and water resources. In addition, there are concerns related
to the availability of equipment and funding for the disposal of nuclear waste.
Russian environmental legislation envisages the possibility of stringent
sanctions on companies that commit serious or persistent breaches, including
closure of the enterprise concerned. The extent of the cost, if any, for the
abatement of environmental hazards by an issuer will not be determinable at the
time the Fund is considering an investment.
CORRUPTION AND CRIME
The Russian economic system suffers from pervasive corruption, a state of
affairs that to a large extent has been carried over from the Communist era.
Many businesses, particularly in the large cities, are subject to the influence
of criminal elements although there is not a single group or confederation of
criminals that can be characterized as "organized" crime, as that term is
understood in Western Europe and North America. In an effort to root out crime,
President Yeltsin has issued a series of decrees giving the security forces
extreme powers to carry out a crackdown on crime. The President has acknowledged
that many provisions of his anti-crime decrees violate the Russian constitution
as well as the criminal code and these decrees have been viewed by many as a
threat to civil rights. The social and economic difficulties resulting from the
problem of corruption and crime in Russia can adversely affect the value of the
Fund's investments.
DIRECT INVESTMENTS
Direct investments in Russia Companies will involve a high degree of
business and financial risk that can result in substantial losses. Because of
the absence of any public trading market for these investments, the Fund may
take longer to liquidate these positions than would be the case for publicly
traded securities and the prices on these sales could be less than those
originally paid by the Fund. Under certain circumstances, this lack of liquidity
may impede the Fund's ability to achieve its investment objective of long-term
capital appreciation. Further, issuers whose securities are not publicly traded
may not be subject to disclosure and other investor protection requirements
applicable to publicly traded securities. Certain of the Fund's direct
investments may include investments in smaller, less-seasoned companies, which
may involve greater risks. These companies may have limited product lines,
markets or financial resources, or they may be dependent on a limited management
group.
ILLIQUID SECURITIES
The securities of Russia Companies are mostly traded over-the-counter and,
despite the large number of stock exchanges, there is still no organized public
market for such securities. This will increase the difficulty of valuing the
Fund's investments and means that until such time as the market develops further
the Fund's investments will generally be illiquid. No established secondary
markets may exist for many of the securities in which the Fund will invest.
Reduced secondary market liquidity may have an adverse effect on market price
and the Fund's ability to dispose of particular instruments when necessary to
meet its liquidity requirements or in response to specific economic events such
as a deterioration in the creditworthiness of the issuer. Reduced secondary
market liquidity for securities may also make it more difficult for the Fund to
obtain accurate market quotations for purposes of
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valuing its portfolio and calculating its net asset value. Market quotations are
generally available on many emerging country securities only from a limited
number of dealers and may not necessarily represent firm bids of those dealers
or prices for actual sales.
OPERATING EXPENSES
The operating expense ratio of the Fund can be expected to be higher than
that of investment companies investing in more established securities markets
since the expenses of the Fund, including management and custodian fees, will
generally be higher than the expenses of such other funds. See "Fund Expenses."
NET ASSET VALUE DISCOUNT; NON-DIVERSIFICATION
The Fund is a newly organized closed-end investment company with no prior
operating history. Prior to the Offering, there has been no public market for
the Fund's Shares. Shares of closed-end investment companies that invest
primarily in foreign countries frequently trade at a discount from net asset
value and the initial public offering price. This characteristic of shares of a
closed-end fund is a risk separate and distinct from the risk that a fund's net
asset value will decrease. The risk of purchasing shares of a closed-end
investment company that might trade at a discount from net asset value is more
pronounced for investors who purchase shares in the initial public offering and
who wish to sell their shares in a relatively short period of time. For those
investors, realization of a gain or loss on their investment is likely to be
more dependent upon the existence of a premium or discount than upon portfolio
performance.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. Thus, the Fund may invest a greater portion of its assets in the
securities of a smaller number of issuers and, as a result, will be subject to
greater risk of loss with respect to its portfolio securities. The Fund,
however, intends to comply with the diversification requirements imposed by the
Code for qualification as a regulated investment company. This intention should
not be regarded as assurance that the diversification requirements will, in
fact, be met. In addition, the Board of Directors has adopted a non-fundamental
policy under which the Fund will not invest more than 10% of its assets in the
securities of any one issuer. See "Taxation--U.S. Federal Income Taxes" and
"Investment Restrictions."
DEBT SECURITIES--HIGH YIELD, HIGH RISK SECURITIES
The Fund may invest in debt securities of Russia Companies which may be
unrated or low-rated. It is likely that many of the debt securities in which the
Fund will invest will be unrated, and whether or not rated, the debt securities
may have speculative characteristics. The market value of debt securities
generally varies in response to changes in interest rates and the financial
conditions of the issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in debt securities rated below BBB by S&P and Baa by
Moody's. Such low-rated debt securities may involve greater risks of loss of
income and principal than higher-rated securities, are speculative in nature,
and are commonly known as "high yield" securities or "junk bonds." The unrated
debt securities in which the Fund may invest will generally involve risks
equivalent to those of low-rated debt securities. Although high risk, low-rated
debt securities and comparable unrated debt securities may offer higher yields
than do higher rated securities, they generally involve greater volatility of
price and risk of principal and income. Securities having the lowest rating for
non-
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subordinated debt instruments assigned by S&P and Moody's (i.e., rated CCC by
S&P or C by Moody's) are considered to have extremely poor prospects of ever
attaining any real investment standing; to be unlikely to have the capacity to
pay interest or repay principal when due in the event of adverse business,
financial or economic conditions; and/or to be in default or not current in the
payment of interest or principal. In addition, the markets in which unrated and
low-rated debt securities are traded are more limited than those in which
higher-rated securities are traded. Adverse publicity and investors'
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of unrated or low-rated debt securities, especially in a
thinly traded market. Analysis of the creditworthiness of issuers of unrated or
low-rated debt securities may be more complex than for issuers of higher-rated
securities, and the ability of the Fund to achieve its investment objective may,
to the extent of investment in unrated or low-rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher-rated securities. A debt security rated "D" by S&P
means that the issuer is in payment default.
Low-rated debt securities and comparable unrated debt securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The prices of low-rated and unrated
debt securities have been found to be less sensitive to interest rate changes
than higher-rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in
low-rated or unrated debt securities prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low-rated or unrated
debt securities defaults, the Fund may incur additional expenses in seeking
recovery.
The Fund may also invest in Structured Investments which involve certain
risks. See "Investment Objective and Policies." In addition to the credit risk
of the issuer of the underlying security and the normal risks of price changes
in response to underlying interest rates, the redemption amount of a Structured
Investment may decrease as a result of changes in the price of the underlying
instrument. Further, in the case of certain Structured Investments, the coupon
and/or dividend may be reduced to zero, and any further declines in the value of
the underlying instrument may then reduce the redemption amount payable on
maturity. Finally, the price of Structured Investments may be more volatile than
the price of the underlying instrument. The Fund is permitted to invest in
classes of Structured Investments which are subordinated to the right of payment
of another class, which typically present greater risks than unsubordinated
Structured Investments. Structured Investments are typically sold in private
placement transactions and currently have no active trading market.
FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES
Rules adopted under the 1940 Act permit the Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Pursuant to those rules, the Fund's portfolio of
securities and cash, when invested in foreign countries, will be held by its
subcustodians who will be approved by the Board of Directors of the Fund as and
when appropriate in accordance with the rules of the Commission. Selection of
the subcustodians will be made by the Board of Directors following the
consideration of a number of factors, including, but not limited to, the
reliability and financial stability of the institution, the ability of the
institution to capably perform custodial services for the Fund, the reputation
of the institution in its national market, the political and economic stability
of the countries in which the subcustodians will be located, and risks of
potential nationalization or expropriation of Fund assets. In addition, the 1940
Act requires that foreign subcustodians, among other things, have shareholder
equity in excess of $200,000,000, have no lien on the Fund's assets and maintain
adequate and accessible records. Certain banks in foreign countries may not be
eligible subcustodians for the Fund, in which event the Fund may be precluded
from purchasing
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securities in which it would otherwise invest, and other banks that are eligible
foreign subcustodians may be recently organized or otherwise lack extensive
operating experience.
ADDITIONAL INVESTMENT PRACTICES
The Fund is authorized to use various investment strategies described below,
some or all of which may be classified as derivatives, to hedge various market
risks (such as interest rates, currency exchange rates and broad or specific
market movements), although the Investment Manager has no present intention of
using them. Subject to the requirements of the 1940 Act, the Fund may hedge up
to 100% of its assets when deemed appropriate by the Investment Manager. The
Fund is also authorized to use investment strategies to manage the effective
maturity or duration of debt securities or instruments held by the Fund, or to
enhance the Fund's income or gain. Although these strategies are regularly used
by some investment companies and other institutional investors in various
markets, most of these strategies are currently unavailable in Russia and may
not become available in the future. Techniques and instruments may change over
time, however, as new instruments and strategies are developed or regulatory
changes occur. To the extent not used for hedging purposes, the use of
derivatives may be considered speculative.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The Fund will normally conduct foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. The Fund will generally not enter into forward contracts
with terms of greater than one year. 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 will generally enter into forward contracts only under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock" in
the U.S. dollar price of the security in relation to another currency by
entering into a forward contract to buy the amount of foreign currency needed to
settle the transaction. Second, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." The Fund's
forward transactions may call for the delivery of one foreign currency in
exchange for another foreign currency and may at times not involve currencies in
which its portfolio securities are then denominated. The Fund has no specific
limitation on the percentage of assets it may commit to forward contracts,
subject to its stated investment objective and policies, except that the Fund
will not enter into a forward contract if the amount of assets set aside to
cover the contract would impede portfolio management. Although forward contracts
will be used primarily to protect the Fund from adverse currency movements, they
also involve the risk of loss in the event that anticipated currency movements
are not accurately predicted.
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the U.S. dollar value of
foreign currency-denominated portfolio securities and against increases in the
U.S. dollar cost of such securities to be acquired. As in the case of other
kinds of options, however, the writing of an option on a foreign currency
constitutes only a partial hedge, up to the amount of the premium received, and
the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a
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foreign currency may constitute an effective hedge against fluctuations in
exchange rates although, in the event of rate movements adverse to the Fund's
position, it may forfeit the entire amount of the premium plus related
transaction costs. Options on foreign currencies to be written or purchased by
the Fund are traded on U.S. and foreign exchanges or over-the-counter.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures
contracts, index futures contracts, foreign currency futures contracts and
options on any of the foregoing. A financial futures contract is an agreement
between two parties to buy or sell a specified debt security at a set price on a
future date. An index futures contract is an agreement to take or make delivery
of an amount of cash based on the difference between the value of the index at
the beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When the Fund enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when the Fund enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act. See Appendix D to this Prospectus.
OPTIONS ON SECURITIES OR INDICES
The Fund may write (i.e., sell) covered put and call options and purchase
put and call options on securities or securities indices that are traded on
United States and foreign exchanges or in the over-the-counter markets. An
option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option. The Fund may write a call or put option only if the option is
"covered." This means that as long as the Fund is obligated as the writer of a
call option, it will own the underlying securities subject to the call, or hold
a call at the same exercise price, for the same exercise period, and on the same
securities as the written call. A put is covered if the Fund maintains liquid
assets with a value equal to the exercise price in a segregated account, or
holds a put on the same underlying securities at an equal or greater exercise
price. The value of the underlying securities on which options may be written at
any one time will not exceed 25% of the total assets of the Fund. The Fund will
not purchase put or call options if the aggregate premium paid for such options
would exceed 5% of its total assets at the time of purchase.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers portfolio securities with an aggregate
market value of up to one-third of its total assets. Such loans must be secured
by collateral (consisting of any combination of cash, U.S. Government securities
or irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to 102% of the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to retain any voting rights with respect to the securities.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase equity and debt 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 in the case of debt securities, are subject to changes in value based
upon changes in the general level of interest rates. Purchasing a security on a
when-issued or delayed delivery basis can involve a risk that the market price
at the time of delivery may be lower than the agreed-upon purchase price, in
which case there could be an unrealized loss at the time of delivery. Due to
their higher volatility, this risk may be greater in the case of equity
securities purchased on a when-issued or delayed delivery basis. 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.
INVESTMENT COMPANIES
The Fund may invest in other investment companies, other than those for
which the Investment Manager serves as investment adviser or sponsor, which
invest principally in securities in which the Fund is authorized to invest.
These other investment companies may include investment companies, some of which
may be organized outside of the United States, whose shares are only available
to a limited number of United States investors. Under the 1940 Act, the Fund may
invest a maximum of 10% of its total assets in the securities of other
investment companies and not more than 5% of the Fund's total assets in the
securities of any one investment company, provided the investment does not
represent more than 3% of the voting stock of the acquired investment company at
the time such shares are purchased. To the extent the Fund invests in other
investment companies, the Fund's shareholders will incur certain duplicative
fees and expenses, including investment advisory fees. The Fund's investment in
certain investment companies will result in special U.S. federal income tax
consequences described below under "Taxation."
BORROWING
The Fund will not employ leverage to purchase portfolio securities. However,
the Fund may borrow money for temporary or emergency purposes (including, for
example, clearance of transactions) in an amount not exceeding 5% of the value
of the Fund's total assets (including the amount borrowed), and may borrow money
in connection with repurchases of its Shares or tender offers (see "Common
Stock") or to pay dividends or distributions required for tax purposes in an
amount up to one-third of the value of the Fund's total assets (including the
amount borrowed). The Fund will not purchase portfolio securities during any
period when borrowings exceed 5% of its total assets.
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INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund that may not
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (as defined in "Investment Objective and
Policies"). If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes will
not be considered a violation of the restriction. Also, if the Fund receives
from an issuer of securities held by the Fund subscription rights to purchase
securities of that issuer, and if the Fund exercises such subscription rights at
a time when the Fund's portfolio holdings of securities of that issuer would
otherwise exceed the limits set forth in paragraph 1 below, it will not
constitute a violation if, prior to receipt of securities upon exercise of such
rights, and after announcement of such rights, the Fund has sold at least as
many securities of the same class and value as it would receive on exercise of
such rights. As a matter of fundamental policy, the Fund may not:
(1) invest 25% or more of the total value of its assets in a particular
industry. For purposes of this restriction, a foreign government (but not
the United States government) is deemed to be an "industry," and
supranational organizations, in the aggregate, are deemed to be an
"industry";
(2) issue senior securities or borrow money, except that (a) short-term
credits necessary for settlement of securities transactions are not
considered borrowings or senior securities, and (b) the Fund may borrow up
to 5% of its total assets (including the amount borrowed) for temporary or
emergency purposes and may borrow up to 33 1/3% of its total assets
(including the amount borrowed) in connection with repurchases of its Shares
or tender offers or to pay dividends or distributions required for tax
purposes;
(3) purchase or sell commodities or commodity contracts, including
futures contracts and options thereon, except for bona-fide hedging
purposes;
(4) make loans, except that the Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit, bankers' acceptances and fixed time deposits) in
accordance with its investment objective and policies, (b) enter into
repurchase agreements with respect to portfolio securities, and (c) make
loans of portfolio securities, as described under "Additional Investment
Practices--Loans of Portfolio Securities" in this Prospectus;
(5) underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter;
(6) purchase real estate, real estate mortgage loans or real estate
limited partnership interests (other than securities secured by real estate
or interests therein or securities issued by companies that invest in real
estate or interests therein);
(7) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions); or
(8) make short sales of securities or maintain a short position.
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
The Fund's investment manager is Templeton Investment Management (Singapore)
Pte. Ltd. (the "Investment Manager"). The Investment Manager is a Singapore
corporation that is registered under the U.S. Investment Advisers Act of 1940,
as amended, with offices at 20 Raffles Place, Singapore. An affiliate of the
Investment Manager has established a representative office in Moscow, located at
Leninsky Prospect 113/1, E-516 Park Place, Moscow, Russia, which currently has a
staff of two securities analysts. The Investment Manager expects this office to
provide it with a valuable resource for
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research and securities analysis with regard to securities of Russia Companies.
Dr. J. Mark Mobius, Director of the Investment Manager, will be the Fund's
principal portfolio manager of the team of four investment professionals that
will manage the Fund in Singapore. The Investment Manager also serves as
investment manager to Templeton Vietnam Opportunities Fund, Inc., a closed-end
management investment company registered under the 1940 Act. In addition, an
affiliate of the Investment Manager serves as investment manager to six other
U.S. investment companies and 18 other non-U.S. public and private funds that
invest primarily in equity securities of issuers in emerging markets, with
assets totalling $6 billion as of March 31, 1995. The six other U.S. investment
companies are registered under the 1940 Act and invest primarily in equity
securities of issuers in emerging markets: Templeton Emerging Markets Fund,
Inc., a diversified closed-end management investment company, Templeton China
World Fund, Inc., a non-diversified closed-end management investment company,
Templeton Emerging Markets Appreciation Fund, Inc., a non-diversified closed-end
management investment company, Templeton Dragon Fund, Inc., a non-diversified,
closed-end management investment company, and Templeton Developing Markets Trust
and the Emerging Markets Series of Templeton Institutional Funds, Inc.,
diversified open-end management investment companies.
The Investment Manager and its affiliates serve as advisers for a wide
variety of public investment mutual funds and private clients in many nations.
The Templeton organization, originating with earlier advisers then owned by John
M. Templeton, has been investing globally over the past 52 years and provides
investment management and advisory services to a worldwide client base,
including approximately 900,000 mutual fund shareholders, foundations and
endowments, employee benefit plans and individuals. As of March 31, 1995, the
Templeton organization managed approximately $43.5 billion in assets worldwide.
The Investment Manager is an indirect wholly owned subsidiary of Franklin
Resources, Inc. ("Franklin"). Through its subsidiaries, Franklin is engaged in
various aspects of the financial services industry. As of March 31, 1995, the
Franklin Templeton organization managed over $118 billion in assets worldwide.
Prior to joining the Templeton organization in 1987, Dr. Mobius was
president of the International Investment Trust Company Limited (investment
manager of Taiwan R.O.C. Fund) (1986-1987) and a director of Vickers da Costa,
Hong Kong (an international securities firm) (1983-1986). Dr. Mobius began
working in Vickers da Costa's Hong Kong office in 1980 and moved to Taiwan in
1983 to open the firm's office there and to direct operations in India,
Indonesia, Thailand, the Philippines and Korea. Before joining Vickers da Costa,
Dr. Mobius operated his own consulting firm in Hong Kong from 1970 until 1980.
Prior to 1970, Dr. Mobius was a research scientist for Monsanto Overseas
Enterprises Company in Hong Kong and the American Institute for Research in
Korea and Thailand. Dr. Mobius holds bachelors and masters degrees from Boston
University and received his Ph.D. in economics and political science in 1964
from the Massachusetts Institute of Technology. Mr. Dennis Lim, a Director and
Portfolio Manager of the Investment Manager, and Mr. Tek Khoan Ong, Portfolio
Manager, will exercise secondary portfolio management responsibilities with
respect to the Fund. Prior to joining the Templeton organization in 1990, Mr.
Lim was a student at the University of Wisconsin, from which he received a
master's degree in finance, and worked as an engineering service officer for the
Ministry of National Development of the Government of Singapore. Mr. Ong has
worked as a product manager for Franklin Institutional Services Corporation
since 1993. Mr. Ong previously served as a senior review officer for five years
with Singapore's Central Bank, the Monetary Authority of Singapore. He also
interned with the San Francisco office of the Government of Singapore Investment
Corporation and was a teaching assistant at the University of Pennsylvania's
Wharton School, from which he received a masters of business administration
degree. Because securities markets in Russia are relatively new, the portfolio
managers do not have significant experience in investing in equity securities of
Russia Companies. However, it is expected that the portfolio managers will make
use of the Moscow office and will adhere to the Templeton organization
investment principles, which will include frequent on-site visits to Russia
Companies.
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The Fund has been advised that there is doubt as to the enforceability in
the courts of Russia of judgments against the Investment Manager predicated upon
the civil liability provisions of the federal securities laws of the United
States. The Investment Manager is advised by U.S. counsel with respect to the
federal securities laws of the United States.
Subject to applicable regulations, Shares of the Fund may be purchased by
certain discretionary accounts of the Investment Manager and its affiliates.
THE INVESTMENT MANAGEMENT AGREEMENT
Under the Investment Management Agreement between the Fund and the
Investment Manager (the "Management Agreement"), the Investment Manager will
manage the Fund's assets in accordance with the Fund's stated investment
objective, policies and restrictions and subject to the supervision of the
Fund's Board of Directors and will make investment decisions on behalf of the
Fund, including the selection of, and placement of orders with, brokers, dealers
and banks to execute portfolio transactions on behalf of the Fund. The
Investment Manager is not required to furnish any personnel, overhead items or
facilities for the Fund.
For its services, the Investment Manager will receive a monthly fee, payable
in arrears in U.S. dollars, at an annual rate of 1.25% of the Fund's average
weekly net assets. This fee is higher than those paid by most other U.S.
investment companies, primarily because of the additional time and expense
required of the Investment Manager in pursuing the Fund's policy of investing in
Russia Company securities. It is expected, however, that the Fund's investment
management fee will be comparable to those of other U.S. closed-end investment
companies of comparable size that invest primarily in securities of other
emerging market issuers.
The Fund will pay or cause to be paid all of its expenses, including: fees
paid to the Investment Manager and the Business Manager; organization expenses
(which include out-of-pocket expenses, but not overhead or employee costs, of
the Investment Manager); legal expenses; auditing and accounting expenses; taxes
and governmental fees; stock exchange listing fees; dues and expenses incurred
in connection with membership in investment company organizations; fees and
expenses of the Fund's custodian, subcustodians, transfer agent and registrar;
expenses of preparing share certificates and other expenses in connection with
the issuance, offering or underwriting of securities issued by the Fund;
expenses related to shareholder servicing; expenses relating to investor and
public relations; expenses of registering or qualifying securities of the Fund
for sale; freight, insurance and other charges in connection with the shipment
of the Fund's portfolio securities; brokerage commissions or other costs of
acquiring or disposing of portfolio securities of the Fund; expenses of
preparing and distributing reports, notices and dividends to shareholders; costs
of stationery; any litigation expenses, and costs of shareholders' and other
meetings.
The Management Agreement provides that the Investment Manager will select
brokers and dealers for execution of the Fund's portfolio transactions
consistent with the Fund's brokerage policies (see "Portfolio Transactions and
Brokerage"). Although the services provided by broker-dealers in accordance with
the brokerage policies incidentally may help reduce the expenses of or otherwise
benefit the Investment Manager and other investment advisory clients of the
Investment Manager and of its affiliates, as well as the Fund, the value of such
services is indeterminable and the Investment Manager's fee is not reduced by
any offset arrangement by reason thereof.
Under the Management Agreement, the Investment Manager is permitted to
provide investment advisory services to other clients, including clients that
may invest in the same types of securities as the Fund and, in providing such
services, the Investment Manager may use information furnished by others.
Conversely, information furnished by others to the Investment Manager in
providing services to other clients may be useful to the Investment Manager in
providing services to the Fund. When the Investment Manager determines to buy or
sell the same security for the Fund that the Investment Manager or one or more
of its affiliates has selected for one or more of its other clients or for
clients of
34
<PAGE>
its affiliates, the orders for all such security transactions are placed for
execution by methods determined by the Investment Manager, with approval by the
Fund's Board of Directors, to be impartial and fair.
The Management Agreement provides that the Investment Manager will have no
liability to the Fund or any shareholder of the Fund for any error of judgment,
mistake of law, or any loss arising out of any investment or other act or
omission in the performance by the Investment Manager of its duties under the
Management Agreement or for any loss or damage resulting from the imposition by
any government of exchange control restrictions that might affect the liquidity
of the Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any war or political act of any foreign government to
which such assets might be exposed, except for any liability, loss or damage
resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part or reckless disregard of its duties under the
Management Agreement.
The Management Agreement by its terms continues in effect for a period of
two years from the date hereof. If not sooner terminated, it will continue in
effect for successive periods of twelve months thereafter provided each
continuance is specifically approved annually by a vote of a majority of the
members of the Board of Directors who are not interested persons of the
Investment Manager or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and by a majority vote either of the Fund's
Board of Directors or of the Fund's outstanding voting securities. The
Management Agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act), and may be terminated by either party at any time
without payment of any penalty on 60 days' written notice provided that
termination by the Fund is approved by a majority of the Directors of the Fund
in office at the time or by vote of a majority of the Fund's outstanding voting
securities.
The Investment Manager will reduce its fee by one-half during the fiscal
quarter following any of the first eight fiscal quarters of the Fund if the
average closing price of the Fund's Shares in the preceding quarter is less than
the $15.00 initial offering price. The Fund cannot predict whether its Shares
will trade at, above or below net asset value.
The Investment Manager may retain the services of consultants and, with the
approval of the shareholders and the Board of Directors of the Fund, including a
majority of the Fund's "non-interested" Directors, sub-investment advisers at no
additional cost to the Fund when the Investment Manager determines it to be
appropriate.
BUSINESS MANAGER; SUB-ADMINISTRATOR
Templeton Global Investors, Inc. (the "Business Manager"), 500 East Broward
Boulevard, Ft. Lauderdale, Florida 33394, will enter into a Business Management
Agreement with the Fund, under which the Business Manager will perform certain
administrative functions as business manager for the Fund, including: (i)
providing office space, telephone, office equipment and supplies for the Fund;
(ii) paying compensation of the Fund's officers; (iii) authorizing expenditures
and approving bills for payment on behalf of the Fund; (iv) supervising
preparation of periodic reports to shareholders, notices of dividends, capital
gains distributions and tax credits, and attending to correspondence and other
communications with individual shareholders; (v) pricing of the Fund's portfolio
securities and supervising publication of the net asset value of the Fund's
Shares, earnings reports and other financial data; (vi) monitoring relationships
with organizations serving the Fund, including the custodian, transfer agent,
sub-administrator and printers; (vii) providing trading desk facilities to the
Fund; (viii) supervising compliance by the Fund with recordkeeping requirements
under the 1940 Act and regulations thereunder, maintaining books and records for
the Fund (other than those maintained by the custodian and transfer agent), and
preparing and filing Fund tax reports other than the Fund's income tax returns;
and (ix) providing executive, clerical and secretarial help needed to carry out
these responsibilities.
35
<PAGE>
For its services, the Business Manager will receive a monthly fee, payable
in arrears in U.S. dollars, at an annual rate of .25% of the Fund's average
weekly net assets. The Business Manager is relieved of liability to the Fund for
any act or omission in the course of its performance under the Business
Management Agreement, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties. The Business Management
Agreement may be terminated by either party at any time on 60 days' written
notice without payment of any penalty, provided that termination by the Fund is
approved by a majority of the Directors of the Fund in office at the time or by
vote of a majority of the outstanding voting securities of the Fund, and will
terminate automatically in the event of its assignment.
The Business Manager and the Fund will enter into a sub-administration
agreement with Princeton Administrators, L.P. (the "Sub-Administrator"), under
which the Sub-Administrator will perform, subject to the Business Manager's
supervision, various administrative functions, which may include maintaining
certain of the books and records of the Fund, calculating the net asset value of
the Fund's Shares based upon prices provided by the Investment Manager or others
and providing the results of such calculations to information services,
preparing certain financial data and reports and other documents required by the
U.S. federal securities laws and regulations, paying authorized expenses of the
Fund, interacting and working with organizations serving the Fund including the
custodian, transfer agent and printers, maintaining certain records and
information and providing data for calculations, reports and filings under
federal and state tax statutes applicable to the Fund and providing the Fund
with administrative office facilities. The Business Manager will remain legally
obligated to provide all administrative services to the Fund. For its services
and facilities, the Business Manager will pay the Sub-Administrator a monthly
fee, payable in arrears in U.S. dollars, at an annual rate of .20% of the Fund's
average weekly net assets, subject to a monthly minimum fee of $12,500.
The Sub-Administrator is an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. The principal address of the Sub-Administrator is P.O. Box
9011, Princeton, New Jersey 08543-9011.
DIRECTORS AND OFFICERS
The names and addresses of the Directors and officers of the Fund are set
forth below, together with their positions with the Fund and their principal
occupations during the past five years, and, in the case of the Directors, their
positions with certain other organizations and publicly held companies.
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
CHARLES B. JOHNSON*............ President, chief executive officer, and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; chairman of the board and
San Mateo, California director, Franklin Advisers, Inc. and Franklin Templeton
Chairman of the Board and Distributors, Inc.; director, General Host Corporation
Vice President and Templeton Global Investors, Inc.; and officer and
director, trustee or managing general partner, as the
case may be, of most other subsidiaries of Franklin and
of most of the investment companies in the Franklin
Templeton Group.
HARMON E. BURNS*............... Executive vice president, secretary, and director of
777 Mariners Island Blvd. Franklin Resources, Inc.; executive vice president and
San Mateo, California director, Franklin Templeton Distributors, Inc.;
Director executive vice president, Franklin Advisers, Inc.;
director, Franklin Administrative Services, Inc.; and
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc., and officer
and/or director of various investment companies in the
Franklin Templeton Group.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
MARTIN L. FLANAGAN*............ Senior vice president, treasurer, and chief financial
777 Mariners Island Blvd. officer of Franklin Resources, Inc.; director and
San Mateo, California executive vice president of Templeton Investment
Director and Vice President Counsel, Inc. and Templeton Global Investors, Inc.;
president or vice president of the Templeton Funds;
accountant, Arthur Andersen & Company (1982-1983); and
member of the International Society of Financial
Analysts and the American Institute of Certified Public
Accountants.
NICHOLAS F. BRADY*............. A director or trustee of other Templeton Funds; chairman
The Bullitt House and president of Darby Advisors, Inc. (an investment firm)
Dover & Harrison Streets since January, 1993; director of the H. J. Heinz
Easton, Maryland Company, Capital Cities/ABC, Inc. and the Christiana
Director Companies; Secretary of the United States Department of
the Treasury (1988 to January, 1993); and chairman of
the board of Dillon, Read & Co. Inc. (investment
banking) prior thereto.
HASSO-G VON DIERGARDT-NAGLO.... Farmer; president of Clairhaven Investments, Ltd. and
R.R. 3 other private investment companies; and a director or
Stouffville, Ontario trustee of other Templeton Funds.
Director
F. BRUCE CLARKE................ Retired; former credit advisor, National Bank of Canada,
19 Vista View Blvd. Toronto; and a director or trustee of other Templeton
Thornhill, Ontario Funds.
Director
BETTY P. KRAHMER............... A director or trustee of other Templeton Funds; director
2201 Kentmere Parkway or trustee of various civic associations; and former
Wilmington, Delaware economic analyst, U.S. Government.
Director
FRED R. MILLSAPS............... A director or trustee of other Templeton Funds; manager of
2665 N.E. 37th Drive personal investments (1978-present); chairman and chief
Fort Lauderdale, Florida executive officer of Landmark Banking Corporation (1969-
Director 1978); financial vice president of Florida Power and
Light (1965-1969); vice president of Federal Reserve
Bank of Atlanta (1958-1965); and director of various
business and nonprofit organizations.
JOHN G. BENNETT, JR............ Founder, chairman of the board, and president of the
3 Radnor Corporate Center Foundation for New Era Philanthropy; president and
Suite 150 chairman of the boards of the Evelyn M. Bennett Memorial
100 Matsonford Road Foundation and NEP International Trust; chairman of the
Radnor, Pennsylvania board and chief executive officer of The Bennett Group
Director International, LTD; chairman of the boards of Human
Service Systems, Inc. and Multi-Media Communications,
Inc.; a director or trustee of many national and
international organizations, universities, and
grantmaking foundations serving in various executive
board capacities; and member of the Public Policy
Committee of the Advertising Council.
ANDREW H. HINES, JR............ Consultant, Triangle Consulting Group; chairman of the
150 2nd Avenue N. board and chief executive officer of Florida Progress
St. Petersburg, Florida Corporation (1982-February 1990) and director of various
Director of its subsidiaries; chairman and director of Precise
Power Corporation; executive-in-residence of Eckerd
College (1991-present); director of Checkers Drive-In
Restaurants, Inc.; and a director or trustee of other
Templeton Funds.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
HARRIS J. ASHTON............... Chairman of the board, president, and chief executive
Metro Center officer of General Host Corporation (nursery and craft
1 Station Place centers); director of RBC Holdings Inc. (a bank holding
Stamford, Connecticut company) and Bar-S Foods; director or trustee of other
Director Templeton Funds; and director, trustee or managing
general partner, as the case may be, for most of the
investment companies in the Franklin Group of Funds.
S. JOSEPH FORTUNATO............ Member of the law firm of Pitney, Hardin, Kipp & Szuch;
200 Campus Drive director of General Host Corporation; director or
Florham Park, New Jersey trustee of other Templeton Funds; and director, trustee
Director or managing general partner, as the case may be, for
most of the investment companies in the Franklin Group
of Funds.
GORDON S. MACKLIN.............. Chairman of White River Corporation (information
8212 Burning Tree Road services); director of Infovest Corporation, FundAmerican
Bethesda, Maryland Enterprise Holdings, Inc., Martin Marietta Corporation,
Director MCI Communications Corporation and Medimmune, Inc.;
director or trustee of other Templeton Funds; director,
trustee, or managing general partner, as the case may
be, of most of the investment companies in the Franklin
Group of Funds; formerly: chairman, Hambrecht and Quist
Group; director, H&Q Healthcare Investors; and
president, National Association of Securities Dealers,
Inc.
J. MARK MOBIUS................. Director and executive vice president of Templeton,
Two Exchange Square Galbraith & Hansberger Ltd.; managing director of
Hong Kong Templeton Investment Management (Hong Kong) Limited;
President president of International Investment Trust Company
Limited (investment manager of Taiwan R.O.C. Fund)
(1986-1987); and director of Vickers de Costa, Hong Kong
(1983-1986).
MARK G. HOLOWESKO.............. President and director of Templeton, Galbraith &
Lyford Cay Hansberger Ltd.; director of global equity research for
Nassau, Bahamas Templeton Worldwide, Inc.; president or vice president
Vice President of the Templeton Funds; and investment administrator
with Roy West Trust Corporation (Bahamas) Limited
(1984-1985).
SAMUEL J. FORESTER, JR......... President of the Templeton Global Bond Managers Division
Broward Financial Centre of Templeton Investment Counsel, Inc.; president or vice
Fort Lauderdale, Florida president of other Templeton Funds; founder and partner
Vice President of Forester, Hairston Investment Management (1989-1990);
managing director (Mid-East Region) of Merrill Lynch,
Pierce, Fenner & Smith Inc. (1987-1988); and advisor for
Saudi Arabian Monetary Agency (1982-1987).
JOHN R. KAY.................... Vice president of the Templeton Funds; vice president and
500 East Broward Blvd. treasurer of Templeton Global Investors, Inc.; assistant
Suite 1400 vice president of Franklin Templeton Distributors, Inc.;
Fort Lauderdale, Florida and formerly, vice president and controller of the
Vice President Keystone Group, Inc.
JAMES R. BAIO.................. Certified public accountant; treasurer of the Templeton
500 East Broward Blvd. Funds; senior vice president of Templeton Worldwide, Inc.,
Suite 1400 Templeton Global Investors, Inc., and Templeton Funds
Fort Lauderdale, Florida Trust Company; and formerly, senior tax manager of Ernst
Treasurer & Young (certified public accountants) (1977-1989).
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION DURING
POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ----------------------------------------------------------
<S> <C>
THOMAS M. MISTELE.............. Senior vice president of Templeton Global Investors, Inc.;
700 Central Avenue vice president of Franklin Templeton Distributors, Inc.;
St. Petersburg, Florida secretary of the Templeton Funds; attorney, Dechert
Secretary Price & Rhoads (1985-1988) and Freehill, Hollingdale &
Page (1988); and judicial clerk, U.S. District Court
(Eastern District of Virginia) (1984-1985).
JACK L. COLLINS................ Assistant treasurer of the Templeton Funds; assistant vice
700 Central Avenue president of Franklin Templeton Investor Services, Inc.;
St. Petersburg, Florida and former partner of Grant Thornton, independent public
Assistant Treasurer accountants.
JEFFREY L. STEELE.............. Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
</TABLE>
- ------------
* Messrs. Johnson, Burns, Flanagan and Brady are Directors who are "interested
persons" of the Fund as that term is defined in the 1940 Act. Messrs. von
Diergardt-Naglo, Clarke, Millsaps, Bennett, Hines, Ashton, Fortunato and
Macklin and Mrs. Krahmer are Directors who are not "interested persons" of the
Fund.
Each fund in the Templeton Family of Funds pays its independent
directors/trustees and Mr. Brady an annual retainer and/or fees for attendance
at board and committee meetings, the amount of which is based on the level of
assets in the fund. Accordingly, the Fund will pay the Independent Directors and
Mr. Brady an annual retainer which is not expected to exceed $5,000 and a fee
which is not expected to exceed $500 per meeting attended of the Board and its
committees. Directors are reimbursed for any expenses incurred in attending
meetings.
The Fund has a standing Audit Committee presently consisting of Messrs.
Clarke, Bennett, Millsaps and Hines, all of whom are members of the Board of
Directors and non-interested persons of the Fund. The Audit Committee reviews
both the audit and other work of the Fund's independent accountants, submits a
recommendation to the Board of Directors as to the selection of independent
accountants, subject to ratification by the shareholders in each fiscal year,
and reviews generally the maintenance of the Fund's records and the safekeeping
arrangements of the Fund's custodian. The Fund has a Nominating Committee
consisting of Messrs. Millsaps, Hines and Bennett, all of whom are members of
the Board of Directors and non-interested persons of the Fund. The Nominating
Committee is responsible for the selection and nomination for election of
candidates to serve as Independent Directors of the Fund.
The Board of Directors is divided into three classes, each class having a
term of three years. Each year the term of one class will expire. See "Common
Stock--Anti-Takeover Provisions in the Articles of Incorporation."
The Articles of Incorporation and the Bylaws of the Fund provide that the
Fund will indemnify Directors, officers, employees or agents of the Fund against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Fund. However, nothing in the
Articles of Incorporation or Bylaws of the Fund protects or provides for the
indemnification of a Director against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
While the Fund is a Maryland corporation, the Investment Manager and certain
of the Fund's Directors and officers (Messrs. von Diergardt-Naglo, Clarke,
Mobius and Holowesko) are non-residents of the United States and have all, or a
substantial part, of their assets located outside the United States. None of
such Directors and officers has authorized an agent for service of process in
the United States. As a result, it may be difficult for U.S. investors to effect
service of process upon such Directors and officers within the U.S. or
effectively to enforce judgements of courts of the United States predicated upon
civil liabilities of such officers under the federal securities laws of the
United States.
39
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Manager is responsible for selecting members of securities
exchanges, brokers and dealers (such members, brokers and dealers being
hereinafter referred to as "brokers") for the execution of the Fund's portfolio
transactions and, when applicable, the negotiation of commissions in connection
therewith.
Purchase and sale orders are usually placed with brokers who are selected by
the Investment Manager as being able to achieve "best execution" of such orders.
"Best execution" means prompt and reliable execution at the most favorable
securities price, taking into account the other considerations as hereinafter
set forth. The determination of what may constitute best execution and price in
the execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
the availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Investment
Manager in determining the overall reasonableness of brokerage commissions.
The Investment Manager is authorized to allocate brokerage business to
brokers who have provided brokerage and research services, including brokerage
and research services regarding direct investments, as such services are defined
in Section 28(e) of the U.S. Securities Exchange Act of 1934, as amended (the
"1934 Act"), for the Fund and/or other accounts, if any, for which the
Investment Manager exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act). Commission rates in foreign countries, which are
sometimes fixed rather than negotiable as in the United States, are likely to be
higher than rates in the United States. With respect to transactions as to which
fixed minimum commission rates are not applicable, the Investment Manager is
authorized to cause the Fund to pay a commission for effecting a securities
transaction in excess of the amount another broker would have charged for
effecting the transaction, if the Investment Manager in making the selection in
question determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or of the
Investment Manager's overall responsibilities with respect to the Fund and the
other accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Manager is not required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith, the
Investment Manager must be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance to the Investment
Manager in the performance of its investment decision-making responsibilities;
and that the commissions paid were within a reasonable range. The determination
that commissions were within a reasonable range will be based on any available
information as to the level of commissions known to be charged by other brokers
on comparable transactions, but there will be taken into account (i) the Fund's
policy that obtaining a low commission is deemed secondary to obtaining a
favorable securities price, since it is recognized that usually it is more
beneficial to the Fund to obtain a favorable price than to pay the lowest
commission, and (ii) the quality, comprehensiveness and frequency of research
studies which are provided for the Investment Manager and are useful to the
Investment Manager in performing advisory services under the Management
Agreement. Research services provided by brokers to the Investment Manager are
considered to be in addition to, and not in lieu of, services required to be
performed by the Investment Manager under such Agreement.
40
<PAGE>
NET ASSET VALUE
Net asset value will be calculated no less frequently than the close of
business on the last business day of each week, by dividing the value of the
Fund's securities plus any cash and other assets (including accrued interest and
dividends receivable) less all liabilities (including accrued expenses) by the
number of shares outstanding, the result being adjusted to the nearest whole
cent. A security listed or traded on a recognized stock exchange or NASDAQ is
valued at its last sale price on the principal exchange on which the security is
traded unless management believes, in the case of a particular security, that
the over-the-counter market represents the principal market for such security.
The value of a foreign security is determined in its national currency as of the
close of trading on the foreign exchange on which it is traded, or as of 4:00
p.m., New York time, if that is earlier, and that value is then converted into
its U.S. dollar equivalent at the foreign exchange rate in effect at noon, New
York time, on the day the value of the foreign security is determined. If no
sale is reported at that time, the mean between the last current bid and asked
price will be used. Occasionally, events which affect the value of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange, and will therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at fair value as determined by the management
and approved in good faith by the Board of Directors. All other securities for
which over-the-counter market quotations are readily available are valued at the
mean between the last current bid and asked price. Securities for which market
quotations are not readily available and other assets are valued at fair value
as determined by the management and approved in good faith by the Board of
Directors. The Fund's direct investments will be valued at cost unless the Board
of Directors, based on advice from the Investment Manager, concludes that there
has been a material change of a long-term nature in the value of such investment
and that the Investment Manager has sufficient reliable information available to
it to revalue these investments. The Investment Manager will monitor corporate
events, including subsequent financings by the issuer, as well as any economic
and market factors directly affecting the issuer, in assessing the continuing
appropriateness of cost valuation for direct investments.
Shares of closed-end investment companies frequently trade at a discount
from net asset value, but in certain instances have traded above net asset
value. The Fund cannot predict whether its Shares will trade above or below net
asset value.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Fund intends to distribute to shareholders, at least annually,
substantially all of its net investment income and net realized capital gains.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose Fund Shares are registered in his own name will have all
distributions reinvested automatically in additional Shares of the Fund by
Chemical Mellon Shareholder Services, Inc. (the "Plan Agent") as agent under the
Plan unless the shareholder elects to have distributions in cash. Shareholders
whose Shares are held by a broker or nominee that does not provide a dividend
reinvestment program may be required to have their Shares registered in their
own name to participate in the Plan. Investors who own Shares of the Fund
registered in street name should contact their broker or nominee for details.
All distributions to investors who do not participate in the Plan will be paid
by check mailed directly to the record holder (or, if the Shares are held in
street or other nominee name, then to such nominee) by Mellon Securities Trust
Company as dividend paying agent. The terms and conditions of the Plan are
contained in Appendix C.
The Plan Agent serves as agent for the shareholders in administering the
Plan. When the Fund declares a dividend or capital gains distribution,
participants in the Plan will receive Shares of the Fund, as outlined below,
with the number of Shares determined as of the time of purchase (generally, the
41
<PAGE>
payable date of the dividend) or at such other date as the Board of Directors
may determine. Whenever market price is equal to or exceeds net asset value at
the time Shares are valued for the purpose of determining the number of Shares
to be received, participants will be issued Shares of the Fund at a price equal
to net asset value but not less than 95% of the then-current market price of the
Fund's Shares. The Fund will not issue Shares under the Plan at a price below
net asset value. If net asset value determined as at the time of purchase
exceeds the market price of Fund Shares at such time, or if the Fund should
declare a dividend or other distribution payable only in cash (i.e., if the
Board of Directors should preclude reinvestment at net asset value), the Plan
Agent will, as agent for the participants, buy Fund Shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants' accounts. If,
before the Plan Agent has completed its purchases, the market price exceeds the
net asset value of a Fund Share, the average per Share purchase price paid by
the Plan Agent may exceed the net asset value of the Fund's Shares, resulting in
the acquisition of fewer Shares than if the dividend or distribution had been
paid in Shares issued by the Fund valued at net asset value.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in noncertificated form in
the name of the participant, and each shareholder's proxy will include those
Shares purchased pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. A $5.00 fee will be
imposed for withdrawal from participation in the Plan. There will be no
brokerage charges with respect to Shares issued directly by the Fund as a result
of dividends or capital gains distributions payable either in Shares or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any U.S. income tax that may be payable on such dividends or
distributions.
Experience under the Plan may indicate that changes thereto may be
desirable. Accordingly, the Fund reserves the right to amend or terminate the
Plan as applied to any dividend or distribution paid (i) subsequent to notice of
the change sent to all shareholders of the Fund at least 90 days before the
record date for such dividend or distribution or (ii) otherwise in accordance
with the terms of the Plan. The Plan also may be amended or terminated by the
Plan Agent by at least 90 days' prior written notice to all shareholders of the
Fund. All correspondence concerning the Plan should be directed to the Plan
Agent at Chemical Mellon Shareholder Services, Inc., Dividend Reinvestment
Services, P.O. Box 750, Pittsburgh, PA 15230.
42
<PAGE>
TAXATION
U.S. FEDERAL INCOME TAXES
The Fund intends to qualify as a regulated investment company under the
Code. To so qualify, the Fund must, with respect to each taxable year, among
other things: (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, and other income
(including gains from options, futures contracts, and forward contracts) derived
with respect to the Fund's business of investing in stocks, securities, or
currencies; (b) derive less than 30% of its gross income from the sale or other
disposition of the following assets held for less than three months: (i) stock
and securities, (ii) options, futures, and forward contracts (other than
options, futures, and forward contracts on foreign currencies), and (iii)
foreign currencies (and options, futures, and forward contracts on foreign
currencies) which are not directly related to the Fund's principal business of
investing in stocks and securities (or options and futures with respect to stock
or securities); and (c) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the value of the Fund's total
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies, and other securities, with
such other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the Fund's total assets and to not more than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's total assets is invested in the securities (other than
U.S. Government securities or securities of other regulated investment
companies) of any one issuer or of any two or more issuers that the Fund
controls and that are determined to be engaged in the same business or similar
or related businesses.
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income that it
distributes to its shareholders, provided that at least 90% of its investment
company taxable income for the taxable year is distributed; however, even if the
Fund qualifies as a regulated investment company, it will be subject to tax on
the income and gains which it does not distribute in a timely manner. See also
the discussion of passive foreign investment companies below. Investment company
taxable income includes dividends, interest, and net short-term capital gains in
excess of net long-term capital losses, but does not include net long-term
capital gains in excess of net short-term capital losses. The Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income. The Fund may borrow money or liquidate assets to make
such distributions.
If the Fund fails to satisfy the 90% distribution requirement or otherwise
fails to qualify as a regulated investment company in any taxable year, it will
be subject to tax in such year on all of its taxable income, regardless of
whether the Fund makes any distributions to its shareholders. In addition, in
that case, all of the Fund's distributions to its shareholders will be
characterized as ordinary income (to the extent of the Fund's current and
accumulated earnings and profits) and shareholders will not be entitled to treat
foreign income taxes paid by the Fund as having been paid by them in computing
their own federal income tax liability. In contrast, as explained below, if the
Fund qualifies as a regulated investment company, a portion of its distributions
may be characterized as long-term capital gain in the hands of shareholders, and
if the Fund meets certain requirements and so elects, shareholders may be
treated as having paid the foreign income taxes paid by the Fund.
Dividend distributions of investment company taxable income are taxable to a
U.S. shareholder as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, whether paid in cash or in Fund shares.
Dividends paid by the Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received from U.S. corporations, may
qualify for the dividends received deduction. However, the revised alternative
minimum tax applicable to corporations may reduce the value of the dividends
received deduction.
As a regulated investment company, the Fund will not be subject to U.S.
federal income tax on its net capital gain (net long-term capital gains in
excess of net short-term capital losses and capital loss
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carryovers from the prior eight taxable years, if any) that it designates as a
"capital gain dividend" and distributes in a timely manner to its shareholders.
Capital gain dividends are taxable to shareholders as long-term capital gains
whether paid in cash or in shares and regardless of length of time the
shareholder has held the Fund's shares. Such distributions are not eligible for
the dividends received deduction. Under current rates, net long-term capital
gains are taxed at a rate no greater than 28% for individuals and 35% for
corporations. No later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice designating the amounts
of ordinary income dividends and capital gain dividends.
If the Fund retains all or a portion of its net capital gain, it will be
subject to a tax at current rates of up to 35% of the amount retained. The Board
of Directors of the Fund will determine at least once a year whether to
distribute any net capital gain. The Fund expects to designate any amounts
retained as undistributed capital gains in a notice to its shareholders who, if
subject to U.S. federal income taxation on long-term capital gains, (a) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their respective shares of the undistributed amount, and (b) will
be entitled to credit against their U.S. federal income tax liabilities their
respective shares of the tax paid by the Fund on the undistributed amount and to
claim refunds to the extent that their credits exceed their liabilities. For
U.S. federal income tax purposes, if the Fund designates amounts as
undistributed capital gains, the basis of shares owned by a shareholder of the
Fund will be increased by an amount equal to 65% of the amount of undistributed
capital gains included in the shareholder's income. Shareholders will be
notified annually as to the U.S. federal income tax status of their dividends
and distributions.
Any dividend declared by the Fund in October, November or December of any
year and payable to shareholders of record on a specified date in such a month
shall be deemed to have been paid by the Fund and received by each shareholder
on December 31, provided that such dividend is actually paid by the Fund during
January of the following year.
If the value of Fund shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, the distribution will be taxable even
though it, in effect, represents a return of invested capital. Investors
considering buying shares just prior to a dividend or capital gain distribution
payment date should be aware that, although the price of shares purchased at
that time may reflect the amount of the forthcoming distribution, those who
purchase just prior to the record date for a distribution may receive a
distribution which will be taxable to them.
If the Fund is the holder of record of corporate stock on the record date
for any dividends payable with respect to such stock, such dividends must be
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends), or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Certain types of debt securities that the Fund may acquire may be considered
as having original issue discount or market discount. Original issue discount is
included in the Fund's taxable income (which generally must be is distributed to
shareholders) over the period during which the Fund holds the debt security,
even though no periodic payments representing the original issue discount are
received by the Fund. Generally, unless the Fund makes certain elections, market
discount is not included in the Fund's taxable income before actual payments on
a market discount debt security are received. Original issue discount and market
discount are characterized as ordinary income.
Under the Code, the Fund may be subject to a 4% excise tax on a portion of
its undistributed income. To avoid the tax, the Fund must distribute or be
deemed under Code rules to have distributed annually at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year and at least 98% of its capital gain net income for the 12-month
period ending, as a
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general rule, on October 31 of the calendar year. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any under distribution or over distribution,
as the case may be, in the previous year. For a distribution to qualify under
the foregoing test, the distribution generally must be declared and paid during
the year. However, as noted above, a special provision applies to certain
distributions paid during January.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore, in turn,
affect the character, amount, and timing of distributions to shareholders. These
provisions also may require the Fund to mark-to-market certain types of the
positions in its portfolio (i.e., treat them as if they were closed out), which
may cause the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy its distribution requirements for
relief from income and excise taxes. The Fund will monitor its transactions and
may make such tax elections as Fund management deems appropriate with respect to
foreign currency, options, futures contracts, forward contracts, or hedged
investments. The Fund's status as a regulated investment company may limit its
transactions involving foreign currency, futures, options, and forward
contracts.
Effect of Foreign Currencies; "Section 988" Gains or Losses. The Fund will
maintain accounts and calculate income by reference to the U.S. dollar for U.S.
federal income tax purposes. Some of the Fund's investments will be maintained
and income therefrom calculated by reference to certain foreign currencies
(including Russian Rubles) and such calculations will not necessarily correspond
to the Fund's distributable income and capital gains for U.S. federal income tax
purposes as a result of fluctuations in currency exchange rates. Furthermore,
exchange control regulations may restrict the ability of the Fund to repatriate
investment income or the proceeds of sales of securities. These restrictions and
limitations may limit the Fund's ability to make sufficient distributions to
satisfy the 90% distribution requirement for qualification as a regulated
investment company. Even if the Fund so qualified, these restrictions could
inhibit its ability to distribute all of its income in order to be fully
relieved of tax liability.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues income or other receivables (including
dividends) or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities
denominated in a foreign currency and certain forward contracts, futures, and
options, gains or losses attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the security or other
instrument and the date of disposition also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders or, in some cases, as
capital gain, rather than as an ordinary dividend.
Passive Foreign Investment Companies. The Fund may invest in shares of
foreign corporations which may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute investment-type assets,
or 75% or more of its gross income is investment-type income. If the Fund
receives a so-called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of
the excess distribution, whether or not the corresponding income is distributed
by the Fund to
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shareholders. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the Fund
held the PFIC shares. The Fund itself will be subject to tax on the portion, if
any, of an excess distribution that is so allocated to prior Fund taxable years
and an interest factor will be added to the tax, as if the tax had been payable
in such prior taxable years. Certain distributions from a PFIC as well as gain
from the sale of PFIC shares are treated as excess distributions. Excess
distributions are characterized as ordinary income even though, absent
application of the PFIC rules, certain excess distributions might have been
classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions were received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains would be treated as though they were realized.
If this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Foreign Taxes. The Fund may be subject to certain taxes imposed by the
countries in which it invests or operates. See the discussion below for a
summary of certain Russian taxes. If the Fund qualifies as a regulated
investment company and if more than 50% of the value of the Fund's total assets
at the close of any taxable year consists of stocks or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
any foreign taxes paid by the Fund that qualify as income or similar taxes under
United States income tax principles as having been paid by the Fund's
shareholders. For any year for which the Fund makes such an election, each
shareholder will be required to include in its gross income an amount equal to
its allocable share of such taxes paid by the Fund and the shareholders will be
entitled, subject to certain limitations, to credit their portions of these
amounts against their U.S. federal income tax liability, if any, or to deduct
their portions from their U.S. taxable income, if any. No deduction for foreign
taxes may be claimed by individuals who do not itemize deductions. In any year
in which it elects to "pass through" foreign taxes to shareholders, the Fund
will notify shareholders within 60 days after the close of the Fund's taxable
year of the amount of such taxes and the sources of its income.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. With respect to the Fund, gains
from the sale of securities may have to be treated as derived from U.S. sources
and certain currency fluctuation gains, including Section 988 gains, may have to
be treated as derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income, including foreign
source passive income received from the Fund. Shareholders may be unable to
claim a credit for the full amount of their proportionate share of the foreign
taxes paid by the Fund. The foreign tax credit can be applied to offset no more
than 90% of the alternative minimum tax imposed on corporations and individuals.
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The foregoing is only a general description of the foreign tax credit.
Because application of the credit depends on the particular circumstances of
each shareholder, shareholders are advised to consult their own tax advisers.
Shareholder Dispositions of Fund Shares. Upon the sale or exchange of Fund
Shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and its basis in the Shares. Such gain or loss will be treated
as capital gain or loss if the Shares are capital assets in the shareholder's
hands, and will be long-term if the shareholder's holding period for the Shares
is more than one year and otherwise will be short-term. Any loss realized on a
sale or exchange will be disallowed to the extent that the shares disposed of
are replaced (including replacement through the reinvesting of dividends and
capital gain distributions in the Fund) within a period of 61 days beginning 30
days before and ending 30 days after the disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of Fund shares
held by the shareholder for six months or less will be treated for federal
income tax purposes as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such shares.
An amount received by a shareholder from the Fund in exchange for Shares of
the Fund (pursuant to a repurchase of shares or otherwise) generally will be
treated as a payment in exchange for the shares tendered, which may result in
taxable gain or loss as described above. However, if the amount received by a
shareholder exceeds the fair market value of the shares tendered, or if a
shareholder does not tender all of the shares of the Fund owned or deemed under
the Code to be owned by the shareholder, all or a portion of the amount received
may be treated as a dividend taxable as ordinary income or as a return of
capital. In addition, if a tender offer is made, any shareholders who do not
tender their shares could be deemed, under certain circumstances, to have
received a taxable distribution of shares of the Fund as a result of their
increased proportionate interest in the Fund.
Backup Withholding. The Fund may be required to withhold 31% of reportable
payments (which may include dividends, capital gain distributions, and
redemption proceeds, if any) to certain shareholders. A shareholder generally
may avoid becoming subject to this requirement by filing an appropriate form
certifying under penalties of perjury that such shareholder's taxpayer
identification number is correct and that he is not subject to backup
withholding, or is exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liability. Additional tax withholding
requirements that apply with respect to foreign shareholders are discussed
below.
Foreign Shareholders. U.S. taxation of a shareholder who, as to the United
States, is a non-resident alien individual, a foreign trust or estate, 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. Ordinarily, income from the Fund will
not be treated as so "effectively connected."
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld
from such distributions. Furthermore, foreign shareholders may be subject to
U.S. tax at the rate of 30% (or lower treaty rate) of the income resulting from
the Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but will not be able to claim a credit or deduction for the
foreign taxes treated as having been paid by them.
Distributions of capital gain dividends to a non-resident alien who is
present in the United States for fewer than one hundred eighty-three days during
the taxable year will not be subject to the 30% U.S. withholding tax. A
non-resident alien who is physically present in the United States for more than
one hundred eighty-two days during the taxable year generally is treated as a
resident for U.S. federal income tax purposes, in which case he or she will be
subject to U.S. federal income tax on his or her
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worldwide income including ordinary income and capital gain dividends at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S.
withholding tax. In the case of a foreign shareholder who is a non-resident
alien individual, the Fund may be required to withhold U.S. federal income tax
at a rate of 31% of distributions of capital gain dividends under the backup
withholding system unless the foreign shareholder makes required certifications
to the Fund on a properly completed U.S. Internal Revenue Service Form W-8. The
amount so withheld could be applied as a credit against any U.S. tax due from
the shareholder or, if no tax is due, refunded pursuant to a claim therefor
properly filed on an income tax return.
Income Effectively Connected. If the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by a foreign shareholder,
then distributions of net investment income and net capital gains, and any gains
realized upon the sale of Shares of the Fund, will be subject to U.S. federal
income tax at the graduated rates applicable to U.S. citizens, residents and
domestic corporations. Such shareholders may also be subject to the 30% branch
profits tax.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Fund.
Notices. Shareholders will be notified annually by the Fund of the
dividends, distributions and deemed distributions made by the Fund to its
shareholders. Furthermore, shareholders will be sent, if appropriate, various
written notices after the close of the Fund's taxable year regarding certain
dividends, distributions and deemed distributions that were paid (or that were
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year.
OTHER TAXATION
Distributions also may be subject to additional state, local and foreign
taxes depending on each shareholder's particular situation.
RUSSIAN TAXATION
The following is based on the advice of Coopers & Lybrand.
The Fund intends to qualify for benefits under the Income Tax Convention
between the Russian Federation and the United States (the "Treaty"). Under the
Treaty, a Russian withholding tax at a maximum rate of 10% will be imposed upon
dividends paid by a Russian company to the Fund. Interest received by the Fund
from sources within Russia and capital gains of the Fund arising from its
investments in Russia, other than investments in real estate, will, under the
Treaty, be exempt from income tax imposed by Russia.
Complete assurance cannot be given that the Fund's intention to qualify for
Treaty benefits will be realized. Generally, if the Fund does not qualify for
such benefits, dividends and interest received from Russian sources will be
subject to Russian withholding tax of 15% and capital gains may be subject to
Russian withholding tax of 20%.
The Fund will be subject to a Russian tax on the transfer of securities at
effective rates between 0.1% and 0.6% of the transfer value.
The companies in which the Fund invests may be subject to Russian taxes.
Currently, net income of Russian corporations is taxed at rates up to 43%, but
certain businesses are taxed at higher rates. In addition, for Russian tax
purposes, some expenses incurred are not deductible in computing net income
subject to tax. There are a number of special fees, royalties, export taxes and
excise taxes that apply to the oil and gas, and mining industries, the structure
and rates of which change frequently. The Fund's manager may, but is not
obligated to, take taxes into account in making investment decisions.
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Shareholders not otherwise subject to taxation by Russia will not be subject
to Russian income or withholding taxes on distributions from the Fund or on
dispositions of Fund Shares, or to Russian estate taxes.
The tax environment in Russia is evolving rapidly, which could result in the
imposition of taxes which differ from, or are in addition to, those described
herein. In addition, new taxes or new interpretations of existing tax
legislation may be applied on a retroactive basis.
THE TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES,
EACH SHAREHOLDER IS ADVISED TO CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES TO IT OF PARTICIPATION IN THE FUND, INCLUDING THE
EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 Shares of Common
Stock ($0.01 par value). Shares of the Fund, when issued, will be fully paid and
non-assessable and will have no conversion, preemptive or other subscription
rights. Holders of Common Stock are entitled to one vote per Share on all
matters to be voted upon by shareholders and will not be able to cumulate their
votes in the election of Directors. Thus, holders of more than 50% of the Shares
voting for the election of Directors have the power to elect 100% of the
Directors. Under rules of the New York Stock Exchange, the Fund is required to
hold annual meetings of shareholders. All Shares are equal as to assets,
earnings and the receipt of dividends, if any, as may be declared by the Board
of Directors out of funds available therefor. In the event of liquidation,
dissolution or winding up of the Fund, each Share of Common Stock is entitled to
receive its proportion of the Fund's assets remaining after payment of all debts
and expenses.
The Fund does not presently intend to offer additional Shares of Common
Stock, except that additional Shares may be issued under the Plan. Other
offerings of the Fund will require approval of the Fund's Board of Directors and
may require shareholder approval. Any such additional offerings would also be
subject to the requirements of the 1940 Act, including the requirement that
Shares may not be sold at a price below the then-current net asset value
(exclusive of underwriting discounts and commissions) except in connection with
an offering to existing shareholders or with the consent of a majority of the
Fund's outstanding voting securities.
The Fund is a closed-end investment company, and as such its shareholders
will not have the right to cause the Fund to redeem their Shares of Common
Stock. The Fund, however, may repurchase Shares of Common Stock from time to
time in the open market or in private transactions when it can do so at prices
at or below the current net asset value per Share on terms that represent a
favorable investment opportunity. Subject to its investment limitations, the
Fund may borrow to finance the repurchase of Shares. However, the payment of
interest on such borrowings will increase the Fund's expenses. In addition, the
Fund is required under the 1940 Act to maintain "asset coverage" of not less
than 300% of its "senior securities representing indebtedness" as such terms are
defined in the 1940 Act.
The Fund's Shares of Common Stock will trade in the open market at a price
which will be a function of several factors, including their net asset value.
The shares of closed-end investment companies frequently sell at a discount
from, but sometimes at a premium over, their net asset values. The risk of the
Shares trading at a discount may be greater for investors selling their Shares
in a relatively short period following completion of the Offering. See "Risk
Factors and Special Considerations." No assurance can be given that it will be
possible for investors to resell Shares of the Fund at or above the initial
public offering price or that the market price of the Fund's Shares will equal
or exceed net asset value. Because the Fund may repurchase its Shares at prices
below their net asset value or
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make a tender offer for its Shares, the net asset value of those Shares that
remain outstanding will be increased. Although Share repurchases and tender
offers generally would have a favorable effect on the market price of the Fund's
Shares, it should be recognized that the acquisition of Shares by the Fund will
decrease its total assets and therefore may increase the Fund's expense ratio.
In addition, the sale of portfolio securities to finance the acquisition of
Shares would increase the Fund's portfolio turnover rate. Except for the limited
circumstances described below, the Fund has not established any policy with
respect to tender offers or Share repurchases, has not established any program
for tender offers or Share repurchases, and has not established a schedule for
considering the adoption of such a program. No assurance can be given that the
Board of Directors will decide to undertake any tender offers or Share
repurchases in the future, or if undertaken that they will reduce any market
discount. The Investment Manager will reduce its fee by one-half during the
fiscal quarter following any of the first eight fiscal quarters of the Fund if
the average closing price of the Fund's Shares in the preceding quarter is less
than the $15.00 initial offering price.
Currently, the Directors intend not to accept tenders or effect repurchases
if (i) such transactions, if consummated, would (a) result in the delisting of
the Fund's Shares from the New York Stock Exchange, (b) impair the Fund's status
as a regulated investment company under the Code, or (c) result in a failure to
comply with applicable asset coverage requirements; (ii) the Fund would not be
able to liquidate portfolio securities in an orderly manner and consistent with
the Fund's investment objective and policies in order to repurchase Shares; or
(iii) there is, in the judgment of the Directors, any material event or
condition which would have an adverse effect on the Fund or its shareholders if
Shares were repurchased. The Directors may modify these conditions in light of
experience.
Beginning two years after the date of this Prospectus, the Board of
Directors of the Fund will consider at its regularly scheduled quarterly
meetings any average discount (calculated on the basis of the closing price as
of the last day of trading each week during the fiscal quarters) from the net
asset value at which Shares of the Fund's common stock have traded during the
previous three fiscal quarters. If any such discount, in light of prevailing
market conditions at that time, is deemed to be substantial, then the Board will
consider whether or not any actions to address such discount should be
undertaken. If it is determined that action should be taken, alternatives to
address such discount may include but will not be limited to the repurchase of
Shares in any existing secondary trading market for the Shares or repurchase
offers to all shareholders or tender offers to purchase Shares from all
shareholders at a price equal to the net asset value of the Fund.
Any tender offer by the Fund will be made at a price based upon the net
asset value as of the close of business on the last day of the tender offer. No
open market purchases of Shares will be made by the Fund during a tender offer.
Each offer will be made and shareholders notified in accordance with the
requirements of the 1934 Act, and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. Persons
tendering Shares may be required to pay a service charge to help defray certain
costs of the transfer agent. Any such service charges will not be deducted from
the consideration paid for the tendered Shares. During the period of a tender
offer, the Fund's shareholders will be able to determine the Fund's current net
asset value (which will be calculated on each day the New York Stock Exchange is
open) by use of a toll-free telephone number. Any offer to repurchase Shares
directly from shareholders, other than a tender offer, could, under applicable
rules under the 1940 Act, be made no more frequently than once every two years,
unless more frequent repurchase offers were approved by shareholders.
ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund. Commencing with the first annual meeting of shareholders, the Board
of Directors will be divided into three classes, each having a term of three
years. At the annual meeting of shareholders in each year thereafter, the term
of one class will expire. This provision could delay for up to two years the
replacement of a majority of the Board of
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Directors. A Director may be removed from office only by vote of the holders of
at least two-thirds of the Shares of the Fund entitled to be voted on the
matter.
In addition, the Articles of Incorporation require the favorable vote of the
holders of at least two-thirds of the Shares of the Fund then entitled to be
voted to approve, adopt or authorize the following:
(i) a conversion of the Fund to an open-end investment company;
(ii) a merger or consolidation of the Fund with another corporation;
(iii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities); or
(iv) a liquidation or dissolution of the Fund, unless such action has
been approved, adopted or authorized by the affirmative vote of two-thirds
of the total number of Directors fixed in accordance with the Bylaws, in
which case the affirmative vote of a majority of the outstanding Shares is
required.
The Board of Directors has determined that the two-thirds voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Articles of Incorporation on file
with the Commission for the full text of these provisions, which could have the
effect of depriving shareholders of an opportunity to sell their Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Fund has agreed to sell to each of the Underwriters
named below, and each of the Underwriters, for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated, A.G. Edwards & Sons, Inc., Nomura Securities
International, Inc. and Prudential Securities Incorporated are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Fund the number of Common Shares set forth opposite its name below. The
several Underwriters are committed to purchase all of such Common Shares if any
are purchased.
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
A.G. Edwards & Sons, Inc. ...................................
Nomura Securities International, Inc. .......................
Prudential Securities Incorporated...........................
---------
Total.............................................
---------
---------
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Shares being
sold pursuant to such Agreement if any of the Shares being sold pursuant to such
Agreement are purchased. Under certain circumstances, the commitments of
non-defaulting Underwriters may be increased. In the event of a failure to
close, any funds debited from any investor's account maintained with any
underwriter will be credited to such account and any funds received by any
underwriter by check or money order from any investor will be returned to such
investor by check.
51
<PAGE>
The Representatives of the Underwriters have advised the Fund that they
propose initially to offer the Shares to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $. per Share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per
Share to certain other dealers. The Investment Manager has agreed to pay Merrill
Lynch a fee for acting as lead managing underwriter in an amount equal to .30%
of the value of the Shares sold by such firm. After the initial public offering,
the public offering price, concession and discount may be changed. Investors
must pay for any Shares purchased in the initial public offering on or before
, 1995. The sales load of $ is equal to % of the initial
offering price.
The Fund has granted to the Underwriters an option, exercisable for 45 days
after the date hereof, to purchase up to an aggregate of 600,000 additional
Shares to cover over-allotments, if any, at the initial public offering price
less the sales load. To the extent the Underwriters exercise such option, each
of the Underwriters will have a firm commitment, subject to certain conditions,
to purchase a number of option Shares proportionate to the initial commitment of
such Underwriters.
Prior to the offering, there has been no public market for the Shares of the
Fund. During an initial period which is not expected to exceed three months from
the date of this Prospectus, the Fund's Shares will not be listed on any
securities exchange. Additionally, during such period, the Underwriters do not
intend to make a market in the Fund's Shares, although a limited market may
develop. Consequently, it is anticipated that an investment in the Fund will be
illiquid during such period. The Fund intends to apply for listing of its Shares
on the New York Stock Exchange so that trading on such Exchange will begin no
later than three months from the date of this Prospectus. The Fund expects that
it will meet the New York Stock Exchange standards for listing. In the event the
Fund's Shares are not approved for listing on the New York Stock Exchange at the
end of the three-month period, the Fund intends to apply either to have the
Fund's Shares listed on the American Stock Exchange or traded on the NASDAQ
National Market System.
Purchasers of the Shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.
The Fund has agreed to pay the Underwriters $250,000 in partial
reimbursement of their expenses.
The Fund has agreed not to offer or sell any additional Shares for a period
of 180 days after the date of the Purchase Agreement without the prior written
consent of the Underwriters, except for the sale of Shares to the Underwriters
pursuant to the Purchase Agreement and Shares issued in reinvestment of
dividends and distributions.
The Fund anticipates that the Representatives and certain of the
Underwriters may from time to time act as brokers or dealers in connection with
the execution of the Fund's portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as brokers while they
are Underwriters.
The Purchase Agreement contains covenants of indemnity and contribution
between the Underwriters, the Fund and the Investment Manager with respect to
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended.
Princeton Administrators, L.P., an affiliate of Merrill Lynch, will provide
administrative services to the Fund pursuant to a sub-administration agreement
with the Fund and the Business Manager. The Business Manager will pay a monthly
fee for such services at an annual rate of .20% of the Fund's average weekly net
assets, subject to a monthly minimum fee of $12,500.
52
<PAGE>
CERTAIN INVESTOR SUITABILITY STANDARDS
Investment in the Fund is suitable only for investors who can assume the
risks described herein. Residents of certain states must satisfy specific
conditions.
Residents of Arkansas who purchase Shares of the Fund in the offering made
by this Prospectus are required to have either (a) a net worth (exclusive of
home, home furnishings and personal automobiles) of not less than $60,000 and a
current annual income of not less than $60,000 or (b) a net worth (computed as
described above) of not less than $225,000.
Residents of South Dakota who purchase Shares of the Fund in the offering
made by this Prospectus are required to (i) have made a prior investment in
securities and (ii) have either (a) a net worth (exclusive of home, home
furnishings and personal automobiles) of not less than $45,000 and a current
annual income of not less than $45,000 or (b) a net worth (computed as described
above) of not less than $150,000.
CUSTODIAN AND TRANSFER AND DIVIDEND PAYING AGENT
The Chase Manhattan Bank, N.A. is the custodian of the Fund's assets. Its
address is MetroTech Center, Brooklyn, New York 11245. The custodian may employ
subcustodians outside the U.S. approved by the Board of Directors in accordance
with regulations under the 1940 Act. Chemical Mellon Shareholder Services, Inc.
is the transfer and dividend paying agent and registrar for the Fund. Its
address is 450 West 33rd Street, New York, New York 10001.
EXPERTS
The statement of assets and liabilities included in this Prospectus has been
examined by McGladrey & Pullen, independent certified public accountants, 555
Fifth Avenue, New York, New York 10017, as indicated in their report with
respect thereto, and has been included herein in reliance upon the authority of
said firm as experts in giving said report.
LEGAL MATTERS
Legal matters in connection with this offering will be passed on for the
Fund by Dechert Price & Rhoads, Washington, D.C. and for the Underwriters by
Brown & Wood, New York, New York. Counsel will rely on the opinion of Piper &
Marbury, Baltimore, Maryland, as to certain matters of Maryland law. Matters of
Russian law will be passed on for the Fund and the Underwriters by Linklaters &
Paines, Moscow, Russia and Egorov, Pughinsky, Afanasiev & Associates, Moscow,
Russia and Philadelphia, Pennsylvania.
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the U.S. Securities Act of 1933, as
amended, relating to the Shares of its Common Stock offered hereby. For further
information with respect to the Fund and its Common Stock, reference is made to
such Registration Statement and the exhibits filed with it.
53
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholder of
TEMPLETON RUSSIA FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Templeton Russia Fund, Inc. as of , 1995. This financial statement
is the responsibility of the Fund's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of the Templeton Russia Fund as
of , 1995, in conformity with generally accepted accounting
principles.
New York, New York,
, 1995
54
<PAGE>
TEMPLETON RUSSIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
, 1995
<TABLE>
<S> <C>
ASSETS
Cash........................................................................... $
--------
Deferred organization expenses (Note 3)........................................
--------
Total assets............................................................... $
--------
LIABILITIES
Organization expenses payable.................................................. $
Commitments and contingencies (Note 3)......................................... $
--------
$
--------
NET ASSETS
Net assets applicable to shares of common stock, $0.01 par value;
authorized 100,000,000 shares................................................ $
--------
--------
Net Asset Value Per Share........................................................ $
--------
--------
</TABLE>
- ------------
NOTES:
(1) The Fund was incorporated on September 30, 1994, and is registered under the
Investment Company Act of 1940 as a closed-end management investment
company. The Fund has had no operations to date other than matters relating
to its organization and registration and the sale and issuance of
shares of its common stock to Templeton Global Investors, Inc., its Business
Manager, on , 1995.
(2) The Investment Management Agreement, the Business Management Agreement, and
the Sub-Administrative Agreement are described elsewhere in the Prospectus.
(3) Organizational expenses have been advanced on behalf of the Fund by its
Business Manager. These expenses are being deferred by the Fund and
amortized ratably over a five-year period. During the amortization period,
the proceeds of any redemption of the original shares by any holder thereof
will be reduced by a pro rata portion of any then unamortized organizational
expenses based on the ratio of the shares redeemed to the total initial
shares outstanding immediately prior to the redemption.
55
<PAGE>
APPENDIX A
THE RUSSIAN FEDERATION
The information set forth in this Appendix has been extracted from various
government and private publications. The Fund and its Board of Directors make no
representation as to the accuracy of the information, nor has the Fund or its
Board of Directors attempted to verify it; furthermore, no representation is
made that any correlation exists between Russia, or its economy in general, and
the Fund.
GENERAL INFORMATION
GEOGRAPHY AND POPULATION
Russia covers an area of over 6.6 million square miles, almost twice the
size of the United States. It is the largest country in the world, covering
one-eighth of the world's land surface, and spans eleven time zones. Russia is
divided into the following administrative units: 66 provinces, two metropolitan
cities (Moscow and St. Petersburg), 21 ethnic republics with their own
independent governments, and ten national regions.
Russia has a population of approximately 148.2 million. There are over 120
nationalities and ethnic groups in the territory of the Russian Federation, but
82% of the native population is ethnic Russian. The largest non-Russian
minorities are Tartars (3.8% of the total in 1991), Ukrainians (3%), Belarusians
(0.8%), and Germans (0.6%). As a result of industrialization, a high percentage
of the population in Russia (74% as of 1992) lives in cities. The largest
cities, as of 1993, were Moscow (8.6 million inhabitants), St. Petersburg (4.3
million), Novosibirsk (1.4 million), Nizhny Novgorod (1.4 million), and
Ekaterinburg (1.3 million).
Russia has a sizable, well-educated intelligentsia and skilled labor force.
As of 1993, there were 548 educational establishments holding higher-education
status with 2.5 million students, as well as 52 universities with 382,300
students. The following chart shows the distribution of the employed population
by level of education, from a sampled survey performed in October, 1992:
<TABLE>
<S> <C>
Higher Education................................................... 17.9%
General or Special Secondary Education............................. 63.6%
Secondary Education Not Completed.................................. 18.5%
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
POLITICAL BACKGROUND AND GOVERNMENT
In the early 1900's, poor economic conditions caused revolutionary movements
to develop in the Russian empire, which led to the fall of the Romanov dynasty
in March 1917. On November 7, 1917, the Bolsheviks took power and created the
communist state of the Russian Soviet Federative Socialist Republic (the Russian
Federation). In 1922, the Union of Soviet Socialist Republics (U.S.S.R.) was
formed.
The U.S.S.R. was a centralized communist system consisting, after World War
II, of fifteen republics. The Russian Federation was the largest and most
dominant republic in the U.S.S.R. The Russian Federation accounted for over 60%
of Soviet gross national product and comprised over half of the total population
of the U.S.S.R. Russians also dominated the Soviet military, the Communist
Party, and the KGB. In the 1980's, the U.S.S.R. began to collapse, caused partly
by the republics' demands for independence and economic reforms which undermined
the centralized communist system. In August 1991, hardliners in the army and
Communist Party attempted a military coup. The coup failed, and it was the
downfall of communist power in the U.S.S.R. The republics each declared
independence from
A-1
<PAGE>
the U.S.S.R., and the Communist Party was suspended. By the end of 1991, Soviet
President Mikhail Gorbachev lost his position as president and the U.S.S.R. was
disbanded.
After the collapse of the Soviet Union, Russia was politically unstable. The
government, which launched radical economic reforms and policies attempting
stabilization, was opposed by conservatives, represented by the Congress of
People's Deputies (the CPD), and the Supreme Soviet. Much of the political
instability arose from the issue of whether the president of Russia or the CPD
held ultimate constitutional power. Boris Yeltsin was elected president of
Russia in June 1991, in the first fully free presidential election in Russia.
However, in December 1992, the CPD and the Supreme Soviet caused Egor Gaidar,
the acting prime minister, to be replaced with Viktor Chernomyrdin, who was
thought to be more conservative. In April 1993, President Yeltsin forced a
referendum to be held to ascertain the level of the electorate's confidence in
his government. The referendum results showed that there was strong support for
Mr. Yeltsin and his reforms.
In September 1993, President Yeltsin dissolved the CPD and the Supreme
Soviet. Opponents of President Yeltsin in the CPD refused to comply and
nominated an alternative government and president. On October 3, 1993,
opposition supporters led an armed insurrection, which failed. President Yeltsin
then ordered the military to take over the parliament building in Moscow,
resulting in further fighting. Since the failed coup, the political situation
has become more stable although elections for the newly created State Duma
showed sweeping gains for the right wing Liberal Democrat party led by the
nationalist Vladimir Zhirinovsky. Presidential elections are currently scheduled
for June 12, 1996 and elections for the State Duma are due around December 1995.
The Russian constitution was approved by a referendum in December 1993. The
legislature was changed to create a Federation Council (which would have two
representatives from each of Russia's 89 regional units including ethnic
republics and other regional units) and a State Duma (with 450 representatives).
Under the constitution, the president has considerable powers, including heading
the armed forces and Security Council, and nominating the highest state
officials. The president also has authority, under certain circumstances, to
dissolve the State Duma.
In the fall of 1994, civil war began with the Northern Caucasian ethnic
republic of Chechnya. The Chechen president had declared independence from the
Russian Federation in 1991. In August 1994, fighting began between Chechen
supporters and opposition groups. After failing to resolve the crisis by
political means, Russian forces entered Chechnya in December, 1994. While
fighting on a significant scale is still continuing, by the end of January,
1995, Russian forces had gained control of most of the republic, including the
capital city of Grozny. The civil war has weakened confidence domestically and
internationally in Mr. Yeltsin and the reformist government.
INTERNATIONAL RELATIONS
After the collapse of the U.S.S.R. in 1991, Russia succeeded to the
diplomatic network and military power of the U.S.S.R. Russia is in the process
of gradually reconciling with the West and opening up economically. In 1992,
eleven of the fifteen former Soviet republics, including Russia, formed the
Commonwealth of Independent States (CIS), which was intended to function as a
vehicle for mutual cooperation. The CIS has failed to evolve into a strong
union.
Russia inherited much of the U.S.S.R.'s military/industrial complex. Members
of the CIS considered creating a joint CIS command of the former Soviet army,
but this was opposed by some CIS countries. Most of the states of the former
Soviet Union, including Russia, have now built their own armed forces. As of
June 1992, the Russian army had 2,700,000 soldiers, including 1,500,000
conscripts. The current military policy calls for decreasing the armed forces to
approximately 1.5 million men and increasing the quality of equipment.
A-2
<PAGE>
INTERNATIONAL ORGANIZATIONS
Russia is a member of various international organizations, including the
United Nations, of which Russia is a permanent member of its Security Council,
the International Monetary Fund, the World Bank, the International Finance
Corporation, and the European Bank for Reconstruction and Development. Russia
inherited observer status in the General Agreement on Tariffs and Trade (GATT)
from the former U.S.S.R. in 1991, and currently is seeking to be accepted as a
contracting party to GATT. In 1994, Russia applied for observer status in the
Paris Club.
THE ECONOMY
GENERAL INFORMATION
Under communism, the Soviet Union had a centrally planned economic system.
The state owned all of the means of production and the State Planning Committee
(GosPlan) planned all aspects of the economic system, including what and how
much each enterprise produced, from where supplies were to be obtained, and
where output was to go. All prices were controlled by the state.
The result of the centrally planned system was inefficiency. Attempts were
made to reform the system beginning in the 1960's. In the late 1980's and in
1990, under Soviet President Gorbachev, radical reforms were begun; however,
such reforms were abandoned under pressure from conservatives in industry and
the military. In 1991, the financial crisis became full-fledged. Output
decreased, inflation increased, and the budget deficit grew. After the attempted
coup by communist hardliners in 1991, as Soviet President Gorbachev lost power,
Russian President Yeltsin encouraged economic reform for the Russian Federation.
Yeltsin supported a stabilization program, which was to consist of liberalizing
prices, reducing centralized budget expenditures, and privatizing state
monopolies. After implementation of the program, the financial crisis continued
to worsen. Under pressure from conservatives, the government was forced
temporarily to give up some elements of reform in 1992. The political struggle
for economic reform continued in 1993. The reformists gained some strength as
Boris Fyodorov, a reformist, became finance minister. He was, however,
subsequently removed.
NATIONAL BUDGET
During the Soviet era, the budget of the Russian Federation was simply a
unit of the larger Soviet budget. During 1991, the Soviet budget collapsed, as
many of the Soviet republics continued to receive government funds but failed to
contribute to the Soviet budget. As of 1991, the budget deficit for the U.S.S.R.
was approximately 20% of gross national product. After the break-up of the
U.S.S.R., the Russian Federation cut spending in an attempt to balance its first
budget. The budget in 1992 had an official deficit of 3.6% of gross domestic
product, although it is believed that, due to differences between Russian and
Western accounting procedures, the actual deficit was higher. For example, the
deficit as calculated by the International Monetary Fund was 22% of gross
domestic product. The 1993 budget, as revised in July 1993, had an official
deficit of 25% of projected gross domestic product. The actual outturn for the
1993 budget was a deficit of 9.6% of gross domestic product. The 1994 budget,
which was adopted in June 1994, limited the budget deficit to 9.6% of forecast
gross domestic product and according to the State Committee on Statistics
(Goskomstat) had an actual outturn of 9.1% of gross domestic product. The 1995
budget, passed by the State Duma in January 1995, aims to lower the deficit and
finance the budget deficit through non-inflationary means, such as borrowing
from the International Monetary Fund.
A-3
<PAGE>
The following chart shows information relating to revenues and expenditures
of the Russian Federation in recent years.
RUSSIAN NATIONAL BUDGET
(BILLIONS OF RUBLES)
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
----- ----- ------- --------- ------------
<S> <C> <C> <C> <C> <C>
TOTAL INCOME............................... 159.5 310.0 5,327.6 41,771.1 177,400
Includes:
Income Tax................................. N/A 91.9 1,566.8 16,773.5 40,000
VAT........................................ N/A N/A 1,998.9 11,271.2 37,300
Personal Income Tax........................ N/A 41.1 431.3 4,383.2 17,500
Excise Tax................................. N/A N/A 211.5 1,776.6 7,400
Foreign Activity Income.................... N/A 7.8 467.4 2,346.7 19,200
Underground and Natural Resources Use
Royalties.................................. N/A N/A 104.7 1,153.7 N/A
Geologic Reserve Depletion Tax(1).......... N/A N/A 73.4 N/A N/A
Land Taxes................................. N/A N/A 71.0 314.5 N/A
Privatization Income....................... N/A N/A 62.3 318.9 N/A
TOTAL EXPENSES............................. 151.0 347.6 5,969.5 57,319.0 234,800
Includes:
Economic Projects.......................... N/A 129.9 2,038.7 16,134.7 63,400
Social and Cultural Projects............... N/A 103.1 1,383.1 14,297.0 55,300
Defense.................................... N/A N/A 855.3 7,210.0 28,000
Foreign Economic Operations................ N/A N/A 416.7 2,764.3 5,000
Law Enforcement and Government
Administration Organs...................... N/A 13.3 301.1 4,100.1 18,500
Difference between Revenue and Expenses.... 8.5 (37.6) (641.9) (15,547.9) (57,400)
As Percentage of Gross Domestic Product.... 1.3 2.9 3.6 9.6 9.1
</TABLE>
- ------------
(1) This tax generates funds for new exploration.
N/A = Information not available.
Sources: Goskomstat, Russian Federation in 1992--Statistical Yearbook;
Goskomstat, The Russian Federation in Figures, 1993; Goskomstat,
Russian Socioeconomic Conditions, January-September, 1994 (Preprint);
Goskomstat, Russian Socioeconomic Conditions, January 1995 (Preprint).
Traditionally, a net material product (NMP) system was used in Russian and
Soviet statistics. The NMP system was developed in the U.S.S.R. to meet the
needs of a planned economy. NMP is the sum of gross output minus intermediate
inputs and depreciation for six branches of material production: (1) industry,
(2) agriculture, (3) construction, (4) transport and communications, (5) trade,
supply, and procurement, and (6) services for material production. NMP differs
from gross domestic product (GDP) primarily in that it excludes depreciation and
value added of non-material service sectors. The difference between GDP and NMP
is estimated to be approximately 40%. It is anticipated that Russia will convert
at some point to the U.N. System of National Accounts, and recent reports have
included figures for GDP as well as NMP. GDP is estimated by the State Committee
on Statistics (Goskomstat) by beginning with NMP, adding depreciation, adding
value added produced by the non-material production sectors, and subtracting
value added by non-material services within material production sectors (to
prevent double-counting).
A-4
<PAGE>
The GDP of Russia has fallen in recent years, in both the sectors for goods
and services. Since 1993, a structural shift in the composition of GDP has
occurred. The share of goods produced (industry, agriculture, and construction)
in relation to total GDP has fallen from 48.8% in 1993 to 43.5% in 1994, while
the share of services in relation to GDP has increased from 42.2% in 1993 to 50%
in 1994. The following chart sets forth the GDP of Russia and the percentage
change from the prior year's GDP.
GROSS DOMESTIC PRODUCT
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
----- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
GDP*......................................... 644.0 1,300.1 18,063.0 162,311.3 630,000
Percentage change from prior year**.......... -- 87 81 88 85
Goods*....................................... 473.3 1,055.8 10,518.3 79,157.2 274,050
Percentage change from prior year**.......... -- -- 79 87 80
Services*.................................... 126.1 193.2 5,886.2 68,532.1 315,000
Percentage change from prior year**.......... -- -- 84 91 90.5
</TABLE>
- ------------
* In actual prices (billion rubles).
** In comparable constant prices (rubles).
Sources: Goskomstat, The Russian Federation in Figures, 1992; Goskomstat, The
Russian Federation in Figures, 1993; Goskomstat, Social-Economic
Condition of Russia in 1994.
The following table sets forth Russia's net material product by sector.
PRODUCTION OF NET MATERIAL PRODUCT BY SECTOR
(IN ACTUAL PRICES)
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991
---------------------- ----------------------
IN BILLIONS IN IN BILLIONS IN
OF RUBLES PERCENT OF RUBLES PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Net Material Product................................... 444.6 100.0 1,050.8 100.0
Industry............................................. 187.7 42.2 451.1 42.9
Agriculture.......................................... 88.5 19.9 145.6 13.9
Construction......................................... 56.6 12.7 112.1 10.7
Other (Transportation, Communications, Trade,
Technical Supplies, Harvesting, etc.).................. 111.8 25.1 342.0 32.5
</TABLE>
<TABLE>
<CAPTION>
1992 1993
---------------------- ----------------------
IN BILLIONS IN IN BILLIONS IN
OF RUBLES PERCENT OF RUBLES PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Net Material Product................................... 14,652.0 100.0 119,844.2 100.0
Industry............................................. 7,594.9 51.8 53,356.3 44.5
Agriculture.......................................... 1,428.6 9.8 12,015.4 10.0
Construction......................................... 1,242.0 8.5 13,748.1 11.5
Other (Transportation, Communications, Trade,
Technical Supplies, Harvesting, etc.).................. 4,386.5 29.9 40,724.4 34.0
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
A-5
<PAGE>
CURRENCY AND FOREIGN EXCHANGE INFORMATION
As part of the Soviet centrally planned system, an artificial "official"
exchange rate was used. This rate changed only slightly from Rbs. 0.84: $1 in
1985 to Rbs. 0.62: $1 in 1992. In practice, however, there were multiple
exchange rates. In 1991, there were three main exchange rates for the ruble
against convertible currencies: the commercial rate, tourist rate, and interbank
market rate. The commercial rate was pegged to a basket of five convertible
currencies (U.S. dollar, Japanese yen, Deutsche mark, French franc, and pound
sterling). The commercial rate applied to foreign exchange surrendered by
enterprises to the government, imports financed through centralized foreign
exchange funds, and all capital flows. For Soviet citizens traveling abroad,
commercial banks were free to determine the tourist rate which depreciated from
Rbs. 5.5 in early 1991 to Rbs. 108 per U.S. dollar by the end of 1991. Finally,
the interbank market rate was established at foreign exchange auctions conducted
by the Vneshekonombank from January to April 1991 and under the auspices of
Gosbank beginning April 9, 1991. Beginning in 1992, the exchange system was
liberalized, and an effort was made to unify the multiple foreign exchange
arrangements. Nevertheless, for a period of time, several exchange rates
prevailed. As part of the market reform of 1992, the government moved to the use
in July 1992 of a single official Central Bank exchange rate determined by
reference to the market. Commercial banks are free to set their own exchange
rates by reference to the market. The ruble is, however, not a freely
convertible currency in that restrictions exist on holdings of rubles,
particularly by non-Russian residents, and it is illegal to export rubles out of
Russia.
The following table sets forth the exchange rates of the ruble to the U.S.
dollar as of the following dates.
EXCHANGE RATE OF THE RUBLE
<TABLE>
<CAPTION>
EXCHANGE RATE
RUBLES: U.S. DOLLARS
--------------------
<S> <C>
December 30, 1991......................................... Rbs. 1.7: $1
December 30, 1992......................................... Rbs. 415: $1
December 30, 1993......................................... Rbs. 1,247: $1
March 31, 1994............................................ Rbs. 1,753: $1
June 30, 1994............................................. Rbs. 1,989: $1
September 30, 1994........................................ Rbs. 2,633: $1
December 30, 1994......................................... Rbs. 3,550: $1
March 31, 1995............................................ Rbs. 4,762: $1
</TABLE>
- ------------
Sources: European Bank for Reconstruction and Development, Transition Report,
October, 1994; Izvestia, April 1, 1994 and July 1, 1994; and Kommersant
Weekly, September 30, 1994.
The Central Bank exchange rate has been set by reference to the Moscow
Interbank Currency Exchange rate since 1992. The Moscow Interbank Currency
Exchange is the largest currency exchange in Russia. Currency exchanges are also
active in a number of other cities. Prior to 1992, the official exchange rate
was set at 66 kopecks (of which there are 100 in one ruble) to the U.S. dollar.
This rate has deteriorated since the beginning of economic reform. Following a
period of relative stability, since September 1994, the exchange rate suffered a
period of high volatility. During the period September 1, 1994 to April 20,
1995, the exchange rate ranged from a low of Rbs. 2,156: $1 to a high of Rbs.
5,064: $1.
BANKING AND FINANCE
Under communism, the financial sector was highly centralized. The State Bank
of the Soviet Union (Gosbank) effectively controlled all financial aspects of
the centrally planned system. The decentralization of banking carried out in the
Soviet Union under the Gorbachev regime led to the creation of more than 1,500
commercial banks in Russia. Resolution No. 821 of the Central Committee and the
Council
A-6
<PAGE>
of Ministers of July 17, 1987 provided for the creation of six state banks:
Gosbank, Promstroybank, Vneshekonombank, Agroprombank, Zhilsotsbank, and
Sberbank. Letter No. 206 of Gosbank of May 24, 1989 effectively provided for the
conversion of certain U.S.S.R. banks to the principle of profit and loss
accounting and self-financing, thereby making those banks semi-independent. The
Law "On the Central Bank of the RSFSR" passed in December, 1990 decreed the
creation of the Russian Central Bank (RCB). The Resolution of the Supreme Soviet
which brought the Law on the Central Bank into force provided for the renaming
of Gosbank as the Central Bank of the RSFSR (Bank of Russia). Vneshekonombank
remained the channel for the management of Russian foreign debt.
In November 1993 the Russian President imposed limits on the participation
of foreign banks in the country, including restricting most foreign banks from
handling accounts of Russian citizens and businesses, including joint ventures,
until after January 1, 1996. This was demanded by Russian banks, fearful that
their foreign competitors would attract most of the hard currency deposits held
by Russian enterprises. Only 12 foreign banks have so far been given licenses to
operate in Russia. In June 1994, President Yeltsin restored the rights of some
foreign banks to do business in Russia, although the decree excluded U.S. and
Turkish banks on the grounds that the U.S. and Turkey had not ratified Bilateral
Investment Treaties with Russia.
EMPLOYMENT
Under communism, unemployment technically did not exist. Unemployment,
however, began to rise sharply following economic reforms introduced in 1992.
The following chart lists the number of officially registered unemployed persons
and lists the number of unemployed as a percentage of the national workforce as
of the end of each year indicated.
<TABLE>
<CAPTION>
1991 1992 1993 1994
---- ----- ----- -------
<S> <C> <C> <C> <C>
Amount of People Officially Registered as Unemployed (in
thousands).................................................... 61.9 577.7 835.5 1,636.8
As Percentage of National Workforce........................... 0.1 0.8 1.1 2.2
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993; Goskomstat,
Social-Economic Condition of Russia in 1994, 1995 (preprint).
Not all unemployed individuals, however, register with Russian employment
offices as being unemployed. As of January 1, 1994, the number of unemployed
persons, as classified according to the methodology of the International Labor
Organization, stood at 4.2 million, or 5.5% of the national workforce. At
December 30, 1994, this number had increased to 5.3 million persons, or 7.1% of
the national workforce. In addition, persons such as part-time workers and those
on leave without payment or with partial payment are not included in the
definition of unemployed. Including such persons, total unemployment, as of
December 30, 1994, was 10.1 million persons or 13.5% of the national workforce.
In July 1994, Prime Minister Chernomyrdin signed a federal program for dealing
with unemployment.
Nominal wages have grown considerably in recent years. Average real wages
(nominal wages deflated by the rate of consumer price inflation) have fallen.
The real average monthly wage index, assuming a base of 100 in 1987, stood at
127 in 1990, 119 in 1991, 86 in 1992, 90 in 1993, and 88 as of July, 1994. The
following chart sets forth average monthly wages in rubles for the periods
indicated.
AVERAGE MONTHLY WAGES
(NOT ADJUSTED FOR INFLATION)
<TABLE>
<CAPTION>
1990 1991 1992 1993 MAY 1994 NOV. 1994
----- ----- ----- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Wages (in rubles)......................... 296.8 552.0 6,126 58,700 183,500 281,600
</TABLE>
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1992; Goskomstat, The
Russian Federation in Figures, 1993; Russian Federal Government Center
of Economic Conjuncture, Russia 1994--Economic Conjuncture (Issue 1);
Goskomstat, Social-Economic Condition of Russia in 1994.
A-7
<PAGE>
INFLATION
Under the centrally-planned system, inflation was suppressed by the
government by means of administratively determined prices. Although the official
retail price annual inflation was 1-2%, actual inflation was higher. Inflation
rose significantly in 1991. The consumer price index rose by 160% from December
1990 to December 1991, and rose at an average of approximately 40% per month in
1992. During 1993, inflation increased at approximately 20% to 25% per month,
although it decreased to 16% in November and 13% in December. During 1994,
inflation initially fell, to 8.1% in the month of May and 4.8% in the month of
June. Inflation fell to a low of 4% in the month of August. Inflation increased,
however, by 8% in the month of September, 15.1% in the month of October, 14% in
the month of November, 16.4% in the month of December, and 17.8% in the month of
January 1995. However, inflation decreased to 11% in the month of February 1995,
and 8.9% in the month of March 1995.
The following chart shows selected inflation indices as a percentage of the
previous year for the years 1990 through 1994, utilizing 1985 prices as a base.
<TABLE>
<CAPTION>
1985 1990 1991 1992 1993 1994
---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consumer Price Index(1)............................... 100 110 260 2,610 940 324
Wholesale Industrial Price Index(1)................... 100 103 240 2,050 990 N/A
Wholesale Agricultural Price Index(1)................. 100 141 160 930 840 N/A
</TABLE>
- ------------
(1) Average for year, as a percentage of the previous year.
Sources: Goskomstat, The Russian Federation in Figures, 1992; Goskomstat, The
Russian Federation in Figures, 1993; Goskomstat, Russian Annual
Statistical Report, 1994; Goskomstat, Russian Socioeconomic Conditions,
1994 (preprint).
AGRICULTURE
Agriculture in Russia was collectivized in the 1930's into collective farms
and state farms. This collectivization promoted inefficiency. The agricultural
system has been unable to provide sufficient food, requiring grain and animal
feeds to be imported since the 1970's.
Since the end of communism, agricultural reform has been important. The
government has permitted the prices of agricultural products to rise, providing
farms with an incentive to increase production. The government has also begun to
privatize the collective and state farms. Further, a presidential decree of
October 1993 has permitted private farmers to purchase land. In spite of these
changes, market reforms have been slow; most farms are still obligated to
deliver produce to the state, and may only sell the remainder in free markets.
In general, agricultural production has declined over the past few years.
The following chart shows annual agricultural production as a percentage of the
previous year for the years 1990 through 1994.
AGRICULTURAL INDICES
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
----- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Agriculture(1)................................ 100.0 96.4 95.5 90.6 96.0 91.0
Crops(1)............................................ 100.0 92.4 100.4 94.6 97.0 90.0
Animal Products(1).................................. 100.0 98.8 92.7 88.1 95.0 92.0
</TABLE>
- ------------
(1) Indices calculated on gross production in 1983 comparable prices.
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, ]1993; Goskomstat, Russian
Socioeconomic Conditions, 1994 (preprint).
A-8
<PAGE>
The following chart shows agricultural production in Russia for the years
1990 through 1993.
AGRICULTURAL PRODUCTION
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
-------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C>
CROPS (in millions of tons)
Grain........................................ 116.7 89.1 106.9 99.1 81.3
Sugar beets.................................. 32.3 24.3 25.5 25.5 10.9
Sunflower.................................... 3.4 2.9 3.1 2.8 2.6
Potatoes..................................... 30.8 34.3 38.3 37.7 33.8
Vegetables................................... 10.3 10.4 10.0 9.8 9.6
Fruits, berries, grapes...................... 3.0 2.7 3.4 3.2 N/A
ANIMAL PRODUCTS
Meat (including fowl) thousand tons.......... 10,112 9,375 8,300 7,500 10,800
Milk, million tons........................... 55.7 52.0 47.2 46.5 42.8
Eggs, billion................................ 47.5 46.9 42.9 40.3 37.4
Wool, thousand tons.......................... 227 204 179 158 N/A
</TABLE>
- ------------
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, 1993; Goskomstat, Russian
Socioeconomic Conditions, 1994 (preprint).
ENERGY
The former Soviet Union was the world's leading producer of all major fuels.
The majority of the former Soviet Union's resources are located in the Russian
Federation. Oil and gas were the main earner of hard currency for the Soviet
Union and continue to be the main earner of hard currency for Russia. Natural
gas accounts for the largest percentage of energy output and final consumption.
Gas output increased until 1991, and has decreased only slightly since then. Oil
output and export from Russia have fallen in the past decade, and have fallen
further in 1993. It is believed that the Russian government is committed to
increasing the output of oil by allowing foreign investment in the oil industry
and increasing the price of oil in Russia. As of 1993, over 30 Russian-Western
joint ventures were actively producing oil, and accounted for 4% of production.
It is not expected that the fall in production will be reversed until the late
1990's.
OIL AND NATURAL GAS DRILLING IN THE RUSSIAN FEDERATION
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Oil Drilling (including gas condensates)(1)................... 516 462 399 354 316
Natural Gas(2)................................................ 641 643 641 619 607
</TABLE>
- ------------
(1) Millions of tonnes (metric tons)
(2) Billions of cubic meters
Sources: Statistical Yearbook--The Russian Federation Economy, 1992; Goskomstat,
The Russian Federation in Figures, 1993; Goskomstat, Russian
Socioeconomic Conditions, January-September, 1994 (preprint);
Goskomstat, Russian Socioeconomic Conditions, 1994 (preprint).
A-9
<PAGE>
MANUFACTURING
Under communist rule, industrial development focused on heavy industry,
especially defense. Nearly 15% of Russia's industries are defense-related.
Consumer-goods industries have traditionally been underdeveloped. In 1992,
industrial enterprises accounted for 30% of total employment in Russia; however,
consumer-oriented industries comprised only a quarter of total industry output
as of 1991. Russia is the second largest steel producer in the world. Other
important industries in Russia are chemicals, timber and wood products, paper,
and non-ferrous materials. Industrial production, which was slow in the 1980's,
fell during the 1990's, by 7.8% in 1991, 19% in 1992, 16% in 1993, and 20.9% in
1994. The rate of decline, however, slowed noticeably during the second half of
1994.
FOREIGN TRADE
In the late 1980's, Russia had a trade surplus with other countries in the
former Soviet Union and a trade deficit with countries outside the former Soviet
Union. In the early 1990's, both imports and exports fell dramatically. In 1993,
Russia imported approximately $27 billion of goods, which represents a decrease
of 27% from 1992, but exported $44 billion of goods, which represents an
increase from 1992. Russia maintained a strong positive balance of trade with
foreign countries of $17 billion. In 1994, imports into Russia increased by 8.2%
and exports increased by 8.4%, resulting in a trade surplus of $12.3 billion.
The following chart shows the total dollar amount of exports and imports of
Russia for the years indicated.
DOLLAR AMOUNT OF EXPORTS AND IMPORTS OF RUSSIA
(IN MILLIONS OF U.S. DOLLARS)
1992 1993 1994
------ ------ ------
Exports........................................... 42,391 44,297 48,000
Imports........................................... 36,990 26,807 35,700
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1993; Goskomstat,
Russia's Social and Economic Position: January-June, 1994; Goskomstat,
Russia's Social and Economic Position, 1994 (preprint). The Economist
Intelligence Unit, Russia Country Report, first quarter 1995 reports a
number of 33,000 for 1993 imports.
A-10
<PAGE>
Russia's trade outside the former Soviet Union is mainly with Germany,
Italy, Great Britain, China, Hungary, Japan, and the United States. The
following chart shows Russia's trade outside the former U.S.S.R. with major
partners.
RUSSIA'S FOREIGN TRADE WITH MAJOR TRADING PARTNERS
Total, in actual figures, in millions of U.S. dollars (1) and the share of
each country as a percentage of the total (2).
1994
1992 1993 (JAN.-JUNE)
------------ ------------ --------------
(1) (2) (1) (2) (1) (2)
----- ---- ----- ---- ----- ----
EXPORTS TO:
Germany............ 5,935 14.0 5,094 11.5 2,492 11.7
Britain............ 2,798 6.6 3,367 7.6 2,024 9.5
China.............. 2,798 6.6 3,056 6.9 1,342 6.3
Italy.............. 2,967 7.0 2,614 5.9 1,491 7.0
Hungary............ 1,526 3.6 2,082 4.7 596 2.8
USA................ 763 1.8 1,993 4.5 1,385 6.5
Japan.............. 1,738 4.1 1,993 4.5 831 3.9
Netherlands........ 2,332 5.5 975 2.2 575 2.7
Finland............ 1,568 3.7 1,373 3.1 767 3.6
France............. 1,992 4.7 1,550 3.5 554 2.6
IMPORTS FROM:
Germany............ 6,954 18.8 5,147 19.2 2,244 17.0
Britain............ 592 1.6 643 2.4 422 3.2
China.............. 1,850 5.0 2,332 8.7 515 3.9
Italy.............. 3,144 8.5 1,099 4.1 634 4.8
Hungary............ 1,110 3.0 617 2.3 436 3.3
USA................ 3,033 8.2 2,305 8.6 1,241 9.4
Japan.............. 1,739 4.7 1,367 5.1 607 4.6
Netherlands........ 407 1.1 429 1.6 766 5.8
Finland............ 1,295 3.5 724 2.7 752 5.7
France............. 1,332 3.6 911 3.4 515 3.9
- ------------
Sources: Goskomstat, The Russian Federation in Figures, 1993; Goskomstat,
Russia's Social and Economic Position: January-June, 1994.
A-11
<PAGE>
During 1994, the volume of exports and imports rose 8% from the volume of
exports and imports in 1993. The majority of Russian exports are fuel and raw
materials. In 1994, 44.7% of the volume of exported goods were fuel and energy
goods, 20.2% were ferrous and nonferrous metals, 7.6% were chemical industry
products, 5.3% were machines and equipment, and 4.3% were forestry, timber,
paper, and cellulose industry products. In 1994, imports of machines and
equipment were 34% of total imports, foodstuffs and agricultural produce were
29.2%, chemical industry products were 10.7%, textiles, textile clothing, and
footwear were 8.8%, and ferrous and nonferrous metals and products were 3.5%.
The following chart shows the composition of trade with countries outside the
former Soviet Union.
EXPORTS AND IMPORTS OF RUSSIA BY PRODUCT
Russian exports and imports in actual prices, in billions of U.S. dollars
(1) and as a percentage of total volume (2).
<TABLE>
<CAPTION>
1990 1991 1992 1993
----------- ----------- ----------- -----------
(1) (2) (1) (2) (1) (2) (1) (2)
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXPORTS............................ 71.1 100 50.9 100 42.4 100 44.3 100
Machines and equipment........... 12.5 17.6 5.2 10.2 3.7 8.7 2.9 6.5
Minerals......................... 32.3 45.4 26.3 51.7 21.7 51.2 20.7 46.7
Metals & precious stones......... 9.2 12.9 7.3 14.3 8.5 20.0 10.3 23.2
Chemicals........................ 3.3 4.6 3.4 6.6 2.5 5.9 2.6 6.0
Timber & cellulose............... 3.1 4.4 2.4 4.7 1.5 3.6 1.9 4.2
Textiles......................... 0.7 1.0 0.5 0.9 0.3 0.7 0.2 0.4
Furs & leathers.................. 0.1 0.2 0.1 0.3 0.1 0.2 0.1 0.2
Foodstuffs & raw produce......... 1.5 2.1 1.3 2.6 1.5 3.5 1.6 3.8
Other............................ 8.4 11.8 4.4 8.7 2.6 6.2 4.0 9.0
IMPORTS............................ 81.8 100 44.5 100 37.0 100 26.8 100
Machines & equipment............. 36.3 44.3 15.8 35.6 13.9 37.6 9.1 33.8
Minerals......................... 2.4 2.9 1.3 2.9 1.0 2.7 1.1 4.0
Metals & precious stones......... 4.4 5.4 2.8 6.2 1.2 3.2 0.9 3.5
Chemicals........................ 8.9 10.9 5.5 12.4 3.5 9.5 1.7 6.2
Timber & cellulose............... 0.9 1.1 0.5 1.1 0.5 1.3 0.1 0.5
Textiles......................... 7.6 9.3 4.4 9.9 4.2 11.4 3.7 13.9
Furs & leathers.................. 0.8 1.0 0.5 1.1 0.7 1.9 0.7 2.6
Foodstuffs & raw produce......... 16.6 20.3 12.4 27.9 9.6 25.9 5.9 22.2
Other............................ 3.9 4.8 1.3 2.9 2.4 6.5 3.6 13.3
</TABLE>
- ------------
Source: Goskomstat, The Russian Federation in Figures, 1993.
The volume of trade with the former Soviet republics has decreased. In 1990,
exports within the U.S.S.R. accounted for 12% of Russia's GNP. As of the first
quarter of 1994, exports to the former republics had fallen to 4% of Russia's
GNP. Trade with the former Soviet republics consists mainly of industrial
products.
BALANCE OF PAYMENTS
Goskomstat estimates that Russia's trade balance, excluding transactions
with states of the former Soviet Union, has increased from $7.4 billion in 1992
to $9.5 billion in 1993, while its services balance has decreased from -$1.2
billion to -$2.7 billion. Other sources, however, estimate that the trade
balance increased from $4.4 billion in 1992 to $11.9 billion in 1993, while the
services balance has remained - 10.1 billion in 1992 and -9.7 billion in 1993.
It is believed that balance of payments statistics compiled by Goskomstat have
not been prepared consistently with international compilation practices. In
addition, it is believed that data has become less available as the Russian
economy has become less centralized.
The following table sets forth estimates of Russia's balance of payments for
1991, 1992, 1993, and the first quarter of 1994. The table excludes information
on the balance of payments with states of the former Soviet Union.
A-12
<PAGE>
BALANCE OF PAYMENTS OF THE RUSSIAN FEDERATION
(EXCLUDING TRANSACTIONS WITH STATES OF THE FORMER SOVIET UNION)
(IN BILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
JAN.-
MARCH
1991(1) 1992 1993(2) 1994(3)
------- ----- ------- -------
<S> <C> <C> <C> <C>
Current account........................... 3.5 -5.7 2.3 -0.9
Trade balance........................... 5.9 4.4 11.9 1.7
Exports................................. 51.0 41.6 46.3 9.1
Unadjusted............................ N/A 41.6 42.9 9.1
Oil................................. 11.8 12.7 11.8 2.3
Natural gas......................... 9.7 7.5 6.9 1.9
Gold................................ N/A 1.1 1.0 0.2
Other............................... 29.5 20.3 23.1 4.7
Adjustments........................... N/A N/A 3.4 N/A
Imports................................. -45.1 -37.2 -34.3 -7.4
Unadjusted............................ N/A -37.2 -24.8 -6.1
Food and light industry............. N/A -8.3 -8.1 -2.6
Machinery and equipment............. N/A -16.2 -9.8 -2.2
Humanitarian imports................ N/A -1.9 -0.3 N/A
Other............................... N/A -10.8 -5.9 -1.1
Adjustment............................ N/A N/A -9.6 -1.3
Services, net........................... 4.6 -10.1 -9.7 -2.6
Nonfactor services, net............... N/A -5.5 -5.3 -1.4
Transportation and insurance........ 0.1 -1.7 -0.1 -0.1
Travel and tourism.................. -0.3 -0.4 -1.4 -0.4
Construction........................ N/A N/A -1.7 -0.4
Training and technical assistance... N/A N/A -0.4 -0.2
Other............................... N/A -3.4 -1.6 -0.4
Interest, net......................... -2.2 -4.6 -4.3 -1.2
Receipts............................ 0.5 0.9 0.7 0.2
Payments............................ -2.7 -5.5 -5.1 -1.4
Capital account......................... 4.7 -1.2 -10.1 -3.5
Grants, net........................... 1.6 3.0 2.8 0.7
Medium- and long-term capital
(official), net..................... N/A 2.7 -10.0 -2.6
Disbursements....................... 7.8 12.2 4.8 0.6
Amortization........................ -5.0 -8.9 -14.1 -3.0
Other............................... 1.1 -0.6 -0.7 -0.3
Medium- and long-term capital
(private), net............................ N/A N/A 0.5 0.2
Commercial banks, net................. -0.7 -6.4 0.1 -0.3
Currency operations, net.............. N/A N/A -2.2 -1.5
Purchases of foreign currency....... N/A N/A -5.7 -4.2
Counterpart of "private" imports.... N/A N/A 3.5 2.7
Other short-term...................... N/A -1.4 -2.7 N/A
Trade credits....................... N/A N/A -1.8 N/A
Other long-term flows................. N/A 0.7 0.4 N/A
Direct investment, net.............. -0.1 0.7 0.7 N/A
Monetization of gold.................. N/A 0.2 0.9 0.1
Errors and omissions, net............... -2.3 -6.4 -6.5 -1.1
</TABLE>
A-13
<PAGE>
<TABLE>
<CAPTION>
JAN.-
MARCH
1991(1) 1992 1993(2) 1994(3)
------- ----- ------- -------
<S> <C> <C> <C> <C>
Overall balance......................... 5.9 -13.3 -14.4 -5.4
Financing............................... -5.9 13.3 14.4 5.4
Net official international reserves... 0.6 -0.8 -3.4 1.3
Assets.............................. 1.5 -1.7 -4.4 1.2
Liabilities......................... -0.9 0.9 1.0 0.1
Fund purchases...................... N/A 1.0 1.5 N/A
Other............................... -0.9 -0.1 -0.5 0.1
Convertible currency payments of
countries of former Soviet Union..... N/A N/A 0.4 0.2
Arrears............................... N/A 6.9 -2.7 N/A
Official (Paris Club)............... N/A 3.8 -2.7 N/A
Nonofficial......................... N/A 3.1 N/A N/A
Deferral of precutoff principal....... N/A 7.2 5.6 0.9
Official (Paris Club)............... N/A 1.6 N/A N/A
Nonofficial......................... N/A 5.6 5.6 0.9
Official rescheduling................. N/A N/A 11.2 1.9
Amounts unpaid pending rescheduling... N/A N/A 3.2 1.1
Nonofficial......................... N/A N/A 1.8 N/A
Suppliers........................... N/A N/A 0.3 N/A
Official (non-Paris Club)........... N/A N/A 1.2 N/A
</TABLE>
- ------------
(1) Estimated.
(2) Revised estimates.
(3) Preliminary estimates.
Sources: International Monetary Fund, Russian Federation 1993, International
Monetary Fund, Russian Federation 1994.
EXTERNAL DEBT
At the end of 1994, foreign debt of Russia, including debt of the former
U.S.S.R., was estimated to be approximately $90 billion. Of this amount, it is
estimated that 60% is owed to official creditors, 30% is owed to commercial bank
creditors, and 10% is owed to private creditors such as bond holders. The
Russian government has entered into several agreements to postpone or reschedule
the repayment of interest and/or principal due on external debt; however, no
comprehensive debt rescheduling agreement has been reached. It was estimated
that payments due on the external debt during 1994 would total $32.5 billion.
The State Duma imposed a limit of $4.1 billion on the repayment of external debt
during 1994.
A-14
<PAGE>
FOREIGN INVESTMENT
Foreign direct investment in Russia is regulated by the Law on Foreign
Investment approved in July 1991. A revised edition of the law is being
prepared. Its contents and likelihood of timely adoption by the State Duma are
generally unknown. Repatriation of interest, dividends and capital is permitted
under existing legislation, as is 100% foreign ownership of most types of
businesses.
As of January 1, 1994, 12,173 enterprises with foreign investment were
registered with the Roskomstat. In 1992, direct investment was $1.4 billion with
portfolio investment at $0.2 billion. In 1993, direct investment in Russia was
again $1.4 billion with portfolio investment rising to $0.4 billion. In 1994,
total foreign investment was $1.37 billion, of which direct investment was $1.03
billion and portfolio investment was $0.18 billion.
Limited information is available on the distribution of the foreign
investment by sectors and country of origin. The top sectors which attracted
foreign investment in 1993 were machine-building/metal working, fuels, trade and
food service, and construction. Recently, the bulk of investment has been in the
fuel industry which, in 1994, received 68.2% of all foreign investment. The
trade and dining industry received 5.5%, the construction industry received
3.8%, and the timber, paper, and cellulose industries received 3.1% of all
foreign investment. The United States is the leading foreign investor in Russia.
Other prominent investors include France, South Korea, Germany, Great Britain,
and Italy.
LEGAL SYSTEM
The Russian Federation operates on a civil legal system.
Part I of a new Civil Code largely went into effect on January 1, 1995. This
first part deals with general provisions, legal entities (including commercial
organizations), rights, ownership, general issues of law of contracts, agency,
security and other questions of a general character. The second part is still to
be adopted and may go into effect late in 1995.
The Civil Code states that it has priority over all other legislation
including federal laws. It also identifies a number of issues to be governed by
federal laws. "The Fundamental Principles of Civil Legislation of the USSR and
Republics," adopted May 31, 1991, is still recognized as valid law in Russia but
only in those parts and to the extent that it is not inconsistent with or
superseded by the new Civil Code or other legislation adopted after June 12,
1990.
The new civil code has replaced previous legislation aimed at addressing the
movement toward a market economy and the subsequent development of the private
sector, such as the Law On Ownership and most of the Law On Enterprises and
Entrepreneurial Activities.
According to the Civil Code, legal persons are divided into commercial
(business) and non-commercial organizations. The Civil Code provides for several
types of business organizations. Among them is a joint-stock company that can be
"open" or "closed," the principal difference being the existence of a
shareholder's preemptive right to acquire shares sold by other shareholders.
Open joint-stock companies may carry out public share issues. Other types of
vehicles for business activity are (1) the limited liability society which
broadly is a similar type of entity to a closed joint-stock company but with no
shares issued to partners, (2) a full partnership, (3) a limited partnership and
(4) an additional liability society.
According to the Civil Code each particular type of business organization is
to be regulated by a corresponding Law, which in each case is yet to be passed.
Until the Law On Joint-Stock Companies is adopted the Regulations On Joint-Stock
Companies approved by Resolution 601 of the Russian Council of Ministers on
December 25, 1990 shall apply. Although much of it is superseded, Regulation 601
still sets out some of the basic rules for the establishment and management of
joint-stock companies. A company is entitled to issue only registered shares,
which may be designated either ordinary or
A-15
<PAGE>
preference; all shares of the same category must have the same rights. A fixed
dividend on preference shares and a rate of interest on bonds must be set at the
time of their issue. All shares have the right to dividends except for those
acquired less than 30 days before the announced day of the dividend payment.
Dividends on ordinary shares are paid out of the net profit of a company after
taxes. Given the speed of development of reforms in Russia and the fact that
Regulation 601 was passed in 1990, it is out of date and contains a number of
unsatisfactory provisions and omissions. There is a notable gap in the
regulations defining the requirements for directors' rights and liabilities.
There are several issues in respect of joint-stock companies addressed in the
Civil Code itself such as the procedure for establishment of a company, the
increase and decrease of a company's capital, and general provisions relating to
types of shares, dividends, directors and management, auditing and subsidiaries
and liquidation.
Regulations on registration of business vehicles were recently adopted by
Presidential Decree addressing the general questions concerning the registration
of companies. Currently the minimum share capital of any enterprise with foreign
investment, as well as all joint stock companies, state and municipal
enterprises, must be not less than 1000 times the minimum monthly wage set by
the Russian Federation (currently, the minimum wage is 34,400 rubles as of April
1, 1995 and due to be increased to 43,300 rubles as of May 1, 1995. This is
reviewed periodically depending on the level of inflation). The minimum share
capital of enterprises of all legal organizational forms other than joint stock
companies may not be less than 100 times the minimum monthly wage.
The primary regulation in the field of securities is the Regulation "On the
Issue and Circulation of Securities and Stock Exchanges in Russia" approved by
Resolution No. 78 of the Government of the R.S.F.S.R. of 28 December 1991. This
Regulation describes different activities of investment institutions (brokers,
investment consultants, investment companies, investment funds), sets forth some
of the licensing requirements for investment institutions and establishes other
basic rules for activity in the securities market. It also regulates issues of
securities by either private placement (i.e., up to 100 investors and for an
amount up to 50 million rubles) and public offers (which necessitate publication
and registration of an issue prospectus). This regulation also contains rules on
circulation of securities and basic requirements for stock exchanges. Among
other things it provides that if one person or a group of connected persons
acquire over 15 percent of the shares of any issuers they shall notify the
Ministry of Finance of the acquisition and if a person or connected persons
acquire 35 percent or more of shares of any issuer or the shares providing for
over 50 percent of shareholders' votes they must obtain prior consent of the
State Anti-Monopoly Committee.
In addition to Regulation No. 78, a large number of Instructions and Letters
issued by the Ministry of Finance, the Federal Commission for Securities and the
Stock Market, the Central Bank, the State Anti-Monopoly Committee, the State
Property Management Committee (GKI) and other bodies regulate various aspects of
the securities market. An important draft of a new federal law establishing a
framework for the securities market has gone through a first reading in the
State Duma (the lower chamber of the Russian parliament). Its second reading is
due on April 26, 1995. The likelihood, however, for its adoption is
unpredictable.
The Russian judicial system consists of three branches of courts. These are
courts of general jurisdiction united in a system under the supervision of the
Supreme Court of the Russian Federation, a system of arbitration courts
resolving economic disputes under the supervision of the High Arbitration Court
of the Russian Federation, and the constitutional court. The courts hearing
general practice cases consist of the Supreme Court of the Russian Federation,
regional courts and district courts. Economic disputes (i.e., disputes regarding
commercial matters, although in some cases the court requires an arbitration
clause between the parties or an appropriate international agreement to accept
jurisdiction) are heard by courts of the so-called arbitration court system
headed by the High Arbitration Court of the Russian Federation. However, a
particular contract might provide for private arbitration (as opposed to the
High Arbitration Court System, which is a state court) to be the forum for the
resolution of their disputes.
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<PAGE>
Russia as successor to the USSR is a signatory to the 1958 New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Russian courts therefore should normally recognize and enforce arbitral awards
made in other jurisdictions which are also signatories to that Convention.
Foreign arbitral awards may be enforced in Russia in accordance with the Civil
Procedure Code and the Code of Arbitration Procedure which recognize such
arbitral awards. However, there are a number of grounds on which recognition and
enforcement of a foreign arbitral award may be refused, which are listed in the
law On International Commercial Arbitration of 7 July 1993, the Civil Procedure
Code and the Code of Arbitration Procedure.
The Law of the Russian Federation on International Commercial Arbitration
reproduces similar provisions contained in the UNCITRAL Model Law. Under this
law the arbitrator is entitled to apply the law which the parties have chosen as
applicable. Another important provision is that an arbitral award made in a
country whose arbitral awards are recognized in Russia is recognized and
enforced subject to a written application to a competent court.
The International Commercial Arbitration Court, which is the most common
private arbitration forum in Russia, is established under the Chamber of Trade
and Industry of the Russian Federation and may hear cases in which one of the
parties is located abroad or, in the case of an enterprise, has economic
activity abroad.
A-17
<PAGE>
APPENDIX B
SECURITIES MARKETS OF RUSSIA
The information set forth in this Appendix has been extracted from various
government and private publications. The Fund and its Board of Directors make no
representation as to the accuracy of the information, nor has the Fund or its
Board of Directors attempted to verify it; furthermore, no representation is
made that any correlation exists between the Russian Federation, or its economy
in general, and the performance of the Fund.
PRIVATIZATION AND VOUCHER PROGRAM
In October 1992, Russia launched the largest mass privatization program
ever. Nearly 150 million privatization vouchers were distributed at a nominal
cost to approximately 148 million eligible Russians. The vouchers carried a face
value of Rbs. 10,000, which was the equivalent of approximately $32. The
vouchers were freely transferable bearer securities that could be used to bid
for the shares of the 15,000 medium and large companies that were being
privatized, exchanged for shares in voucher investment funds, which were
established to provide diversification and ongoing investment management, or
sold for cash in the newly developed secondary market. Under the privatization
program, foreign investors were permitted to purchase vouchers and obtain shares
in most privatized companies. The voucher program ended in June 1994, when
vouchers ceased for most purposes to be valid.
To begin the privatization process, firms were incorporated and transferred
to state property funds at appropriate levels of government--municipally and
state owned enterprises to local and regional property funds, and federally
owned enterprises to the Federal Property Fund. State Property Management
Committees were given responsibility for managing the privatization of
enterprises at each level.
Medium- and large-scale enterprises were obligated to transform themselves
into "open type" joint stock companies in 1992, and workers would select from
one of three types of privatization options that allow employees and former
employees at the enterprise opportunities to acquire different levels of
ownership at, in certain cases, preferential prices. Such distribution to the
employees was called a "closed subscription." Together with the appropriate
State Property Management Committee, a privatization plan would be worked out
for each enterprise to define the methods of distributing the company's shares.
In some cases, employees together would have the right to acquire 5%-10% of the
shares, or at least to pay for their entitlements in the closed subscription,
through an employee shareholding fund (referred to as a "FARP"), which
represented certain past profits of the state enterprise set aside for this
purpose. According to Presidential decree, medium and large scale open-type
companies were obligated to offer at least 29% of their shares to the general
public by way of voucher auction, although in practice this decree was not
always strictly enforced.
According to the latest version of the State Privatization Program, called
"On the Fundamental Provisions of the State Privatisation Programme for State
and Municipal Enterprises in the Russian Federation after the 1 July, 1994,"
following the expiration with certain limited exceptions of validity of the
voucher on June 30, 1994, and with it voucher auctions, the remaining shares are
to be allocated to one of the remaining permitted privatization methods through,
for medium and large enterprises transformed into joint stock companies of the
open type, "investment tender," "commercial tender," "cash auction" or
"specialized auction for the sale of shares." An investment tender involves the
acquisition of a defined percentage of shares through a tender in which the
investor must submit a "sealed" proposal as to the amount of investment that the
investor is willing to make, subject to a minimum set out in the company's
investment program (which is part of its privatization plan). The person making
the highest proposal on the day bids are revealed is awarded the tender and has
the right to acquire the shares for payment of only a nominal value to the
appropriate property fund acting as seller. In addition, the winner must pay the
amount of the investment directly to the company. Although characterized as an
"investment," this amount may not be recoverable and does not afford the
investor any rights other than the right to acquire the shares at a nominal
value.
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<PAGE>
A commercial tender is a tender in which the winner of the tender is
required to fulfill certain conditions in relation to the privatized company.
The winner of the tender is the bidder whose proposal most fully satisfies the
requirements of the tender and who offers the highest price.
Regulations detailing the procedure for the sale of shares through an
auction (apart from voucher auction and specialized auction) have not, to date,
been adopted. Regulations governing the procedure of holding specialized
auctions were adopted by the State Property Management Committee on October 6,
1994. According to the Fundamental Provisions of the State Program of
Privatization of State and Municipal Enterprises in the Russian Federation after
July 1, 1994, specialized auctions for the sale of shares will be open offers in
which investors will participate by submitting an application specifying the
total sum to be paid and the number of shares to be acquired. All winners will
receive shares at the same price.
Reliable information concerning privatization of Russian enterprises is not
available. Such figures as are available should be treated with particular
caution inter alia since privatization of an enterprise is often an on-going
process involving a number of stages such as transformation into a legal entity,
closed subscription to workers, voucher auction, tenders and other types of
auctions described above extended over a considerable period of time. Different
sources, or even the same source, may use different bases for considering an
enterprise privatized for the purposes of statistics, or exclude particular
classifications of enterprises from their statistics. The following is a summary
of some of the available statistics:
The following tables indicate the rate of privatization by activity and
region during 1993 and 1994.
NUMBER OF ENTERPRISES PRIVATIZED BY ACTIVITY
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1, JULY 1,
1993 1994 1994
---------- ---------- -------
<S> <C> <C> <C>
Light industry................................................ 776 1,112 1,431
Food industry................................................. 1,588 2,972 3,208
Construction.................................................. 2,344 5,253 6,132
Construction materials........................................ 806 1,385 1,474
Agriculture................................................... 1,560 3,938 4,389
Automobile and repair......................................... 1,010 3,220 4,294
Retail trade.................................................. 18,803 30,638 33,511
Wholesale trade............................................... 573 1,339 1,727
Public catering............................................... 4,487 8,061 9,367
Consumer services............................................. 10,982 17,198 18,457
Unfinished construction sites................................. 651 1,503 1,776
Other......................................................... 4,715 12,195 18,030
Total....................................................... 48,295 88,814 103,796
</TABLE>
- ------------
Source: International Monetary Fund
NUMBER OF ENTERPRISES PRIVATIZED BY REGION
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1, JULY 1,
1993 1994 1994
---------- ---------- -------
<S> <C> <C> <C>
Northern...................................................... 1,598 3,374 3,928
Northwestern.................................................. 3,986 5,971 7,021
Central....................................................... 10,910 21,044 26,508
Volga-Vyatsk.................................................. 2,037 4,978 5,588
Central Black-Earth........................................... 3,847 5,485 5,781
Volga......................................................... 3,720 7,481 8,916
North Caucasus................................................ 5,686 11,158 12,100
Urals......................................................... 6,968 10,766 12,003
Western Siberia............................................... 4,341 7,947 9,590
Eastern Siberia............................................... 2,547 5,754 6,782
Far East...................................................... 2,339 4,307 4,900
Kaliningrad................................................... 316 549 679
Total....................................................... 48,295 88,814 103,796
</TABLE>
- ------------
Source: International Monetary Fund
B-2
<PAGE>
The following table provides information for voucher auctions concluded as
of June 24, 1994 in sectors which represent more than 3% of the total redeemed
shares.
<TABLE>
<CAPTION>
AVERAGE CAPITAL AVERAGE
CAPITALIZATION SOLD BLOCK OF % OF TOTAL
NUMBER OF (MILLION (MILLION SHARES SHARES
SECTOR COMPANIES RBS.) RBS.) (%) REDEEMED
- ------------------------------------------ --------- -------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Machinery and equipment................... 1,661 69 23,945 20.8 11.4
Metallurgy................................ 382 273 23,007 22.1 11.1
Chemicals................................. 1,281 72 18,337 20.0 10.5
Oil and gas exploration................... 22 3,945 13,427 15.5 9.1
Oil refining.............................. 58 1,575 9,438 10.3 8.9
Electricity............................... 65 1,807 14,223 12.1 8.1
Postal service and communications......... 49 129 1,377 21.8 5.8
Building.................................. 163 316 14,853 29.2 5.0
Transportation Machinery..................
Food industry............................. 899 21 4,086 21.8 4.7
Construction.............................. 2,041 17 7,755 22.3 3.2
Timber.................................... 841 27 5,049 22.1 3.0
</TABLE>
- ------------
Source: Kommersant Weekly, No. 25, 1994.
The following table provides information on the twenty-five largest
companies in Russia by market capitalization as of October 1994.
<TABLE>
<CAPTION>
SHARES SHARE TOTAL
COMPANY OUTSTANDING PRICE ($) CAPITALIZATION ($)
------------------------------------------------ -------------- --------- ------------------
<C> <S> <C> <C> <C>
1. Gazprom......................................... 23,673,512,900 .15 3,551,026,935
2. LUK-Oil Holding................................. 95,073,624 33.80 3,213,488,491
3. Unified Energy System........................... 139,989,946 20.27 2,837,596,205
4. Norilsk Nickel.................................. 125,999,916 13.77 1,735,018,843
5. Surgutneftegaz (Surgut Petroleum)............... 5,384,347,600 .23 1,238,399,948
6. Yuganskneftegaz (Yugansk Petroleum)............. 53,366,690 21.00 1,120,700,490
7. Rostelekom...................................... 186,750,080 4.75 887,062,880
8. Noyabrskneftegaz (Noyabrsk Petroleum)........... 78,545,000 9.40 738,323,000
9. LUK-Oil Kogalym................................. 14,649,934 46.30 678,291,944
10. Purneftegaz (Pur Petroleum)..................... 111,365,000 5.53 615,848,450
11. Megionneftegaz (Megion Petroleum)............... 132,209,120 3.80 502,394,656
12. Kondpetroleum................................... 50,509,000 8.90 449,530,100
13. Nizhnevartovskneftegaz (Nizhnevartovsk
Petroleum)...................................... 18,217,283 19.42 353,779,636
14. Tomskneft (Tomsk Oil)........................... 45,032,112 7.85 353,502,079
15. Komineft (Komi Oil)............................. 33,971,200 9.60 326,123,520
16. Mosenergo (Moscow Power)........................ 2,560,000,000 .10 256,000,000
17. LUK-Oil Langepas................................ 28,479,308 8.90 253,465,841
18. St. Petersburg Telephone........................ 15,550,000 14.90 231,695,000
19. Varyeganneftegaz (Varyegan Petroleum)........... 23,022,610 9.70 223,319,317
20. Sakhalinmorneftegaz (Sakhalin Sea Petroleum).... 81,241,175 2.18 177,105,762
21. KamAZ (Kama Autoworks).......................... 60,000,000 2.82 169,200,000
22. Chernogorneft (Chernogor Oil)................... 2,677,100 57.40 153,665,540
23. Krasnoyarsk Aluminum............................ 13,478,400 10.18 137,210,112
24. AvtoVAZ (Vaz Autoworks)......................... 21,416,643 5.86 125,501,528
25. Kirishi Oil Refinery............................ 35,180,190 3.35 117,853,637
</TABLE>
- ------------
Source: Finansovaya Gazeta, Issue No. 44, October 26, 1994.
Since the inception of the program, more than 100,000 enterprises have been
privatized, with approximately 15,000 of these being medium- and large-scale
enterprises. Most of the market value is concentrated in a very small number of
companies. As of October 1994, the ten largest companies in Russia had a total
market capitalization of approximately $16.5 billion. Certain key enterprises,
such as oil and gas, telecommunications and military enterprises, are either
excluded from privatization or privatized according to separate procedures set
forth in special legislation applicable to the industry or companies concerned.
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<PAGE>
SECONDARY SECURITIES MARKET TRADING
Immediately after the launch of the privatization program, a secondary
market for shares and vouchers emerged. There are at least twelve organized
exchanges and a number of small exchanges. At the beginning of 1994, the Russian
Ministry of Finance had issued licenses to 72 exchanges and of these 62 were in
operation. Several regional exchanges trade up to 200 stocks in small volumes.
Among the largest Russian stock exchanges are the Central Russian Universal
Exchange, the Moscow Central Stock Exchange, the Moscow International Stock
Exchange, and the Russian Commodities and Raw Materials Exchange (stock
department).
The following table sets forth basic information regarding Russian
securities market activity for the years 1991 through 1993:
<TABLE>
<CAPTION>
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
Number of exchanges (end of year)..................................... 182 238 180
Completed transactions (in thousands)................................. 106.3 195.7 329.6
Market volume (billions of rubles).................................... 69.9 346.8 1,593
Market Volume by Sector:
Consumer goods.................................................... 23.6 107.9 215.5
Industrial and technical production............................... 45.0 227.0 656.6
Securities........................................................ 1.2 6.0 480.0
Money resources................................................... 0.1 5.7 234.6
Other goods and services.......................................... 0.05 0.2 6.3
</TABLE>
- ------------
Source: The Russian Federation in Figures, 1993, Goskomstat Russia, Republic
Information-Publishing Center, Moscow (1994).
The following table provides a breakdown of capital markets activity in 1993
(in billions of rubles).
<TABLE>
<CAPTION>
FIRST
FIRST THREE FIRST SIX NINE
MONTHS OF MONTHS OF MONTHS OF ALL
1993 1993 1993 OF 1993
----------- --------- --------- -------
<S> <C> <C> <C> <C>
Total sales volume................................... 8.9 211.4 1,560.8 2,046.6
includes:
securities........................................... 4.6 32.3 141.3 595.1
of which:
stocks............................................. 0.1 1.3 15.7 37.3
government obligations............................. -- 3.3 31.7 283.1
certificates....................................... -- -- 0.2 0.4
bills of exchange.................................. -- -- 0.5 0.6
options............................................ -- 0.3 1.2 2.4
futures............................................ -- -- -- 0.2
privatization vouchers............................. 4.5 27.3 91.9 270.4
other.............................................. -- 0.1 0.1 0.7
monetary resources................................... 4.2 178.0 1,418.2 1,451.5
of which:
deposits........................................... 0.2 4.5 8.4 13.2
interbank loans.................................... 3.9 172.8 1,407.9 1,429.6
commercial loans................................... 0.1 0.7 1.9 2.5
currency (in conversion to rubles)................. 0.1 1.1 1.3 6.2
</TABLE>
- ------------
Source: The Russian Federation in Figures, 1993, Goskomstat Russia, Republic
Information-- Publishing Center, Moscow (1994).
B-4
<PAGE>
Government Regulation No. 78 authorizes the Ministry of Finance to establish
minimum listing criteria for Russian stock exchanges and investment
institutions. Article 5 of the program for the control of the activity of stock
exchanges, approved by Letter No. 5-1-06 of the Ministry of Finance on November
13, 1992, sets forth certain general criteria for listing, including
registration of the securities with the State and publication of certain
information about the securities. Beyond these conditions, exchanges are
permitted to establish their own listing requirements. For example, an issuer
may be authorized to list an issuance of securities on the Russian Exchange of
Goods and Raw Materials only if there are more than 250 investors, the issuance
is more than 50 million rubles, and the issuer earned a profit in its last
fiscal year of 10% or more.
Although evolving rapidly, even the largest of Russia's stock exchanges are
not well developed compared to Western stock exchanges. Listing procedures are
primitive and vary from one exchange to another. By the end of 1993, more than
40 stock and commodity exchanges were open for trading more than twice a week
and the total securities traded in 1993 amounted to Rbs. 736 billion, or about
.045% of gross national product. However, the actual volume of exchange-based
trading in Russia is low and active on-market trading generally occurs only in
the shares of a few private companies. Further, to the extent that secondary
market trading of equity securities occurs, it is generally done through
over-the-counter trading facilitated by a growing number of licensed brokers.
Shares are traded on the over-the-counter market primarily by the management of
enterprises, investment funds and short-term speculators, with foreign investors
becoming increasingly active. Average weekly trading volumes in the over-
the-counter market are estimated to be in excess of $35 million.
CUSTODY AND CLEARING SERVICES
Although Russian corporate law envisions joint stock companies issuing share
certificates, as a practical matter, share certificates are frequently not used
and equity shares generally are maintained in book-entry form only. Ownership of
equity shares is reflected by entries in a company's share register and extracts
from the register are normally issued to shareholders. Transfer of title takes
place only when appropriate changes are made in the register or when a transfer
is made on the books of a depository holding shares on behalf of an owner.
Russian companies with 1,000 or more shareholders are required by law to enter
into a contractual arrangement with a third party to maintain the company's
share register. These registrars perform services similar to those provided by a
transfer agent. It is estimated that share registration services are provided by
approximately 3,000 registrars. Entities that serve as registrars include
Russian commercial banks, brokerage firms, the issuer (if less than 1,000
shareholders), and wholly owned subsidiaries of the issuer.
Registrars, which are generally located near the company whose registers
they maintain, are located throughout Russia. While a Russian enterprise with
more than 1,000 shareholders is required by law to contract out the maintenance
of its shareholder register to an independent entity that meets certain
statutory criteria, in practice this regulation has not always been strictly
enforced. A company's share register generally is maintained by only one
registrar.
The President, the State Property Management Committee, the Commission on
Securities and Stock Exchanges under the President of the Russian Federation
(which recently has been replaced by the Federal Commission on Securities and
the Stock Market, having the status of a Federal Ministry) and the President
have issued detailed regulations and decrees applicable to registrars and the
share registration system, although registrars are not subject to active
government supervision. Under the applicable regulations, registrars are liable
for damages in the event they violate the terms of the agreement with the
issuer, commit mistakes in making entries in the register, or unlawfully refuse
to make entries. Furthermore, the regulations state that a mistake made by a
registrar with respect to a good-faith acquiror of shares shall always be
treated in favor of the good faith purchaser. The extent to which these
provisions as a practical matter would be enforceable against a share registrar
or third
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<PAGE>
party, however, remains unclear, especially given that the system for resolving
commercial disputes in Russia is still developing.
After purchasing shares, it is common for investors to obtain an extract of
the share register to provide evidence of their interest in a company, and to
conduct regular audits of these share registers (and obtain additional extracts)
to ensure that their interest continues to be appropriately recorded. Further,
management of a company often is able illegally to exert considerable influence
over the trading of the company's shares by their control or influence of the
share register. There is, therefore, a risk that the management of certain
enterprises may instruct the registrar not to record the names of investors into
the company's register. This could affect the ability of foreign investors, such
as the Fund, to make investments in companies that they believe present
appropriate growth prospects.
A number of initiatives are underway to support the development of the
Russian securities market. In addition to creating a computer-linked,
over-the-counter trading system, several groups are attempting to establish
central clearing and settlement systems. These central settlement and clearing
systems supplement rather than replace the current share registration system.
DEBT SECURITIES MARKETS
Although securities regulations in Russia permit a joint stock company to
issue publicly traded debt securities, few Russian corporations have issued
conventional debt securities in the public markets to date. This is attributed
mainly to fears of inflation, the lack of a reliable indicator of government
risk and capacity constraints on emerging equity-focused public exchanges.
The near-term outlook for Russian debt and issuers in the international
capital markets is bleak. Russia has no sovereign debt rating and loans of the
Vnesheconombank trade at over a 50% discount to face value in the international
markets. Moreover, Russian corporate borrowers currently have limited access to
foreign bank lenders. This is due in part to the fact that the regulatory regime
under which foreign banks operate in Russia includes restrictions on the
establishment of Russian banking subsidiaries of foreign entities.
In 1993, Russia issued $7.8 billion of dollar-denominated bonds through the
Ministry of Finance. The bonds were issued in five series, with varying
maturities. The Russian Ministry of Finance also currently has approximately
$390 million of three- and six-month Treasury bills outstanding. Although a
small sum, the revenue from the Treasury bills is psychologically significant in
the prevailing conditions of a rudimentary capital market and an unstable
economy.
CORPORATE AND SECURITIES MARKET REGULATION
Regulation of Joint Stock Companies. Among the first legislative efforts to
address, within the confines of the existing Civil Code, the movement toward a
market economy and the subsequent development of private enterprise was the Law
on Enterprises and Entrepreneurial Activities, adopted by the Supreme Soviet on
December 25, 1990, and amended on June 24, 1992, July 1, and July 20, 1993, and
December 24, 1993. This law is, however, with the exception of two articles
concerning registration, no longer in effect and has been replaced by Part I of
the Civil Code.
The 1990 Law on Enterprises and Entrepreneurial Activities was accompanied
by the Regulation on Joint Stock Companies approved by Regulation No. 601 of the
Russian Council of Ministers on December 25, 1990. Although largely superseded,
many parts of Regulation No. 601 remain in force, insofar as they are not
inconsistent with Part I of the new Civil Code, pending adoption and the coming
into force of, inter alia, a new Law "On joint stock companies" which is
envisaged by Part I, and which is scheduled for adoption in the course of 1995.
Regulation No. 601 set forth the basic rules for the
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<PAGE>
establishment and management of joint stock companies. Under Regulation 601, the
share capital of a company may consist of ordinary and privileged shares.
According to Part I of the Civil Code, capital contributions may be made either
in cash or in kind. The value of contributions in kind is assessed by a joint
decision of shareholders, and no concept of authorized but unissued shares
exists. At least 50% of the share capital is required to be paid up within 30
days after registration of a company, the other half due within one year of
registration.
Currently, the minimum share capital of an enterprise with foreign
investments, joint stock companies and state and municipal enterprises must be
an amount not less than 1,000 times (and for other enterprises 100 times) the
minimum monthly wage set by the Russian Federation, which presently is Rbs.
34,400, due to be increased to 43,300 rubles on May 1, 1995. This minimum
monthly wage is typically reviewed every three to six months depending on the
level of inflation.
A company is entitled to issue only registered shares. These may be one of
two types, ordinary or preferred shares; all shares of the same category must
have the same rights. Preferred shares carry a fixed dividend. All outstanding
shares have the right to dividends except for those shares acquired less than 30
days before the declaration of the dividend payment. Dividends are paid out of
the net profits of a company after taxes and payments into reserve funds.
As the owners of a joint stock company, shareholders as a group are regarded
as the company's highest governing body. Joint stock companies are required to
hold annual shareholder meetings and shareholders holding more than 10% of
shares may require the calling of extraordinary meetings on notice at any time.
It is usual (although, since introduction of Part I of the new Civil Code, no
longer obligatory in all cases) for companies to have a two tier management
structure with a board of directors and an executive governing body, the
relative competence of which are defined in the company's charter. In the
absence of specific guidance from the shareholders, such as at an annual
meeting, a company's board of directors, the governing body, and also the
general director (or president) are given the responsibility for governing the
company's affairs. Certain actions by the joint stock company, such as a change
in the charter or reorganization or liquidation of the company, must be approved
by three quarters of the total votes cast by the shareholders present at the
meeting. All other matters submitted for shareholder approval need only be
supported by a simple majority of votes of those present at the meeting. Special
rules in this respect apply to privatized open joint stock companies according
to the State Privatization Program for 1994 approved by Presidential Decree on
December 22, 1993. According to this certain additional actions including
approval of transactions over certain limits, must be approved by a three
quarters majority of shareholders.
Regulation of joint stock companies suffers from the speed and volume at
which legislation has been passed, and the diversity of authorities regulating
both companies and the securities market in general. This situation is
aggravated by the lack of a legislative habit of repealing legislation which is
outdated or no longer applied. As a result, legislation is frequently
inconsistent, contradictory or not in practice applied. On the one hand this
means that authorities may in the future seek to apply regulations which are
currently regarded as not being in effect, and different authorities may apply
different regulations or interpretations of regulations. On the other hand
provisions that are designed to protect investors may in practice be widely
ignored. For example, although rudimentary concepts of directors' duties exist,
for example in the standard form of charter required for certain privatized
companies, the Law on Insolvency (Bankruptcy) of Enterprises, and Part I of the
Civil Code, the provisions are widely ignored by directors in practice. Also,
while Regulation No. 601 and Part I of the Civil Code require open companies,
and in some cases closed companies, to publish their annual accounts and to send
copies to shareholders, this is rarely done. In addition, development of a
system of corporate governance and investor protection is still very much in the
early stages in Russia. For example, although the Ministry of Finance's existing
regulations require that investors receive adequate information about their
investments and hold issuers responsible for the content of their prospectuses
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and advertisements, in practice few facilities exist to investigate alleged
malpractice or to enforce sanctions imposed for violation of the regulations.
Securities Laws. Russian securities markets are primarily subject to
regulation pursuant to Regulation On the Issue and Circulation of Securities and
on Stock Exchanges in Russia approved by Government Regulation No. 78, enacted
on December 28, 1991. The Regulation describes the different activities of
"investment institutions" (brokers, investment consultants, investment
companies, investment funds); sets forth the requirement that investment
institutions obtain a license to act in that capacity; and provides other basic
rules relating to the securities markets. The Regulation also governs securities
issuances, both for private placements (defined as up to 100 investors and over
50 million rubles), and public offerings, which require publication and
registration of a prospectus. The Regulation also contains rules on circulation
of securities and basic requirements for stock exchanges. Among other things,
the Regulation requires notification to the Ministry of Finance if a person or
group of persons acquires more than 15% of the shares of an issuer. Further, the
prior consent of the State Anti-Monopoly Committee must be obtained if a person
or group acquires 35% or more of the shares that provide for more than 50% of
voting authority over that issuer. With the creation of the new Federal
Commission on Securities and the Stock Market (see "Regulatory Agencies" below),
and the potential adoption of a new law regulating the securities market by the
State Duma, a new procedure for licensing professional activities in the
securities market and for qualification of all financial instruments is expected
to be issued in the near future.
Apart from Regulation No. 78, a large number of Instructions and Letters
issued by the Ministry of Finance, the Central Bank, the State Property
Management Committee, the State Anti-Monopoly Committee and other bodies
regulate in some way the securities markets. Recently, more comprehensive drafts
of securities legislation have been prepared and are being circulated to
interested parties, although the time table for enactment is unclear.
Regulation of Russian Investment Funds. Regulation No. 78 also sets forth
the regulatory requirements regarding Russian investment funds. Like all
"investment institutions," investment funds must be licensed by the Ministry of
Finance and there are detailed regulations specifying the licensing procedure.
Among other requirements, managers and operating employees of an investment fund
must possess qualification certificates issued by the Ministry of Finance. While
Regulation No. 78 appears to be intended to address investment funds organized
in Russia, given the undeveloped state of securities regulation in Russia, it is
possible that Regulation No. 78 may be held to apply to the Fund. The Fund will
take certain steps in an attempt to avoid requiring that the Fund be licensed in
Russia, including not offering or selling any of the Fund's Shares in Russia.
Regulatory Agencies. There are a number of regulatory agencies that in some
way are involved in the regulation of joint stock companies and securities
markets.
Federal Commission on Securities and Stock Markets. Decree No. 2063 of
the President of the Russian Federation on measures for state regulation of the
securities market in the Russian Federation of November 4, 1994 adopted the
Regulations on the Federal Commission on the Securities and Stock Exchanges
under the Government of the Russian Federation. This Federal Commission, which
was formed within the government of the Russian Federation, and which was
granted the status of a Ministry, replaces the former Russian Commission on
Securities and Stock Exchanges, had been located within the office of the
President of the Russian Federation. The Federal Commission consists of a
Chairman and ten commission members from various other Russian agencies. In
addition, a representative of each chamber of the Federal Assembly will serve as
members on the Federal Commission for coordination purposes.
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Decree No. 2063 directs the Federal Commission to act in the following
areas:
. develop the main principles regarding the evolvement of the securities
markets and coordinate with the activities of state authorities on the
regulation of the securities markets;
. adopt standards governing prospectus disclosure requirements;
. carry out the licensing of the various investment professionals;
. carry out the state registration of stock exchanges and their
associations;
. determine standards for the activity of investment funds and private
pension funds; and
. issuing general licenses to licensing bodies, such as self-regulating
organizations of investment institutions.
Decree 2063 also recommends that regional securities and stock market
commissions be formed to implement the Federal Commission's regulations and to
adopt regulations governing the local markets. The Decree states that
regulations of the regional commissions will have to be confirmed by the
chairman of the Federal Commission. The Federal Commission also will appoint and
remove from office the chairman of the regional commissions. In addition, the
Federal Commission will carry out the management of the activities of the
regional commissions.
Ministry of Finance. Regulations of the Ministry of Finance adopted by
Resolution No. 984 of the Government of the Russian Federation of August 19,
1994 and Regulations of the Ministry of Finance provide the Russian Ministry of
Finance with authority over the securities markets. Article 7 of these
Regulations provides that in the area of securities markets the Ministry of
Finance carries out the following activities:
. developing improvements in the functioning of financial markets;
. implementing the regulation of the securities markets;
. issuing licenses for investment institutions and stock exchanges in
accordance with applicable legislation;
. overseeing the registration of securities issuances;
. maintaining the Unified State Register of Securities Registered in
Russia and the Unified Register of Investment Funds;
. issuing licenses for the manufacture of securities certificates; and
. monitoring compliance rules for the production, storage and accounting
of such certificates.
Under Presidential Decree No. 2063, some of these responsibilities are to be
taken over by the Federal Commission.
The State Property Management Committee. The State Property Management
Committee of the Russian Federation was created on the basis of the Regulations
of the State Committee of the Russian Federation for the management of state
property, adopted by the Decree No. 35 of the Council of Ministers of the
Russian Federation of January 21, 1991. Its functions are set forth in the law
"On
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Privatization of State and Municipal Enterprises in the RFSFR" of July 3, 1991.
The State Property Management Committee, inter alia:
. drafts and monitors implementation of state privatization programs;
. makes decisions on the reorganization of State enterprises and their
privatization and transfers them to the Federal Property Fund;
. creates funds and holding companies to hold shares owned by the State;
. issues regulations regarding the privatization process and interprets
these and state privatization programs; and
. monitors the privatization process through its territorial agencies.
Federal Property Fund. This body acts as the holder of and ultimately
the seller of enterprises being privatized. Its functions include exercising the
state's rights as shareholder at shareholders meetings and collecting dividends.
Both the Federal Property Fund and the State Property Management Committee exist
not only at the federal level but also act through territorial agencies at
regional and local levels. These agencies have authority defined separately in
the Privatization Law and in the statutes governing the activity of each
committee and fund.
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APPENDIX C
TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1. Each holder of shares (a "Shareholder") in Templeton Russia Fund, Inc.
(the "Fund") whose Fund shares are registered in his or her own name will
automatically be a participant ("Participant") in the Dividend Reinvestment Plan
(the "Plan"), unless any such Shareholder specifically elects to receive all
dividends and capital gains in cash, paid by check, mailed directly to the
Shareholder. A Shareholder whose shares are registered in the name of a
broker-dealer or other nominee (the "Nominee") will be a Participant if (a) such
a service is provided by the Nominee and (b) the Nominee makes an election on
behalf of the Shareholder to participate in the Plan. Those Underwriters (as
defined in the Fund's Prospectus dated , 1995) which have the capacity to
allow participation intend to make such an election on behalf of Shareholders
whose shares are registered in their names, as Nominee, unless a Shareholder
specifically instructs his or her Nominee to pay dividends and capital gains in
cash. Chemical Mellon Shareholder Services, Inc. (the "Plan Agent") will act as
agent for Participants and will open an account under the Plan for each
Participant in the same name as such Participant's shares are registered on the
books and records of the transfer agent for the shares.
2. Whenever the Fund declares a capital gains distribution or an income
dividend payable in shares or cash, Participants will receive such distribution
or dividend in the manner described in paragraph 3 below as determined on the
date such distribution or dividend becomes payable.
3. Whenever the market price of the Fund's shares is equal to or exceeds the
net asset value price per share at the time shares are valued for the purpose of
determining the number of shares equivalent to the cash dividend or capital
gains distribution, Participants will be issued shares valued at the greater of
(i) net asset value per share or (ii) 95% of the then-current market price.
Participants will receive any such distribution or dividend entirely in shares
and the Plan Agent shall automatically receive such shares, including fractions,
for all Participants' accounts. If the net asset value per share of the Fund's
shares at the time of valuation exceeds the market price of the Fund's shares at
such time, or if the Fund should declare a dividend or capital gains
distribution payable only in cash, the Plan Agent will, as purchasing agent for
the Participants, buy shares in the open market, on the New York Stock Exchange
(the "Exchange") or elsewhere, for each Participant's account. The valuation
date will be the payable date for such distribution or dividend. If, before the
Plan Agent has completed its purchases, the market price exceeds the net asset
value per share, the average per share purchase price paid by the Plan Agent may
exceed the net asset value of the Fund's shares, resulting in the acquisition of
fewer shares than if the dividend or capital gains distribution had been paid in
shares issued by the Fund at net asset value per share. The Plan Agent will
apply all cash received as a dividend or capital gains distribution to purchase
shares on the open market as soon as practicable after the payment date of such
dividend or capital gains distribution, but in no event later than 30 days after
such date, except where necessary to comply with applicable provisions of the
federal securities laws.
4. For all purposes of the Plan: (a) the market price of the Fund's shares
on a particular date shall be the last sale price on the Exchange on that date
or, if there is no sale on the Exchange on that date, then the mean between the
closing bid and asked quotations for such shares on the Exchange on such date
and (b) net asset value per share on a particular date shall be as determined by
or on behalf of the Fund.
5. The open-market purchases provided for above may be made on any
securities exchange where the shares of the Fund are traded, in the
over-the-counter market or in negotiated transactions, and may be on such terms
as to price, delivery and otherwise as the Plan Agent shall determine. Funds
held by the Plan Agent uninvested will not bear interest, and it is understood
that, in any event, the Plan Agent shall have no liability in connection with
any inability to purchase shares within 30 days after the
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payment date of a dividend or capital gains distribution as herein provided, or
with the timing of any purchases effected. The Plan Agent shall have no
responsibility as to the value of the shares of the Fund acquired for any
Participant's account.
6. The Plan Agent will hold shares acquired pursuant to the Plan in
non-certificated form in the Plan Agent's name or that of its Nominee. The Plan
Agent will forward to each Participant any proxy solicitation material and will
vote any shares so held for each Participant only in accordance with the proxy
returned by any such Participant to the Fund. Upon any Participant's written
request, the Plan Agent will deliver to her or him, without charge, a
certificate or certificates for the full shares.
7. The Plan Agent will confirm to each Participant acquisitions made for its
account as soon as practicable but not later than 60 days after the date
thereof. Although a Participant may from time to time have an undivided
fractional interest (computed to four decimal places) in a share of the Fund, no
certificates for a fractional share will be issued. However, dividends and
distributions on fractional shares will be credited to the Participant's
account.
8. Any stock dividends or split shares distributed by the Fund on shares
held by the Plan Agent for any Participant will be credited to such
Participant's account. In the event that the Fund makes available to
Participants transferrable rights to purchase additional shares of other
securities, the Plan Agent will sell such rights and apply the proceeds of the
sale to the purchase of additional shares of the Fund for the account of
Participants.
9. The Plan Agent's service fee for handling capital gains distributions or
income dividends will be paid by the Fund. Participants will be charged a pro
rata share of brokerage commissions on all open market purchases.
10. Any Participant may withdraw shares from such Participant's account or
terminate such Participant's account under the Plan by notifying the Plan Agent
in writing. Such withdrawal or termination will be effective immediately if
notice is received by the Plan Agent not less than 10 days prior to any dividend
or distribution record date; otherwise such withdrawal or termination will be
effective, with respect to any subsequent dividend or distribution, on the first
trading day after the dividends paid for such record date have been credited to
the Participant's account. The Plan may be terminated by the Plan Agent or the
Fund upon notice in writing mailed to each Participant at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any withdrawal or termination, the Plan Agent will cause to be delivered to
each Participant a certificate or certificates for the appropriate number of
full shares and a cash adjustment for any fractional share (valued at the market
value of the shares at the time of withdrawal or termination); provided,
however, that any Participant may elect by notice to the Plan Agent in writing
in advance of such termination to have the Plan Agent sell part or all of the
shares in question and remit the proceeds to such Participant, net of any
brokerage commissions. A $5.00 fee will be charged by the Plan Agent upon any
cash withdrawal or termination, and the Plan Agent is authorized to sell a
sufficient number of the Participant's shares to cover such fee and any
brokerage commission on such sale.
11. These terms and conditions may be amended or supplemented by the Plan
Agent or the Fund at any time or times, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, with respect to any such Participant, prior to the effective
date thereof, the Plan Agent receives written notice of the termination of that
Participant's account under the Plan. Any such amendment may include an
appointment by the Plan Agent in its place and stead of a successor plan agent
under these terms and conditions, with full power and authority to perform all
or any of the acts to be performed by the Plan Agent under these terms and
conditions. Upon any such appointment of a plan agent for the purpose of
receiving dividends and distributions, the Fund will be authorized to pay to
such successor plan agent,
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for Participants' accounts, all dividends and distributions payable on the
shares held in each Participant's name or under the Plan for retention or
application by such successor plan agent as provided in these terms and
conditions.
12. The Plan Agent shall at all times act in good faith and agree to use its
best efforts within reasonable limits to ensure the accuracy of all services
performed under this Plan and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by its or its employees' negligence, bad faith or willful
misconduct.
13. The Participant shall have no right to draw checks or drafts against
such Participant's account or to give instructions to the Plan Agent in respect
of any shares or cash held therein except as expressly provided herein.
14. The Participant agrees to notify the Plan Agent promptly in writing of
any change of address. Notices to the Participant may be given by the Plan Agent
by letter addressed to the Participant as shown on the records of the Plan
Agent.
15. This Plan and the account established hereunder for the Participant
shall be governed by and construed in accordance with the laws of the State of
New York and the rules and regulations of the Securities and Exchange
Commission, as they may be changed or amended from time to time.
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APPENDIX D
DESCRIPTION OF FUTURES CONTRACTS, OPTIONS ON SECURITIES
AND INDICES AND FOREIGN CURRENCY HEDGING TRANSACTIONS
Futures Contracts. The Fund may purchase and sell financial futures
contracts. Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
The Fund may also buy and sell index futures contracts with respect to any
stock index traded on a recognized stock exchange or board of trade. An index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.
At the time the Fund purchases a futures contract, an amount of cash, U.S.
Government securities, or other highly liquid debt securities equal to the
market value of the futures contract will be deposited in a segregated account
with the Fund's Custodian. When writing a futures contract, the Fund will
maintain with its Custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's Custodian).
Options on Securities or Indices. The Fund may write (i.e., sell) covered
put and call options and purchase put and call options on securities or
securities indices that are traded on United States and foreign exchanges or in
the over-the-counter markets.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a securities index gives the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option.
The Fund may write a call or put option only if the option is "covered." A
call option on a security written by the Fund is "covered" if the Fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash or high grade U.S. Government
securities in a segregated account with its Custodian. A put option on a
security written by the Fund is "covered" if the Fund maintains cash or
fixed-income securities with a value equal to the exercise price in a segregated
account with its Custodian, or else holds a put on the same
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security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written.
The Fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the Investment Manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the Fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the Fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The Fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rule of the exchange on which the
option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the Fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the Fund's investments. By writing a
put option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The Fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the Fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
accuracy of the correlation between the changes in value of the underlying
security or index and the changes in value of the Fund's security holdings being
hedged.
The Fund may purchase call options on individual securities to hedge against
an increase in the price of securities that the Fund anticipates purchasing in
the future. Similarly, the Fund may purchase call options on a securities index
to attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options,
the Fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.
No assurance can be given that a liquid market will exist when the Fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of either
buyers or sellers, or the options exchange could suspend trading after the price
has risen or fallen more than the maximum specified by the exchange. Although
the Fund may be able to offset to some extent any adverse effects of being
unable to liquidate an option position, the Fund may experience losses in some
cases as a result of such inability.
Foreign Currency Hedging Transactions. In order to hedge against foreign
currency exchange rate risks, the Fund may enter into forward foreign currency
exchange contracts and foreign currency futures contracts, as well as purchase
put or call options on foreign currencies, as described below. The Fund may also
conduct its foreign currency exchange transactions on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
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The Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. 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. In addition, for example, when the Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when the Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging." Because in connection with the Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, the Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, the Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. 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 engaged in such contracts.
The Fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. 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.
The Fund may enter into exchange-traded contracts for the purchase or sale
for future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of securities
that the Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the Fund's Investment
Manager to forecast currency exchange rate movements correctly. Should exchange
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of foreign currency futures or may realize losses.
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE INVESTMENT MANAGER, OR ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE SUPPLEMENTED OR AMENDED ACCORDINGLY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
-------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.................... 3
FUND EXPENSES......................... 11
THE FUND.............................. 12
USE OF PROCEEDS....................... 12
INVESTMENT RATIONALE.................. 12
INVESTMENT OBJECTIVE AND POLICIES..... 15
RISK FACTORS AND SPECIAL
CONSIDERATIONS........................ 19
ADDITIONAL INVESTMENT
PRACTICES............................ 29
INVESTMENT RESTRICTIONS............... 32
MANAGEMENT OF THE FUND................ 32
DIRECTORS AND OFFICERS................ 36
PORTFOLIO TRANSACTIONS AND
BROKERAGE............................. 40
NET ASSET VALUE....................... 41
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND
REINVESTMENT PLAN..................... 41
TAXATION.............................. 43
COMMON STOCK.......................... 49
UNDERWRITING.......................... 51
CERTAIN INVESTOR SUITABILITY
STANDARDS............................. 53
CUSTODIAN AND TRANSFER AND DIVIDEND
PAYING AGENT.......................... 53
EXPERTS............................... 53
LEGAL MATTERS......................... 53
ADDITIONAL INFORMATION................ 53
REPORT OF INDEPENDENT CERTIFIEDNOMURA
SECURITIES INTERNATIONAL, INC.
PUBLIC ACCOUNTANTS................... 54
STATEMENT OF ASSETS AND LIABILITIES... 55
APPENDIX A............................ A-1
APPENDIX B............................ B-1
APPENDIX C............................ C-1
APPENDIX D............................ D-1
UNTIL , 1995 (90 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
TEMPLETON
RUSSIA
FUND, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART B
NOT APPLICABLE
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(1) Financial Statements
Contained in Part A:
--Report of Independent Accountants
--Statement of Assets and Liabilities
Contained in Part B:
--Not Applicable
Contained in Part C:
--None
(2) Exhibits
(a) --Articles of Incorporation*
(b) --Amended and Restated Bylaws
(c) --Not Applicable
(d) --Not Applicable
(e) --Dividend Reinvestment Plan
(f) --Not Applicable
(g) --Form of Investment Management Agreement
(h)(i) --Form of Purchase Agreement
(h)(ii) --Form of Standard Dealer Agreement
(i) --Not Applicable
(j) --Form of Custodian Agreement
(k)(i) --Form of Agreement For Stock Transfer Services
(k)(ii) --Form of Business Management Agreement
(k)(iii) --Form of Sub-Administration Agreement
(l) --Opinion and Consent of Dechert Price & Rhoads**
(m) --Not Applicable
(n) --Consent of Independent Accountants**
(o) --Not Applicable
(p) --Form of Investment Letter
(q) --Not Applicable
(r)(i) --Powers of Attorney*
(r)(ii) --Assistant Secretary's Certificate Pursuant to Rule
483(b)*
-------------------
* Previously filed.
** To be filed by amendment.
C-1
<PAGE>
ITEM 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
ITEM 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
SEC Registration fees $ *
NASD fees and fees and expenses of qualification
under state securities laws (including fees of counsel) *
New York Stock Exchange listing fee *
Printing (other than stock certificates) *
Engraving and printing stock certificates *
Legal fees and expenses *
Underwriters' expense allowance *
Miscellaneous *
-------
Total
----------------
* To be completed by amendment
ITEM 27. Persons Controlled by or under Common Control with Registrant
Upon conclusion of the initial public offering of the Registrant's
shares of Common Stock, it is anticipated that no person will control or be
controlled by or under common control with the Registrant.
ITEM 28. Number of Holders of Securities
Common Stock, par value $.01 per share, one record holder as of the
effective date of this Registration Statement.
ITEM 29. Indemnification
Section 2-418 of the General Corporation Law of the State of Maryland,
Article TENTH of the Fund's Articles of Incorporatin, Article V of the Fund's
Bylaws, the Investment Management Agreement filed as Exhibit 2(g), and the
Purchase Agreement filed as Exhibit 2(h)(i) provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Fund of expenses incurred or paid by a director, officer or controlling
person of the Fund in the successful defense of any action, suit or
proceeding) is asserted by such a director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 30. Business and Other Connections of the Investment Manager
Information as to the directors and officers of the Investment Manager,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the directors and officers
of the Investment Manager in the last two years, is included in its
application for registration as in investment adviser on Form ADV (File No.
801-46997) filed under the Investment Advisers Act of 1940 (the "Advisers
Act") and is incorporated herein by reference thereto.
C-2
<PAGE>
ITEM 31. 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 and the rules promulgated
thereunder are maintained at the offices of the (a) Registrant, (b) Templeton
Global Investors, Inc., (c) Registrant's administrator, (d) its custodians
and (e) its transfer agent. The address of each is as follows:
(a) Templeton Russia Fund, Inc.
700 Central Avenue
St. Petersburg, Florida 33701
(b) Templeton Global Investors, Inc.
500 East Broward Boulevard
Ft. Lauderdale, Florida 33394
(c) Princeton Administrators, L.P.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(d) The Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
New York, New York 10036
(e) Chemical Mellon Shareholder Services, Inc.
P.O. Box 750
Pittsburgh, PA 15230
ITEM 32. Management Services
None.
ITEM 33. Undertakings
(1) Registrant undertakes to suspend offering of the Common Stock
covered hereby until it amends its Prospectus contained herein if (i)
subsequent to the effective date of this Registration Statement, its net
asset value declines more than 10 percent from its net asset value as of the
effective date of this Registration Statement, or (ii) its net asset value
increases to an amount greater than its net proceeds as stated in the
Prospectus contained herein.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) Registrant undertakes that:
(a) For the purpose of determining any liability under the Act,
the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(6) Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, Registrant has duly caused this
amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, D.C. on the
24th day of April, 1995.
TEMPLETON RUSSIA FUND, INC.
By: /s/ J. Mark Mobius
------------------------------
J. Mark Mobius*
President
* By: /s/ William J. Kotapish
----------------------------
William J. Kotapish
as attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ J. Mark Mobius President (Principal Executive April 24, 1995
- -------------------------
J. Mark Mobius* Officer)
/s/ James R. Baio Treasurer (Principal Financial April 24, 1995
- -------------------------
James R. Baio* and Accounting Officer)
Director April 24, 1995
- -------------------------
Charles B. Johnson and Vice President
/s/ Harmon E. Burns Director April 24, 1995
- -------------------------
Harmon E. Burns*
/s/ Martin L. Flanagan Director April 24, 1995
- -------------------------
Martin L. Flanagan*
/s/ Hasso-G von Diergardt- Director April 24, 1995
- --------------------------
Naglo
- -----
Hasso-G von Diergardt-
Naglo*
/s/ F. Bruce Clarke Director April 24, 1995
- -------------------------
F. Bruce Clarke*
<PAGE>
/s/ Andrew H. Hines, Jr. Director April 24, 1995
- -------------------------
Andrew H. Hines, Jr.*
/s/ Betty P. Krahmer Director April 24, 1995
- -------------------------
Betty P. Krahmer*
/s/ Fred R. Millsaps Director April 24, 1995
- -------------------------
Fred R. Millsaps*
/s/ John G. Bennett, Jr. Director April 24, 1995
- -------------------------
John G. Bennett, Jr.*
/s/ Harris J. Ashton Director April 24, 1995
- -------------------------
Harris J. Ashton*
/s/ S. Joseph Fortunato Director April 24, 1995
- -------------------------
S. Joseph Fortunato*
/s/ Gordon S. Macklin Director April 24, 1995
- -------------------------
Gordon S. Macklin*
/s/ Nicholas F. Brady Director April 24, 1995
- -------------------------
Nicholas F. Brady*
* By: /s/ William J. Kotapish
----------------------------
William J. Kotapish
as attorney-in-fact**
** Powers of Attorney previously filed with Pre-Effective Amendment No. 2 to
the Registration Statement, filed on March 6, 1995.
<PAGE>
EXHIBIT LIST
------------
Exhibit Number Name of Exhibit
-------------- ---------------
(b) Amended and Restated Bylaws
(e) Dividend Reinvestment Plan
(g) Form of Investment Management Agreement
(h)(i) Form of Purchase Agreement
(h)(ii) Form of Standard Dealer Agreement
(j) Form of Custodian Agreement
(k)(i) Form of Agreement for Stock Transfer
Services
(k)(ii) Form of Business Management Agreement
(k)(iii) Form of Sub-Administration Agreement
(p) Form of Investment Letter
Exhibit 99(b)
BYLAWS
------
-of-
TEMPLETON RUSSIA FUND, INC.
---------------------------
September 30, 1994
(AMENDED AND RESTATED AS OF APRIL 25, 1995)
ARTICLE I
---------
NAME OF COMPANY, LOCATION OF OFFICES AND SEAL.
---------------------------------------------
Section 1. Name. The name of the Company is Templeton Russia
--------- ----
Fund, Inc.
Section 2. Principal Offices. The principal office of the
--------- -----------------
Company in the State of Maryland shall be located in Baltimore, Maryland.
The Company may, in addition, establish and maintain such other offices and
places of business within or outside the State of Maryland as the Board of
Directors may from time to time determine.
Section 3. Seal. The corporate seal of the Company shall be
--------- ----
circular in form and shall bear the name of the Company, the year of its
incorporation and the words "Corporate Seal, Maryland." The form of the
seal shall be subject to alteration by the Board of Directors and the seal
may be used by causing it or a facsimile to be impressed or affixed or
printed or otherwise reproduced. Any officer or Director of the Company
shall have authority to affix the corporate seal of the Corporation to any
document requiring the same.
<PAGE>
ARTICLE II
----------
STOCKHOLDERS
------------
Section 1. Place of Meetings. All meetings of the Stockholders
--------- -----------------
shall be held at such place within the United States, whether within or
outside the State of Maryland as the Board of Directors shall determine,
which shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meetings. The annual meeting of the
--------- ---------------
Stockholders of the Company shall be held on a date between July 15th and
August 15th of every year, as fixed from time to time by the Board of
Directors, at which time the Stockholders shall elect a Board of Directors
by a plurality vote, and transact such other business as may properly come
before the meeting. Any business of the Company may be transacted at the
annual meeting without being specially designated in the notice except as
otherwise provided by statute, by the Articles of Incorporation or by these
Bylaws.
Section 3. Special Meetings. Special meetings of the
--------- ----------------
Stockholders for any purpose or purposes, unless otherwise prescribed by
statute or by the Articles of Incorporation, may be called by resolution of
the Board of Directors or by the President, and shall be called by the
President or Secretary at the request in writing of a majority of the Board
of Directors or
- 2 -
<PAGE>
at the request in writing by Stockholders owning 10% in amount of the
entire capital stock of the Company issued and outstanding at the time of
the call, provided that such request shall state the purpose of such
meeting and the matters proposed to be acted on. No special meeting shall
be called upon the request of Stockholders to consider any matter which is
substantially the same as a matter voted upon at any special meeting of the
Stockholders held during the preceding 12 months, unless requested by the
holders of a majority of all shares entitled to be voted at such meeting.
Section 4. Notice. Written notice of every meeting of
--------- ------
Stockholders, stating the purpose or purposes for which the meeting is
called, the time when and the place where it is to be held, shall be
served, either personally or by mail, not less than 10 nor more than 90
days before the meeting, upon each Stockholder as of the record date fixed
for the meeting and who is entitled to vote at such meeting. If mailed (1)
such notice shall be directed to a Stockholder at his address as it shall
appear on the books of the Company (unless he shall have filed with the
Transfer Agent of the Company a written request that notices intended for
him be mailed to some other address, in which case it shall be mailed to
the address designated in such request) and (2) such notice shall be deemed
to have been given as of the date when it is deposited in the United States
mail with first class postage thereon prepaid. Irregularities in the
- 3 -
<PAGE>
notice or in the giving thereof, as well as the accidental omission to give
notice of any meeting to, or the non-receipt of any such notice by, any of
the Stockholders shall not invalidate any action otherwise properly taken
by or at any such meeting. Notice of any Stockholders' meeting need not be
given to any Stockholder who shall sign a written waiver of such notice
either before or after the time of such meeting, which waiver shall be
filed with the records of such meeting, or to any Stockholder who is
present at such meeting in person or by proxy.
Section 5. Quorum, Adjournment of Meetings. The presence at any
---------- --------------------------------
Stockholders' meeting, in person or by proxy, of Stockholders entitled to
cast a majority of the votes entitled to be cast shall be necessary and
sufficient to constitute a quorum for the transaction of business. The
holders of a majority of shares entitled to vote at the meeting and present
in person or by proxy, whether or not sufficient to constitute a quorum,
or, any officer present entitled to preside or act as Secretary of such
meeting may adjourn the meeting without determining the date of the new
meeting or from time to time without further notice to a date not more than
120 days after the original record date. Any business that might have been
transacted at the meeting originally called may be transacted at such
adjourned meeting at which a quorum is present.
Section 6. Vote of the Meeting. When a quorum is present or
--------- -------------------
represented at any meeting, the vote of the holders of
- 4 -
<PAGE>
a majority of the stock entitled to vote thereat present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provisions of applicable
statutes, of the Articles of Incorporation, or of these Bylaws, a different
vote is required, in which case such express provisions shall govern and
control the decision of such question.
Section 7. Voting Rights of Stockholders. Each Stockholder of
--------- -----------------------------
record having the right to vote shall be entitled at every meeting of the
Stockholders of the Company to one vote for each share of stock having
voting power standing in the name of such Stockholder on the books of the
Company on the record date fixed in accordance with Section 5 of Article
VII of these Bylaws, with pro-rata voting rights for any fractional shares,
and such votes may be cast either in person or by written proxy.
Section 8. Proxies. Every proxy must be executed in writing by
--------- -------
the Stockholder or by his duly authorized attorney-in-fact. No proxy shall
be valid after the expiration of eleven months from the date of its
execution unless it shall have specified therein its duration. Every proxy
shall be revocable at the pleasure of the person executing it or of his
personal representatives or assigns. Proxies shall be delivered prior to
the meeting to the Secretary of the Company or to the person acting as
Secretary of the meeting before being voted. A proxy with respect to stock
held in the name of two or more persons
- 5 -
<PAGE>
shall be valid if executed by one of them unless at or prior to exercise of
such proxy the Company receives a specific written notice to the contrary
from any one of them. A proxy purporting to be executed by or on behalf of
a Stockholder shall be deemed valid unless challenged at or prior to its
exercise.
Section 9. Stock Ledger and List of Stockholders. It shall be
--------- -------------------------------------
the duty of the Secretary or Assistant Secretary of the Company to cause an
original or duplicate stock ledger to be maintained at the office of the
Company's transfer agent.
Section 10. Action without Meeting. Any action to be taken by
---------- ----------------------
Stockholders may be taken without a meeting if (1) all Stockholders
entitled to vote on the matter consent to the action in writing, (2) all
Stockholders entitled to notice of the meeting but not entitled to vote at
it sign a written waiver of any right to dissent and (3) said consents and
waivers are filed with the records of the meetings of Stockholders. Such
consent shall be treated for all purposes as a vote of the meeting.
- 6 -
<PAGE>
ARTICLE III
-----------
DIRECTORS
---------
Section 1. Board of 3 to 15 Directors. The Board of Directors
--------- --------------------------
shall consist of not less than three (3) nor more than fifteen (15)
Directors, all of whom shall be of full age and at least 40% of whom shall
be persons who are not interested persons of the Company as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), provided that
prior to the issuance of stock by the Company, the Board of Directors may
consist of less than three (3) Directors, subject to the provisions of
Maryland law. Directors need not be Stockholders. The Directors shall
have power from time to time, and at any time when the Stockholders as such
are not assembled in a meeting, regular or special, to increase or decrease
their own number. If the number of Directors be increased, the additional
Directors may be elected by a majority of the Directors in office at the
time of the increase. If such additional Directors are not so elected by
the Directors in office at the time they increase the number of places on
the Board, or if the additional Directors are elected by the existing
Directors prior to the first meeting of the Stockholders of the Company,
then in either of such events the additional Directors shall be elected or
reelected by the Stockholders at their next annual meeting or at an earlier
special meeting called for that purpose.
- 7 -
<PAGE>
Commencing with the first annual meeting of Stockholders held
after the initial public offering of the shares of the Company (the
"initial meeting"), the Board of Directors shall be divided into three
classes, each having a term of three years. At the annual meeting of
Stockholders in each year thereafter, the term of one class will expire.
At each subsequent annual election, the Directors chosen to succeed those
whose terms are expiring shall be identified as being of the same class as
the Directors whom they succeed, and shall be elected for a term expiring
at the time of the third succeeding annual meeting of Stockholders, or
thereafter in each case when their respective successors are elected and
qualified. The number of Directorships shall be apportioned among the
classes so as to maintain the classes as nearly equal as possible.
The number of Directors may also be increased or decreased by
vote of the Stockholders at any regular or special meeting called for that
purpose. In the event the Stockholders should vote a decrease in the
number of Directors, they shall determine by at least a two-thirds vote at
such meeting which of the Directors shall be removed and which of the then
existing vacancies on the Board shall be eliminated. If the Stockholders
vote an increase in the Board they shall by plurality vote elect Directors
to the newly created places as well as fill any then existing vacancies on
the Board.
- 8 -
<PAGE>
The Board of Directors may elect, but shall not be required to
elect, a Chairman of the Board who must be Director.
Section 2. Vacancies. If the office of any Director or
--------- ---------
Directors becomes vacant for any reason (other than due to an increase in
the number of places on the Board as provided in Section 1 of Article III),
the Directors in office, although less than a quorum, shall continue to act
and may, by a majority vote, choose a successor or successors, who shall
hold office for the unexpired term in respect to which such vacancy
occurred or until the next election of Directors (if immediately after
filling any such vacancy at least two-thirds of the Directors then holding
office shall have been elected by the Stockholders), or any vacancy may be
filled by the Stockholders at any meeting thereof.
Section 3. Majority to be Elected by Stockholders. If at any
--------- --------------------------------------
time, less than a majority of the Directors in office shall consist of
Directors elected by Stockholders, a meeting of the Stockholders shall be
called within 60 days for the purpose of electing Directors to fill any
vacancies in the Board of Directors (unless the Securities and Exchange
Commission or any court of competent jurisdiction shall by order extend
such period).
Section 4. Removal. At any meeting of Stockholders duly called
--------- -------
and at which a quorum is present, the Stockholders may, by the affirmative
vote of the holders of at least two-thirds of the votes entitled to be cast
thereat, remove any
- 9 -
<PAGE>
Director or Directors from office, with or without cause, and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of the removed Directors.
Section 5. Powers of the Board. The business of this Company
--------- -------------------
shall be managed under the direction of its Board of
Directors, which may exercise or give authority to exercise all powers of
the Company and do all such lawful acts and things as are not by statute,
by the Articles of Incorporation or by these Bylaws required to be
exercised or done by the Stockholders.
Section 6. Place of Meetings. The Directors may hold their
--------- -----------------
meetings at the principal office of the Company or at such other places,
either within or without the State of Maryland, as they may from time to
time determine.
Section 7. Regular Meetings. Regular meetings of the Board may
--------- ----------------
be held at such date and time as shall from time to time be determined by
resolution of the Board.
Section 8. Special Meetings. Special meetings of the Board may
--------- ----------------
be called by order of the President on one day's notice given to each
Director either in person or by mail, telephone, telegram, telefax, telex,
cable or wireless to each Director at his residence or regular place of
business. Special meetings will be called by the President or Secretary in
a like manner on the written request of a majority of the Directors.
Section 9. Waiver of Notice. No notice of any meeting of the
---------- ----------------
Board of Directors or a committee of the Board need be
- 10 -
<PAGE>
given to any Director who is present at the meeting or who waives notice of
such meeting in writing (which waiver shall be filed with the records of
such meeting), either before or after the time of the meeting.
Section 10. Quorum of One-Third. At all meetings of the Board
---------- -------------------
the presence of one-third of the entire number of Directors then in office
(but not less than two Directors) shall be necessary to constitute a quorum
and sufficient for the transaction of business, and any act of a majority
present at a meeting at which there is a quorum shall be the act of the
Board of Directors, except as may be otherwise specifically provided by
statute, by the Articles of Incorporation or by these Bylaws. If a quorum
shall not be present at any meeting of Directors, the Directors present
thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section 11. Informal Action by Directors and Committees. Any
---------- -------------------------------- ----------
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may, except as otherwise required by
statute, be taken without a meeting if a written consent to such action is
signed by all members of the Board, or of such committee, as the case may
be and filed with the minutes of the proceedings of the Board or committee.
Subject to the 1940 Act, members of the Board of Directors or a committee
thereof may participate in a meeting by
- 11 -
<PAGE>
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Section 12. Executive Committee. There may be an Executive
---------- -------------------
Committee of two or more Directors appointed by the Board who may meet at
stated times or on notice to all by any of their own number. The Executive
Committee shall consult with and advise the Officers of the Company in the
management of its business and exercise such powers of the Board of
Directors as may be lawfully delegated by the Board of the Directors.
Vacancies shall be filled by the Board of Directors at any regular or
special meeting. The Executive Committee shall keep regular minutes of its
proceedings and report the same to the Board when required.
Section 13. Audit Committee. There shall be an Audit Committee
---------- ---------------
of two or more Directors who are not "interested persons" of the Company
(as defined in the 1940 Act) appointed by the Board who may meet at stated
times or on notice to all by any of their own number. The Committee's
duties shall include reviewing both the audit and other work of the
Company's independent accountants, recommending to the Board of Directors
the independent accountants to be retained, and reviewing generally the
maintenance and safekeeping of the Company's records and documents.
- 12 -
<PAGE>
Section 14. Other Committees. The Board of Directors, by the
---------- ----------------
affirmative vote of a majority of the entire Board, may appoint other
committees which shall in each case consist of such number of members (not
less than two) and shall have and may exercise, to the extent permitted by
law, such powers as the Board may determine in the resolution appointing
them. A majority of all members of any such committee may determine its
action, and fix the time and place of its meetings, unless the Board of
Directors shall otherwise provide. The Board of Directors shall have power
at any time to change the members and, to the extent permitted by law, the
powers of any such committee, to fill vacancies, and to discharge any such
committee.
Section 15. Advisory Board. There may be an Advisory Board of
---------- --------------
any number of individuals appointed by the Board of Directors who may meet
at stated times or on notice to all by any of their own number or by the
President. The Advisory Board shall be composed of Stockholders or
representatives of Stockholders. The Advisory Board will have no power to
require the Company to take any specific action. Its purpose shall be
solely to consider matters of general policy and to represent the
Stockholders in all matters except those involving the purchase or sale of
specific securities. A majority of the Advisory Board, if appointed, must
consist of Stockholders who are not otherwise affiliated or interested
persons of the Company or of
- 13 -
<PAGE>
any affiliate of the Company as those terms are defined in the 1940 Act.
Section 16. Compensation of Directors. The Board may, by
---------- -------------------------
resolution, determine what compensation and reimbursement of expenses of
attendance at meetings, if any, shall be paid to Directors in connection
with their service on the Board. Nothing herein contained shall be
construed to preclude any Director from serving the Company in any other
capacity or from receiving compensation therefor.
ARTICLE IV
----------
OFFICERS
--------
Section 1. Officers. The Officers of the Company shall be fixed
--------- --------
by the Board of Directors and shall include a President, a Vice-President,
a Secretary and a Treasurer. Any two of the aforesaid offices, except
those of President and Vice President, may be held by the same person.
Section 2. Appointment of Officers. The Directors, at their
--------- -----------------------
first meeting after each annual meeting of Stockholders, shall appoint a
President and the other Officers who need not be members of the Board.
Section 3. Additional Officers. The Board, at any regular or
--------- -------------------
special meeting, may appoint such other Officers and agents as it shall
deem necessary who shall exercise such powers
- 14 -
<PAGE>
and perform such duties as shall be determined from time to time by the
Board.
Section 4. Salaries of Officers. The salaries of all Officers
--------- --------------------
of the Company shall be fixed by the Board of Directors.
Section 5. Term, Removal, Vacancies. The Officers of the
--------- ------------------------
Company shall hold office for one year and until their successors are
chosen and qualify in their stead. Any Officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Directors. If the office of any Officer becomes vacant for
any reason, the vacancy shall be filled by the Board of Directors.
Section 6. President. The President shall be the chief
--------- ---------
executive officer of the Company; he shall, subject to the supervision of
the Board of Directors, have general responsibility for the management of
the business of the Company and shall see that all orders and resolutions
of the Board are carried into effect.
Section 7. Vice-President. The Vice-President (senior in
--------- --------------
service), at the request or in the absence or disability of the President
shall perform the duties and exercise the powers of the President and shall
perform such other duties as the Board of Directors shall prescribe.
Section 8. Treasurer. The Treasurer shall have the custody of
--------- ---------
the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books
- 15 -
<PAGE>
belonging to the Company and shall deposit all moneys and other valuable
effects in the name and to the credit of the Company in such depositories
as may be designated by the Board of Directors. He shall disburse the
funds of the Company as may be ordered by the Board, taking proper vouchers
for such disbursements, and shall render to the President and Directors at
the regular meetings of the Board, or whenever they may require it, an
account of all his transactions as Treasurer and of the financial condition
of the Company.
Any Assistant Treasurer may perform such duties of the Treasurer
as the Treasurer of the Board of Directors may assign, and, in the absence
of the Treasurer, he may perform all the duties of the Treasurer.
Section 9. Secretary. The Secretary shall attend meetings of
--------- ---------
the Board and meetings of the Stockholders and record all votes and the
minutes of all proceedings in books to be kept for that purpose. He shall
give or cause to be given notice of all meetings of Stockholders and
special meetings of the Board of Directors and shall perform such other
duties as may be prescribed by the Board of Directors. He shall keep in
safe custody the seal of the Company and affix it to any instrument when
authorized by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary
as the Secretary or the Board of Directors may assign,
- 16 -
<PAGE>
and, in the absence of the Secretary, may perform all the duties of the
Secretary.
Section 10. Subordinate Officers. The Board of Directors from
---------- --------------------
time to time may appoint such other officers or agents as it may deem
advisable, each of whom shall have such title, hold office for such period,
have such authority and perform such duties as the Board of Directors may
determine. The Board of Directors from time to time may delegate to one or
more officers or agents the power to appoint any such subordinate officers
or agents and to prescribe their respective rights, terms of office,
authorities and duties.
Section 11. Surety Bonds. The Board of Directors may require
---------- ------------
any officer or agent of the Company to execute a bond (including, without
limitation, any bond required by the 1940 Act, and the rules and
regulations of the Securities and Exchange Commission) to the Company in
such sum and with such surety or sureties as the Board of Directors may
determine, conditioned upon the faithful performance of his duties to the
Company, including responsibility for negligence and for the accounting of
any of the Company's property, funds or securities that may come into his
hands.
- 17 -
<PAGE>
ARTICLE V
---------
INDEMNIFICATION
---------------
Section 1. Indemnification of Directors and Officers. The
--------- -----------------------------------------
Company shall indemnify its Directors to the fullest extent that
indemnification of directors is permitted by the Maryland General
Corporation Law. The Company shall indemnify its Officers to the same
extent as its Directors and to such further extent as is consistent with
law. The Company shall indemnify its Directors and Officers who while
serving as Directors or Officers also serve at the request of the Company
as a director, officer, partner, trustee, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan to the fullest extent consistent with law. The
indemnification and other rights provided by this Article shall continue as
to a person who has ceased to be a director or officer and shall inure to
the benefit of the heirs, executors and administrators of such a person.
This Article shall not protect any such person against any liability to the
Company or any Stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office
("disabling conduct").
- 18 -
<PAGE>
Section 2. Advances. Any current or former director or officer
--------- --------
of the Company seeking indemnification within the scope of this Article
shall be entitled to advances from the Company for payment of the
reasonable expenses incurred by him in connection with the matter as to
which he is seeking indemnification in the manner and to the fullest extent
permissible under the Maryland General Corporation Law. The person seeking
indemnification shall provide to the Company a written affirmation of his
good faith belief that the standard of conduct necessary for
indemnification by the Company has been met and a written undertaking to
repay any such advance if it should ultimately be determined that the
standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to
the Company for his undertaking; (b) the Company is insured against losses
arising by reason of the advance; or (c) a majority of a quorum of
Directors of the Company who are neither interested persons as defined in
the 1940 Act, nor parties to the proceeding ("disinterested non-party
Directors"), or independent legal counsel, in a written opinion, shall have
determined, based on a review of facts readily available to the Company at
the time the advance is proposed to be made, that there is reason to
believe that the person seeking indemnification will ultimately be found to
be entitled to indemnification.
- 19 -
<PAGE>
Section 3. Procedure. At the request of any person claiming
--------- ---------
indemnification under this Article, the Board of Directors shall determine,
or cause to be determined, in a manner consistent with the Maryland General
Corporation Law, whether the standards required by this Article have been
met. Indemnification shall be made only following: (a) a final decision on
the merits by a court or other body before whom the proceeding was brought
that the person to be indemnified was not liable by reason of disabling
conduct or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the person to be
indemnified was not liable by reason of disabling conduct by (i) the vote
of a majority of a quorum of disinterested non-party Directors or (ii) an
independent legal counsel in a written opinion.
Section 4. Indemnification of Employees and Agents. Employees
--------- ---------------------------------------
and agents who are not Officers or Directors of the Company may be
indemnified, and reasonable expenses may be advanced to such employees or
agents, as may be provided by action of the Board of Directors or by
contract, subject to any limitations imposed by the 1940 Act.
Section 5. Other Rights. The Board of Directors may make
--------- ------------
further provision consistent with law for indemnification and advance of
expenses to Directors, Officers, employees and agents by resolution,
agreement or otherwise. The indemnification provided by this Article shall
not be deemed
- 20 -
<PAGE>
exclusive of any other right, with respect to indemnification or otherwise,
to which those seeking indemnification may be entitled under any insurance
or other agreement or resolution of Stockholders or disinterested Directors
or otherwise. The rights provided to any person by this Article shall be
enforceable against the Company by such person who shall be presumed to
have relied upon it in serving or continuing to serve as a director,
officer, employee, or agent as provided above.
Section 6. Amendments. References in this Article are to the
--------- ----------
Maryland General Corporation Law and to the 1940 Act as from time to time
amended. No amendment of these Bylaws shall affect any right of any person
under this Article based on any event, omission or proceeding prior to the
amendment.
Section 7. Insurance. The Company may purchase and maintain
--------- ---------
insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Company or who, while a director, officer,
employee, or agent of the Company, is or was serving at the request of the
Company as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
other enterprise, or employee benefit plan against any liability asserted
against and incurred by such person in any such capacity or arising out of
such person's position; provided, that no insurance may be purchased which
would indemnify any Director or Officer of the Company against any
liability to the Company or to
- 21 -
<PAGE>
its security holders to which he would otherwise be subject by reason of
disabling conduct.
ARTICLE VI
----------
GENERAL PROVISIONS
------------------
Section 1. Waiver of Notice. Whenever by statute, the
--------- ----------------
provisions of the Articles of Incorporation or these Bylaws, the
Stockholders or the Board of Directors are authorized to take any action at
any meeting after notice, such notice may be waived, in writing, before or
after the holding of the meeting, by the person or persons entitled to such
notice, or, in the case of a Stockholder, by his attorney thereunto
authorized.
Section 2. Checks. All checks or demands for money and notes of
--------- ------
the Company shall be signed by such Officer or Officers or such other
person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Company shall be
--------- -----------
determined by resolution of the Board of Directors.
Section 4. Accountant. The Company shall employ an independent
--------- ----------
public accountant or a firm of independent public accountants as its
Accountant to examine the accounts of the Company and to sign and certify
financial statements filed by the Company. The employment of the
Accountant shall be conditioned
- 22 -
<PAGE>
upon the right of the Company to terminate the employment forthwith without
any penalty by vote of a majority of the outstanding voting securities at
any Stockholders' meeting called for that purpose.
ARTICLE VII
-----------
CAPITAL STOCK
-------------
Section 1. Certificate of Stock. The interest of each
--------- --------------------
Stockholder of the Company may be evidenced by certificates for shares of
stock in such form as the Board of Directors may from time to time
prescribe. The certificates shall be numbered and entered in the books of
the Company as they are issued. They shall exhibit the holder's name and
the number of shares and no certificate shall be valid unless it has been
signed by the President or a Vice-President and the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary and bears
the corporate seal. Such seal may be a facsimile, engraved or printed.
Where any such certificate is signed by a Transfer Agent or by a Registrar,
the signatures of any such Officer may be facsimile, engraved or printed.
In case any of the Officers of the Company whose manual or facsimile
signature appears on any stock certificate delivered to a Transfer Agent of
the Company shall cease to be such Officer prior to the issuance of such
certificate, the Transfer Agent may nevertheless countersign and
- 23 -
<PAGE>
deliver such certificate as though the person signing the same or whose
facsimile signature appears thereon had not ceased to be such Officer,
unless written instructions of the Company to the contrary are delivered to
the Transfer Agent.
Section 2. Lost, Stolen or Destroyed Certificates. The Board of
--------- --------------------------------------
Directors, or the President together with the Treasurer or Secretary, may
direct a new certificate to be issued in place of any certificate
theretofore issued by the Company, alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming the
certificate of stock to be lost, stolen or destroyed, or by his legal
representative. When authorizing such issue of a new certificate, the
Board of Directors, or the President and Treasurer or Secretary, may, in
its or their discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate,
or his legal representative, to advertise the same in such manner as it or
they shall require and/or give the Company a bond in such sum and with such
surety or sureties as it or they may direct as indemnity against any claim
that may be made against the Company with respect to the certificate
alleged to have been lost, stolen or destroyed or such newly issued
certificate.
Section 3. Transfer of Stock. Shares of stock of the Company
--------- -----------------
shall be transferable on the books of the Company by the holder thereof in
person or by his duly authorized attorney or
- 24 -
<PAGE>
legal representative upon surrender and cancellation of a certificate or
certificates for the same number of shares of the same class, duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, with such proof of the authenticity of the signature as the
Company or its agents may reasonably require. The Board of Directors may,
from time to time, adopt rules and regulations with reference to the method
of transfer of the shares of stock of the Company.
Section 4. Registered Holder. The Company shall be entitled to
--------- -----------------
treat the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part
of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by statute.
Section 5. Record Date. The Board of Directors may fix a time
--------- -----------
not less than 10 nor more than 90 days prior to the date of any meeting of
Stockholders or prior to the last day on which the consent or dissent of
Stockholders may be effectively expressed for any purpose without a
meeting, as the time as of which Stockholders entitled to notice of and to
vote at such a meeting or whose consent or dissent is required or may be
expressed for any purpose, as the case may be, shall be determined; and all
persons who were holders of record of voting stock at such time and no
other shall be entitled to notice of
- 25 -
<PAGE>
and to vote at such meeting or to express their consent or dissent, as the
case may be. If no record date has been fixed, the record date for the
determination of Stockholders entitled to notice of or to vote at a meeting
of Stockholders shall be the later of the close of business on the day on
which notice of the meeting is mailed or the thirtieth day before the
meeting, or, if notice is waived by all Stockholders, at the close of
business on the tenth day next preceding the day on which the meeting is
held. The Board of Directors may also fix a time not exceeding 90 days
preceding the date fixed for the payment of any dividend or the making of
any distribution, or for the delivery of evidences of rights, or evidences
of interests arising out of any change, conversion or exchange of capital
stock, as a record time for the determination of the Stockholder entitled
to receive any such dividend, distribution, rights or interests.
Section 6. Stock Ledgers. The stock ledgers of the Company,
--------- -------------
containing the names and addresses of the Stockholders and the number of
shares held by them respectively, shall be kept at the principal offices of
the Company or at the offices of the transfer agent of the Company or at
such other location as may be authorized by the Board of Directors from
time to time.
Section 7. Transfer Agents and Registrars. The Board of
--------- ------------------------------
Directors may from time to time appoint or remove transfer agents and/or
registrars of transfers (if any) of shares of stock of the Company, and it
may appoint the same person as both
- 26 -
<PAGE>
transfer agent and registrar. Upon any such appointment being made, all
certificates representing shares of capital stock thereafter issued shall
be countersigned by one of such transfer agents or by one of such
registrars of transfers (if any) or by both and shall not be valid unless
so countersigned. If the same person shall be both transfer agent and
registrar, only one countersignature by such person shall be required.
Section 8. Dividends. Dividends upon the capital stock of the
--------- ---------
Company, subject to any provisions of the Articles of Incorporation
relating thereto, may be declared by the Board of Directors at any regular
or special meeting, pursuant to law.
Section 9. Reserve Before Dividends. Before payment of any
--------- ------------------------
dividend, there may be set aside out of the net profits of the Company
available for dividends such sum or sums as the Directors from time to time
in their absolute discretion think proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the Company, or for such other purpose as the Directors
shall think conducive to the interests of the Company, and the Directors
may modify or abolish any such reserve in the manner in which it was
created.
Section 10. No Pre-emptive Rights. Shares of stock shall not
---------- ---------------------
possess pre-emptive rights to purchase additional shares of stock when
offered.
- 27 -
<PAGE>
Section 11. Fractional Shares. Fractional shares of stock
---------- -----------------
entitle the holder to the same voting and other rights and privileges as
whole shares on a pro-rata basis.
ARTICLE VIII
------------
AMENDMENTS
----------
Section 1. By Stockholders. Except as provided by this Section
--------- ---------------
1 of Article VIII, Bylaws may be adopted, amended or repealed, by vote of
the holders of a majority of the Company's stock, as defined by the 1940
Act, at any annual or special meeting of the Stockholders at which a quorum
is present or represented, provided notice of the proposed amendment shall
have been contained in the notice of the meeting. Sections 1 and 4 of
Article III may be amended only by vote of the holders of two-thirds of the
Company's Common Stock, unless such action has previously been approved,
adopted or authorized by the affirmative vote of two-thirds of the total
number of Directors fixed in accordance with these Bylaws, in which case
the affirmative vote of a majority of the outstanding shares is required.
Section 2. By Directors. The Directors may adopt, amend or
--------- ------------
repeal any Bylaw (in a manner not inconsistent with any Bylaw adopted,
amended or repealed by the Company's Stockholders in accordance with
Section 1 of this Article VIII) by majority
- 28 -
<PAGE>
vote of all of the Directors in office at any regular meeting, or at any
special meeting, subject to the requirements of applicable law.
ARTICLE IX
----------
CUSTODY OF SECURITIES
---------------------
Section 1. Employment of a Custodian. The Company shall place
--------- -------------------------
and at all times maintain in the custody of a Custodian (including any sub-
custodian for the Custodian, which may be a foreign bank which meets
applicable requirements of law) all funds, securities and similar
investments owned by the Company. The Custodian (and any sub-custodian)
shall be a bank having not less than $2,000,000 aggregate capital, surplus
and undivided profits or such other financial institution as shall be
permitted by rule or order of the United States Securities and Exchange
Commission. The Custodian shall be appointed from time to time by the
Directors, who shall fix its remuneration.
Section 2. Action Upon Termination of Custodian Agreement. Upon
--------- ------------------------------------ ---------
termination of a Custodian Agreement or
inability of the Custodian to continue to serve, the Directors shall
promptly appoint a successor custodian, but in the event that no successor
custodian can be found who has the required qualifications and is willing
to serve, the Directors shall call as promptly as possible a special
meeting of the Stockholders to
- 29 -
<PAGE>
determine whether the Company shall function without a custodian or shall
be liquidated. If so directed by vote of the holders of a majority of the
outstanding voting securities, the Custodian shall deliver and pay over all
funds, securities and similar investments held by it as specified in such
vote.
Section 3. Provisions of Custodian Agreement. The following
--------- ---------------------------------
provisions shall apply to the employment of a Custodian and to any contract
entered into with the Custodian so employed:
The Directors shall cause to be delivered to the Custodian all
securities owned by the Company or to which it may become
entitled, and shall order the same to be delivered by the
Custodian only in completion of a sale, exchange, transfer,
pledge, loan of portfolio securities to another person, or other
disposition thereof, all as the Directors may generally or from
time to time require or approve or to a successor Custodian; and
the Directors shall cause all funds owned by the Company or to
which it may become entitled to be paid to the Custodian, and
shall order the same disbursed only for investment against
delivery of the securities acquired, or the return of cash held
as collateral for loans of portfolio securities, or in payment of
expenses, including management compensation, and liabilities of
the Company, including distributions to stockholders, or to a
successor Custodian. In
- 30 -
<PAGE>
connection with the Company's purchase or sale of futures
contracts, the Custodian shall transmit, prior to receipt on
behalf of the Company of any securities or other property, funds
from the Company's custodian account in order to furnish to and
maintain funds with brokers as margin to guarantee the
performance of the Company's futures obligations in accordance
with the applicable requirements of commodities exchanges and
brokers.
ARTICLE X
---------
MISCELLANEOUS
-------------
Section 1. Miscellaneous.
--------- -------------
(a) Except as hereinafter provided, no Officer or Director of the
Company and no partner, officer, director or shareholder of the Investment
Adviser of the Company or of the Distributor of the Company, and no
Investment Adviser or Distributor of the Company, shall take long or short
positions in the securities issued by the Company.
(1) The foregoing provision shall not prevent the
Distributor from purchasing shares of stock from the Company if such
purchases are limited (except for reasonable allowances for clerical
errors, delays and errors of transmission and cancellation of orders) to
purchases for the purpose of filling
- 31 -
<PAGE>
orders for such shares received by the Distributor, and provided that
orders to purchase from the Company are entered with the Company or the
Custodian promptly upon receipt by the Distributor of purchase orders for
such shares, unless the Distributor is otherwise instructed by its
customer.
(2) The foregoing provision shall not prevent the
Distributor from purchasing shares of stock of the Company as agent for the
account of the Company.
(3) The foregoing provision shall not prevent the purchase
from the Company or from the Distributor of shares of stock issued by the
Company, by any officer, or Director of the Company or by any partner,
officer, director or shareholder of the Investment Adviser of the Company
or of the Distributor of the Company at the price available to the public
generally at the moment of such purchase, or as described in the then
currently effective Prospectus of the Company.
(4) The foregoing shall not prevent the Distributor, or any
affiliate thereof, of the Company from purchasing shares of stock prior to
the effectiveness of the first registration statement relating to the
shares under the Securities Act of 1933.
(b) The Company shall not lend assets of the Company to any
officer or Director of the Company, or to any partner, officer, director or
shareholder of, or person financially interested in, the Investment Adviser
of the Company, or the
- 32 -
<PAGE>
Distributor of the Company, or to the Investment Adviser of the Company or
to the Distributor of the Company.
(c) The Company shall not impose any restrictions upon the
transfer of the shares of stock of the Company except as provided in the
Articles of Incorporation, but this requirement shall not prevent the
charging of customary transfer agent fees.
(d) The Company shall not permit any officer or Director of the
Company, or any partner, officer or director of the Investment Adviser or
Distributor of the Company, to deal for or on behalf of the Company with
himself as principal or agent, or with any partnership, association or
corporation in which he has a financial interest; provided that the
foregoing provisions shall not prevent (a) Officers and Directors of the
Company or partners, officers or directors of the Investment Adviser or
Distributor of the Company from buying, holding or selling shares of stock
in the Company, or from being partners, officers or directors or otherwise
financially interested in the Investment Adviser or Distributor of the
Company; (b) purchases or sales of securities or other property by the
Company from or to an affiliated person or to the Investment Adviser or
Distributor of the Company if such transaction is exempt from the
applicable provisions of the 1940 Act; (c) purchases of investments for the
portfolio of the Company or sales of investments owned by the Company
through a security dealer who is, or one or more of whose partners, share-
holders, officers or directors is, an Officer or
- 33 -
<PAGE>
Director of the Company, or a partner, officer or director of the
Investment Adviser or Distributor of the Company, if such transactions are
handled in the capacity of broker only and commissions charged do not
exceed customary brokerage charges for such services; (d) employment of
legal counsel, registrar, Transfer Agent, dividend disbursing agent or
Custodian who is, or has a partner, shareholder, officer, or director who
is, an officer or Director of the Company, or a partner, officer or
director of the Investment Adviser or Distributor of the Company, if only
customary fees are charged for services to the Company; (e) sharing
statistical research, legal and management expenses and office hire and
expenses with any other investment company in which an officer or Director
of the Company, or a partner, officer or director of the Investment Adviser
or Distributor of the Company, is an officer or director or otherwise
financially interested.
- 34 -
Exhibit 99(e)
TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1. Each holder of shares (a "Shareholder") in Templeton Russia Fund, Inc.
(the "Fund") whose Fund shares are registered in his or her own name will
automatically be a participant ("Participant"), in the Dividend Reinvestment
Plan (the "Plan"), unless any such Shareholder specifically elects to receive
all dividends and capital gains in cash, paid by check, mailed directly to the
Shareholder. A Shareholder whose shares are registered in the name of a broker-
dealer or other nominee (the "Nominee") will be a Participant if (a) such a
service is provided by the Nominee and (b) the Nominee makes an election on
behalf of the Shareholder to participate in the Plan. Those Underwriters (as
defined in the Fund's Prospectus dated ___________, 1995) which have the
capacity to allow participation intend to make such an election on behalf of
Shareholders whose shares are registered in their names, as Nominee, unless a
Shareholder specifically instructs his or her Nominee to pay dividends and
capital gains in cash. Mellon Securities Trust Company (the "Plan Agent") will
act as agent for Participants and will open an account under the Plan for each
Participant in the same name as such Participant's shares are registered on the
books and records of the transfer agent for the shares.
2. Whenever the Fund declares a capital gains distribution or an income
dividend payable in shares or cash, Participants will receive such distribution
or dividend in the manner described in paragraph 3 below as determined on the
date such distribution or dividend becomes payable.
3. Whenever the market price of the Fund's shares is equal to or exceeds
the net asset value price per share at the time shares are valued for the
purpose of determining the number of shares equivalent to the cash dividend or
capital gains distribution, Participants will be issued shares valued at the
greater of (i) net asset value per share or (ii) 95% of the then-current market
price. Participants will receive any such distribution or dividend entirely in
shares and the Plan Agent shall automatically receive such shares, including
fractions, for all Participants' accounts. If the net asset value per share of
the Fund's shares at the time of valuation exceeds the market price of the
Fund's shares at such time, or if the Fund should declare a dividend or capital
gains distribution payable only in cash, the Plan Agent will, as purchasing
agent for the Participants, buy shares in the open market, on the New York Stock
Exchange (the "Exchange") or elsewhere, for each Participant's account. The
valuation date will be the payable date for such distribution or dividend. If,
before the Plan Agent has completed its purchases, the market price exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or capital gains distribution
had been paid in shares issued by the Fund at net asset value per share. The
Plan Agent will apply all cash received as a dividend or capital gains
distribution to purchase shares on the open market as soon as practicable after
the payment date of such dividend or capital gains distribution, but in no event
later than 30 days after such date, except where necessary to comply with
applicable provisions of the federal securities laws.
4. For all purposes of the Plan: (a) the market price of the Fund's
shares on a particular date shall be the last sale price on the Exchange on that
date or, if there is no sale on the Exchange on that date, then the mean between
the closing bid and asked quotations for such shares on the Exchange on such
date and (b) net asset value per share on a particular date shall be as
determined by or on behalf of the Fund.
5. The open-market purchases provided for above may be made on any
securities exchange where the shares of the Fund are traded, in the over-the-
counter market or in negotiated transactions, and may be on such terms as to
price, delivery and otherwise as the Plan Agent shall determine. Funds held by
the Plan Agent uninvested will not bear interest, and it is understood that, in
any event, the Plan Agent shall have no liability in connection with any
inability to purchase shares within 30 days after the payment date of a dividend
or capital gains distribution as herein provided, or with the timing of any
purchases effected. The Plan Agent
- 1 -
<PAGE>
shall have no responsibility as to the value of the shares of the Fund acquired
for any Participant's account.
6. The Plan Agent will hold shares acquired pursuant to the Plan in non-
certificated form in the Plan Agent's name or that of its Nominee. The Plan
Agent will forward to each Participant any proxy solicitation material and will
vote any shares so held for each Participant only in accordance with the proxy
returned by any such Participant to the Fund. Upon any Participant's written
request, the Plan Agent will deliver to her or him, without charge, a
certificate or certificates for the full shares.
7. The Plan Agent will confirm to each Participant acquisitions made for
its account as soon as practicable but not later than 60 days after the date
thereof. Although a Participant may from time to time have an undivided
fractional interest (computed to four decimal places) in a share of the Fund, no
certificates for a fractional share will be issued. However, dividends and
distributions on fractional shares will be credited to the Participant's
account.
8. Any stock dividends or split shares distributed by the Fund on shares
held by the Plan Agent for any Participant will be credited to such
Participant's account. In the event that the Fund makes available to
Participants transferrable rights to purchase additional shares of other
securities, the Plan Agent will sell such rights and apply the proceeds of the
sale to the purchase of additional shares of the Fund for the account of
Participants.
9. The Plan Agent's service fee for handling capital gains distributions
or income dividends will be paid by the Fund. Participants will be charged a
pro rata share of brokerage commissions on all open market purchases.
10. Any Participant may withdraw shares from such Participant's account or
terminate such Participant's account under the Plan by notifying the Plan Agent
in writing. Such withdrawal or termination will be effective immediately if
notice is received by the Plan Agent not less than 10 days prior to any dividend
or distribution record date; otherwise such withdrawal or termination will be
effective, with respect to any subsequent dividend or distribution, on the first
trading day after the dividends paid for such record date have been credited to
the Participant's account. The Plan may be terminated by the Plan Agent or the
Fund upon notice in writing mailed to each Participant at least 90 days prior to
any record date for the payment of any dividend or distribution by the Fund.
Upon any withdrawal or termination, the Plan Agent will cause to be delivered to
each Participant a certificate or certificates for the appropriate number of
full shares and a cash adjustment for any fractional share (valued at the market
value of the shares at the time of withdrawal or termination); provided,
however, that any Participant may elect by notice to the Plan Agent in writing
in advance of such termination to have the Plan Agent sell part or all of the
shares in question and remit the proceeds to such Participant, net of any
brokerage commissions. A $5.00 fee will be charged by the Plan Agent upon any
cash withdrawal or termination, and the Plan Agent is authorized to sell a
sufficient number of the Participant's shares to cover such fee and any
brokerage commission on such sale.
11. These terms and conditions may be amended or supplemented by the Plan
Agent or the Fund at any time or times, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by
each Participant unless, with respect to any such Participant, prior to the
effective date thereof, the Plan Agent receives written notice of the
termination of that Participant's account under the Plan. Any such amendment
may include an appointment by the Plan Agent in its place and stead of a
successor plan agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Plan Agent
under these terms and conditions. Upon any such appointment of a plan agent for
the purpose of receiving dividends and distributions, the Fund will be
- 2 -
<PAGE>
authorized to pay to such successor plan agent, for Participants' accounts, all
dividends and distributions payable on the shares held in each Participant's
name or under the Plan for retention or application by such successor plan agent
as provided in these terms and conditions.
12. The Plan Agent shall at all times act in good faith and agree to use
its best efforts within reasonable limits to ensure the accuracy of all services
performed under this Plan and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by its or its employees' negligence, bad faith or willful
misconduct.
13. The Participant shall have no right to draw checks or drafts against
such Participant's Account or to give instructions to the Plan Agent in respect
of any shares or cash held therein except as expressly provided herein.
14. The Participant agrees to notify the Plan Agent promptly in writing of
any change of address. Notices to the Participant may be given by the Plan
Agent by letter addressed to the Participant as shown on the records of the Plan
Agent.
15. This Plan and the account established hereunder for the Participant
shall be governed by and construed in accordance with the laws of the State of
New York and the rules and regulations of the Securities and Exchange
Commission, as they may be changed or amended from time to time.
- 3 -
Exhibit 99(g)
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
AGREEMENT made as of the ____ day of ______, 1995, between
TEMPLETON RUSSIA FUND, INC. (hereinafter referred to as the "Company"), and
TEMPLETON INVESTMENT MANAGEMENT (SINGAPORE) PTE. LTD. (hereinafter referred
to as the "Manager").
In consideration of the mutual agreements herein made, the
Company and the Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Company's assets consistent with the provisions of the
Articles of Incorporation of the Company and the investment policies
adopted and declared by the Company's Board of Directors. In pursuance of
the foregoing, the Investment Manager shall make all determinations with
respect to the investment of the Company's assets and the purchase and sale
of its investment securities, and shall take such steps as may be necessary
to implement those determinations. Such determinations and services shall
include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the
Company's investment securities shall be exercised, subject to guidelines
adopted by the Board of Directors. It is understood that all acts of the
Manager in performing this Agreement are performed by it outside the United
States.
(2) The Manager is not required to furnish any personnel,
overhead items or facilities for the Company.
(3) The Manager shall be responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for
<PAGE>
the execution of the Company's portfolio transactions consistent with the
Fund's brokerage policies and, when applicable, the negotiation of
commissions in connection therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with brokers
which are selected by the Manager as able to achieve "best
execution" of such orders. "Best execution" shall mean
prompt and reliable execution at the most favorable security
price, taking into account the other provisions hereinafter
set forth. The determination of what may constitute best
execution and price in the execution of a securities
transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net
economic result to the Company (involving both price paid or
received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block
is involved, availability of the broker to stand ready to
execute possibly difficult transactions in the future, and
the financial strength and stability of the broker. Such
considerations are judgmental and are weighed
- 2 -
<PAGE>
by the Manager in determining the overall reasonableness of
brokerage commissions.
B. In selecting brokers for portfolio transactions, the Manager
shall take into account its past experience as to brokers
qualified to achieve "best execution," including brokers who
specialize in any foreign securities held by the Company.
C. The Manager is authorized to allocate brokerage business to
brokers who have provided brokerage and research services,
as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), for the
Company and/or other accounts, if any, for which the Manager
exercises investment discretion (as defined in
Section 3(a)(35) of the 1934 Act) and, as to transactions
for which fixed minimum commission rates are not applicable,
to cause the Company to pay a commission for effecting a
securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if
the Manager determines in good faith that such amount of
commission is reasonable in relation to the value of the
brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the
Manager's
- 3 -
<PAGE>
overall responsibilities with respect to the Company and the
other accounts, if any, as to which it exercises investment
discretion. In reaching such determination, the Manager
will not be required to place or attempt to place a specific
dollar value on the research or execution services of a
broker or on the portion of any commission reflecting either
of said services. In demonstrating that such determinations
were made in good faith, the Manager shall be prepared to
show that all commissions were allocated and paid for
purposes contemplated by the Company's brokerage policy;
that the research services provide lawful and appropriate
assistance to the Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based on
any available information as to the level of commission
known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Company's policies that (i) obtaining a low commission is
deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial to
- 4 -
<PAGE>
the Company to obtain a favorable price than to pay the
lowest commission; and (ii) the quality, comprehensiveness
and frequency of research studies that are provided for the
Manager are useful to the Manager in performing its advisory
activities under this Agreement. Research services provided
by brokers to the Manager are considered to be in addition
to, and not in lieu of, services required to be performed by
the Manager under this Agreement. Research furnished by
brokers through which the Company effects securities
transactions may be used by the Manager for any of its
accounts, and not all research may be used by the Manager
for the Company. When execution of portfolio transactions
is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various
services provided by the broker.
(4) The Company agrees to pay to the Manager a monthly fee in
dollars at an annual rate of 1.25% of the Fund's average weekly net assets,
payable at the end of each calendar month.
(5) This Agreement shall become effective on _____________, and
shall continue in effect until _______________. If not sooner terminated,
this Agreement shall continue in effect for successive periods of 12 months
each thereafter, provided that
--------
- 5 -
<PAGE>
each such continuance shall be specifically approved annually by the vote
of a majority of the Company's Board of Directors who are not parties to
this Agreement or "interested persons" (as defined in Investment Company
Act of 1940 (the "1940 Act")) of any such party, cast in person at a
meeting called for the purpose of voting on such approval and either the
vote of (a) a majority of the outstanding voting securities of the Company,
as defined in the 1940 Act, or (b) a majority of the Company's Board of
Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Company is approved by vote of a majority of the
Company's Board of Directors in office at the time or by vote of a majority
of the outstanding voting securities of the Company.
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Manager no
longer acts as Manager to the Company, the Manager reserves the right to
withdraw from the Company the use of the name "Templeton" or any name
misleadingly implying a continuing relationship between the Company and the
Manager or any of its affiliates.
- 6 -
<PAGE>
(9) Except as may otherwise be provided by the 1940 Act, neither
the Manager nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any
loss arising out of any investment or other act or omission in the
performance by the Manager of its duties under the Agreement or for any
loss or damage resulting from the imposition by any government of exchange
control restrictions which might affect the liquidity of the Fund's assets,
or from acts or omissions of custodians or securities depositories, or from
any war or political act of any foreign government to which such assets
might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments or to exercise rights with respect to
emerging country securities, except for any liability, loss or damage
resulting from willful misfeasance, bad faith or gross negligence on the
Manager's part or by reason of reckless disregard of the Manager's duties
under this Agreement.
(10) It is understood that the services of the Manager are not
deemed to be exclusive, and nothing in this Agreement shall prevent the
Manager, or any affiliate thereof, from providing similar services to other
investment companies and other clients, including clients which may invest
in the same types of securities as the Company, or, in providing such
services, from using information furnished by others. When the Manager
determines to buy or sell the same security for the Company that the
Manager or one or more of its affiliates has selected for clients of its
- 7 -
<PAGE>
affiliates, the orders for all such security transactions shall be placed
for execution by methods determined by the Manager, with approval by the
Company's Board of Directors, to be impartial and fair.
(11) This Agreement shall be construed in accordance with the
laws of the State of Maryland, provided that nothing herein shall be
--------
construed as being inconsistent with applicable Federal and state
securities laws and any rules, regulations and orders thereunder.
(12) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting the
Manager an agent of the Company.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
TEMPLETON RUSSIA FUND, INC.
By:________________________________
TEMPLETON INVESTMENT MANAGEMENT
(SINGPORE) PTE. LTD.
By:_________________________________
- 9 -
Exhibit 99(h)(i)
4/24/95
-------
_____________ Shares
Templeton Russia Fund, Inc.
(a Maryland corporation)
Common Stock
(Par Value $0.01 Per Share)
PURCHASE AGREEMENT
------------------
________ __, 1995
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
A.G. EDWARDS & SONS, INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
as Representatives of the several Underwriters
named in Schedule A hereto
c/o Merrill Lynch & Co.
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, NY 10281-1305
Dear Sirs:
Templeton Russia Fund, Inc., a Maryland corporation (the "Fund"),
Templeton Investment Management (Singapore) Pte. Ltd. (the "Investment
Manager") and Templeton Worldwide, Inc. ("Templeton") each confirms its
agreement with the several Underwriters named in Schedule A hereto (the
"Underwriters"), for whom Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), A.G. Edwards & Sons, Inc.,
Nomura Securities International, Inc. and Prudential Securities
Incorporated are acting as representatives (the "Representatives") with
respect to the issue and sale by the Fund and the purchase by the
Underwriters, acting severally and not jointly, of ___________ shares of
Common Stock, par value $0.01 per share, of the Fund as set forth in
Schedule A hereto, except as may be provided otherwise in the Pricing
Agreement, as hereinafter defined, and with respect to the grant by the
Fund to the Underwriters of the option described in Section 2
<PAGE>
hereof to purchase all or any part of ____________ additional shares of
Common Stock to cover over-allotments. The aforesaid ___________ shares
(the "Initial Shares"), together with all or any part of the __________
shares of Common Stock subject to the option described in Section 2 hereof
(the "Option Shares"), are collectively hereinafter called the "Shares."
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Fund and the Representatives, acting on behalf of the
Underwriters, shall enter into an agreement substantially in the form of
Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take
the form of an exchange of any standard form of written telecommunication
between the Fund and the Representatives and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the
Shares will be governed by this Agreement, as supplemented by the Pricing
Agreement. From and after the date of the execution and delivery of the
Pricing Agreement, this Agreement shall be deemed to incorporate the
Pricing Agreement.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form N-2 (No. 33-84676) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "1933 Act"), and a notification on
Form N-8A of registration of the Fund as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules
and regulations of the Commission under the 1940 Act (together with the
rules and regulations under the 1933 Act, the "Rules and Regulations") and
has filed such amendments to such registration statement on Form N-2, if
any, and such amended preliminary prospectus as may have been required to
the date hereof. The Fund will prepare and file such additional amendments
thereto and such amended prospectus as may hereafter be required. Such
registration statement (as amended, if applicable) and the prospectus
constituting a part thereof (including the information, if any, deemed to
be part thereof pursuant to Rule 430A(b) of the Rules and Regulations), as
from time to time amended or supplemented pursuant to the 1933 Act, are
hereinafter referred to as the "Registration Statement" and the
"Prospectus," respectively, except that if any revised prospectus shall be
provided to the Underwriters by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective
(whether such revised prospectus is required to be filed by the Fund
pursuant to Rule 497(b) or Rule 497(h) of the Rules and Regulations), the
term "Prospectus" shall refer to each such revised prospectus from and
after the time it is first provided to the Underwriters for such use.
The Fund understands that the Underwriters propose to make a public
offering of the Shares as soon as the Representatives deem
2
<PAGE>
advisable after the Registration Statement becomes effective and the
Pricing Agreement has been executed and delivered.
SECTION 1. Representations and Warranties. (a) The Fund, the
------------------------------
Investment Manager and Templeton each severally represents and warrants to
each Underwriter as of the date hereof and as of the date of the Pricing
Agreement (such later date being hereinafter referred to as the
"Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and
at the Representation Date, the Registration Statement will comply in
all material respects with the requirements of the 1933 Act, the 1940
Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective,
at the Representation Date and at Closing Time referred to in Section
2, the Prospectus (unless the term "Prospectus" refers to a prospectus
which has been provided to the Underwriters by the Fund for use in
connection with the offering of the Shares which differs from the
Prospectus on file with the Commission at the time the Registration
Statement becomes effective, in which case at the time such prospectus
is first provided to the Underwriters for such use) will not contain
an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus made in reliance upon and in
conformity with information furnished to the Fund in writing by any
Underwriter through Merrill Lynch expressly for use in the
Registration Statement or Prospectus.
(ii) The accountants who certified the statement of assets and
liabilities included in the Registration Statement are independent
public accountants as required by the 1933 Act and the Rules and
Regulations.
(iii) The statement of assets and liabilities included in the
Registration Statement and the Prospectus presents fairly the
financial position of the Fund as at the date indicated and said
statement has been prepared in conformity with generally accepted
accounting principles.
(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, of the Fund, or in the earnings,
business affairs
3
<PAGE>
or business prospects of the Fund, whether or not arising in the
ordinary course of business, (B) there have been no transactions
entered into by the Fund which are material to the Fund other than
those in the ordinary course of business, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the
Fund or any class of its capital stock.
(v) The Fund has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Maryland with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the
Registration Statement; the Fund is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which the failure to so qualify, either individually
or in the aggregate, would have a material adverse effect upon the
operations or financial condition of the Fund; and the Fund has no
subsidiaries.
(vi) The Fund is registered with the Commission under the 1940
Act as a closed-end non-diversified management investment company, and
no order of suspension or revocation of such registration has been
issued or proceedings therefor initiated or threatened by the
Commission.
(vii) The authorized, issued and outstanding capital stock of the
Fund is as set forth in the Prospectus under the caption "Common
Stock"; the Shares have been duly authorized by all requisite
corporate action on the part of the Fund for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Fund pursuant to this Agreement against payment of the
consideration set forth in the Pricing Agreement, will be validly
issued and fully paid and nonassessable; the Shares conform in all
material respects to all statements relating thereto contained in the
Registration Statement; and the issuance of the Shares is not subject
to preemptive rights.
(viii) The Fund is not in violation of its articles of
incorporation (the "Charter") or by-laws (the "By-Laws") or in default
in the performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which it
is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement, the Pricing Agreement, the
Investment Management Agreement, the Business Management Agreement,
the Sub-Administration Agreement, the Agreement for Stock Transfer
Services and the Custodian Agreement referred to in the Registration
Statement (as used herein, the "Investment Management Agreement," the
"Business Management Agreement,"
4
<PAGE>
the "Sub-Administration Agreement," the "Transfer Agent Agreement" and
the "Custodian Agreement," respectively) and the consummation of the
transactions contemplated herein and therein have been duly authorized
by all necessary corporate action and will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Fund pursuant to any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Fund is a party or by which it may be bound or to which any of the
property or assets of the Fund is subject, nor will such action result
in any violation of the provisions of the Charter or By-laws of the
Fund or, to the best knowledge of the Fund, the Investment Manager and
Templeton, any law, administrative regulation or administrative or
court decree applicable to the Fund; and no consent, approval,
authorization or order of any court or governmental authority or
agency is required for the consummation by the Fund of the
transactions contemplated by this Agreement, the Pricing Agreement,
the Investment Management Agreement, the Business Management
Agreement, the Sub-Administration Agreement and the Custodian
Agreement except such as have been obtained under the 1940 Act or as
may be required under the 1933 Act, the Rules and Regulations, state
securities or Blue Sky laws or foreign securities laws in connection
with the purchase and distribution of the Shares by the Underwriters.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated
in the Prospectus and the Fund has not received any notice of
proceedings relating to the revocation or modification of any such
licenses, permits, consents, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now
pending, or, to the knowledge of the Fund, the Investment Manager and
Templeton threatened against or affecting, the Fund, which might
result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Fund, or
might materially and adversely affect the properties or assets of the
Fund; and there are no material contracts or documents of the Fund
which are required to be filed as exhibits to the Registration
Statement by the 1933 Act, the 1940 Act or by the Rules and
Regulations which have not been so filed.
(xi) The Fund owns or possesses, or can acquire on reasonable
terms, adequate trademarks, service marks and trade names necessary to
conduct its business as described in the
5
<PAGE>
Registration Statement, and the Fund has not received any notice of
infringement of or conflict with asserted rights of others with
respect to any trademarks, service marks or trade names which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling
or finding, would materially adversely affect the conduct of the
business, operations, financial condition or income of the Fund.
(xii) The Fund intends to direct the investment of the proceeds
of the offering described in the Registration Statement in such a
manner as to comply with the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended ("Subchapter M of the
Code"), and intends to qualify as a regulated investment company under
Subchapter M of the Code.
(xiii) This Agreement, the Investment Management Agreement, the
Business Management Agreement, the Sub-Administration Agreement, the
Transfer Agent Agreement and the Custodian Agreement have each been
duly authorized by all requisite corporate action on the part of the
Fund, executed and delivered by the Fund and each complies with all
applicable provisions of the 1940 Act.
(xiv) The custodian arrangements of the Fund, as described in
the Registration Statement, are in compliance with the applicable
requirements under the 1940 Act.
(b) The Investment Manager and Templeton each severally represents
and warrants to each Underwriter as of the date hereof and as of the
Representation Date as follows:
(i) The Investment Manager has been duly organized as a
corporation under the laws of Singapore with requisite power and
authority to conduct its business as described in the Prospectus.
(ii) The Investment Manager is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and is not prohibited by the Advisers Act or the 1940
Act, or the rules and regulations under such acts, from acting under
the Investment Management Agreement for the Fund as contemplated by
the Prospectus.
(iii) The description of the Investment Manager in the Prospectus
is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and there are no pending legal proceedings that would be
required to be described under Item 12 of Form N-2.
6
<PAGE>
(iv) This Agreement has been duly authorized, executed and
delivered by the Investment Manager; the Investment Management
Agreement has been duly authorized, executed and delivered by the
Investment Manager and such agreement constitutes a valid and binding
obligation of the Investment Manager, enforceable in accordance with
its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization or other similar laws relating to or affecting
creditors' rights generally and to general equity principles; and
neither the execution and delivery of this Agreement or the Investment
Management Agreement nor the performance by the Investment Manager of
its obligations hereunder or thereunder will conflict with, or result
in a breach of, any of the terms and provisions of, or constitute,
with or without the giving of notice or the lapse of time or both, a
default under, any material agreement or instrument to which the
Investment Manager is a party or by which the Investment Manager is
bound, or any law, order, rule or regulation applicable to it of any
jurisdiction, court, federal or state regulatory body, administrative
agency or other governmental body, stock exchange or securities
association having jurisdiction over the Investment Manager or its
respective properties or operations.
(v) The Investment Manager has the financial resources
available to it necessary for the performance of its services and
obligations as contemplated in the Prospectus.
(vi) Any advertisement approved by the Investment Manager for
use in the public offering of the Shares pursuant to Rule 482 under
the Rules and Regulations (an "Omitting Prospectus") complies with the
requirements of such Rule 482.
(vii) The Fund will not be subject to taxation under the laws of
Russia or Singapore by virtue of its relationship with the Investment
Manager, except as described in the Prospectus.
(c) Any certificate signed by any officer of the Fund, the Investment
Manager or Templeton and delivered to the Underwriters or counsel for the
Underwriters shall be deemed a representation and warranty by the Fund, the
Investment Manager or Templeton as the case may be, to the Underwriters, as
to the matters covered thereby.
7
<PAGE>
SECTION 2. Sale and Delivery to the Underwriters; Closing.
----------------------------------------------
(a) On the basis of the representations and warranties herein con-
tained and subject to the terms and conditions herein set forth, the Fund
agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter agrees to purchase from the Fund, at the price per share set
forth in the Pricing Agreement, the number of Initial Shares set forth in
Schedule A opposite the name of such Underwriter (except as otherwise
provided in the Pricing Agreement), plus any additional number of Initial
Shares which such Underwriter may become obligated to purchase pursuant to
the provisions of Section 10 hereof.
(i) If the Fund has elected not to rely upon Rule 430A under
the Rules and Regulations, the initial public offering price and the
purchase price per share to be paid by the Underwriters for the Shares
has been determined and set forth in the Pricing Agreement, dated the
date hereof, and an amendment to the Registration Statement and the
Prospectus will be filed before the Registration Statement becomes
effective.
(ii) If the Fund has elected to rely upon Rule 430A under the
Rules and Regulations, the purchase price per share to be paid by the
Underwriters for the Shares shall be an amount equal to the applicable
initial public offering price, less an amount per share to be
determined by agreement between the Representatives and the Fund. The
initial public offering price per share shall be a fixed price to be
determined by agreement between the Representatives and the Fund. The
initial public offering price and the purchase price, when so
determined, shall be set forth in the Pricing Agreement. In the event
that such price has not been agreed upon and the Pricing Agreement has
not been executed and delivered by all parties thereto by the close of
business on the fourth business day following the date of this
Agreement, this Agreement shall terminate forthwith, without liability
of any party to any other party, except as provided in Section 4,
unless otherwise agreed to by the Fund, the Investment Manager,
Templeton and the Representatives.
(b) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Fund hereby grants an option to the Underwriters, severally and not
jointly, to purchase all or any part of the Option Shares at the price per
share set forth above. The option hereby granted will expire 45 days after
the date hereof (or, if the Fund has elected to rely upon Rule 430A under
the Rules and Regulations, 45 days after the execution of the Pricing
Agreement) and may be exercised only for the purpose of covering over-
allotments which may be made in connection with the offering and
distribution of the Initial Shares upon notice by the
8
<PAGE>
Representatives to the Fund setting forth the number of Option Shares as to
which the several Underwriters then exercising the option and the time,
date and place of payment and delivery for such Option Shares. Any such
time and date of delivery (a "Date of Delivery") shall be determined by the
Representatives but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to Closing Time, as
hereinafter defined, unless otherwise agreed upon by the Representatives
and the Fund. If the option is exercised as to all or any portion of the
Option Shares, the Option Shares shall be purchased by the Underwriters,
severally and not jointly, in proportion to their respective Initial Share
underwriting obligations as set forth in Schedule A (except as may be
otherwise provided in the Pricing Agreement).
(c) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the office of Brown & Wood, One World
Trade Center, New York, New York 10048-0557, or at such other place as
shall be agreed upon by the Representatives and the Fund, at 10:00 A.M. on
the fifth business day (unless postponed in accordance with the provisions
of Section 10) following the date the Registration Statement becomes
effective (or, if the Fund has elected to rely upon Rule 430A under the
Rules and Regulations, the fifth business day after execution of the
Pricing Agreement), or such other time not later than ten business days
after such date as shall be agreed upon by the Representatives and the Fund
(such time and date of payment and delivery being herein called "Closing
Time"). In addition, in the event that any or all of the Option Shares are
purchased by the Underwriters, payment of the purchase price for, and
delivery of certificates for, such Option Shares shall be made at the
above-mentioned office of Brown & Wood, or at such other place as shall be
mutually agreed upon by the Fund and the Representatives, on each Date of
Delivery as specified in the notice from the Representatives to the Fund.
Payment shall be made to the Fund by check or checks drawn in New York
Clearing House or similar next day funds and payable to the order of the
Fund, against delivery to the Underwriters of the certificates for the
Shares to be purchased by them. Certificates for the Initial Shares and
the Option Shares shall be in such denominations and registered in such
names as the Representatives may request in writing at least two business
days before Closing Time or the Date of Delivery, as the case may be. The
certificates for the Initial Shares and the Option Shares will be made
available by the Fund for examination by the Representatives not later than
10:00 A.M. on the last business day prior to Closing Time or the Date of
Delivery, as the case may be.
SECTION 3. Covenants of the Fund. The Fund covenants with each
---------------------
Underwriter as follows:
(a) The Fund will use its best efforts to cause the Registration
Statement to become effective under the 1933 Act,
9
<PAGE>
and will advise the Representatives promptly as to the time at which
the Registration Statement and any amendments thereto (including any
post-effective amendment) becomes so effective and, if required, to
cause the issuance of any orders exempting the Fund from any
provisions of the 1940 Act and will advise the Representatives
promptly as to the time at which any such orders are granted.
(b) The Fund will notify the Representatives immediately, and
confirm the notice in writing, (i) of the effectiveness of the
Registration Statement and any amendment thereto (including any post-
effective amendment), (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment
to the Registration Statement or any amendment or supplement to the
Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose, and (v) of the issuance by the Commission of an order of
suspension or revocation of the notification on Form N-8A of
registration of the Fund as an investment company under the 1940 Act
or the initiation of any proceeding for that purpose. The Fund will
make every reasonable effort to prevent the issuance of any stop order
described in subsection (iv) hereunder or any order of suspension or
revocation described in subsection (v) hereunder and, if any such stop
order or order of suspension or revocation is issued, to obtain the
lifting thereof at the earliest possible moment.
(c) The Fund will give the Representatives notice of its
intention to file any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus which
the Fund proposes for use by the Underwriters in connection with the
offering of the Shares, which differs from the Prospectus on file at
the Commission at the time the Registration Statement becomes
effective, whether such revised prospectus is required to be filed
pursuant to Rule 497(b) or Rule 497(h) of the Rules and Regulations),
whether pursuant to the 1940 Act, the 1933 Act, or otherwise, and will
furnish the Underwriters with copies of any such amendment or supple-
ment a reasonable amount of time prior to such proposed filing or use,
as the case may be, and will not file any such amendment or supplement
to which the Representatives or counsel for the Underwriters shall
reasonably object.
(d) The Fund will deliver to the Representatives, as soon as
practicable, two signed copies of the notification of registration and
two signed copies of the Registration Statement as originally filed
and of each amendment thereto, in each case with two sets of the
exhibits filed therewith,
10
<PAGE>
and will also deliver to the Representatives a conformed copy of the
Registration Statement as originally filed and of each amendment
thereto (but without exhibits to the Registration Statement or any
such amendment) for each of the Underwriters.
(e) The Fund will furnish to each Underwriter, from time to time
during the period when the Prospectus is required to be delivered
under the 1933 Act, such number of copies of the Prospectus (as
amended or supplemented) as each Underwriter may reasonably request
for the purposes contemplated by the 1933 Act or the Rules and
Regulations.
(f) If any event shall occur as a result of which it is
necessary, in the opinion of counsel for the Underwriters, to amend or
supplement the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it
is delivered to a purchaser, the Fund will forthwith amend or
supplement the Prospectus by preparing and furnishing to the
Underwriters a reasonable number of copies of an amendment or
amendments of or a supplement or supplements to, the Prospectus (in
form and substance satisfactory to counsel for the Underwriters) which
will amend or supplement the Prospectus so that the Prospectus will
not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading.
(g) The Fund will endeavor, in cooperation with the
Underwriters, to qualify the Shares for offering and sale under the
applicable securities laws of such states and other jurisdictions of
the United States as the Representatives may designate, and will
maintain such qualifications in effect for a period of not less than
one year after the date hereof. The Fund will file such statements
and reports as may be required by the laws of each jurisdiction in
which the Shares have been qualified as above provided.
(h) The Fund will make generally available to its security
holders as soon as practicable, but no later than 60 days after the
close of the period covered thereby, an earning statement (in form
complying with the provisions of Rule 158 of the Rules and
Regulations) covering a twelve-month period beginning not later than
the first day of the Fund's fiscal quarter next following the
"effective" date (as defined in said Rule 158) of the Registration
Statement.
(i) For a period of 180 days after the date of this Agreement,
the Fund will not, without your prior consent, offer or sell, or enter
into any agreement to sell, any equity or equity related securities of
the Fund other than the Shares
11
<PAGE>
and the shares of Common Stock issued in reinvestment of dividends or
distributions.
(j) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in
reliance upon Rule 430A of the Rules and Regulations, then immediately
following the execution of the Pricing Agreement, the Fund will
prepare, and file or transmit for filing with the Commission in
accordance with such Rule 430A and Rule 497(h) of the Rules and
Regulations, copies of amended Prospectus, or, if required by such
Rule 430A, a post-effective amendment to the Registration Statement
(including amended Prospectus), containing all information so omitted.
(k) The Fund will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of
the Code.
(l) The Fund will use its best efforts to effect the listing of
the Shares on the New York Stock Exchange so that trading on such
Exchange begins not later than three months from the date of the
Prospectus.
SECTION 4. Payment of Expenses. The Fund will pay all expenses
-------------------
incident to the performance of its obligations under this Agreement,
including, but not limited to, expenses relating to (i) the printing and
filing of the registration statement as originally filed and of each
amendment thereto, (ii) the preparation, issuance and delivery of the
certificates for the Shares to the Underwriters, (iii) the fees and
disbursements of the Fund's counsel and accountants, (iv) the qualification
of the Shares under securities laws in accordance with the provisions of
Section 3(g) of this Agreement, including filing fees and any reasonable
fees or disbursements of counsel for the Underwriters in connection
therewith and in connection with the preparation of the Blue Sky Survey,
(v) the printing and delivery to the Underwriters of copies of the
registration statement as originally filed and of each amendment thereto,
of the preliminary prospectus, and of the Prospectus and any amendments or
supplements thereto, (vi) the printing and delivery to the Underwriters of
copies of the Blue Sky Survey, (vii) the fees and expenses incurred with
respect to filings with the National Association of Securities Dealers,
Inc., (viii) the fees and expenses incurred with respect to the listing of
the Shares on the New York Stock Exchange, (ix) an aggregate of $250,000 in
partial reimbursement of the Underwriters' expenses, which the Fund will
pay to the Underwriters at Closing Time and (x) the printing and delivery
to the Underwriters of any Omitting Prospectus and advertising and
marketing materials prepared for "internal use" by broker-dealers. The
Underwriters will reimburse the Fund in an amount of up to $0.01 per Share
for costs described in clause (x) above; provided, however, that no such
payment will be made if it would result in a deficit in the underwriting
account.
12
<PAGE>
If this Agreement is terminated by the Representatives in accordance
with the provisions of Section 5 or Section 9(a)(i), the Fund and the
Investment Manager, jointly and severally, shall reimburse the Underwriters
for all of their reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters. In the
event the transactions contemplated hereunder are not consummated, the
Investment Manager agrees to pay all of the costs and expenses set forth in
the first paragraph of this Section 4 which the Fund would have paid if
such transactions had been consummated.
SECTION 5. Conditions of Underwriters' Obligations. The obligations
---------------------------------------
of the Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Fund, the Investment Manager and
Templeton herein contained, to the performance by the Fund, the Investment
Manager and Templeton of their respective obligations hereunder, and to the
following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:30 P.M., New York City time, on the date of this
Agreement, or at a later time and date not later, however, than 5:30
P.M. on the first business day following the date hereof, or at such
later time and date as may be approved by a majority in interest of
the Underwriters, and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission. If the Fund has elected to rely upon Rule 430A of the
Rules and Regulations, the price of the Shares and any price-related
information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 497(h) of the Rules and
Regulations within the prescribed time period, and prior to Closing
Time the Fund shall have provided evidence satisfactory to the
Representatives of such timely filing, or a post-effective amendment
providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A of the
Rules and Regulations.
(b) At Closing Time, the Representatives shall have received:
(1) The favorable opinion, dated as of Closing Time, of
Dechert, Price & Rhoads, counsel for the Fund and Templeton, and
special United States counsel for the Investment Manager, in form
and substance satisfactory to counsel for the Underwriters, to
the effect that:
13
<PAGE>
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Maryland.
(ii) The Fund has corporate power and authority to own,
lease and operate its properties and conduct its business as
described in the Registration Statement and the Prospectus.
(iii) The Fund is duly qualified as a foreign
corporation to transact business and is in good standing in
each jurisdiction in which the failure to so qualify, either
individually or in the aggregate, would have a material
adverse effect on the operations or financial condition of
the Fund.
(iv) The Shares have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement and,
when issued and delivered by the Fund pursuant to this
Agreement against payment of the consideration set forth in
the Pricing Agreement, will be validly issued and fully paid
and nonassessable; the issuance of the Shares is not subject
to any preemptive rights; and the authorized capital stock
conforms as to legal matters in all material respects to the
description thereof in the Registration Statement under the
caption "Common Stock".
(v) This Agreement and the Pricing Agreement each has
been duly authorized, executed and delivered by the Fund and
each complies with all applicable provisions of the 1940
Act.
(vi) The Registration Statement is effective under the
1933 Act and, to the best of their knowledge and
information, no stop order suspending the effectiveness of
the Registration Statement has been issued under the 1933
Act or proceedings therefor initiated or threatened by the
Commission.
(vii) At the time the Registration Statement became
effective the Registration Statement (other than the
financial statements as to which no opinion need be
rendered) complied as to form in all material respects with
the requirements of the 1933 Act and the 1940 Act and the
Rules and Regulations.
(viii) To the best of their knowledge and information,
there are no legal or governmental proceedings pending or
threatened against the Fund
14
<PAGE>
which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(ix) To the best of their knowledge and information,
there are no contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments of the Fund
required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits
thereto, the descriptions thereof are correct in all
material respects, references thereto are correct, and no
default exists in the due performance or observance of any
material obligation, agreement, covenant or condition
contained in any contract, indenture, loan agreement, note
or lease so described, referred to or filed.
(x) No consent, approval, authorization or order of any
court or governmental authority or agency is required in
connection with the sale of the Shares to the Underwriters
hereunder, except such as has been obtained under the 1933
Act, the 1940 Act or the Rules and Regulations or such as
may be required under state and foreign securities laws; and
to the best of their knowledge and information, the
execution and delivery of this Agreement, the Pricing
Agreement, the Investment Management Agreement, the
Administration Agreement, the Transfer Agent Agreement and
the Custodian Agreement and the consummation of the
transactions contemplated herein and therein will not
conflict with or constitute a breach of, or default under,
or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Fund
pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument known to such
counsel to which the Fund is a party or by which it may be
bound or to which any of the property or assets of the Fund
is subject, nor will such action result in any violation of
the provisions of the Charter or By-Laws of the Fund, or any
law or administrative regulation, or, to the best of their
knowledge and information, administrative or court decree.
(xi) The Investment Management Agreement, the Business
Management Agreement, the Sub-Administration Agreement, the
Transfer Agent Agreement and the Custodian Agreement have
each
15
<PAGE>
been duly authorized and approved by the Fund and comply as
to form in all material respects with all applicable
provisions of the 1940 Act, and each has been duly executed
by the Fund.
(xii) The Fund is registered with the Commission under the
1940 Act as a closed-end, non-diversified management
investment company, and all required action has been taken
by the Fund under the 1933 Act, the 1940 Act and the Rules
and Regulations to make the public offering and consummate
the sale of the Shares pursuant to this Agreement; the
provisions of the Charter and By-Laws of the Fund comply as
to form in all material respects with the requirements of
the 1940 Act; and, to the best of their knowledge and
information, no order of suspension or revocation of such
registration under the 1940 Act, pursuant to Section 8(e) of
the 1940 Act, has been issued or proceedings therefor
initiated or threatened by the Commission.
(xiii) The information in the Prospectus under the
caption "Taxation - U.S. Federal Income Taxes," to the
extent that it constitutes matters of law or legal
conclusions, has been reviewed by them and is correct in all
material respects.
(xiv) The custodian arrangements of the Fund, as
described in the Registration Statement, comply in all
material respects with the applicable requirements under the
1940 Act.
(xv) The Investment Manager is duly registered as an
investment adviser under the Advisers Act and is not
prohibited by the Advisers Act or the 1940 Act, or the rules
and regulations under such acts, from acting under the
Investment Management Agreement for the Fund as contemplated
by the Prospectus.
(xvi) This Agreement has been duly authorized, executed
and delivered by Templeton.
(2) The favorable opinion, dated as of Closing Time, of
Shook Lin & Bok, Singapore counsel for the Investment Manager, in
form and substance satisfactory to counsel for the Underwriters,
to the effect that:
(i) The Investment Manager has been duly organized
as a corporation organized under the laws of Singapore, with
requisite power and authority to
16
<PAGE>
conduct its business as described in the Registration
Statement and the Prospectus.
(ii) This Agreement and the Investment Management
Agreement have been duly authorized, executed and delivered
by the Investment Manager; the Investment Management
Agreement constitutes a valid and binding obligation of the
Investment Manager; no consent, approval, authorization or
order of any court or governmental authority or agency is
required which has not been obtained for the performance of
this Agreement or the Investment Management Agreement by the
Investment Manager; and to the best of such counsel's
knowledge and information, neither the execution and
delivery of this Agreement or the Investment Management
Agreement nor the performance by the Investment Manager of
its obligations hereunder or thereunder will conflict with,
or result in a breach of any of the terms and provisions of,
or constitute, with or without the giving of notice or the
lapse of time or both, a default under, any law, order, rule
or regulation applicable to the Investment Manager of any
court, regulatory body, administrative agency or other
governmental body, stock exchange or securities association
in Singapore.
(iii) Such counsel confirms that nothing has come to
their actual attention that would lead them to believe that
the description of the Investment Manager in the
Registration Statement and the Prospectus contains any
untrue statement of a material fact or omits to state any
material fact necessary to make the statements therein not
misleading.
(iv) Except for such consents, certificates,
approvals, licenses, authorizations and orders of any court
or governmental authority or agency as shall be specified in
such counsel's opinion, all of which have been obtained and
are in full force and effect and all conditions of which
have been fully satisfied, there are no other consents,
certificates, approvals, licenses, authorizations or orders
of any court or governmental authority or agency required by
any party to any of this Agreement, the Investment
Management Agreement or the Custodian Agreement from any
governmental or other regulatory authorities, stock
exchanges or securities business associations in or of
Singapore in connection with the execution, delivery or
performance of any of this Agreement, the
17
<PAGE>
Investment Management Agreement or the Custodian Agreement
in the manner contemplated therein, or of the issue and sale
of the Shares in the manner contemplated in the Prospectus
or the conduct of the business of the Fund as described in
the Prospectus.
(v) No stamp duty or other documentary tax is payable
in Singapore in respect of the execution, delivery or
performance of this Agreement or the Investment Management
Agreement.
(vi) The choice of the laws of the State of New York
to govern this Agreement, and the choice of the laws of the
State of Maryland to govern the Investment Management
Agreement, is in each case a valid choice of law under the
laws of Singapore, and accordingly would be applied by the
courts of Singapore if any such agreement or any claim made
thereunder is or are brought before such court upon proof of
the relevant provisions of United States laws and provided
that such provisions are not contrary to the public policy
of Singapore.
(vii) The Fund will not be subject to taxation under
the laws of Singapore by virtue of its relationship with the
Investment Manager.
(3) The favorable opinion, dated as of Closing Time, of
Linklaters & Paines, Russian counsel to the Fund, in form and
substance satisfactory to counsel for the Underwriters, to the
effect that:
(i) Except for such consents, certificates,
approvals, licenses, authorizations and orders of any court
or governmental authority or agency as shall be specified in
such counsel's opinion, all of which have been obtained and
are in full force and effect and all conditions of which
have been fully satisfied, there are no other consents,
certificates, approvals, licenses, authorizations or orders
of any court or governmental authority or agency required by
any party to any of this Agreement, the Investment
Management Agreement or the Custodian Agreement from any
governmental or other regulatory authorities, stock
exchanges or securities business associations in or of
Russia in connection with the execution, delivery or
performance of any of this Agreement, the Investment
Management Agreement or the Custodian Agreement in the
manner contemplated therein, or for the issue and sale of
the Shares in the manner
18
<PAGE>
contemplated in the Prospectus or the conduct of the
business of the Fund as described in the Prospectus.
(ii) The information in the Prospectus under the
headings "Prospectus Summary," "Investment Rationale --
Investment in Russia," "Risk Factors and Special
Considerations," "Appendix A -- Russia," "Appendix B -- The
Securities Markets of Russia," and "Taxation -- Russian
Taxation" has been reviewed by such counsel and insofar as
it relates to matters of law or regulations of Russia or
legal conclusions based thereon, (a) is a full fair and
accurate description of the laws of Russia or legal
conclusions thereunder applicable to the Fund and the
operation of its business as described in the Prospectus and
(b) at the time the Registration Statement became effective
and at Closing Time, did not contain any untrue statement of
material fact or omit to state a material fact necessary to
make the statements therein not misleading.
(iii) No stamp, registration, documentary or similar
taxes are payable in Russia in respect of the execution,
delivery or performance of this Agreement, the Investment
Management Agreement or the Custodian Agreement; under
current laws and regulations, no stamp duty or other
documentary tax will be charged on, and no other deduction
will be made by any court in Russia from, the amount awarded
in any judgment rendered in respect of any of the agreements
referred to in this paragraph.
(iv) To the best knowledge of such counsel, there is
in Russia no pending or threatened action, suit,
investigation or proceeding before any court or governmental
agency, authority or body or any arbitrator involving or
affecting the Fund or questioning the validity of any of
this Agreement, the Investment Management Agreement or the
Custodian Agreement.
(v) It is not necessary, by reason of the entry into
or performance of this Agreement, the Investment Management
Agreement or the Custodian Agreement that any of the parties
thereto be licensed or qualified or otherwise authorized to
do business in Russia, and the entry into or performance of
such agreement by any such party will not, to the best of
its knowledge, violate any applicable law, rule or
regulation of Russia or any
19
<PAGE>
government or any agency thereof, in each case so long as
such parties enter into and perform such agreements outside
of Russia.
(vi) The Fund will not be subject to taxation under
the laws of Russia by virtue of its relationship with the
Investment Manager.
(4) The favorable opinion, dated as of Closing Time, of
Egorov, Pughinsky, Afanasiev & Associates, Russian counsel to the
Fund, in form and substance satisfactory to the Underwriters, to
the effect that the information relating to Russia in the
Prospectus under the headings "Prospectus Summary," "Investment
Rationale," "Risk Factors and Special Considerations," "Appendix
A - Russia," and "Appendix B - The Securities Markets of Russia"
has been reviewed by such counsel and that nothing has come to
their attention that would lead them to believe that such
information, at the time the Registration Statement became
effective or at Closing Time, contained any untrue statement of a
material fact or omitted to state a material fact necessary to
make the statements therein not misleading.
(5) The favorable opinion, dated as of Closing Time, of
Brown & Wood, counsel for the Underwriters, with respect to the
matters set forth in (i) and (iv) to (vii), inclusive, of
subsection (b)(1) of this Section.
(6) In giving their opinions required by subsections (b)(1)
and (b)(5) of this Section, Dechert, Price & Rhoads and Brown &
Wood shall additionally state that nothing has come to their
attention that would lead them to believe that the Registration
Statement (other than the financial statement included therein,
as to which no belief need be stated), at the time it became
effective or at the Representation Date, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (other than the
financial statement included therein, as to which no belief need
be stated), at the Representation Date (unless the term
"Prospectus" refers to a prospectus which has been provided to
the Underwriters by the Fund for use in connection with the
offering of the Shares which differs from the Prospectus on file
at the Commission at the time the Registration Statement becomes
effective, in which case at the time such prospectus is first
provided to the Underwriters for such use) or at Closing Time,
included an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the
20
<PAGE>
statements therein, in the light of the circumstances under which
they were made, not misleading. In rendering their opinions,
Dechert, Price & Rhoads and Brown & Wood may rely, as to matters
of Maryland law, on the opinion of Piper & Marbury, dated as of
Closing Time.
(c) At Closing Time, (i) the Registration Statement and the
Prospectus shall contain all statements which are required to be
stated therein in accordance with the 1933 Act, the 1940 Act and the
Rules and Regulations and in all material respects shall conform to
the requirements of the 1933 Act, the 1940 Act and the Rules and
Regulations and the Prospectus shall not contain any untrue statement
of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, and no action, suit or proceed-
ing at law or in equity shall be pending or, to the knowledge of the
Fund, the Investment Manager or Templeton, threatened against the
Fund, the Investment Manager or Templeton which would be required to
be set forth in the Prospectus other than as set forth therein, (ii)
there shall not have been, since the respective dates as of which
information is given in the Prospectus, any material adverse change in
the condition, financial or otherwise, of the Fund or in its earnings,
business affairs or business prospects, whether or not arising in the
ordinary course of business, from that set forth in the Registration
Statement and Prospectus, (iii) the Investment Manager shall have the
financial resources available to it necessary for the performance of
its services and obligations as contemplated in the Registration
Statement and the Prospectus and (iv) no proceedings shall be pending
or, to the knowledge of the Fund, the Investment Manager or Templeton,
threatened against the Fund, the Investment Manager or Templeton
before or by any Federal, state or other commission, board or
administrative agency wherein unfavorable decision, ruling or finding
would materially and adversely effect the business, property,
financial condition or income of either the Fund, the Investment
Manager or Templeton other than as set forth in the Registration
Statement and the Prospectus. As used in this Section 5(c), the term
"Prospectus" means the Prospectus in the form first used to confirm
sales of Shares. The Underwriters shall have received, at Closing
Time, a certificate of the President or Treasurer of the Fund, of a
Managing Director of the Investment Manager and of an executive
officer of Templeton dated as of Closing Time, evidencing, to the best
of their knowledge and belief, after reasonable investigation,
compliance with the appropriate provisions of this subsection (c).
(d) At Closing Time, the Underwriters shall have received
certificates, dated as of Closing Time, (i) of the President or
Treasurer of the Fund to the effect that the
21
<PAGE>
representations and warranties of the Fund contained in Section 1(a)
are true and correct with the same force and effect as though
expressly made at and as of Closing Time, (ii) of a Managing Director
of the Investment Manager to the effect that the representations and
warranties of the Investment Manager contained in Sections 1(a) and
1(b) are true and correct with the same force and effect as though
expressly made at and as of Closing Time and (iii) of an executive
officer of Templeton to the effect that the representations and
warranties of Templeton contained in Sections 1(a) and 1(b) are true
and correct with the same force and effect as though expressly made at
and as of Closing Time.
(e) At the time of execution of this Agreement, the Underwriters
shall have received from McGladrey & Pullen a letter, dated such date
in form and substance satisfactory to the Underwriters, to the effect
that:
(i) they are independent accountants with respect to the
Fund within the meaning of the 1933 Act and the Rules and
Regulations;
(ii) in their opinion, the statement of assets and
liabilities examined and audited by them and included in the
Registration Statement complies as to form in all material
respects with the applicable accounting requirements of the 1933
Act and the 1940 Act and the Rules and Regulations; and
(iii) they have performed specified procedures, not
constituting an audit, including a reading of the latest
available interim financial statements of the Fund, a reading of
the minute books of the Fund, inquiries of officials of the Fund
responsible for financial accounting matters and such other
inquiries and procedures as may be specified in such letter, and
on the basis of such inquiries and procedures nothing came to
their attention that caused them to believe that at the date of
the latest available statement of assets and liabilities read by
such accountants, or at a subsequent specified date not more than
five days prior to the date of this Agreement, there was any
change in the capital stock or net assets of the Fund as compared
with amounts shown on the statement of assets and liabilities
included in the Prospectus.
(f) At Closing Time, the Underwriters shall have received from
McGladrey & Pullen a letter, dated as of Closing Time, to the effect
that they reaffirm the statements made in the letter furnished
pursuant to subsection (e) of this
22
<PAGE>
Section, except that the "specified date" referred to shall be a date
not more than five days prior to Closing Time.
(g) At Closing Time, counsel for the Underwriters shall have
been furnished with such documents and opinions as they may reasonably
require for the purpose of enabling them to pass upon the issuance and
sale of the Shares as herein contemplated and to pass upon related
proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Fund,
the Investment Manager and Templeton in connection with the
organization and registration of the Fund under the 1940 Act and the
issuance and sale of the Shares as herein contemplated shall be
satisfactory in form and substance to the Representatives and counsel
for the Underwriters.
(h) In the event the Underwriters exercise their option provided
in Section 2 hereof to purchase all or any portion of the Option
Shares, the representations and warranties of the Fund, the Investment
Manager and Templeton contained herein and the statements in any
certificate furnished by the Fund, the Investment Manager and
Templeton hereunder shall be true and correct as of each Date of
Delivery, and the Underwriters shall have received:
(1) Certificates, dated the Date of Delivery, of the
President or Treasurer of the Fund, of a Managing Director of
each of the Investment Manager and of an executive officer of
Templeton confirming that the information contained in the
certificate delivered by each of them at Closing Time pursuant to
Sections 5(c) and (d), as the case may be, remains true as of
such Date of Delivery.
(2) The favorable opinion of Dechert, Price & Rhoads,
counsel for the Fund, the Investment Manager and Templeton and
special United States counsel for the Investment Manager, in form
and substance satisfactory to counsel for the Underwriters, dated
such Date of Delivery, relating to the Option Shares and
otherwise to the same effect as the opinion required by Sections
5(b)(1) and 5(b)(6).
(3) The favorable opinion of Shook Lin & Bok, Singapore
counsel for the Investment Manager, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Shares and otherwise to the same
effect as the opinion required by Section 5(b)(2).
23
<PAGE>
(4) The favorable opinion of Linklaters & Paines, Russia
counsel for the Fund, in form and substance satisfactory to
counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Shares and otherwise to the same effect as
the opinion required by Section 5(b)(3).
(5) The favorable opinion of Egorov, Pughinsky, Afanasiev &
Associates, in form and substance satisfactory to counsel for the
Underwriters, dated such Date of Delivery, to the same effect as
the opinion required by Section 5(b)(4).
(6) The favorable opinion of Brown & Wood, counsel for the
Underwriters, dated the Date of Delivery, relating to the Option
Shares and otherwise to the same effect as the opinion required
by Sections 5(b)(5) and 5(b)(6).
(7) A letter from McGladrey & Pullen, in form and substance
satisfactory to counsel for the Underwriters and dated such Date
of Delivery, substantially the same in scope and substance as the
letter furnished to the Underwriters pursuant to Section 5(e),
except that the "specified date" in the letter furnished pursuant
to this Section 5(h)(8) shall be a date not more than five days
prior to such Date of Delivery.
If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be
terminated by the Representatives by notice to the Fund at any time at or
prior to Closing Time, and such termination shall be without liability of
any party to any other party except as provided in Section 4.
SECTION 6. Indemnification. (a) The Fund, the Investment Manager
---------------
and Templeton, jointly and severally, agree to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the
information deemed to be part of the Registration Statement pursuant
to Rule 430A of the Rules and Regulations, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any
24
<PAGE>
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever as incurred to the extent of the aggregate amount
paid in settlement of any litigation, or investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, if such settlement is
effected with the written consent of the indemnifying party; and
(iii) against any and all expense whatsoever (including the fees
and disbursements of counsel chosen by the Underwriters) reasonably
incurred in investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid
under (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to any
- -------- -------
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with written information furnished to
the Fund by the Underwriters through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Fund, the Investment Manager and Templeton, their respective directors,
each of the Fund's officers who signed the Registration Statement, and each
person, if any, who controls the Fund, the Investment Manager and Templeton
within the meaning of Section 15 of the 1933 Act, against any and all loss,
liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to
untrue statements or omissions, or alleged untrue statements or omissions,
made in the Registration Statement (or any amendment thereto) or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information
furnished to the Fund by such Underwriter expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
25
<PAGE>
(c) In addition to the foregoing indemnification, each of the
Investment Manager and Templeton, jointly and severally, also agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act,
against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, with respect to
any Omitting Prospectus or any advertising or marketing materials prepared
or approved by the Investment Manager for use in connection with the
offering of the Shares.
(d) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of any such action. In no event shall the indemnifying parties be
liable for the fees and expenses of more than one counsel (in addition to
any local counsel) separate from their own counsel for all indemnified
parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances.
SECTION 7. Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for
in Section 6 is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Fund, the
Investment Manager, Templeton and the Underwriters shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by said indemnity agreement as incurred by the Fund, the
Investment Manager, Templeton and the Underwriters, as incurred, in such
proportions that the Underwriters are responsible for that portion
represented by the percentage that the aggregate underwriting compensation
payable pursuant to Section 2 hereof bears to the aggregate initial public
offering price of the Shares sold under this Agreement and the Fund, the
Investment Manager and Templeton are responsible for the balance; provided,
however, that as between the Fund on the one hand and the Investment
Manager and Templeton on the other (and solely for the purpose of
allocating between such parties the total amount to be contributed by them)
the relative benefits received by the Fund, the Investment Manager and
Templeton shall be deemed to be in the same proportion that the total net
proceeds from the offering (before deducting expenses) received by the Fund
bears to the present value of the future revenue stream to be generated by
the investment management fee to be paid by the Fund to the Investment
Manager pursuant to the Investment Management Agreement; and provided,
further, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
26
<PAGE>
from any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section, each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act shall have the
same rights to contribution as such Underwriter, and each director of the
Fund, the Investment Manager and Templeton, respectively, each officer of
the Fund who signed the Registration Statement, and each person, if any,
who controls the Fund, the Investment Manager or Templeton within the
meaning of Section 15 of the 1933 Act shall have the same rights to
contribution as the Fund, the Investment Manager and Templeton,
respectively.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement or the Pricing Agreement, or contained in certificates of
officers of the Fund, the Investment Manager or Templeton submitted
pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or
controlling person, or by or on behalf of the Fund, the Investment Manager
or Templeton and shall survive delivery of the Shares to the Underwriters.
SECTION 9. Termination of Agreement. (a) The Representatives, by
------------------------
notice to the Fund, may terminate this Agreement at any time at or prior to
Closing Time (i) if there has been, since the date of this Agreement or
since the respective dates as of which information is given in the
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Fund, the Investment Manager or Templeton, whether or not arising in
the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States, Russia or
elsewhere or any outbreak of hostilities or other calamity or crisis or any
escalation of existing hostilities the effect of which is such as to make
it, in the Representatives' judgment, impracticable to market the Shares or
enforce contracts for the sale of the Shares, or (iii) if trading generally
on the American Stock Exchange, the New York Stock Exchange, or any of the
stock exchanges in Russia has been suspended, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securities
have been required, by any of said exchanges or by order of the Commission
or any other governmental authority, or if a banking moratorium has been
declared by United States, New York, or Russian authorities. As used in
this Section 9(a), the term "Prospectus" means the Prospectus in the form
first used to confirm sales of the Shares.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party
except as provided in Section 4.
27
<PAGE>
SECTION 10. Default by One or More of the Underwriters. If one or
------------------------------------------
more of the Underwriters shall fail or refuse at Closing Time to purchase
the Shares which it or they are obligated to purchase under this Agreement
and the Pricing Agreement (the "Defaulted Shares"), the Representatives
shall have the right, within 48 hours thereafter, to make arrangements for
one or more of the non-defaulting Underwriters, or any other underwriters,
to purchase all, but not less than all, of the Defaulted Shares in such
amounts as may be agreed upon and upon the terms herein set forth; if,
however, the Representatives shall not have completed such arrangements
within such 48-hour period, then:
(a) if the number of Defaulted Shares does not exceed 10% of the
Shares, the non-defaulting Underwriters shall be obligated to purchase
the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Shares exceeds 10% of the total
number of Shares, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the Representatives or the Fund shall
have the right to postpone Closing Time for a period not exceeding seven
days in order to effect any required changes in the Registration Statement
or Prospectus or in any other documents or arrangements.
SECTION 11. Jurisdiction of Courts of New York. The Investment
----------------------------------
Manager hereby appoints Templeton as its authorized agent (the "Authorized
Agent") upon which process may be served in any action by any Underwriter,
arising out of or based upon this Agreement which may be instituted in any
state or federal court in The City of New York, and the Investment Manager
expressly accepts the jurisdiction of any such court in respect of such
action. Such appointment shall be irrevocable unless and until the
appointment of a successor Authorized Agent and such successor's acceptance
of such appointment. The Investment Manager will take any and all action,
including the filing of any and all documents and instruments, that may be
necessary to continue such appointment or appointments in full force and
effect as aforesaid and will appoint a successor Authorized Agent if the
Authorized Agent named above ceases operations in the United States.
Service of process upon the Authorized Agent and written notice of such
service mailed or delivered to the Investment Manager at its address set
forth in Section 12 hereof shall be deemed in every respect service of
process upon the Investment Manager.
28
<PAGE>
SECTION 12. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed
or transmitted by any standard form of written telecommunication. Notices
to the Underwriters shall be directed to Merrill Lynch & Co., Merrill Lynch
World Headquarters, North Tower, World Financial Center, New York, New York
10281, Attention: Patricia Jorgensen; notices to the Fund shall be
directed to the Fund, Attention: Thomas M. Mistele, Esq., Templeton Funds
Management, Inc., 700 Central Avenue, St. Petersburg, Florida 33701;
notices to the Investment Manager shall be directed to the Investment
Manager, Attention: J. Mark Mobius, Managing Director, Templeton
Investment Management (Singapore) Pte. Ltd., 20 Raffles Place, Singapore;
and notices to Templeton shall be sent to the Templeton, Attention:
________________________, Templeton Worldwide, Inc., Broward Financial
Centre, 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida
33394-3091.
SECTION 13. Parties. This Agreement and the Pricing Agreement shall
-------
inure to the benefit of and be binding upon the Underwriters, the Fund, the
Investment Manager, Templeton and their respective successors. Nothing
expressed or mentioned in this Agreement or the Pricing Agreement is
intended or shall be construed to give any person, firm or corporation,
other than the parties hereto and their respective successors and the
controlling persons and officers and directors referred to in Sections 6
and 7 and their heirs and legal representatives, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and the Pricing Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the parties hereto and thereto and their respective
successors, and said controlling persons and officers and directors and
their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Shares from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. Governing Law and Time. This Agreement and the Pricing
----------------------
Agreement shall be governed by the laws of the State of New York applicable
to agreements made and to be performed in said State. Specified times of
day refer to New York City time.
29
<PAGE>
If the foregoing is in accordance with your understanding of our
Agreement, please sign and return to us a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a single binding
agreement among the Underwriters, the Fund, the Investment Manager and
Templeton in accordance with its terms.
Very truly yours,
TEMPLETON RUSSIA FUND, INC.
By:
---------------------------------
Name:
Title:
TEMPLETON INVESTMENT MANAGEMENT
(SINGAPORE) PTE. LTD
By:
---------------------------------
Name:
Title:
TEMPLETON WORLDWIDE, INC.
By:
---------------------------------
Name:
Title:
30
<PAGE>
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
A.G. EDWARDS & SONS, INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:
----------------------------------
(Authorized Signatory)
For themselves and as Representatives of the
several Underwriters named in Schedule A
hereto.
31
<PAGE>
Schedule A
Name of Underwriters Number of Shares
-------------------- ----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . ___________
A.G. Edwards & Sons, Inc. . . . . . . . . . . . . . ___________
Nomura Securities International, Inc. . . . . . . . ___________
Prudential Securities Incorporated . . . . . . . . ___________
Total . . . . . . . . . . . . . . . . . . . .
============
<PAGE>
Exhibit A
______________ Shares
Templeton Russia Fund, Inc.
(a Maryland corporation)
COMMON STOCK
(Par Value $0.01 Per Share)
PRICING AGREEMENT
-----------------
________ __, 1995
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
A.G. EDWARDS & SONS, INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
as Representatives of the several Underwriters
named in Schedule A to the Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281
Dear Sirs:
Reference is made to the Purchase Agreement, dated ________ __, 1995
(the "Purchase Agreement"), relating to the purchase by the several
Underwriters named in Schedule A thereto, for whom Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, A.G. Edwards & Sons,
Inc., Nomura Securities International, Inc. and Prudential Securities
Incorporated are acting as representatives (the "Representatives"), of the
above-referenced shares of Common Stock, par value $0.01 per share (the
"Initial Shares"), of Templeton Russia Fund, Inc. (the "Fund") and relating
to the option granted to the Underwriters to purchase up to an additional
__________ shares of Common Stock, par value $0.01 per share, of the Fund
to cover over-allotments in connection with the sale of the Initial Shares
(the "Option Shares"). The Initial Shares and all or any part of the
Option Shares are collectively herein referred to as the "Shares".
A-1
<PAGE>
Pursuant to Section 2 of the Purchase Agreement, the Fund agrees with
each Underwriter as follows:
1. The initial public offering price per share for the Shares,
determined as provided in said Section 2, shall be $__.__.
2. The purchase price per share for the Shares to be paid by
the several Underwriters shall be $__.__, being an amount equal to
the initial public offering price set forth above less $.__ per share.
3. The number of Initial Shares to be purchased by each
Underwriter is as set forth on Schedule A to the Purchase Agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Fund a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a
binding agreement between the Underwriters and the Fund in accordance with
its terms.
Very truly yours,
TEMPLETON RUSSIA FUND, INC.
By:
-------------------------------
Name:
Title:
A-2
<PAGE>
Confirmed and Accepted, as of the
date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
A.G. EDWARDS & SONS, INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PRUDENTIAL SECURITIES INCORPORATED
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:
-----------------------------------
(Authorized Signatory)
For themselves and as Representatives of the
several Underwriters named in Schedule A
to the Purchase Agreement.
A-3
Exhibit 99(h)(ii)
Revised October 29, 1990
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, N.Y. 10281-1305
STANDARD DEALER AGREEMENT
-------------------------
Dear Sirs:
In connection with public offerings of securities underwritten by us,
or by a group of underwriters (the "Underwriters") represented by us, you
may be offered the opportunity to purchase a portion of such securities, as
principal, at a discount from the offering price representing a selling
concession or reallowance granted as consideration for services rendered by
you in the sale of such securities. We request that you agree to the
following terms and provisions, and make the following representations,
which, together with any additional terms and provisions set forth in any
wire or letter sent to you in connection with a particular offering, will
govern all such purchases of securities and the reoffering thereof by you.
Your subscription to, or purchase of, such securities will constitute
---------------------------------------------------------------------
your reaffirmation of this Agreement.
- -------------------------------------
1. When we are acting as representative (the "Representative") of
the Underwriters in offering securities to you, it should be understood
that all offers are made subject to prior sale of the subject securities,
when, as and if such securities are delivered to and accepted by the
Underwriters and subject to the approval of legal matters by their counsel.
In such cases, any order from you for securities will be strictly subject
to confirmation and we reserve the right in our uncontrolled discretion to
reject any order in whole or in part. Upon release by us, you may reoffer
such securities at the offering price fixed by us. With our consent, you
may allow a discount, not in excess of the reallowance fixed by us, in
selling such securities to other dealers, provided that in doing so you
comply with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise
us of the identity of any dealer to whom you allow such a discount and any
Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering
price and other selling terms.
2. You represent that you are a dealer actually engaged in the
investment banking or securities business and that you are either (i) a
member in good standing of the NASD or (ii) a dealer
<PAGE>
with its principal place of business located outside the United States, its
territories or possessions and not registered under the Securities Exchange
Act of 1934 (a "non-member foreign dealer") or (iii) a bank not eligible
for membership in the NASD. If you are a non-member foreign dealer, you
agree to make no sales of securities within the United States, its
territories or its possessions or to persons who are nationals thereof or
residents therein. Non-member foreign dealers and banks agree, in making
any sales, to comply with the NASD's interpretation with respect to free-
riding and withholding. In accepting a selling concession where we are
acting as Representative of the Underwriters, in accepting a reallowance
from us whether or not we are acting as such Representative, and in
allowing a discount to any other person, you agree to comply with the
provisions of Section 24 of Article III of the Rules of Fair Practice of
the NASD, and, in addition, if you are a non-member foreign dealer or bank,
you agree to comply, as though you were a member of the NASD, with the
provisions of Sections 8 and 36 of Article III of such Rules of Fair
Practice and to comply with Section 25 of Article III thereof as that
Section applies to a non-member foreign dealer or bank. You represent that
you are fully familiar with the above provisions of the Rules of Fair
Practice of the NASD.
3. If the securities have been registered under the Securities Act
of 1933 (the "1933 Act"), in offering and selling such securities, you are
not authorized to give any information or make any representation not
contained in the prospectus relating thereto. You confirm that you are
familiar with the rules and policies of the Securities and Exchange
Commission relating to the distribution of preliminary and final
prospectuses, and you agree that you will comply therewith in any offering
covered by this Agreement. If we are acting as Representative of the
Underwriters, we will make available to you, to the extent made available
to us by the issuer of the securities, such number of copies of the
prospectus or offering documents, for securities not registered under the
1933 Act, as you may reasonably request.
4. If we are acting as Representative of the Underwriters of
securities of an issuer that is not required to file reports under the
Securities Exchange Act of 1934 (the "1934 Act"), you agree that you will
not sell any of the securities to any account over which you have
discretionary authority.
5. Payment for securities purchased by you is to be made at our
office, One Liberty Plaza, 165 Broadway, New York, N.Y. 10006 (or at such
other place as we may advise), at the offering price less the concession
allowed to you, on such date as we may advise, by certified or official
bank check in New York Clearing House funds (or such other funds as we may
advise), payable to our order, against delivery of the securities to be
purchased by you. We shall have authority to make appropriate arrangements
for payment for
2
<PAGE>
and/or delivery through the facility of The Depository Trust Company or any
such other depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as
Representative of the Underwriters, you agree to repay to us for the
accounts of the Underwriters the amount of the concession allowed to you
plus brokerage commissions and any transfer taxes paid in connection with
such purchase.
7. At any time prior to the completion of the distribution of
securities covered by this Agreement you will, upon our request as
Representative of the Underwriters, report to us the amount of securities
purchased by you which then remains unsold and will, upon our request, sell
to us for the account of one or more of the Underwriters such amount of
such unsold securities as we may designate, at the offering price less an
amount to be determined by us not in excess of the concession allowed to
you.
8. If we are acting as Representative of the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions
of the United States in which it is believed that the securities being
offered are qualified for sale under, or are exempt from the requirements
of, their respective securities laws, but we assume no responsibility with
respect to your right to sell securities in any jurisdiction. We shall
have authority to file with the Department of State of the State of New
York a Further State Notice with respect to the securities, if necessary.
9. You agree that in connection with any offering of securities
covered by this Agreement you will comply with the applicable provisions of
the 1933 Act and the 1934 Act and the applicable rules and regulations of
the Securities and Exchange Commission thereunder, the applicable rules and
regulations of the NASD, and the applicable rules of any securities
exchange having jurisdiction over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by
this Agreement. We shall be under no liability to you except for our lack
of good faith and for obligations assumed by us in this Agreement, except
that you do not waive any rights that you may have under the 1933 Act or
the rules and regulations thereunder.
11. Any notice from us shall be deemed to have been duly given if
mailed or transmitted by any standard form of written telecommunications to
you at the above address or at such other address as you shall specify to
us in writing.
12. With respect to any offering of securities covered by this
Agreement, the price restrictions contained in Paragraph 1 hereof
3
<PAGE>
and the provisions of Paragraphs 6 and 7 hereof shall terminate as to such
offering at the close of business on the 45th day after the securities are
released for sale or, as to any or all such provisions, at such earlier
time as we may advise. All other provisions of this Agreement shall remain
operative and in full force and effect with respect to such offering.
13. This Agreement shall be governed by the laws of the State of New
York.
Please confirm your agreement hereto by signing the enclosed duplicate
copy hereof in the place provided below and returning such signed duplicate
copy to us at World Headquarters, North Tower, World Financial Center, New
York, N.Y. 10281-1305, Attention: Corporate Syndicate. Upon receipt
thereof, this instrument and such signed duplicate copy will evidence the
agreement between us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:......................................
Name: Fred F. Hessinger
Confirmed and accepted as of the
day of ,19
........................................
Name of Dealer
........................................
Authorized Officer or Partner
(if not Officer or Partner, attach copy of
Instrument of Authorization)
4
Exhibit 99(j)
CUSTODY AGREEMENT
AGREEMENT dated ____________, 1995, between THE CHASE MANHATTAN
BANK, N.A. ("Chase"), having its principal place of business at 1 Chase
Manhattan Plaza, New York, New York 10081, and TEMPLETON RUSSIA FUND, INC.
(the "Fund"), an investment company registered under the Investment Company
Act of 1940 ("Act of 1940"), having its principal place of business at 700
Central Avenue, St. Petersburg, Florida 33701.
WHEREAS, the Fund wishes to appoint Chase as custodian to its
securities and assets and Chase is willing to act as custodian under the
terms and conditions hereinafter set forth;
NOW, THEREFORE, the Fund and its successors and assigns and Chase
and its successors and assigns, hereby agree as follows:
1. Appointment as Custodian. Chase agrees to act as custodian
------------------------
for the Fund, as provided herein, in connection with (a) cash ("Cash")
received from time to time from, or for the account of, the Fund for credit
to the Fund's deposit account or accounts administered by Chase, Chase
Branches and Domestic Securities Depositories (as hereinafter defined),
and/or Foreign Banks and Foreign Securities Depositories (as hereinafter
defined) (the "Deposit Account"); (b) all stocks, shares, bonds,
debentures, notes, mortgages, or other obligations for the payment of money
and any certificates,
<PAGE>
receipts, warrants, or other instruments representing rights to receive,
purchase, or subscribe for the same or evidencing or representing any other
rights or interests therein and other similar property ("Securities") from
time to time received by Chase and/or any Chase Branch, Domestic Securities
Depository, Foreign Bank or Foreign Securities Depository for the account
of the Fund (the "Custody Account"); and (c) original margin and variation
margin payments in a segregated account for futures contracts (the
"Segregated Account").
All cash held in the Deposit Account or in the Segregated Account
in connection with which Chase agrees to act as custodian is hereby
denominated as a special deposit which shall be held in trust for the
benefit of the Fund and to which Chase, Chase Branches and Domestic
Securities Depositories and/or Foreign Banks and Foreign Securities
Depositories shall have no ownership rights, and Chase will so indicate on
its books and records pertaining to the Deposit Account and the Segregated
Account. All cash held in auxiliary accounts that may be carried for the
Fund with Chase (including a Money Market Account, Redemption Account,
Distribution Account and Imprest Account) is not so denominated as a
special deposit and title thereto is held by Chase subject to the claims of
creditors.
- 2 -
<PAGE>
2. Authorization to Use Book Entry System, Domestic Securities
-----------------------------------------------------------
Depositories, Branch Offices, Foreign Banks and Foreign Securities
- ------------------------------------------------------------------
Depositories. Chase is hereby authorized to appoint and utilize, subject
- ------------
to the provisions of Sections 4 and 5 hereof:
A. The Book Entry System and The Depository Trust Company;
and also such other Domestic Securities Depositories selected by
Chase and as to which Chase has received a certified copy of a
resolution of the Fund's Board of Directors authorizing deposits
therein;
B. Chase's foreign branch offices in the United Kingdom,
Hong Kong, Singapore, and Tokyo, and such other foreign branch
offices of Chase located in countries approved by the Board of
Directors of the Fund as to which Chase shall have given prior
notice to the Fund;
C. Foreign Banks which Chase shall have selected, which
are located in countries approved by the Board of Directors of
the Fund, and as to which banks Chase shall have given prior
notice to the Fund; and
D. Foreign Securities Depositories which Chase shall have
selected and as to which Chase has received a certified copy of a
resolution of the Fund's Board of Directors authorizing deposits
therein;
- 3 -
<PAGE>
to hold Securities and Cash at any time owned by the Fund, it being
understood that no such appointment or utilization shall in any way relieve
Chase of its responsibilities as provided for in this Agreement. Foreign
branch offices of Chase appointed and utilized by Chase are herein referred
to as "Chase Branches." Unless otherwise agreed to in writing, (a) each
Chase Branch, each Foreign Bank and each Foreign Securities Depository
shall be selected by Chase to hold only Securities as to which the
principal trading market or principal location as to which such Securities
are to be presented for payment is located outside the United States; and
(b) Chase and each Chase Branch, Foreign Bank and Foreign Securities
Depository will promptly transfer or cause to be transferred to Chase, to
be held in the United States, Securities and/or Cash that are then being
held outside the United States upon request of the Fund and/or of the
Securities and Exchange Commission. Utilization by Chase of Chase
Branches, Domestic Securities Depositories, Foreign Banks and Foreign
Securities Depositories shall be in accordance with provisions as from time
to time amended, of an operating agreement to be entered into between Chase
and the Fund (the "Operating Agreement").
3. Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings:
(a) "Authorized Persons of the Fund" shall mean such
officers or employees of the Fund or any other person or persons
as shall have been
- 4 -
<PAGE>
designated by a resolution of the Board of Directors of the Fund,
a certified copy of which has been filed with Chase, to act as
Authorized Persons hereunder. Such persons shall continue to be
Authorized Persons of the Fund, authorized to act either singly
or together with one or more other of such persons as provided in
such resolution, until such time as the Fund shall have filed
with Chase a written notice of the Fund supplementing, amending,
or revoking the authority of such persons.
(b) "Book-Entry system" shall mean the Federal
Reserve/Treasury book-entry system for United States and federal
agency securities, its successor or successors and its nominee or
nominees.
(c) "Domestic Securities Depository" shall mean The
Depository Trust Company, a clearing agency registered with the
Securities and Exchange Commission, its successor or successors
and its nominee or nominees; and (subject to the receipt by Chase
of a certified copy of a resolution of the Fund's Board of
Directors specifically approving deposits therein as provided in
Section 2(a) of this Agreement) any other person authorized to
act as a depository under the Act of 1940, its
- 5 -
<PAGE>
successor or successors and its nominee or nominees.
(d) "Foreign Bank" shall mean any banking institution
organized under the laws of a jurisdiction other than the United
States or of any state thereof.
(e) A "Foreign Securities Depository" shall mean any system
for the central handling of securities abroad where all
securities of any particular class or series of any issuer
deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping without physical delivery
of the securities by any Chase Branch or Foreign Bank.
(f) "Written Instructions" shall mean instructions in
writing signed by Authorized Persons of the Fund giving such
instructions, and/or such other forms of communications as from
time to time shall be agreed upon in writing between the Fund and
Chase.
4. Selection of Countries in Which Securities May be Held.
------------------------------------------------------
Chase shall not cause Securities and Cash to be held in any country outside
the United States until the Fund has directed the holding of its assets in
such country. Chase will be provided with a copy of a resolution of the
Fund's Board of Directors authorizing such custody in any
- 6 -
<PAGE>
country outside of the United States, which resolution shall be based upon,
among other factors, the following:
(a) comparative operational efficiencies of custody;
(b) clearance and settlement and the costs thereof; and
(c) political and other risks, other than those risks
specifically assumed by Chase.
5. Responsibility of Chase to Select Custodians in Individual
----------------------------------------------------------
Foreign Countries. The responsibility for selecting the Chase Branch,
- -----------------
Foreign Bank or Foreign Securities Depository to hold the Fund's Securities
and Cash in individual countries authorized by the Fund shall be that of
Chase. Chase generally shall utilize Chase Branches where available. In
locations where there are no Chase Branches providing custodial services,
Chase shall select as its agent a Foreign Bank, which may be an affiliate
or subsidiary of Chase. To facilitate the clearance and settlement of
securities transactions, Chase represents that, subject to the approval of
the Fund, it may deposit Securities in a Foreign Securities Depository in
which Chase is a participant. In situations in which Chase is not a
participant in a Foreign Securities Depository, Chase may, subject to the
approval of the Fund, authorize a Foreign Bank acting as its subcustodian
to deposit the Securities in a Foreign Securities Depository in which the
Foreign Bank is a participant. Notwithstanding the foregoing, such
selection
- 7 -
<PAGE>
by Chase of a Foreign Bank or Foreign Securities Depository shall not
become effective until Chase has been advised by the Fund that a majority
of its Board of Directors:
(a) Has approved Chase's selection of the particular
Foreign Bank or Foreign Securities Depository, as the case may
be, as consistent with the best interests of the Fund and its
Shareholder;
(b) Has approved as consistent with the best interests of
the Fund and its Shareholders a written contract prepared by
Chase which will govern the manner in which such Foreign Bank
will maintain the Fund's assets.
6. Conditions on Selection of Foreign Bank or Foreign
--------------------------------------------------
Securities Depository. Chase shall authorize the holding of Securities and
- ---------------------
Cash by a Chase Branch, Foreign Bank or Foreign Securities Depository only:
(a) to the extent that the Securities and Cash are not
subject to any right, charge, security interest, lien or claim
of any kind in favor of any such Foreign Bank or Foreign
Securities Depository, except for their safe custody or
administration, and
(b) to the extent that the beneficial ownership of
Securities is freely transferable without the payment of money or
value other than for safe custody or administration.
- 8 -
<PAGE>
7. Chase Branches and Foreign Banks Not Agents of the Fund.
-------------------------------------------------------
Chase Branches, Foreign Banks and Foreign Securities Depositories shall be
subject to the instructions of Chase and/or the Foreign Bank, and not to
those of the Fund. Chase warrants and represents that all such
instructions shall afford protection to the Fund at least equal to that
afforded for Securities held directly by Chase. Any Chase Branch, Foreign
Bank or Foreign Securities Depository shall act solely as agent of Chase or
of such Foreign Bank.
8. Custody Account. Securities held in the Custody Account
---------------
shall be physically segregated at all times from those of any other person
or persons except that (a) with respect to Securities held by Chase
Branches, such Securities may be placed in an omnibus account for the
customers of Chase, and Chase shall maintain separate book entry records
for each such omnibus account, and such Securities shall be deemed for the
purpose of this Agreement to be held by Chase in the Custody Account; (b)
with respect to Securities deposited by Chase with a Foreign Bank, a
Domestic Securities Depository or a Foreign Securities Depository, Chase
shall identify on its books as belonging to the Fund the Securities shown
on Chase's account on the books of the Foreign Bank, Domestic Securities
Depository or Foreign Securities Depository; and (c) with respect to
Securities deposited by a Foreign Bank with a Foreign Securities
Depository, Chase shall cause the Foreign Bank to
- 9 -
<PAGE>
identify on its books as belonging to Chase, as agent, the Securities shown
on the Foreign Bank's account on the books of the Foreign Securities
Depository. All Securities of the Fund maintained by Chase pursuant to
this Agreement shall be subject only to the instructions of Chase, Chase
Branches or their agents. Chase shall only deposit Securities with a
Foreign Bank in accounts that include only assets held by Chase for its
customers.
8a. Segregated Account for Futures Contracts. With respect to
----------------------------------------
every futures contract purchased, sold or cleared for the Custody Account,
Chase agrees, pursuant to Written Instructions, to:
(a) deposit original margin and variation margin payments
in a segregated account maintained by Chase; and
(b) perform all other obligations attendant to transactions
or positions in such futures contracts, as such payments or
performance may be required by law or the executing broker.
8b. Segregated Account for Repurchase Agreements.
---------------------------------------------
With respect to purchases for the Custody Account from banks (including
Chase) or broker-dealers, of United States or foreign government
obligations subject to repurchase agreements, Chase agrees, pursuant to
Written Instructions, to:
- 10 -
<PAGE>
(a) deposit such securities and repurchase agreements in a
segregated account maintained by Chase; and
(b) promptly show on Chase's records that such securities
and repurchase agreements are being held on behalf of the Fund
and deliver to the Fund a written confirmation to that effect.
8c. Segregated Accounts for Deposits of Collateral. Chase
-----------------------------------------------
agrees, with respect to (i) cash or high quality debt securities to secure
the Fund's commitments to purchase new issues of debt obligations offered
on a when-issued basis; (ii) cash, U.S. government securities, or
irrevocable letters of credit of borrowers of the Fund's portfolio
securities to secure the loan to them of such securities; and/or (iii)
cash, securities or any other property delivered to secure any other
obligations; (all of such items being hereinafter referred to as
"collateral"), pursuant to Written Instructions, to:
(a) deposit the collateral for each such obligation in a
separate segregated account maintained by Chase; and
(b) promptly to show on Chase's records that such
collateral is being held on behalf of the Fund and deliver to the
Fund a written confirmation to that effect.
9. Deposit Account. Subject to the provisions of this
---------------
Agreement, the Fund authorizes Chase to establish and
- 11 -
<PAGE>
maintain in each country or other jurisdiction in which the principal
trading market for any Securities is located or in which any Securities are
to be presented for payment, an account or accounts, which may include
nostra accounts with Chase Branches and omnibus accounts of Chase at
Foreign Banks, for receipt of cash in the Deposit Account, in such
currencies as directed by Written Instructions. For purposes of this
Agreement, cash so held in any such account shall be evidenced by separate
book entries maintained by Chase at its office in London and shall be
deemed to be Cash held by Chase in the Deposit Account. Unless Chase
receives Written Instructions to the contrary, cash received or credited by
Chase or any other Chase Branch, Foreign Bank or Foreign Securities
Depository for the Deposit Account in a currency other than United States
dollars shall be converted promptly into United States dollars whenever it
is practicable to do so through customary banking channels (including
without limitation the effecting of such conversions at Chase's preferred
rates through Chase, its affiliates or Chase Branches), and shall be
automatically transmitted back to Chase in the United States.
10. Settlement Procedures. Settlement procedures for
---------------------
transactions in Securities delivered to, held in, or to be delivered from
the Custody Account in Chase Branches, Domestic Securities Depositories,
Foreign Banks and Foreign Securities Depositories, including receipts and
payments of cash held in any nostra account or omnibus account for the
- 12 -
<PAGE>
Deposit Account as described in Section 9, shall be carried out in
accordance with the provisions of the Operating Agreement. It is
understood that such settlement procedures may vary, as provided in the
Operating Agreement, from securities market to securities market, to
reflect particular settlement practices in such markets.
Chase shall make or cause the appropriate Chase Branch or Foreign
Bank to move payments of Cash held in the Deposit Account only:
(a) in connection with the purchase of Securities for the
account of the Fund and only against the receipt of such
Securities by Chase or by another appropriate Chase Branch,
Domestic Securities Depository, Foreign Bank or Foreign
Securities Depository, or otherwise as provided in the Operating
Agreement, each such payment to be made at prices confirmed by
Written Instructions, or
(b) in connection with any dividend, interim dividend or
other distribution declared by the Fund, or
(c) as directed by the Fund by Written Instructions setting
forth the name and address of the person to whom the payment is
to be made and the purpose for which the payment is to be made.
- 13 -
<PAGE>
Upon the receipt by Chase of Written Instructions specifying the
Securities to be so transferred or delivered, which instructions shall name
the person or persons to whom transfers or deliveries of such Securities
shall be made and shall indicate the time(s) for such transfers or
deliveries, Securities held in the Custody Account shall be transferred,
exchanged, or delivered by Chase, any Chase Branch, Domestic Securities
Depository, Foreign Bank, or Foreign Securities Depository, as the case may
be, against payment in Cash or Securities, or otherwise as provided in the
Operating Agreement, only:
(a) upon sale of such Securities for the account of the
Fund and receipt of such payment in the amount shown in a
broker's confirmation of sale of the Securities or other proper
authorization received by Chase before such payment is made, as
confirmed by Written Instructions;
(b) in exchange for or upon conversion into other
Securities alone or other Securities and Cash pursuant to any
plan of merger, consolidation, reorganization, recapitalization,
readjustment, or tender offer;
(c) upon exercise of conversion, subscription, purchase, or
other similar rights represented by such Securities; or
- 14 -
<PAGE>
(d) otherwise as directed by the Fund by Written
Instructions which shall set forth the amount and purpose of such
transfer or delivery.
Until Chase receives Written Instructions to the contrary, Chase
shall, and shall cause each Chase Branch, Domestic Securities Depository,
Foreign Bank and Foreign Securities Depository holding Securities or Cash
to, take the following actions in accordance with procedures established in
the Operating Agreement:
(a) collect and timely deposit in the Deposit Account all
income due or payable with respect to any Securities and take any
action which may be necessary and proper in connection with the
collection and receipt of such income;
(b) present timely for payment all Securities in the
Custody Account which are called, redeemed or retired or
otherwise become payable and all coupons and other income items
which call for payment upon presentation and to receive and
credit to the Deposit Account Cash so paid for the account of the
Fund except that, if such Securities are convertible, such
Securities shall not be presented for payment until two business
days preceding the date on which such conversion rights would
expire unless Chase previously shall have received Written
Instructions with respect thereto;
- 15 -
<PAGE>
(c) present for exchange all Securities in the Custody
Account converted pursuant to their terms into other Securities;
(d) in respect of securities in the Custody Account,
execute in the name of the Fund such ownership and other
certificates as may be required to obtain payments in respect
thereto, provided that Chase shall have requested and the Fund
shall have furnished to Chase any information necessary in
connection with such certificates;
(e) exchange interim receipts or temporary Securities in
the Custody Account for definitive Securities; and
(f) receive and hold in the Custody Account all Securities
received as a distribution on Securities held in the Custody
Account as a result of a stock dividend, share split-up or
reorganization, recapitalization, readjustment or other
rearrangement or distribution of rights or similar Securities
issued with respect to any Securities held in the Custody
Account.
11. Records. Chase hereby agrees that Chase and any Chase
-------
Branch or Foreign Bank shall create, maintain, and retain all records
relating to their activities and obligations as custodian for the Fund
under this Agreement in such manner as will meet the obligations of the
Fund under the Act of 1940, particularly Section 31 thereof and Rules
- 16 -
<PAGE>
31a-1 and 31a-2 thereunder, and Federal, state and foreign tax laws and
other legal or administrative rules or procedures, in each case as
currently in effect and applicable to the Fund. All records so maintained
in connection with the performance of its duties under this Agreement
shall, in the event of termination of this Agreement, be preserved and
maintained by Chase as required by regulation, and shall be made available
to the Fund or its agent upon request, in accordance with the provisions of
Section 19.
Chase hereby agrees, subject to restrictions under applicable
laws, that the books and records of Chase and any Chase Branch pertaining
to their actions under this Agreement shall be open to the physical, on-
premises inspection and audit at reasonable times by the independent
accountants ("Accountants") employed by, or other representatives of, the
Fund. Chase hereby agrees that, subject to restrictions under applicable
laws, access shall be afforded to the Accountants to such of the books and
records of any Foreign Bank, Domestic Securities Depository or Foreign
Securities Depository with respect to Securities and Cash as shall be
required by the Accountants in connection with their examination of the
books and records pertaining to the affairs of the Fund. Chase also agrees
that as the Fund may reasonably request from time to time, Chase shall
provide the Accountants with information with respect to Chase's and Chase
Branches' systems of internal accounting controls as
- 17 -
<PAGE>
they relate to the services provided under this Agreement, and Chase shall
use its best efforts to obtain and furnish similar information with respect
to each Domestic Securities Depository, Foreign Bank and Foreign Securities
Depository holding Securities and Cash.
12. Reports. Chase shall supply periodically, upon the
-------
reasonable request of the Fund, such statements, reports, and advice with
respect to Cash in the Deposit Account and the Securities in the Custody
Account and transactions in Securities from time to time received and/or
delivered for or from the Custody Account, as the case may be, as the Fund
shall require. Such statements, reports and advice shall include an
identification of the Chase Branch, Domestic Securities Depository, Foreign
Bank and Foreign Securities Depository having custody of the Securities and
Cash, and descriptions thereof.
13. Registration of Securities. Securities in the Custody
--------------------------
Account which are issued or issuable only in bearer form (except such
securities as are held in the Book-Entry System) shall be held by Chase,
Chase Branches, Domestic Securities Depositories, Foreign Banks or Foreign
Securities Depositories in that form. All other Securities in the Custody
Account shall be held in registered form in the name of Chase, or any Chase
Branch, the Book-Entry System, Domestic Securities Depository, Foreign Bank
or Foreign Securities Depository and their nominees, as custodian or
nominee.
- 18 -
<PAGE>
14. Standard of Care.
----------------
(a) General. Chase shall assume entire responsibility for
-------
all Securities held in the Custody Account, Cash held in the
Deposit Account, Cash or Securities held in the Segregated
Account and any of the Securities and Cash while in the
possession of Chase or any Chase Branch, Domestic Securities
Depository, Foreign Bank or Foreign Securities Depository, or in
the possession or control of any employees, agents or other
personnel of Chase or any Chase Branch, Domestic Securities
Depository, Foreign Bank or Foreign Securities Depository; and
shall be liable to the Fund for any loss to the Fund occasioned
by any destruction of the Securities or Cash so held or while in
such possession, by any robbery, burglary, larceny, theft or
embezzlement by any employees, agents or personnel of Chase or
any Chase Branch, Domestic Securities Depository, Foreign Bank or
Foreign Securities Depository, and/or by virtue of the
disappearance of any of the Securities or Cash so held or while
in such possession, with or without any fault attributable to
Chase ("fault attributable to Chase" for the purposes of this
Agreement being deemed to mean any negligent act or omission,
robbery, burglary, larceny, theft or embezzlement by any
employees or agents of Chase or
- 19 -
<PAGE>
any Chase Branch, Domestic Securities Depository, Foreign Bank or
Foreign Securities Depository). In the event of Chase's
discovery or notification of any such loss of Securities or Cash,
Chase shall promptly notify the Fund and shall reimburse the Fund
to the extent of the market value of the missing Securities or
Cash as at the date of the discovery of such loss. The Fund
shall not be obligated to establish any negligence, misfeasance
or malfeasance on Chase's part from which such loss resulted, but
Chase shall be obligated hereunder to make such reimbursement to
the Fund after the discovery or notice of such loss, destruction
or theft of such Securities or Cash. Chase may at its option
insure itself against loss from any cause but shall be under no
obligation to insure for the benefit of the Fund.
(b) Collections. All collections of funds or other
-----------
property paid or distributed in respect of Securities held in the
Custody Account shall be made at the risk of the Fund. Chase
shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Chase (or by any Chase Branch or
Foreign Bank in the case of Securities or Cash held outside of
the United States) of any payment, redemption or other
transaction regarding Securities held in the Custody Account or
Cash held
- 20 -
<PAGE>
in the Deposit Account in respect of which Chase has agreed to
take action in the absence of Written Instructions to the
contrary as provided in Section 10 of this Agreement, which does
not appear in any of the publications referred to in Section 16
of this Agreement.
(c) Exclusions. Notwithstanding any other provision in
----------
this Agreement to the contrary, Chase shall not be responsible
for (i) losses resulting from war or from the imposition of
exchange control restrictions, confiscation, expropriation, or
nationalization of any securities or assets of the issuer of such
securities, or (ii) losses resulting from any negligent act or
omission of the Fund or any of its affiliates, or any robbery,
theft, embezzlement or fraudulent act by any employee or agent of
the Fund or any of its affiliates. Chase shall not be liable for
any action taken in good faith upon Written Instructions of
Authorized Persons of the Fund or upon any certified copy of any
resolution of the Board of Directors of the Fund, and may rely on
the genuineness of any such documents which it may in good faith
believe to be validly executed.
(d) Limitation on Liability under Section 14(a).
-------------------------------------------
Notwithstanding any other provision in this Agreement to the
contrary, it is agreed that
- 21 -
<PAGE>
Chase's sole responsibility with respect to losses under Section
14(a) shall be to pay the Fund the amount of any such loss as
provided in Section 14(a) (subject to the limitation provided in
Section 14(e) of this Agreement). This limitation does not apply
to any liability of Chase under Section 14(f) of this Agreement.
(e) Annual Adjustment of Limitation of Liability. As soon
--------------------------------------------
as practicable after June 1 of every year, the Fund shall provide
Chase with the amount of its total net assets as of the close of
business on such date (or if the New York Stock Exchange is
closed on such date, then in that event as of the close of
business on the next day on which the New York Stock Exchange is
open for business).
It is understood by the parties to this Agreement (1) that
Chase has entered into substantially similar custody agreements
with other Templeton Funds, including, but not necessarily
limited to, Templeton Funds, Inc. on behalf of Templeton World
Fund and Templeton Foreign Fund; Templeton Growth Fund, Ltd.,
Templeton Growth Fund, Inc.; Templeton Emerging Markets Fund,
Inc.; Templeton Global Income Fund, Inc.; Templeton Income Trust
on behalf of Templeton Money Fund and Templeton Income Fund;
Templeton Global Governments
- 22 -
<PAGE>
Income Trust; Templeton Global Utilities, Inc.; Templeton Smaller
Companies Growth Fund, Inc.; Templeton Real Estate Securities
Fund; Templeton Global Opportunities Trust; Templeton
Institutional Funds, Inc.; Templeton American Trust, Inc.;
Templeton Developing Markets Trust; Templeton Capital Accumulator
Fund, Inc.; Templeton Variable Annuity Fund; Templeton Variable
Products Series Fund; Templeton China World Fund, Inc.; Templeton
Emerging Markets Income Fund, Inc.; and Templeton Global
Investment Trust, all of which Funds have as their investment
adviser either the Investment Manager of the Fund or companies
which are affiliated with the Investment Manager; and (2) that
Chase may enter into substantially similar custody agreements
with additional mutual funds under Templeton management which may
hereafter be organized. Each of such custody agreements with
each of such other Templeton Funds contains (or will contain) a
"Standard of Care" section similar to this Section 14, except
that the limit of Chase's liability is (or will be) in varying
amounts for each Fund, with the aggregate limits of liability in
all of such agreements, including this Agreement, amounting to
$150,000,000.
On each June 1, Chase will total the net assets reported by
each one of the Templeton Funds,
- 23 -
<PAGE>
and will calculate the percentage of the aggregate net assets of
all the Templeton Funds that is represented by the net asset
value of this Fund. Thereupon Chase shall allocate to this
Agreement with this Fund that proportion of its total of
$150,000,000 responsibility undertaking which is substantially
equal to the proportion which this Fund's net assets bears to the
total net assets of all such Templeton Funds subject to
adjustments for claims paid as follows: all claims previously
paid to this Fund shall first be deducted from its proportionate
allocable share of the $150,000,000 Chase responsibility, and if
the claims paid to this Fund amount to more than its allocable
share of the Chase responsibility, then the excess of such claims
paid to this Fund shall diminish the balance of the $150,000,000
Chase responsibility available for the proportionate shares of
all of the other Templeton Funds having similar custody
agreements with Chase. Based on such calculation, and on such
adjustment for claims paid, if any, Chase thereupon shall notify
the Fund of such limit of liability under this Section 14 which
will be available to the Fund with respect to (1) losses in
excess of payment allocations for previous years and (2) losses
discovered during the next year this Agreement remains in effect
and until a new
- 24 -
<PAGE>
determination of such limit of responsibility is made on the next
succeeding June 1.
(f) Other liability. Independently of Chase's liability to
---------------
the Fund as provided in Section 14(a) above (it being understood
that the limitations in Sections 14(d) and 14(e) do not apply to
the provisions of this Section 14(f)), Chase shall be responsible
for the performance of only such duties as are set forth in this
Agreement or contained in express instructions given to Chase
which are not contrary to the provisions of this Agreement.
Chase will use and require the same care with respect to the
safekeeping of all Securities held in the Custody Account, Cash
held in the Deposit Account, and Securities or Cash held in the
Segregated Account as it uses in respect of its own similar
property, but it need not maintain any insurance for the benefit
of the Fund. With respect to Securities and Cash held outside of
the United States, Chase will be liable to the Fund for any loss
to the Fund resulting from any disappearance or destruction of
such Securities or Cash while in the possession of Chase or any
Chase Branch, Foreign Bank or Foreign Securities Depository, to
the same extent it would be liable to the Fund if Chase had
retained physical possession of such Securities and Cash in New
York.
- 25 -
<PAGE>
It is specifically agreed that Chase's liability under this
Section 14(f) is entirely independent of Chase's liability under
Section 14(a). Notwithstanding any other provision in this
Agreement to the contrary, in the event of any loss giving rise
to liability under this Section 14(f) that would also give rise
to liability under Section 14(a), the amount of such liability
shall not be charged against the amount of the limitation on
liability provided in Section 14(d).
(g) Counsel; legal expenses. Chase shall be entitled to
-----------------------
the advice of counsel (who may be counsel for the Fund) at the
expense of the Fund in connection with carrying out Chase's
duties hereunder and in no event shall Chase be liable for any
action taken or omitted to be taken by it in good faith pursuant
to advice of such counsel. If, in the absence of fault
attributable to Chase and in the course of or in connection with
carrying out its duties and obligations hereunder, any claims or
legal proceedings are instituted against Chase or any Chase
Branch by third parties, the Fund will hold Chase harmless
against any claims, liabilities, costs, damages or expenses
incurred in connection therewith and, if the Fund so elects, the
Fund may assume the defense thereof with counsel satisfactory to
Chase, and thereafter shall
- 26 -
<PAGE>
not be responsible for any further legal fees that may be
incurred by Chase, provided, however, that all of the foregoing
is conditioned upon the Fund's receipt from Chase of prompt and
due notice of any such claim or proceeding.
15. Expropriation Insurance. Chase represents that it does not
-----------------------
intend to obtain any insurance for the benefit of the Fund which protects
against the imposition of exchange control restrictions on the transfer
from any foreign jurisdiction of the proceeds of sale of any Securities or
against confiscation, expropriation or nationalization of any securities or
the assets of the issuer of such securities by a government of any foreign
country in which the issuer of such securities is organized or in which
securities are held for safekeeping either by Chase, or any Chase Branch,
Foreign Bank or Foreign Securities Depository in such country. Chase has
discussed the availability of expropriation insurance with the Fund, and
has advised the Fund as to its understanding of the position of the staff
of the Securities and Exchange Commission that any investment company
investing in securities of foreign issuers has the responsibility for
reviewing the possibility of the imposition of exchange control
restrictions which would affect the liquidity of such investment company's
assets and the possibility of exposure to political risk, including the
appropriateness of insuring against such risk. The Fund has acknowledged
that it has the responsibility to review the
- 27 -
<PAGE>
possibility of such risks and what, if any, action should be taken.
16. Proxy, Notices, Reports, Etc. Chase shall watch for the
-----------------------------
dates of expiration of (a) all purchase or sale rights (including warrants,
puts, calls and the like) attached to or inherent in any of the Securities
held in the Custody Account and (b) conversion rights and conversion price
changes for each convertible Security held in the Custody Account as
published in Telstat Services, Inc., Standard & Poor's Financial Inc.
and/or any other publications listed in the Operating Agreement (it being
understood that Chase may give notice to the Fund as provided in Section 21
as to any change, addition and/or omission in the publications watched by
Chase for these purposes). If Chase or any Chase Branch, Foreign Bank or
Foreign Securities Depository shall receive any proxies, notices, reports,
or other communications relative to any of the Securities held in the
Custody Account, Chase shall, on its behalf or on behalf of a Chase Branch,
Foreign Bank or Foreign Securities Depository, promptly transmit in writing
any such communication to the Fund. In addition, Chase shall notify the
Fund by person-to-person collect telephone concerning any such notices
relating to any matters specified in the first sentence of this Section 16.
As specifically requested by the Fund, Chase shall execute or
deliver or shall cause the nominee in whose name Securities are registered
to execute and deliver to such
- 28 -
<PAGE>
person as may be designated by the Fund proxies, consents, authorizations
and any other instruments whereby the authority of the Fund as owner of any
Securities in the Custody Account registered in the name of Chase or such
nominee, as the case may be, may be exercised. Chase shall vote Securities
in accordance with Written Instructions timely received by Chase, or such
other person or persons as designated in or pursuant to the Operating
Agreement.
Chase and any Chase Branch shall have no liability for any loss
or liability occasioned by delay in the actual receipt by them or any
Foreign Bank or Foreign Securities Depository of notice of any payment or
redemption which does not appear in any of the publications referred to in
the first sentence of this Section 16.
17. Compensation. The Fund agrees to pay to Chase from time to
------------
time such compensation for its services pursuant to this Agreement as may
be mutually agreed upon in writing from time to time and Chase's out-of-
pocket or incidental expenses, as from time to time shall be mutually
agreed upon by Chase and the Fund. The Fund shall have no responsibility
for the payment of services provided by any Domestic Securities Depository,
such fees being paid directly by Chase. In the event of any advance of
Cash for any purpose made by Chase pursuant to any Written Instruction, or
in the event that Chase or any nominee of Chase shall incur or be assessed
any taxes in connection with the performance of this Agreement, the Fund
shall indemnify and reimburse Chase
- 29 -
<PAGE>
therefor, except such assessment of taxes as results from the negligence,
fraud, or willful misconduct of Chase, any Domestic Securities Depository,
Chase Branch, Foreign Bank or Foreign Securities Depository, or as
constitutes a tax on income, gross receipts or the like of any one or more
of them. Chase shall have a lien on Securities in the Custody Account and
on Cash in the Deposit Account for any amount owing to Chase from time to
time under this Agreement upon due notice to the Fund.
18. Agreement Subject to Approval of the Fund. It is understood
-----------------------------------------
that this Agreement and any amendments shall be subject to the approval of
the Fund.
19. Term. This Agreement shall remain in effect until
----
terminated by either party upon 60 days' written notice to the other, sent
by registered mail. Notwithstanding the preceding sentence, however, if at
any time after the execution of this Agreement Chase shall provide written
notice to the Fund, by registered mail, of the amount needed to meet a
substantial increase in the cost of maintaining its present type and level
of bonding and insurance coverage in connection with Chase's undertakings
in Section 14(a), (d) and (e) of this Agreement, said Section 14(a), (d)
and (e) of this Agreement shall cease to apply 60 days after the providing
of such notice by Chase, unless prior to the expiration of such 60 days the
Fund agrees in writing to assume the amount needed for such purpose.
Chase, upon the date this Agreement terminates pursuant to notice which has
- 30 -
<PAGE>
been given in a timely fashion, shall, and/or shall cause each Domestic
Securities Depository to, deliver the Securities in the Custody Account,
pay the Cash in the Deposit Account, and deliver and pay Securities and
Cash in the Segregated Account to the Fund unless Chase has received from
the Fund 60 days prior to the date on which this Agreement is to be
terminated Written Instructions specifying the name(s) of the person(s) to
whom the Securities in the Custody Account shall be delivered, the Cash in
the Deposit Account shall be paid, and Securities and Cash in the
Segregated Account shall be delivered and paid. Concurrently with the
delivery of such Securities, Chase shall deliver to the Fund, or such other
person as the Fund shall instruct, the records referred to in Section 11
which are in the possession or control of Chase, any Chase Branch, or any
Domestic Securities Depository, or any Foreign Bank or Foreign Securities
Depository, or in the event that Chase is unable to obtain such records in
their original form Chase shall deliver true copies of such records.
20. Authorization of Chase to Execute Necessary Documents. In
-----------------------------------------------------
connection with the performance of its duties hereunder, the Fund hereby
authorizes and directs Chase and each Chase Branch acting on behalf of
Chase, and Chase hereby agrees, to execute and deliver in the name of the
Fund, or cause such other Chase Branch to execute and deliver in the name
of the Fund, such certificates, instruments, and other documents as shall
be reasonably necessary in connection with
- 31 -
<PAGE>
such performance, provided that the Fund shall have furnished to Chase any
information necessary in connection therewith.
21. Notices. Any notice or other communication authorized or
-------
required by this Agreement to be given to the parties shall be sufficiently
given (except to the extent otherwise specifically provided) if addressed
and mailed postage prepaid or delivered to it at its office at the address
set forth below:
If to the Fund, then to
Templeton Russia Fund, Inc.
700 Central Avenue, P.O. Box 33030
St. Petersburg, Florida 33733
Attention: Thomas M. Mistele, Secretary
If to Chase, then to
The Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
33rd Floor
New York, New York 10036
Attention: Global Custody Division Executive
or such other person or such other address as any party shall have
furnished to the other party in writing.
22. Non-Assignability of Agreement. This Agreement shall not be
------------------------------
assignable by either party hereto; provided, however, that any corporation
into which the Fund or Chase, as the case may be, may be merged or
converted or with which it may be consolidated, or any corporation
succeeding to all or substantially all of the trust business of Chase,
shall succeed to the respective rights and shall assume the respective
duties of the Fund or of Chase, as the case may be, hereunder.
- 32 -
<PAGE>
23. Governing Law. This Agreement shall be governed by the laws
-------------
of the State of New York.
THE CHASE MANHATTAN BANK, N.A.
By:_______________________
Vice President
TEMPLETON RUSSIA FUND, INC.
By:_____________________________
Thomas M. Mistele
Secretary
- 33 -
<PAGE>
RIDER TO CUSTODY AGREEMENT
AMENDMENT, dated April __, 1995 to the agreement ("Agreement"),
between the Templeton Russia Fund, Inc. ("Fund"), having its principal
place of business at 700 Central Ave., St. Petersburg, FL 33701, and The
Chase Manhattan Bank, N.A. ("Chase"), having its principal place of
business at 1 Chase Manhattan Plaza, New York, N.Y. 10081.
It is hereby agreed as follows:
Section 1. Unless otherwise provided herein, all terms and conditions
of the Agreement are expressly incorporated herein by reference and except
as modified hereby, the Agreement is confirmed in all respects.
Capitalized terms used herein without definition shall have the meanings
ascribed to them in the Agreement.
Section 2. Section 3 of the Agreement is amended as follows by adding
in appropriate alphabetic sequence the following:
(a) "Application" shall mean the application submitted March 9,
1995 by the Fund to the Securities and Exchange Commission ("SEC") for "no-
action" relief under Sec.17(f) of The Investment Company Act of 1940 ("Act"),
as amended, and SEC Rule 17f-5 thereunder in connection with custody of the
Fund's Russian Securities investments.
(b) "CMBI" shall mean Chase Manhattan Bank International, an
indirect wholly-owned subsidiary of Chase, located in Moscow, Russia.
(c) "Direct Loss" shall mean a loss determined based on the
market value of the Russian Security that is the subject of the loss at the
date of discovery of such loss and without reference to any consequential
damages, special conditions or circumstances.
(d) "International Financial Institution" shall mean any bank in
the top 1,000 (together with their affiliated companies) as measured by
"Tier 1" capital or any broker/dealer in the top 100 as measured by
capital.
(e) "Negligence" shall mean the failure to exercise reasonable
care under the applicable circumstances as measured by the custodial
practices prevailing in Russia of International Financial Institutions
acting as custodians for their institutional investor clients in Russia.
<PAGE>
(f) "Registrar Company" shall mean any entity providing share
registration services to an issuer of Russian Securities.
(g) "Registrar Contract" shall mean a contract between CMBI and
a Registrar Company (and as the same may be amended from time to time)
containing, inter alia, the contractual provisions described at pps. 10-12
----- ----
of the Application.
(h) "Russian Security" shall mean a Security issued by a Russian
issuer.
(i) "Share Extract" shall mean an extract of its share
registration books issued by a Registrar Company indicating an investor's
ownership of a security.
Section 3(a). Section 10 of the Agreement is amended by adding a new
subsection (d) on p. 14 as follows: "Delivery of Securities may be made in
accordance with the customary or established securities trading or
securities processing practices and procedures in Russia. Delivery of
Securities may also be made in any manner specifically required by
instructions acceptable to the Bank.
Section 3(c). Section 10 of the Agreement is further amended by
adding a new subsection (g) on p. 17 as follows: "It is understood and
agreed that Chase need only use its reasonable efforts with respect to
performing functions (a)-(f) immediately above with respect to Russian
Securities."
Section 4(a). Section 14(a) of the Agreement is amended by inserting
the following at the end of the first sentence as follows: " provided that,
with respect to Russian Securities, Chase's responsibility shall be limited
to safekeeping of relevant Share Extracts."
Section 4(b). Section 14(a) of the Agreement is further amended by
inserting the following after the first sentence thereof: "In connection
with the foregoing, neither Chase nor CMBI shall assume responsibility for,
and neither shall be liable for, any action or inaction of any Registrar
Company and no REgistrar Company shall be, or shall be deemed to be, Chase,
CMBI a Chase Branch, a Domestic Securities Depository, a Foreign Bank, a
Foreign Securities Depository or the employee, agent or personnel of any of
the foregoing. Anything to the contrary contained in the Agreement
notwithstanding, with respect to custodial services for Russian Securities,
neither Chase nor CMBI shall be liable to Fund except for Direct Losses to
the extent caused by their respective Negligence or willful misconduct. To
- 2 -
<PAGE>
the extent that CMBI employs agents to perform any of the functions to be
performed by Chase or CMBI with respect to Russian Securities, neither
Chase nor CMBI shall be responsible for any act, omission, default or for
the solvency of any such agent unless the appointment of such agent was
made with Negligence or in bad faith, except that where Chase or CMBI uses
an agent to perform the share registration or share confirmation functions
described at pps. 10-11 of the Application, Chase and CMBI shall be liable
to Fund as if CMBI was responsible for performing such services itself."
Section 5. Add a new Section 25 to the Agreement as follows:
"(a) Chase will advise Fund (and will update such advice from
time to time as changes occur) of those Registrar Companies with which CMBI
has entered into a Registrar Contract. Chase shall cause CMBI to monitor
each Registrar Company and Chase shall promptly advise Fund when CMBI has
actual knowledge of the occurrence of any one or more of the five events
described on pps. 13-14 of the Application with respect to a Registrar
Company that serves in that capacity for any issuer the shares of which are
held by the Fund.
(b) Where Fund is considering investing in the Russian
Securities of an issuer as to which CMBI does not have a Registrar Contract
with the issuer's Registrar Company, Fund may request that CMBI consider
whether it would be willing to attempt to enter into such a Registrar
Contract and CMBI shall advise Fund of its willingness to do so. Where
CMBI has agreed to make such an attempt, Chase will advise Fund of the
occurrence of any one or more of the events described in items 1-4 on pps.
13-14 of the Application of which CMBI has actual knowledge.
(c) Where Fund is considering investing in the Russian
Securities of an issuer as to which CMBI has a Registrar Contract with the
issuer's Registrar Company, Fund may advise Chase of its interest in
investing in such issuer and, in such event, Chase will advise Fund of the
occurrence of any one or more of the events described on p. 14 of the
Application of which CMBI has actual knowledge.
- 3 -
<PAGE>
Section 6. Add a new Section 26 to the Agreement as the date first
above written.
TEMPLETON RUSSIA FUND, INC. THE CHASE MANHATTAN BANK, N.A.
By: By:
----------------------- --------------------------
Name: Name:
Title: Title:
Date: Date:
- 4 -
Exhibit 99(k)(i)
SERVICE AGREEMENT
-----------------
THIS AGREEMENT made as of the ____ day of __________, between Templeton
Russia Fund, Inc., a corporation organized under the laws of the State of
Maryland (hereinafter called "Company") and Chemical Mellon Shareholder
Services, Inc., a New York Trust Company with its principal office at 120
Broadway, New York, New York (hereinafter called "Chemical Mellon").
WITNESSETH:
NOW THEREFORE, in consideration of the mutual covenants herein set forth,
the Company and Chemical Mellon agree as follows:
1. Chemical Mellon will be named as Transfer Agent, Registrar, and
Dividend Disbursement Agent for the Company.
2. All indemnities contained in the resolution of the Board of Directors
of the Company by which Chemical Mellon is appointed as Transfer Agent,
Registrar, and Dividend Disbursement Agent for the Company shall remain in full
force and effect.
3. Attached to this Agreement and designated as "Schedule A" is a listing
of the services which Chemical Mellon agrees to provide to the Company.
4. It is agreed that Chemical Mellon will be compensated for its services
to the Company pursuant to this Agreement in accordance with the provisions of
the Fee Schedule which is attached hereto and designated as "Schedule B".
5. It is agreed between Chemical Mellon and the Company that the term of
this Agreement shall be for a period of one year commencing on the date of the
execution of this Agreement by both Chemical Mellon and the Company.
6. It is understood that Chemical Mellon's fee will not be increased
during the period of this Agreement, provided however, that at the end of the
initial (12) month period of this Agreement and at the end of any subsequent
(12) month period, such fees shall be adjusted by the annual percentage of
change in the average hourly earnings of all office clerical workers (all
industries) as last reported by the Bureau of Labor Statistics of the United
States Department of Labor. In the event there is an increase in the cost of
performance of the services due to changes in applicable regulations of any
regulatory agencies, the amount of such cost shall be paid by the Company. It
is further provided that Chemical Mellon shall comply with all applicable laws
and regulations relating to pricing and responsibilities which may then be in
effect.
7. These fees do not include out-of-pocket expenses such as stationery,
postage, forms or counsel fees, if any, nor services
<PAGE>
related to special work, such as stock dividends, mergers, tenders, acquisitions
or other services not presently being performed by Chemical Mellon as requested
or authorized by the Company.
8. It is agreed that Chemical Mellon will bill the Company monthly for
fees and costs, expenses and disbursements, and that payment will be made by the
Company within 30 days of the date of the bill.
9. This Agreement may not be terminated prior to the expiration for any
reason except for unacceptable service performance by Chemical Mellon, or the
non-payment by the Company of Chemical Mellon's bills within a period of the
time deemed reasonable by Chemical Mellon. Unacceptable service performance
shall mean noncompliance with the then current generally accepted service
standards of the securities transfer industry.
10. This Agreement may not be amended or modified in any manner except by
a written agreement by both Chemical Mellon and the Company with the same
formality as this Agreement.
11. During the last ninety days of this Agreement either Chemical Mellon
or the Company may by thirty days written notice to the other request that the
terms herein be renegotiated or the Agreement terminated. In the absence of
such written notification by either party to the other during such ninety day
period, this Agreement will automatically continue for an additional one year
period and subsequent one year periods thereafter under the same conditions.
12. This Agreement shall be governed by and construed, and interpreted in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the day and year first above written.
CHEMICAL MELLON SHAREHOLDER SERVICES, INC.
Attest: ____________________ By: ______________________
Title: ____________________ Title: ______________________
TEMPLETON RUSSIA FUND, INC.
Attest: ____________________ By: ______________________
Title: ____________________ Title: ______________________
- 2 -
<PAGE>
TEMPLETON RUSSIA FUND, INC.
"SCHEDULE A"
TRANSFER AGENT AND REGISTRATION SERVICES
- ----------------------------------------
. Issuance and cancellation of certificates
. Checking of stop transfer notations
. Processing of legal transfers
. Issuance of shares upon exercise of stock options
. Replacing lost or stolen certificates
. Preparing and mailing of daily transfer sheets, including a Management
Summary Journal
. Processing of transfers for Depository Trust Company on FAST System (book
credit entries)
. Controlling supply of unissued certificates
. Filing of cancelled certificates and subsequent shipping to you
. Countersigning and recording of certificates as Registrar
SHAREHOLDER RECORDS
- -------------------
. Maintain current account file/open new accounts
. Obtaining and maintaining taxpayer I.D. numbers pursuant to IDTCA rules and
regulations
. Posting of debits and credits including out-of-town transfers, if
applicable
. Set-up, maintenance, placing and releasing of stop transfer notations
. Processing changes of address/confirm to shareholder
. Processing dividend payment orders (if appropriate)
. Shareholder correspondence including replacement of checks and
communications with the brokerage community
. Purge closed accounts annually and maintain on microfiche
. Notification of activity of certain stop transfer accounts (i.e., optionee
----
and participants of restricted awards)
. Code accounts with "bad addresses" to suppress future mailings
. Annual mailings of W-9 and W-8 forms to appropriate holders
ANNUAL MEETING SERVICES are included in our "per shareholder" fee as follows:
- -----------------------
. Mail Broker Dual Post Card to Broker/Nominee File or provide labels to
conduct search for number of sets of proxy materials required
. Furnish a certified list of shareholders promptly after the record date
. Prepare and mail proxy cards Annual Reports and Meeting notices to holders
- 3 -
<PAGE>
. Tabulate proxies, provide daily reports and deliver proxies to company
. Prepare complete voted list for Meeting and periodic voted/unvoted listings
as required
. Provide Inspectors of Election, as needed, at meeting
MISCELLANEOUS PRODUCTION SERVICES
- ---------------------------------
. Track VIP coded accounts and option share transfers
. Three mailings of quarterly reports or newsletters per annum or three sets
of mailing labels shipped to Company or Mailing House
. Annual mailing of tax consequences of prior year's distributions as
determined by Fund (in addition to providing Form 1099 and Form 1042 tax
information as indicated below)
Dividend Services covered under the per shareholder fee include:
- -----------------
. Withhold 31% of gross payments on accounts missing TIN numbers
. Update 1099 and 1042 information and furnish necessary reports to the
government in addition to shareholders
. Prepare and mail state share and/or money reports (where applicable)
. Provide periodic reconciliation of dividend disbursement account and return
of unclaimed, unpaid dividend monies for Funds Returned to Principal
Reports. Forward to company for escheat purposes.
. Calculate "capital gains" distribution portion of reportable income at end
of fiscal year and post to file for reporting purposes
. Issuance of year-end statements
. Provide Foreign Tax Credit Information to Shareholders at year-end
. Withhold proper amounts in accordance with tax treaties on non-resident
alien accounts
TERMINATION OF TRANSFER AGENCY
- ------------------------------
. On the termination of a Transfer Agency there will be a charge of 15% of
the total fees billed for the full year preceding the effective date of the
termination, with a minimum of $350.00. This is for the work and out-of-
pocket expenses involved in rerouting certificates sent to us because our
name appears thereon as Transfer Agent and other administrative and
clerical work.
- 4 -
<PAGE>
TEMPLETON RUSSIA FUND, INC.
SCHEDULE B
Per Shareholder Service Fee
- ---------------------------
Annual Monthly
$________ $________
Certificate issuance rate all classes $________
Per Shareholder Fee covers 2 dividend payments yearly
Minimum Annual Fee - $________
(Should services not reach this amount)
Dividend Reinvestment
- ---------------------
Per Statement Mailed $________
Per Liquidation and Termination $________
The above charges are exclusive of out-of-pocket expenses for postage,
insurance, stationery, etc. Additional services required other than appearing
on "Schedule A" will be charged according to the basic current fee schedule.
- 5 -
Exhibit 99(k)(ii)
BUSINESS MANAGEMENT AGREEMENT
-----------------------------
AGREEMENT as of ________, 1995, between Templeton Russia Fund,
Inc. (hereinafter referred to as the "Company"), a non-diversified, closed-
end management investment company, and TEMPLETON GLOBAL INVESTORS, INC.
(hereinafter referred to as the "Business Manager").
In consideration of the mutual agreements herein made, the
Company and the Business Manager understand and agree as follows:
(1) The Business Manager agrees, during the life of this
Agreement, to be responsible for:
(a) providing office space, telephone, office equipment and
supplies for the Company;
(b) paying compensation of the Company's officers for
services rendered as such;
(c) authorizing expenditures and approving bills for
payment on behalf of the Company;
(d) supervising preparation of quarterly reports to the
Company's shareholders, notices of dividends, capital
gains distributions and tax credits, and attending to
routine correspondence and other communications with
individual shareholders;
(e) daily pricing of the Company's investment portfolio and
preparing and supervising publication of the net asset
value of the Company's shares, earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Company, including the Custodian, Transfer Agent and
printers;
(g) providing trading desk facilities for the Company;
(h) supervising compliance by the Company with
recordkeeping requirements under the Investment Company
Act of 1940 (the "1940 Act") and regulations
thereunder, maintaining books and records for the
Company (other than those maintained by the Custodian
and Transfer Agent) and preparing and filing of tax
reports other than the Company's income tax returns;
and
<PAGE>
(i) providing executive, clerical and secretarial help
needed to carry out these responsibilities.
(2) The Company agrees, during the life of this Agreement, to
pay to the Business Manager as compensation for the foregoing a fee equal
on an annual basis to 0.25% of the Company's average weekly net assets,
payable at the end of each calendar month.
(3) In rendering the services required under this Agreement, the
Business Manager may, subject to the approval of the Company's Board of
Directors, cause such services or any portion thereof to be provided by
another person pursuant to a sub-administrative agreement.
(4) This Agreement shall remain in full force and effect through
_________________, and thereafter from year to year to the extent such
continuance is approved annually by the Board of Directors of the Company.
(5) This Agreement may be terminated by either party at any time
on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Company shall be directed or approved by the
vote of a majority of the Directors of the Company in office at the time or
by the vote of a majority of the outstanding voting securities of the
Company (as defined in the 1940 Act); and will terminate automatically and
immediately in the event of its assignment (as defined in the 1940 Act).
(6) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Business Manager, or of reckless disregard of
its obligations hereunder, the Business Manager shall not be subject to
liability for any act or omission in the course of, or connected with,
rendering services hereunder.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their authorized officers and their respective
corporate seals to be hereunto affixed and attested.
TEMPLETON RUSSIA FUND, INC.
By: ________________________________________
TEMPLETON GLOBAL INVESTORS, INC.
By: ________________________________________
-3-
Exhibit 99(k)(iii)
DRAFT OF 14 OCTOBER 1994
------------------------
SUB-ADMINISTRATION AGREEMENT
AGREEMENT made this ____ day of ____________ 1994, by and between Templeton
Russia Fund, Inc., a Maryland corporation (hereinafter called the "Fund"),
Templeton Global Investors, Inc., a Delaware corporation (hereinafter called the
"Business Manager"), and Princeton Administrators, L.P., a Delaware limited
partnership (hereinafter called the "Sub-Administrator");
W I T N E S S E T H
-------------------
WHEREAS, the Fund is a closed-end non-diversified management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Fund and Templeton Investment Management (Singapore) Pte. Ltd.
(the "Investment Manager") are entering into an Investment Management Agreement
(the "Investment Management Agreement") pursuant to which the Investment Manager
will provide investment advice to the Fund and be responsible for the portfolio
management of the Fund; and
WHEREAS, the Fund and the Business Manager are entering into a Business
Management Agreement (the "Business Management Agreement") pursuant to which the
Business Manager will perform or arrange for the performance of certain
administrative functions to the Fund; and
WHEREAS, the Business Manager desires to retain the Sub-Administrator to
render certain administrative services in the manner and on the terms and
conditions hereafter set forth; and
WHEREAS, the Sub-Administrator desires to be retained to perform services
on said terms and conditions.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the Fund, the Business Manager and the Sub-Administrator
agree as follows:
<PAGE>
1. Duties of the Sub-Administrator. The Business Administrator hereby
-------------------------------
retains the Sub-Administrator to act as sub-administrator of the Fund, subject
to the supervision and direction of the Business Manager of the Fund, as
hereinafter set forth. The Sub-Administrator shall perform or arrange for the
performance of the following administrative services and clerical services: (i)
maintain and keep certain of the books and records of the Fund; (ii) prepare
and, subject to approval by the Fund, file certain reports and other documents
required by U.S. Federal securities laws and regulations and by U.S. stock
exchanges on which Fund shares are listed; (iii) coordinate tax-related matters;
(iv) prepare periodic reports to Fund shareholders; (v) respond to inquiries
from Fund shareholders; (vi) calculate, or arrange for the calculation of, the
net asset value of the Fund's shares; (vii) arrange for payment of the Fund's
expenses; (viii) oversee the performance of administrative and professional
services rendered to the Fund by others, including its custodian, registrar,
transfer agent, dividend disbursing agent and dividend reinvestment plan agent,
as well as accounting, auditing and other services; (ix) provide the Fund with
the services of persons competent to perform such administrative and clerical
functions as are necessary to provide effective operation of the Fund; (x)
provide the Fund with administrative office and data processing facilities; (xi)
consult with the Fund's officers, independent accountants, legal counsel,
custodian and any sub-custodian, registrar, transfer agent and dividend
disbursing agent and dividend reinvestment plan agent in establishing the
accounting policies of the Fund; (xii) prepare such financial information and
reports as may be required by any banks from which the Fund borrows funds;
(xiii) provide such assistance to the Investment Manager, the custodian and any
sub-custodian, and the Fund's counsel and auditors as generally may be required
to carry on properly the business and operations of the Fund; and (xiv) prepare
reports related to the Fund's preferred stock, if any, as required by rating
agencies. The Fund agrees to cause the custodian, Investment Manager and the
Business Manager to deliver, on a timely basis, such information to the Sub-
Administrator as may be necessary or appropriate for the Sub-Administrator's
performance of its duties and responsibilities hereunder, including but not
limited to, daily records of transactions, valuation of investments in United
States dollars (which may be based on information provided by a pricing service)
and expenses borne by the Fund, the Fund management letter to stockholders and
such other information necessary for the Sub-Administrator to prepare the above
referenced reports and filings, and the Sub-Administrator shall be entitled to
rely on the accuracy and completeness of such information in performing its
duties hereunder.
2
<PAGE>
2. Expenses of the Sub-Administrator. The Sub-Administrator will bear
---------------------------------
all expenses necessary to perform its obligations under this Agreement, except
that the Fund shall pay reasonable travel expenses of persons who perform
administrative, clerical and bookkeeping functions on behalf of the Fund. The
Fund, the Investment Manager and the Business Manager assume and shall pay or
cause to be paid all other expenses of the Fund as set forth in the Investment
Management Agreement and the Business Management Agreement. The expenses of the
legal counsel and accounting experts retained by the Sub-Administrator, after
consulting with the Business Manager, the Fund counsel and independent auditors,
as may be necessary or appropriate for the Sub-Administrator's performance of
its duties and responsibilities under this Agreement are deemed expenses of, and
shall be paid by, the Fund.
3. Compensation of the Sub-Administrator. For the services rendered to
-------------------------------------
the Business Manager by the Sub-Administrator pursuant to this Agreement, the
Business Manager shall pay to the Sub-Administrator on the first business day of
each calendar month a fee for the previous month at an annual rate equal to the
greater of (i) $150,000 per annum ($12,500 per month), or (ii) at an annual rate
equal to .20% of the Fund's net assets based upon the net asset values
applicable to shares of common stock and shares of preferred stock and debt, if
any, at the end of each week. For the purpose of determining fees payable to
the Sub-Administrator, the value of the Fund's net assets shall be computed at
the times and in the manner specified in the Fund's registration statement on
Form N-2, as amended from time to time (the "Registration Statement").
Compensation by the Business Manager of the Sub-Administrator shall commence on
the date of the first receipt by the Fund of the proceeds of the sale of its
shares to the Underwriters as described in the Registration Statement, and the
fee for the period from the date the Fund shall first receive the proceeds of
the sale of its shares to the Underwriters as aforesaid to the end of the month
during which such proceeds are so received, shall be pro-rated according to the
proportion that such period bears to the full monthly period. Upon termination
of this Agreement before the end of a month, the fee for such part of that month
shall be pro-rated according to the proportion that such period bears to the
full monthly period and shall be payable within (7) days after the date of
termination of this Agreement.
3
<PAGE>
4. Limitation of Liability of the Sub-Administrator, Indemnification.
-----------------------------------------------------------------
(a) The Sub-Administrator shall exercise its best judgment in rendering
its services pursuant to this Agreement. The Sub-Administrator shall not be
liable to any person for any error of judgment or mistake of law or for any loss
arising out of any act or omission by the Sub-Administrator in the performance
of its duties hereunder, provided, however, that nothing herein contained shall
be construed to protect the
Sub-Administrator against any liability to the Fund or its shareholders or the
Business Manager, to which the Sub-Administrator shall otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of its duties, or by reckless disregard of its obligations and duties hereunder.
(b) The Sub-Administrator may, after consulting with the Business Manager,
with respect to questions of law, apply for and obtain the advice and opinion of
legal counsel, and with respect to the application of generally accepted
accounting principles or Federal tax accounting principles, apply for and obtain
the advice and opinion of accounting experts, at the expense of the Fund. The
Sub-Administrator shall be fully protected with respect to any action taken or
omitted by it in good faith in conformity with such advice or opinion.
(c) The Fund and the Business Manager agree to indemnify and hold harmless
the Sub-Administrator from and against all charges, claims, expenses (including
legal fees) and liabilities reasonably incurred by the Sub-Administrator in or
by reason of any action, suit, investigation or other proceeding arising out of
or based upon any action actually taken or allegedly taken or omitted by the
Sub-Administrator in connection with the performance of its duties hereunder.
Notwithstanding the preceding sentence, nothing contained herein shall protect
or be deemed to protect the Sub-Administrator against or entitle or be deemed to
entitle the Sub-Administrator to indemnification by reason of the Sub-
Administrator's willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties hereunder. Such expenses shall be paid by the Fund and
the Business Manager in advance of the final disposition of such matter upon
invoice by the Sub-Administrator and receipt by the Fund and the Business
Manager of an undertaking from the Sub-Administrator to repay such amounts if it
shall ultimately be established that the Sub-Administrator is not entitled to
payment of such expenses hereunder.
4
<PAGE>
(d) As used in this Paragraph 4, the term "Sub-Administrator" shall
include any affiliates of the Sub-Administrator performing services for the Fund
contemplated hereby and directors, partners, officers, agents and employees of
the Sub-Administrator and such affiliates.
5. Activities of the Sub-Administrator. The services of the
-----------------------------------
Sub-Administrator under this Agreement are not to be deemed exclusive, and the
Sub-Administrator and any person controlled by or under common control with the
Sub-Administrator shall be free to render similar services to others.
6. Duration and Termination of this Agreement. This Agreement shall
-------------------------------------------
become effective as of the date first above written, shall supersede any other
written agreement between the parties hereto, and shall remain in force until
terminated as provided herein. This Agreement may be terminated at any time,
without the payment of any penalty, by the Fund, the Business Manager or the
Sub-Administrator, on sixty days' written notice to the other parties. This
Agreement shall automatically terminate in the event of its assignment.
7. Amendments of this Agreement. This Agreement may be amended by the
----------------------------
parties hereto only if such amendment is specifically approved by the Board of
Directors of the Fund and such amendment is set forth in a written instrument
executed by each of the parties hereto.
8. Governing Law. The provisions of this Agreement shall be construed
-------------
and interpreted in accordance with the laws of the State of New York as at the
time in effect and the applicable provisions of the 1940 Act. To the extent
that the applicable law of the State of New York, or any of the provisions
herein, conflict with the applicable provisions of the 1940 Act, the latter
shall control.
9. Counterparts. This Agreement may be executed by the parties hereto in
------------
counterparts and if executed in more than one counterpart the separate
instruments shall constitute one agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
TEMPLETON RUSSIA FUND, INC.
By:_________________________________
Title:________________________________
TEMPLETON GLOBAL INVESTORS, INC.
By:__________________________________
Title:_________________________________
PRINCETON ADMINISTRATORS, L.P.
By PRINCETON SERVICES, INC.,
General Partner
By: _________________________________
Title: Senior Vice President
-----------------------------
6
Exhibit 99(p)
Templeton Russia Fund, Inc.
700 Central Avenue
St. Petersburg, Florida 33701-3628
April 25, 1995
Templeton Global Investors, Inc.
500 East Broward Boulevard, Suite 2100
Ft. Lauderdale, Florida 33394-3091
Dear Sirs:
Templeton Russia Fund, Inc. (the "Fund") hereby accepts your
offer to purchase 7,093 shares of the Fund's common stock for $100,011.30
and acknowledges receipt of payment thereof, subject to the understanding
that you have no present intention of reselling the shares so acquired.
Enclosed is our letter of instructions to Chemical-Mellon Shareholder
Services Company, the Fund's transfer agent, directing that a certificate
for such shares be issued in your name.
Sincerely,
Thomas M. Mistele
Secretary
