<PAGE> 1
- --------------------------------------------------------------------------------
October 15, 1995
DEAR FUND SHAREHOLDER,
We are pleased to present you with the audited financial statements of The
Czech Republic Fund, Inc. (the "Fund") for the period ending August 31, 1995.
As you know, the Fund was established to provide investors with the
opportunity to participate in the rapid transformation of the Czech Republic and
ongoing development of Czech industry. In our opinion, over the last year we
have accomplished this goal by being broadly invested in more than 15 of the key
sectors in the Czech economy as well as by participating in both the first and
second waves of privatization.
During much of the past year, the Czech market experienced periods of
significant decline. Between the Fund's inception on September 30, 1994 and
August 31, 1995, the PX-50, the local market index of the top 50 capitalized
companies on the Prague Stock Exchange, declined by 36.3% in U.S. dollar terms.
After languishing for several months, the Czech market reached a bottom on June
29, 1995. From June 30 through August 31, renewed interest from both foreign and
local investors has in part sparked an increase in the market of 9.6% in U.S.
dollar terms. Despite the volatility of the Czech market, the Fund's net asset
value has performed well, depreciating by only 3.8% from September 30, 1994 to
August 31, 1995.
The macroeconomic picture continues to appear strong in the Czech Republic.
GDP has been positive thus far for 1995, estimated at 4.5% for the year,
inflation has remained in the 9% - 10% range and unemployment has remained low
at approximately 3%. While the Czech Republic has been experiencing a trade
deficit in 1995, foreign capital inflows and tourism revenues have been strong.
The Czech Parliament recently announced legislation which will allow full
convertibility for current account transactions and limited convertibility for
capital account transactions. In addition, the Czech government has announced
that it will decrease its ownership in 53 major companies through direct sales
to strategic investors.
To provide you with a more detailed macroeconomic picture as well as further
insight into why the Fund is invested in particular companies, the Investment
Adviser has provided below its views on the Czech economy, a description of its
investment approach, and information regarding the Fund's top ten equity
positions.
On October 12, 1995, the Fund filed a registration statement with the
Securities and Exchange Commission regarding a proposed rights offering to the
holders of the Fund's common stock. Pursuant to the proposed rights offering,
the Fund would issue one transferable right for each share of common stock
owned, entitling shareholders the opportunity to acquire one newly issued share
of common stock for every three rights held at a subscription price which has
not yet been determined.
1
<PAGE> 2
The Fund's net asset value is calculated weekly and published in The Wall
Street Journal every Monday under the heading "Closed End Funds." The Fund's net
asset value is also published in The New York Times on Mondays and in Barron's
on Saturdays. The Fund is listed on the New York Stock Exchange, ticker symbol
"CRF", and on the Osaka Securities Exchange.
We thank you for your participation in the Fund. If you have any questions
or would like updates on the Fund, please call our toll-free number at
1-800-421-4777. This number also provides callers with a recorded monthly update
that reviews the markets in which the Fund invests as well as specific details
about the Fund, its portfolio, and performance.
Sincerely,
/s/ ALAN H. RAPPAPORT
---------------------
ALAN H. RAPPAPORT
CHAIRMAN
2
<PAGE> 3
THE CZECH REPUBLIC FUND, INC. ANNUAL REPORT
PORTFOLIO MANAGER'S REPORT
The first fiscal year of the Fund witnessed the continued restructuring and
modernization of Czech industry. The following discussion provides a brief
overview of the Czech economy as well as a review of key events that impacted
the Czech market and the performance of the Fund for the period from the Fund's
inception on September 30, 1994 through August 31, 1995.
ECONOMIC OVERVIEW
The Czech Republic's macroeconomic fundamentals have been strong thus far in
1995 with annual GDP growth estimated at approximately 4.5%, unemployment at
approximately 3.0%, and inflation between 9% and 10%. In comparison, in 1994 GDP
growth was 2.6%, unemployment was 3.2%, and inflation was 10%. During the first
seven months of 1995, the Czech trade deficit reached almost US$2 billion,
compared to a modest trade surplus for the corresponding period last year.
Efforts by Czech industries to modernize and compete with their Western
counterparts have fueled increasing demand for capital equipment and raw
materials. A closer look at the trade deficit reveals that at least 35% of the
imported goods is attributable to the import of machinery and production
equipment. During 1995, international reserves have increased significantly,
spurred by direct investments, foreign capital inflows, and tourism and service
revenues, and are more than sufficient to offset the trade deficit.
With respect to currency convertibility, the Czech Parliament approved new
legislation on September 26, 1995 to establish the Czech crown as a hard
currency. As of October 1, 1995, current account transactions have been fully
convertible.
Since the Fund's launch, the second wave of privatization has been
completed, transferring an additional 676 companies to private hands, and
increasing the total number of companies privatized or partially privatized
through the voucher method to approximately 1,747. Going forward, the government
has announced that future privatizations will be conducted as direct sales to
strategic investors rather than as IPOs or through voucher schemes. The
government also recently announced its intention to further reduce its ownership
in major companies in such sectors as utilities and banking.
STOCK MARKET
Since the Fund's inception on September 30, 1994 through August 31, 1995,
the PX-50, the local market index of the top 50 capitalized companies, has
posted a return of -38.6% in local currency terms. In our view, the performance
of the Czech market should be discussed in terms of two distinct periods: first,
from the Fund's inception through June 29, 1995, and second, from June 30, 1995
through August 31, 1995.
For the period from September 30, 1994 through June 29, 1995, the Czech
market substantially declined, registering a drop of 44.3% in local currency
terms. The market's decline, which accelerated between January and April, was a
result of a number of factors including the following:
- The Mexican peso crisis, which caused many foreign investors to retreat
from the emerging markets, including the Czech Republic.
- Similar to the first privatization wave, many Czechs sold off the vouchers
they received from the second privatization wave at any price available.
- Finally, initial stock market prices for the second wave of privatization
companies were set above the level of market interest and their subsequent
adjustment adversely impacted the market.
3
<PAGE> 4
However, on June 29, 1995, the PX-50 reached a bottom at 387. The Czech
market made a positive turn in early July as local market participants and
foreign investors responded to strong corporate earnings reports, increasingly
attractive valuations, market upturns in Poland and Hungary, and the Czech
Republic's continuing strong macroeconomic fundamentals. For the period from
June 30, 1995 through August 31, 1995, the market was up by 9.6% in local
currency terms.
Further, investors responded positively to several changes to the market. In
May 1995, the Prague Stock Exchange announced that the market will be
restructured and that reporting requirements on the Exchange will become more
stringent to increase trading transparency and liquidity. The restructuring of
the Prague Stock Exchange will be accompanied by continuous trading in the
largest and most liquid stocks. Additionally, in August eight major brokers in
Prague began to publish daily volume and price information on blocks traded on
and off the Prague Stock Exchange to generate greater disclosure of market
trades.
INVESTMENT STRATEGY
For the Fund's initial fiscal year, we took a cautious approach in deploying
the Fund's assets in the Czech Republic in light of the market's volatility. We
have pursued companies with what we believe have clear competitive strengths,
strong technical, managerial and financial resources, and attractive valuations.
The Fund has invested in both first and second wave privatization companies with
a greater weighting in first wave stocks.
During the initial months of investing, many of the possible companies in
which the Fund could invest in the Czech Republic were expensive relative to
comparable companies in other Central European countries. Thus, we chose to
invest in comparable companies in Austria, Poland, Hungary and the Slovak
Republic. However, as the Czech market has shown signs of recovery in recent
months, we have gradually increased the Fund's allocation in Czech equities,
taking advantage of the relatively attractive valuations and depressed stock
prices. At present, price/earnings ratios in the Czech Republic, based on the
H.N. Wood index of 60 companies, are estimated at 6.3 times 1996's estimated
earnings, 10.3 times 1995's estimated earnings and 13.5 times 1994's actual
earnings. Going forward, we plan to increase the Fund's allocation in Czech
equities.
THE FUND'S PERFORMANCE
For the period from September 30, 1994 through August 31, 1995, the Fund's
total net asset value return was -3.85% based on its initial net asset value of
$13.77, reflecting a dividend payment of $0.10 paid on January 13, 1995. The
Fund significantly outperformed the PX-50, which produced a return of -36.3% in
U.S. dollar terms. The total net assets of the Fund amounted to nearly US$58
million as of August 31, 1995.
The following chart shows the Fund's geographical allocation as well as a
breakdown of the number of positions held in each country as of August 31, 1995.
<TABLE>
<CAPTION>
% OF TOTAL NUMBER OF
COUNTRY INVESTMENTS COMPANIES
--------------------------------------------- ----------- ---------
<S> <C> <C>
Czech Republic............................... 73.7% 39
Austria...................................... 11.1% 5
Poland....................................... 3.7% 3
Hungary...................................... 3.8% 3
Slovak Republic.............................. 2.9% 4
</TABLE>
4
<PAGE> 5
The following is a breakdown of the Fund's sectoral allocation as of August
31, 1995.
<TABLE>
<CAPTION>
SECTOR % OF TOTAL INVESTMENTS
----------------------------------------------------- ----------------------
<S> <C>
Telecommunications................................... 15.3%
Banking.............................................. 11.6%
Utilities............................................ 10.9%
Building Materials................................... 6.5%
Investment Funds..................................... 5.8%
Forest Products & Paper.............................. 5.0%
Construction......................................... 4.5%
Health Care & Pharmaceuticals........................ 4.4%
Beverages & Tobacco.................................. 3.8%
Machinery & Engineering.............................. 3.7%
Electronics Components/Instruments................... 3.3%
Metals -- Steel...................................... 2.7%
Broadcasting & Communication......................... 2.5%
Transportation....................................... 2.3%
Food & Household Products............................ 1.1%
Other................................................ 16.6%
</TABLE>
TOP TEN HOLDINGS IN THE CZECH REPUBLIC
The following is a brief description of the top ten companies in which the
Fund was invested as of August 31, 1995.
CZECH REPUBLIC
SPT TELECOM is the major supplier of public telecommunications services in
the Czech Republic. The company has a monopoly until the year 2000 on
international and long-distance telephone services and limited competition in
local telephone service. The company is also the sole provider of cellular
telephone services in the Czech Republic in conjunction with US West. A joint
venture between PTT Netherlands and Swiss Telecom recently acquired a 27% stake
in the company.
KOMERCNI BANKA A.S. is the largest commercial bank in the Czech Republic.
Created in 1988, the bank inherited almost the entire portfolio of commercial
loans to Czech industry.
CEZ is the country's dominant electrical power producer and distributor,
supplying an estimated 80% of the total electricity output in the Czech
Republic. The primary activity is power production and transmission of
electrical power to regional distribution companies and some corporate clients.
The company is also active in other areas such as hydroelectric power and heat
generation.
TABAK A.S. KUTNA HORA is the country's sole tobacco producer. It is
majority-owned by Philip Morris which spent US$150 million to increase Tabak's
annual production by 30% to over 24 billion cigarettes by 1997; current
production is approximately 18 billion cigarettes, of which 14% is Marlboro
brand production. Petra Start and Sparta are the company's own top selling
name-brands.
BIOCEL PASKOV is the largest producer of bleached sulphate pulp in the Czech
Republic with an annual capacity of 220,000 tons. The company exports 80% of its
production to Western Europe. Roughly
5
<PAGE> 6
one-third of its capacity is produced chlorine-free and can be used in sanitary
products and food wrappings.
CHLUMCANSKE KERAMICKE ZAVODY is the third largest producer of ceramic tiles
and a major producer of floor tiles. The company also produces kaolin, clay,
feldspar, refractories and stoneware. The company has approximately 75% of the
domestic floor tile market and 20% of the combined wall and floor tile domestic
market.
SEPAP is a holding company of three subsidiaries involved in the paper
industry. The company is the only Czech producer of bleached sulphate pulp which
is sold to other paper producers. The company also produces newsprint, sack
paper and sacks, liners for corrugated board, folding boxes and wrapping paper.
Assidoman of Sweden recently purchased a 30% stake in the company.
OTHER TOP HOLDINGS OUTSIDE THE CZECH REPUBLIC
AUSTRIA MIKRO SYSTEMS is an Austrian company which designs, develops and
produces application-specific integrated circuits (ASICS) for communication,
automotive and industrial electronic market segments which are customer made
components designed for specific customer needs.
FLUGHAFFEN WIEN (Vienna Airport) is strategically located to participate in
the growth of travel in Central Europe. The company estimates that passenger
growth will be at least 8% per year until at least the year 2000. The company
has been designated as a European gateway airport.
BOHLER UDDEHOLM is located in Austria and manufactures high-grade specialty
steel products which are distributed through its worldwide network.
Going forward, 1996 will be an election year which will mean some
uncertainty in the market and which may slow down the pace of reforms in the
Czech Republic. However, we believe that the direction of the economic and
corporate reforms is well established and we remain cautiously optimistic about
the continuing recovery in the market.
/s/ PIERRE DAVIRON
- ------------------
PIERRE DAVIRON
PORTFOLIO MANAGER
QUEST FOR VALUE ADVISORS
6
<PAGE> 7
PORTFOLIO OF INVESTMENTS THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995
<TABLE>
<CAPTION>
No.
of Shares Security Value
- --------- --------------------------------------------------------------- -----------
<C> <S> <C> <C>
COMMON STOCKS -- 91.60%
AUSTRIA -- 11.11%
Building Materials & Components -- 1.76%
4,380 Weinerberger Baustoff.......................................... $ 1,029,016
-----------
Electronic Components, Instruments -- 3.30%
11,000 Austria Mikro Systems.......................................... 1,929,955
-----------
Metals Steel -- 2.22%
18,000 Bohler Uddeholm+............................................... 1,299,167
-----------
Retail Merchandising -- 1.50%
23,000 Baumax......................................................... 880,159
-----------
Transportation Airlines -- 2.33%
25,000 Flughaffen Wien................................................ 1,363,592
-----------
TOTAL AUSTRIA (COST $5,171,786)................................ 6,501,889
-----------
CZECH REPUBLIC -- 70.04%
Aerospace & Military Components -- 0.76%
11,700 Ceska Zbrojovka................................................ 443,808
-----------
Banking -- 10.20%
96,000 Komercni Banka a.s............................................. 4,926,739
58,000 Komercni Banka a.s.-Sponsored GDR.............................. 1,044,000
-----------
5,970,739
-----------
Beverages & Tobacco -- 3.78%
675 Bohemia Sekt................................................... 61,501
16,000 Tabak a.s. Kutna Hora.......................................... 2,148,010
-----------
2,209,511
-----------
Broadcasting & Publishing -- 1.69%
28 Bonton*+....................................................... 989,215
-----------
Building Materials & Components -- 3.56%
9,471 Chlumcanske Keramicke Zavody................................... 1,331,364
25,000 Sklo Union Teplice............................................. 585,720
4,000 VERTEX......................................................... 167,348
-----------
2,084,432
-----------
Chemicals -- 1.72%
13,636 Deza........................................................... 1,009,135
-----------
</TABLE>
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
No.
of Shares Security Value
- --------- --------------------------------------------------------------- -----------
<C> <S> <C> <C>
CZECH REPUBLIC -- 70.04% (CONTINUED)
Construction -- 3.69%
12,172 IPS Praha...................................................... $ 973,217
7,725 Metrostav...................................................... 614,782
14,000 Stavby Silnic a Zeleznic a.s.+................................. 572,704
-----------
2,160,703
-----------
Data Transmission -- 0.78%
13,000 Kablo Kladno+.................................................. 456,861
-----------
Forest Products & Paper -- 4.64%
41,000 Biocel Paskov+................................................. 1,523,206
19,000 Sepap+......................................................... 1,194,124
-----------
2,717,330
-----------
Health & Personal Care -- 1.47%
16,000 Setuza......................................................... 862,774
-----------
Industrial Components -- 0.90%
4,447 FAB............................................................ 529,208
-----------
Investment Funds -- 5.34%
25,000 Creditanstalt Czech Investment Fund............................ 692,637
34,187 Pojistovna Investicny Fond..................................... 650,939
17,249 PPF Prvni Cesky Investment Fund................................ 277,754
54,500 YSE Investment Fund............................................ 739,773
50,000 Zivnobanka Investment Fund..................................... 760,506
-----------
3,121,609
-----------
Machinery & Engineering -- 3.73%
6,269 MSA............................................................ 193,502
48,700 Prvni Brnenska Strojirna....................................... 278,907
47,980 Skoda Plzen.................................................... 963,525
15,000 Slovacke Strojirny............................................. 228,710
11,500 ZPS Zlin....................................................... 517,479
-----------
2,182,123
-----------
Metals Steel -- 0.47%
24,344 Nova Hut+...................................................... 271,595
-----------
Miscellaneous Materials & Components -- 0.83%
6,500 Sklarny Kavalier............................................... 483,451
-----------
Pharmaceuticals -- 1.62%
10,463 Leciva Praha+.................................................. 947,468
-----------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
No.
of Shares Security Value
- --------- --------------------------------------------------------------- -----------
<C> <S> <C> <C>
CZECH REPUBLIC -- 70.04% (CONTINUED)
Telecommunications Equipment -- 15.28%
91,000 SPT Telecom.................................................... $ 8,697,286
3,394 Telekomunikacni Montaze........................................ 241,076
-----------
8,938,362
-----------
Utilities, Electrical & Gas -- 9.58%
82,500 CEZ+........................................................... 3,221,458
28,000 CEZ II+........................................................ 896,541
3,166 Prazska Energetika+............................................ 128,924
21,161 Prvni Severozapadni Teplarenska+............................... 675,987
12,003 Severomoravska Energetika...................................... 678,489
-----------
5,601,399
-----------
TOTAL CZECH REPUBLIC (COST $44,783,084)........................ 40,979,723
-----------
HUNGARY -- 3.82%
Food & Household Products -- 1.14%
13,000 Pick Szeged.................................................... 670,238
-----------
Health & Personal Care -- 1.34%
46,000 Gedeon Richter Sponsored GDR................................... 782,000
-----------
Pharmaceutical Distribution -- 1.34%
33,000 Egis Gyogyszergiar............................................. 781,505
-----------
TOTAL HUNGARY (COST $2,296,285)................................ 2,233,743
-----------
POLAND -- 3.69%
Automobiles -- 1.10%
53,000 Debica......................................................... 643,334
-----------
Banking -- 1.37%
52,000 Bank Rozwoju Eksportu.......................................... 801,618
-----------
Building Materials & Components -- 1.22%
43,000 Krosno......................................................... 713,332
-----------
TOTAL POLAND (COST $2,243,296)................................. 2,158,284
-----------
SLOVAK REPUBLIC -- 2.94%
Construction -- 0.84%
13,000 Vahostav Zilina................................................ 490,786
-----------
Forest Products & Paper -- 0.32%
13,000 Juhoslovenske Celulozky a Papierne............................. 187,273
-----------
Investment Funds -- 0.42%
8,423 Creditanstalt Slovenska Investicny Fond........................ 245,467
-----------
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995 (CONCLUDED)
<TABLE>
<CAPTION>
No.
of Shares Security Value
- --------- --------------------------------------------------------------- -----------
<C> <S> <C> <C>
SLOVAK REPUBLIC -- 2.94% (CONTINUED)
Utilities, Electrical & Gas -- 1.36%
12,000 Nafta Gbely.................................................... $ 798,768
-----------
TOTAL SLOVAK REPUBLIC (COST $2,043,486)........................ 1,722,294
-----------
TOTAL COMMON STOCK (COST $56,537,937).......................... 53,595,933
-----------
</TABLE>
<TABLE>
<CAPTION>
Par
(000)
- ---------
<C> <S> <C> <C>
SHORT TERM OBLIGATIONS -- 8.40%
CZECH REPUBLIC TIME DEPOSITS -- 3.62%
57,000 CSK CSOB Prague 10.50%, 09/06/95 (Cost $2,119,747)................. 2,119,747
-----------
UNITED STATES COMMERCIAL PAPER -- 4.78%
Federal National Mortgage Association 5.67%, 09/06/95 (Cost
$ 2,800 $2,797,795).................................................. 2,797,795
-----------
TOTAL SHORT TERM OBLIGATIONS (COST $4,917,542)................. 4,917,542
-----------
TOTAL INVESTMENTS (COST $61,455,479**) 100.00%................. $58,513,475
============
</TABLE>
- ---------------
* At fair value as determined by the Board of Directors.
** Aggregate cost for Federal income tax purposes is substantially the same as
for book purposes. The aggregate gross unrealized appreciation (depreciation)
for all securities is as follows:
<TABLE>
<S> <C>
Excess of value over tax cost $ 3,336,056
Excess of tax cost over value (6,278,060)
------------
$ (2,942,004)
=============
</TABLE>
+ non-income producing security
CSK -- Czech crown (Ceskakoruna)
See accompanying notes to financial statements.
10
<PAGE> 11
STATEMENT OF ASSETS AND LIABILITIES THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $61,455,479)..................................... $ 58,513,475
Cash (including $399,464 of foreign currency holdings with a cost of
$399,485).................................................................. 1,442,944
Receivables:
Interest................................................................ 206,314
Dividends............................................................... 291,919
Investments sold........................................................ 251,423
Prepaid expenses............................................................. 32,464
Unamortized organizational cost.............................................. 205,150
------------
Total assets....................................................... 60,943,689
------------
LIABILITIES:
Payables for securities purchased............................................ 2,718,268
Due to investment manager.................................................... 48,440
Due to administrator......................................................... 9,688
Accrued expenses............................................................. 287,262
------------
Total liabilities.................................................. 3,063,658
------------
NET ASSETS................................................................... $ 57,880,031
============
NET ASSET VALUE PER SHARE ($57,880,031/4,407,134)............................ $13.13
=======
Net assets consist of:
Common stock, $.001 par value; 4,407,134 shares issued and outstanding
(100,000,000 shares authorized)............................................ $ 4,407
Paid-in capital.............................................................. 60,689,052
Undistributed net investment income.......................................... 1,159,164
Accumulated net realized loss on investments and foreign currency related
transactions............................................................... (1,023,093)
Net unrealized depreciation in value of investments and translation of assets
and liabilities denominated in foreign currencies.......................... (2,949,499)
------------
$ 57,880,031
============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 12
STATEMENT OF OPERATIONS THE CZECH REPUBLIC FUND, INC.
FOR THE PERIOD FROM SEPTEMBER 30, 1994 (COMMENCEMENT OF
OPERATIONS) THROUGH AUGUST 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 1,858,314
Dividends (net of taxes withheld of $107,965)..................... 684,508
------------
Total investment income................................. 2,542,822
------------
EXPENSES:
Management fees................................................... 530,369
Custodian fees.................................................... 148,932
Administration fees............................................... 106,074
Transfer agent fees............................................... 19,241
Directors' fees................................................... 29,734
Legal fees........................................................ 104,693
Printing.......................................................... 76,161
Insurance......................................................... 70,778
Audit fees........................................................ 67,255
Amortization of organization cost................................. 46,250
Listing fees...................................................... 16,545
Miscellaneous..................................................... 49,289
--------
Total expenses.......................................... 1,265,321
------------
Net investment income............................................. 1,277,501
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCY HOLDINGS AND OTHER ASSETS AND LIABILITIES DENOMINATED
IN FOREIGN CURRENCIES:
Net realized gain (loss) from:
Security transactions............................................. (1,045,113)
Foreign currency related transactions............................. 344,396
------------
(700,717)
------------
Net unrealized depreciation in value of investments and
translation of assets and liabilities denominated in foreign
currencies...................................................... (2,949,499)
------------
Net realized and unrealized loss on investments, foreign currency
holdings and other assets and liabilities denominated in foreign
currencies...................................................... (3,650,216)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $ (2,372,715)
============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS THE CZECH REPUBLIC FUND, INC.
FOR THE PERIOD FROM SEPTEMBER 30, 1994 (COMMENCEMENT OF
OPERATIONS) THROUGH AUGUST 31, 1995
<TABLE>
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income......................................................... $ 1,277,501
Net realized loss on investments and foreign currency related transactions.... (700,717)
Net change in unrealized depreciation in value of investments and translation
of assets and liabilities denominated in foreign currencies................. (2,949,499)
------------
Net decrease in net assets resulting from operations..................... (2,372,715)
------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ($0.10 per share)....................................... (440,713)
------------
Decrease in net assets from distributions................................ (440,713)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 4,400,000 shares (net of $4,312,000 of underwriting
discount)................................................................... 61,688,000
Offering costs charged to paid-in capital..................................... (1,094,560)
------------
Net increase in net assets from capital share transactions............... 60,593,440
------------
Total increase in net assets........................................ 57,780,012
------------
NET ASSETS:
Beginning of period (7,134 shares)............................................ 100,019
------------
End of period (including undistributed net investment income of $1,159,164)... $ 57,880,031
============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE> 14
FINANCIAL HIGHLIGHTS THE CZECH REPUBLIC FUND, INC.
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
FOR THE PERIOD SEPTEMBER 30, 1994 (COMMENCEMENT OF
OPERATIONS) THROUGH AUGUST 31, 1995
<TABLE>
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........................................ $ 13.77(1)
--------
Net investment income....................................................... 0.29
Net realized and unrealized loss on investments, foreign currency holdings,
and translation of other assets and liabilities denominated in foreign
currencies............................................................... (0.83)
--------
Net decrease from investment operations..................................... (0.54)
--------
Less distributions:
Dividends from net investment income........................................ (0.10)
--------
Total dividends and distributions........................................... (0.10)
--------
Net asset value, end of period.............................................. $ 13.13
========
Per share market value, end of period......................................... $ 12.125
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE(2).............................. (12.80)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)........................................ $ 57,880
Ratio of expenses to average net assets..................................... 2.39%(3)
Ratio of net investment income to average net assets........................ 2.41%(3)
Portfolio turnover.......................................................... 20.39%
</TABLE>
- ------------------------
(1) Initial public offering price $15.00 per share less underwriting discount of
$0.98 per share and offering costs of $0.25 per share.
(2) Total investment return is calculated assuming a purchase of common stock at
the offering price of $15.00 per share less sales commission of $0.98 per
share on the first day and a sale at the current market price on the last
day of the period reported. Dividends and distributions, if any, are
assumed, for purposes of this calculation, to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Total investment
return does not reflect brokerage commissions or sales charges and is not
annualized.
(3) Annualized.
See accompanying notes to financial statements.
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Czech Republic Fund, Inc. (the "Fund") was incorporated in Maryland on
March 3, 1994 and commenced operations on September 30, 1994. The Fund is
registered under the Investment Company Act of 1940, as amended, as a closed-end
non-diversified management investment company. Prior to commencing its
operations on September 30, 1994, the Fund had no activities other than the sale
of an aggregate of 7,134 shares of its common stock to Oppenheimer & Co., Inc.,
("Oppenheimer") and Oppenheimer Capital, for an aggregate purchase price of
$100,019. At August 31, 1995, Oppenheimer owned 3,567 shares and Oppenheimer
Capital owned 3,567 shares of the Fund's common stock.
SIGNIFICANT ACCOUNTING POLICIES ARE AS FOLLOWS:
PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. In valuing the Fund's assets, all securities for which
market quotations are readily available are valued (i) at the last sale price
prior to the time of determination if there was a sale on the date of
determination, (ii) at the mean between the last current bid and asked prices if
there was no sales price on such date and bid and asked quotations are
available, and (iii) at the bid price if there was no sales price on such date
and only bid quotations are available. In instances where market quotations are
not readily available or a price determined above is deemed not to represent
fair market value, the price is determined in such manner as the Board of
Directors may prescribe. Securities totalling $989,215 (1.71% of net assets) at
August 31, 1995 were valued in this manner. Short-term investments having a
maturity of 60 days or less are valued at amortized cost, unless the Board of
Directors determines that such valuation does not constitute fair value. The net
asset value per share of the Fund is calculated weekly and at the end of each
month.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on the accrual basis; dividend
income is recorded on the ex-dividend date or when known. The collectibility of
income receivable from foreign securities is evaluated periodically, and any
resulting allowances for uncollectible amounts are reflected currently in the
determination of investment income.
TAX STATUS: No provision is made for U.S. Federal income or excise taxes
as it is the Fund's intention to qualify as a regulated investment company and
to make the requisite distributions to its shareholders which will be sufficient
to relieve it from all or substantially all federal income and excise taxes.
The characterization of distributions made during the year from net
investment income or net realized gains for financial reporting purposes may
differ from their ultimate characterization for Federal income tax purposes.
Net investment income and realized capital gains differ for financial
statement and tax purposes primarily because of the Fund's election to defer
$1,026,108 of net realized capital losses arising
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995
after October 31, 1994. In accordance with U.S. Treasury regulations, such
losses are treated for tax purposes as arising on September 1, 1995.
The tax treaty entered into between the United States and the Czech
Republic (the "Treaty") provides protection from Czech taxation in certain
circumstances. The benefits allowed under the Treaty will apply, without
limitation, if the Fund is a tax resident in the United States, does not have a
permanent establishment in the Czech Republic and, with respect to the Fund's
shares, there is "substantial and regular trading on a recognized securities
exchange." The following benefits are provided under the Treaty:
(i) dividends received from Czech securities will generally be subject
to a withholding tax at a rate of 15%, and at a lesser rate of 5%
if the holder has a beneficial ownership interest of 10% or more of
the voting shares of the issuer;
(ii) interest received from such investments will not be subject to
withholding taxes in the Czech Republic;
(iii) capital gains of the Fund from Czech securities will not be taxed
in the Czech Republic.
Based upon current circumstances, the Fund believes it is entitled to the
benefits of the Treaty and accordingly recognizes withholding taxes based upon
the applicable Treaty rates. However, there is no history of regulatory or legal
interpretation of the Treaty by Czech authorities and there can be no assurance
that the benefits of the Treaty will be available to the Fund. If the benefits
of the Treaty were not available to the Fund, the Fund would be subject to tax
under Czech domestic tax law which provides that the capital gains on certain
sales of shares and securities in Czech corporations are subject to Czech
taxation at the rate of 41%. (On January 1, 1996 this rate is scheduled to be
reduced to 39%.) In addition, the Fund would be subject to withholding of 25% on
dividend and interest payments received with respect to Czech investments.
The Fund believes that dividend income in the Slovak Republic, Austria,
Hungary and Poland is subject to the applicable withholding tax rates, which
currently are up to 15% and that capital gains on the sale of securities of
companies domiciled in such countries are not subject to taxation in such
countries. Certain of these rates are based upon applicable treaties between the
United States and such countries. Such treaties may be subject to certain of the
risks and considerations described above with respect to the Treaty. At present,
the aforementioned countries do not impose a withholding tax on interest income
earned.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, assets and liabilities at
the current rates of exchange on the valuation date; and
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995
(ii) purchases and sales of investment securities, income and expenses
at the relevant rates of exchange prevailing on the respective
dates of such transactions.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in foreign exchange.
The Fund does not generally isolate the effect of fluctuations in foreign
currency rates from the effect of fluctuations in the market prices of
securities. However, the Fund does isolate the effect of fluctuations in foreign
currency rates when determining the gain or loss upon the sale of foreign
currency denominated debt obligations pursuant to U.S. Federal income tax
regulations; such amounts are categorized as foreign currency gains or losses
for both financial reporting and federal income tax purposes. The Fund reports
certain realized gains and losses on foreign currency related transactions as
components of realized gain and loss for financial reporting purposes, whereas
such components are included in or are a reduction of ordinary income for
Federal income tax purposes.
Foreign security and currency transactions involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets, the possibilities of political or economic
instability, and the fact that foreign securities markets may be smaller and
less developed.
DISTRIBUTION OF INCOME AND GAINS: The Fund intends to distribute annually
to shareholders, substantially all of its net investment income, including
foreign currency gains, and normally to distribute annually any net realized
long-term capital gains in excess of net realized short-term capital losses
(including any capital loss carryovers). An additional distribution may be made
to the extent necessary to avoid payment of a 4% Federal excise tax.
Distributions to shareholders are recorded on the ex-dividend date. The
amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with Federal income tax
regulations, which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their Federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income and net realized capital gains. To
the extent they exceed net investment income and net realized gains for tax
purposes, they are reported as distributions of additional paid-in capital.
During the period ended August 31, 1995, the Fund reclassified $322,376
from accumulated net realized gain on investments and foreign currency related
transactions to undistributed net investment income as a result of permanent
book and tax differences relating primarily to foreign currency gains. Net
investment income and net assets were not affected by the change.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995
OTHER: Costs incurred by the Fund in connection with its organization are
being amortized on a straight-line basis over a five-year period beginning with
the commencement of operations of the Fund.
NOTE B: MANAGEMENT, INVESTMENT ADVISORY, AND ADMINISTRATIVE SERVICES
The Investment Manager is Advantage Advisers, Inc., a subsidiary of
Oppenheimer (the "Investment Manager"), the Investment Adviser is Quest for
Value Advisors, an affiliate of Oppenheimer (the "Investment Adviser"), and the
Regional Adviser is BAI Fondsberatung GmbH, an affiliate of Bank Austria
Aktiengesellschaft (the "Regional Adviser"). Pursuant to a Management Agreement,
the Investment Manager supervises the Fund's investment program, including
advising and consulting with the Investment Adviser regarding the Fund's overall
investment strategy. Pursuant to an Investment Advisory Agreement, the
Investment Adviser is responsible on a day-to-day basis for investing the Fund's
portfolio in accordance with its investment objective and policies. Pursuant to
a Regional Advisory Agreement, the Regional Adviser furnishes advice and makes
recommendations to the Investment Adviser regarding the purchase, sale or
holding of particular Czech and Central European securities and provides
research and statistical data to the Investment Adviser. The Regional Adviser is
not responsible, nor has discretionary authority, for the actual investment
decisions of the Fund. For its services, the Investment Manager receives a
monthly fee at an annual rate of 1.00% of the Fund's average weekly net assets
and the Investment Adviser and Regional Adviser each receive from the Investment
Manager a monthly fee at an annual rate of 0.40% and 0.20%, respectively, of the
Fund's average weekly net assets. For the period ended August 31, 1995, fees
paid or accrued to the Investment Manager amounted to $530,369. Of this amount,
$212,147 and $106,074, were paid or payable to the Investment Adviser and
Regional Adviser, respectively.
Oppenheimer serves as the Fund's Administrator (the "Administrator")
pursuant to the terms of an Administration Agreement. For its services, the
Administrator receives a monthly fee at an annual rate of 0.20% of the Fund's
average weekly net assets. For the period ended August 31, 1995, these fees
amounted to $106,074. The Administrator subcontracts certain of the services it
is required to perform under the Administration Agreement to PFPC Inc.
The Fund pays each of its directors who is not a director, officer or
employee of the Investment Manager, the Investment Adviser, the Regional
Adviser, the Administrator or any affiliate thereof an annual fee of $5,000 plus
up to $700 for each Board of Directors meeting attended. In addition, the Fund
reimburses all directors for travel and out-of-pocket expenses incurred in
connection with Board of Directors meetings.
NOTE C: PORTFOLIO ACTIVITY
Purchases and sales of securities other than short-term obligations
aggregated $64,681,285 and $7,170,395, respectively, for the period ended August
31, 1995.
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED) THE CZECH REPUBLIC FUND, INC.
AUGUST 31, 1995
NOTE D: TRANSACTIONS WITH AFFILIATES
Oppenheimer, an affiliate of the Investment Manager and the Investment
Adviser, participated in the underwriting group as underwriter in the Fund's
initial offering of common stock. Oppenheimer informed the Fund that it received
$808,013 and $304,442 in sales commissions and management fees, respectively, in
connection with the initial offering of common stock.
NOTE E: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
NET REALIZED &
UNREALIZED GAIN NET INCREASE
(LOSS) ON (DECREASE) IN
INVESTMENTS, FOREIGN NET ASSETS
INVESTMENT NET INVESTMENT CURRENCY & RELATED RESULTING FROM
INCOME INCOME TRANSACTIONS OPERATIONS
------------------ ------------------ -------------------- -------------------
TOTAL PER TOTAL PER TOTAL PER TOTAL PER
(000) SHARE (000) SHARE (000) SHARE (000) SHARE
------- ------ ------- ------ -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
November 30, 1994*................. $ 473 $ 0.11 $ 224 $ 0.05 $ (1,499) $ (0.34) $ (1,275) $ (0.29)
February 28, 1995.................. 658 0.15 327 0.07 (2,481) (0.56) (2,154) (0.49)
May 31, 1995....................... 698 0.16 390 0.09 (1,098) (0.25) (708) (0.16)
August 31, 1995.................... 714 0.16 337 0.08 1,427 0.32 1,764 0.40
------- ------ ------- ------ -------- ------- -------- -------
$ 2,543 $ 0.58 $ 1,278 $ 0.29 $ (3,651) $ (0.83) $ (2,373) $ (0.54)
====== ===== ====== ===== ======== ====== ======== ======
</TABLE>
- ---------------
* From commencement of operations on September 30, 1994
NOTE F: SUBSEQUENT EVENT
On October 12, 1995, the Fund filed a registration statement with the
Securities and Exchange Commission regarding a proposed rights offering to
holders of the Fund's common stock. Pursuant to the proposed rights offering,
the Fund would issue one transferable right for each share of common stock
owned, entitling shareholders to the opportunity to acquire one newly issued
share of common stock for every three rights held at a subscription price which
has yet to be determined.
NOTE G: OTHER
At August 31, 1995, substantially all of the Fund's net assets were
invested in securities of issuers in the Czech Republic and other Central
European countries. The Czech Republic and Central European securities markets
are substantially smaller, less developed, less liquid, and more volatile than
the major securities markets in the United States. Consequently, acquisitions
and dispositions of securities by the Fund involve special risks and
considerations not present with respect to U.S. securities.
19
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The Czech Republic Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Czech Republic Fund, Inc. (the
"Fund") at August 31, 1995, and the results of its operations, the changes in
its net assets and the financial highlights for the period September 30, 1994
(commencement of operations) through August 31, 1995, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at August 31, 1995 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 17, 1995
20
<PAGE> 21
DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
The Fund intends to distribute annually to shareholders substantially all
of its net investment income, and normally to distribute any net realized
capital gains annually. Net investment income for this purpose is income other
than net realized long- and short-term capital gains net of expenses.
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
shareholders whose shares of common stock are registered in their own names will
be deemed to have elected to have all distributions automatically reinvested by
State Street Bank and Trust Company (the "Plan Agent") in Fund shares pursuant
to the Plan, unless such shareholders elect to receive distributions in cash.
Shareholders who elect to receive distributions in cash will receive all
distributions in cash paid by check in dollars mailed directly to the
shareholders by State Street Bank and Trust Company as dividend paying agent. In
the case of shareholders, such as banks, brokers and nominees, that hold shares
for others who are beneficial owners, the Plan Agent will administer the Plan on
the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in such shareholders'
names and held for the account of beneficial owners that have not elected to
receive distributions in cash. Investors that own shares registered in the name
of a bank, broker or other nominee should consult with such nominee as to
participation in the Plan through such nominee, and may be required to have
their shares registered in their own names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the directors of the Fund declare an income dividend or a capital gains
distribution payable either in the Fund's common stock or in cash,
nonparticipants in the Plan will receive cash and participants in the Plan will
receive common stock, to be issued by the Fund or purchased by the Plan Agent in
the open market, as provided below. If the market price per share on the
valuation date equals or exceeds the net asset value per share on that date, the
Fund will issue new shares to participants at net asset value; provided,
however, if the net asset value is less than 95% of the market price on the
valuation date, then such shares will be issued at 95% of the market price. The
valuation date will be the dividend or distribution payment date or, if that
date is not a New York Stock Exchange trading day, the next preceding trading
day. If net asset value exceeds the market price of Fund shares at such time, or
if the Fund should declare an income dividend or capital gains distribution
payable only in cash, the Plan Agent will, as agent for the participants, buy
Fund shares in the open market, on the New York Stock Exchange or elsewhere, for
the participants' accounts on, or shortly after, the payment date. If, before
the Plan Agent has completed its purchases, the market price exceeds the net
asset value of a Fund share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the distribution had been paid in shares
issued by the Fund on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if the
Plan Agent is unable to invest the full dividend amount in open-market purchases
during the purchase period or if the market discount shifts to a market premium
during the purchase period, the Plan Agent will cease making open-market
purchases and will receive the uninvested portion of the dividend amount in
newly issued shares at the close of business on the last purchase date.
Participants have the option of making additional cash payments to the Plan
Agent, annually, in any amount from $100 to $3,000, for investment in the Fund's
common stock. The Plan Agent will
21
<PAGE> 22
use all such funds received from participants to purchase Fund shares in the
open market on or about September 15. Any voluntary cash payment received more
than 30 days prior to this date will be returned by the Plan Agent, and interest
will not be paid on any uninvested cash payment. To avoid unnecessary cash
accumulations, and also to allow ample time for receipt and processing by the
Plan Agent, it is suggested that participants send in voluntary cash payments to
be received by the Plan Agent approximately ten days before an applicable
purchase date specified above. A participant may withdraw a voluntary cash
payment by written notice, if the notice is received by the Plan Agent not less
than 48 hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in the name of the
participant, and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions or voluntary cash payments. The Plan Agent's fees for the
reinvestment of dividends and capital gains distributions and voluntary cash
payments will be paid by the Fund. There will be no brokerage charges with
respect to shares issued directly by the Fund as a result of dividends or
capital gains distributions payable either in stock or in cash. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and capital gains distributions and voluntary cash
payments made by the participant. Brokerage charges for purchasing small amounts
of stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions, because the Plan Agent will
be purchasing stock for all participants in blocks and prorating the lower
commission thus attainable.
The receipt of dividends and distributions under the Plan will not relieve
participants of any income tax which may be payable on such dividends or
distributions.
Experience under the Plan may indicate that changes in the Plan are
desirable. Accordingly, the Fund and the Plan Agent reserve the right to
terminate the Plan as applied to any voluntary cash payments made and any
dividend or distribution paid subsequent to notice of the termination sent to
members of the Plan at least 30 days before the record date for such dividend or
distribution. The Plan also may be amended by the Fund or the Plan Agent, but
(except when necessary or appropriate to comply with applicable law, rules or
policies or a regulatory authority) only by at least 30 days' written notice to
participants in the Plan. All correspondence concerning the Plan should be
directed to the Plan Agent at P.O. Box 8209, Boston, Massachusetts 02266-8209.
U.S. FEDERAL TAXATION NOTICE
The Fund paid foreign taxes of $107,965 during the fiscal period ended August
31, 1995 which it intends to pass through pursuant to Section 853 of the U.S.
Internal Revenue Code to its shareholders. During the same period the Fund
distributed $548,678 of foreign source income.
22
<PAGE> 23
Investment Manager:
ADVANTAGE ADVISERS, INC.
Investment Adviser:
QUEST FOR VALUE ADVISORS
Regional Adviser:
BAI FONDSTERATUNG GMBH
Administrator
OPPENHEIMER & CO., INC.
Custodian, Transfer Agent, Registrar
STATE STREET BANK AND TRUST COMPANY
THE CZECH REPUBLIC FUND, INC.
Annual Report
August 31, 1995
ADVANTAGE ADVISERS, INC.
