<PAGE> 1
- --------------------------------------------------------------------------------
April 15, 1996
DEAR FUND SHAREHOLDER:
We are pleased to present you with the unaudited financial statements of The
Czech Republic Fund, Inc. (the "Fund") for the six months ended February 29,
1996.
The past six months has been a positive period for the Czech stock market as
the PX-50, the local market index of the top 50 capitalized companies on the
Prague Stock Exchange, appreciated by 11.3% from August 31, 1995 to February 29,
1996.
The macroeconomic fundamentals that initially attracted us to the Czech
Republic remain strong. GDP for 1995 was 5.2%, exceeding original government
forecasts of 4.5%. Inflation was 9.1% for the year and unemployment remained low
at 2.9%. Additionally, several positive developments for the financial markets
transpired during the last six months. The Czech National Bank widened the
trading band for the currency, the Prague Stock Exchange tiered the market
according to size, quality and trading volume and both Moody's and Standard and
Poor's raised their credit ratings on the country's sovereign debt. We believe
these developments bode well for the Czech Republic and should bolster investor
sentiment.
Over the last year, the Fund provided investors with broad exposure to the
Czech Republic. As of February 29, 1996, the portfolio was invested in 43
securities in more than 20 sectors. To provide you with a more detailed
macroeconomic picture as well as further insight into the Fund's investment
strategy, the Investment Adviser has provided its views on the Czech economy, a
description of its investment approach, and information regarding the Fund's top
ten equity positions.
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 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 RAPPAPORT
------------------------------------
ALAN RAPPAPORT
CHAIRMAN
1
<PAGE> 2
THE CZECH REPUBLIC FUND, INC.
INVESTMENT ADVISER'S REPORT
The following summary provides an overview of the Czech Republic's economy
as well as the events that impacted the Czech market and the Fund's performance
for the six months ended February 29, 1996.
ECONOMIC OVERVIEW
The macroeconomic fundamentals of the Czech Republic have continued to be
strong both in absolute terms and relative to other Central European countries.
GDP growth, initially forecasted at 4.5% by the government, was 5.2% in 1995 (up
from 2.6% in 1994); official government forecasts for 1996 are 5.6%. Inflation
was 9.1% for the year with the government forecasting a rate below 9% for 1996.
Unemployment remained low at 2.9% for 1995, down marginally from 3% in 1994.
The concern for the Czech economy is the worsening of the current account
balance, in particular, the trade balance. Exports have been growing at a much
slower pace than imports, with capital and semi-finished goods making up a
majority of these imports. Government estimates for the current account deficit
are roughly 2.7% of GDP for 1995 and expected to climb to 5.7% in 1996. The
capital account, however, remains at an enormous surplus, due to short and long
term capital inflows, and both increasing foreign direct and portfolio
investments into the Czech Republic. The continuing surplus has allowed for
increasing foreign exchange reserves and little difficulty in financing the
current account deficit.
On February 29, 1996, much to the surprise of the market, the Czech National
Bank (CNB) widened the band within which the Czech crown can fluctuate, from
0.5% to 7.5%, to provide a more accurate reflection of the market level of the
currency. The decision to widen the band will provide the CNB with greater
flexibility to lower interest rates and to limit capital inflows. The immediate
effect of the new band was a slight devaluation of roughly 2%; however, the
currency quickly stabilized as capital inflows and service receipts more than
made up for trade outflows. The basket against which the crown is fixed remained
unchanged at 65% Deutsche mark (DM)/35% U.S. dollar, but the Governor of the
Central Bank stated that in the future the crown may be pegged either to the ECU
(European Currency Unit) or the DM.
In other news, on November 28, 1995, the Czech Republic became the 26th
member of the Organization for Economic Cooperation and Development (OECD), the
first post-communist member to join. Additionally, Standard and Poor's and
Moody's have both raised their credit assessment of the country with investment
grade ratings of A/Baa1.
STOCK MARKET
For the six-month period ended February 29, 1996, the PX-50, the local
market index of the top 50 capitalized companies, posted a return of 11.3% in
U.S. dollar terms. The local currency depreciated 4% over the period.
The Czech market has rebounded during the last six months with the PX-50
index rising from 426.2 on August 31, 1995 to 471.2 on February 29, 1996. In
September, both liquidity and trading volumes
3
<PAGE> 3
began to pick up, but by October, the Czech market began to consolidate its
gains. The end of the year saw typical softness ahead of the Christmas holidays.
In January and February, reallocation by global investors to emerging
markets helped to boost the Central European markets. Hungary and Poland reaped
most of the benefits from these allocations but the Czech Republic also
experienced a steady inflow of portfolio investment from abroad. Most of the
capital was primarily allocated to a handful of the large market capitalized
stocks which are well covered by the international brokerage community. However,
even the performance of the broader market remained strong.
During the six months ended February 29, 1996, the Prague Stock Exchange
implemented a series of measures designed to tier the market according to size,
quality and trading volume, in addition to announcing the start of continuous
trading in a select group of stocks and bonds. These measures are likely to
increase investor's confidence in the system.
INVESTMENT STRATEGY
Since the Fund's inception, the Czech market has seen many changes.
Corporate earnings histories have enabled the market to be more selective in
choosing companies; corporate restructuring is proceeding, albeit slowly in the
absence of regulations and pricing structures; and takeover activity continues
at a rapid pace. While the parliamentary elections scheduled for this June have
slowed regulatory and pricing initiatives, these issues should be resolved after
the elections take place.
The Fund's allocation to Czech equities has been fairly constant over the
period, at approximately 80% of total net assets, with approximately 15%
dedicated to other Central European investments. The allocation to the Czech
Republic increased from 73.7% on August 31, 1995 to 84.4% by the end of
February. During the six months, the Fund's allocation to Austria was reduced
from 11.1% on August 31, 1995 to 2.5% on February 29, 1996. In addition, the
Fund's exposure to Slovakia was reduced to zero, while exposure to Poland and
Hungary was increased.
The recovery of the Czech market has lagged behind the rapid increase in the
Polish and Hungarian bourses in 1996. The Investment Adviser feels that the
Czech market continues to offer investment opportunities, and as a result at
least 80% of the Fund's assets will be weighted in Czech equities for the near
future. Selected large capitalization stocks in the Czech Republic will remain
the central focus of the Fund, as these companies have the best financial
reporting disclosure and financial controls. The Fund will also continue to hold
positions in some medium capitalization names as these stocks offer very
favorable risk/reward characteristics.
THE FUND'S PERFORMANCE
For the period from September 1, 1995 through February 29, 1996, the Fund's
total net asset value return was 13.15% based on the net asset value of $13.76,
reflecting a dividend payment of $0.195 paid on January 13, 1996, and adjusted
for the recent rights offering by the Fund. The rights offering raised
approximately $16 million for investments by the Fund. The Investment Adviser
has already deployed
4
<PAGE> 4
most of these proceeds to take advantage of available opportunities. The total
net assets of the Fund were $80.9 million on February 29, 1996.
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 February 29,
1996.
<TABLE>
<CAPTION>
% OF TOTAL NUMBER OF
COUNTRY INVESTMENTS COMPANIES
--------------------------------------------- ----------- ---------
<S> <C> <C>
Czech Republic............................... 84.36% 36
Poland....................................... 6.41 3
Hungary...................................... 5.95 3
Austria...................................... 2.52 1
</TABLE>
The following is a breakdown of the Fund's sector allocation as of February
29, 1996
<TABLE>
<CAPTION>
% OF TOTAL
INVESTMENTS
-----------
<S> <C>
Telecommunications...................................... 18.2%
Banking/Financial Services.............................. 14.4
Utilities/Electrical & Gas.............................. 13.0
Health Care & Pharmaceuticals........................... 8.1
Beverages & Tobacco..................................... 6.0
Construction............................................ 5.9
Chemicals............................................... 5.6
Machinery & Engineering................................. 2.5
Forest Products & Paper................................. 2.5
Electronic Components................................... 2.5
Metals -- Steel......................................... 2.1
Broadcasting & Publishing............................... 1.6
Food & Household Products............................... 1.0
Other................................................... 16.6
</TABLE>
TOP TEN HOLDINGS IN THE CZECH REPUBLIC FUND
The following is a brief description of the top ten holdings in which the
Fund was invested on February 29, 1996.
SPT TELECOM is the major supplier of public telecommunication services in
the Czech Republic. The company has a monopoly until the year 2000 on
international and long-distance services and limited competition in local
telephone service. The company is also one of two providers of cellular
telephone services in the Czech Republic.
KOMERCNI BANKA A.S. is the largest bank in the Czech Republic. Created in
1988, the bank inherited almost the entire portfolio of commercial loans to
Czech industry.
5
<PAGE> 5
CEZ is the country's dominant electrical power producer and distributor,
supplying an estimated 80% of total electricity output in the Czech Republic.
The company's 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.
DEBICA manufactures tires for cars, trucks, bicycles and motorcycles. They
also provide service at stations throughout Poland. Debica exports to 30
countries in Europe, North and South America and Africa. The company is
majority-owned by Goodyear Tire & Rubber.
IPS PRAHA, one of the leading construction companies in the Czech Republic,
is a diversified general contractor. The company's activities include civil
projects, housing, industrial and commercial construction, roads and railways,
and ecological projects.
CESKA POJISTOVNA is a universal insurer offering a variety of insurance and
re-insurance products, and banking services.
GEDEON RICHTER is the largest pharmaceutical company in Hungary in terms of
revenues. As a fully integrated pharmaceutical group, it sees it products from
R&D all the way through to marketing and sales. It has an extensive range of
products covering all major therapeutic areas. The company currently
manufacturers approximately 100 ethical drugs in some 170 different
presentations.
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.
AUSTRIA MIKRO SYSTEME 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.
Sincerely,
/s/ Pierre Daviron
----------------------
PIERRE DAVIRON
PORTFOLIO MANAGER
6
<PAGE> 6
PORTFOLIO OF INVESTMENTS THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
No.
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
COMMON STOCKS -- 100.00%
AUSTRIA -- 2.52%
Electronic Components, Instruments -- 2.52%
10,800 Austria Mikro Systems................................................ $ 1,577,328
-----------
TOTAL AUSTRIA (COST $1,107,893)...................................... 1,577,328
-----------
CZECH REPUBLIC -- 84.36%
Aerospace & Military Components -- 1.74%
22,000 Ceska Zbrojovka...................................................... 1,090,623
-----------
Banking -- 12.61%
96,000 Komercni Banka a.s................................................... 6,567,885
58,000 Komercni Banka a.s.-Sponsored GDR 144A+.............................. 1,336,900
-----------
7,904,785
-----------
Beverages & Tobacco -- 6.02%
4,053 Bohemia Sekt+........................................................ 455,968
2,700 Plzensky Prazdroj a.s.+.............................................. 309,681
3,300 Prazske Pivovary..................................................... 169,026
16,000 Tabak a.s. Kutna Hora................................................ 2,839,059
-----------
3,773,734
-----------
Broadcasting & Publishing -- 1.55%
28 Bonton*+............................................................. 973,183
-----------
Building Materials & Components -- 3.65%
10,824 Chlumcanske Keramicke Zavody......................................... 1,467,198
13,000 Kablo Kladno+........................................................ 318,662
31,634 Sklo Union Teplice................................................... 502,292
-----------
2,288,152
-----------
Business & Public Services -- 0.34%
1,500 Podnik Vypocetni Techniky+........................................... 214,301
-----------
Chemicals -- 5.64%
28,000 Chemopetrol+......................................................... 1,137,087
17,868 Deza................................................................. 1,438,174
9,000 Kralupy+............................................................. 370,431
35,126 Precheza+............................................................ 591,152
-----------
3,536,844
-----------
Construction -- 5.86%
18,686 IPS Praha............................................................ 1,832,162
7,725 Metrostav............................................................ 847,876
25,500 Stavby Silnic a Zeleznic a.s.+....................................... 993,579
-----------
3,673,617
-----------
</TABLE>
7
<PAGE> 7
PORTFOLIO OF INVESTMENTS THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
No.
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CZECH REPUBLIC -- 84.36% (CONTINUED)
Food & Household Products -- 1.01%
6,500 Sklarny Kavalier+.................................................... $ 634,947
-----------
Forest Products & Paper -- 2.50%
25,777 Sepap+............................................................... 1,570,216
-----------
Health & Personal Care -- 1.26%
16,000 Setuza............................................................... 787,327
-----------
Insurance -- 2.66%
10,000 Ceska Pojistovna+.................................................... 1,664,654
-----------
Investment Funds -- 2.15%
34,187 Pojistovna Investicny Fond**......................................... 740,449
30,000 PPF Prvni Cesky Investment Fund**.................................... 608,056
-----------
1,348,505
-----------
Machinery & Engineering -- 2.53%
48,700 Prvni Brnenska Strojirna+............................................ 234,298
33,659 Skoda Plzen.......................................................... 836,149
11,500 ZPS Zlin............................................................. 517,506
-----------
1,587,953
-----------
Metals Steel -- 2.07%
99,711 Nova Hut+............................................................ 1,295,043
-----------
Pharmaceuticals -- 1.58%
10,463 Leciva Praha+........................................................ 987,617
-----------
Telecommunications Equipment -- 18.17%
106,000 SPT Telecom+......................................................... 10,936,231
4,499 Telekomunikacni Montaze.............................................. 454,295
-----------
11,390,526
-----------
Utilities, Electrical & Gas -- 13.02%
131,500 CEZ+................................................................. 4,719,625
28,000 CEZ II+.............................................................. 824,644
8,679 Prazska Energetika+.................................................. 442,952
21,161 Prvni Severozapadni Teplarenska+..................................... 717,676
21,466 Severomoravska Energetika............................................ 1,460,753
-----------
8,165,650
-----------
TOTAL CZECH REPUBLIC (COST $52,914,519).............................. 52,887,677
-----------
HUNGARY -- 5.95%
Building Materials & Components -- 0.74%
13,337 Zalakeramia+......................................................... 460,545
-----------
</TABLE>
8
<PAGE> 8
PORTFOLIO OF INVESTMENTS THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
No.
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
HUNGARY -- 5.95% (CONTINUED)
Pharmaceuticals -- 5.21%
44,000 Egis Gyogyszergiar+.................................................. $ 1,496,124
46,000 Gedeon Richter....................................................... 1,495,000
8,500 Gedeon Richter Sponsored GDR 144A+................................... 276,250
-----------
3,267,374
-----------
TOTAL HUNGARY (COST $2,143,179)...................................... 3,727,919
-----------
POLAND -- 6.41%
Automobiles -- 3.39%
90,000 Debica............................................................... 2,127,784
-----------
Banking -- 1.81%
52,000 Bank Rozwoju Eksportu................................................ 1,137,945
-----------
Building Materials & Components -- 1.21%
43,000 Krosno............................................................... 756,155
-----------
TOTAL POLAND (COST $2,814,902)....................................... 4,021,884
-----------
OTHER -- 0.76%
Investment Funds -- 0.76%
550,000 Central European Growth Fund......................................... 478,176
-----------
TOTAL OTHER (COST $444,506).......................................... 478,176
-----------
TOTAL COMMON STOCK (COST $59,424,999)................................ 62,692,984
-----------
TOTAL INVESTMENTS (COST $59,424,999)++ 100.00%....................... $62,692,984
===========
</TABLE>
- ---------------
+ Non-income producing security
* At fair value as determined by the Board of Directors
** Passive Foreign Investment Company
144A -- SEC Rule 144A security. Such securities have limited primary and
secondary markets in that they are traded only among "qualified
institutional buyers."
++ Aggregate cost for Federal income tax purposes is substantially the same for
book purposes. The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows:
<TABLE>
<S> <C>
Excess of value over tax cost $ 8,518,507
Excess of tax cost over value (5,250,522)
------------
$ 3,267,985
============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $59,424,999)..................................... $ 62,692,984
Cash (including $646,113 of foreign currency holdings with a cost
of $652,222)............................................................... 1,601,284
Receivables:
Fund shares sold........................................................ 16,207,424
Maturities.............................................................. 699,207
Investments sold........................................................ 604,013
Dividends and interest.................................................. 19,053
Prepaid expenses............................................................. 3,632
Unamortized organizational cost.............................................. 192,561
------------
Total assets....................................................... 82,020,158
------------
LIABILITIES:
Payables for securities purchased............................................ 698,601
Offering costs payable....................................................... 195,616
Due to investment manager.................................................... 53,074
Due to administrator......................................................... 10,615
Accrued expenses............................................................. 180,501
------------
Total liabilities.................................................. 1,138,407
------------
NET ASSETS................................................................... $ 80,881,751
============
NET ASSET VALUE PER SHARE ($80,881,751/5,878,047)............................ $13.76
============
Net assets consist of:
Capital stock, $.001 par value; 5,878,047 shares issued and outstanding
(100,000,000 shares authorized)............................................ $ 5,878
Paid-in capital.............................................................. 76,675,124
Accumulated net investment loss.............................................. (219,616)
Accumulated net realized gain on investments and foreign currency related
transactions............................................................... 1,166,126
Net unrealized appreciation in value of investments and translation of assets
and liabilities denominated in foreign currencies.......................... 3,254,239
------------
$ 80,881,751
============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 10
STATEMENT OF OPERATIONS THE CZECH REPUBLIC FUND, INC.
FOR THE SIX MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest......................................................................... $ 89,289
Dividends (net of taxes withheld of $1,131)...................................... 51,851
-----------
Total investment income................................................ 141,140
-----------
EXPENSES:
Management fees....................................................... 302,875
Custodian fees........................................................ 69,341
Administration fees................................................... 60,575
Directors' fees....................................................... 14,563
Transfer agent fees................................................... 11,227
Legal fees............................................................ 45,511
Audit fees............................................................ 34,943
Amortization of organization cost..................................... 30,000
Printing.............................................................. 25,770
Insurance............................................................. 23,426
Listing fees.......................................................... 8,829
Interest expense...................................................... 4,231
Miscellaneous......................................................... 29,238
--------
Total expenses......................................................... 660,529
-----------
Net investment loss.............................................................. (519,389)
-----------
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............................................................ 2,250,470
Foreign currency related transactions............................................ (61,251)
-----------
2,189,219
-----------
Net change in unrealized appreciation in value of investments and
translation of assets and liabilities denominated in foreign
currencies..................................................................... 6,203,738
-----------
Net realized and unrealized gain on investments, foreign currency
holdings and other assets and liabilities denominated in foreign
currencies..................................................................... 8,392,957
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $ 7,873,568
===========
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 11
STATEMENTS OF CHANGES IN NET ASSETS THE CZECH REPUBLIC FUND, INC.
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30, 1994
FOR THE SIX (COMMENCEMENT OF
MONTHS ENDED OPERATIONS)
FEBRUARY 29, 1996 THROUGH AUGUST 31,
(UNAUDITED) 1995
----------------- ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment (loss) income.............................. $ (519,389) $ 1,277,501
Net realized gain (loss) on investments and foreign
currency related transactions........................... 2,189,219 (700,717)
Net change in unrealized appreciation (depreciation) in
value of investments and translation of assets and
liabilities denominated in foreign currencies........... 6,203,738 (2,949,499)
----------- ------------
Net increase (decrease) in net assets resulting
from operations................................. 7,873,568 (2,372,715)
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ($0.195 and $0.10 per share,
respectively)........................................... (859,391) (440,713)
----------- ------------
Decrease in net assets from distributions.......... (859,391) (440,713)
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of 1,470,913 and 4,400,000 shares
(net of sales commissions and fees of $290,347 and
$4,312,000, respectively)............................... 16,257,424 61,688,000
Offering costs charged to paid-in capital................. (269,881) (1,094,560)
----------- ------------
Net increase in net assets from capital share
transactions.................................... 15,987,543 60,593,440
----------- ------------
Total increase in net assets.................... 23,001,720 57,780,012
----------- ------------
NET ASSETS:
Beginning of period....................................... 57,880,031 100,019
----------- ------------
End of period (including undistributed net investment
income of $1,159,164 at August 31, 1995)................ $80,881,751 $ 57,880,031
=========== ============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 12
FINANCIAL HIGHLIGHTS THE CZECH REPUBLIC FUND, INC.
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SEPTEMBER 30, 1994
SIX MONTHS (COMMENCEMENT
ENDED OF OPERATIONS)
FEBRUARY 29, 1996 THROUGH
(UNAUDITED) AUGUST 31, 1995
----------------- ------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................. $ 13.13 $ 13.77(1)
------- --------
Net investment (loss) income......................... (0.10) 0.29
Net realized and unrealized gain (loss) on
investments, foreign currency holdings, and
translation of other assets and liabilities
denominated in foreign currencies................. 1.85 (0.83)
------- --------
Net increase (decrease) from investment operations... 1.75 (0.54)
------- --------
Less distributions:
Dividends from net investment income................. (0.20) (0.10)
------- --------
Total dividends and distributions.................... (0.20) (0.10)
------- --------
Capital share transactions
Dilutive effect of rights offering................... (0.92) --
------- --------
Total capital share transactions..................... (0.92) --
------- --------
Net asset value, end of period....................... $ 13.76 $ 13.13
======= ========
Per share market value, end of period.................. $ 14.00 $ 12.125
TOTAL INVESTMENT RETURN BASED ON MARKET VALUE(2)....... 24.67% (12.80)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)................. $80,832 $ 57,880
Ratio of expenses to average net assets.............. 2.18%(3) 2.39%(3)
Ratio of net investment (loss) income to average net
assets............................................ (1.71)%(3) 2.41%(3)
Portfolio turnover................................... 26.48% 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 current market price on the first day and a sale at the current market
price on the last day of the period reported, except that for the period ended
August 31, 1995, total investment return is based on a beginning of period
price of $14.02 (initial offering price of $15.00 per share less sales
commission of $0.98 per share). 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. Rights offerings, if any, are
assumed, for purposes of this calculation, to be fully subscribed under the
terms of the rights offering. Total investment return does not reflect
brokerage commissions or sales charges and is not annualized.
(3) Annualized.
See accompanying notes to financial statements.
13
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED)
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 February 29, 1996, Oppenheimer owned 3,567 shares and Oppenheimer
Capital owned 3,645 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 $973,183 (1.20% of net assets) at
February 29, 1996 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 the Fund has qualified and intends to continue 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
$83,166 of net realized foreign currency losses
14
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED)
arising after October 31, 1995. In accordance with U.S. Treasury regulations,
such losses are treated for tax purposes as arising on September 1, 1996.
The tax treaty entered into between the United States and the Czech
Republic (the "Treaty") provides protection from Czech taxation in certain
circumstances. The benefits allowed under the Treaty will apply, without
limitation, if the Fund is a tax resident in the United States, does not have a
permanent establishment in the Czech Republic and, with respect to the Fund's
shares, there is "substantial and regular trading on a recognized securities
exchange." In relevant part, the following benefits are provided under the
Treaty:
(i) dividends received from Czech securities will 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 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
(ii) purchases and sales of investment securities, income and expenses
at the relevant rates of exchange prevailing on the respective
dates of such transactions.
15
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED)
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.
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.
16
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED)
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 OpCap
Advisors, an affiliate of Oppenheimer (the "Investment Adviser"), and the
Regional Adviser is BAI Fondsberatung GmbH, an affiliate of Bank Austria
Aktiengesellschaft and GiroCredit Bank Aktiengesellschaft (the "Regional
Adviser"). Pursuant to a Management Agreement, the 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 six months ended February 29, 1996, fees paid or accrued to the
Investment Manager amounted to $302,875. Of this amount, $121,150 and $60,575,
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 six months ended February 29, 1996, these
fees amounted to $60,575. 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 $15,905,549 and $15,268,844, respectively, for the six months ended
February 29, 1996.
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.
17
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED) THE CZECH REPUBLIC FUND, INC.
FEBRUARY 29, 1996 (UNAUDITED)
NOTE E: RIGHTS OFFERING
During the six months ended February 29, 1996 the Fund issued 1,470,913
shares in connection with a rights offering of the Fund's shares. Shareholders
of record on January 29, 1996 were issued 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 of $11.25 per share. Offering costs of $269,881 attributed to the rights
offering were charged to additional paid-in capital, of which $50,000 was paid
to Oppenheimer as reimbursement for its expenses in acting as dealer-manager for
the offering. Additionally, the Fund paid Oppenheimer $165,478 for financial
advisory services and $124,869 in sales commissions in connection with the
offering. The dilutive effect of the rights offering on net asset value per
share was $0.92 per share.
NOTE F: OTHER
At February 29, 1996, 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.
18
<PAGE> 18
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
19
<PAGE> 19
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.
RESULTS OF ANNUAL SHAREHOLDERS MEETING
The Fund held its initial annual shareholders meeting on December 15, 1995.
At the meeting, shareholders elected each of the nominees proposed for election
to the Fund's Board of Directors and ratified the selection of Price Waterhouse
LLP as the independent accountants of the Fund for
20
<PAGE> 20
the year ending August 31, 1996. The following table provides information
concerning the matters voted on at the meeting:
I. ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
NOMINEES VOTES FOR VOTES ABSTAINED
-------- --------- ---------------
<S> <C> <C>
Leslie H. Gelb........................................... 3,637,234 64,448
Wendy W. Luers........................................... 3,639,550 62,132
Robert I. Kleinberg...................................... 3,641,050 60,632
Alan H. Rappaport........................................ 3,641,050 60,632
Luis Rubio............................................... 3,363,934 64,748
Paul Belica.............................................. 3,636,934 64,748
</TABLE>
II. RATIFICATION OF PRICE WATERHOUSE LLP AS THE INDEPENDENT ACCOUNTANTS OF THE
FUND
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
- --------- ------------- ---------------
<S> <C> <C>
3,666,940 13,915 10,927
</TABLE>
21
<PAGE> 21
Investment Manager:
ADVANTAGE ADVISERS, INC.
Investment Adviser:
OPCAP 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.
Semi-Annual Report
February 29, 1996
ADVANTAGE ADVISERS, INC.
