THE CZECH REPUBLIC FUND, INC.
INVESTMENT MANAGER:
ADVANTAGE ADVISERS, INC.
INVESTMENT ADVISER:
OPCAP ADVISORS THE CZECH REPUBLIC FUND, INC.
Annual Report
August 31, 1996
ADMINISTRATOR:
OPPENHEIMER & CO., INC.
CUSTODIAN, TRANSFER AGENT, REGISTRAR:
STATE STREET BANK AND TRUST COMPANY
ADVANTAGE ADVISERS, INC.
<PAGE>
The Czech Republic Fund, Inc.
September 9, 1996
Dear Fund Shareholder:
We are pleased to present you with the audited financial statements of The Czech
Republic Fund, Inc. (the "Fund") for the year ended August 31, 1996. The Fund's
net asset value (NAV) return was 43%* over these 12 months, outperforming the
PX-50, an index of the 50 largest Czech stocks, which returned 40% in U.S.
dollars.
The macroeconomic fundamentals that initially attracted us to the Czech Republic
remain in place. GDP for 1996 is forecast to meet or possibly exceed last year's
5.2% growth rate. Inflation is expected to remain at the current 9.1% level for
1996, and unemployment remains low at 3%. Political and economic events
continued to drive the market over the period. Spring's strong performance was
brought on by better than expected economic results for 1995, a strengthening
currency and the restructuring of the Prague Stock Exchange. This spring's
parliamentary elections resulted in a brief 4% market slide as Vaclav Klaus'
center-right coalition lost its majority in the Parliament. The market recovered
quickly, however, as the consensus grew that no major policy changes would
result.
Over the last year, the Fund provided investors with broad exposure to the Czech
Republic as well as to selected countries elsewhere in central Europe. As of
August 31, 1996, the portfolio was invested in 42 companies across 18
industries. To provide you with a more detailed macroeconomic picture as well as
further insight into the Fund's investment strategy, the Investment Adviser
discusses the Czech economy, its investment approach and information regarding
the Fund's top ten equity positions in the following letter.
Sincerely,
/s/ Alan Rappaport
- -------------------------
Alan Rappaport
Chairman
*Including dividends and distributions and after adjusting for the rights
offering.
<PAGE>
Investment Adviser's Report The Czech Republic Fund, Inc.
Economic Overview
Macroeconomic fundamentals in the Czech Republic have continued to be positive,
both in absolute terms as well as against the performance of other Central
European countries. Growth of gross domestic product (GDP) was 5.2% in 1995,
versus 2.6% in 1994, and recent government forecasts are calling for 5.1%-5.4%
growth in 1996. Inflation remained steady at 9.1% for 1995 and should be little
changed in 1996. Unemployment continues to hover in the low 3% range. We
anticipate that the state budget will continue to be balanced, and external debt
balances remain very low.
The weak spot remains the worsening current account balance, in particular the
trade balance, where the deficit continues to exceed government forecasts. The
capital account surplus has narrowed but stable foreign exchange reserves should
enable it to cover the current account deficit.
After widening the band within which the Czech crown can fluctuate, from +/-0.5%
to +/-7.5%, the Central Bank raised interest rates in late summer. These actions
maintained the country's strong currency policy in order to facilitate
industrial restructuring and increase labor productivity.
While economic fundamentals are generally sound, some weakness can be detected.
The government's challenge is to increase exports of finished goods while
keeping import growth to a minimum. This task will remain a challenge in the
current environment of strong real wage growth.
The Czech Stock Market
For the year ended August 31, 1996, the PX-50, the local stock market index of
the top 50 capitalized companies, posted a return of 40.0% in USD terms; rising
from 426.2 to 577.4, an increase of 35.5% in local terms. Over the period the
Czech currency strengthened 3.4%.
The Czech market has been on a recovery streak over the Fund's latest fiscal
year, gathering strength in the first quarter of 1996 with global investors'
reallocation to emerging markets. Parliamentary elections this spring reelected
the governing coalition, though it lost its majority status and returned as a
minority government. Although economic reforms are not expected to change as a
result, the legislative process will become more difficult. The formation of a
Senate, scheduled for November, could be seen as a continued vote of confidence
for the ruling coalition. More turmoil is expected in the political arena, which
could impact market performance.
The Prague Stock Exchange was restructured in the last 12 months, and continuous
trading of a number of stocks and bonds was implemented, increasing liquidity
and accessibility of Czech stocks to investors. In addition, a number of
legislative changes, effective July 1, 1996, were introduced to protect minority
shareholders' rights and improve market safety and transparency. Over the longer
term, these actions should increase the attractiveness of the Czech stock
market.
2
<PAGE>
Investment Strategy
As the Fund begins its third year of operations, we remain quite optimistic
about the development of the Czech capital market. While the enforcement of
regulations has been problematic in the past, positive changes are expected to
occur in this area.
Corporate earnings histories are developing track records; corporate
restructuring is proceeding, albeit slowly in the absence of regulations and
consistent pricing structures; and takeover activity continues at a blistering
pace. The parliamentary elections this spring have slowed down regulatory and
pricing initiatives; however, these issues should be resolved after the
elections take place in November.
Prior to the changes in the Czech commercial code and investment fund
regulations, the pace of takeover battles escalated, in the so-called "third
wave of privatization". We have taken the opportunity to sell holdings where we
believed value was no longer justified by a high stock price. We will reallocate
funds as we see increased value behind stock prices.
We will continue to focus on selective large capitalization stocks in the Czech
Republic, since these companies have the best financial reporting, disclosure
and financial controls. The Fund will maintain its positions in high-quality
medium capitalization names, however, because we believe these stocks offer very
good risk/ reward characteristics.
The Fund's Performance
For the 12 months through August 31, 1996, the Fund's total net asset value
(NAV) return (after adjusting for the rights offering) was 43.4%, including
dividend payments of $0.195 and $0.055 paid on January 13 and April 4, 1996. The
Fund's NAV closed on August 31, 1996, at $17.23.
In January 1996 the Fund declared a 3-for-1 rights issue, raising approximately
$16 million for investment. The Fund's additional assets were deployed within
the following month. At the end of August, total net assets were $101.3 million,
compared to $57.9 million on August 31, 1995.
Geographic Allocation as of August 31, 1996
% of
Total Number of
Country Investments Companies
- -------------------------------------------------------
Czech Republic 84.14% 31
Austria 0.74 1
Poland 4.34 4
Hungary 10.78 6
3
<PAGE>
Top Ten Holdings as of August 31, 1996
The following are brief descriptions of the top ten companies in which the Fund
was invested as of August 31, 1996.
SPT Telecom -- 19.4% of total net investments
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 services and enjoys limited competition in local telephone
service. The company is also one of two providers of cellular telephone services
in the Czech Republic.
Komercni Banka -- 13.2% of total net investments
Komercni Banka is the largest bank in the Czech Republic. Created in 1988, the
bank inherited almost the entire portfolio of commercial loans to Czech
industry.
Ceske Energeticke Zavody -- 8.0% of total net investments
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 -- 4.4% of total net investments
Tabak 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 brands.
Ceske Radiokomunikace -- 3.9% of total net investments
Ceske Radiokomunikace is the owner and operator of telecommunications and radio
communication networks, which are independent of SPT Telecom. It provides its
clients with both inter-urban and international television and with telephone
and data transmission through its radio relay network. It is 70% owned by the
government. The company is also the 51% owner of the second digital wireless
license in the Czech Republic.
CKD Praha -- 3.3% of total net investments
CKD Praha is one of the world's leading producers of rail transport and one of
the leading Czech heavy engineering conglomerates. CKD trams can be found in
over 85 different cities and account for one-third of the trams worldwide.
4
<PAGE>
Nova Hut -- 2.7% of total net investments
Nova Hut is the largest steel producer in the Czech Republic in addition to
being one of the largest employers. It is an integrated producer, performing all
production processes in house. Although rolled steel and tubes are the principal
products of Nova Hut, it also sells coke, iron and semi-finished steel.
Prazske Pivovary -- 2.7% of total net investments
Prazske Pivovary is the third largest brewery in the Czech Republic and is
majority owned by Bass Plc of the UK. Current capacity will be increased with
the addition of two regional breweries, Ostravar and Vratislavice. The company
enjoys strong brand name recognition in the premium price segment with
Staropramen. Strong export growth is expected through the Bass distribution
channels. As the consolidation in the Czech beer industry continues, Prazske
Pivovary will be one of the dominant beer producers.
Gedeon Richter -- 2.7% of total net investments
Gedeon Richter is the largest pharmaceutical company in Hungary in terms of
revenues. As a fully integrated pharmaceutical group, it sees its products from
research and development all the way to marketing and sales. It has an extensive
range of products covering all major therapeutic areas. The company currently
manufactures approximately 100 ethical drugs in some 170 different
presentations.
Severomoravska Energetika -- 2.4% of total net investments
Severomoravska Energetika is the largest electricity distribution company in the
Czech Republic and the sole distributor in North Moravia, a heavily
industrialized area with over two million inhabitants. It has an advantageous
customer base as industrial customer prices are closer to market rates, as
opposed to sales to households, which generally are unprofitable.
Sincerely,
/s/ Pierre Daviron
- ---------------------
Pierre Daviron
Portfolio Manager
OpCap Advisors
October 2, 1996
5
<PAGE>
Schedule of Investments The Czech Republic Fund, Inc.
August 31, 1996
Number Percent
of Shares Security of Holdings Value
================================================================================
COMMON STOCKS 100.00%
AUSTRIA 0.74%
Transportation - Airlines 0.74%
10,000 Flughafen Wien AG ................................ $ 698,233
-----------
TOTAL AUSTRIA (Cost $656,884) ............... 698,233
-----------
CZECH REPUBLIC 84.14%
Aerospace & Military Components 1.34%
22,000 Ceska Zbrojovka................................... 1,272,587
-----------
Banking 13.23%
96,000 Komercni Banka.................................... 9,242,856
47,000 Komercni Banka Sponsored GDR...................... 1,462,875
58,000 Komercni Banka Sponsored GDR 144A................ 1,805,250
-----------
12,510,981
-----------
Beverages & Tobacco 7.65%
4,053 Bohemia Sekt Ceskomoravska ....................... 543,189
25,626 Prazske Pivovary ................................. 2,565,955
16,000 Tabak............................................. 4,125,395
-----------
7,234,539
-----------
Broadcasting & Publishi 1.08%
28 Bonton +* ........................................ 1,024,417
-----------
Building Materials & Components 0.05%
1,200 Vertex Rights (expiration date 9/6/96) +.......... 43,414
-----------
Chemicals 4.24%
38,000 Chemopetrol....................................... 1,937,611
17,868 Deza.............................................. 1,651,513
35,126 Precheza +........................................ 418,006
-----------
4,007,130
-----------
6
<PAGE>
Schedule of Investments (continued) The Czech Republic Fund, Inc.
August 31, 1996
Number Percent
of Shares Security of Holdings Value
================================================================================
COMMON STOCKS (continued)
Construction 16.14%
25,000 Ceske Radiokomunikace +........................... $ 3,653,816
194,464 CKD Praha +....................................... 3,108,009
15,686 Inzenyrske a Prumyslove Stavby +.................. 1,972,379
9,000 Kaucuk............................................ 454,402
13,000 Metrostav......................................... 1,466,918
124,543 Nova Hut +........................................ 2,551,678
35,500 Stavby Silnic a Zeleznic.......................... 2,050,759
-----------
15,257,961
-----------
Energy Equipment & Services 0.62%
16,847 Kablo Kladno +.................................... 585,227
-----------
Forest Products & Paper 1.21%
25,777 Sepap +........................................... 1,141,629
-----------
Insurance 1.63%
10,000 Ceska Pojistovna +................................ 1,540,476
10,000 Ceska Pojistovna Rights (expiration date 10/3/96) + 0
-----------
1,540,476
-----------
Investment Funds 1.58%
58,125 PPF Prvni Cesky Investment Fund +**.............. 548,433
27,500 Restitucni Investicni Fund +**.................... 948,933
-----------
1,497,366
-----------
Machinery & Engineering 0.23%
48,700 Prvni Brnenska Strojirna +........................ 215,686
-----------
Pharmaceuticals 1.06%
10,463 Leciva Praha +.................................... 1,003,346
-----------
Telecommunications Equipment 20.90%
140,000 SPT Telecom +..................................... 18,364,014
12,141 Telekomunikacni Montaze Praha..................... 1,402,719
-----------
19,766,733
-----------
7
<PAGE>
Schedule of Investments (continued) The Czech Republic Fund, Inc.
August 31, 1996
Number Percent
of Shares Security of Holdings Value
================================================================================
COMMON STOCKS (continued)
Utilities, Electrical & Gas 13.18%
166,500 Ceske Energeticke Zavody +........................ $ 6,604,598
28,000 Ceske Energeticke Zavody II +..................... 964,030
4,449 Jihoceska Energetika.............................. 450,623
12,546 Prazska Energetika ............................... 1,095,830
21,161 Prvni Severozapadni Teplarenska +................. 1,061,880
21,466 Severomoravska Energetika......................... 2,282,509
-----------
12,459,470
-----------
TOTAL CZECH REPUBLIC (Cost $61,314,662)........... 79,560,962
-----------
HUNGARY 10.78%
Building Materials 2.10%
43,337 Zalakeramia ...................................... 1,981,350
-----------
Chemicals 0.61%
66,500 Tiszai Vegyi Kombinat Sponsored GDR 144A +....... 581,875
-----------
Forest Products & Paper 2.39%
68,750 Cie Financiere Pour L'Europe Centrale
Sponsored GDR 144A+.............................. 2,260,156
-----------
Pharmaceuticals 4.80%
29,000 Egis Gyogyszergyar ............................... 1,964,783
46,000 Gedeon Richter Sponsored GDR 144A................. 2,578,875
-----------
4,543,658
-----------
Textiles & Apparel 0.88%
27,864 Graboplast ...................................... 830,824
-----------
TOTAL HUNGARY (Cost $7,130,307).................. 10,197,863
-----------
POLAND 4.34%
Automobile Components 0.99%
43,000 Debica S.A. +..................................... 933,930
-----------
Banking 1.69%
52,000 Bank Rozwoju Eksportu S.A......................... 1,594,451
-----------
8
<PAGE>
Schedule of Investments (continued) The Czech Republic Fund, Inc.
August 31, 1996
Number Percent
of Shares Security of Holdings Value
================================================================================
COMMON STOCKS (continued)
Beverages 0.72%
12,000 Zaklady Piwowarskie W Zywcu S.A................... $ 678,956
-----------
Building Materials & Components 0.94%
43,000 Krosnienskie Huty Szkla Kros...................... 894,689
-----------
TOTAL POLAND (Cost $3,287,394).................... 4,102,026
-----------
TOTAL COMMON STOCKS (Cost $72,389,247)............ 94,559,084
-----------
TOTAL INVESTMENTS (Cost $72,389,247)*** ...100.00% $94,559,084
===========
- -------------
Footnotes and Abbreviations
+ Non-income producing security
* At fair value as determined by the Board of Directors.
** Passive Foreign Investment Company.
*** Aggregate cost for Federal income tax purposes is $72,493,375.
The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Excess of value over tax cost $26,128,570
Excess of tax cost over value (4,062,861)
-----------
$22,065,709
===========
GDR - Global Depository Receipt
144A - SEC Rule 144A security. Such securities have limited primary and
secondary markets in that they are traded only among qualified institutional
buyers.
See accompanying notes to financial statements.
9
<PAGE>
Statement of Assets and Liabilities The Czech Republic Fund, Inc.
August 31, 1996
Assets
Investments, at value (Cost $72,389,247).................... $ 94,559,084
Cash (including $758,341 of foreign currency holdings
with a cost of $751,799)............................... 6,223,892
Dividends receivable........................................ 592,354
Prepaid expenses............................................ 52,915
Unamortized organizational cost............................. 189,270
------------
Total Assets........................................... 101,617,515
------------
Liabilities
Due to Investment Manager................................... 81,324
Due to Administrator........................................ 16,265
Accrued expenses............................................. 190,962
Offering costs payable...................................... 54,545
------------
Total Liabilities..................................... 343,096
------------
Net Assets................................................. $101,274,419
============
Net Asset Value Per Share ($101,274,419/5,878,047)......... $ 17.23
============
Net assets consist of:
Capital stock, $0.001 par value; 5,878,047 shares issued
and outstanding (100,000,000 shares authorized)........ $ 5,878
Paid-in capital............................................. 76,630,922
Accumulated net investment income........................... 254,750
Accumulated net realized gain on investments
and foreign currency related transactions............. 2,167,458
Net unrealized appreciation in value of investments and
on translation of other assets and liabilities
denominated in foreign currencies .................... 22,215,411
------------
$101,274,419
============
See accompanying notes to financial statements.
10
<PAGE>
Statement of Operations The Czech Republic Fund, Inc.
For the Year Ended August 31, 1996
Investment Income
Interest.................................................... $ 114,828
Dividends (net of taxes withheld of $180,627)............... 1,077,004
-----------
Total investment income................................ 1,191,832
-----------
Expenses
Management fees ............................... $755,154
Custodian fees................................. 182,911
Administration fees............................ 151,031
Legal fees..................................... 145,431
Audit fees..................................... 101,621
Transfer agent fees............................ 98,371
Amortization of organization costs............. 71,967
Directors' fees................................ 31,816
Insurance ..................................... 31,008
Listing fees................................... 21,615
Printing ..................................... 6,879
Interest expense............................... 4,232
Miscellaneous.................................. 16,587
--------
Gross expenses.......................................... 1,618,623
Less: Expense offset.................................... (43,441)
-----------
Net expenses............................................ 1,575,182
-----------
Net investment loss..................................... (383,350)
-----------
Net Realized and Unrealized Gain (Loss) on Investments,
Foreign Currency Holdings and Translation of Other Assets
and Liabilities Denominated in Foreign Currencies
Net realized gain (loss) from:
Security transactions.................................. 3,917,751
Foreign currency related transactions.................. (65,580)
-----------
3,852,171
Net change in unrealized appreciation in value of investments,
foreign currency holdings and translation of other assets
and liabilities denominated in foreign currencies ..... 25,164,910
-----------
Net realized and unrealized gain on investments, foreign
currency holdings and translation of other assets and
liabilities denominated in foreign currencies.......... 29,017,081
-----------
Net increase in net assets resulting from operations........ $28,633,731
` ===========
See accompanying notes to financial statements.
11
<PAGE>
Statements of Changes in Net Assets The Czech Republic Fund, Inc.
<TABLE>
<CAPTION>
For the Period
September 30, 1994
(Commencement
For the Year of Operations)
Ended through
August 31, 1996 August 31, 1995
--------------- ----------------
<S> <C> <C>
Increase In Net Assets
Operations
Net investment income (loss) ......................................... $ (383,350) $ 1,277,501
Net realized gain (loss) on investments and foreign
currency related transactions ................................... 3,852,171 (700,717)
Net change in unrealized appreciation (depreciation) in value
of investments, foreign currency holdings and translation of
other assets and liabilities denominated in foreign currencies .. 25,164,910 (2,949,499)
------------ ------------
Net increase (decrease) in net assets resulting from operations. 28,633,731 (2,372,715)
------------ ------------
Distributions to shareholders
Net investment income ($0.25 and $0.10 per share, respectively) ...... (1,182,684) (440,713)
------------ ------------
Capital share transactions
Proceeds from issuance of 1,470,913 and 4,400,000 shares
(net of $290,347 of sales commissions and $4,312,000 of
underwriting discounts), respectively ........................... 16,257,424 61,688,000
Offering costs charged to paid-in capital ............................ (314,083) (1,094,560)
------------ ------------
Net increase in net assets from capital share transactions ...... 15,943,341 60,593,440
------------ ------------
Total increase in net assets ......................................... 43,394,388 57,780,012
------------ ------------
Net Assets
Beginning of period .................................................. 57,880,031 100,019
------------ ------------
End of period (including undistributed net investment
income of $254,750 and $1,159,164, respectively) ................ $101,274,419 $ 57,880,031
============ ============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights The Czech Republic Fund, Inc.
(For a Share Outstanding throughout Each Period)
For the Period
September 30, 1994
(Commencement
For the Year of Operations)
Ended through
August 31, 1996 August 31, 1995
--------------- ----------------
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ................................. $ 13.13 $ 13.77*
------------ ------------
Net investment income (loss) ......................................... (0.07)+ 0.29
Net realized and unrealized gains (losses) on investments, foreign
currency holdings, and translation of other assets and liabilities
denominated in foreign currencies .................................. 5.35+ (0.83)
------------ ------------
Net increase (decrease) from investment operations ................... 5.28 (0.54)
------------ ------------
Less Dividends and Distributions
Dividends from net investment income ................................. (0.25) (0.10)
------------ ------------
Capital share transactions
Dilutive effect of rights offering ................................... (0.93) --
------------ ------------
Net asset value, end of period ....................................... $ 17.23 $ 13.13
------------ ------------
Per share market value, end of period ................................ $ 14.750 $ 12.125
============ ============
Total Investment Return Based on
Market Value** ....................................................... 32.17% (12.80)%
Ratios/Supplemental Data
Net assets, end of period (in 000s) .................................. $ 101,274 $ 57,880
Ratios of expenses to average net assets ............................. 2.09%++ 2.39%***
Ratios of net investment income (loss) to average net assets ......... (0.51)%++ 2.41%***
Portfolio turnover ................................................... 42.26% 20.39%
Average commission rate paid ......................................... $ 0.1554+++ N/A
</TABLE>
* Initial public offering price $15.00 per share less underwriting discount
of $0.98 per share and offering costs of $0.25 per share.
** 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 each 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 less
underwriting discount of $0.98). 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, including on rights
offerings, and is not annualized.
*** Annualized.
+ Based on average shares outstanding.
++ Includes expense offsets by the Custodian. If such expense offsets had not
been made, the ratio of expenses to average net assets and the ratio of net
investment loss to average net assets would have been 2.14% and (0.57%),
respectively, for the year ended August 31, 1996.
+++ Computed by dividing the total amount of brokerage commissions paid by the
total number of shares of investment securities purchased and sold during
the period for which commissions were charged as required by the SEC for
fiscal years beginning after September 1, 1995.
See accompanying notes to financial statements.
13
<PAGE>
Notes to Financial Statements The Czech Republic Fund, Inc.
August 31, 1996
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, the parent of OpCap Advisors, for an
aggregate purchase price of $100,019. At August 31, 1996, Oppenheimer owned
3,567 shares and Oppenheimer Capital owned 4,875 shares of the Fund's common
stock.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
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 ("fair value") as the
Board of Directors may prescribe. Securities totaling $1,024,417 (1.01% of net
assets) at August 31, 1996, were fair valued. Short-term investments having a
remaining maturity of 60 days or less are valued at amortized cost, which
approximates market value, 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
14
<PAGE>
Notes to Financial Statements The Czech Republic Fund, Inc.
August 31, 1996 (continued)
requisite distributions to its shareholders that 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.
The Fund elected to defer $87,496 of net realized foreign currency losses
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
15
<PAGE>
Notes to Financial Statements The Czech Republic Fund, Inc.
August 31, 1996 (continued)
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.
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 gains and losses 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.
16
<PAGE>
Notes to Financial Statements The Czech Republic Fund, Inc.
August 31, 1996 (continued)
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,
that 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 that 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 year ended August 31, 1996, the Fund reclassified $661,620 from
accumulated net realized gain on investments and foreign currency related
transactions to accumulated net investment income as a result of permanent book
and tax differences relating primarily to foreign currency losses and gains on
sale of investments in passive foreign investment companies. 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.
From time to time, the Fund may maintain a cash balance with its custodian and,
in lieu of interest thereon, receive a reduction of its custody fees and
expenses. For financial reporting purposes for the year ended August 31, 1996,
custodian fees and expenses were increased by $43,441 to reflect this fee
reduction. There was no effect on net investment income. The Fund could have
invested such cash amounts in an income producing asset if it had not agreed to
a reduction of fees or expenses under the expense offset arrangement with its
custodian.
NOTE B: Management, Investment Advisory and Administrative Services
The Investment Manager is Advantage Advisers, Inc., a subsidiary of Oppenheimer
("Advantage", the "Investment Manager"), the Investment Adviser is OpCap
Advisors, an affiliate of Oppenheimer ("OpCap", formerly Quest for Value
Advisors, the "Investment Adviser"), and the Regional Adviser is BAI
Fondsberatung GmbH, an affiliate of Bank Austria Aktiengesellschaft and
GiroCredit Bank Aktiengesellschaft ("BAI", 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
17
<PAGE>
Notes to Financial Statements The Czech Republic Fund, Inc.
August 31, 1996 (continued)
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 year ended August
31, 1996, fees paid or accrued to the Investment Manager amounted to $755,154.
Of this amount, the Investment Manager informed the Fund that $302,062 and
$151,031 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 year ended August 31, 1996, these fees amounted to $151,031.
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
$41,844,810 and $29,911,251, respectively, for the year ended August 31, 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.
18
<PAGE>
Notes to Financial Statements The Czech Republic Fund, Inc.
August 31, 1996 (continued)
NOTE E: Rights Offering
During the year ended August 31, 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 $314,083 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. Oppenheimer informed the Fund that it received $165,478 for
financial advisory services and $42,709 in sales commissions in connection with
the offering. The dilutive effect of the rights offering on net asset value per
share was $0.93 per share (including $0.07 of offering cost per share).
NOTE F: Subsequent Event
On September 13, 1996, BAI informed the Fund that it was resigning as Regional
Adviser to the Fund, effective as of the Annual Meeting of Stockholders of the
Fund, scheduled for November 15, 1996. Subsequent to the effectiveness of BAI's
resignation, Advantage and OpCap will assume responsibility for the services
previously provided by BAI. At the November 15, 1996, Annual Meeting,
stockholders will vote on a New Advisory Agreement between Advantage and OpCap
which, if approved, would result in an increase in the advisory fee received by
OpCap from an annual rate of 0.40% to 0.50% of the average weekly net assets of
the Fund.
NOTE G: Other
At August 31, 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.
- --------------------------------------------------------------------------------
U.S. Federal Taxation Notice (unaudited)
The Fund paid foreign taxes of $180,627 during the fiscal year ended August 31,
1996, which it intends to pass through pursuant to Section 853 of the U.S.
Internal Revenue Code to its shareholders. During the same year, the Fund
distributed $1,182,684 of foreign source income.
- --------------------------------------------------------------------------------
19
<PAGE>
Report of The Czech Republic Fund, Inc.
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 schedule 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, 1996, the results of its operations for the year then
ended, and the changes in its net assets and the financial highlights for the
year then ended and 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 audits. We conducted our audits 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 audits, which included
confirmation of securities at August 31, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 28, 1996
20
<PAGE>
Dividend Reinvestment and The Czech Republic Fund, Inc.
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 be 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
21
<PAGE>
Dividend Reinvestment and The Czech Republic Fund, Inc.
Cash Purchase Plan (continued)
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 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 purchase 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
22
<PAGE>
Dividend Reinvestment and The Czech Republic Fund, Inc.
Cash Purchase Plan (continued)
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
(excepting 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: State Street Bank and Trust Co., P.O. Box 8209,
Boston, Massachusetts 02266-8209.
23
