The Czech Republic Fund, Inc.
March 12, 1997
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 28,
1997. The Fund's net asset value (NAV) return was 4.6% over this period,
outperforming the PX-50, an index of the 50 largest Czech stocks, which fell 6%
in U.S. dollar terms.
The macroeconomic fundamentals that initially attracted us to the Czech Republic
remain in place, though the Investment Adviser has grown cautious in the last
six months over the near-term outlook for the Czech economy. The government may
be faced with difficult choices to overcome the country's trade imbalance and
economic conditions. Other news is positive, however; the stock exchange in
Prague continues to upgrade itself to more accepted world standards, which
should improve liquidity of Czech stocks. The Fund continues to provide its
shareholders with broad exposure to the Czech Republic and selected countries in
Central Europe.
To provide you with a more detailed macroeconomic picture as well as further
insight into the Fund's investment strategy, the Investment Adviser discusses
its investment approach, the Czech economy and the Fund's top ten equity
positions in the following letter.
Sincerely,
/s/ Alan Rappaport
- ----------------------
Alan Rappaport
Chairman
<PAGE>
Investment Adviser's Report The Czech Republic Fund, Inc.
The Czech Stock Market
In the six months ended February 28, 1997, the Czech stock market declined 6.0%,
measured by the PX-50 Index in U.S. dollars. The index consists of the top 50
capitalized companies in the Czech Republic. In local currency, by contrast, the
index rose 5.5% during the six months.
The market began the period in retreat, with the PX-50 falling in September and
October 1996. The market then stabilized in November and moved steadily higher
over the remainder of the six-month period. Many large-capitalization stocks
approached new highs in February, in the expectation that international
investors would increase their purchases of Czech securities following the
strong performance of the Hungarian and Polish stock markets in January. That
expectation, however, has not proved out. Indeed, we believe investors' concerns
over the state of the Czech economy is likely to result in market weakness over
the next six months.
The restructuring of the Czech securities markets continues, bringing positive
change. The Securities Center began daily reporting of over-the-counter trades
in February. In addition, the Ministry of Finance recently announced plans to
set up an institution for the settlement of security trading to ensure that
actual prices of trades are published. The new clearing operation is expected to
begin operation by January 1998. Also, the Prague Stock Exchange expects to
delist about 800 companies in 1997, mostly smaller businesses with infrequently
traded shares.
Investment Strategy
The Fund has consistently outperformed the PX-50 by investing in what we believe
are well-managed, quality Czech businesses acquired at reasonable valuations and
by allocating a portion of assets to other markets, including Hungary, Poland
and Austria. From its inception on September 30, 1994, the Fund has delivered an
aggregate total return of 45.0%, compared with a negative return of 16.3% for
the PX-50 in U.S. dollars.
Given our caution about the economic outlook for the Czech Republic (detailed
below), we recently reduced the Fund's investments in Czech securities, selling
stocks that had reached prices we believed to be excessively high. Investments
in the Czech Republic represented 84.1% of the Fund's total net investments on
August 31, 1996, but were trimmed to 76.2% as of February 28, 1997. We have also
cut back on the number of Czech companies owned by the Fund, from 31 at the end
of August 1996 to 25 at the end of February 1997, to concentrate on quality
businesses that are best equipped to prosper in the current period of economic
uncertainty.
As a result, we have increased the Fund's investments in Poland and Austria. The
Fund's investment policies require that at least 65% of net assets be invested
in the Czech Republic. We expect to move closer to that minimum until the
country's economic outlook clarifies itself.
The Fund's Performance
The Fund continued its strong relative performance in the six months ended
February 28, 1997. The Fund's total net asset value (NAV) return in U.S. dollars
was 4.6%, significantly exceeding the
2
<PAGE>
PX-50. The Fund's NAV closed at $17.43 per share on February 28. On December 31,
1996, the Fund distributed realized capital gains of $0.50 per share.
Economic Outlook
We have become less optimistic about the economic outlook for the Czech Republic
than we were six months ago. The country's economic fundamentals have weakened,
evidenced by a significant increase in the current account deficit, particularly
as a result of its deteriorating trade position. Real wage increases have led to
a consumer demand boom, fueling imports. Exports, on the other hand, have lagged
seriously, revealing the lack of competitiveness of much of Czech industry. In
1996, the trade deficit widened beyond forecasts to a record 160 billion crowns,
up from 95 billion crowns in 1995. As a result, the current account deficit is
now running at about 8.5% of gross domestic product (GDP), with the prospect of
a further sharp increase.
These conditions cannot continue without potentially painful economic
consequences, including the possibility of currency devaluation and the prospect
of an economic downturn. In fact, industrial production growth, which had been
fairly strong in 1996, turned negative in the initial months of 1997, declining
2.1% in January-February 1997 from a year earlier.
On the positive side, the Czech Republic has relatively little external debt.
Consequently, it does not face the pressures of servicing large amounts of debt
as it addresses the need for internal change.
The challenge faced by the government is to strengthen domestic industry,
increase exports of finished goods and dampen demand for imports. These actions
will inevitably involve some wrenching change. Coalition parties are discussing
raising rents threefold by the year 2000 to bring them closer to market rates.
There is also discussion about raising electricity prices to residential
customers in a similar period. Residential electricity rates are indirectly
subsidized by industry, increasing industrial costs and providing little
incentive for residential customers to control their electricity use. Although
Czech inflation eased slightly to 8.8% in 1996 from 9.1% in 1995, higher rents
and electricity prices, if implemented, are likely to boost the inflation rate.
Nonetheless, the process must occur if the economy is to be brought back into
balance.
Although we are cautious about the near future, we continue to believe that
investment in the Czech Republic and its neighbors offers unique opportunities
in the long run.
Top Ten Holdings as of February 28, 1997
The following are brief descriptions of the top ten companies in which the Fund
was invested as of February 28, 1997.
SPT Telecom - 16.0% 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.
3
<PAGE>
Ceske Energeticke Zavody - 10.8% 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.
Komercni Banka a.s. - 10.4% of total net investments
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.
CKD Praha - 7.4% 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.
Tabak a.s. Kutna Hora - 4.5% 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 Radiokommunikace - 4.2% of total net investments
Ceske Radiokommunikace 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 GSM license in the
Czech Republic.
Gedeon Richter - 3.1% 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.
Polish Mass Privatization Certificates Common - 3.0% of total net investments
The fifteen National Investment Funds (NIFs) that make up this holding were
established in December of 1994 to assist in the privatization of state-owned
companies - to attract an international or domestic partner to professionally
manage these funds, assist in the restructuring of these companies, and provide
financial and managerial expertise as well as capital. The NIFs hold stakes in
512 companies and will be listed individually on the Warsaw stock exchange.
(Each NIF holds 33% stakes in approximately 33 companies and 1.93% stakes in the
others.)
4
<PAGE>
Galena - 2.6% of total net investments
Galena is the second largest pharmaceutical manufacturer in the Czech Republic
whose traditional production was medication in liquid formulations. The company
produces generic formulations of cyclosporin, ergot alkaloids and other generic
drugs. We believe the company will benefit from the registration of a number of
Ivax drugs, especially their asthma medications and delivery systems. Staffing
levels have been dramatically reduced and unfocused R&D spending has been
eliminated, which greatly increased profitability.
Prazske Pivovary - 2.2% 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. Sincerely,
/s/ Pierre Daviron
Pierre Daviron
Portfolio Manager
OpCap Advisors
March 14, 1997
- --------------------------------------------------------------------------------
On February 14, 1997, Oppenheimer Group, Inc., the ultimate parent company of
Advantage Advisers, Inc., the Fund's investment manager, and an affiliate of
OpCap Advisors, the Fund's investment adviser, entered into an agreement to sell
the stock of the investment manager and a controlling interest in the investment
adviser to PIMCO Advisors, L.P., and its affiliates. On April 1, 1997, the Board
of Directors of the Fund approved, subject to the vote of the Fund's
shareholders, a new investment management and investment advisory agreement for
the Fund with the investment manager and the investment adviser. The agreements
are substantially identical to the existing agreements and would take effect
upon shareholder approval and the closing of the proposed transaction. The
closing of the transaction is also subject to certain additional closing
conditions.
- --------------------------------------------------------------------------------
5
<PAGE>
Schedule of Investments The Czech Republic Fund, Inc.
February 28, 1997 (unaudited)
Number Percent
of Shares Security of Holdings Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCKS 97.72%
- --------------------------------------------------------------------------------
AUSTRIA 3.12%
Forest Products & Paper 0.74%
15,000 Mayr-Melnhof Karton+ ............................. $ 767,903
------------
Steel 1.61%
42,000 Voest-Alpine Stahl AG ............................ 1,665,819
------------
Transportation - Airlines 0.77%
16,000 Flughafen Wien AG ................................ 801,583
------------
TOTAL AUSTRIA (Cost $3,222,337) .................. 3,235,305
------------
CZECH REPUBLIC 76.22%
Aerospace & Military Components 2.10%
31,520 Ceska Zbrojovka .................................. 2,173,495
------------
Banking 10.43%
96,000 Komercni Banka ................................... 9,056,914
50,000 Komercni Banka Sponsored GDR 144A ................ 1,750,000
------------
10,806,914
------------
Beverages & Tobacco 6.67%
25,626 Prazske Pivovary ................................. 2,299,825
16,000 Tabak ............................................ 4,610,793
------------
6,910,618
Broadcasting & Publishing 0.88%
7,280 Bonton+* ......................................... 912,554
------------
Chemicals 0.14%
35,126 Precheza+ ........................................ 143,100
------------
Construction 4.35%
112,046 Inzenyrske a Prumyslove Stavby Praha+ ............ 1,210,830
16,832 Metrostav ........................................ 1,631,287
35,500 Stavby Silnic a Zeleznic ......................... 1,657,535
------------
4,499,652
------------
Energy Equipment & Services 0.39%
16,847 Kablo Kladno+ .................................... 408,041
------------
Forest Products & Paper 1.04%
25,777 Sepap+ ........................................... 1,072,678
------------
6
<PAGE>
Schedule of Investments (continued) The Czech Republic Fund, Inc.
February 28, 1997 (unaudited)
Number Percent
of Shares Security of Holdings Value
- --------------------------------------------------------------------------------
COMMON STOCKS (continued)
Insurance 0.84%
8,200 Ceska Pojistovna+ ................................ $ 872,071
------------
Investment Funds 1.43%
51,125 PPF Prvni Cesky Investment Fund+** ............... 492,851
27,500 Restitucni Investicni Fund+** .................... 992,487
------------
1,485,338
------------
Machinery & Engineering 7.52%
222,711 CKD Praha+ ....................................... 7,640,434
48,700 Prvni Brnenska Strojirna+ ........................ 148,528
------------
7,788,962
------------
Pharmaceuticals 2.65%
49,000 Galena+ .......................................... 2,740,060
------------
Steel 2.18%
109,543 Nova Hut+ ........................................ 2,254,822
------------
Telecommunications Equipment 20.26%
34,029 Ceske Radiokomunikace+ ........................... 4,389,483
128,000 SPT Telecom+ ..................................... 16,598,854
------------
20,988,337
------------
Utilities, Electrical & Gas 15.34%
249,500 Ceske Energeticke Zavody+ ........................ 10,314,162
28,000 Ceske Energeticke Zavody II+ ..................... 883,735
4,449 Jihoceska Energetika ............................. 405,995
12,632 Praska Energetika ................................ 925,223
21,161 Prvni Severozapadni Teplarenska+ ................. 1,104,911
22,142 Severomoravska Energetika ........................ 2,254,535
------------
15,888,561
------------
TOTAL CZECH REPUBLIC (Cost $60,042,686) ......... 78,945,203
------------
HUNGARY 10.80%
Building Materials 3.55%
44,864 Graboplast ....................................... 2,097,249
33,337 Zalakeramia ...................................... 1,579,291
------------
3,676,540
------------
Chemicals 2.68%
31,000 Borsodchem ....................................... 1,149,784
101,500 Tiszai Vegyi Kombina Sponsored GDR+ ............. 1,306,812
25,000 Tiszai Vegyi Kombina Sponsored GDR 144A+ ........ 321,875
------------
2,778,471
------------
7
<PAGE>
Schedule of Investments (continued) The Czech Republic Fund, Inc.
February 28, 1997 (unaudited)
Number Percent
of Shares Security of Holdings Value
- --------------------------------------------------------------------------------
COMMON STOCKS (continued)
Forest Products & Paper 1.51%
47,550 Cie Financiere Pour L'Europe
Centrale Sponsored GDR 144A+ ..................... $ 1,563,206
------------
Pharmaceuticals 3.06%
46,000 Gedeon Richter Sponsored GDR 144A ................ 3,162,500
------------
TOTAL HUNGARY (Cost $7,112,870) .................. 11,180,717
------------
POLAND 7.58%
Automobiles 1.23%
95,000 Stomil Olsztyn+ .................................. 1,273,396
------------
Building Materials & Components 0.99%
59,000 Krosnienskie Huty Szkla Kros ..................... 1,022,313
------------
Data Processing & Reproduction 1.07%
40,000 Computerland+ .................................... 1,111,565
------------
Food & Household Products 1.27%
48,913 Agros Holdings+ .................................. 1,319,272
------------
Investment Funds 3.02%
58,000 Polish Mass Privatization
Certificates Common+** ........................... 3,128,729
------------
TOTAL POLAND (Cost $7,469,765) 7,855,275
------------
TOTAL COMMON STOCKS (Cost $77,847,658) 101,216,500
------------
8
<PAGE>
Schedule of Investments (continued) The Czech Republic Fund, Inc.
February 28, 1997 (unaudited)
Par Value Percent
(000) Security of Holdings Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS 2.28%
- --------------------------------------------------------------------------------
DISCOUNT NOTE 2.28%
$2,360 FHLMC Discount Note 5.30%, 3/3/97 ................ $ 2,359,305
------------
TOTAL DISCOUNT NOTE (Cost $2,359,305) 2,359,305
------------
TOTAL INVESTMENTS (Cost $80,206,963)*** 100.00% $103,575,805
============
- ----------
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 $80,823,715
The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Excess of value over tax cost $26,688,573
Excess of tax cost over value (3,936,483)
-----------
$22,752,090
===========
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.
February 28, 1997 (Unaudited)
Assets
Investments, at value (Cost $80,206,963) ....................... $103,575,805
Cash (including $1,757,630 of foreign currency holdings with a
cost of $1,761,997) .......................................... 1,763,244
Receivables:
Dividends ...................................................... 1,200
Securities sold ................................................ 58,541
Prepaid expenses ............................................... 37,411
Unamortized organizational cost ................................ 158,792
------------
Total Assets ................................................... 105,594,993
------------
Liabilities
Payable for securities purchased ............................... 2,785,723
Due to Investment Manager ...................................... 78,694
Due to Administrator ........................................... 15,739
Accrued expenses ............................................... 231,627
------------
Total Liabilities .............................................. 3,111,783
------------
Net Assets ..................................................... $102,483,210
------------
NET ASSET VALUE PER SHARE ($102,483,210/5,878,047) ............. $ 17.43
============
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 loss ................................ (524,164)
Accumulated net realized gain on investments
and foreign currency related transactions .................... 2,987,671
Net unrealized appreciation in value of investments and
on translation of other assets and liabilities denominated
in foreign currencies ........................................ 23,382,903
------------
$102,483,210
============
See accompanying notes to financial statements.
10
<PAGE>
Statement of Operations Czech Republic Fund, Inc.
For the Six Months Ended February 28, 1997 (Unaudited)
Investment Income
Interest ....................................................... $ 143,757
-----------
Total investment income ............................... 143,757
-----------
Expenses
Management fees ...................................... $470,131
Custodian fees ....................................... 133,383
Administration fees .................................. 94,026
Legal fees ........................................... 77,359
Audit fees ........................................... 41,655
Transfer agent fees .................................. 32,133
Amortization of organization cost .................... 30,478
Insurance ............................................ 25,595
Printing ............................................. 19,836
Directors' fees ...................................... 5,472
Listing fees ......................................... 8,723
Interest expense ..................................... 3,621
Miscellaneous ........................................ 8,431
--------
Gross expenses ................................................ 960,843
Less: Expense offset .......................................... (38,172)
-----------
Net expenses .................................................. 922,671
-----------
Net investment loss ........................................... (778,914)
===========
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) on:
Security transactions ......................................... 3,835,902
Foreign currency related transactions ......................... (76,665)
-----------
3,759,237
Net change in unrealized appreciation in value of investments,
foreign currency holdings and translation of other assets and
liabilities denominated in foreign currencies ................. 1,167,492
Net realized and unrealized gain on investments, foreign currency
holdings and translation of other assets and liabilities
denominated in foreign currencies ............................. 4,926,729
-----------
Net increase in net assets resulting from operations ............ $ 4,147,815
===========
See accompanying notes to financial statements.
11
<PAGE>
Statement of Changes in Net Assets The Czech Republic Fund, Inc.
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
February 28, 1997 Ended
(Unaudited) August 31, 1996
---------------------------------
<S> <C> <C>
Increase In Net Assets
Operations
Net investment loss ........................................... $ (778,914) $ (383,350)
Net realized gain on investments and foreign
currency related transactions ............................... 3,759,237 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 ............... 1,167,492 25,164,910
------------- -------------
Net increase in net assets resulting from operations ........ 4,147,815 28,633,731
------------- -------------
Distributions to Shareholders
Net investment income ($0.25 per share) ....................... -- (1,182,684)
Net realized gains ($0.50 per share) .......................... (2,939,024) --
------------- -------------
Decrease in net assets resulting from distributions ......... (2,939,024) (1,182,684)
------------- -------------
Capital Share Transactions
Proceeds from issuance of 1,470,913 shares
(net of $290,347 of sales commissions) ...................... -- 16,257,424
Offering costs charged to paid-in capital ..................... -- (314,083)
------------- -------------
Net increase in net assets from capital share transactions .... -- 15,943,341
------------- -------------
Total increase in net assets .................................. 1,208,791 43,394,388
------------- -------------
Net Assets
Beginning of period ........................................... 101,274,419 57,880,031
------------- -------------
End of period (including undistributed net investment income of
$254,750 as of August 31, 1996) ............................. $ 102,483,210 $ 101,274,419
============= =============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
Financial Highlights The Czech Republic Fund, Inc.
For a Share Outstanding throughout Each Period
<TABLE>
<CAPTION>
For the Period
September 30,1994
For the (Commencement
Six Months Ended For the of Operations)
February 28, 1997 Year Ended through
(Unaudited) August 31, 1996 August 31, 1995
---------------------------------------------------------
<S> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period ....................... $17.23 $13.13 $13.77*
------ ------ ------
Net investment income (loss) ............................... (0.13) (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 ........ 0.83 5.35 (0.83)
------ ------ ------
Net increase (decrease) from investment operations ......... 0.70 5.28 (0.54)
------ ------ ------
Less Distributions
Dividends from net investment income ..................... -- (0.25) (0.10)
Distributions from net realized gains .................... (0.50) -- --
------ ------ ------
Total dividends and distributions ........................ (0.50) (0.25) (0.10)
------ ------ ------
Capital share transactions
Dilutive effect of rights offering ....................... -- (0.93) --
Net asset value, end of period ............................. $17.43 $17.23 $13.13
====== ====== ======
Per share market value, end of period ...................... $15.250 $14.750 $12.125
Total Investment Return Based on Market Value ** ........... 6.91% 32.17% (12.80)%
Ratios/Supplemental Data
Net assets, end of period (in 000s) ........................ $102,483 $101,274 $57,880
Ratios of expenses to average net assets ................... 1.96%***++ 2.09%++ 2.39%***
Ratios of net investment income (loss) to
average net assets ....................................... (1.66)%***++ (0.51)%++ 2.41%***
Portfolio turnover ......................................... 26.41% 42.26% 20.39%
Average commission rate paid+++ ............................ 0.2637 $ 0.1554 N/A
</TABLE>
* Initial public offering price $15.00 per share less underwriting discount
of $0.98 per share and offering costs $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 calcula tion 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 ratios of expenses to average net assets and the ratios of
net investment income (loss) to average net assets would have been 2.04%
and (1.74%) respectively, for the six months ended February 28, 1997, and
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 on or after September 1, 1995.
See accompanying notes to financial statements.
13
<PAGE>
Notes to Financial Statements The Czech Republic
February 28, 1997 (Unaudited) Fund, Inc.
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 28, 1997, Oppenheimer owned 3,567 shares and Oppenheimer
Capital owned 4,999 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.
Securities for which sales prices and bid and asked quotations are not available
on the date of determination may be valued at the most recently available prices
or quotations under policies adopted by the Board of Directors. In addition, 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 $912,554 (0.89% of net assets) at February 28,
1997, 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.
14
<PAGE>
Notes to Financial Statements -- continued The Czech Republic
February 28, 1997 (Unaudited) Fund, Inc.
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 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 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.
15
<PAGE>
Notes to Financial Statements -- continued The Czech Republic
February 28, 1997 (Unaudited) Fund, Inc.
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.
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 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.
16
<PAGE>
Notes to Financial Statements -- continued The Czech Republic
February 28, 1997 (Unaudited) Fund, Inc.
During the period 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
the sales of Passive Foreign Investment Companies. Net investment income and net
assets were not affected by the reclassification.
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 six months ended February 28,
1997, custodian fees and expenses were increased by $38,172 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 as an alternative to a
reduction of fees or expenses under the expense offset arrangement with the
custodian.
NOTE B: Management, Investment Advisory and Administrative Services
The investment manager is Advantage Advisers, Inc., a subsidiary of Oppenheimer
("Advantage," or the "Investment Manager"), the investment adviser is OpCap
Advisors, an affiliate of Oppenheimer ("OpCap," or the "Investment 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.
Effective November 15, 1996, BAI Fondsberatung GmbH ("BAI," or the "Regional
Adviser") resigned as Regional Adviser to the Fund. BAI had previously furnished
advice and made recommendations to the Investment Adviser regarding the purchase
or sale of securities and provided research and statistical data.
Under the Management Agreement, the Investment Manager is entitled to receive a
monthly fee for its services at an annual rate of 1.00% of the Fund's average
weekly net assets, and prior to November 15, 1996, the Investment Adviser and
Regional Adviser were each entitled to 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. As of November 15, 1996, the Investment Adviser's fee
was increased from 0.40% to 0.50% of the Fund's average weekly net assets upon
vote of the Fund's shareholders approving the fee increase. For the six months
ended February 28, 1997, fees paid or accrued to the Investment Manager amounted
to $470,131. Of this amount, the Investment Manager informed the Fund that
$215,325 and $39,481, 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 28, 1997, these fees
17
<PAGE>
Notes to Financial Statements -- continued The Czech Republic
February 28, 1997 (Unaudited) Fund, Inc.
amounted to $94,026. 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
$25,274,495 and $23,651,987, respectively, for the six months ended February 28,
1997.
NOTE D: 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 dilative 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 E: Subsequent Event
On February 14, 1997, Oppenheimer Group, Inc., the ultimate parent company of
Advantage and an affiliate of OpCap Advisors, entered into an agreement to sell
the stock of Advantage and a controlling interest in OpCap Advisors to PIMCO
Advisors, L.P., and its affiliates. On April 1, 1997, the Board of Directors of
the Fund approved a new Management Agreement with Advantage and a new Investment
Advisory Agreement with OpCap Advisors. The new agreements are substantially
identical to the existing advisory agreements and would take effect upon
shareholder approval and the closing of the proposed acquisition. The closing is
subject to certain additional closing conditions. At the April 1 meeting, the
Board of Directors also approved a new Administration Agreement for the Fund,
pursuant to which OpCap Advisers would replace Oppenheimer as the Fund's
administrator.
NOTE F: Other
At February 28, 1997, 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.
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================================================================================
THE CZECH REPUBLIC FUND, INC. THE CZECH REPUBLIC
FUND, INC.
INVESTMENT MANAGER
ADVANTAGE ADVISERS, INC. -----------------------------
INVESTMENT ADVISER
OPCAP ADVISERS [PICTURE]
ADMINISTRATOR:
OPPENHEIMER & CO., INC. -----------------------------
Semiannual Report
February 28, 1997
CUSTODIAN, TRANSFER AGENT, REGISTRAR:
STATE STREET BANK AND TRUST COMPANY
ADVANTAGE ADVISERS, INC.
================================================================================
