<PAGE>
The Central European Value Fund, Inc.
October 16, 1998
Dear Shareholder:
The fiscal year ended August 31, 1998 was a challenging period for investors in
emerging stock markets, including those of Central Europe. Stock markets
worldwide were volatile, culminating in a severe price decline in August
triggered by Russia's economic crisis and concerns about the economic downturn
in Asia. The extent of the August 1998 emerging markets selloff is indicated by
Morgan Stanley Capital International's emerging markets index, which declined
28.0% (in U.S. dollars, without dividends reinvested) in the month and was down
51.5% in the 12 months ended August 31, 1998.
The Central European Value Fund was not immune to this extreme turbulence. The
Fund's net asset value (NAV) declined 24.3% in August and decreased 25.0% in the
12 months ended August 31, 1998 after taking into account the reinvestment of
dividends.
Outperforming Its Benchmarks and Its Peers
Despite this decline, the Fund performed well in relation to its benchmarks and
to other funds that invest in the region.
The Fund's benchmark was the PX-50, an index of the 50 largest Czech companies,
for the first six months of the fiscal year when the Fund's investment mandate
required that it invest, under normal market conditions, primarily in the Czech
Republic. From September 1, 1997 through February 28, 1998, the Fund's NAV
declined 4.9% after taking into account the reinvestment of dividends, compared
with a 13.4% decrease for the PX-50.
On February 20, 1998, acting on the board of directors' recommendation,
shareholders approved a change in the Fund's investment mandate to permit
greater access to investment opportunities throughout Central Europe as well as
in Eastern Europe. Although the Fund's new broadened investment mandate permits
investments in Russia, the Fund's investment adviser determined earlier this
year, in consultation with the board of directors, that such investments were
not prudent at the time. This decision has served the Fund well in light of the
Russian stock market's virtual collapse.
As a result of the Fund's broadened investment mandate and our decision not to
invest in Russia, we began using the Central European Stock Index (CESI) as the
Fund's benchmark. The CESI is a capitalization-weighted index of stocks listed
on the exchanges of Hungary, Poland, the Czech Republic, Slovenia and Slovakia,
but not Russia. During the second half of the fiscal year -- that is, from March
1, 1998 through August 31, 1998 -- the Fund's NAV declined 21.1%, compared with
a 28.9% decrease for the CESI.
During that same six month period, following implementation of the Fund's new
investment mandate, the Fund outperformed its closest peer funds, the Central
European Equity Fund, Inc. (the only other United States based closed-end fund
which invests primarily in Central Europe) and the Central European Growth Fund
plc, a London-based Central European closed-end investment trust. From March 1,
1998 through August 31, 1998, the Fund's net asset value declined 21.1%, while
the net asset values of the Central European Equity Fund and the Central
European Growth Fund declined 38.58% and 43.12%, respectively.
<PAGE>
The Fund's performance relative to its peers benefited from favorable stock
selection, our avoidance of any investments in Russia and an increase in the
Fund's cash position prior to the August 1998 market break. At the end of
August, 27.2% of the Fund's net assets was allocated to cash and cash
equivalents.
Investment Opportunities in Central Europe
We are confident about the Fund's future and remain dedicated to achieving
favorable returns by investing in superior businesses that we believe are
undervalued. We define a superior business as one that is well managed, earns
high and sustainable returns on capital, and uses its free cash flow to create
shareholder value. Regardless of any perception to the contrary, we believe
there are many quality companies in Central Europe with high profitability and
good growth prospects.
We are bullish on the outlook for the telecommunications industry and own
several stocks in this sector, including Ceske Radiokomunikace and SPT Telecom
in the Czech Republic and Matav (Magyar Tavkozlesi ADR) in Hungary. In each
case, we believe management is capable, profits are increasing and the valuation
of the stock is reasonable. Moreover, each company is allied with a major global
telecommunications provider. Matav, for instance, was privatized in 1991 to
modernize and expand Hungary's telecommunications system. It provides local,
long-distance, cellular, Internet and other telecommunications services and is
allied with Ameritech and Deutsche Telekom, which together own 60% of the
company and furnish technical assistance. Matav continues to expand its business
aggressively and reduce costs. Earnings increased 52% (28% in U.S. dollars) in
the first half of calendar 1998 from the first half of 1997 while revenues
advanced 26%.
Another of the Fund's positions is Gedeon Richter, a leading Hungarian
pharmaceuticals company with generic product lines in therapeutic areas of
cardiovascular drugs, hormones and antibiotics. We believe Gedeon Richter
possesses a strong distribution system throughout Central and Eastern Europe and
has one of the best management teams in the region. It generates high returns on
equity and reinvests its cash flow in the growth of its business. It continues
to benefit from increased pharmaceutical spending per capita.
As a result of the market's severe downturn, many quality companies in the
region now sell at their lowest valuations in three years. One reason for low
valuations is the perception among investors that the region is dependent on
exports to Russia and will therefore suffer from Russia's economic woes. In
reality, the economies of the region are more closely linked to Western Europe,
especially Germany, than to Russia or Eastern Europe. This misperception has, in
our view, caused some stocks to fall to prices well below their intrinsic value.
We do not know when the stock markets of Central Europe will recover. We do
believe, however, that many quality stocks in Central Europe offer excellent
value at this time.
Broadening the Fund's Investment Strategy
A key positive change for the Fund occurred on February 20, 1998. Prior to that
date, the Fund was called The Czech Republic Fund, Inc. and, under normal market
conditions, was focused primarily on investments in that nation. However, the
Czech economy and stock market have not developed as rapidly as anticipated.
Thus, on February 20, shareholders approved a new investment strategy which
allows the Fund, under normal market conditions, to invest at least 65% of its
assets in Central European issuers, including the Czech Republic. Previously,
the Fund was required to invest at least 65% of its assets exclusively in Czech
Republic issuers.
2
<PAGE>
With the approval of the Fund's board, we adopted a temporary defensive posture
in May 1997, which we felt was in the best interest of the Fund. This posture
allowed the Fund to reduce its holdings of Czech equities below the then-normal
minimum of 65%.
During the fiscal year, we realigned the Fund's portfolio as follows:
Asset Allocation by Net Assets
------------------------------
August 31, 1997 August 31, 1998
- --------------------------------------------------------------------------------
Czech Republic 50.4% 27.9%
Poland 10.6% 16.3%
Austria 8.1% 14.2%
Hungary 14.1% 14.0%
Romania 0.0% 0.4%
Croatia 1.1% 0.0%
Cash& Equivalents 15.7% 27.2%
Economic Outlook
Asset allocation is a result of company selection. We invest in what we believe
to be quality businesses available at reasonable prices, wherever they are
located in Central Europe, rather than pre-determining how much we will invest
in any particular country.
Moreover, we focus more on individual companies and their business prospects
than we do on the general economic outlook. Nonetheless, we are sensitive to
economic conditions because they inevitably affect the business environment in
which companies operate.
In the Czech Republic, inflation continues to abate, but we are cautious in our
view of the economy because of rising unemployment, political uncertainty and
restrictive monetary policy. We have pared the Fund's investments to a core
group of stable Czech companies with what we believe to be excellent prospects,
including several telecommunications, utility and tobacco companies.
The Fund's investments in Austria, an established market that tends to mirror
the German stock market, help offset the volatility of investing in the region's
newer markets. Austria has many excellent companies with strong balance sheets,
favorable competitive positions and low market valuations relative to Western
European companies. The Fund's largest investment in Austria is Bank Austria,
one of the nation's premier financial institutions, which is capitalizing on
business opportunities throughout Europe. The Fund also owns utility and tobacco
stocks, which typically perform well even in periods of market volatility.
In Hungary, exports and fixed capital investments should continue to drive
economic growth through the remainder of 1998 and perhaps beyond. Consumer
spending has been subdued, but is expected to strengthen later this year. The
Fund's largest position in Hungary is Mol, a leading oil and gas company with
major domestic positions in exploration and production, wholesale gas
distribution, and refining and marketing. Mol has a strong balance sheet, a
record of earnings and cash flow growth, and a proven ability to compete in
Hungary against large international energy companies. In addition, its pivotal
location in Central Europe provides an opportunity for Mol to grow regionally.
3
<PAGE>
The economic outlook for Poland is characterized by solid GDP (gross domestic
product) growth. Industrial production rose 8.3% in the first seven months of
1998 in comparison to the first seven months of 1997. Moreover, producer price
inflation is slowing faster than expected, indicating that inflation is coming
under control.
Performance at Market
During the fiscal year ended August 31, 1998, the market price of the Fund's
common shares on the New York Stock Exchange declined 40.1% after taking into
account the reinvestment of dividends, including a decline of 34.5% in the
second half of the fiscal year.
Because the market price decreased more than the NAV, the Fund's market discount
(the amount by which the market price is below NAV) widened to 32.4% as of
August 31, 1998 from 15.1% one year earlier. Since August 31, 1998, the discount
has narrowed and now stands at 18.4% as of the date of this letter. While we are
not pleased by any discount, one way for owners of the Fund's shares to
capitalize on the discount and acquire an interest in a diversified portfolio of
quality securities at a price well below NAV is by reinvesting dividends, as
many of the Fund's shareholders do.
Portfolio Manager Change
On September 14, 1998, Pierre H. Daviron left his position as president of
Oppenheimer Capital International and his position as a portfolio manager of the
Fund. Oppenheimer Capital International is a division of Oppenheimer Capital,
the parent of OpCap Advisors, investment adviser to the Fund.
Elisa A. Mazen, who has helped manage the Fund's portfolio since the Fund's
inception, continues to manage the Fund. Prior to joining the Fund's portfolio
management team in September, 1994, Ms. Mazen was a portfolio manager at
Clemente Capital, managing international equities and an equity analyst with
respect to the United States, Canada, Turkey and Israel. We have confidence in
her experience and abilities, as demonstrated by her contributions in guiding
the Fund for the past four years to a long-term performance record that has
consistently exceeded its benchmarks.
Amendments to the Fund's By-laws
The Board of Directors of the Fund recently reviewed and approved various
amendments to the Fund's by-laws. For example, the by-law provisions relating to
timely notice for proposals to be brought before an annual meeting of
stockholders (other than a proposal under rule 14a-8 under the Securities
Exchange Act of 1934 to be included in the Fund's proxy statement) have been
amended. As amended, a stockholder's notice must be delivered to the Fund not
less than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting. An exception applies in the event the date of
the annual meeting is substantially advanced or delayed from the anniversary
date. The Board believes that the amended timely notice provisions will provide
greater certainty to stockholders because previously, timely notice keyed off
the date of the current year's meeting or the date public disclosure of the
current year's meeting is made. In addition, the provisions provide that any
business to be brought before a special meeting of stockholders must be
specified in the notice of meeting or otherwise properly brought before the
meeting by or at the direction of the Board of Directors. Finally, upon
recommendation of the Fund's Maryland counsel, other changes to certain by-law
provisions were made to conform to the by-law provisions of more recently
organized Maryland companies.
4
<PAGE>
Year 2000 Processing Issue
Many computer programs in use today use two digits rather than four to identify
the year and cannot distinguish the year 2000 from the year 1900. The Year 2000
issue affects virtually all companies and organizations. The Fund's Investment
Manager and Investment Adviser are working on necessary changes to their
computer systems to deal with the Year 2000 issue. The Fund's Transfer Agent,
Custodian and other service providers have reported that they are working on
dealing with the Year 2000 issue as well. There can be no assurance that the
problem will be corrected in all respects or that it will not have a negative
effect on the Fund's operations or results. In addition, companies in which the
Fund invests could be adversely affected by the Year 2000 issue, which could
have a negative effect on the Fund's investment return.
Recorded Update
For a recorded periodic update, reviewing the Central European stock markets and
containing specific information regarding the Fund and its portfolio, including
largest holdings, asset alloca-tion, NAV, performance and other information,
please call our toll-free number (800) 223-2413.
Summary
Following the stock market's precipitous decline in August, many quality
companies in Central Europe now trade at low valuations. Although no one can
predict short-term investment trends with certainty, we are convinced that
better times lie ahead, whether next quarter, next year or further down the
road.
The Fund continues to focus on long-term capital prospects and reasonable market
valuations. By remaining disciplined in our investment approach, we seek to
deliver superior returns over time. Thank you for your continued support.
Sincerely,
/s/ Stephen Treadway
- ---------------------
Stephen Treadway
Chairman
5
<PAGE>
The Central European Value Fund, Inc.
Schedule of Investments
August 31, 1998
<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 64.7%
AUSTRIA 14.2%
Banking 4.3%
55,295 Bank Austria Vorzug AG........................................... $ 3,039,783
------------
Beverages & Tobacco 3.4%
33,000 Austria Tabakwerke AG............................................ 1,934,193
8,941 Brau Union Goss-Reinighaus AG.................................... 480,680
------------
2,414,873
------------
Forest Products & Paper 1.5%
20,000 Mayr-Melnhof Karton AG........................................... 1,023,485
------------
Retail--Restaurants 0.7%
11,662 Do & Co Restaurants and Catering AG*............................. 485,543
------------
Steel 1.4%
20,000 Boehler-Uddeholm AG.............................................. 957,436
------------
Utilities, Electrical & Gas 2.9%
15,000 Energie-Versorgung Niederoesterreich AG.......................... 2,067,586
------------
Total Austria (cost--$10,987,163)................................ 9,988,706
------------
CZECH REPUBLIC 27.9%
Beverages & Tobacco 8.3%
224,441 Prazske Pivovary AS*............................................. 408,711
25,000 Tabak AS......................................................... 5,400,546
------------
5,809,257
------------
Broadcasting & Publishing 1.1%
72,800 Bonton AS+*...................................................... 738,902
------------
Forest Products & Paper 0.9%
25,777 Assidomaen Sepap AS*............................................. 601,473
------------
Machinery & Engineering 0.7%
27,406 CKD Praha Holding AS*............................................ 460,157
------------
</TABLE>
6
<PAGE>
The Central European Value Fund, Inc.
Schedule of Investments (continued)
August 31, 1998
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (continued)
CZECH REPUBLIC (continued)
Pharmaceuticals 1.4%
44,000 Galena AS*....................................................... $ 1,006,312
------------
Steel 0.8%
80,000 Nova Hut*........................................................ 597,787
------------
Telecommunications Equipment 12.5%
15,380 Ceske Radiokomunikace AS*........................................ 3,427,324
138,443 Ceske Radiokomunikace AS New +*.................................. 3,085,105
200,000 SPT Telecom AS*.................................................. 2,246,948
------------
8,759,377
------------
Utilities, Electrical & Gas 2.2%
31,542 Severomoravska Energetika AS..................................... 1,572,257
------------
Total Czech Republic (cost--$19,858,517).......................... 19,545,522
------------
HUNGARY 14.0%
Food & Household Products 1.1%
95,000 Pick Szeged Sponsored GDR 144A................................... 662,625
15,000 Pick Szeged RT GDR............................................... 104,625
------------
767,250
------------
Pharmaceuticals 2.2%
45,000 Gedeon Richter Sponsored GDR..................................... 1,525,500
------------
Telecommunications Equipment 2.3%
80,000 Magyar Tavkozlesi ADR............................................ 1,645,000
------------
Utilities, Electrical & Gas 8.4%
10,000 Edasz............................................................ 759,437
186,000 Mol Magyar Olaj-es Gazipari RT .................................. 3,651,865
32,000 Mol Magyar Olaj-es Gazipari RT Sponsored GDR..................... 617,600
160,000 Tigaz............................................................ 857,717
------------
5,886,619
------------
Total Hungary (cost--$12,210,047)................................ 9,824,369
------------
</TABLE>
7
<PAGE>
The Central European Value Fund, Inc.
Schedule of Investments (continued)
August 31, 1998
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (continued)
POLAND 8.2%
Automobile Components 1.4%
67,588 Debica SA........................................................ $ 957,798
------------
Banking 3.9%
25,000 Bank Przemyslowo Handlowy SA..................................... 1,403,743
4,000 Bank Rozwoju Eksport............................................. 90,909
68,300 Powsechny Bank Kredytowy SA...................................... 1,269,211
------------
2,763,863
------------
Beverages & Tobacco 1.2%
138,700 Okocimskie Zaklady Piwowarsk SA* ................................ 808,465
------------
Machinery & Engineering 0.3%
71,120 Bydgoska Frabryka Kabli SA* ..................................... 173,046
45,000 Mostostal Krakow SA*............................................. 53,543
------------
226,589
------------
Pharmaceuticals 1.4%
36,235 Jelfa SA......................................................... 271,278
55,000 Medicines SA* ................................................... 366,177
38,000 Polfa Kutnowskie Zaklady Farma SA* .............................. 334,278
------------
971,733
------------
Total Poland (cost--$10,373,873) ................................ 5,728,448
------------
ROMANIA 0.4%
Building Materials
50,000 Romcim Bucharest GDR* (cost--$745,000)........................... 271,875
------------
Total Common Stocks (cost--$54,174,600).......................... 45,358,920
------------
</TABLE>
8
<PAGE>
The Central European Value Fund, Inc.
Schedule of Investments (concluded)
August 31, 1998
<TABLE>
<CAPTION>
Par Value
(000) Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 8.1%
POLAND
Machinery & Engineering 2.0%
DM 2,500 Elektrim 2.00%, (Convertible) 5/30/04 ........................... $ 1,379,409
------------
Sovereign 6.1%
PLZ 5,500 Poland Government Bond 12.00%, 6/12/01 .......................... 1,297,794
12,000 Poland Government Bond 14.00%, 2/12/00 .......................... 3,024,064
------------
4,321,858
------------
Total Bonds (cost--$5,969,957)................................... 5,701,267
------------
SHORT-TERM DISCOUNT NOTE 19.7%
$ 13,800 Federal National Mortgage Assoc. 5.70%, 9/01/98
(cost--$13,800,000) .......................................... 13,800,000
------------
Total Investments (cost--$73,944,557)**................... 92.5% $ 64,860,187
Other Assets in Excess of Liabilities..................... 7.5 5,266,956
----- -------------
Total Net Assets.......................................... 100.0% $ 70,127,143
====== =============
</TABLE>
- -------------------
Footnotes and Abbreviations
+ At fair value as determined by or under the supervision of the Board
of Directors.
* Non-income producing security.
** Aggregate gross unrealized appreciation for securities in which there
is an excess of value over tax cost is $3,996,060, aggregate gross
unrealized depreciation for securities in which there is an excess of
tax cost over value is $13,217,306 and net unrealized depreciation for
Federal income tax purposes is $9,221,246. The cost basis of portfolio
securities for Federal income tax purposes is $74,081,433.
DM Deutsche Mark
PLZ Polish Zloty
ADR American Depository Receipts
GDR Global Depository Receipts
See accompanying notes to financial statements.
9
<PAGE>
The Central European Value Fund, Inc.
Statement of Assets and Liabilities
August 31, 1998
<TABLE>
<S> <C>
Assets
Investments, at value (cost--$73,944,557) .............................................. $ 64,860,187
Cash ................................................................................... 1,431,333
Receivable from investments sold ....................................................... 3,590,453
Interest receivable .................................................................... 292,583
Deferred organization expenses ......................................................... 66,346
Foreign withholding taxes reclaimable .................................................. 39,014
Dividends receivable ................................................................... 19,638
Prepaid expenses ....................................................................... 72,207
-------------
Total Assets ........................................................................ 70,371,761
-------------
Liabilities
Investment management fee payable ...................................................... 71,471
Administration fee payable ............................................................. 14,294
Other payables and accrued expenses .................................................... 158,853
-------------
Total Liabilities ................................................................... 244,618
-------------
Total Net Assets ....................................................................... $ 70,127,143
=============
Net Asset Value Per Share ($70,127,143/5,878,047)....................................... 11.93
=============
Composition of Net Assets
Capital stock, $0.001 par value; 5,878,047 shares issued and outstanding
(100,000,000 shares authorized)...................................................... $ 5,878
Paid-in capital in excess of par........................................................ 76,133,405
Accumulated net investment loss ........................................................ (697,813)
Accumulated net realized gain on investments ........................................... 3,771,824
Net unrealized depreciation in value of investments, foreign currency related
transactions and on translation of other assets and liabilities
denominated in foreign currencies ................................................... (9,086,151)
-------------
Total Net Assets ....................................................................... $ 70,127,143
=============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
The Central European Value Fund, Inc.
Statement of Operations
For the Year Ended August 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends (net of foreign withholding taxes of $201,369)............ $ 1,275,999
Interest ........................................................... 1,178,960
--------------
Total investment income ........................................... $ 2,454,959
Operating Expenses
Investment management fee .......................................... 895,576
Legal fees ......................................................... 198,774
Custodian fees (note 1g)............................................ 180,204
Administrative services fee ........................................ 179,115
Insurance expense .................................................. 85,456
Auditing and tax return preparation fees ........................... 85,170
Transfer and dividend disbursing agent fees ........................ 68,882
Amortization of deferred organization expenses ..................... 61,462
Reports and notices to shareholders ................................ 52,044
Directors' fees .................................................... 28,503
Stock exchange listing fee ......................................... 16,170
Miscellaneous ...................................................... 20,419
--------------
Total operating expenses .......................................... 1,871,775
Less: Expenses offset (note 1g) ................................... (1,980)
--------------
Net operating expenses ........................................ 1,869,795
-------------
Net investment income ......................................... 585,164
-------------
Net Realized and Unrealized Gain (Loss) on Investments, Foreign
Currency Related Transactions and Translation of Other
Assets and Liabilities Denominated in Foreign Currencies
Net realized gain on investments................................... 5,343,891
Net realized loss on forward currency contracts.................... (432,970)
Net realized loss on foreign currency related transactions......... (29,401)
--------------
Net realized gain on investments and foreign currency related
transactions.................................................... 4,881,520
Net change in unrealized appreciation (depreciation)
on investments, foreign currency related transactions and
translation of other assets and liabilities
denominated in foreign currencies .............................. (28,857,373)
-------------
Net realized and unrealized loss on investments, foreign
currency related transactions and translation of other
assets and liabilities denominated in foreign currencies ..... (23,975,853)
-------------
Net decrease in net assets resulting from operations ................. $ (23,390,689)
=============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
The Central European Value Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------
1998 1997
--------- --------
<S> <C> <C>
Operations
Net investment income (loss) .......................................... $ 585,164 $ (810,812)
Net realized gain (loss) on investments ............................... 5,343,891 (381,378)
Net realized loss on foreign currency related transactions............. (462,371) (377,126)
Net change in unrealized (appreciation) depreciation on investments,
foreign currency related transactions and translation of other
assets and liabilities denominated in foreign currencies............ (28,857,373) (2,444,189)
-------------- -------------
Net decrease in net assets resulting from operations ............ (23,390,689) (4,013,505)
-------------- -------------
Dividends and Distributions to shareholders
Net investment income ($0.0644 and $0 per share, respectively)......... (378,546) --
Net realized gains ($0.07239 and $0.50 per share, respectively) ....... (425,512) (2,939,024)
-------------- -------------
Total dividends and distributions to shareholders ............... (804,058) (2,939,024)
-------------- -------------
Total decrease in net assets.................................. (24,194,747) (6,952,529)
-------------- -------------
Net Assets
Beginning of year...................................................... 94,321,890 101,274,419
-------------- -------------
End of year............................................................ $ 70,127,143 $ 94,321,890
============== =============
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
The Central European Value Fund, Inc.
Notes to Financial Statements
August 31, 1998
1. Organization and Significant Accounting Policies
The Central European Value Fund, Inc. (the "Fund", formerly The Czech Republic
Fund, Inc.) 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.
At the Annual Meeting of Shareholders on February 20, 1998, shareholders
approved changes in the Fund's investment strategy and corresponding name change
that permits the Fund to invest primarily in securities of Central European
Issuers. Pursuant to the Fund's investment policies as modified at the meeting,
the Fund invests at least 65% of its total assets, under normal market
conditions, in the securities of Central European issuers. In addition, the Fund
is permitted to invest up to 35% of its total assets in Eastern European
issuers. The Fund's Board of Directors has currently approved investing in the
following Central European countries: Austria, Croatia, Czech Republic, Hungary,
Poland, Romania, Slovakia and Slovenia.
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. The following is a summary of
significant accounting policies consistently followed by the Fund:
(a) Valuation of Investments
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 at the last reported sale price; if there are no
such reported sales, the securities are valued at the mean between the last
current bid and asked prices. If there was no sales price on such date and only
bid quotations are available, the securities are valued at the last quoted bid
price.
Securities for which sales prices and bid and asked quotations are not available
may be valued at the most recently available prices or quotations under policies
adopted by the Board of Directors. Short-term investments having a remaining
maturity of 60 days or less are valued at amortized cost or amortized value.
Securities for which market values are not readily ascertainable (which totaled
$3,824,007 or 5.45% of net assets at August 31, 1998) are carried at fair value
as determined by or under the supervision of the Board of Directors. The net
asset value per share of the Fund is calculated weekly and at the end of each
month.
(b) Investment Transactions and Other 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
an accrual basis; dividend income is recorded on the ex-dividend date or when
the information, using reasonable diligence, is available after the ex-dividend
date. 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.
13
<PAGE>
The Central European Value Fund, Inc.
Notes to Financial Statements (continued)
August 31, 1998
(c) 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 $1,954,307 of net realized foreign currency losses
arising after October 31, 1997. In accordance with U.S. Treasury regulations,
such losses are treated for tax purposes as arising on September 1, 1998.
The Fund believes that dividend and interest income from its investments in the
Central European countries is subject to applicable withholding tax rates, which
currently are up to 25% and that capital gains on the sale of securities of
companies domiciled in such countries are not generally subject to taxation in
such countries. Certain of these rates are based upon applicable treaties
between the United States and such countries. Based upon current circumstances,
the Fund believes it is generally entitled to the benefits of the treaties
between the United States and the respective countries and accordingly
recognizes withholding taxes based upon the applicable treaty rates. However,
there is no history of regulatory or legal interpretation of the treaties with
certain Central European countries and there can be no assurance that the
benefits of the treaties with such countries will be available to the Fund.
(d) 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)
the market value of investment securities, and 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.
The Fund does not generally isolate the effect of fluctuations in foreign
currency rates from the effect of fluctuations in the market prices of equity
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.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in foreign exchange rates. 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, the fact that
foreign securities markets may be smaller and less developed, and the fact that
securities, tax and corporate laws may have only recently developed or be in the
developing stages, and laws may not exist to cover all contingencies or to
protect investors adequately.
(e) Forward Currency Contracts
The Fund may enter into forward currency contracts to hedge its currency
exposure. A forward currency contract is an agreement between two parties to buy
or sell a currency at a set price on a future date. The
14
<PAGE>
The Central European Value Fund, Inc.
Notes to Financial Statements (continued)
August 31, 1998
market value of a forward currency contract fluctuates with changes in forward
currency exchange rates. Forward currency contracts are marked to market daily
and the change in value is recorded by the Fund as an unrealized gain or loss.
When a forward currency contract is closed, the Fund records a realized gain or
loss on foreign currency related transactions. In addition, unrealized gains or
losses on certain open contracts are required to be recognized for U.S. Federal
income tax purposes at the close of the Fund's taxable year and may be treated
as ordinary income for such purposes. Forward currency contracts may involve
risks in excess of the unrealized gain or loss that would be reflected in the
Fund's Statement of Assets and Liabilities (e.g. the Fund could be exposed to
risk if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar). At August 31,
1998, there were no open forward currency contracts.
(f) Dividends and Distributions
The Fund intends to distribute substantially all of its net investment income,
foreign currency gains, and net realized capital gains, if any, to shareholders
at least annually.
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 paid-in capital.
During the period ended August 31, 1998, the Fund reclassified $585,309 from
accumulated net realized gain on investments to accumulated net investment loss
as a result of permanent book and tax differences relating primarily to foreign
currency losses. Net assets were not affected by the reclassification.
(g) Expenses Offset
The Fund benefits from an expense offset arrangement with its custodian bank
whereby uninvested cash balances earn credits that reduce monthly custody
expenses. Had these cash balances been invested in income producing securities,
they would have generated income for the Fund.
(h) Organization Expenses
Expenses 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.
2. Investment Management, Investment Advisory and Administrative Services
Value Advisors LLC serves as the Fund's investment manager (the "Manager") since
November 4, 1997, pursuant to a Management Agreement that was approved by the
Fund's shareholders on October 14, 1997. Prior to November 4, 1997, Advantage
Advisers, Inc. served as the Fund's investment manager. Pursuant to the
Management Agreements, the investment manager supervises the Fund's investment
program, including advising and consulting with OpCap Advisors, the Fund's
investment adviser (the "Adviser") regarding the
15
<PAGE>
The Central European Value Fund, Inc.
Notes to Financial Statements (concluded)
August 31, 1998
Fund's overall investment strategy. Pursuant to an Investment Advisory
Agreement, the Adviser is responsible on a day-to-day basis for investing the
Fund's portfolio in accordance with its investment objective and policies. The
Manager and the Adviser are wholly-owned subsidiaries of PIMCO Advisors, L.P.
and its affiliates and were acquired from CIBC Oppenheimer Corp. ("CIBC",
formerly Oppenheimer & Co., Inc.).
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 Adviser receives
from the investment manager a monthly fee at an annual rate of 0.50%, of the
Fund's average weekly net assets.
For the year ended August 31, 1998, investment management fees paid amounted to
$895,576 of which $735,131 was paid to the Manager and $160,445 was paid to
Advantage Advisers, Inc. The investment managers have informed the Fund that
$447,788 was paid to the Adviser for the year ended August 31, 1998.
Value Advisors LLC has served as the Fund's administrator (the "Administrator")
pursuant to the terms of an Administration Agreement since November 4, 1997.
Prior thereto CIBC, parent of Advantage Advisers, Inc., served as the Fund's
administrator. 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, 1998, administration fees amounted to $179,115 of which $163,738 was
paid to the Administrator and $15,377 was paid to CIBC.
3. Portfolio Activity
Purchases and sales of securities other than short-term debt securities
aggregated $54,898,060 and $62,682,674, respectively, for the year ended August
31, 1998.
4. Other
Central European securities markets are substantially smaller, less developed,
less liquid, and more volatile than the major securities markets in the United
States. Consequently, purchases and sales of securities by the Fund involve
special risks and considerations not present with respect to U.S. securities
markets.
16
<PAGE>
The Central European Value Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
For a share outstanding throughout each period: September 30,
1994 (1) to
Year Ended August 31, August 31,
1998 1997 1996 1995
-------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period........... $ 16.05 $ 17.23 $ 13.13 $ 13.77 (2)
------- ------- ------- ---------
Net investment income (loss)................... 0.10 (0.14) (0.07) 0.29
Net realized and unrealized gains (losses) on
investments, foreign currency related
transactions, and translation of other
assets and liabilities denominated in
foreign currencies.......................... (4.08) (0.54) 5.35 (0.83)
------- ------- ------- ---------
Net increase (decrease) from investment
operations.................................. (3.98) (0.68) 5.28 (0.54)
------- ------- ------- ---------
Dividends and distributions to shareholders
Dividends from net investment income........ (0.07) -- (0.25) (0.10)
Distributions from net realized gains....... (0.07) (0.50) -- --
------- ------- ------- ---------
Total dividends and distributions to
shareholders................................ (0.14) (0.50) (0.25) (0.10)
------- ------- ------- ---------
Capital share transactions
Dilutive effect of rights offering.......... -- -- (0.93) --
------- ------- ------- ---------
Net asset value, end of period................. $ 11.93 $ 16.05 $ 17.23 $ 13.13
======= ======= ======= =========
Per share market value, end of period.......... $8.0625 $13.625 $ 14.75 $ 12.125
Total investment return (3).................... (40.12)% (4.49)% 32.17% (12.80)%
Ratios / Supplemental Data
Net assets, end of period (000)................ $70,127 $94,322 $101,274 $ 57,880
Ratios of expenses to average net assets (5)... 2.09% (4) 2.09% 2.14% 2.39% (6)
Ratios of net investment income (loss) to
average net assets.......................... 0.65% (4) (0.87)% (0.51)% 2.41% (6)
Portfolio turnover rate........................ 73.31% 55.89% 42.26% 20.39%
</TABLE>
- ----------------------
(1) Commencement of operations
(2) Initial public offering price of $15.00 per share less underwriting
discount of $0.98 per share and offering costs of $0.25 per share. '
(3) 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. Total investment
return does not reflect brokerage commissions or sales charges.
(4) Average net assets for the year ended August 31, 1998 were $89,557,635.
(5) For fiscal periods ending after September 1, 1995, the ratios are
calculated to include expenses offset by earnings credits from a custodian
bank. (See Note 1g in Notes to Financial Statements).
(6) Annualized
17
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
The Central European Value 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 Central European Value Fund,
Inc. (the "Fund") at August 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the three years in
the period then ended and for the period from 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 1998
18
<PAGE>
The Central European Value Fund, Inc.
Dividend Reinvestment
and Cash Purchase Plan
The Central European Value Fund, Inc. has a Dividend Reinvestment and Cash
Purchase Plan (the "Plan") in which all dividends and distributions paid to
shareholders are automatically reinvested in additional shares (unless the
shareholder elects to receive cash).
Boston EquiServe L.P. (the "Plan Agent") serves as agent for the shareholders
in administering the Plan. After the Fund pays an income dividend and/or a
capital gain distribution, Plan participants 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 on the payable date equals or exceeds the
net asset value, 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, then such shares will be issued at 95% of the market price. If the net
asset value exceeds the market price on the payable date, the Plan Agent will
buy shares in the open market for the participants' accounts. If the Plan Agent
is unable to invest the full dividend and/or distribution amount in open-market
purchases or if the market price exceeds the net asset value during the purchase
period, the Plan Agent will cease making open market purchases and will receive
the uninvested portion of the dividend and/or distribution amount in newly
issued shares.
Participants have an option to make 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 such funds to purchase Fund shares in the
open market on or about September 15. Any cash payment received more than 30
days prior to this date will will returned. It is suggested that participants
send in cash payments approximately ten days before the date specified above. A
participant may withdraw a voluntary cash payment by written notice to the Plan
Agent not less than 48 hours before such payment is to be invested.
The Plan Agent's fees for the reinvestment of dividends and/or distributions
or voluntary cash payments will be paid by the Fund. There will be no brokerage
charges with respect to shares issued directly by the Fund, however, each
participant will pay a pro-rata share of brokerage commissions incurred with
respect to any of the Plan Agent's open market purchases.
The receipt of dividends and distributions under the Plan will not relieve
participants of any income tax which may be payable on such dividends and
distributions.
All correspondence concerning the Plan should be directed to the Plan Agent
at P.O. Box 8209, Boston, Massachusetts 02266-8209 or by telephone at
1-800-426-5523.
U.S. Federal Taxation Notice (unaudited)
The Fund paid foreign taxes of $201,369 during the fiscal year ended August
31, 1998, which it intends to pass through pursuant to Section 853 of the
Internal Revenue Code, to its shareholders, which is deemed to be foreign source
income for tax information reporting purposes. During the fiscal year ended
August 31, 1998, the Fund made long-term capital gains distributions of
$302,574.
19
<PAGE>
Directors and Principal Officers
Stephen J. Treadway
Director and Chairman of the Board
Paul Belica
Director
Leslie H. Gelb
Director
Wendy W. Luers
Director
Luis F. Rubio
Director
Bernard H. Garil
President
Newton B. Schott, Jr.
Executive Vice President and Assistant Secretary
Elisa A. Mazen
Executive Vice President
Deborah Kaback
Secretary
Richard L. Peteka
Treasurer
Investment Manager
Value Advisors LLC
800 Newport Center Drive
Newport Beach, CA 92660
Investment Adviser
OpCap Advisors
Two World Financial Center
New York, NY 10281
Transfer Agent, Dividend Paying Agent
and Registrar
BostonEquiServe L.P.
Post Office Box 8200
Boston, MA 02266
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
This report, including the financial information herein, is transmitted to the
shareholders of The Central European Value Fund, Inc. for their information. It
is not a prospectus, circular or representation intended for use in the purchase
of shares of the Fund or any securities mentioned in this report.
The Central European
Value Fund, Inc.
Annual Report
August 31, 1998
Value Advisors LLC
