<PAGE>
CVO GREATER CHINA FUND, INC.
ANNUAL REPORT
OCTOBER 31, 1998
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
The following graph represents the total return based on a $250,000 investment
made in the CVO Greater China Fund at the trading commencement date of November
19, 1996 and held through October 31, 1998 as well as the performance of the
MSCI Pacific Free ex-Japan Index over the same period. In addition, to provide
a comparison to the overall performance of the regions in which the Fund
invests, the graph below includes a market capitalization weighted composite of
the return of the four MSCI Indices for the markets in which the Fund invests.
Certain fees on the Fund were waived during the period shown. Had they not been
waived, returns would have been lower.
<TABLE>
<CAPTION>
11/96 12/96 3/97 6/97 9/97 10/97 12/97 3/98 6/98 9/98 10/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MSCI Pacific Free
ex-Japan Index 248,986 247,629 239,290 253,502 214,999 168,767 156,005 170,397 127,852 116,444 140312
Greater China
Composite Index 255,125 257,089 239,380 276,764 261,322 195,416 194,537 199,814 144,138 141,426 181874
CVO Greater
China Fund 245,475 251,710 245,488 275,209 263,816 217,252 200,547 202,789 148,091 132,939 150713
</TABLE>
Past performance is not predictive of future performance
Investment return and principal value will fluctuate with market conditions.
When shares of the Fund are redeemed they may be worth more or less than their
original cost.
<PAGE>
REPORT OF THE INVESTMENT ADVISOR TO THE SHAREHOLDERS OF
THE CVO GREATER CHINA FUND
FOR THE YEAR ENDING OCTOBER 31, 1998
The Asian markets have experienced a dramatic series of events over the last
twelve months as the initial "Asian Crisis" caused a major sell-off in January
1998, followed by a sharp recovery in the next few months and a further plunge
to the mid-6000 level of the Hang Sang Index by mid-August, before the depth of
the economic and currency crisis became apparent. With the virtual collapse of
Indonesia, the worsening recession in Japan, fears of a devaluation of the
Chinese currency, the Renminbi (RMB), and associated concern over the breaking
of Hong Kong's currency board link ("the peg") to the US dollar, Greater China
(the People's Republic of China (PRC), Hong Kong, Singapore and Taiwan) stock
markets fell to levels not experienced for many years.
The crisis in Asia was revealed to be a global phenomenon when other emerging
markets came under assault following the effective default and devaluation by
the Russian authorities in mid-August, with equity and fixed income markets in
Eastern Europe, Latin American and even the US domestic high yield sector
experiencing extraordinary volatility, and investors suffered losses of more
than 10% in all markets during the third quarter of 1998. The subsequent
actions of the US Federal Reserve and other central banks in rapidly reducing
interest rates stabilized the situation, and caused strengthening of the
Japanese yen against the US dollar.
Chinese authorities have reduced interest rates and recapitalized the banking
system in an effort to achieve GDP growth of over 7% in 1998 and 1999. This
compares with recessions in the other ASEAN economies. In Korea and in Hong
Kong the rapid fall in property and share prices (over 50% between mid-1997 and
mid-1998) led to those economies' contracting by 5% this year. The Hong Kong
Monetary Authority, the Special Administrative Region's (SAR) central bank,
intervened in the equity market in August 1998, purchasing over 10% of the
available index stocks to protect the Hong Kong dollar from speculative attack
via the linked exchange rate currency board. Meanwhile, Taiwan has continued to
grow, helped by its links to the US electronics and computer markets, with GDP
growth forecast at 4.75% in 1998.
While the holdings of the CVO Greater China Fund have achieved positive
earnings growth this year of 8% with a projected P/E ratio of 12, and the
earnings in both Hong Kong and Singapore declined more than 15%, the Funds'
investment performance year to date was -24.85%. The Fund remains hedged
against currency depreciation.
The comparative returns of the CVO Greater China Fund are shown in the table
below.
<TABLE>
<CAPTION>
Year Ending Year-to-Date Since Inception
10/31/98 1998 11/19/96-10/31/98
-------- ---- -----------------
<S> <C> <C> <C>
MSCI Pacific Free ex-Japan Index* -16.86% -10.06% -43.88%
Greater China Composite Index** -6.93% -6.51% -27.25%
CLSA China World Index+ -49.63% -39.33% -41.02%
CVO Greater China Fund++ -30.53% -24.85% -39.57%
</TABLE>
*Index returns do not reflect the deduction of any fees or commissions. Returns
reported with dividends reinvested for all periods except 11/19/96 through
12/31/96 when dividend information is unavailable but estimated based on
historical yields. Data Source: Morgan Stanley Capital International (MSCI).
**Market capitalization weighted index composed of the market values of China
Free, Singapore Free, and Hong Kong markets and 30% of Taiwan market from
November 1, 1997 forward (20% from November 19, 1996 through June 30, 1997 and
25% from July 1, 1997 through October 31, 1997), in accordance with limitations
on non-Taiwan investors. Index returns do not reflect the deduction of any fees
or commissions. Data Source: MSCI.
+Credit Lyonnais Securities (Asia) China World Index representing investable
universe of Greater China shares in the China Free, Singapore Free, Hong Kong
and Taiwan markets.
++CVO Greater China Fund performance is net of all fees and expenses.
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS (101.7%)
APPLIANCES & HOUSEHOLD GOODS (4.6%)
CHINA (4.6%)
Guangdong Kelon Electrical Holdings Co. Ltd. 320,000 $ 272,664
Wuxi Little Swan Co. Ltd., Class B 330,840 164,442
-------
437,106
-------
AUTOMOTIVE (1.6%)
CHINA (1.6%)
Qingling Motors Co. 844,000 155,816
-------
BANKING & FINANCIAL SERVICES (8.1%)
HONG KONG (2.5%)
Dao Heng Bank Group Ltd. 60,000 125,100
JCG Holdings Ltd. 412,000 109,040
-------
234,140
-------
SINGAPORE (3.1%)
Oversea-Chinese Banking Corp., Ltd. - Foreign Shares 33,800 147,387
Overseas Union Bank Ltd. - Foreign Shares 52,800 143,331
-------
290,718
-------
TAIWAN (2.5%)
Bank Sinopac* 275,712 117,629
United World Chinese Commercial Bank* 123,840 117,877
-------
235,506
-------
760,364
-------
BUILDING MATERIALS (3.3%)
CHINA (1.6%)
Shenzhen Fangda Co., Ltd., Class B 208,720 148,204
TAIWAN (1.7%)
Chia Hsin Cement Corp.* 244,160 162,457
-------
310,661
-------
COMMERCIAL SERVICES (1.6%)
HONG KONG (1.6%)
Cosco Pacific Ltd. 312,000 153,063
-------
COMPUTER SERVICES (1.5%)
SINGAPORE (1.5%)
Informatics Holdings Ltd. 440,000 139,170
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COMPUTERS (9.4%)
HONG KONG (3.7%)
ASM Pacific Technology Ltd. 322,000 $ 85,220
Founder Hong Kong Ltd. 714,240 139,237
Wong's International Holdings Ltd. 1,134,000 121,514
-------
345,971
-------
SINGAPORE (5.7%)
Elec & Eltek International Co., Ltd. 46,500 232,500
Natsteel Electronics Ltd. 150,000 307,696
-------
540,196
-------
886,167
-------
CONGLOMERATES (7.5%)
HONG KONG (7.5%)
China Overseas Land & Investment 836,000 120,881
China Resources Enterprise Ltd. 158,000 211,121
Hutchison Whampoa Ltd. 32,000 229,285
Jardine Matheson Holdings Ltd. 52,000 145,600
-------
706,887
-------
DISTRIBUTION (9.2%)
HONG KONG (6.0%)
Four Seas Mercantile Holdings Ltd. 764,000 224,392
Li & Fung Ltd. 220,000 343,670
-------
568,062
-------
SINGAPORE (3.2%)
Thakral Corporation Ltd. 570,000 296,400
-------
864,462
-------
ELECTRIC EQUIPMENT (3.2%)
SINGAPORE (3.2%)
GP Batteries International Ltd. 138,000 303,422
-------
ELECTRICAL & ELECTRONICS (9.5%)
HONG KONG (7.4%)
IDT International Ltd. 300,000 39,118
Techtronic Industries Co. 996,000 187,735
Varitronix International Ltd. 128,000 242,918
VTech Holdings Ltd. 62,000 232,526
-------
702,297
-------
TAIWAN (2.1%)
Yageo Corp.* 150,837 198,402
-------
900,699
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FOOD (5.9%)
HONG KONG (3.3%)
Guangnan Holdings Ltd. 445,713 $ 136,663
Ng Fung Hong Ltd. 202,000 178,639
-------
315,302
-------
TAIWAN (2.6%)
Want Want Holdings Ltd. 205,200 244,188
-------
559,490
-------
INDUSTRIAL (0.9%)
HONG KONG (0.9%)
Lung Kee (Bermuda) Holdings Ltd. 788,000 86,473
------
MACHINERY & EQUIPMENT (2.7%)
CHINA (2.7%)
Shanghai Zhenhua Port Machinery Co., Ltd., Class B 406,000 170,520
Wafangdian Bearing Group Co., Ltd., Class B 497,600 86,083
-------
256,603
-------
MEDICAL SUPPLIES (1.4%)
HONG KONG (1.4%)
China Pharmaceutical Enterprise & Investment
Corp., Ltd. 1,489,000 130,718
-------
PAPER PRODUCTS (2.4%)
HONG KONG (2.4%)
Hung Hing Printing Group 576,000 223,088
-------
POWER ELECTRIC & UTILITIES (2.7%)
CHINA (1.2%)
Beijing Datang Power Generation Co., Ltd. 366,000 113,403
HONG KONG (1.5%)
Hong Kong & China Gas Co., Ltd. 100,000 142,012
-------
255,415
-------
REAL ESTATE (4.1%)
HONG KONG (2.1%)
Cheung Kong (Holdings) Ltd. 30,000 205,272
-------
SINGAPORE (2.0%)
City Developments Ltd. 50,000 181,178
-------
386,450
-------
RETAIL (8.9%)
HONG KONG (6.0%)
Esprit Holdings Ltd. 744,000 276,149
Glorious Sun Enterprises Ltd. 976,000 176,405
Jusco Stores (Hong Kong) Co., Ltd. 1,212,000 117,354
-------
569,908
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
CVO GREATER CHINA FUND, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL (CONTINUED)
TAIWAN (2.9%)
President Chain Store Corp. 84,048 $ 267,965
-------
837,873
-------
TELECOMMUNICATIONS (2.0%)
HONG KONG (2.0%)
China Telecom (Hong Kong) Ltd.* 100,000 187,844
-------
TRANSPORTATION (11.2%)
CHINA (9.1%)
Guangshen Railway Co., Ltd. 996,000 154,303
Jiangsu Expressway Co., Ltd.* 1,192,000 292,390
Shenzhen Expressway Co., Ltd.* 1,816,000 410,286
-------
856,979
HONG KONG (2.1%)
New World Infrastructure Ltd.* 139,000 198,294
-------
1,055,273
---------
TOTAL COMMON STOCKS (COST $14,784,004) 9,597,044
---------
WARRANTS (0.0%)
INDUSTRIAL (0.0%)
HONG KONG (0.0%)
Hong Kong & China Gas 9,470 978
---
TOTAL WARRANTS (COST $0) 978
---
REPURCHASE AGREEMENT (6.4%)
Bank of New York Repurchase Agreement, 5.30%, 11/02/98
(dated 10/30/98; proceeds $607,668, collateralized
by $600,000 U.S. Treasury Notes,
6.375%, due 05/15/99) $607,400 607,400
-------
TOTAL REPURCHASE AGREEMENT (COST $607,400) 607,400
-------
TOTAL INVESTMENTS (COST $15,391,404) (+) - 108.1% 10,205,422
OTHER LIABILITIES IN EXCESS OF ASSETS - (8.1%) (765,905)
-------
NET ASSETS - 100.0% $ 9,439,517
---------
---------
</TABLE>
+ Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $426,593
Unrealized depreciation (5,612,575)
------------
Net unrealized depreciation $(5,185,982)
------------
------------
</TABLE>
* Denotes non-income producing security.
The accompanying notes are an integral part of the financial statements.
<PAGE>
CVO GREATER CHINA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at market value (cost $15,391,404 ) $10,205,422
Interest and dividends receivable 26,356
Receivable for investment securities sold 162,483
Receivable from Adviser 13,194
Deferred organization expense 123,984
Prepaid expenses and other assets 17,349
----------
Total Assets $10,548,788
LIABILITIES:
Payable for investment securities purchased 38,375
payable for capital shares redeemed 729,495
Payable for closed forward currency contracts 117,426
Unrealized depreciation on open foreign currency contracts 169,100
Audit fees payable 25,000
Other payables and accrued expenses 29,875
----------
Total liabilities 1,109,271
-----------
NET ASSETS $ 9,439,517
-----------
-----------
NET ASSETS CONSIST OF:
Shares of capital stock, $0.001 par value per share,
1,566,657 Class I Shares issued and outstanding $ 1,567
Additional paid-in capital 20,099,245
Accumulated undistributed net investment income 425,713
Accumulated net realized loss on investments and
foreign currency transactions (5,731,930)
Net unrealized depreciation of investments and
foreign currency transactions (5,355,078)
----------
NET ASSETS $9,439,517
----------
----------
CLASS I NET ASSET VALUE PER SHARE (OFFERING AND
REDEMPTION PRICE PER SHARE) $ 6.03
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
CVO GREATER CHINA FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
OCTOBER 31, 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax withholding of $10,365) $530,435
Interest 21,143
Total income ----------- $551,578
-----------
EXPENSES:
Advisory 191,203
Professional Fees 71,077
Custody 47,911
Amortization of organization expenses 40,483
Fund accounting 38,566
Registration and filing 30,748
Printing 27,728
Administration 21,859
Transfer agent and shareholder servicing 16,792
Directors 12,945
Miscellaneous 7,946
Total expenses before waivers/reimbursements ----------- 507,258
Less expenses waived/reimbursed (200,513)
-----------
Net expenses 306,745
-----------
NET INVESTMENT INCOME 244,833
-----------
REALIZED AND UNREALIZED GAIN (Loss) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized loss on investment transactions (5,731,930)
Net realized gain on foreign currency transactions 140,463
Net change in unrealized depreciation of investments (1,396,977)
Net change in unrealized depreciation of foreign currency transactions (163,571)
Net realized and unrealized loss on investments and foreign currency -----------
transactions (7,152,015)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,907,182)
-----------
-----------
</TABLE>
<PAGE>
CVO GREATER CHINA FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED NOVEMBER 19, 1996*
OCTOBER 31, 1998 THROUGH OCTOBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 244,833 $ 70,716
Net realized loss on investment and foreign currency transactions (5,591,467) (49,890)
Net change in unrealized depreciation of investments and foreign currency
transactions (1,560,548) (3,794,530)
------------ -----------
Net decrease in net assets resulting from operations (6,907,182) (3,773,704)
------------ -----------
DISTRIBUTION TO SHAREHOLDERS FROM:
CLASS I:
Net investment income (46,475) -
Net realized gains (13,227) -
------------ -----------
Total distributions to shareholders (59,702) -
------------ -----------
DISTRIBUTION TO SHAREHOLDERS FROM:
CLASS II:
NET INVESTMENT INCOME (111) -
NET REALIZED GAINS (29) -
------------ -----------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (140) -
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued 3,943,998 26,880,923
Dividends reinvested 52,838 -
Cost of shares redeemed (9,519,155) (1,278,389)
------------ -----------
Net increase (decrease) in net assets from capital share transactions (5,522,319) 25,602,534
------------ -----------
Total increase (decrease) in net assets (12,489,343) 21,828,830
NET ASSETS
Beginning of period 21,928,860 100,030
------------ -----------
End of period (including $425,713 and $7,557 of undistributed net
investment income, respectively.) $ 9,439,517 $21,928,860
------------ -----------
------------ -----------
</TABLE>
* Commencement of operations.
<PAGE>
CVO GREATER CHINA FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED NOVEMBER 19, 1996*
OCTOBER 31, 1998 THROUGH OCTOBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS I SHARES:
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.70 $ 10.00
------------ -------------
Net investment income 0.28 0.03
Net realized and unrealized loss (2.93) (1.33)
------------ -------------
Total from investment operations (2.65) (1.30)
------------ -------------
LESS DIVIDENDS FROM:
Net investment income (0.01) -
Net realized gains (0.01) -
------------ -------------
Total distributions (0.02) -
------------ -------------
Net change in net asset value per share (2.67) (1.30)
------------ -------------
NET ASSET VALUE, END OF PERIOD $ 6.03 $ 8.70
------------ -------------
------------ -------------
TOTAL RETURN (30.53%) (13.00%)(a)
RATIOS/ SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 9,440 $ 21,885
Ratios to average net assets:
Expenses** 2.00% 2.00% (b)
Net investment income 1.60% 0.71% (b)
PORTFOLIO TURNOVER RATE (c) 39% 8%
CLASS II SHARES: (d)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------------
Net investment income/ (loss) 0.05
Net realized and unrealized loss (1.36)
-------------
Total from investment operations (1.31)
-------------
LESS DIVIDENDS FROM:
Excess of net investment income -
Net realized gains -
-------------
Total distributions -
-------------
Net change in net asset value per share (1.31)
-------------
NET ASSET VALUE, END OF PERIOD $ 8.69
-------------
-------------
TOTAL RETURN (13.10%)(a)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 43
Ratios to average net assets:
Expenses** 2.00% (b)
Net investment income 0.55% (b)
PORTFOLIO TURNOVER RATE (c) 8%
- ----------------------------------------------------
</TABLE>
* Commencement of operations.
** During the period, certain fees were voluntarily reduced and/ or reimbursed.
If such voluntary fee reductions and/ or reimbursements had not occurred,
the ratios would have been higher.
(a) Not annualized.
(b) Annualized.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(d) As of October 31, 1998 there were no Class II shares outstanding.
The accompanying notes are an integral part of the financial statements.
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION
CVO Greater China Fund, Inc. (the "Fund") was incorporated in Maryland on
September 2, 1994. Its operations through November 19, 1996 were limited to the
organization, registration, and the issuance of 5,003 shares of Class I and
5,000 shares of Class II to the Fund's former administrator. The Fund is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund operates as a non-diversified, no-load, open-end, management
investment company and offers two classes of shares: Class I Shares, which are
offered to institutional investors, and Class II Shares, which are offered to
non-institutional investors. Each class of shares outstanding bears the same
voting, dividend, liquidation and other rights and conditions, except that Class
II Shares are expected to bear additional shareholder servicing expenses.
The Fund seeks to provide investors with capital appreciation and income
generation from investment in publicly-traded equity securities of companies
which, in the opinion of the Adviser, will benefit from the economic development
and growth of the People's Republic of China, Hong Kong, Taiwan and Singapore
(collectively, the "Greater China Region").
NOTE 2-- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
PORTFOLIO VALUATIONS
Equity securities, including those for which the primary market is outside the
U.S., are valued using the closing price or the last sale price on the principal
exchange for such securities. Short-term obligations having maturities of 60
days or less are valued at amortized cost, which approximates fair value, and if
applicable, adjusted for foreign exchange translation. Securities for which
market quotations are not readily available are valued at fair value determined
in good faith by, or under the direction of, the Fund's Board of Directors.
Securities quoted in foreign currencies initially are valued in the currency in
which they are denominated and then are translated into U.S. dollars at the
prevailing foreign exchange rate. Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics.
SECURITIES TRANSACTIONS AND RELATED INCOME
The Fund records securities transactions on a trade date basis. Interest
income, including accretion of discount and amortization of premium is accrued
daily. Dividend income is recognized on the ex-dividend date. Realized gains
and losses from securities transactions are recorded on the identified cost
basis.
MULTIPLE CLASS ALLOCATIONS
The investment income and expenses of the Fund (other than class specific
expenses) and realized and unrealized gains and losses on investments of the
Fund are allocated to each class of shares based upon their relative net asset
value on the date income is earned or expenses and realized and unrealized gains
and losses are incurred.
ORGANIZATION COSTS
Costs incurred in connection with the organization and initial registration of
the Fund have been deferred and are being amortized over a sixty-month period
beginning with the Fund's commencement of operations.
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from the Fund's net investment income, if any, are declared and paid
at least annually. Net realized gains on portfolio securities, if any, are
distributed at least annually by the Fund. However, to the extent net realized
gains can be offset by capital loss carryovers, such gains will not be
distributed. Dividends and distributions are recorded by the Fund on the
ex-dividend date.
The amount of dividends from net investment income and distributions from net
realized 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 composition of net assets based on their federal
tax-basis treatment; temporary differences do not require a reclassification.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized gains. To the extent they exceed net investment income
and net realized capital gains for tax purposes, they are reported as
distributions of capital.
As of October 31, 1998, the following reclassifications have been made to
increase (decrease) such accounts:
<TABLE>
<CAPTION>
Accumulated Undistributed Accumulated Net Realized
Net Investment Income Gain/(Loss) on Investments Paid-In Capital
------------------------- -------------------------- ---------------
<S> <C> <C>
$219,909 $(140,476) $(79,433)
</TABLE>
FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
net investment company taxable income and net capital gains to shareholders.
Therefore, no federal income tax provision is required.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars at the current rate of
exchange to determine the value of investments, assets and liabilities.
Purchases and sales of securities, and income and expenses are translated at the
prevailing rate of exchange on the respective dates of such transactions. The
Fund does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gains or losses from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities and forward currency contracts, sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest and foreign withholding amounts actually received
or paid. Net unrealized foreign exchange gains and losses arise from changes in
the value of assets and liabilities, other than investments in securities,
resulting from changes in the exchange rate.
REPURCHASE AGREEMENTS
The Fund may purchase instruments from financial institutions, such as banks and
broker-dealers, subject to the seller's agreement to repurchase them at an
agreed upon time and price ("repurchase agreements"). The seller under a
repurchase agreement is required to maintain the value of the securities subject
to the agreement at not less than the repurchase price. Default by the seller
would, however, expose the Fund to possible loss because of adverse market
action or delay in connection with the disposition of the underlying
obligations.
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
DERIVATIVE INSTRUMENTS:
The Fund may invest in various financial instruments including positions in
forward currency contracts, enter into currency swaps and purchase foreign
currency options. The Fund enters into such contracts for the purposes of
hedging exposure to changes in foreign currency exchange rates on portfolio
holdings.
A forward foreign exchange contract is a commitment to sell or buy a foreign
currency at a future date at a negotiated exchange rate. A Fund bears the
market risk which arises from possible changes in foreign exchange values.
Risks may arise from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of the foreign
currency relative to the U.S. dollar. Forward foreign exchange contracts may
involve market or credit risk in excess of the related amounts reflected on the
Fund's statement of assets and liabilities. The gain or loss from the
difference between the cost of original contracts and the amount realized upon
the closing of such contracts is included in net realized gain on foreign
currency transactions. Fluctuations in the value of forward contracts held at
October 31, 1998 are recorded for financial reporting purposes as unrealized
gain or loss by the Fund.
The table below indicates the Fund's outstanding forward currency contract
positions at October 31, 1998:
<TABLE>
<CAPTION>
US$ VALUE ON
CONTRACT MATURITY ORIGINATION US$ VALUE AT UNREALIZED
CURRENCY AMOUNTS DATE DATE OCTOBER 31, 1998 DEPRECIATION
-------- ------------ -------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sell HKD (43,990,619) 05/13/99 $(5,586,678) $(5,614,772) $(28,094)
Sell SGD (1,418,450) 06/15/99 (825,256) (890,427) (65,171)
Sell TWD (28,951,494) 06/18/99 (814,159) (889,994) (75,835)
----------
Net unrealized depreciation on forward positions: $(169,100)
----------
----------
</TABLE>
Currency abbreviations:
HKD - Hong Kong Dollars
SGD - Singapore Dollars
TWD - Taiwan Dollars
NOTE 3 -- AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
CVO Greater China Partners, L.P. (the "Adviser") serves as the Fund's
investment adviser. Effective June 1, 1998, PFPC Inc. ("PFPC"), an indirect
wholly owned subsidiary of PNC Bank Corp., began providing administrative and
fund accounting services for the Funds. OFFIT Funds Distributor, Inc. (the
"Distributor"), serves as the distributor of the Funds' shares. PFPC also
provides transfer and dividend disbursing agent services for the Funds.
Prior to June 1, 1998, BISYS Fund Services, Limited Partnership, and BISYS
Fund Services, Inc. provided the aforementioned services.
The Fund has entered into an investment advisory agreement (the "Investment
Advisory Agreement") with the Adviser. Pursuant to the terms of the Investment
Advisory Agreement, the Adviser is entitled to a fee that is calculated daily
and paid monthly on the average daily net assets of the Fund at the annual rate
of 1.25%. For the year ended October 31, 1998, the Adviser earned fees of
$191,203 and waived fees of $146,305.
PFPC provides the Fund with administrative services pursuant to an
administration agreement (the "Administration Agreement"). The services under
the Administration Agreement are subject to the supervision of the Fund's Board
of Directors and officers and include the day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian and assistance in the preparation of the Fund's registration
statements under federal and state laws. Pursuant to the Administration
Agreement, the Fund pays PFPC a monthly fee for its services at an annual rate
of 0.125% of the Fund's first $300 million in average daily net assets; 0.11% of
the Fund's next $300 million in average daily net assets; 0.08% of the Fund's
next $300 million in average daily net assets; 0.05% of the Fund's next $300
million in average daily net assets; and 0.0275% of the Fund's average daily net
assets in excess of $1.2 billion. From time to time, PFPC may waive
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
all or a portion of its fees. For the period from June 1, 1998 through October
31, 1998, PFPC was entitled to fees of $5,822 and waived fees of $5,822. For
the period prior to June 1, 1998 BISYS Fund Services, Inc., the previous
administrator was entitled to fees of $16,037 and waived fees of $16,037.
PFPC provides the Fund with fund accounting and related services pursuant to a
fund accounting agreement with the Company. For these services PFPC is
entitled a fee of $1,250 per month plus out of pocket expenses. From time to
time, PFPC may waive all or a portion of its fees. For the period from June 1,
1998 through October 31, 1998, PFPC earned and waived fees of $15,625. For the
period prior to June 1, 1998 BISYS Funds Services, Inc., the previous Fund
accounting agent earned fees, including reimbursement of out of pocket expenses,
of $22,941.
PFPC also serves as transfer agent for the Fund and receives reimbursement of
certain expenses plus a fee for related services pursuant to a transfer agency
agreement with the Fund. From time to time, PFPC may waive all or portion of
these fees. For the period from June 1, 1998 through October 31, 1998, PFPC
earned fees of $15,000. PFPC waived fees of $3,530. For the period prior to
June 1, 1998 BISYS Fund Services, Inc., the previous transfer agent earned fees,
including reimbursement of out pocket expenses of $1,792.
The Fund has entered into a distribution agreement (the "Distribution
Agreement") with the Distributor. Under the Distribution Agreement, the
Distributor, as agent of the Fund, agrees to use its best efforts as sole
distributor of the Fund's shares. Under the Plan of Distribution, the Fund is
authorized to spend up to 0.25% of its average daily net assets of the Fund
solely attributable to Class II Shares for the purpose of compensating the
Distributor for activities primarily intended to result in the sales of Class II
Shares. The Plan of Distribution provides that the Fund will bear the costs of
the registration of its shares with the Securities and Exchange Commission and
various states and the printing of its prospectuses, statements of additional
information and reports to shareholders. For the year ended October 31, 1998,
no distribution costs were incurred.
The Adviser has voluntarily agreed to limit the expense ratio for the Fund at
2.00%. In order to maintain this ratio, the Adviser has waived a portion of its
advisory fee and has agreed to reimburse the Fund $13,194.
NOTE 4 -- SECURITIES TRANSACTIONS
For the year ended October 31, 1998, the cost of purchases and the proceeds from
sales of the Fund's portfolio securities (excluding short-term investments),
amounted to $5,493,467 and $6,990,958 respectively for the Fund. The cost of
securities is substantially the same for Federal income tax purposes as it is
for financial reporting purposes.
NOTE 5 -- CAPITAL STOCK TRANSACTIONS
The Fund's Articles of Incorporation permit the Fund to issue ten billion shares
(par value $0.001). Transactions in shares of common stock for the year ended
October 31, 1998 and the period ended October 31, 1997, were as follows:
<TABLE>
<CAPTION>
CLASS I SHARES
----------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares issued 550,508 $ 3,943,998 2,625,247 $26,880,923
Shares reinvested 7,995 52,708 - -
Shares redeemed (1,506,675) (9,490,994) (115,421) (1,278,389)
----------- ------------ ---------- ------------
Net increase/(decrease) (948,172) $(5,494,288) 2,509,826 $25,602,534
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<CAPTION>
CLASS II SHARES
---------------------------
YEAR ENDED
OCTOBER 31, 1998
---------------------------
SHARES AMOUNT
-------- ---------
Shares reinvested 20 $130
Shares redeemed (5,020) (28,161)
-------- ---------
Net decrease (5,000) $(28,031)
-------- ---------
-------- ---------
</TABLE>
NOTE 6 -- OTHER MATTERS
The Fund invests primarily in the Greater China Region. Investments are made in
obligations of foreign entities and securities denominated in foreign currencies
that involve risk not typically involved in domestic investments. Such risks
include fluctuations in the foreign exchange rates, potential inability to
convert proceeds into U.S. dollars, application of foreign tax laws, foreign
investment restrictions, less publicly available information about foreign
financial instruments, less liquidity resulting from substantially less trading
volume, more volatile prices and generally less government supervision of
foreign markets and issuers.
Note 7- Subsequent Events
On December 17, 1998, the Board of Directors of the Fund approved a plan to
liquidate the Fund's portfolio investments and to solicit the redemption of the
shares in the Fund on or prior to December 23, 1998.
<PAGE>
CVO GREATER CHINA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
To the Board of Directors
and Shareholders of
CVO Greater China Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of portfolio 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 CVO Greater China Fund, Inc. (the
"Fund") at October 31, 1998, the results of its operations for the year then
ended, and the changes in its net assets and the financial highlights for the
year then ended and for the period November 19, 1996 (commencement of
operations) through October 31, 1997, 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 October 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 10036
December 10, 1998, except to as Note 7,
which is as of December 17, 1998
<PAGE>
This report is submitted for the information of the shareholders of the Fund.
It is not authorized for distribution to prospective investors in the Fund
unless preceded or accompanied by an effective prospectus which includes
information regarding the Fund's objectives and policies, charges, expenses
and other data. Please read the prospectus carefully before you invest or
send money.
THE CVO GREATER CHINA FUND, INC.
400 BELLEVUE PARKWAY, SUITE 108, WILMINGTON, DE 19808
(212) 758-9600
