<PAGE>
July 31, 1997
Dear Shareholder,
During the second quarter ending June 30, 1997, the Germany Fund's share
price appreciated 11.3%, recording a new all time high. The Fund's net asset
value per share rose 5.7% in US$ terms in the quarter and remained in line with
the DAX index of thirty leading German stocks.
The recent merger announced by Bayerische Hypothekenbank and Bayerische
Vereinsbank is a clear indication of a growing trend towards a focus on
shareholder value and a new equity culture in Germany. An increase in takeover
activity is key for a dynamic market environment, as management is forced to
focus more on corporate profitability. Furthermore, data from other equity
markets around the world confirm that there is a positive correlation between
the level of merger activity and overall equity returns.
Proposed tax reform for 1999, the changes to equity market legislation, and
further privatizations of public assets should continue to support the German
equity market. The upturn in the market has also been driven by the softening of
the Deutsche Mark, boosting earnings of major exporters, as well as the positive
effects of the plan for EMU to start in 1999. Realistically, both the Monetary
Union and the tax reform--although with some modifications--ought to proceed on
schedule.
Despite the record levels of the equity market and the high valuation by
historical standards we consider the risks limited. Monetary policy should
continue to be accommodative, given the high unemployment, output gap, and lack
of scope for industry to pass on higher costs in prices. Also, the news flow
related to companies and the economy as a whole should remain positive in the
foreseeable future. Based on current earnings estimates for 1998, the market is
still reasonably valued relative to the bond market. Flow of fund patterns have
also been clearly in favor of the equity market. There has not been much strain
from new issues and IPOs so far this year. However, we do expect a pick-up in
the privatization of public assets as the government needs to finance its budget
shortfall.
Most international investors are still underweighted in German equities,
but recent figures suggest a net increase in demand. Furthermore, domestic
institutions have no suitable investment alternatives at the moment. German
insurers, for instance, are still raising their equity weightings in order to
meet the minimum returns promised to policyholders and investors. Based on this
scenario we believe the German equity market will remain attractive well into
1998.
Sincerely,
/s/ Dr. Ronaldo H. Schmitz /s/ G. Richard Stamberger
Dr. Ronaldo H. Schmitz G. Richard Stamberger
Chairman and President Chief Executive Officer
1
<PAGE>
FUND HISTORY AS OF JUNE 30, 1997
STATISTICS
<TABLE>
<S> <C>
Net Assets $262,264,908
Shares Outstanding 14,581,698
NAV Per Share $17.99
</TABLE>
TOTAL RETURNS
<TABLE>
<S> <C>
Period NAV
6 months ended 6/30/97 14.15%
1 year ended 12/31/96 25.47%
3 years ended 12/31/96* 14.79%
5 years ended 12/31/96* 13.55%
</TABLE>
*Average annual return
OTHER INFORMATION
<TABLE>
<S> <C>
NYSE Ticker Symbol GER
Dividend Reinvestment Plan Yes
Voluntary Cash Purchase Program Yes
Annual Expense Ratio 1.20%
</TABLE>
DIVIDEND & CAPITAL GAIN DISTRIBUTIONS
<TABLE>
<S> <C> <C>
Record Ordinary LT Capital
Date Income Gains
9/3/97 $0.07 $0.24
12/19/96 $0.34 $0.72
9/3/96 -- $0.13
12/27/95 $0.29 $0.64
9/7/95 $0.06 $0.07
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
6 Months ended Year ended
6/30/97 12/31/96
<S> <C> <C>
Net Asset Value 14.15% 25.47%
Market Value 16.83% 21.55%
DAX 16.17% 18.95%
</TABLE>
2
<PAGE>
PORTFOLIO BY MARKET SECTOR AS OF JUNE 30, 1997
<TABLE>
<S> <C>
Medical Equipment 1.0%
Steel Manufacturing 7.2%
Telecommunications 6.8%
Electrical 9.3%
Utilities 6.5%
Insurance 6.5%
Apparel 2.7%
Merchandising 2.5%
Automotive 19.8%
Chemical 20.8%
Pharmaceuticals 3.8%
Banking 13.1%
</TABLE>
10 LARGEST EQUITY HOLDINGS AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
% of % of
Portfolio Portfolio
--------- ---------
<S> <C> <C> <C>
1. Daimler Benz 10.2 6. VEBA 5.5
2. Hoechst 8.9 7. Dresdner Bank 5.5
3. Volkswagen 8.3 8. Allianz Holdings 5.3
4. Deutsche Telekom 6.8 9. SAP 4.7
5. Mannesmann 5.8 10. BASF 4.6
</TABLE>
3
<PAGE>
INTERVIEW WITH THE PORTFOLIO MANAGER
QUESTION: In your letter to shareholders you mentioned an increase in merger
activity in Germany and their benefits for equity investors. Mergers in Germany
do not seem to be as common as in some other European markets such as the United
Kingdom or the Netherlands. What makes you think we will see more activity in
the future?
ANSWER: First, it should be mentioned that mergers have not been uncommon in
Germany. Over the past five years we have witnessed fourteen mergers in excess
of two billion Deutsche Marks, eleven have been completed, two are still pending
and one has been withdrawn. This number might not match the activity in some
other countries, but nevertheless is quite significant for a so called highly
regulated market. Interestingly enough, German regulation is less strict to
prevent takeovers than is neighboring Holland. German takeovers are governed by
a voluntary code, which in itself is not particularly extreme or stringent. The
obstacles arise from cross-share holdings and the capital gains tax implications
if a merger is successful.
QUESTION: O.K., so mergers are likely to happen again. I am still curious to
know how one can avoid the issues of cross-share holdings and taxation and how
it would affect future merger activity in Germany.
ANSWER: Corporations manage to avoid the 60% capital gains tax liability by
swapping shares. Restrictions, however, are tight and require that the assets
must be similar in value, type and function. Yet, interpretation can vary as
decisions are delivered by the State and not the Federal Government. In the case
of the Bavarian bank merger, the States tax authorities have ruled that a share
swap involving stock in two different sectors (insurance and banks) qualifies to
reduce capital gains liabilities. Earlier this year the German ministry of
finance issued a draft decree stating that share swaps could involve equity of
any type of company. While there is still a question mark over how cross border
deals would be interpreted, there is no doubt that merger activity in Germany
will increase as market deregulation advances and restructuring continues.
QUESTION: You have mentioned the tax reform of 1999 and the proposed changes to
the equity market legislation. Could you please explain where these issues stand
regarding implementation and how these changes benefit the equity investor?
ANSWER: The seemingly endless debate on tax reform might possibly be brought to
a conclusion this September. There are currently two separate tax reform drafts
for the years 1998 and 1999, both of which were passed by the Bundestag at the
end of June. As expected, the SPD-dominated Bundesrat (upper House) rejected the
drafts earlier this summer. A final compromise will now have to be worked out by
a parliamentary mediation committee. It appears that the SPDs objections to the
proposed tax reform are not on issues affecting corporate Germany, but on how
the tax reform is to be financed and its implications on the individual taxpayer
(e.g. tax progression). Essentially, the opposition, too, is keen on
implementing the tax reform, although with different accents. The relevant
aspects of corporate tax reform include: 1) the reduction of the corporate
income tax rate from 45% to 35% on retained earnings and from 30% to 25% on
distributed earnings, 2) a reduction of the solidarity surcharge by two
percentage points to 5.5%, and 3) a broader tax base. In addition to the
proposed changes in the tax laws we expect the passage of the Third Financial
Market Promotion Bill, a new law to ease fund raising
(Kapitalaufnahmeerleichterungsgesetz) and to reform the equities law
(Aktienrecht). All of these proposals would have a positive effect on the
overall equity market as the new laws would increase profitability, efficiency,
and transparency of corporate Germany.
Hanspeter Ackermann, Portfolio Manager of The Germany Fund, Inc.
4
<PAGE>
REPORT OF INVESTMENT ADVISER AND MANAGER
OUTLOOK FOR THE GERMAN ECONOMY
Despite some weaker data for the month of May, the German economy returned
to above-trend growth in the second quarter. The composition of growth has
become more uneven still with exports exceeding even the most optimistic
expectations while domestic demand continues to lag behind. Export growth was
highest in Eastern Europe and the United States. For 1997 we expect GDP growth
to accelerate to 2.7%, an estimate that remains above consensus forecast. The
main driver for our forecast is export-led growth, aided by the weaker Deutsche
Mark, and an increase in capital spending.
Short-term interest rates are at record lows and monetary aggregates have
been growing strongly since early 1996. The recent decision by the Bundesbank
not to pre-announce weekly fixed-rate repo operations at the 3% level has led to
speculations about the introduction of variable repos in the near future. It is
obvious that the Bundesbank is unsatisfied with the rapid pace of the recent
decline in the Deutsche Mark. However, in our view, the Bundesbank is not yet
ready to increase interest rates any time soon. There are two main reasons for
our belief: First, despite the recent currency weakness, import price inflation
has remained relatively benign. Second, domestic costs are on the decline, as
wage growth has slowed and productivity is increasing. This combination is
likely to keep consumer price inflation below 2% for 1997 and early 1998 despite
the weaker currency.
The outlook for the German labor market is one of the more interesting and
controversial issues in the economy. The recent strong rise in unemployment
remains somewhat unusual at this stage of the economic cycle and our estimate of
an 11.2% unemployment rate in 1997 might prove too conservative. Usually,
unemployment only rises that strongly in times of a recession or severe slowdown
of the economy. There are, however, some encouraging signs such as the number of
labor participants working short-shifts that has fallen significantly since the
beginning of the year, and vacancies are pointing upwards. Also, corporate
investment seems to be rising at a faster pace, which has historically coincided
with rising employment.
THE FUND'S PORTFOLIO STRATEGY
The German equity market (DAX 30) is currently trading at an earnings
multiple of 23.8 times estimated 1997 earnings and 20.6 times estimated 1998
earnings, which suggests fair value.
Comparing the Bond/Earnings Yield and the Bond/Dividend Yield ratios to
their long term history also suggest fair valuation levels, as both measures are
close to their mean. Analyzing enterprise value and cash flow based criteria in
all of Europe, German stocks continue to rate favorably in relative terms.
Our stock selection concentrates on cost leadership, exposure to global
growth, and a strict commitment by management to enhance shareholder value.
During the second quarter the Germany Fund reduced its underweight in the
financial sector as recent earnings releases surprised on the upside. Banks
benefited from strong financial markets, and higher commission income and
trading results, while insurance companies were helped by strong financial
markets lifting their investment results. The Fund remains overweighted in the
chemical/pharmaceutical sector. We believe that global pharmaceutical companies
with a strong product pipeline should continue to deliver attractive investment
returns. We maintain our strategic underweighting in utilities as earnings
momentum is clearly flattening. In addition, the planned taxation of nuclear
decommissioning underlines the exposure of a cash-rich industry to a government
committed to reduce budget deficits by using all options available. Also, we
continue to underweight the retail sector for structural reasons. Certain
consumer-oriented shares, however, such as producers of luxury goods remain
overweighted on a selective basis, provided they display double-digit sales and
earnings growth.
5
<PAGE>
DISCOUNT TO NET ASSET VALUE
Some shareholders have expressed concern about the high discounts to net
asset value that closed-end country funds have been trading at in recent years.
While the Directors of your Fund share these concerns, they must also balance
the interests of all shareholders. As we know, and as was stated in your Fund's
initial offering prospectus, 'shares of closed-end funds frequently trade at a
discount from net asset value.' Sometimes the discounts widen when investors
seek opportunities elsewhere and there is an imbalance in demand. This has been
true since 1994, as the U.S. stock market has been steadily out-performing the
Western European markets. To the extent the sentiment changes and more investors
return to seek greater value overseas, a higher demand for Western European
country funds could help over-all discounts to narrow. This would have a
positive effect on your market price return.
For example, during the 12 months to June 30, 1997, your Fund's discount
narrowed from 19.8% to 18.0%. As a result, while the net asset value per share
increased 32.3% during the period, the market value increased 37.0%. (Both
calculations have been adjusted to include distributions). Thus not only is
there value in a discount--the ability to effectively own shares of portfolio
securities at 82% of their market price--there is the added benefit that during
times of a decline in the discount, total market value return exceeds net asset
value return. Obviously, we cannot predict what will happen, but we want
shareholders to realize that the existence of a discount can also present an
opportunity.
Your Independent Directors review your Fund's discount at every Board
meeting and regularly consider steps aimed at reducing it. These steps include
open-market purchases of shares and increased marketing efforts. While special
SEC constraints do place some limitations on the extent of Fund repurchases, we
have tried to be active in the market. During the 12 months ended June 30, 1997,
your Fund repurchased 674,872 of its shares. A public relations firm has also
been retained and has assisted in obtaining favorable media coverage for your
Fund.
In conclusion, the Board believes that the closed-end format is
intentionally different from the open-end one. Its advantages are: i)
flexibility of portfolio management where cash position and security selection
do not depend on liquidity considerations and ii) predictable and relatively
constant asset size and resulting expense ratio. This has been the nature of
your Fund from the outset. The Board believes your Fund should be run in the
best interests of all shareholders and is working diligently towards that end.
6
<PAGE>
- ----------------------------------------------------------
THE GERMANY FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------
<S> <C> <C>
INVESTMENTS
IN GERMAN
SECURITIES-- 92.1% OF NET ASSETS
COMMON STOCKS--83.2%
APPAREL--2.5%
34,500 Adidas AG.................... $ 3,822,550
2,212 Hugo Boss AG................. 2,590,551
------------
6,413,101
------------
AUTOMOTIVE--18.2%
3,790 Bayerische Motoren Werke
AG......................... 3,139,658
303,000 DaimlerBenz AG............... 24,613,641
26,000 Volkswagen AG................ 19,956,370
------------
47,709,669
------------
BANKING--12.0%
247,000 Bayerische Vereinsbank AG.... 10,110,282
287,000 Commerzbank AG............... 8,139,273
385,820 Dresdner Bank AG............. 13,356,074
------------
31,605,629
------------
CHEMICAL--18.1%
302,000 BASF AG...................... 11,173,948
273,000 Bayer AG..................... 10,503,737
58,000 Degussa AG................... 3,073,311
21,432 Henkel KGaA.................. 1,138,102
507,000 Hoechst AG................... 21,532,729
------------
47,421,827
------------
ELECTRICAL--6.4%
28,000 SAP AG....................... 5,626,041
187,200 Siemens AG................... 11,128,400
------------
16,754,441
------------
INSURANCE--2.3%
15,000 Allianz AG Holding........... 3,143,120
1,000 Munchener Ruckversiche-
rungs AG................... 2,807,279
------------
5,950,399
------------
MERCHANDISING--2.3%
55,000 Metro AG..................... 6,033,928
------------
<CAPTION>
- ---------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS--3.5%
5,500 Altana AG.................... $ 5,872,897
32,000 Schering AG.................. 3,423,388
------------
9,296,285
------------
STEEL-MANUFACTURING--6.6%
31,300 Mannesmann AG................ 13,961,823
14,000 Thyssen AG................... 3,319,364
------------
17,281,187
------------
TELECOMMUNICATIONS--6.3%
682,000 Deutsche Telekom AG.......... 16,444,113
------------
UTILITIES--5.0%
56,000 Rheinisch-Westfalisches
Elektrizitatswerk AG....... 2,411,160
191,000 VEBA AG...................... 10,745,737
------------
13,156,897
------------
Total Common Stocks
(cost $137,427,720)........ 218,067,476
------------
PREFERRED STOCKS--4.2%
CHEMICAL--1.1%
50,875 Henkel KGaA.................. 2,891,455
------------
ELECTRICAL--2.1%
27,000 SAP AG....................... 5,611,114
------------
MEDICAL EQUIPMENT--1.0%
11,200 Fresenius AG................. 2,546,185
------------
Total Preferred Stocks
(cost $8,763,147).......... 11,048,754
------------
WARRANTS ON COMMON
STOCKS*--4.7%
INSURANCE--3.7%
102,550 Allianz AG Holding of 1993
expires February 18,
1998....................... 9,743,398
------------
</TABLE>
- ------------------
* Non-income producing securities.
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------
<S> <C> <C>
UTILITIES--1.0%
7,500 VEBA AG of 1993
expires April 6, 1998........ $ 2,630,748
------------
Total Warrants on
Common Stocks
(cost $7,757,868)............ 12,374,146
------------
Total Investments in
German Securities
(cost $153,948,735)........ 241,490,376
------------
<CAPTION>
- -------------
DEUTSCHE
MARKS
(IN
THOUSANDS)
- -------------
<S> <C> <C>
TIME DEPOSIT--2.8%
12,761 BNP Bank
(Luxembourg)--2.9375%
7/7/97
(cost $7,364,381).......... 7,325,908
------------
<CAPTION>
- -------------
U.S. DOLLARS
(IN
THOUSANDS)
- -------------
<S> <C> <C>
REPURCHASE
AGREEMENTS**--27.2%
14,465 Agreement with Lehman
Brothers, Inc., 5.95%
dated 6/30/97, due 7/1/97
in the amount of
$14,467,514, collateralized
by TVA of $15,030,000,
6.375% due 6/15/05......... 14,465,123
57,000 Agreement with
J.P. Morgan Securities,
Inc., 6.05%
dated 6/30/97, due 7/1/97
in the amount of
$57,009,579,
collateralized by FNMA
of $55,775,000, 7.79% due
9/27/06.................... 57,000,000
------------
Total Repurchase
Agreements
(cost $71,465,123)......... 71,465,123
------------
<CAPTION>
- ---------------------------------------------------------
VALUE
DESCRIPTION (NOTE 1)
- ---------------------------------------------------------
<S> <C> <C>
Total Investments--122.1%
(cost $232,778,239).......... $320,281,407
Liabilities in excess of cash
and other
assets--(22.1%)............ (58,016,499)
------------
NET ASSETS--100%............. $262,264,908
------------
------------
</TABLE>
- ------------------
** Investment of cash collateral received for portfolio securities on loan.
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
THE GERMANY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $232,778,239)............................................................... $320,281,407
Cash (includes $10,676,257 equivalent in an interest-bearing Deutsche mark account
with Deutsche Bank AG)................................................................................ 11,187,259
Receivable for securities sold.......................................................................... 2,070,200
Interest receivable..................................................................................... 507,515
Dividends receivable.................................................................................... 296,261
Foreign withholding tax refund receivable............................................................... 204,842
Other assets............................................................................................ 2,662
------------
Total assets....................................................................................... 334,550,146
------------
LIABILITIES
Payable upon return of securities loaned................................................................ 71,465,123
Payable for securities lending brokers' rebate and agency fees.......................................... 416,466
Management fee payable.................................................................................. 121,433
Investment advisory fee payable......................................................................... 61,566
Payable for shares repurchased.......................................................................... 70,800
Accrued expenses and accounts payable................................................................... 149,850
------------
Total liabilities.................................................................................. 72,285,238
------------
NET ASSETS.............................................................................................. $262,264,908
------------
------------
Net assets consist of:
Paid-in capital, $.001 par (Authorized 80,000,000 shares)............................................... $152,450,016
Cost of 259,212 shares held in treasury................................................................. (3,471,766)
Undistributed net investment income..................................................................... 2,009,734
Undistributed net realized gain on investments and Deutsche mark transactions........................... 23,994,848
Net unrealized appreciation of investments and Deutsche mark currency................................... 87,282,076
------------
Net assets.............................................................................................. $262,264,908
------------
------------
Net asset value per share ($262,264,908 divided by 14,581,698 shares of common stock
issued and outstanding)............................................................................... $17.99
------
------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE GERMANY FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
six months ended
June 30, 1997
----------------
<S> <C>
NET INVESTMENT INCOME
Income
Dividends (net of foreign withholding taxes of $345,986)............................................. $ 3,113,875
Interest............................................................................................. 342,082
----------------
Total income...................................................................................... 3,455,957
----------------
Expenses
Management fee....................................................................................... 684,138
Investment advisory fee.............................................................................. 349,396
Custodian and Transfer Agent's fees and expenses..................................................... 80,854
Directors' fees and expenses......................................................................... 70,417
Legal fee............................................................................................ 41,395
Audit fee............................................................................................ 30,500
Reports to shareholders.............................................................................. 110,709
NYSE listing fee..................................................................................... 14,256
Miscellaneous........................................................................................ 64,558
----------------
Total expenses.................................................................................... 1,446,223
----------------
Net investment income.................................................................................. 2,009,734
----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
DEUTSCHE MARK TRANSACTIONS
Net realized gain (loss) on:
Investments.......................................................................................... 21,705,842
Deutsche mark transactions........................................................................... (2,129,613)
Net change in unrealized appreciation/depreciation on:
Investments.......................................................................................... 11,838,804
Translation of other assets and liabilities from Deutsche marks...................................... 13,713
----------------
Net gain on investments and Deutsche mark transactions................................................. 31,428,746
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $ 33,438,480
----------------
----------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE GERMANY FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
six months ended year ended
June 30, 1997 Dec. 31, 1996
---------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income.............................................................. $ 2,009,734 $ 1,191,843
Net realized gain (loss) on:
Investments..................................................................... 21,705,842 19,641,354
Deutsche mark transactions...................................................... (2,129,613) (1,243,377)
Net change in unrealized appreciation/depreciation on:
Investments..................................................................... 11,838,804 29,432,368
Translation of other assets and liabilities from Deutsche marks................. 13,713 (181,807)
---------------- -------------
Net increase in net assets resulting from operations............................... 33,438,480 48,840,381
---------------- -------------
Distributions to shareholders from:
Net realized short term capital gains*............................................. -- (4,835,800)
Net realized long term capital gains............................................... -- (12,094,795)
---------------- -------------
-- (16,930,595)
---------------- -------------
Capital share transactions:
Net proceeds from reinvestment of dividends (657,368 and 647,796 shares,
respectively)................................................................... 8,710,126 7,822,971
Cost of shares repurchased (275,712 and 474,460 shares, respectively).............. (3,683,354) (5,619,012)
---------------- -------------
Net increase in net assets from capital share transactions......................... 5,026,772 2,203,959
---------------- -------------
Total increase....................................................................... 38,465,252 34,113,745
NET ASSETS
Beginning of period.................................................................. 223,799,656 189,685,911
---------------- -------------
End of period (including undistributed net investment income of $2,009,734 and $-0-,
respectively)...................................................................... $ 262,264,908 $ 223,799,656
---------------- -------------
---------------- -------------
</TABLE>
* Characterized as ordinary income for tax purposes.
See Notes to Financial Statements.
11
<PAGE>
- ---------------------------------------------------------
THE GERMANY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- ---------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The Germany Fund, Inc. (the 'Fund') was incorporated in Delaware on April 8,
1986 as a diversified, closed-end management investment company. Investment
operations commenced on July 23, 1986. Pursuant to shareholder approvals, the
Fund reincorporated in Maryland on August 29, 1990 and dissolved the charter of
incorporation in Delaware, and on October 16, 1996 the Fund changed from a
diversified to a non-diversified company.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. 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.
SECURITY VALUATION: Investments are stated at value. All securities for which
market quotations are readily available are valued at the last sales price on
the primary exchange on which they are traded prior to the time of valuation,
or, if no sales price is available at that time, at the price established by the
exchange. Securities that are traded in the unregulated market are valued, if
bid and asked quotations are available, at the current bid price. If bid and
asked quotations are not available, then such securities will be valued as
determined in good faith by the Board of Directors of the Fund. Investments in
securities having a maturity of 60 days or less are valued at amortized cost.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Cost of securities sold is calculated using the
identified cost method. Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Such dividend income is
recorded net of unrecoverable foreign withholding tax.
REPURCHASE AGREEMENTS: The Fund's custodian takes possession of collateral
pledged for investments in repurchase agreements, the market value of which is
required to be at least 102 percent of the resale amount at the time of
purchase. The value of the collateral is marked-to-market on a daily basis and
additional collateral is requested from the counterparty, as necessary, to
ensure that its value is at least equal at all times to the total amount of the
repurchase obligation, including interest. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings commence with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
LOANS OF PORTFOLIO SECURITIES: The Fund may lend portfolio securities while it
continues to earn dividends on such securities loaned. The cash collateral
received is at least equal at all times to 105 percent of the market value of
the securities loaned, which are marked-to-market daily. Such collateral is
invested in short term instruments and any interest income in excess of agency
fees and of a predetermined rebate to the borrowers is earned by the Fund as
interest income.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are maintained
in United States dollars. Assets and liabilities denominated in Deutsche mark
('DM') and other foreign currency amounts are translated into United States
dollars at the 10:00 A.M. mid-point of the buying and selling spot rates quoted
by the Federal Reserve Bank of New York. Purchases and sales of investment
securities, income and expenses are reported at the rate of exchange prevailing
on the respective dates of such transactions. The resultant gains and losses
arising from exchange rate fluctuations are identified separately in the
Statement of Operations, except for such amounts attributable to investments
which are included in net realized and unrealized gains and losses on
investments.
Foreign investments may involve certain considerations and risks not
typically associated with those of domestic origin as a result of, among others,
the possibility of political and economic developments and the level of
governmental supervision and regulation of foreign securities markets.
TAXES: No provision has been made for United States Federal income tax because
the Fund intends to meet the requirements of the United States Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to shareholders.
12
<PAGE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund records dividends and
distributions to its shareholders on the ex-dividend date. Income and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences, which could be temporary or permanent in nature, may result in
reclassification of distributions; however, net investment income, net realized
gains and net assets are not affected.
NOTE 2. MANAGEMENT AND INVESTMENT ADVISORY AGREEMENTS
The Fund has entered into a Management Agreement with Deutsche Morgan Grenfell
Inc. (the 'Manager') and an Investment Advisory Agreement with Deutsche Asset
Management GmbH (the 'Investment Adviser').The Manager and the Investment
Adviser are affiliated companies.
The Management Agreement provides the Manager with a fee, computed weekly
and payable monthly, at the annual rates of .65% of the Fund's average weekly
net assets up to $50 million, and .55% of such assets in excess of $50 million.
The Investment Advisory Agreement provides the Investment Adviser with a fee,
computed weekly and payable monthly, at the annual rates of .35% of the Fund's
average weekly net assets up to $100 million and .25% of such assets in excess
of $100 million.
Pursuant to the Management Agreement, the Manager will be the corporate
manager and administrator of the Fund and, subject to the supervision of the
Board of Directors and pursuant to recommendations made by the Fund's Investment
Adviser, will determine the suitable securities for investment by the Fund. The
Manager will also provide office facilities and certain administrative, clerical
and bookkeeping services for the Fund. Pursuant to the Investment Advisory
Agreement, the Investment Adviser, in accordance with the Fund's stated
investment objective, policies and restrictions, will make recommendations to
the Manager with respect to the Fund's investments and, upon instructions given
by the Manager as to suitable securities for investment by the Fund, will
transmit purchase and sale orders, and select brokers and dealers to execute
portfolio transactions on behalf of the Fund.
NOTE 3. TRANSACTIONS WITH AFFILIATES
For the six months ended June 30, 1997, Deutsche Bank AG, the German parent of
the Manager and Investment Adviser, received $210,731 in brokerage commissions
as a result of executing agency transactions in portfolio securities on behalf
of the Fund.
For the six months ended June 30, 1997, interest income earned on the
Deutsche mark account with Deutsche Bank AG was $78,987.
Certain directors and officers of the Fund are also directors and officers
of either the Manager, the Investment Adviser or Deutsche Bank AG.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the six months ended June 30, 1997 were $63,116,831 and $74,657,358,
respectively.
NOTE 5. PORTFOLIO SECURITIES LOANED
At June 30, 1997, the market value of the securities loaned and amount of
collateral received with respect to such loans were $67,258,110 and $71,465,123,
respectively. For the six months ended June 30, 1997, net earnings to the Fund
from investing such collateral were $169,091, after deducting borrowers' rebate
and agency fees of $2,650,044 and $109,755, respectively.
NOTE 6. CAPITAL
During the six months ended June 30, 1997 and the year ended December 31, 1996,
the Fund purchased 275,712 and 474,460 of its shares of common stock on the open
market at a total cost of $3,683,354 and $5,619,012, respectively. The weighted
average discount of these purchases comparing the purchase price to the net
asset value at the time of purchase was 19.0% and 20.4%, respectively. These
shares were held in treasury. During the six months ended June 30, 1997 and the
year ended December 31, 1996, the Fund issued 657,368 and 647,796 shares,
respectively to shareholders as a result of dividend reinvestment.
NOTE 7. DIVIDEND
On July 14, 1997 the Board of Directors of the Fund declared a dividend of $0.31
per share to stockholders of record on September 3, 1997, payable on September
16, 1997.
13
<PAGE>
- ---------------------------------------------------------
THE GERMANY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
- ---------------------------------------------------------
Selected data for a share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED JUNE FOR THE YEAR ENDED DECEMBER 31,
30, 1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
NET ASSET VALUE:
BEGINNING OF
PERIOD....... $ 15.76 $ 13.52 $ 12.89 $ 12.87 $ 9.78 $ 10.95
---- ---- ---- ---- ---- ----
NET
INVESTMENT
INCOME....... .14 .08 .12 .11 .12 .12
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS AND
DEUTSCHE MARK
TRANSACTIONS.... 2.13 3.34 1.64 .69 3.25 (.91)
---- ---- ---- ---- ---- ----
INCREASE
(DECREASE) FROM
INVESTMENT
OPERATIONS...... 2.27 3.42 1.76 .80 3.37 (.79)
---- ---- ---- ---- ---- ----
INCREASE
RESULTING FROM
SHARE
REPURCHASES..... .06 .10 - .01 - -
---- ---- ---- ---- ---- ----
DISTRIBUTIONS
FROM NET
INVESTMENT
INCOME.......... - - (.12) (.12) (.06) (.12)
DISTRIBUTIONS
FROM NET
REALIZED FOREIGN
CURRENCY
GAINS+.......... - - (.08) (.05) - (.06)
DISTRIBUTIONS
FROM NET
REALIZED SHORT
TERM GAINS+..... - (.34) (.15) (.28) - -
DISTRIBUTIONS
FROM NET
REALIZED LONG
TERM GAINS...... - (.85) (.71) (.34) (.22) (.20)
--- --- --- --- --- ---
TOTAL
DISTRIBUTIONS... - (1.19) (1.06) (.79) (.28) (.38)
--- --- --- --- --- ---
DILUTION IN NAV
FROM DIVIDEND
REINVESTMENT.... (.10) (.09) (.07) - - -
--- --- --- --- --- ---
NET ASSET VALUE:
END OF PERIOD... $ 17.99 $ 15.76 $ 13.52 $ 12.89 $ 12.87 $ 9.78
--- --- --- --- --- ---
--- --- --- --- --- ---
MARKET VALUE:
END OF PERIOD... $ 14.75 $ 12.625 $ 11.375 $ 10.75 $ 12.50 $ 10.13
TOTAL INVESTMENT
RETURN FOR THE
PERIOD:++
BASED UPON
MARKET VALUE.. 16.83% 21.55% 15.72% (8.63)% 26.22% (15.96)%
BASED UPON NET
ASSET VALUE... 14.15% 25.47% 13.12% 6.37% 36.84% (8.80)%
RATIO TO AVERAGE
NET ASSETS:
TOTAL
EXPENSES...... 1.20%* 1.26% 1.23% 1.28% 1.36% 1.39%
NET INVESTMENT
INCOME........ 1.67%* .56% .88% .79% 1.09% 1.06%
PORTFOLIO
TURNOVER........ 28% 55.4% 41% 31% 39% 49%
AVERAGE BROKERAGE
COMMISSIONS**... $ 0.1484 $ 0.2674 - - - -
NET ASSETS AT END
OF PERIOD (000'S
OMITTED)........ $ 262,265 $ 223,800 $ 189,686 $ 173,935 $ 171,863 $ 128,561
</TABLE>
- ------------------
+ CHARACTERIZED AS ORDINARY INCOME FOR TAX PURPOSES.
++ TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING THAT SHARES OF THE FUND'S
COMMON STOCK WERE PURCHASED AT THE CLOSING MARKET PRICE AS OF THE BEGINNING
OF THE PERIOD, DIVIDENDS, CAPITAL GAINS AND OTHER DISTRIBUTIONS WERE
REINVESTED AS PROVIDED FOR IN THE FUND'S DIVIDEND REINVESTMENT PLAN AND THEN
SOLD AT THE CLOSING MARKET PRICE PER SHARE ON THE LAST DAY OF THE PERIOD. THE
COMPUTATION DOES NOT REFLECT ANY SALES COMMISSION INVESTORS MAY INCUR IN
PURCHASING OR SELLING SHARES OF THE FUND. THE TOTAL INVESTMENT RETURN BASED
ON THE NET ASSET VALUE IS SIMILARLY COMPUTED EXCEPT THAT THE FUND'S NET ASSET
VALUE IS SUBSTITUTED FOR THE CLOSING MARKET VALUE.
* ANNUALIZED.
** REPRESENTS AVERAGE BROKERAGE COMMISSION RATE PER SHARE OF TOTAL SECURITY
TRADES ON WHICH BROKERAGE COMMISSIONS WERE CHARGED. THIS INFORMATION IS ONLY
PRESENTED FOR THE PERIODS BEGINNING WITH THE YEAR ENDED DECEMBER 31, 1996.
- ---------------------------------------------------------
REPORT OF
STOCKHOLDERS' MEETING (UNAUDITED)
- ---------------------------------------------------------
The Fund held its Annual Meeting of Stockholders on June 20, 1997. The two
matters voted upon by stockholders and the resulting votes for each matter were
as follows:
<TABLE>
<CAPTION>
VOTING RESULTS*
-----------------------------
AGAINST/
FOR WITHHELD ABSTAINED
------ -------- ---------
<S> <C> <C> <C>
1. Election of the following
Directors:
Detlef Bierbaum........... 9,965 611 -
Dr. Ronaldo H. Schmitz.... 9,959 616 -
Edward C. Schmults........ 9,989 586 -
Hans G. Storr............. 10,001 575 -
2. Selection of Independent
Accountants................ 9,996 185 364
</TABLE>
* In thousands of shares.
14
<PAGE>
EXECUTIVE OFFICES--
31 West 52nd Street, New York, NY 10019
(For latest net asset value, schedule of the Fund's largest
holdings, dividend data and shareholder inquiries, please
call 1-800-GERMANY in the U.S. or 617-443-6918 outside
of the U.S.)
MANAGER--
Deutsche Morgan Grenfell Inc.
INVESTMENT ADVISER--
Deutsche Asset Management GmbH
CUSTODIAN AND TRANSFER AGENT--
Investors Bank & Trust Company
LEGAL COUNSEL--
Sullivan & Cromwell
DIRECTORS AND OFFICERS--
DR. RONALDO H. SCHMITZ, Chairman,
President and Director
DETLEF BIERBAUM, Director
JOHN A. BULT, Director
PROF. DR. CLAUS KOEHLER, Director
EDWARD C. SCHMULTS, Director
HANS G. STORR, Director
CHRISTIAN STRENGER, Director
DR. JUERGEN F. STRUBE, Director
ROBERT H. WADSWORTH, Director
WERNER WALBROEL, Director
OTTO WOLFF von AMERONGEN, Director
G. RICHARD STAMBERGER, Executive Vice President
and Chief Executive Officer
ROBERT R. GAMBEE, Chief Operating Officer
and Secretary
JOSEPH M. CHEUNG, Chief Financial Officer
and Treasurer
---------------
All investment management decisions are made by a committee of United States and
German advisors.
This report, including the financial statements herein, is transmitted to the
shareholders of The Germany Fund, Inc. for their information. This 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 information
contained in the letter to shareholders, the interview with the portfolio
manager and the report of investment adviser and manager in this report is
derived from carefully selected sources believed reasonable. We do not
guarantee its accuracy or completeness, and nothing in this report shall be
construed to be a representation of such guarantee. Any opinions expressed
reflect the current judgment of the author, and do not necessarily reflect the
opinion of Deutsche Bank AG or any of its subsidiaries and affiliates.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
Comparisons between changes in the Fund's net asset value per share and
changes in the Deutsche Aktien index should be considered in light of the
Fund's investment policy and objectives, the characteristics and quality of
the Fund's investments, the size of the Fund and variations in the Deutsche
Mark/Dollar exchange rate.
15
<PAGE>
---------------------------------------------------------
SUMMARY OF GENERAL INFORMATION
---------------------------------------------------------
THE FUND
The Germany Fund is a non-diversified, closed-end investment company listed
on the New York Stock Exchange with the symbol 'GER'. The Fund seeks long-term
capital appreciation primarily through investment in German equities. It is
managed by Deutsche Morgan Grenfell Inc., using investment advice from the
Deutsche Asset Management GmbH unit of Deutsche Bank AG, Germany's largest
banking and financial services group.
SHAREHOLDER INFORMATION
Daily prices for the Fund's shares are published in the New York Stock
Exchange Composite Transactions section of newspapers under the designation
'Germany Fd'. Net asset value and market price information are published each
Monday in The Wall Street Journal and The New York Times, and each Saturday in
Barron's and other newspapers in a table called 'Closed End Funds'. Daily
information on the Fund's net asset value, together with the Deutsche mark
exchange rate and the DAX index, is available by calling: 1-800-GERMANY (in the
U.S.) or 617-443-6918 (outside of the U.S.). In addition, a schedule of the
Fund's largest holdings, dividend data and general shareholder information may
be obtained by calling these numbers.
For periodic updates please also visit our Web site: http://www.gerfund.com.
THERE ARE THREE CLOSED-END FUNDS FOR YOUR SELECTION:
o Germany Fund-investing exclusively in German equities, primarily the 'blue
chip' corporations.
o New Germany Fund-investing primarily in the middle-market German companies,
and up to 20% outside Germany (with no more than 10% in any single country
outside of Germany).
o Central European Equity Fund-investing primarily in Central and Eastern
Europe as well as Russia.
Please consult your broker for advice on any of the above or call
1-800-GERMANY (in the U.S.) or 617-443-6918 (outside of the U.S.) for
shareholder reports.
14950
[LOGO]
THE GERMANY
FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1997
