<PAGE>
The Germany
Fund, Inc.
[LOGO APPEARS HERE]
LETTER TO THE SHAREHOLDERS
- --------------------------------------------------------------------------------
August 13, 1999
Dear Shareholder,
During the second quarter ended June 30, 1999, the net asset value per
share of the Germany Fund rose 4.5%, in US dollar terms, and the Fund's share
price rose 10.8%, compared to a rise of 5.4% in the Fund's benchmark, the DAX 30
Index. Year to date, both the Fund's net asset value per share and the DAX Index
declined by 5.0%. The Fund's share price, however, outperformed the index by
6.8%, rising 1.8%.
After a relatively poor performance during the first quarter of 1999,
the German equity market began to bounce back during the second quarter,
outperforming the other European markets by over 5% in US dollar terms. The main
reasons for the upturn in equity prices are the tax relief laws passed this
spring and the improved economic outlook for Germany. Manufacturing activity and
industrial production is increasing to keep up with a surge in export orders,
especially from Asia and Eastern Europe. We expect exports will be the largest
stimulus for growth in 2000, expanding over 6% in real terms compared to an
increase of only 0.5% in 1999. A significant factor is that growth across Europe
is stronger than expected, and countries outside Euroland, such as the UK, have
avoided recessions. As a result, business confidence is rising, rebounding from
a year and a half low. Furthermore, consumer confidence is still at record
highs, backed by the highest increase in real income since 1992. Wage increases
in the public sector of 3.5% represents a considerable improvement in real
purchasing power, given the low inflation rate. Combined with a stabilization of
the unemployment rate at current level, we expect private consumption to
continue to fuel economic growth in the second half of the year. Going forward,
corporate Germany should begin to see the benefits of both the weak Euro and the
one-half percentage reduction in interest rates by the European Central Bank,
both of which will fuel economic growth. As a result, forecasted GDP growth for
Germany has been revised upward to 3.0% in 2000 from 1.6% this year.
The Germany Fund continued its open-market share purchases and bought
580,200 shares during the first six months. The Fund's discount to net asset
value has fallen from 15.5% at the beginning of the year to 5.5% at the time of
this writing.
You will see a familiar name as a co-signer of this letter, Christian
Strenger. Mr. Strenger, for many years our Fund's President and Chief Executive
Officer, was elected Chairman of the Board at the July 12th Board of Directors
meeting. (Please see page six of this report).
Sincerely,
/s/ Christian Strenger /s/ Kenneth J. Tarr
Christian Strenger Kenneth J. Tarr
Chairman President and
Chief Executive Officer
1
<PAGE>
FUND HISTORY AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATISTICS:
<S> <C>
Net Assets ............................................................................... $ 212,348,666
Shares Outstanding ....................................................................... 13,915,104
NAV Per Share ............................................................................ $ 15.26
TOTAL RETURNS:
Period NAV
--------- --------
6 months ended 6/30/99 ................................................................... (5.04)%
1 year ended 12/31/98 .................................................................... 22.66%
3 years ended 12/31/98* .................................................................. 23.76%
5 years ended 12/31/98* .................................................................. 17.93%
* Average annual return
<CAPTION>
DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS:
Record Ordinary LT Capital
Date Income Gains Total
- ----------- ----- ----- -----
<S> <C> <C> <C>
9/1/99 ............................................... -- $0.56 $0.56
11/16/98 ............................................. $1.46 $1.76 $3.22
9/1/98 ............................................... $0.17 $0.45 $0.62
11/17/97 ............................................. $0.62 $2.23 $2.85
9/3/97 ............................................... $0.07 $0.24 $0.31
12/19/96 ............................................. $0.34 $0.72 $1.06
9/3/96 ............................................... -- $0.13 $0.13
12/27/95 ............................................. $0.29 $0.64 $0.93
<CAPTION>
OTHER INFORMATION:
<S> <C>
NYSE Ticker Symbol ....................................................................... GER
NASDAQ Symbol ............................................................................ XGERX
Dividend Reinvestment Plan ............................................................... Yes
Voluntary Cash Purchase Program .......................................................... Yes
Annual Expense Ratio ..................................................................... 1.26%
</TABLE>
[BAR CHART]
Six months ended 6/30/99 Year ended 12/31/98
------------------------ -------------------
NET ASSET VALUE (5.04%) 22.66%
MARKET VALUE 1.80% 23.45%
DAX (5.03%) 26.38%
2
<PAGE>
PORTFOLIO BY MARKET SECTOR AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
[PIE CHART]
Chemical (12.1%)
Banking (11.7%)
Medical Equipment (1.4%)
Electrical (7.1%)
Computer Services (4.8%)
Insurance (11.9%)
Automotive (13.8%)
Pharmaceutical (2.1%)
Telecommunications (23.3%)
Retail (4.0%)
Transportation (1.0%)
Utilities (6.8%)
10 LARGEST EQUITY HOLDINGS AS OF JUNE 30, 1999
- --------------------------------------------------------------------------------
% of % of
Portfolio Portfolio
--------- ---------
1. Deutsche Telekom 12.7 6. BASF 5.8
2. Daimler-Chrysler 9.4 7. Dresdner Bank 4.7
3. Allianz 7.8 8. Commerzbank 4.4
4. Siemens 7.1 9. Metro 4.0
5. Mannesmann 6.8 10. SAP 3.6
3
<PAGE>
INTERVIEW WITH THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
Question: In the "Letter to Shareholders", you mention that Germany's GDP growth
is expected to increase to 3.0% in 2000, from just 1.6% in 1999. Why are you so
positive on Germany?
Answer: Towards the end of 1998 and into the first quarter
of this year, there was a noticeable decline in Europe's exports resulting from
the emerging market crisis in Asia, Latin America, and Eastern Europe. Germany
was especially affected by this crisis because of its role as Europe's largest
exporter. With global growth on the upswing, Germany should now be among the
greatest beneficiaries. Exports should surge by 6.7% in 2000, compared to an
increase of only 0.5% in 1999. We expect a strong increase in exports to Central
Europe, the Far East, and some recovery in exports to Russia. We also project a
considerable upturn in intra-European trade, as most countries participating in
the EMU will register stronger economic growth. In addition, the labor market
will probably also benefit from the pick-up in growth. We expect the employment
figure to rise by roughly 140,000 next year. This will give an additional boost
to the already robust private consumption. Private consumption in 2000 will
remain strong due to noticeably higher real wage increases and slightly faster
employment gains. Sustained consumer confidence and markedly higher disposable
incomes will support the propensity to spend. In addition, one of the aims of
the recently passed tax relief laws is to stimulate investment activity.
Investment in plant and equipment has lately been up markedly. The boost in
investment activity is coming from better prospects for higher sales and
earnings, as well as low interest rates. Taking into account all the above
factors, Germany's GDP growth looks set to grow by at least 3% next year.
Question: Can you go into more detail on the proposed tax reform laws and why
the impact will be on corporate Germany?
Answer: The first stage of the government's income tax reform was introduced at
the beginning of this year. The second stage, set to take place in 2000,
foresees a further increase in the basic tax-free allowance, a reduction in the
lowest income tax by 1%, to 23%, and a cut in the top income tax rate by 2%, to
51%. The main beneficiaries of these reforms is the general public, which will
now have more disposable income. The corporate tax reform is scheduled to take
place in 2001 in order to have more time to prepare. The central aim of the
corporate tax reform is to lower the overall tax burden for companies from over
50% currently to just over 35%. In the long-term, the impact of these reforms
will be increased corporate earnings, higher foreign direct investments, and
more job creations.
Question: The Fund's discount to net asset value has decreased considerably this
year. Can you explain this recent development?
Answer: The discount is primarily determined by the market and is therefore
difficult to explain. However, we believe that two events may have a positive
effect on the discount. First, the managers of the Fund have been actively
buying shares of the Fund in the open market when warranted by the discount
level. Second, we believe investors are diversifying globally due to the
extremely high price valuations of US equities. According to Morgan Stanley Dean
Witter's Composite Valuation Indicator (averaging prospective 1999 and 2000
valuation ratios expressed as a percentage of their respective ten-year
averages), the US equity market is valued at a 53% premium to its 10-year
average, making it the most expensive developed market on every single valuation
method. On the other hand, Germany's valuations are at a 6% discount to
historical averages, making it much more attractive than US equities.
Hanspeter Ackermann
Portfolio Manager of the Germany Fund
4
<PAGE>
REPORT OF INVESTMENT ADVISER AND MANAGER
- --------------------------------------------------------------------------------
Outlook for the German Economy
Germany: The outlook for a sustained recovery in the global economy has
continued to brighten during the second quarter. Following this year's dip, GDP
growth in Germany is likely to pick up noticeably in 2000, with exports being
the driving force. Exports to Southeast Asia and Eastern European reform
countries are likely to rise noticeably. Economic growth in Euroland is picking
up faster than expected, and countries outside Euroland, such as the UK, have
been able to avoid recession. In addition, German exporters should continue to
benefit from the weakness of the Euro.
Private consumption will continue to support economic growth next year.
This is largely due both further reductions in the tax rate for the lowest
income tax bracket, and increases in child deductions. The tax reforms will
bring relief to households of around DEM 13.5 billion next year. In addition,
wage increases in the public sector of 3.5% represents a considerable
improvement in real purchasing power, given the low inflation rate. Our forecast
for real GDP growth in 2000 is 3%, up from just 1.6% in 1999. This would be the
largest increase in economic growth since the early 90's.
Longer term, the recently passed tax reforms offer huge potential for
stimulating growth in Germany by making it one of the most attractive location
within Europe to do business. By shifting from one of the highest taxed
countries in Europe to one of the lowest, the potential is tremendous to
increase foreign direct investment and stimulate job creation. The corporate tax
reform passed this spring aims to lower the overall tax burden for companies
from over 50% currently to just over 35% by 2001. At this level, corporate taxes
would fall even below the level in the United States. At the same time, in order
to stimulate the creation of new start-up companies, the income tax rate for
entrepreneurial profits will be lowered to 35% from 45% currently. On these
assumptions, there will be significant stimulus for growth.
The Fund's Portfolio Strategy
The Fund maintains its overweight in banks as this sector represents
compelling valuations and we believe market participants underestimate the
potential recovery in earnings. We believe that this should become more evident
with the release of second quarter results, as strong M&A activity and high IPO
volumes should support investment banking results. As we have become more
confident on the sustainability of the economic upswing, we have increased our
exposure in cyclical stocks, mainly moving funds into the chemical sector. The
Fund is under-weighted in the automotive sector due to increased price
competition of low cost producers and the increasing stock of second-hand cars.
In the telecommunications sector, we are, for now, maintaining our neutral
stance on the sector. We expect further consolidation in the sector and above
average growth potential in the mobile phone sector throughout Europe.
5
<PAGE>
CHANGES TO THE BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
At the July 12, 1999 meeting of the Board of Directors of the Fund in
Berlin, several changes to the Board were voted on. First, Christian Strenger
was elected Chairman of the Board. Since inception of the Fund until his return
to Germany in 1991, Mr. Strenger served as its President and Chief Executive
Officer. He has been a Director of the Fund all this time. Mr. Michael W.R.
Dobson will continue as a Director.
Also at this meeting, the Board elected a new Director, the Honorable
Richard R. Burt, former U.S. Ambassador to Germany. Ambassador Burt has had a
long and distinguished career in diplomacy, government service and international
business. Among other accomplishments, Mr. Burt was the U.S. Chief Negotiator in
the Strategic Arms Reduction Talks with the former Soviet Union. In 1991, an
agreement was concluded that reduced both the U.S. and Russian nuclear arsenals
by 50%.
Mr. Burt is a director of Weirton Steel Corporation, Hollinger
International, Archer Daniels Midland Corporation and Homestake Mining
Corporation. He is a director of the Mitchell Hutchins family of funds, a member
of the international advisory council of Textron Corporation and is chairman of
IEP Advisers, Inc., a Washington-based financial/business advisory services
firm. He has published several articles on foreign policy and arms control
matters. We welcome him to the Board of Directors of the Fund.
SHARE BUY-BACKS INCREASED
- --------------------------------------------------------------------------------
The Directors of your Fund voted in March 1998 to increase the number
of shares authorized for repurchase each year. The authorized limit of 5% will
be net of all shares to be issued in the form of reinvested dividends, effective
January 1, 1998. Thus the actual number of shares purchased in the open market
can be condiderably greater than 5%. For example, calendar year-to-date
purchases of GER's shares represent 4.0% of the amount outstanding at the
beginning of the year.
Shares issued for dividends tend to remain in shareholders' accounts
and do not increase the float in the market. The Directors continue to believe
the Fund represents excellent value.
VOLUNTARY CASH PURCHASE PROGRAM
- --------------------------------------------------------------------------------
The Fund has an attractive way to purchase additional shares at a
reduced cost. This is the Voluntary Cash Purchase Program which is part of the
Dividend Reinvestment Plan. By enrolling in the Voluntary Cash Purchase Program,
you may make additional investments each month--as little as $100 in any month
or as much as $36,000 a year. Share purchases are combined to receive a
beneficial brokerage fee.
6
<PAGE>
THE GERMANY FUND, INC.
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999 (unaudited)
- --------------------------------------------------------------------------------
Shares Description Value
---------- ----------- ------------
INVESTMENTS IN GERMAN
SECURITIES--90.2% OF NET ASSETS
COMMON STOCKS--86.6%
AUTOMOTIVE--13.8%
7,000 Bayerische Motoren Werke ...... $ 4,821,676
230,260 Daimler-Chrysler+ ............. 19,974,318
70,000 Volkswagen .................... 4,489,147
------------
29,285,141
------------
BANKING--10.9%
56,000 Bayerische Hypothekenbank
und Vereinsbank ............. 3,643,366
310,000 Commerzbank ................... 9,428,035
256,820 Dresdner Bank ................. 10,051,763
------------
23,123,164
------------
CHEMICAL--12.1%
280,500 BASF .......................... 12,412,460
150,000 Bayer ......................... 6,258,162
155,000 Hoechst ....................... 7,027,007
------------
25,697,629
------------
ELECTRICAL--7.1%
196,000 Siemens ....................... 15,140,208
------------
INSURANCE--9.2%
59,800 Allianz ....................... 16,612,218
15,300 Munchener Ruckversicherungs ... 2,836,156
------------
19,448,374
------------
MEDICAL EQUIPMENT--1.4%
50,000 Fresenius Medical Care ........ 2,989,667
------------
PHARMACEUTICAL--0.9%
18,000 Schering ...................... $ 1,910,908
------------
RETAIL--4.0%
137,000 Metro ......................... 8,517,090
------------
TELECOMMUNICATIONS--19.5%
640,000 Deutsche Telekom .............. 26,899,769
97,000 Mannesmann .................... 14,494,874
------------
41,394,643
------------
TRANSPORTATION--0.9%
110,000 Lufthansa ..................... 1,997,035
------------
UTILITIES--6.8%
160,000 Rheinisch-Westfalisches
Elekrizitatswerk ............ 7,417,264
120,000 VEBA .......................... 7,063,668
------------
14,480,932
------------
Total Common Stocks
(cost $132,654,908) ......... 183,984,791
------------
PREFERRED STOCKS--3.6%
COMPUTER SERVICES--3.6%
19,100 SAP
(cost $2,930,339) ........... 7,643,271
------------
Total Investments in
German Securities
(cost $135,585,247) ......... 191,628,062
------------
- ---------
+ Investment in an affiliate of Deutsche Bank AG.
See Notes to Financial Statements.
7
<PAGE>
THE GERMANY FUND, INC.
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999 (unaudited) (continued)
- --------------------------------------------------------------------------------
Shares Description Value
- ----------- ----------- ------------
INVESTMENTS IN DUTCH
COMMON STOCKS--2.7%
BANKING--0.8%
80,000 ABN AMRO Holdings ............... $ 1,734,936
------------
INSURANCE--1.9%
73,000 Internationale Nederlanden Groep. 3,957,823
------------
Total Investments in
Dutch Common Stocks
(cost $6,019,848) ........... 5,692,759
------------
INVESTMENTS IN FINNISH
COMMON STOCKS--1.2%
COMPUTER SERVICES--1.2%
62,000 Tieto
(cost $2,262,056) ............. 2,586,707
------------
INVESTMENTS IN FRENCH
COMMON STOCKS--2.3%
PHARMACEUTICAL--1.2%
55,000 Rhone-Poulenc (A shares) ...... 2,516,742
------------
TELECOMMUNICATIONS--1.1%
16,000 Alcatel ....................... 2,255,417
------------
Total Investments in
French Common Stocks
(cost $4,646,417) ........... 4,772,159
------------
INVESTMENTS IN ITALIAN
COMMON STOCKS--3.7%
INSURANCE--0.9%
55,000 Assicurazioni Generali ........ $ 1,910,702
------------
TELECOMMUNICATIONS--2.8%
660,000 Telecom Italia Mobile ......... 3,949,086
350,000 Telecom Italia Savings Shares . 1,906,622
------------
5,855,708
Total Investments in
Italian Common Stocks
(cost $7,839,336) ........... 7,766,410
------------
U.S. Dollars
(In Thousands)
REPURCHASE AGREEMENT*--9.3%
19,798 Agreement with Salomon
Smith Barney Inc., 4.75%
dated 6/30/99, due 7/1/99
in the amount of $19,800,452
collateralized by USTN of
$19,785,000, 6.75% due 4/30/00
(cost $19,797,840) ............ 19,797,840
------------
Total Investments--109.4%
(cost $176,150,744) ........... 232,243,937
------------
Liabilities in excess of cash
and other assets--(9.4%) .... (19,895,271)
------------
NET ASSETS--100% .............. $212,348,666
============
- ------------
*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
June 30, 1999 (unaudited)
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $176,150,744) ................. $232,243,937
Cash and foreign currency ................................. 1,829,778
Receivable for securities sold ............................ 9,475,229
Dividend receivable ....................................... 50,341
Interest receivable ....................................... 121,217
Foreign withholding tax refund receivable ................. 202,770
Other assets .............................................. 9,127
------------
Total assets ........................................... 243,932,399
-----------
LIABILITIES
Payable upon return of securities loaned .................. 19,797,840
Payable for securities purchased .......................... 11,389,667
Payable for securities lending brokers'
rebate and agency fees ................................. 113,081
Management fee payable .................................... 99,156
Investment advisory fee payable ........................... 51,439
Accrued expenses and accounts payable ..................... 132,550
-------------
Total liabilities ...................................... 31,583,733
-------------
NET ASSETS ................................................ $ 212,348,666
=============
Net assets consist of:
Paid-in capital, $.001 par
(Authorized 80,000,000 shares) ......................... $ 158,453,475
Cost of 1,620,953 shares held in treasury ................. (24,701,409)
Undistributed net realized gain on investments
and foreign currency transactions ...................... 21,134,425
Undistributed net investment income ....................... 1,330,484
Net unrealized appreciation of investments
and foreign currency ................................... 56,131,691
-------------
Net assets ................................................ $ 212,348,666
=============
Net asset value per share
($ 212,348,666 divided by 13,915,104 shares of
common stock issued and outstanding) ................... $15.26
=====
STATEMENT OF OPERATIONS (unaudited)
- --------------------------------------------------------------------------------
For the six
months ended
June 30, 1999
-------------
NET INVESTMENT INCOME
Income
Dividends (net of foreign
withholding taxes of $303,600) ......................... $ 2,604,308
Interest .................................................. 86,274
------------
Total income .............................................. 2,690,582
------------
Expenses
Management fee ............................................ 621,635
Investment advisory fee ................................... 320,985
Reports to shareholders ................................... 97,730
Custodian and Transfer Agent's
fees and expenses .................................... 99,416
Directors' fees and expenses .............................. 69,368
Legal fee ................................................. 20,269
Audit fee ................................................. 29,000
NYSE listing fee .......................................... 14,256
Miscellaneous ............................................. 87,439
------------
Total expenses ............................................ 1,360,098
------------
Net investment income ........................................ 1,330,484
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Investments ............................................... 13,996,219
Foreign currency transactions ............................. (196,202)
Net change in unrealized appreciation/depreciation on:
Investments ............................................... (27,892,887)
Translation of other assets and
liabilities from foreign currency .................... 38,716
------------
Net loss on investments and
foreign currency transactions ............................. (14,054,154)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................. $(12,723,670)
============
See Notes to Financial Statements.
9
<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, 1999 December 31, 1998
---------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income ....................................................... $ 1,330,484 $ 2,983,269
Net realized gain (loss) on:
Investments .............................................................. 13,996,219 45,626,460
Foreign currency transactions ............................................ (196,202) 512,896
Net change in unrealized appreciation/depreciation on:
Investments .............................................................. (27,892,887) 4,854,890
Translation of other assets and liabilities from foreign currency ........ 38,716 13,531
---------------- -----------------
Net increase (decrease) in net assets resulting from operations ............. (12,723,670) 53,991,046
---------------- -----------------
Distributions to shareholders from:
Net investment income ....................................................... -- (2,983,269)
Net realized foreign currency gains* ........................................ -- (720,027)
Net realized short term capital gains* ...................................... -- (17,137,087)
Net realized long term capital gains ........................................ -- (28,062,983)
---------------- -----------------
-- (48,903,366)
---------------- -----------------
Capital share transactions:
Net proceeds from reinvestment of dividends
(0 and 3,951,509 shares, respectively) ...................................... -- 56,522,712
Cost of shares repurchased (580,200 and 3,516,802 shares, respectively) ..... (7,883,029) (56,830,882)
---------------- -----------------
Net decrease in net assets from capital share transactions .................. (7,883,029) (308,170)
---------------- -----------------
Total increase (decrease) in net assets ........................................ (20,606,699) 4,779,510
NET ASSETS
Beginning of period ............................................................ 232,955,365 228,175,855
---------------- -----------------
End of period (including undistributed net investment income of
$1,330,484 and $0, respectively) ............................................ $ 212,348,666 $ 232,955,365
================ =================
</TABLE>
- ------------
*Characterized as ordinary income for tax purposes.
See Notes to Financial Statements.
10
<PAGE>
THE GERMANY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- June 30, 1999 (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.
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 Euros ("EUR")
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.
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 Federal 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.
11
<PAGE>
THE GERMANY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- June 30, 1999 (unaudited) (continued)
- --------------------------------------------------------------------------------
NOTE 2. MANAGEMENT AND INVESTMENT
ADVISORY AGREEMENTS
The Fund has entered into a Management Agreement with Deutsche Bank Securities
Inc. (the "Manager"), and an Investment Advisory Agreement with Deutsche Asset
Management International 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, 1999, Deutsche Bank AG, the German parent of
the Manager and Investment Adviser, received $244,666 in brokerage commissions
as a result of executing agency transactions in portfolio securities on behalf
of the Fund.
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, 1999 were $97,270,187 and $103,071,245,
respectively.
During the period November 1, 1998 to December 31, 1998, the Fund incurred
foreign currency losses of $207,131. This loss was deferred for federal income
tax purposes to January 1, 1999.
NOTE 5. PORTFOLIO SECURITIES LOANED
At June 30, 1999, the market value of the securities loaned and amount of
collateral received with respect to such loans were $18,823,816 and $19,797,840,
respectively. For the six months ended June 30, 1999, net earnings to the Fund
from investing such collateral were $68,077, after deducting borrowers' rebate
and agency fees of $1,092,102 and $37,077, respectively.
NOTE 6. CAPITAL
During the six months ended June 30, 1999 and the year ended December 31, 1998,
the Fund purchased 580,200 and 3,516,802 of its shares of common stock on the
open market at a total cost of $7,883,029 and $56,830,882, respectively. The
weighted average discount of these purchases comparing the purchase price to the
net asset value at the time of purchase was 10.9% and 11.6%, respectively. These
shares were held in treasury.
NOTE 7. DIVIDEND
On July 12, 1999, the Board of Directors of the Fund declared a dividend of
$0.56 per share to stockholders of record on September 1, 1999, payable on
September 15, 1999.
12
<PAGE>
THE GERMANY FUND, INC.
FINANCIAL HIGHLIGHTS (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six
months ended For the year ended December 31,
June 30, 1999 1998 1997 1996 1995 1994
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value:
Beginning of period ................................ $ 16.07 $ 16.23 $ 15.76 $ 13.52 $ 12.89 $ 12.87
----------- --------- --------- --------- --------- ---------
Net investment income............................... .09 .23 .09 .08 .12 .11
Net realized and unrealized gain (loss) on
investments and foreign currency transactions.... (.97) 3.41 3.50 3.34 1.64 .69
----------- --------- --------- --------- --------- ---------
Increase (decrease) from investment operations...... (.88) 3.64 3.59 3.42 1.76 .80
----------- --------- --------- --------- --------- ---------
Increase resulting from share repurchases........... .07 .54 .19 .10 -- .01
----------- --------- --------- --------- --------- ---------
Distributions from net investment income............ -- (.23) -- -- (.12) (.12)
Distributions from net realized
foreign currency gains+.......................... -- (.06) -- -- (.08) (.05)
Distributions from net realized
short-term capital gains+........................ -- (1.35) (.69) (.34) (.15) (.28)
Distributions from net realized
long-term capital gains.......................... -- (2.20) (2.47) (.85) (.71) (.34)
----------- --------- --------- --------- --------- ---------
Total distributions................................. -- (3.84) (3.16) (1.19) (1.06) (.79)
----------- --------- --------- --------- --------- ---------
Dilution in NAV from dividend reinvestment.......... -- (.50) (.15) (.09) (.07) --
----------- --------- --------- --------- --------- ---------
Net asset value:
End of period.................................... $ 15.26 $ 16.07 $ 16.23 $ 15.76 $ 13.52 $ 12.89
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Market value:
End of period.................................... $ 14.125 $13.875 $ 14.25 $ 12.625 $ 11.375 $ 10.75
Total investment return for the period:++
Based upon market value.......................... 1.80% 23.45% 38.3% 21.55% 15.72% (8.63)%
Based upon net asset value....................... (5.04)% 22.66% 23.16% 25.47% 13.12% 6.37%
Ratio to average net assets:
Total expenses................................... 1.26%* 1.15% 1.19% 1.26% 1.23% 1.28%
Net investment income............................ 1.23%* 1.20% .49% .56% .88% .79%
Portfolio turnover.................................. 45.04% 80.93% 81.2% 55.4% 41% 31%
Net assets at end of period (000's omitted)......... $212,349 $ 232,955 $ 228,175 $ 223,800 $ 189,686 $ 173,935
</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.
13
<PAGE>
REPORT OF
STOCKHOLDERS' MEETING (unaudited)
- --------------------------------------------------------------------------------
The Fund held its Annual Meeting of Stockholders on June 7, 1999. The
two matters voted upon by stockholders and the resulting votes for each matter
were as follows:
Voting Results*
---------------
Against/
For Withheld Abstained
---- -------- ---------
1. Election of the following Directors:
Prof. Dr. Claus Koehler ....... 10,243 217 --
Christian Strenger ............ 10,245 216 --
Werner Walbroel ............... 10,254 206 --
Otto Wolff von Amerongen....... 10,251 210 --
2. Selection of Independent
Accountants ................... 10,333 63 65
- ---------
* In thousands of shares.
The Year 2000 Issue (unaudited)
- --------------------------------------------------------------------------------
Background. Investment companies, as well as financial and business
organizations around the world, could be adversely affected if the computer
systems and embedded technology used by them and their service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. Investment companies are, to a much greater extent than other
business organizations, dependent on their service providers for Year 2000
readiness.
Directors' Review. At each quarterly meeting, the Fund's Board of Directors
receives and reviews progress reports from the Fund's principal service
providers as to their Year 2000 readiness. To date the Board is satisfied that
these service providers, which are the Deutsche Bank AG affiliates that act as
the Fund's Manager and Investment Adviser and Investors Bank & Trust Company
("IBT"), the Fund's custodian, transfer agent and registrar, are making
satisfactory progress as to their own readiness efforts involving their services
to the Fund. Each has confirmed that it expects its "mission critical systems"
to be compliant.
The Fund will continue to receive updates from these and other outside
vendors as they become available.
Since the Fund has investments in securities whose issuers may be
materially adversely impacted by the Year 2000 issue, the Fund could also be
adversely affected by problems of these issuers. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers to the Fund's service providers, it
remains possible that the consequences of Year 2000 failures will have a
material impact on the Fund's results of operations, liquidity or financial
condition.
Contingency Plan. Based on the representations made by its service providers,
the Fund has not made any contingency plans relating to their services. The
Fund's Directors will reassess the need for contingency plans during 1999 if
progress of its service providers in achieving Year 2000 readiness falls behind
current expectations.
This statement constitutes a Year 2000 readiness disclosure.
DEUTSCHE BANK AG ACQUIRES BANKERS
TRUST CORPORATION
- --------------------------------------------------------------------------------
On June 4, 1999, Deutsche Bank AG acquired Bankers Trust Corporation,
creating the largest banking firm in the world. This will enable the combined
entity to build upon Deutsche Bank's worldwide investment banking, custody,
asset management, and private banking businesses. With Bankers Trust, Deutsche
Bank not only broadens its own investment banking products, but expands its
presence in the important American market. Combined assets under management are
over $600 billion, making Deutsche Bank one of the largest fund managers in the
world.
Deutsche Bank and Bankers Trust each have a tradition of client service
that is many decades old, and that forms the core of each firm's corporate
culture. This combination is a reaffirmation of the commitment to continue to
deliver the best financial products and services available worldwide.
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 Bank Securities Inc.
INVESTMENT ADVISER
Deutsche Asset Management International GmbH
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company
LEGAL COUNSEL
Sullivan & Cromwell
DIRECTORS AND OFFICERS
CHRISTIAN STRENGER
Chairman and Director
DETLEF BIERBAUM
Director
JOHN A. BULT
Director
RICHARD R. BURT
Director
MICHAEL W. R. DOBSON
Director
PROF. DR. CLAUS KOEHLER
Director
EDWARD C. SCHMULTS
Director
HANS G. STORR
Director
DR. JUERGEN F. STRUBE
Director
ROBERT H. WADSWORTH
Director
WERNER WALBROEL
Director
OTTO WOLFF VON AMERONGEN
Director
KENNETH J. TARR
President and Chief Executive Officer
ROBERT R. GAMBEE
Chief Operating Officer and Secretary
JOSEPH M. CHEUNG
Chief Financial Officer and Treasurer
VOLUNTARY CASH PURCHASE PROGRAM
AND DIVIDEND REINVESTMENT PLAN
The Fund offers stockholders a Voluntary Cash Purchase Program and Dividend
Reinvestment Plan ("Plan") which provides for optional cash purchases and for
the automatic reinvestment of dividends and distributions payable by the Fund in
additional Fund shares. A brochure is available by writing or telephoning the
plan agent:
Investors Bank & Trust Company
Shareholder Services
P.O. Box 9130
Boston, MA 02117
Tel. 1-800-437-6269 (1-800-GERMANY)
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 foreign currency/dollar
exchange rate.
[LOGO]
- ---------
All investment management decisions are made by a committee of United States and
German advisors.
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 Bank Securities Inc., using investment advice from the
Deutsche Asset Management International 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 is available from NASDAQ. It is also available, together
with the Deutsche mark exchange rate and the DAX index, 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 primarily in equities of major German 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.
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.
[LOGO]
The Germany
Fund, Inc.
Semi-annual Report
June 30, 1999
