<PAGE>
LETTER TO THE SHAREHOLDERS
- --------------------------------------------------------------------------------
January 25, 1999
Dear Shareholder,
For the year ended December 31, 1998, the net asset value per share of
the Germany Fund, adjusted for $3.84 in distributions paid during the year, rose
22.7%, compared to 26.4% for the Fund's benchmark, the DAX Index. The share
price appreciated 23.5% during the same period. During the fourth quarter both
the Fund's net asset value per share and share price outperformed the DAX,
appreciating 13.0% and 16.6%, respectively, compared to 12.0% for the DAX.
Almost all of this quarter's outperformance can be attributed to its non-German
holdings, specifically the Fund's investments in Italy and Finland. The Fund's
ability to invest a portion of its assets outside of Germany has provided the
benefit of additional diversification and has created a broader investment
universe.
1998 was a year of disappointments. What had begun as only an adverse
sentiment towards a limited number of countries in South-east Asia, increased
dramatically, affecting emerging markets in other regions and threatening global
financial stability. In Russia, financial market turmoil forced the authorities
to announce a debt moratorium; Japan fell into its deepest recession in post-war
history; and commodity prices collapsed due to sharply lower demand. Fearing the
crisis would spill over to other countries, investors sought relief in the most
liquid assets available.
Fortunately, the outlook for 1999 appears favorable. On January 1,
1999, the Euro was successfully launched and most economists expect it to
unleash investor interest in Europe. The outlook for 1999 for Germany's own
economy also looks favorable. GDP growth estimates have been lowered due to a
global slowdown but are still expected to be above 2.0%. Furthermore, Germany's
growth will be better balanced than in the past, when a weak Deutschemark
boosted exports but not much else. Private consumer demand is picking up and
industrial production remains strong. Even the construction sector, after years
in the doldrums, shows signs of improvement. Inflation, now below 1%, is well
under control and should lead to even lower interest rates across Europe,
ensuring growth remains on track.
The Germany Fund continues open-market purchases of its shares buying
3,516,802 shares during the past year, a record number compared to 982,512
shares bought the previous year. Many of these shares were reissued to investors
who chose to take their dividends in the form of stock. We believe that stock
issued for dividends is less likely to be sold into the market since investors
who seek cash would choose this option at the outset. Thus, we feel that the
stock buyback program has been successful in absorbing much of the selling
interest in Fund shares. We believe that the shares are attractively priced, and
the Fund continues its buyback program in an ongoing effort to enhance
shareholder value.
Sincerely,
/S/ Michael W.R. Dobson /S/ Kenneth J. Tarr
Michael W.R. Dobson Kenneth J. Tarr
Chairman President and Chief
Executive Officer
1
<PAGE>
FUND HISTORY AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
STATISTICS:
Net Assets ........................................... $232,955,365
Shares Outstanding ................................... 14,495,304
NAV Per Share ........................................ $ 16.07
TOTAL RETURNS:
Period NAV
------ ---
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
DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS:
Record Ordinary LT Capital
Date Income Gains Total
---- ------ ----- -----
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
OTHER INFORMATION:
NYSE Ticker Symbol ................................... GER
Dividend Reinvestment Plan ........................... Yes
Voluntary Cash Purchase Program ...................... Yes
Annual Expense Ratio ................................. 1.15%
PERFORMANCE
- --------------------------------------------------------------------------------
[BAR CHART]
Year ended 12/31/97 Year ended 12/31/98
------------------- --------------------
NET ASSET VALUE ............... 23.16% 22.66%
MARKET VALUE .................. 38.30% 23.45%
DAX ........................... 26.48% 26.38%
2
<PAGE>
PORTFOLIO BY MARKET SECTOR AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
[PIE CHART]
Telecommunications 16.9%
Insurance 16.6%
Automotive 12.1%
Banking 11.7%
Electricals 11.1%
Chemicals 10.0%
Utilities 6.9%
Retail 4.1%
Medical Equipment 2.6%
Computer Services 2.1%
Multi-Industry 1.7%
Transportation 1.4%
Apparel 1.2%
Pharmaceutical 0.9%
Construction Materials 0.7%
10 LARGEST EQUITY HOLDINGS AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
% of % of
Portfolio Portfolio
--------- ---------
1. Daimler-Chrysler 12.1 6. Siemens 4.1
2. Allianz 9.4 7. Metro 4.1
3. Mannesmann 7.9 8. Bayerische Hypothekenbank
4. Hoechst 7.7 und Vereinsbank 4.1
5. SAP 7.0 9. Dresdner Bank 4.0
10. Commerzbank 3.6
3
<PAGE>
INTERVIEW WITH THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
Question: Germany's new government has pledged to reform Germany's tax structure
to bring it more in line with other Western countries. How will the proposed
changes affect investors in Germany?
Answer: In the four months since the Bundestag elections in September 1998, the
new government has already made a series of important fiscal decisions. There
are now concrete plans for both tax reforms and a reduction in pension-insurance
contributions. Specifically, the tax relief will cut the bottom marginal tax
rate to 23.9% from 25.9%; cut the top marginal tax rate to 45% from 47%; and cut
the corporation tax on retained earnings to 40% from 45%. Households will gain
significantly from the changes in fiscal law. On the bottom line, the tax cuts
should return DEM 10 billion to households and would permit an increase of
nearly half a percentage point in real private consumption. The corporate
sector, on the other hand, will end up paying more. Although companies will
profit in 1999 from the reduction in the top rates of corporate income tax
reform, they will have to foot the bill for most of the extra financing through
tougher rules on the calculation of profits. The effect of this on corporations
will likely lead to fewer investment projects, at least in the short term.
Therefore, the outlook for 1999 is stronger consumption fed by fiscal measures,
but weaker investment.
Question: If you expect Germany's GDP growth to slow to 2% from 2.75%, why then
do you feel that German equities remain attractive?
Answer: There are three key reasons why we remain positive about the German
equity market. First, although growth is forecasted to slow in 1999 in Germany,
the same can be said for the United States and the rest of Europe. However, in
Germany, there is growing pressure on the European Central Bank to cut interest
rates in order to help boost the economy and create jobs. In contrast, GDP
growth in the U.S. during the fourth quarter was much higher than expected and
so there is little chance of any further rate reduction. In fact, some
economists are calling for a rate increase in the U.S. We feel that rates in
Germany will be lowered in 1999 as inflation is at the lowest annual rate in
over 30 years. Lower interest rates should support corporate earnings as
borrowing costs are cheaper. Secondly, German companies are leading the way in
Europe in merger activity as the single currency increases competition. The
automobile industry was turned upside down with the DaimlerBenz and Chrysler
merger and has forced other manufacturers to consider partners in order to
remain competitive. The pending merger with Deutsche Bank and Bankers Trust is
having the same impact on the banking sector. Thirdly, contrary to most
expectations, the Euro has weakened considerably against the dollar. When the
single currency was launched on January 1, one U.S. dollar was worth .85 Euros,
compared to .88 Euros today. Germany, being Europe's biggest exporter, will
benefit from this as its exports become cheaper, and will therefore give an
added boost to corporate earnings.
Hanspeter Ackermann
Portfolio Manager of the Germany Fund
4
<PAGE>
REPORT OF INVESTMENT ADVISER AND MANAGER
- --------------------------------------------------------------------------------
Outlook for the German Economy
Germany's economic growth, while expected to remain above 2.0%, is
likely to slow in 1999 from 2.8% this year as demand falls amid recessions in
Asia, Russia, and Latin America. However, the shift in the relative strength of
the different growth forces looks set to continue in 1999. Exports, which have
long been the main engine of GDP expansion in Germany, will lose momentum next
year but will partially be offset by the strong growth in private consumption.
Consumption should be spurred by a number of factors, including lower average
unemployment and higher pay settlements than in recent years. The new
government's tax reform will also have a positive effect as DEM 14 billion is
returned to households. Consumption is also receiving a boost from falling
interest rates which reduces the cost of financing. Furthermore, the level of
German consumer spending has been below that of many European countries. We
believe there is significant pent-up demand from consumers to participate in the
economic recovery by spending some of their accumulated wealth. In the next
quarter, we expect that the German equity market should be supported by the high
level of liquidity among investors and a reallocation of global funds toward
Europe.
The Fund's Portfolio Strategy
The current environment remains structurally supportive for German
equities. As long as monetary policy remains expansionary, excess liquidity is
likely to be channeled into financial markets. Our stock selection concentrates
on cost leadership, exposure to global growth, and a strict commitment by
management to enhance shareholder value. The Fund has increased its exposure in
the banks as this sector represents compelling valuations and we believe market
participants underestimate the potential earnings recovery in 1999. The Fund
maintains its overweight position in pharmaceutical stocks as this sector offers
superior growth prospects coupled with reasonable valuations. We have reduced
the Fund's exposure to the automobile sector. Although some companies might defy
an expected slow down of car demand with successful launches of new models in
the short-term, we have taken a more cautious view on the ability of car
companies to improve profitability beyond 1999. Going forward, earnings are
bound to shrink ahead of a more difficult volume situation and possible price
pressures for the Euro participants, as pricing discrepancies become more
visible. The Fund has upgraded the retail sector as private consumption is
expected to grow above GDP for the first time since reunification. Furthermore,
Metro, Germany's largest retailer has taken convincing restructuring steps to
improve shareholder returns. Steel, engineering and chemical stocks remain
underweighted, as the slowing business environment will lead to lower earnings
in 1999.
5
<PAGE>
STRUCTURE OF THE FUND
- --------------------------------------------------------------------------------
Unlike open-end mutual funds, closed-end funds do not issue or redeem
shares on a daily basis. Closed-end funds have a fixed number of shares that
trade on a stock exchange, with their share price determined by market factors
such as supply and demand. As a result, closed-end funds may trade above their
net asset value ("market premium"), or below their net asset value ("market
discount"), with share prices fluctuating just like any other listed stock
price.
In contrast, the price of open-end funds is based on net asset value,
and shares are sold either directly through the fund family, or through a
broker. Shareholders may redeem their shares by selling them back to the fund at
the current net asset value. An open-end fund must continuously offer and sell
new shares to offset redemptions or else it will become too small to invest in
an adequately diversified portfolio, and its fixed expenses will become a
serious drag on investment returns.
There are advantages to investing in both closed-end and open-end
funds. Open-end funds are particularly appealing when they are part of a large
fund family offering clients a variety of complementary investment objectives.
Because of the possibility of unexpected redemptions, they usually invest in
highly liquid securities, and they provide shareholders services such as
telephone exchange privileges and direct-mail distribution.
The closed-end format is particularly appealing for specialty
investing, such as investment in the stocks of a particular foreign country or
region. The closed-end fund manager does not have to hold a portion of fund
assets in easy-to-sell securities to cover the possibility of client
redemptions, as the open-end fund manager must do. The closed-end fund manager
may therefore concentrate on choosing the securities that will best allow the
fund to meet its objectives.
Studies comparing the relative performance of open-end and closed-end
foreign equity funds have shown that, over time, closed-end funds may
significantly outperform open-end funds. Results of one such study by a major
securities firm suggest that the spread in performance may be as high as 300
basis points. This performance advantage for closed-end funds is due to several
factors. Because closed-end funds are traded on an exchange without regard to
net asset value, fund managers can focus on long-term investment return without
the threat of raising cash for redemptions at market bottoms, or investing new
cash at market highs. In addition, closed-end funds have significantly lower
expense ratios since they are not burdened with 12b-1 or other marketing fees
generally levied by open-end funds.
SHARE BUY-BACKS INCREASED
- --------------------------------------------------------------------------------
Your Fund has an active stock buy-back program. During 1998 it bought
back 3,516,802 shares, compared with 982,512 in 1997. Many shares are reissued
to those electing to take their dividends in stock. However, management believes
stock issued for dividends is much less likely to come back into the market than
other shares. This is because investors wanting cash would take that option at
the outset. Thus, we believe the stock buy-back program has been successful in
absorbing much of the selling interest in Fund shares.
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. Further information is contained at the end of this
Annual Report.
6
<PAGE>
THE GERMANY FUND, INC.
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Shares Description Value
------ ----------- -----
INVESTMENTS IN GERMAN SECURITIES--
85.9% OF NET ASSETS
COMMON STOCKS--76.5%
APPAREL--1.2%
1,712 Hugo Boss...................... $ 2,865,615
------------
AUTOMOTIVE--12.0%
285,260 Daimler-Chrysler+.............. 28,051,930
------------
BANKING--11.7%
122,000 Bayerische Hypothekenbank und
Vereinsbank.................. 9,517,575
265,000 Commerzbank.................... 8,348,577
221,820 Dresdner Bank.................. 9,282,281
------------
27,148,433
------------
CHEMICAL--7.6%
431,000 Hoechst........................ 17,803,742
------------
ELECTRICAL--5.8%
8,900 SAP............................ 3,830,703
149,000 Siemens........................ 9,575,263
------------
13,405,966
------------
INSURANCE--12.5%
59,800 Allianz........................ 21,842,299
15,300 Munchener Ruckversiche-
rungs........................ 7,381,098
------------
29,223,397
------------
MEDICAL EQUIPMENT--1.5%
50,000 Fresenius Medical Care......... 3,512,076
------------
MULTI-INDUSTRY--1.7%
8,800 Preussag....................... 3,961,263
------------
PHARMACEUTICAL--0.9%
16,000 Schering....................... 2,001,435
------------
RETAIL--4.1%
120,000 Metro.......................... 9,540,890
------------
TELECOMMUNICATIONS--9.2%
100,000 Deutsche Telekom............... 3,275,945
160,000 Mannesmann..................... 18,268,771
------------
21,544,716
------------
TRANSPORTATION--1.4%
145,000 Lufthansa...................... 3,189,861
------------
UTILITIES--6.9%
130,000 Rheinisch-Westfalisches
Elektrizitatswerk............ $ 7,091,404
110,000 VEBA........................... 6,556,074
4,000 VIAG........................... 2,336,203
------------
15,983,681
------------
Total Common Stocks
(cost $109,447,020).......... 178,233,005
------------
PREFERRED STOCKS--9.4%
CHEMICAL--2.3%
60,875 Henkel KGaA.................... 5,422,271
------------
CONSTRUCTION MATERIALS--0.7%
6,100 Dyckerhoff..................... 1,684,720
------------
ELECTRICAL--5.3%
26,000 SAP............................ 12,359,637
------------
MEDICAL EQUIPMENT--1.1%
12,000 Fresenius...................... 2,517,934
------------
Total Preferred Stocks
(cost $12,393,650)........... 21,984,562
------------
Total Investments in
German Securities
(cost $121,840,670).......... 200,217,567
------------
INVESTMENTS IN DUTCH
COMMON STOCKS--3.3%
COMPUTER SERVICES--2.1%
100,000 Getronics...................... 4,925,847
------------
INSURANCE--1.2%
45,000 Internationale Nederlanden
Groep........................ 2,729,078
------------
Total Investments in Dutch
Common Stocks
(cost $6,743,606)............ 7,654,925
------------
INVESTMENT IN FINNISH
COMMON STOCK--3.1%
TELECOMMUNICATIONS--3.1%
60,000 Nokia (A shares)
(cost $4,979,042)............ 7,296,979
------------
+ Investment in an affiliate of Deutsche Bank AG
See Notes to Financial Statements.
7
<PAGE>
THE GERMANY FUND, INC.
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (continued)
- --------------------------------------------------------------------------------
Shares Description Value
------ ----------- -----
INVESTMENTS IN ITALIAN
COMMON STOCKS--7.3%
INSURANCE--2.9%
160,000 Assicurazioni Generali......... $ 6,654,804
------------
TELECOMMUINCATIONS--4.4%
800,000 Telecom Italia Mobile.......... 5,884,509
710,000 Telecom Italia Savings Shares.. 4,435,039
------------
10,319,548
Total Investments in
Italian Common Stocks
(cost $14,594,425)........... 16,974,352
------------
U.S. Dollars
(In Thousands)
- --------------
REPURCHASE AGREEMENT*--16.4%
38,188 Agreement with J.P. Morgan
Securities Inc., 4.7% dated
12/31/98, due 1/4/99 in the
amount of $38,208,399,
collateralized by USTB of
$28,420,000, 12.375% due
5/15/04
(cost $38,188,456)............ 38,188,456
------------
Total Investments--116.0%
(cost $186,346,199)........... 270,332,279
Liabilities in excess of cash
and other assets--(16.0)%..... (37,376,914)
------------
NET ASSETS--100%................ $232,955,365
============
*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
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $186,346,199) ................... $ 270,332,279
Cash and foreign currency (includes $731,323 equivalent
in an interest-bearing Deutsche mark account
with Deutsche Bank AG) ................................... 971,986
Interest receivable ......................................... 205,031
Foreign withholding tax refund receivable ................... 84,476
Other assets ................................................ 445
-------------
Total assets ............................................. 271,594,217
-------------
LIABILITIES
Payable upon return of securities loaned .................... 38,188,456
Payable for securities lending brokers'
rebate and agency fees ................................... 178,128
Management fee payable ...................................... 107,447
Investment advisory fee payable ............................. 55,421
Accrued expenses and accounts payable ....................... 109,400
-------------
Total liabilities ....................................... 38,638,852
-------------
NET ASSETS .................................................. $ 232,955,365
=============
Net assets consist of:
Paid-in capital, $.001 par
(Authorized 80,000,000 shares) ........................... $ 158,453,475
Cost of 1,040,753 shares held in treasury ................... (16,818,380)
Undistributed net realized gain on investments
and foreign currency transactions ........................ 7,334,408
Net unrealized appreciation of investments
and foreign currency ..................................... 83,985,862
-------------
Net assets .................................................. $ 232,955,365
=============
Net asset value per share
($232,955,365 / 14,495,304 shares of
common stock issued and outstanding) ..................... $ 16.07
=============
See Notes to Financial Statements.
9
<PAGE>
THE GERMANY FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the
year ended
December 31, 1998
-----------------
NET INVESTMENT INCOME
Income
Dividends (net of foreign withholding taxes of $575,958) ..... $ 5,317,874
Interest ..................................................... 525,318
-----------
Total income ................................................. 5,843,192
-----------
Expenses
Management fee ............................................... 1,414,811
Investment advisory fee ...................................... 720,581
Reports to shareholders ...................................... 199,411
Custodian and Transfer Agent's
fees and expenses ....................................... 159,087
Directors' fees and expenses ................................. 141,576
Legal fee .................................................... 49,762
Audit fee .................................................... 53,000
NYSE listing fee ............................................. 24,260
Miscellaneous ................................................ 97,435
-----------
Total expenses ............................................... 2,859,923
-----------
Net investment income ........................................... 2,983,269
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized gain on:
Investments .................................................. 45,626,460
Foreign currency transactions ................................ 512,896
Net change in unrealized
appreciation/depreciation on:
Investments .................................................. 4,854,890
Translation of other assets and
liabilities from foreign currency ....................... 13,531
-----------
Net gain on investments and
foreign currency transactions ................................ 51,007,777
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................... $53,991,046
===========
See Notes to Financial Statements.
10
<PAGE>
THE GERMANY FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
year ended year ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income ................................................. $ 2,983,269 $ 1,225,562
Net realized gain (loss) on:
Investments ........................................................ 45,626,460 50,112,491
Foreign currency transactions ...................................... 512,896 (2,630,033)
Net change in unrealized appreciation/depreciation on:
Investments ........................................................ 4,854,890 3,466,826
Translation of other assets and liabilities from foreign currency .. 13,531 221,056
------------- -------------
Net increase in net assets resulting from operations .................. 53,991,046 52,395,902
------------- -------------
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) (10,104,802)
Net realized long term capital gains .................................. (28,062,983) (35,906,688)
------------- -------------
(48,903,366) (46,011,490)
------------- -------------
Capital share transactions:
Net proceeds from reinvestment of dividends
(3,951,509 and 843,067 shares, respectively) ....................... 56,522,712 11,437,576
Cost of shares repurchased (3,516,802 and 982,512 shares, respectively) (56,830,882) (13,445,789)
------------- -------------
Net decrease in net assets from capital share transactions ............ (308,170) (2,008,213)
------------- -------------
Total increase in net assets ............................................. 4,779,510 4,376,199
NET ASSETS
Beginning of year ........................................................ 228,175,855 223,799,656
------------- -------------
End of year (including undistributed net investment income of
$0 as of December 31, 1998 and 1997) .................................. $ 232,955,365 $ 228,175,855
============= =============
</TABLE>
- ----------
*Characterized as ordinary income for tax purposes.
See Notes to Financial Statements.
11
<PAGE>
THE GERMANY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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.
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.
12
<PAGE>
THE GERMANY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- 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 year ended December 31, 1998, Deutsche Bank AG, the German parent of the
Manager and Investment Adviser, and Deutsche Bank Securities Inc, a direct
subsidiary of Deutsche Bank AG, received $529,576 and $33,357, respectively, in
brokerage commissions as a result of executing agency transactions in portfolio
securities on behalf of the Fund.
For the year ended December 31, 1998, interest income earned on the Deutsche
mark account with Deutsche Bank AG was $52,556.
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 year ended December 31, 1998 were $199,489,774 and $259,259,759,
respectively.
The cost of investments at December 31, 1998 was $186,396,163 for United States
Federal income tax purposes. Accordingly, as of December 31, 1998, net
unrealized appreciation of investments aggregated $83,936,116, of which
$84,320,893 and $384,777 related to unrealized appreciation and depreciation,
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 December 31, 1998, the market value of the securities loaned and amount of
collateral received with respect to such loans were $36,243,730 and $38,188,456,
respectively. For the year ended December 31, 1998, net earnings to the Fund
from investing such collateral were $416,532, after deducting borrowers' rebate
and agency fees of $2,955,969 and $179,450, respectively.
NOTE 6. CAPITAL
During the years ended December 31, 1998 and 1997, the Fund purchased 3,516,802
and 982,512 of its shares of common stock on the open market at a total cost of
$56,830,882 and $13,445,789, respectively. The weighted average discount of
these purchases comparing the purchase price to the net asset value at the time
of purchase was 11.6% and 17.1%, respectively. These shares were held in
treasury.
13
<PAGE>
THE GERMANY FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding throughout each of the
years indicated:
<TABLE>
<CAPTION>
For the year ended December 31,
Per share operating performance: 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of year ................................ $ 16.23 $ 15.76 $ 13.52 $ 12.89 $ 12.87
------------ ------------ ------------ ------------ ------------
Net investment income ............................ .23 .09 .08 .12 .11
Net realized and unrealized gain on
investments and foreign currency transactions . 3.41 3.50 3.34 1.64 .69
------------ ------------ ------------ ------------ ------------
Increase from investment operations .............. 3.64 3.59 3.42 1.76 .80
------------ ------------ ------------ ------------ ------------
Increase resulting from share repurchases ........ .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 year ................................... $ 16.07 $ 16.23 $ 15.76 $ 13.52 $ 12.89
============ ============ ============ ============ ============
Market value:
End of year ................................... $ 13.875 $ 14.25 $ 12.625 $ 11.375 $ 10.75
Total investment return for the year:++
Based upon market value ....................... 23.45% 38.3% 21.55% 15.72% (8.63)%
Based upon net asset value .................... 22.66% 23.16% 25.47% 13.12% 6.37%
Ratio to average net assets:
Total expenses ................................ 1.15% 1.19% 1.26% 1.23% 1.28%
Net investment income ......................... 1.20% .49% .56% .88% .79%
Portfolio turnover ............................... 80.93% 81.2% 55.4% 41% 31%
Net assets at end of year (000's omitted) ........ $ 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.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of The Germany Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Germany Fund, Inc. (the "Fund")
at December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 22, 1999
1998 U.S. TAX INFORMATION
(Unaudited)
- --------------------------------------------------------------------------------
The Fund intends to make an election under Internal Revenue Code
Section 853 to pass through foreign taxes paid by the Fund to its shareholders.
The total amount of foreign taxes that will be passed through to the
shareholders for the fiscal year ended December 31, 1998 is $158,934. The
foreign source income for information reporting purposes is $689,575. The Fund
made capital gain distributions of $28,062,983 during the year.
This information is given to meet certain requirements of the Internal
Revenue Code. Shareholders should refer to their Form 1099-DIV to determine the
amounts includable on their respective tax returns for 1998.
15
<PAGE>
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.
16
<PAGE>
VOLUNTARY CASH PURCHASE PROGRAM AND DIVIDEND REINVESTMENT PLAN
(Unaudited)
- --------------------------------------------------------------------------------
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 more complete description of the Plan is
provided in the Plan brochure available from the Fund or from Investors Bank &
Trust Company, the plan agent (the "Plan Agent"), Shareholder Services, P.O. Box
1537, Boston, Massachusetts 02205 (telephone 1-800-356-2754). A stockholder
should read the Plan brochure carefully before enrolling in the Plan.
Under the Plan, participating stockholders ("Plan Participants")
appoint the Plan Agent to receive or invest Fund distributions as described
below under "Reinvestment of Fund Shares." In addition, Plan Participants may
make optional cash purchases through the Plan Agent as often as once a month as
described below under "Voluntary Cash Purchases." There is no charge to Plan
Participants for participating in the Fund's Plan, although when shares are
purchased under the Plan by the Plan Agent on the New York Stock Exchange or
otherwise on the open market, each Plan Participant will pay a pro rata share of
brokerage commissions incurred in connection with such purchases, as described
below under "Reinvestment of Fund Shares" and "Voluntary Cash Purchases."
Enrollment and Withdrawal. In order to become a Plan Participant,
stockholders must complete and sign the authorization form included in the Plan
brochure and return it directly to the Plan Agent if shares are registered in
their name. Stockholders who hold Fund shares in the name of a brokerage firm,
bank or other nominee should contact such nominee to arrange for it to
participate in the Plan on such stockholder's behalf. Participation in the
dividend reinvestment feature of the Plan is effective with the next dividend or
capital gains distribution payable after the Plan Agent receives a stockholder's
written authorization, provided such authorization is received prior to the
record date for such dividend or distribution. A stockholder's written
authorization must be received by the Plan Agent at least five business days in
advance of the next cash purchase investment date (normally the 15th of every
month) in order to make a cash purchase in that month.
Plan Participants may withdraw from the Plan without charge by written
notice to the Plan Agent. Plan Participants who choose to withdraw may elect to
receive stock certificates representing all of the full shares held by the Plan
Agent on their behalf, or to instruct the Plan Agent to sell such full shares
and distribute the proceeds, net of brokerage commissions, to such withdrawing
Plan Participant. Withdrawing Plan Participants will receive a cash adjustment
for the market value of any fractional shares held on their behalf at the time
of termination. Withdrawal will be effective immediately with respect to
distributions with a record date not less than 10 days later than receipt of
such written notice by the Plan Agent.
Reinvestment of Fund Shares. Whenever the Fund declares a dividend or
capital gains distribution payable either in cash or in Fund shares, or payable
only in cash, the Plan Agent automatically receives Fund shares for the account
of each Plan Participant except as provided in the following paragraph. The
number of shares to be credited to a Plan Participant's account shall be
determined by dividing the equivalent dollar amount of the dividend or
distribution payable to such Plan participant by the lower of the net asset
value per share or the market price per share of the Fund's common stock on the
payable date, or if the net asset value per share is less than 95% of the market
price per share on such date, then by 95% of the market price per share.
Whenever the Fund declares a dividend or capital gains distribution
payable only in cash and the net asset value per share of the Fund's common
stock exceeds the market value per share on the payable date, the Plan Agent
will apply the amount of such dividend or distribution payable to Plan
Participants of the Fund in Fund shares (less such Plan Participant's pro rata
share of brokerage commissions incurred with respect to open-market purchases in
connection with the reinvestment of such dividend or distribution) to the
purchase on the open market of Fund shares for such Plan Participant's account.
Such purchases will be made on or after the payable date for such dividend or
distribution, and in no event more than 30 days after such date except where
temporary curtailment or suspension of purchase is necessary to comply with
applicable provisions of federal securities laws. The Plan Agent may aggregate a
Plan Participant's
17
<PAGE>
VOLUNTARY CASH PURCHASE PROGRAM AND DIVIDEND REINVESTMENT PLAN
(Unaudited) -- continued
- --------------------------------------------------------------------------------
purchases with the purchases of other Plan Participants, and the average price
(including brokerage commissions) of all shares purchased by the Plan Agent
shall be the price per share allocable to each Plan Participant.
For all purposes of the Plan, the market price of the Fund's common
stock on a payable date shall be the last sales price on the New York Stock
Exchange on that date, or, if there is no sale on such Exchange on that date,
then the mean between the closing bid and asked quotations for such stock on
such Exchange on such date. The net asset value per share of the Fund's common
stock on a valuation date shall be as determined by or on behalf of the Fund.
The Plan Agent may hold a Plan Participant's shares acquired pursuant
to the Plan, together with the shares of other Plan Participants acquired
pursuant to this Plan, in non-certificated form in the name of the Plan Agent or
that of a nominee. The Plan Agent will forward to each Plan Participant any
proxy solicitation material and will vote any shares so held for a Plan
Participant only in accordance with the proxy returned by a Plan Participant to
the Fund. Upon a Plan Participant's written request, the Plan Agent will deliver
to a Plan Participant, without charge, a certificate or certificates for the
full shares held by the Plan Agent.
Voluntary Cash Purchases. Plan Participants have the option of making
investments in Fund shares through the Plan Agent as often as once a month. Plan
Participants may invest as little as $100 in any month and may invest up to
$36,000 annually through the voluntary cash purchase feature of the Plan.
The Plan Agent will purchase shares for Plan Participants on or about
the 15th of each month. Cash payments received by the Plan Agent less than five
business days prior to a cash purchase investment date will be held by the Plan
Agent until the next month's investment date. Uninvested funds will not bear
interest. The Plan Agent will deduct a pro rata share of brokerage commissions
incurred in connection with voluntary cash purchases from the cash payments it
receives from Plan Participants on whose behalf the purchases were made. Plan
Participants may withdraw any voluntary cash payment by written notice received
by the Plan Agent not less than 48 hours before such payment is to be invested.
Amendment and Termination of Plan. The Plan may only be amended or supplemented
by the Fund or by the Plan Agent by giving each Plan Participant written notice
at least 90 days prior to the effective date of such amendment or supplement,
except that such notice period may be shortened when necessary or appropriate in
order to comply with applicable law or the rules or policies of the Securities
and Exchange Commission or any other regulatory body.
The Plan may be terminated by the Fund or by the Plan Agent by written
notice mailed to each Plan Participant. Such termination will be effective with
respect to all distributions with a record date at least 90 days after the
mailing of such written notice to the Plan Participants.
Federal Income Tax Implications of Reinvestment of Fund Shares. Reinvestment of
Fund shares does not relieve Plan Participants from any income tax which may be
payable on dividends or distributions. For U.S. federal income tax purposes,
when the Fund issues shares representing an income dividend or a capital gains
dividend, a Participant will include in income the fair market value of the
shares received as of the payment date, which will be ordinary dividend income
or capital gains, as the case may be. The shares will have a tax basis equal to
such fair market value, and the holding period for the shares will begin on the
day after the date of distribution. If shares are purchased on the open market
by the Plan Agent, a participant will include in income the amount of the cash
payment made. The basis of such shares will be the purchase price of the shares,
and the holding period for the shares will begin on the day following the date
of purchase. State, local and foreign taxes may also be applicable.
18
<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
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
DIRECTORS AND OFFICERS
MICHAEL W. R. DOBSON
Chairman 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
KENNETH J. TARR
President and Chief Executive Officer
ROBERT R. GAMBEE
Chief Operating Officer and Secretary
JOSEPH M. CHEUNG
Chief Financial Officer and Treasurer
LAURA J. WEBER
Assistant Secretary and Assistant Treasurer
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- ----------
All investment management decisions are made by a committee
of United States and German advisors.
+ Member of the Audit Committee
19
<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, 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 Germany 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 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.
- --------------------------------------------------------------------------------
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[LOGO]
THE GERMANY
FUND, INC.
Annual Report
December 31, 1998
- --------------------------------------------------------------------------------
