Scudder New Europe Fund, Inc.
Annual Report
October 31, 1996
A non-diversified closed-end investment company seeking long-term capital
appreciation through investment primarily in equity securities of companies
traded on smaller or emerging European markets and companies that are viewed as
likely to benefit from changes and developments throughout Europe.
<PAGE>
Scudder New Europe Fund, Inc.
================================================================================
Investment objective and policies
o long-term capital appreciation through investment primarily in equity
securities of companies traded on smaller or emerging European markets and
companies that are viewed as likely to benefit from changes and developments
throughout Europe
Investment characteristics
o emphasis on "Specialized Investments," including equity securities of (i)
privately-held European companies, (ii) European companies that have recently
made initial public offerings of their shares, (iii) government-owned or
controlled European companies that are being privatized, (iv) smaller
publicly-held European companies, and (v) companies and joint ventures based
in Eastern Europe
o a non-diversified closed-end investment company
o a convenient vehicle for participation in opportunities available in smaller
and emerging European markets and that result from the dynamic changes
affecting Europe
Contents
- --------
In Brief 3
Letter to Shareholders 3
Investment Summary 7
Portfolio Summary 8
Investment Portfolio 9
Financial Statements 15
Financial Highlights 18
Notes to Financial Statements 19
Report of Independent Accountants 22
Tax Information 23
Other Information 24
Shareholder Meeting Results 25
Dividend Reinvestment and
Cash Purchase Plan 26
Directors and Officers Back Cover
General Information
- -------------------
Executive offices
Scudder New Europe Fund, Inc.
345 Park Avenue
New York, NY 10154
For Fund information: 1-800-349-4281
Transfer agent, registrar and dividend reinvestment plan agent
The First National Bank of Boston
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
Custodian
Brown Brothers Harriman & Co.
Legal Counsel
Willkie Farr & Gallagher
Independent Accountants
Coopers & Lybrand L.L.P.
New York Stock Exchange Symbol -- NEF
- --------------------------------------------------------------------------------
This report is sent to the shareholders of Scudder New Europe Fund, Inc. for
their information. It is not a prospectus, circular, or representation intended
for use in the purchase or sale of shares of the Fund or of any securities
mentioned in the report.
- --------------------------------------------------------------------------------
2
<PAGE>
Scudder New Europe Fund, Inc.
In Brief
================================================================================
o Scudder New Europe Fund produced a strong total return of 25.92% based on net
asset value for the 12 months ended October 31, 1996, well ahead of the
return for the unmanaged MSCI Europe Index. The Fund's NYSE share price
produced a total return of 37.18% for the same period.
o Longstanding political and economic structures in Europe continue to evolve
in response to the pressures of global competition. While the transition will
not be easy, we believe the potential rewards from deregulation,
privatization, and fiscal reform are exciting.
o The Fund continues to seek out companies positioned to benefit from the
important changes in Europe, including those among the expanding universe of
smaller companies offering their shares to the public.
Letter to Shareholders
================================================================================
Dear Shareholders:
We are pleased to report that total return on the net asset value of
Scudder New Europe Fund was 25.92% over the 12 months ended October 31, 1996.
The net asset value rose from $13.24 to $16.60. This performance compares very
favorably to the 17.47% return of the unmanaged MSCI Europe Index. The Fund's
NYSE share price also increased over the period, by 37.18% from $10.25 to
$14.00, and now reflects a 16% discount to net asset value. The Fund's full
investment performance history is provided on page 7 under "Investment Summary."
Review of the Markets
Over the last 12 months, European equities have been supported by a number
of factors including falling interest rates, reasonable valuations, merger and
acquisition activity, and a growing appreciation by investors of positive
structural changes. Within Europe, economic growth patterns have diverged,
impacting individual stock markets differently. The United Kingdom displayed
growth of more than 2%, with healthy gains in employment bolstering retail
spending. This trend was captured in the portfolio's holding of N Brown, a mail
order catalog retailer, which rose over 50% this year. Yet the U.K. market,
Europe's largest, lagged the region overall. At the same time, the economic
environment in the core continental markets of France and Germany was much
gloomier as unemployment concerns, fiscal stringency, strong currencies and weak
export demand weighed heavily on growth. Nevertheless, the French market
outpaced the European average, led by growth stocks and companies rebounding
from depressed valuations. A number of the Fund's best performing stocks over
this period were in France, including Altran Technologies, Christian Dior,
Dassault Systemes, Essilor, Primagaz, Salomon, and Sligos. In Germany, where
stocks fell short of the average European market, investors could still find
ample rewards in companies where managements are actively showing an interest in
maximizing value for shareholders and are taking steps to assure global
competitiveness.
Among peripheral markets, strong performances were turned in by Sweden and
Spain, which benefited from significant interest rate drops resulting from
governmental policies designed to prepare each country for European currency
union. While the rest of Europe focused on the problems of restructuring, slow
growth, uncompetitive currencies, and high unemployment, Poland offered
sparkling returns, recovering from the emerging market malaise of 1995. The
3
<PAGE>
================================================================================
Polish economy barreled forward with GDP growth of more than 5%, helped by
accelerating foreign direct investment and a rising, entrepreneurial private
sector. Corporate profits growth has been strong and Poland's well-regulated,
transparent stock market is attractive to foreign as well as domestic investors.
The Fund has increased its investments in Poland this year, which now account
for 7% of the portfolio.
Structural Changes Enhance Equity Outlook
Europe today stands at a crossroads. Longstanding political and economic
structures are no longer viable due to the pressures of global competition,
aging dependent populations, and the limits of fiscal support. There is
widespread recognition of the imperative to change -- to deregulate, to
privatize, to reduce labor costs, to cut social welfare spending -- but it will
not be an easy evolution and investors may be shaken by transitional jitters
from time to time. The potential rewards, however, are exciting.
The United States and the United Kingdom have already surmounted similar
challenges, and there are signs that continental Europe is about to do the same.
The corporate sector has been at the forefront of change, determined to reclaim
its global competitiveness. Despite the associated costs and regulatory
barriers, many employers have already cut jobs by as much as 20-30%. Factories
have been closed, production facilities across Europe consolidated, and new
factories built in low-cost regions in Eastern Europe and Asia. A push for
greater labor flexibility is making inroads: the reduction of sick pay and
movement of wage negotiations from the industry to the company level in Germany;
the abolition of wage indexation in Italy; the easing of rules on temporary
employment in Spain with expectations of similar changes forthcoming in Germany
and Sweden. A new emphasis on outsourcing has also served to enhance corporate
flexibility and competitiveness.
For their part, governments have been pushing ahead on the privatization
process, with proceeds providing a welcome source of finance in the struggle to
meet the Maastricht requirements. Recent privatizations have involved sales to
industrial buyers as well as issuance on the equity market. In the latter case,
privatizations are playing an important role in developing the equity markets of
Europe. For example, the market capitalization of still emerging Portugal
expanded by nearly 10% last year as a result of several privatizations including
Portugal Telecom, in which the Fund participated. Tranquilidade, a leading
insurance company in the rapidly growing life insurance market, was also
purchased, bringing the Fund's Portuguese weighting to 8%. This Fall's flotation
of Deutsche Telecom was a landmark event as the largest single privatization in
European stock market history. While the German equity market is among the
larger European markets, it is still underdeveloped by international standards.
German equity market capitalization represents a mere 25% of GDP in comparison
to a similar ratio of 75% in the United States, and only 5% of the German
population own common stocks. The Deutsche Telecom issue enticed many first time
equity investors and, given its success, German investors may well be encouraged
to place more of their considerable savings in equities.
Additional signs of a developing equity culture throughout continental
Europe include a wider array of initial public offerings (IPOs). As corporations
need capital to expand and globalize, they are coming to the equity market for
financing. Adidas in Germany, one of the Fund's holdings, is an example of a
successful IPO in the last year that offered support to the equity investing
4
<PAGE>
================================================================================
trend. Other interesting smaller companies have come to market this year,
allowing the Fund to acquire shares in Germany-based Pfeiffer Vacuum Technology,
and Qiagen, a Netherlands biotechnology company. The Fund's universe of smaller
issues continues to expand as generational succession problems, tax changes, and
the new EASDAQ market encourage companies to offer their shares to the public.
Not only are the investment choices broadening via IPOs and privatizations,
the value system is changing. Continental Europe has traditionally placed the
interests of employees, customers, and suppliers well ahead of the interests of
shareholders, but a new focus on shareholder value is emerging. The drive for
growth at any cost has been supplanted at many companies by the desire to
generate returns for shareholders. Furthermore, continental European managers
are expected to follow the lead of U.S. companies which have enhanced value
through share buybacks. In continental Europe, share repurchases have been
delayed by regulatory impediments and, where legal, are often taxed at very high
levels. However, authorities in Germany, Switzerland, and Sweden are reviewing
current legislation with an eye towards deregulation. Positive news on this
front should lead to price appreciation for corporations poised to use share
buybacks as a mechanism to deploy cash.
Equity market development in Europe will also be fostered by the growth of
a private pension system, still in its infancy throughout Europe. The state
social security system has been the principal guarantor of retirement support,
but the limits of affordability have been surpassed. In Germany, public deficits
could rise to more than 20% of GNP if no changes are undertaken. France has
already put proposals on the table to encourage private pension funding. Private
pension funds would create additional demand for European equities as well as
serving as organized advocates for shareholder value.
Portfolio Strategy
The Fund continues to seek out companies with sound management strategies
positioned to benefit from the important changes in Europe and from growth
opportunities through new products or new customers. We have invested in a
number of companies involved in outsourcing and other means of enhancing client
competitiveness. Dassault Systemes in France is engaged in computer-aided design
and engineering, enabling companies to cut development time and costs in half.
Altran Technologies, a research and development consulting firm in France, helps
companies keep down fixed costs while continuing to invest in R&D. BIS (France)
is a temporary help agency and beneficiary of the movement toward more flexible
labor utilization.
Europe is home base to a number of companies which are emerging global
competitors. Fresenius, the German dialysis products manufacturer, has broadened
its base to become the world's largest supplier of renal products and services
after its merger with W.R. Grace's National Medical division. Ericsson (Sweden),
a leader in the booming market for cellular telecommunications, is another
example.
In the emerging Eastern countries, companies with strong managements in
sectors key to the development of the economy have enormous scope for growth.
Polish portfolio holdings include BRE, a technologically advanced bank equipped
to service the growing corporate middle market as well as foreign corporations
active in Poland, and Computerland, a young, entrepreneurial,
5
<PAGE>
================================================================================
shareholder-oriented company rapidly achieving dominance in the emerging
computer service and consulting business in Poland.
Finally, as stated at this year's shareholder meeting, the discount to net
asset value at which the Fund trades on the NYSE is discussed in detail at each
Board Meeting. We are continually reviewing discount-closing alternatives in the
market and will continue to do so. Although many funds have tried to close their
discounts by implementing one or more of these techniques, as of this date we
have not seen one, other than open ending the Fund, that has lowered the
discount for a sustained period of time. The Board at this time has opted not to
implement any of these techniques and has decided that the investment objective
of this Fund and current portfolio composition, which includes many smaller and
relatively illiquid investments, are best served in a closed end fund format.
The Board is pleased with the performance of the Fund on both a price and NAV
basis over the past year. Also, we have made great efforts to convey this
performance to the brokerage community and analysts who follow closed-end funds.
This has resulted in increased interest in the Fund and some contraction of the
discount during the past year.
Annual Meeting Results
At the July 24, 1996 Annual Meeting, the shareholders elected three
Directors, listed in your proxy statement, and the selection of Coopers &
Lybrand L.L.P. as the Fund's independent accountants for the fiscal year ended
October 31, 1996, was ratified. Please see the table entitled "Shareholder
Meeting Results" on page 25 for more information.
A Team Approach to Investing
Scudder New Europe Fund, Inc. is managed by a team of Scudder investment
professionals who each play an important role in the portfolio's management
process. Team members work together to develop investment strategies and select
securities for the portfolio. They are supported by Scudder's large staff of
economists, research analysts, traders, and other investment specialists who
work in Scudder's offices across the United States and abroad. We believe our
team approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Carol Franklin, Lead Portfolio Manager, sets Fund investment strategy and
oversees its daily operation. Carol has worked on international equity investing
as a portfolio manager at Scudder since 1981. Nicholas Bratt, Portfolio Manager,
helps set the Fund's general investment strategies. Nick has over 20 years of
experience in worldwide investing and has been at Scudder since 1976. Joan
Gregory, Portfolio Manager, focuses on stock selection, a role she has played
since she joined Scudder in 1992. Joan has been involved with investment in
global and international stocks as an assistant portfolio manager since 1989.
There are many reasons to invest in Europe today, a continent of change and
opportunity. Going forward, Scudder New Europe Fund will continue to provide a
vehicle for gaining important exposure to the equity markets of the region,
including the expanding number of smaller companies offering their shares to the
public. We are delighted you are participating in the economic and financial
evolution of Europe as shareholders in the Fund.
Respectfully,
/s/Nicholas Bratt /s/Daniel Pierce
Nicholas Bratt Daniel Pierce
President Chairman of the Board
6
<PAGE>
SCUDDER NEW EUROPE FUND, INC.
INVESTMENT SUMMARY AS OF OCTOBER 31, 1996
- -----------------------------------------------------------------
HISTORICAL
INFORMATION TOTAL RETURN (%)
LIFE OF FUND ---------------------------------------------------------------
MARKET VALUE NET ASSET VALUE (a) INDEX (b)
------------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------------- -------------------- -------------------
CURRENT QUARTER 15.46 -- 6.07 -- 7.57 --
ONE YEAR 37.18 37.18 25.92 25.92 17.47 17.47
THREE YEARS 37.18 11.11 55.52 15.86 47.94 13.93
FIVE YEARS 67.04 10.81 76.15 11.99 82.41 12.76
LIFE OF FUND* 29.20 3.89 65.80 7.83 93.59 10.41
- -----------------------------------------------------------------
PER SHARE INFORMATION AND RETURNS (A)
YEARLY PERIODS ENDED OCTOBER 31
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) with the exact
data points listed in the table below.
1990* 1991 1992 1993 1994 1995 1996
--------------------------------------------------------
NET ASSET VALUE... $11.01 $10.12 $ 9.12 $10.72 $11.61 $13.24 $16.60
INCOME DIVIDENDS.. $ -- $ .47 $ .15 $ .08 $ -- $ -- $ .05
CAPITAL GAINS
AND OTHER
DISTRIBUTIONS..... $ -- $ .20 $ .15 $ .18 $ -- $ -- $ --
TOTAL RETURN (%).. -4.68 -1.26 -6.65 21.33 8.30 14.04 25.92
(a) Total investment returns reflect changes in net asset value per share
during each period and assume that dividends and capital gains
distributions, if any, were reinvested. These percentages are not an
indication of the performance of a shareholder's investment in the
Fund based on market price.
(b) MSCI Europe Index (14)
* The Fund commenced operations on February 16, 1990.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE OF THE
FUND.
7
<PAGE>
SCUDDER NEW EUROPE FUND, INC.
PORTFOLIO SUMMARY AS OF OCTOBER 31, 1996
- ---------------------------------------------------------------------------
GEOGRAPHICAL
Geographical breakdown of the Fund's equity securities
Germany 15%
France 14%
United Kingdom 13%
Italy 12%
Netherlands 8%
Portugal 8%
Poland 7%
Other 23%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the
above table.
- ---------------------------------------------------------------------------
SECTORS
Sector breakdown of the Fund's equity securities
Financial 14%
Manufacturing 13%
Service Industries 12%
Consumer Discretionary 9%
Consumer Staples 9%
Durables 9%
Energy 7%
Technology 6%
Construction 6%
Other 15%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the
above table.
- ---------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
1. MARSCHOLLEK LAUTENSCHLAEGER UND PARTNER AG
Leading German independent life insurance company
2. GETRONICS N.V.
Dutch computer and software distributor
3. JERONIMO MARTINS
Portuguese food producer and retailer
4. BULGARI SPA
Manufacturer and retailer of fine jewelry, luxury watches
and perfumes in Italy
5. MANNESMANN AG
German diversified construction and technology company
6. L.M. ERICSSON TELEPHONE CO.
Leading manufacturer of cellular telephone equipment in Sweden
7. SERCO GROUP PLC
Facilities management company in United Kingdom
8. BIS SA
Operator of temporary employment agencies in France and Switzerland
9. PRIMAGAZ
Liquified petroleum gas distributor in France
10. TELECOM ITALIA MOBILE SPA
Cellular telecommunication services in Italy
8
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
<TABLE>
Investment Portfolio as of October 31, 1996
=================================================================================================
- -------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 6.6%
UNITED STATES
<S> <C> <C> <C>
17,516,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 10/31/96 at 5.52% to be repurchased at $17,518,686
on 11/1/96, collateralized by a $17,515,000 U.S. Treasury
Note, 5.875%, 8/15/98 (Cost $17,516,000) .................... 17,516,000
----------
- -------------------------------------------------------------------------------------------------
PREFERRED STOCKS 0.4%
<CAPTION>
Shares
------
FRANCE
5,000 Essilor International (Manufacturer of various types
of lenses, eyeglasses, contact lenses and optical measuring
instruments) (Cost $489,752) ................................ 1,012,443
-----------
- -------------------------------------------------------------------------------------------------
COMMON STOCKS 93.0%
AUSTRIA 1.3%
15,000 VA Technologie AG (Engineering and construction company) ........ 2,098,296
16,000 VAE Eisenbahnsysteme AG (Manufacturer of electronic
control systems for use in rail transportation technology) .. 1,425,527
-----------
3,523,823
-----------
CZECH REPUBLIC 1.0%
99,600 Central European Media Enterprises Ltd. "A"* (Owner and
operator of national and regional private commercial
television stations in central Europe and Germany) .......... 2,788,800
-----------
DENMARK 0.8%
47,000 Unidanmark A/S "A" (Bank holding company) ....................... 2,165,936
-----------
FINLAND 1.2%
620,000 Diamond Cruise Ltd. (Cruise ship operator) (b)* ................. --
70,000 Nokia AB Oy "A" (Leading manufacturer of cellular telephones) ... 3,233,121
-----------
3,233,121
-----------
FRANCE 12.8%
10,200 Altran Technologies, SA (Engineering and consulting
services for aerospace, telecommunications and
electronics fields) ......................................... 3,053,175
57,200 Assurances Generales de France (Health, life, fire, accident
and special risk insurance) ................................. 1,687,553
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
<TABLE>
Investment Portfolio (continued)
=================================================================================================
- -------------------------------------------------------------------------------------------------
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
39,000 BIS SA (Operator of temporary employment agencies in
France and Switzerland) ..................................... 4,043,902
20,600 Christian Dior (Leading fashion house) .......................... 2,740,541
17,043 Credit Local de France (Bank) ................................... 1,466,430
31,500 Dassault Systemes SA* (Computer aided design, manufacturing
and engineering software products) .......................... 1,355,793
7,000 Essilor International (Manufacturer of various types of lenses,
eyeglasses, contact lenses and optical measuring
instruments) ................................................ 1,841,961
57,581 Michelin "B" (Leading tire manufacturer) ........................ 2,776,875
37,207 Primagaz (Liquified petroleum gas distributor) .................. 3,843,428
3,382 Primagaz Warrants* (Expiration 6/30/98) ......................... 65,504
27,000 Salomon S.A. (Manufacturer of sports equipment) ................. 2,419,298
25,600 Sligos SA (Electrical assistance and computing engineering
services company) (b) ....................................... 2,759,635
38,552 Total SA "B" (International oil and gas exploration,
development and production) ................................. 3,016,188
50,171 Valeo SA (Automobile and truck components manufacturer) ......... 3,011,399
-----------
34,081,682
-----------
GERMANY 13.5%
34,130 Adidas AG (Manufacturer of sport shoes, clothing and
equipment) ................................................. 2,926,363
115,000 B.U.S. Berzelius Umwelt-Service AG (Reprocessing of
high-zinc dust, aluminum-bearing salt slag) ................. 1,595,270
13,000 Draegerwerk AG (pfd.)(Producer of instruments for medical
and aeronautical technology) ................................ 1,734,650
15,000 Fresenius AG (Developer, manufacturer and distributor of
pharmaceuticals) ............................................ 3,200,449
13,500 Mannesmann AG (Bearer) (Diversified construction and
technology company) ........................................ 5,243,584
84,000 Marschollek Lautenschlaeger und Partner AG (pfd.)(Leading
independent life insurance company) ......................... 11,652,409
84,000 Marschollek Lautenschlaeger und Partner AG Rights* (pfd.)
(expiration 11/7/96) ........................................ 105,427
130,000 Pfeiffer Vacuum Technology AG* (ADR)
(Manufacturer of various pumps and vacuum systems) .......... 2,080,000
15,000 SAP AG (pfd.)(Computer software manufacturer) ................... 2,019,355
43,000 Siemens AG (Bearer) (Leading electrical engineering and
electronics company) ....................................... 2,222,644
60,000 VEBA AG (Electric utility, distributor of oil and chemicals) .... 3,201,242
-----------
35,981,393
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
=================================================================================================
- -------------------------------------------------------------------------------------------------
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HUNGARY 1.6%
9,350 EGIS (Pharmaceutical company) ................................... 576,667
9,000 EGIS* (EDR) ..................................................... 540,000
82,100 Graboplast* (Producer of home improvement materials,
artificial leather and book bindings) ....................... 2,514,613
13,600 Pick Szeged (GDS) (Sausage maker) .............................. 618,800
-----------
4,250,080
-----------
IRELAND 0.6%
1,300,000 Waterford Wedgewood PLC (Manufacturer of fine
crystal and china) (c) ...................................... 1,598,667
-----------
ITALY 11.3%
140,000 Banca Popolare di Bergamo-Credito Varesino SCaRL
(Private cooperative and retail bank) ....................... 2,197,636
308,000 Bulgari SpA (Manufacturer and retailer of fine jewelry,
luxury watches and perfumes) ................................ 5,342,655
540,000 Esaote Biomedica SpA* (Manufacturer of biomedical
diagnostic equipment) ....................................... 1,803,947
200,000 Gewiss SpA (Manufacturer of electrical components) .............. 2,433,756
45,600 Gucci Group (New York Shares) (Designer and producer of
personal luxury accessories and apparel) .................... 3,146,400
2,000,000 Istituto Nazionale delle Assicurazione (Insurance company) ...... 2,763,533
50,000 Luxottica Group SpA (ADR) (Manufacturer and marketer
of eyeglasses) ............................................. 3,175,000
78,500 Saes Getters SpA (Manufacturer of getters, refined chemicals
used in cathode ray tubes and other monitors) ............... 1,428,991
55,000 Saes Getters SpA di Risparmio ................................... 678,352
600,000 Saipem SpA (International contractor in oil and gas
exploration and drilling, construction of refineries
and pipelines) .............................................. 3,062,971
1,890,000 Telecom Italia Mobile SpA (Ord.) (Cellular
telecommunication services) ................................. 3,907,959
-----------
29,941,200
-----------
NETHERLANDS 7.8%
364,348 Getronics N.V. (Computer and software distributor) .............. 8,952,250
19,625 Heineken Holdings N.V. "A" (Brewery) ............................ 3,323,351
40,000 IHC Caland N.V. (Dredging and offshore services) ................ 2,231,977
90,000 Qiagen N.V.* (Biopharmaceutical company) ........................ 2,463,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
<TABLE>
Investment Portfolio (continued)
=================================================================================================
- -------------------------------------------------------------------------------------------------
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
45,000 Toolex Alpha N.V.* (Designer and installer of production
lines for manufacture of digital video discs, CD-ROMs and
other disc products) ........................................ 421,875
25,565 Wolters Kluwer CVA (Publisher) .................................. 3,285,347
-----------
20,678,550
-----------
NORWAY 1.0%
150,555 Saga Petroleum AS "A"(Oil and gas exploration and production) ... 2,560,941
-----------
POLAND 6.7%
74,000 Agros Holdings "C"* (Fruit and vegetable processing company) .... 1,908,438
70,800 Bank Rozwoju Eksportu SA (Export bank) .......................... 2,102,945
13,900 Bank Slaski SA (Bank) ........................................... 1,285,572
320,000 Bygdoska Fabryka Kabli SA* (Manufacturer of cables, wires
and insulating materials) ................................... 2,231,076
102,900 ComputerLand Poland S.A.* (Provider of computer services
and systems) ................................................ 1,885,085
77,000 Debica SA "A"* (Tire manufacturer) .............................. 1,561,255
240,000 Elektrim Spolka Akcyjna SA (Manufacturer of power
equipment, electrical machinery and apparatus) .............. 2,048,947
54,000 Gorazdze Cement SA (Cement producer) ............................ 1,402,248
32,400 Krosno S.A. (Manufacturer of wide range of glassware) ........... 610,842
240,000 Polifarb Wroclaw SA (Chemical producer) ......................... 1,067,160
22,000 Zaklady Metali Lekkich Kety* (Manufacturer of aluminum
casting alloys and products) ................................ 1,721,685
-----------
17,825,253
-----------
PORTUGAL 7.2%
150,000 Cimentos de Portugal SA (Manufacturer of cement, ready
mix concrete and aggregates) ................................ 3,152,891
81,633 Conduril SA (Construction Company) (b) .......................... 1,013,412
72,500 Jeronimo Martins (Food producer and retailer) ................... 6,612,872
110,300 Portugal Telecom SA (Telecommunication services) ................ 2,868,304
49,999 Publico Comunicacao Social SA* (Newspaper publisher) (b) ........ 653,368
110,000 Companhia de Seguros Tranquilidade SA (Insurance company) ....... 2,263,966
162,500 Semapa SA (Cement producer) .................................... 2,431,395
-----------
18,996,208
-----------
SPAIN 5.1%
22,990 Acerinox, S.A. (Stainless steel producer) ....................... 2,756,422
47,000 Banco Pastor SA (Registered) (Bank) ............................. 2,799,154
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
=================================================================================================
- -------------------------------------------------------------------------------------------------
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
30,000 Compania Telefonica Nacional de Espana S.A.
(Telecommunication services) ................................ 601,834
54,000 Compania Telefonica Nacional de Espana S.A. (ADR) .............. 3,253,500
40,000 Vidrala SA (Manufacturer of glass bottles) ...................... 2,288,222
18,150 Zardoya-Otis SA (Manufacturer and installer of
elevator equipment) ......................................... 1,850,415
-----------
13,549,547
-----------
SWEDEN 3.0%
70,000 Autoliv AB (Free) (Manufacturer of safety airbags
for automobiles) ............................................ 2,971,630
180,400 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment) ............... 4,983,550
-----------
7,955,180
-----------
SWITZERLAND 4.7%
2,741 ABB AG (Bearer) (Manufacturer of electrical equipment) .......... 3,392,316
11,200 Adecco SA (Bearer) (Personnel and temporary employment
company) .................................................... 3,150,305
500 Baloise Holding Ltd. (Registered) (Provider of private,
commercial and corporate insurance, life insurance,
international reinsurance) .................................. 1,045,876
1,800 Ciba-Geigy AG (Bearer) (Pharmaceutical company) ................. 2,210,601
271 Ciba-Geigy AG (Registered) ...................................... 334,321
4,900 Phoenix Mecano AG (Bearer) (Manufacturer of housings and
components for computers) ................................... 2,407,099
-----------
12,540,518
-----------
TURKEY 0.6%
1,593,000 Migros Turkey (Retailer) ........................................ 1,605,246
-----------
UNITED KINGDOM 12.4%
243,000 Brake Brothers PLC (Specialist supplier of frozen foods
to the catering industry) ................................... 2,994,170
396,000 Cobham PLC (Manufacturer of aerospace components) ............... 3,831,963
725 Creditanstalt Central Europe Fund (Investment company) (b) ...... 1,317,872
560,000 Hardy Oil & Gas PLC (Oil and gas exploration and development) ... 2,420,064
485,000 N Brown Group PLC (Home shopping catalogue retailer) ............ 3,327,465
105,000 PowerGen PLC (Sponsored ADR) (Electric utility in the
United Kingdom) ............................................. 3,517,500
394,806 Provident Financial PLC (Personal finance group) ................ 2,959,291
475,000 Serco Group PLC (Facilities management company) ................. 4,878,622
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
<TABLE>
Investment Portfolio (continued)
=================================================================================================
- -------------------------------------------------------------------------------------------------
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
204,285 Spirax-Sarco Engineering PLC (Manufacturer of products
for control and management of steam and other industrial
fluids) ..................................................... 2,438,995
400,000 TLG PLC (Manufacturer and supplier of lighting equipment
and systems) ................................................ 748,741
785,100 Thistle Hotels PLC* (Hotel chain owner and operator) ............ 2,134,105
70,000 Tibbett and Britten Group PLC (Transportation services
for manufacturing and retail industries) .................... 732,058
225,000 Watmoughs Holdings PLC (Printer of high quality newspaper
supplements, tabloids, catalogues and brochures) ............ 1,519,864
-----------
32,820,710
-----------
UNITED STATES 0.4%
85,000 Rofin-Sinar Technologies Inc.* (Manufacturer of laser products
used for cutting and welding) ............................... 1,041,250
-----------
Total Common Stocks (Cost $156,850,535) ......................... 247,138,105
-----------
- -------------------------------------------------------------------------------------------------
Total Investment Portfolio - 100.0% (Cost $174,856,287) (a) ..... 265,666,548
===========
- -------------------------------------------------------------------------------------------------
<FN>
(a) The cost for federal income tax purposes was $175,203,128. At October 31, 1996, net unrealized
appreciation for all securities based on tax cost was $90,463,420. This consisted of aggregate
gross unrealized appreciation for all securities in which there was an excess of market value
over tax cost of $95,767,625 and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over market value of $5,304,205.
(b) Securities valued in good faith by the Valuation Committee of the Board of Directors. The cost
of these securities at October 31, 1996 aggregated $7,026,951. See Note A of the Notes to
Financial Statements.
(c) Security trades in units; however, equivalent shares are represented in the investment
portfolio.
* Non-income producing security.
Sector breakdown of the Fund's equity securities is noted on page 8.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
<TABLE>
Financial Statements
==============================================================================================
- ----------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $174,856,287) (Note A) ..... $265,666,548
Cash ............................................................... 39
Receivables:
Investments sold ........................................... 718,350
Dividends and interest ..................................... 91,293
Foreign taxes recoverable .................................. 388,051
Other receivable ........................................... 410,066
------------
Total assets ....................................... 267,274,347
LIABILITIES
Payables:
Investments purchased ...................................... $436,875
Accrued management fee (Note C) ............................ 260,453
Other accrued expenses (Note C) ............................ 158,289
--------
Total liabilities .................................. 855,617
------------
Net assets, at market value ........................................ $266,418,730
============
NET ASSETS
Net assets consist of:
Undistributed net investment income ........................ $ 605,044
Accumulated net realized loss .............................. (4,784,335)
Unrealized appreciation on:
Investments ........................................ 90,810,261
Foreign currency related transactions .............. 13,254
Paid-in capital ............................................ 179,774,506
------------
Net assets, at market value ........................................ $266,418,730
============
NET ASSET VALUE per share ($266,418,730 / 16,047,487 shares of
common stock issued and outstanding, $.01 par value,
100,000,000 shares authorized) ............................. $16.60
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
15
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
<TABLE>
Financial Statements (Continued)
========================================================================================================
- --------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $461,275) ..... $ 3,486,174
Interest .................................................. 882,669
-----------
4,368,843
-----------
Expenses:
Management fee (Note C) ................................... $ 2,805,909
Custodian and accounting fees (Note C) .................... 428,666
Directors' fees and expenses (Note C) ..................... 120,737
Reports to shareholders ................................... 110,174
Auditing .................................................. 71,984
Services to shareholders .................................. 34,349
Legal ..................................................... 15,792
Other ..................................................... 37,868 3,625,479
----------- -----------
Net investment income ............................................. 743,364
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments ............................................... 10,455,947
Foreign currency related transactions ..................... (92,583) 10,363,364
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments ............................................... 43,591,954
Foreign currency related transactions ..................... (19,857) 43,572,097
----------- -----------
Net gain on investment transactions ............................... 53,935,461
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................... $54,678,825
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
16
<PAGE>
<TABLE>
========================================================================================================
- --------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ..................................... $ 743,364 $ 751,285
Net realized gain from investment transactions ............ 10,363,364 10,408,502
Net unrealized appreciation on investment transactions
during the period ................................. 43,572,097 15,126,754
------------ ------------
Net increase in net assets resulting from operations .............. 54,678,825 26,286,541
------------ ------------
Reinvestment of distributions ..................................... (802,249) --
------------ ------------
Net asset value of shares issued to shareholders in reinvestment
of distributions .................................. 29,112 --
------------ ------------
INCREASE IN NET ASSETS ............................................ 53,905,688 26,286,541
Net assets at beginning of period ................................. 212,513,042 186,226,501
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed net investment
income of $605,044 and $756,512, respectively) ............ $266,418,730 $212,513,042
============ ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period ......................... 16,044,970 16,044,970
Shares issued to shareholders in reinvestment of distributions .... 2,517 --
------------ ------------
Shares outstanding at end of period ............................... 16,047,487 16,044,970
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
17
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
<TABLE>
Financial Highlights
==================================================================================================
- --------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (a) AND
OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS AND MARKET PRICE DATA.
- --------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended October 31,
-------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ............ $13.24 $11.61 $10.72 $ 9.12 $10.12
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ....................... .05 .05 .02 .03 .07
Net realized and unrealized gain (loss)
on investment transactions ................ 3.36 1.58 0.87 1.83 (.77)
------ ------ ------ ------ ------
Total from investment operations ................ 3.41 1.63 0.89 1.86 (.70)
------ ------ ------ ------ ------
Less distributions from:
Net investment income ....................... (.05) -- -- (.08) (.15)
Net realized gains on investment transactions -- -- -- (.18) (.13)
Additional paid-in capital .................. -- -- -- -- (.02)
------ ------ ------ ------ ------
Total distributions ............................. (.05) -- -- (.26) (.30)
------ ------ ------ ------ ------
Net asset value, end of period .................. $16.60 $13.24 $11.61 $10.72 $ 9.12
====== ====== ====== ====== ======
Market value, end of period ..................... $14.00 $10.25 $ 9.75 $10.25 $ 8.25
====== ====== ====== ====== ======
TOTAL RETURN
Per share market value (%) ...................... 37.18 5.13 (4.88) 28.25 (5.05)
Per share net asset value (%) (b) ............... 25.92 14.04 8.30 21.33 (6.65)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) .......... 266 213 186 172 146
Ratio of operating expenses to average
net assets (%) .............................. 1.51 1.62 1.67 1.72 1.76
Ratio of net investment income to average
net assets (%) .............................. .31 .39 .20 .33 .78
Portfolio turnover rate (%) ..................... 35.3 32.4 43.2 32.7 25.7
Average commission rate paid (c) ................ $.0463 $ -- $ -- $ -- $ --
<FN>
(a) Based on monthly average shares outstanding during the period.
(b) Total investment returns reflect changes in net asset value per share during each period and
assume that dividends and capital gains distributions, if any, were reinvested. These
percentages are not an indication of the performance of a shareholder's investment in the Fund
based on market price.
(c) Average commission rate paid per share of common and preferred stocks is calculated for fiscal
years beginning on or after September 1, 1995.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
Notes to Financial Statements
================================================================================
- --------------------------------------------------------------------------------
A. Significant Accounting Policies
-------------------------------
Scudder New Europe Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end management
investment company.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio securities which are traded on U.S. or foreign
stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale occurred,
the security is then valued at the calculated mean between the most recent bid
and asked quotations. If there are no such bid and asked quotations, the most
recent bid quotation is used. Securities quoted on the National Association of
Securities Dealers Automatic Quotation ("NASDAQ") System, for which there have
been sales, are valued at the most recent sale price reported on such system. If
there are no such sales, the value is the high or "inside" bid quotation.
Securities which are not quoted on the NASDAQ System but are traded in another
over-the-counter market are valued at the most recent sale price on such market.
If no sale occurred, the security is then valued at the calculated mean between
the most recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation shall be used.
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Directors. Securities valued in good
faith by the Valuation Committee of the Board of Directors at fair value
amounted to $5,744,287 (2.16% of net assets) and have been noted in the
investment portfolio as of October 31, 1996. Their values have been estimated by
the Board of Directors in the absence of readily ascertainable market values.
However, because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the difference could be material.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain banks and domestic or foreign broker/dealers whereby the Fund, through
its custodian, receives delivery of the underlying securities, the amount of
which at the time of purchase and each subsequent business day is required to be
maintained at such a level that the market value is equal to at least 100.5% of
the resale price.
FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:
(i) market value of investment securities, other assets and liabilities at
the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the daily rates of exchange prevailing
on the respective dates of such transactions.
19
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
Notes to Financial Statements (continued)
================================================================================
- --------------------------------------------------------------------------------
The Fund does not isolate that portion of gains and losses on investments which
is due to changes in the foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized gain (loss) from foreign currency related transactions includes
gains and losses between trade and settlement dates on securities transactions,
gains and losses arising from the sales of foreign currency, and gains and
losses between the ex and payment dates on dividends, interest, and foreign
withholding taxes.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment
companies, and to distribute all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes, and no federal income tax
provision was required.
At October 31, 1996, the Fund had a net tax basis capital loss carryforward of
approximately $4,784,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until October 31,
2001, the expiration date, whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. Distribution of net investment income is made
annually. During any particular year net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders annually. An additional distribution may be made to the extent
necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to investments in forward contracts, passive
foreign investment companies, and foreign denominated investments. As a result,
net investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
The Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.
20
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
OTHER. Investment security transactions are accounted for on a trade-date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
B. PURCHASES AND SALES OF SECURITIES
---------------------------------
During the year ended October 31, 1996, purchases and sales of investment
securities (excluding short-term investments) aggregated $78,350,352 and
$78,990,517, respectively.
C. RELATED PARTIES
---------------
Under the Fund's Investment Advisory, Management and Administration Agreement
(the "Management Agreement") with Scudder, Stevens & Clark, Inc. (the
"Manager"), the Manager directs the investments of the Fund in accordance with
the Fund's investment objectives, policies, and restrictions and under the
direction and control of the Fund's Board of Directors. In addition to portfolio
management services, the Manager provides certain administrative services in
accordance with the Management Agreement. The Fund pays to the Manager a monthly
fee at an annualized rate of 1.25% of the Fund's average weekly net assets up to
and including $75 million, 1.15% of such net assets on the next $125 million,
and 1.10% of such net assets in excess of $200 million, computed and accrued
daily and payable monthly. For the year ended October 31, 1996, the fee pursuant
to such Management Agreement amounted to $2,805,909 which was equivalent to an
annual effective rate of 1.17% of the Fund's average weekly net assets.
Effective November 29, 1995, Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of the Manager, assumed responsibility for determining the daily net
asset value per share and maintaining the portfolio and general accounting
records of the Fund. For the year ended October 31, 1996, the amount charged to
the Fund by SFAC aggregated $144,228, of which $13,460 is unpaid at October 31,
1996.
The Fund pays each Director not affiliated with the Manager $6,000 annually,
plus specified amounts for attended board and committee meetings. For the year
ended October 31, 1996, Directors' fees and expenses aggregated $120,737, of
which $18,460 was unpaid at October 31, 1996.
21
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
Report of Independent Accountants
================================================================================
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SCUDDER NEW EUROPE FUND, INC.:
We have audited the accompanying statement of assets and liabilities of Scudder
New Europe Fund, Inc., including the investment portfolio as of October 31, 1996
and the related statement of operations for the year then ended, the statements
of changes in 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.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder New Europe Fund, Inc. as of October 31, 1996, 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.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 16, 1996
22
<PAGE>
[Logo] Scudder New Europe Fund, Inc.
Tax Information
================================================================================
- --------------------------------------------------------------------------------
For its fiscal year ended October 31, 1996, the total amount of income received
by the Fund from sources within foreign countries and possessions of the United
States was $.07 per share (representing a total of $1,128,053. The total amount
of taxes paid by the Fund to such countries was $.03 per share (representing a
total of $461,275.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Scudder New Europe Fund account, please call a Service Representative
at 1-617-575-2900.
23
<PAGE>
================================================================================
Other Information
Investment Manager
The investment manager of Scudder New Europe Fund, Inc. is Scudder, Stevens
& Clark, Inc., one of the most experienced investment management and investment
counsel firms in the United States. Established in 1919, the firm provides
investment counsel for individuals, investment companies and institutions.
Scudder has offices throughout the United States and subsidiaries in London and
Tokyo.
Scudder has been a leader in international investment management for over
40 years. It manages Scudder International Fund, which was initially
incorporated in Canada in 1953 as the first foreign investment company
registered with the United States Securities and Exchange Commission. Scudder's
investment company clients include nine other open-end investment companies
which invest primarily in foreign securities.
In addition to the Fund, Scudder also manages the assets of seven other
closed-end investment companies which invest in foreign securities. The
Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The Latin
America Dollar Income Fund, Inc., Scudder World Income Opportunities Fund, Inc.,
Scudder New Asia Fund, Inc., and The First Iberian Fund, Inc.
Dividend Reinvestment and Cash Purchase Plan
We are pleased to advise you of an optional plan for the automatic
reinvestment of your dividends and capital gains distributions in shares of the
Fund. We recommend that you consider enrolling in the Dividend Reinvestment and
Cash Purchase Plan (the "Plan") to build your investment. The Plan's features
are more fully described on page 26.
Net Asset Value
The Fund's NAV is published every Monday in The Wall Street Journal under
the heading "Closed End Funds." The Fund's NAV is also published in The New York
Times and Barron's.
As a service to overseas shareholders, the Fund's NAV is listed daily in
The Financial Times ("FT"). The NAV of the Fund, and other Scudder managed
closed-end funds, can be found in the "FT Managed Funds Service" section under
the heading "other off-shore funds" below the Scudder, Stevens & Clark banner.
24
<PAGE>
Shareholder Meeting Results
================================================================================
The Annual Meeting of Shareholders of the Fund was held on July 24, 1996, at the
offices of Scudder, Stevens & Clark, Inc., 345 Park Avenue, New York, New York.
The two matters voted upon by Shareholders and the resulting votes for each
matter are presented below.
1. The election of three Directors to hold office for a term of three years
or until their respective successors shall have been duly elected and
qualified.
<TABLE>
<CAPTION>
Director: Number of Votes:
--------- ----------------
For Withheld Broker Non-Votes*
--- -------- -----------------
<S> <C> <C> <C>
Paul J. Elmlinger 13,224,809.895 250,384.358 0
Dr. Wilson Nolen 13,222,159.685 253,034.568 0
Ladislas O. Rice 13,223,688.181 251,506.072 0
</TABLE>
2. Ratification or rejection of the action taken by the Board of Directors in
selecting Coopers & Lybrand L.L.P. as independent accountants for the
fiscal year ending October 31, 1996.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
- --- ------- ------- -----------------
13,239,430.319 100,251.355 135,512.579 0
- --------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
25
<PAGE>
Dividend Reinvestment and Cash Purchase Plan
================================================================================
The Plan
The Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers
you an automatic way to reinvest your dividends and capital gains distributions
in shares of the Fund. The Plan also provides for cash investments in Fund
shares of $100 to $3,000 semiannually through The First National Bank of Boston,
the Plan Agent.
Participation in the Plan
If you own shares in your own name, you can participate directly in the
Plan. If you choose to participate in the Plan, your dividends and capital gains
distributions will be promptly invested for you, automatically increasing your
holdings in the Fund. If the Fund declares a dividend or capital gains
distribution payable either in cash or in stock of the Fund, you will
automatically receive stock. If your shares are held in the name of a brokerage
firm, bank, or other nominee as the shareholder of record, please consult your
nominee (or any successor nominee) to determine whether it is participating in
the Plan on your behalf. Many nominees are generally authorized to receive cash
dividends unless they are specifically instructed by a client to reinvest. If
you would like your nominee to participate in the Plan on your behalf, you
should give your nominee instructions to that effect as soon as possible.
Pricing of Dividends and Distributions
If the market price per share on the payment date for the dividend or
distribution (the "Valuation Date") equals or exceeds net asset value per share
on that date, the Fund will issue new shares to participants at the greater of
the following on the Valuation Date: (a) net asset value, or (b) 95% of the
market price. The Valuation Date will be the dividend or distribution payment
date or, if that date is not a New York Stock Exchange trading date, the next
preceding trading date. If the net asset value exceeds the market price of Fund
shares at such time, participants in the Plan are considered to have elected to
receive shares of stock from the Fund, valued at market price, on the Valuation
Date. In either case, for Federal income tax purposes, the shareholder receives
a distribution equal to the market value on Valuation Date of new shares issued.
State and local taxes may also apply. If the Fund should declare an income
dividend or net capital gains distribution payable only in cash, the Plan Agent
will, as agent for the participants, buy Fund shares in the open market, on the
New York Stock Exchange or elsewhere, for the participants' account on, or
shortly after, the payment date.
Voluntary Cash Purchases
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, semiannually, in any amount from $100 to $3,000, for
investment in the Fund's shares. The Plan Agent will use all such monies
received from participants to purchase Fund shares in the open market on or
about February 15 and August 15. Any voluntary cash payments received more than
30 days prior to these dates will be returned by the Plan Agent, and interest
will not be paid on any uninvested cash payments. To avoid unnecessary cash
accumulations, and also to allow ample time for receipt and processing by the
Plan Agent, it is suggested that participants send in voluntary cash payments to
be received by the Plan Agent approximately ten days before February 15, or
August 15, as the case may be. A participant may withdraw a voluntary cash
payment by written notice, if the notice is received by the Plan Agent not less
than 48 hours before such payment is to be invested.
26
<PAGE>
================================================================================
Participant Plan Accounts
The Plan Agent maintains all participant accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by participants for personal and tax records. Shares in the account of
each plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each participant will be able to vote those
shares purchased pursuant to the Plan at a shareholder meeting or by proxy.
No Service Fee to Reinvest
There is no service fee charged to participants for reinvesting dividends
or distributions from net realized capital gains. The Plan Agent's fees for the
handling of the reinvestment of dividends and capital gains distributions will
be paid by the Fund. There will be no brokerage commissions with respect to
shares issued directly by the Fund as a result of dividends or capital gains
distributions payable either in stock or in cash. However, participants will pay
a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of any
dividends or capital gains distributions payable only in cash.
Costs for Cash Purchases
With respect to purchases of Fund shares from voluntary cash payments, the
Plan Agent will charge $1.00 for each such purchase for a participant. Each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases of Fund shares in connection
with voluntary cash payments made by the participant.
Brokerage charges for purchasing small amounts of stock for individual
accounts through the Plan are expected to be less than the usual brokerage
charges for such transactions, because the Plan Agent will be purchasing stock
for all participants in blocks and pro-rating the lower commission thus
attainable.
Amendment or Termination
The Fund and the Plan Agent each reserve the right to terminate the Plan.
Notice of the termination will be sent to the participants of the Plan at least
30 days before the record date for a dividend or distribution. The Plan also may
be amended by the Fund or the Plan Agent, but (except when necessary or
appropriate to comply with applicable law, rules or policies of a regulatory
authority) only by giving at least 30 days' written notice to participants in
the Plan.
A participant may terminate his account under the Plan by written notice to
the Plan Agent. If the written notice is received 10 days before the record day
of any distribution, it will be effective immediately. If received after that
date, it will be effective as soon as possible after the reinvestment of the
dividend or distribution.
If a participant elects to sell his shares before the Plan is terminated,
the Plan Agent will deduct a $3.50 fee plus brokerage commissions from the sale
transaction.
Plan Agent Address and Telephone Number
You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: Scudder New Europe Fund Dividend Reinvestment and Cash Purchase
Plan, c/o First National Bank of Boston, P.O. Box 8209, Boston, MA 02266-8209,
1-800-426-5523.
27
<PAGE>
Directors and Officers
================================================================================
DANIEL PIERCE*
Chairman of the Board and Director
NICHOLAS BRATT*
President and Director
PAUL BANCROFT III
Director
MARY JOHNSTON EVANS
Director
RICHARD M. HUNT
Director
WILLIAM H. LUERS
Director
DR. WILSON NOLEN
Director
LADISLAS O. RICE
Director
PAUL J. ELMLINGER*
Director, Vice President and
Assistant Secretary
JOAN R. GREGORY*
Vice President
CAROL L. FRANKLIN*
Vice President
JERARD K. HARTMAN*
Vice President
DAVID S. LEE*
Vice President
EDWARD J. O'CONNELL*
Vice President and Assistant Treasurer
KATHRYN L. QUIRK*
Vice President and Assistant Secretary
THOMAS F. McDONOUGH*
Vice President and Secretary
PAMELA A. McGRATH*
Vice President and Treasurer
COLEEN DOWNS DINNEEN*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
