SCUDDER
New Europe
Fund, Inc.
Annual Report
October 31, 1997
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.............................16
Financial Highlights.............................19
Notes to Financial Statements....................20
Report of Independent Accountants................24
Tax Information..................................25
Stockholder Meeting Results......................26
Other Information................................27
Dividend Reinvestment and
Cash Purchase Plan............................28
Directors and Officers...........................30
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
First National Bank of Boston
Investor Relations Department
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 posted a total return based on net asset value of
20.66% over the fiscal year ended October 31, 1997. On the New York Stock
Exchange, the Fund's share price stood at $15.50 on October 31,1997 compared
to $14.00 one year ago, representing a current discount to the NAV of 22.3%.
o Recent stock market performance has been led by the "peripheral" markets of
Spain, Portugal, and Italy, where interest rates continued to converge
towards the lower rates of "core" European countries such as Germany and
France.
o Nearly a quarter of the Fund is invested in Europe's smallest, emerging
markets, including Portugal, Hungary, Poland, Slovenia, Austria, and Turkey.
In addition, small companies new to the equity markets contributed to Fund
performance over the period.
Letter to Shareholders
================================================================================
Dear Shareholders:
Scudder New Europe Fund posted a total return of 20.66% for the fiscal year
ended October 31, 1997. Not surprisingly, the Fund failed to keep pace with the
unmanaged MSCI Europe Index, which rose 25.99% for the period, reflecting the
stronger relative performance of larger capitalization stocks. Scudder New
Europe Fund emphasizes smaller capitalization stocks which generally
underperformed the major indices over this time frame. Nevertheless, the Fund's
performance over the period was very competitive with that of other funds
investing in the broad region. For the three-year period ended October, the
Fund's average annual total return of 20.11% exceeded the 18.75% return for the
MSCI Europe Index. The Fund also held up well during the last quarter's weakness
which saw European markets, and especially emerging European markets, lose
ground as concerns over the difficulties of Asian markets infected global
equities. The MSCI Europe Index fell l.65% for the quarter ending October 31,
1997, while the Fund managed to post a slightly positive return for the quarter.
On the New York Stock Exchange, the Fund's share price stood at $15.50 on
October 31,1997 compared to $14.00 one year ago, representing a current discount
to the NAV of 22.3%.
Review: Smaller Markets Lead Performance
Favorable interest rates, a strong U.S. dollar (which helps the competitiveness
of European exporters) and rising corporate earnings underpinned the upward move
of European equities over the last twelve months. Stock market performance was
led by the "peripheral" markets of Spain, Portugal, and Italy, where interest
rates continued to converge towards the lower rates of "core" European countries
such as Germany and France. The Southern European countries benefited from the
growing conviction that they would participate in the first wave of European
Monetary Union (EMU) set to begin on January 1, 1999. Both Spain and Portugal
have put their fiscal houses in order and will comfortably meet the Maastricht
criteria. Italy is facing more of a struggle with budget issues, but has
demonstrated broad-based commitment to joining EMU in the first round. All three
of these southern countries continued to move ahead in the privatization process
with great success this year, as domestic investors showed high enthusiasm,
oversubscribing many of the issues on offer. The Fund's longer term
3
<PAGE>
Scudder New Europe Fund, Inc.
Letter to Shareholders
================================================================================
privatization holdings of Telefonica de Espana, Portugal Telecom, and Telecom
Italia turned in outstanding performances ranging from +36% to +95% (in U.S.
dollar terms).
At the northern periphery of Europe, Finland stood out in performance this year,
jumping 47% in U.S. dollar terms. Nokia, the globally important manufacturer of
cellular telecommunications equipment, accounted in large part for this rise, as
it constitutes over 40% of the Finnish market and shot up some 90% over the
period. The Fund has had a longstanding position in Nokia, and we took some
profits in late October as its share price surged to new highs.
Two of the largest European markets, France and Germany, failed to keep pace
with many of the smaller markets over the last twelve months. The Fund had
reduced representation in both markets over the last year and was underweighted
relative to the European indices. France, suffering from an unpopular
government, fiscal restraint, high unemployment, and a general lack of
confidence was surprised by a snap election in late spring that resulted in a
change of government with Socialist Lionel Jospin taking charge as Prime
Minister. The new government did not justify the worst fears or fulfill the best
hopes of investors. Public confidence rose and the economy began to pick up as
Prime Minister Jospin confirmed his support of the euro (the proposed single
European currency) and allowed some privatizations to proceed. However, the
Socialists disappointed the markets with an increase in corporate taxation and a
program to shorten the workweek to 35 hours.
The German market was buoyant earlier in the year, with the DAX index hitting
new highs in July, propelled by a rising U.S. dollar, merger activity, corporate
restructurings, and the prospect of structural economic reform. But as the year
progressed, two critical elements of structural change required in Germany --
pension and tax reform -- stalled in the legislature. In addition, still rising
unemployment and falling tax receipts have hindered Germany's efforts to meet
the Maastricht criteria. Against this discouraging background, the German equity
market began to lose steam. The spreading financial problems of Asian and other
emerging markets coupled with the retreat of the U.S. dollar aroused further
fears and the German market tumbled nearly 10% in the last quarter. Despite the
difficult market background, a number of the Fund's best performing stocks over
the past year were German, including SAP (+121%), Pfeiffer Vacuum Technology
(+103%), and MLP (+65%).
Strengthening Economies Support European Equities
There are a number of encouraging factors shaping the European investment
environment as we look toward 1998. Economic indicators are strengthening, with
growth broadening from the smaller peripheral economies and the United Kingdom
to the large, lagging economies of France, Italy and Germany. Business and
consumer confidence are on the rise. European export growth has been robust for
some time, but domestic demand is also picking up now as unemployment is
stabilizing and fiscal policies are turning more accommodative. Recent concerns
that developments in Asia may cut off the European economic upturn appear
overblown at this stage. On an overall basis, Europe's direct exposure is
limited, as exports to Asia account for less than 7% of the region's GDP. With
stronger domestic economies supported by benign fiscal and monetary policies,
Europe should be able to withstand a limited decline in external demand. It is
4
<PAGE>
Scudder New Europe Fund, Inc.
Letter to Shareholders
================================================================================
the linkage with the U.S. which is most sensitive. If the U.S. dollar weakens
importantly or the U.S. economy grinds to a halt as a result of Asian events,
Europe would be adversely impacted.
The next year will be a watershed with the move to EMU proceeding from the
decision on participants in the spring of 1998 to implementation on January 1,
1999. It now appears that EMU will be broadly based with 11 members including
Spain, Portugal, and Italy. Greece will not make the criteria for the first
round, and Denmark and Sweden remain unwilling to participate. The U.K.
government under the new leadership of Tony Blair has formally announced that
Britain will not join before the next general election but will work to prepare
for membership thereafter.
Portfolio Perspectives
Scudder New Europe Fund looks particularly to smaller markets and smaller
companies for portfolio holdings. In addition, the Fund seeks opportunity among
those companies benefiting from structural change, either through a company's
own corporate repositioning or from its exposure to an industry sector
benefiting from changes in the European arena.
Nearly a quarter of the Fund is invested in Europe's smallest, emerging markets
including Portugal, Hungary, Poland, Slovenia, Austria, and Turkey. We have
increased our holdings in Hungary over the last year, adding to existing holding
Graboplast (leading producer of home improvement materials), and adding new
positions Gedeon Richter (pharmaceuticals), Danubius (hotels), and Pannonplast
(plastics manufacturer). The Hungarian market soared this year, reflecting its
progress towards a healthier economy, with economic growth picking up from a
previously sluggish pace while inflation and the current and trade accounts
remained under control. In contrast, the Polish market has not done well, losing
over 10% in U.S. dollar terms. While Polish economic growth has remained strong,
rising at a rate of well over 5%, high and increasing real interest rates and a
growing current account and trade account deficit have troubled the market. The
new government seems committed to strict fiscal conduct and increased
privatizations which could create a more positive backdrop for the market going
forward. Despite an unstable macroeconomic environment, the Turkish market
stampeded ahead this year. Migros, a well managed, leading Turkish retailer, was
one of the Fund's best performing stocks, with an increase of 82% in value over
the last twelve months.
Small companies new to the equity markets have contributed to fund performance.
Pfeiffer Vacuum Technology, a German company listed only last year, more than
doubled in 1997 through October. In mid-1996 we purchased Qiagen, a Dutch based
company which supplies patented consumable products used in biotechnology
research. Qiagen has appreciated 66% in the last twelve months. The Spanish
market has provided a number of interesting new issues in which we have
participated, including Baron de Ley (premium wine producer), Aldeasa
(privatized duty free and museum shops), and Telepizza (dominant pizza chain in
Spain's nascent fast food industry). And in Austria, the listing of
Schoeller-Bleckmann allowed the portfolio to take a position in the leading
producer of specialized components used in directional drilling, the fastest
growing activity within oil and gas exploration.
5
<PAGE>
Scudder New Europe Fund, Inc.
Letter to Shareholders
================================================================================
Europe is home base to a number of emerging global competitors in growing
industries. Companies such as SAP -- a longtime Fund holding -- have come to the
marketplace in the last decade and been able to achieve global competitive scale
independently. Others may find the evolution from family ownership to global
leadership requires combination with another entity. Salomon -- a Fund holding
for some time -- has taken the second route. Adidas, which the Fund purchased
and has held since its initial public offering last year, has acquired Salomon,
creating a company with complementary geographic and product strengths now even
better positioned to compete as a leader in the global sports equipment and
apparel markets.
Positive Outlook for European Equities
We remain optimistic about the prospects for European equity markets. Corporate
earnings have been expanding at an impressive rate, often exceeding
expectations, and look set to record further strong increases next year.
European economic growth is accelerating. Investment spending -- which has
lagged in recent years -- is picking up. Still, there are concerns to monitor.
The path to the euro may not be a smooth one, and a substantial fall in the U.S.
dollar or global deflationary impulses emanating from Asia may disturb markets.
Nevertheless, there should be underlying support for healthy equity markets from
the mergers and acquisition boom. In addition, the development of a more
equity-oriented culture in Europe, with managements newly attuned to shareholder
interests and increasing numbers of Europeans interested in investing in
equities, suggests a marketplace of increasing opportunities for all investors
in Europe.
The emerging economies and stock markets in the newly capitalist countries of
Eastern Europe add a further dimension of opportunity which we seek to take
advantage of in the Scudder New Europe Fund. While these markets and economies
face challenges in their development process, several, including Poland and
Hungary, are well-advanced.
Finally, the discount to net asset value at which the Fund trades on the NYSE
continues to be discussed in detail at each Board Meeting, as are a range of
discount-closing alternatives. Although other funds have tried to close their
discounts through one or the other of these techniques, as of this date we have
not seen one, other than changing to an open end structure, that has lowered the
discount on a sustained basis. 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 Fund's performance on both a NYSE price and net
asset value basis over the past year. Moreover, we will continue to convey
information on this performance to the brokerage community and analysts who
follow closed-end funds.
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, 1997
- -----------------------------------------------------------------
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 -6.42 -- .10 -- -1.65 --
ONE YEAR 11.16 11.16 20.66 20.66 25.99 25.99
THREE YEARS 60.30 17.03 73.27 20.11 67.54 18.75
FIVE YEARS 95.56 14.35 127.69 17.89 134.21 18.54
LIFE OF FUND* 43.62 4.81 100.05 9.41 143.86 12.31
- -----------------------------------------------------------------
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990* 1991 1992 1993 1994 1995 1996 1997
----------------------------------------------------------------
NET ASSET VALUE... $11.01 $10.12 $ 9.12 $10.72 $11.61 $13.24 $16.60 $19.96
INCOME DIVIDENDS.. $ -- $ .47 $ .15 $ .08 $ -- $ -- $ .05 $ .06
CAPITAL GAINS
AND OTHER
DISTRIBUTIONS..... $ -- $ .20 $ .15 $ .18 $ -- $ -- $ -- $ --
TOTAL RETURN (%).. -4.68 -1.26 -6.65 21.33 8.30 14.04 25.92 20.66
</TABLE>
(a) Total investment return reflects 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. Index comparisons began
on February 28, 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, 1997
- ---------------------------------------------------------------------------
GEOGRAPHICAL
Geographical breakdown of the Fund's equity securities
United Kingdom 16%
Germany 11%
Italy 11%
France 10%
Portugal 8%
Switzerland 8%
Poland 7%
Other 29%
----
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 20%
Consumer Discretionary 12%
Manufacturing 11%
Durables 10%
Technology 9%
Service Industries 8%
Consumer Staples 7%
Communications 5%
Energy 5%
Other 13%
----
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 NV
Dutch provider of computer installation and maintenance services
3. JERONIMO MARTINS S.A.
Portuguese food producer and retailer
4. SERCO GROUP PLC
Facilities management company in the United Kingdom
5. COBHAM PLC
Manufacturer of aerospace components in the United Kingdom
6. GRABOPLAST RT
Producer of home improvement materials, artificial leather
and book bindings in Hungary
7. AVIS EUROPE PLC
Car rental services in the United Kingdom
8. BALOISE HOLDING LTD.
Multi-line insurance company in Switzerland
9. L.M. ERICSSON TELEPHONE CO.
Leading manufacturer of cellular telephone equipment in Sweden
10. POWERGEN PLC
Electric utility in the United Kingdom
8
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Investment Portfolio as of October 31, 1997
<TABLE>
<CAPTION>
===============================================================================================
Principal Market
Amount($) Value($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS 8.2%
UNITED STATES
26,176,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette dated 10/31/97 at 5.7%
to be repurchased at $26,188,434 on
11/3/97, collateralized by a $25,852,000
U.S. Treasury Note, 6%, 7/31/02
(Cost $26,176,000) ........................ 26,176,000
----------
- -----------------------------------------------------------------------------------------------
COMMON STOCKS 91.8%
Shares
------
AUSTRIA 3.1%
55,800 Flughafen Wien AG (Operator of terminals
and facilities at Vienna International
Airport) .................................. 2,304,018
17,000 Schoeller-Bleckmann Oilfield Equipment AG*
(Manufacturer of components for oil and
gas drilling equipment) ................... 2,010,549
15,000 VA Technologie AG (Engineering and
construction company) ..................... 2,661,639
30,100 VAE Eisenbahnsysteme AG (Manufacturer of
electronic railroad control systems) ...... 2,952,075
----------
9,928,281
----------
CZECH REPUBLIC 1.1%
117,400 Central European Media Enterprises Ltd.
"A"* (Owner and operator of national
and regional private commercial
television stations in central Europe
and Germany) .............................. 3,433,950
----------
FINLAND 2.5%
35,500 Nokia AB Oy "A" (Leading manufacturer of
telecommunications equipment and
cellular telephones) ...................... 3,098,162
76,000 Pohjola Insurance Co., Ltd. "B" (Insurance
company) .................................. 2,905,468
17,700 TT Tieto Oy "B" (Manufacturer of computer
software) ................................. 1,982,159
----------
7,985,789
----------
FRANCE 9.4%
18,100 Accor SA (Catering, hotels, travel
services) ................................. 3,370,069
10,200 Altran Technologies, SA (Engineering and
consulting services for aerospace,
telecommunications and electronics
fields) ................................... 2,723,183
37,000 Bertrand Faure SA (Manufacturer of
automobile seats) ......................... 2,232,219
107,000 Dassault Systemes S.A. (Computer aided
design, manufacturing and engineering
software products) ........................ 3,209,119
26,943 Dexia France (Municipal and local
development financing) .................... 2,704,459
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Investment Porfolio as of October 31, 1997
<TABLE>
<CAPTION>
===============================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12,000 Essilor International (Manufacturer of
various types of lenses, eyeglasses,
contact lenses and optical measuring
instruments) ............................... 3,203,745
12,800 Le Carbone-Lorraine (Manufacturer of
industrial and technological systems and
components) ................................ 3,395,137
57,581 Michelin "B" (Leading tire manufacturer) ...... 2,953,793
38,552 Total SA "B" (International oil and gas
exploration, development and production) ... 4,277,429
25,171 Valeo SA (Automobile and truck components
manufacturer) .............................. 1,678,721
----------
29,747,874
----------
GERMANY 10.1%
26,430 Adidas AG (Manufacturer of sport shoes,
clothing and equipment) .................... 3,824,326
31,850 Beta Systems Software AG* (Developer of
processing automation software) ............ 3,047,759
15,000 Fresenius AG (Manufacturer and distributor
of pharmaceutical and medical systems
products) .................................. 2,296,584
1,666 Fresenius AG (pfd.) ........................... 281,161
60,600 Marschollek Lautenschlaeger und Partner AG
(pfd) (Leading independent life
insurance company) ......................... 13,882,155
130,000 Pfeiffer Vacuum Technology AG (ADR)*
(Manufacturer of various pumps and
vacuum systems) ............................ 4,225,000
15,000 SAP AG (pfd.) (Computer software
manufacturer) .............................. 4,467,030
----------
32,024,015
----------
HUNGARY 4.1%
60,000 Danubius Hotel & Spa* (Hotel operator) ........ 1,878,419
34,550 EGIS Rt (Pharmaceutical company) .............. 1,622,041
9,000 EGIS Rt* (EDR) ................................ 418,500
82,100 Graboplast Rt (Producer of home improvement
materials, artificial leather and book
bindings) .................................. 4,427,922
91,000 Graboplast Rt (GDR) ........................... 784,875
30,331 Pannonplast Rt (Manufacturer of plastic
products from PVC, polypropylene,
polyethylene and other raw materials) ...... 1,666,853
23,000 Gedeon Richter Rt (GDR) (Pharmaceutical
company) ................................... 2,139,000
----------
12,937,610
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Investment Portfolio
<TABLE>
<CAPTION>
=======================================================================================================
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY 10.3%
181,800 Assicurazioni Generali SpA (Life and property insurance
company) ..................................................... 4,063,260
310,000 Autogrill SpA* (Operator of highway and self service
restaurants and snack bars) .................................. 1,422,321
266,000 Banca Popolare di Brescia SpA (Cooperative bank) ................ 1,994,804
652,000 Bulgari SpA (Manufacturer and retailer of fine jewelry,
luxury watches and perfumes) ................................. 3,542,014
200,000 Gewiss SpA (Manufacturer of electrical components) .............. 3,897,254
700,000 La Rinascente SpA di Risparmio (Department store chain) ......... 2,314,733
50,000 Luxottica Group SpA (ADR) (Manufacturer and marketer of
eyeglasses) .................................................. 3,193,750
220,000 Mediolanum SpA (Life insurance company) ......................... 3,689,401
78,500 Saes Getters SpA (Manufacturer of getters, refined chemicals
used in cathode ray tubes and other monitors) ................ 1,402,200
55,000 Saes Getters SpA di Risparmio ................................... 578,093
600,000 Saipem SpA (International contractor in oil and gas
exploration and drilling, construction of refineries
and pipelines) ............................................... 3,367,582
825,000 Telecom Italia SpA di Risparmio (Telecommunications,
electronics, network construction) ........................... 3,332,152
----------
32,797,564
----------
NETHERLANDS 4.2%
225,348 Getronics NV (Provider of computer installation and
maintenance services) ........................................ 7,427,400
60,500 Qiagen NV* (Biopharmaceutical company) .......................... 2,756,531
25,565 Wolters Kluwer CVA (Publisher) .................................. 3,133,842
----------
13,317,773
----------
POLAND 6.3%
74,000 Agros Holdings S.A. "C"* (Fruit and vegetable processing) ....... 1,571,306
112,990 Amica S.A.*(Manufacturer of home appliances) .................... 2,123,628
124,200 Bank Rozwoju Eksportu S.A. (Export bank) ........................ 2,316,499
13,900 Bank Slaski S.A. (Bank) ......................................... 837,590
320,000 Bydgoska Fabryka Kabli S.A.* (Manufacturer of cables, wires
and insulating materials) .................................... 2,616,930
102,900 Computerland Poland S.A.* (Provider of computer services
and systems) ................................................. 1,830,646
93,400 Debica S.A. "A" (Tire manufacturer) ............................. 2,465,653
29,000 Gorazdze Cement S.A .(Cement producer) .......................... 819,656
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Investment Portfolio
<TABLE>
<CAPTION>
=======================================================================================================
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10,524 ITI Group S.A. (Telecommunication services) (b) .................. 2,473,140
107,900 Krosno S.A.* (Manufacturer of wide range of glassware) ........... 1,068,164
23,700 Kutnowskie Zaklady Farmaceutyczne Polfa S.A. "A" (Producer
of pharmaceuticals, veterinary medicines, food components) .... 693,659
88,000 Zaklady Metali LekkichKety S.A. (Manufacturer of aluminum
casting alloys and products) .................................. 1,217,102
----------
20,033,973
----------
PORTUGAL 7.4%
145,000 Banco Comercial Portugues (Bank) ................................ 2,951,948
80,000 Banco Portugues do Investimento (Bank) .......................... 1,799,261
150,000 Cimentos de Portugal S.A. (Manufacturer of cement, ready
mix concrete and aggregates) ................................. 3,795,849
101,999 Jeronimo Martins S.A. (Food producer and retailer) .............. 6,670,392
110,300 Portugal Telecom S.A. (Telecommunication services) .............. 4,525,530
162,500 Semapa S.A. (Cement producer) ................................... 3,751,777
----------
23,494,757
-----------
SLOVENIA 0.3%
95,000 BTC (GDR) (Property management) ................................. 807,500
----------
SPAIN 5.9%
17,990 Acerinox, S.A. (Stainless steel producer) ....................... 2,687,308
68,100 Aldeasa S.A. (Operator of airport duty-free shops) .............. 1,411,435
158,000 Baron de Ley, S.A.* (Wine producer) ............................. 2,986,870
30,000 Compania Telefonica Nacional de Espana S.A.
(Telecommunication services) .................................. 818,726
54,000 Compania Telefonica Nacional de Espana S.A. (ADR) ................ 4,441,500
36,000 Tabacalera, S.A. "A" (Manufactures, sells, imports, and
exports tobacco products) ..................................... 2,593,524
56,634 Telepizza, S.A.* (Operator of fast-food pizza restaurants
in Spain, Portugal, Poland, Mexico and Chile) ................. 3,889,281
----------
18,828,644
----------
SWEDEN 2.7%
108,400 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment) ................ 4,796,700
82,100 Skandia Foersaekrings AB (Free) (Financial conglomerate) ........ 3,829,648
---------
8,626,348
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Investment Portfolio
<TABLE>
<CAPTION>
=======================================================================================================
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND 7.4%
11,200 Adecco SA (Bearer) (Personnel and temporary employment
company) ..................................................... 3,557,967
2,700 Baloise Holding Ltd. (Registered) (Multi-line insurance
company) ..................................................... 4,857,224
16,078 Ciba Specialty Chemical (Registered)* (Manufacturer of
chemical products for plastics, coatings, fibers and
fabrics) ..................................................... 1,578,187
4,994 Clariant AG (Registered) (Manufacturer of color chemicals) ...... 3,839,619
1,920 Novartis AG (Bearer) (Pharmaceutical company) ................... 3,026,385
289 Novartis AG (Registered) ........................................ 452,439
4,900 Phoenix Mecano AG (Bearer) (Manufacturer of housings
and components for computers) ................................ 2,536,051
5,600 Schweizerische Lebensversicherungs und Rentenanstalt AG
(Bearer) (Global life insurance company) ..................... 3,789,834
----------
23,637,706
----------
TURKEY 0.9%
2,787,750 Migros Turkey (Retailer) ........................................ 2,922,170
----------
UNITED KINGDOM 14.7%
1,980,000 Avis Europe PLC (Car rental services) ........................... 4,949,552
243,000 Brake Brothers PLC (Specialist supplier of frozen foods
to the catering industry) .................................... 2,160,710
396,000 Cobham PLC (Manufacturer of aerospace components) ............... 5,567,415
270,000 Compass Group PLC (International catering group) ................ 2,853,768
560,000 Hardy Oil & Gas PLC (Oil and gas exploration and
development) ................................................. 2,903,093
28,571 Misys (Jersey) Ltd. (Software and hardware computer solutions,
support and data services for various industries) ............ 710,615
100,000 Misys PLC ....................................................... 2,536,683
485,000 N Brown Group PLC (Home shopping catalogue retailer) ............ 3,161,165
634,800 Norwich Union PLC* (Multi-line insurance company) ............... 3,621,012
105,000 PowerGen PLC (ADR) (Electric utility in the United Kingdom) ..... 4,725,000
406,997 Provident Financial PLC (Personal finance group) ................ 4,704,623
475,000 Serco Group PLC (Facilities management company) ................. 6,594,411
205,494 Spirax-Sarco Engineering PLC (Manufacturer of products
for control and management of steam and other
industrial fluids) ........................................... 2,347,795
----------
46,835,842
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Investment Portfolio
<TABLE>
<CAPTION>
=======================================================================================================
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------
UNITED STATES 1.4%
<S> <C> <C>
70,000 Autoliv Inc. (Manufacturer of automobile safety bags) ........... 2,760,625
120,000 Rofin-Sinar Technologies Inc.* (Manufacturer of laser
products used for cutting and welding) ....................... 1,665,000
---------
4,425,625
---------
TOTAL COMMON STOCKS (COST $182,825,737) 291,785,421
-----------
PURCHASED OPTIONS 0.0%
Principal
Amount
---------
FRANCE
FRF 196,000,000 Put on French Francs, strike price FRF 6.32, expire
2/17/98 (Cost $617,400) ................................... 54,590
------
- ----------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $209,619,137) (a) ......... 318,016,011
===========
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The cost for federal income tax purposes was $211,594,708. At October 31,
1997, net unrealized appreciation for all securities based on tax cost was
$106,421,303. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $113,152,656 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$6,731,353.
(b) Securities valued in good faith by the Valuation Committee of the Board of
Directors at fair value amounted to $2,473,140 (0.77% of net assets). These
values have been estimated by the Valuation Committee 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. The cost of these
securities at October 31, 1997 aggregated $1,999,560. These securities may
also have certain restrictions as to resale.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Investment Portfolio
================================================================================
- --------------------------------------------------------------------------------
Transactions in written call options on currencies during the year ended October
31, 1997 were:
<TABLE>
<CAPTION>
Principal Amount Premiums
(000s) Received($)
------------------------------
<S> <C> <C>
Outstanding at
October 31, 1996 ........................... FRF -- --
Contracts written .......................... FRF 196,000 617,400
Contracts closed ........................... FRF -- --
------------------------------
Outstanding at
October 31, 1997 (strike price FRF 5.983,
expires 2/17/98) ........................ FRF 196,000 617,400
======= =======
Currency Abbreviations
- ------------------------------------------------
FRF French franc
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Financial Statements
<TABLE>
<CAPTION>
================================================================================
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
ASSETS
<S> <C>
Investments, at market (identified cost $209,619,137) ........ $ 318,016,011
Cash ......................................................... 664
Receivables:
Investments sold ........................................... 6,483,214
Dividends and interest ..................................... 94,513
Foreign taxes recoverable .................................. 221,444
Other ...................................................... 4,002
-------------
Total assets .......................................... 324,819,848
LIABILITIES
Payables:
Investments purchased .............................. $2,313,678
Written options (premiums received $617,400) ....... 1,603,897
Accrued management fee ............................. 319,082
Other payables and accrued expenses ................ 289,798
----------
Total liabilities ..................................... 4,526,455
-------------
Net assets, at market value .................................. $ 320,293,393
=============
NET ASSETS
Net assets consist of:
Accumulated distributions in excess of net investment income $ (562,639)
Unrealized appreciation (depreciation) on:
Investments .............................................. 108,396,874
Written options .......................................... (986,497)
Foreign currency related transactions .................... (1,401)
Accumulated net realized gain .............................. 33,646,492
Paid-in capital ............................................ 179,800,564
-------------
Net assets, at market value .................................. $ 320,293,393
=============
NET ASSET VALUE per share ($320,293,393 [devided by]
16,049,224 shares of common stock issued and outstanding,
$.01 par value, 100,000,000 shares authorized) ............. $ 19.96
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------
16
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Financial Statements
<TABLE>
<CAPTION>
=======================================================================================================
- -------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $558,152) ............ $ 3,421,880
Interest ......................................................... 955,042
------------
4,376,922
------------
Expenses:
Management fee ................................................... $ 3,490,192
Custodian and accounting fees .................................... 571,69
Directors' fees and expenses ..................................... 136,245
Reports to shareholders .......................................... 101,534
Auditing ......................................................... 70,884
Services to shareholders ......................................... 37,001
Legal ............................................................ 23,077
Other ............................................................ 45,604 4,476,233
------------ ------------
Net investment loss ................................................ (99,311)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments ...................................................... 38,495,393
Foreign currency related transactions ............................ (170,090) 38,325,303
----------
Net unrealized appreciation (depreciation) during the period on:
Investments ...................................................... 17,586,613
Written options .................................................. (986,497)
Foreign currency related transactions ............................ (14,655) 16,585,461
------------ ------------
Net gain on investment transactions ................................ 54,910,764
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. $ 54,811,453
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ----------------------------------------------------------------------------
17
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Financial Statements
<TABLE>
<CAPTION>
===================================================================================================
- ---------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31,
-----------------------
INCREASE (DECREASE) IN NET ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income (loss) ................................. $ (99,311) $ 743,364
Net realized gain from investment transactions ............... 38,325,303 10,363,364
Net unrealized appreciation on investment transactions
during the period .......................................... 16,585,461 43,572,097
------------- -------------
Net increase in net assets resulting from operations ........... 54,811,453 54,678,825
------------- -------------
Distributions to shareholders from net investment income ....... (962,847) (802,249)
------------- -------------
Net asset value of shares issued to shareholders in reinvestment
of distributions ............................................. 26,057 29,112
------------- -------------
INCREASE IN NET ASSETS ......................................... 53,874,663 53,905,688
Net assets at beginning of period .............................. 266,418,730 212,513,042
------------- -------------
NET ASSETS AT END OF PERIOD (including accumulated
distributions in excess of net investment income of
$562,639 and undistributed net investment income of
$605,044, respectively) ...................................... $ 320,293,393 $ 266,418,730
============= =============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period ...................... 16,047,487 16,044,970
Shares issued to shareholders in reinvestment of
distributions ............................................. 1,737 2,517
------------- -------------
Shares outstanding at end of period ............................ 16,049,224 16,047,487
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
18
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Financial Highlights
================================================================================
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS AND MARKET PRICE DATA.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------------------------------
1997 1993 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ...... $16.60 $13.24 $11.61 $10.72 $9.12
------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) (a) ........ (.01) .05 .05 .02 .03
Net realized and unrealized gain
on investment transactions ............ 3.43 3.36 1.58 0.87 1.83
------ ------ ------ ------ ------
Total from investment operations .......... 3.42 3.41 1.63 0.89 1.86
------ ------ ------ ------ ------
Less distributions from:
Net investment income ................... (.06) (.05) -- -- (.08)
Net realized gains on investment
transactions .......................... -- -- -- -- (.18)
------ ------ ------ ------ ------
Total distributions ....................... (.06) (.05) -- -- (.26)
------ ------ ------ ------ ------
Net asset value, end of period ............ $19.96 $16.60 $13.24 $11.61 $10.72
====== ====== ====== ====== ======
Market value, end of period ............... $15.50 $14.00 $10.25 $ 9.75 $10.25
====== ====== ====== ====== ======
TOTAL RETURN
Per share market value (%) ................ 11.16 37.18 5.13 (4.88) 28.25
Per share net asset value (%) (b) ......... 20.66 25.92 14.04 8.30 21.33
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) .... 320 266 213 186 172
Ratio of operating expenses to average
net assets (%) .......................... 1.49 1.51 1.62 1.67 1.72
Ratio of net investment income (loss) to
average net assets (%) .................. (.03) .31 .39 .20 .33
Portfolio turnover rate (%) ............... 44.7 35.3 32.4 43.2 32.7
Average commission rate paid (c) .......... $.0453 $.0463 -- -- --
</TABLE>
(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 ending on or after October 31, 1996.
- --------------------------------------------------------------------------------
19
<PAGE>
[SCUDDER 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 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 most recent 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 original 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.
Money market investments having an original 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.
OPTIONS. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the
period, the Fund purchased put options and wrote call options on currencies
primarily as a hedge against potential adverse price movements in the value of
portfolio assets.
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
20
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Notes to Financial Statements
================================================================================
- --------------------------------------------------------------------------------
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain banks and 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, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase 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.
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. During the period, the
Fund utilized forward contracts as a hedge in connection with portfolio
purchases and sales of securities denominated in foreign currencies.
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
21
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Notes to Financial Statements
================================================================================
- --------------------------------------------------------------------------------
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, as amended, 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.
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. 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.
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
For the year ended October 31, 1997, purchases and sales of investment
securities (excluding short-term investments) aggregated $125,900,550 and
$138,837,881, respectively.
C. RELATED PARTIES
Under the Fund's Investment Advisory, Management and Administration Agreement
(te "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
22
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Notes to Financial Statements
================================================================================
- --------------------------------------------------------------------------------
ended October 31, 1997, the fee pursuant to such Management Agreement amounted
to $3,490,192 which was equivalent to an annual effective rate of 1.16% of the
Fund's average weekly net assets.
On June 26, 1997, the Adviser entered into an agreement with The Zurich
Insurance Company ("Zurich"), an international insurance and financial services
organization, pursuant to which Zurich will acquire a majority interest in the
Adviser, and the Adviser will form a new global investment organization by
combining with Zurich's subsidiary, Zurich Kemper Investments, Inc. and change
its name to Scudder Kemper Investments, Inc. Subject to the receipt of the
required regulatory and shareholder approvals, the transaction is expected to
close by the end of the fourth quarter of 1997.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser is
responsible 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, 1997, the amount charged to the Fund by SFAC aggregated $177,738 of
which $32,564 is unpaid at October 31, 1997.
The Fund pays each Director not affiliated with the Manager $6,000 annually,
plus specified amounts for attended board and committee meetings. For he year
ended October 31, 1997, Directors' fees and expenses aggregated $136,245.
23
<PAGE>
[SCUDDER 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,
1997, 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, 1997 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, 1997, 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.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
December 19, 1997
24
<PAGE>
[SCUDDER LOGO] Scudder New Europe Fund, Inc.
Tax Information
================================================================================
- --------------------------------------------------------------------------------
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$33,646,492 as a long-term capital gain dividend for the fiscal year ended
October 31, 1997.
For its fiscal year ended October 31, 1997, the total amount of income received
by the Fund from sources within foreign countries and possessions of the United
States was $0.08 per share (representing a total of $1,218,313. The total amount
of taxes paid by the Fund to such countries was $0.03 per share (representing a
total of $558,152.
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.
25
<PAGE>
Scudder New Europe Fund, Inc.
Stockholder Meeting Results
================================================================================
The Annual Meeting of Stockholders of Scudder New Europe Fund, Inc. was held on
October 21, 1997, at the offices of Scudder, Stevens & Clark, Inc., 25th Floor,
345 Park Avenue (at 51st Street), New York, New York 10154. The following
matters were voted upon by the stockholders (the resulting votes for each matter
are presented below.)
1. To approve the new Investment Management, Advisory and Administration
Agreement between the Fund and Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
10,263,637 515,545 144,858 0
2. To elect Directors.
Number of Votes:
----------------
Director For Withheld
-------- --- --------
Paul Bancroft III 10,408,792 515,248
Richard M. Hunt 10,402,073 521,967
Daniel Pierce 10,426,924 497,116
Continuing Directors:
---------------------
Nicholas Bratt
Paul J. Elmlinger
Mary Johnston Evans
William H. Luers
Wilson Nolen
Ladislas O. Rice
3. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
10,723,175 76,163 124,702
* 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.
26
<PAGE>
Scudder New Europe Fund, Inc.
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.
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Scudder New Europe Fund, Inc.
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
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Scudder New Europe Fund, Inc.
Dividend Reinvestment and Cash Purchase Plan
================================================================================
than 48 hours before such payment is to be invested.
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.
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Scudder New Europe Fund, Inc.
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
WILSON NOLEN
Director
LADISLAS O. RICE
Director
PAUL J. ELMLINGER*
Director, Vice President and
Assistant Secretary
CAROL L. FRANKLIN*
Vice President
JOAN R. GREGORY*
Vice President
JERARD K. HARTMAN*
Vice President
DAVID S. LEE*
Vice President
THOMAS F. McDONOUGH*
Vice President and Secretary
PAMELA A. McGRATH*
Vice President and Treasurer
EDWARD J. O'CONNELL*
Vice President and Assistant Treasurer
KATHRYN L. QUIRK*
Vice President and Assistant Secretary
*Scudder, Stevens & Clark, Inc.
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