<PAGE>
July 31, 1997
Dear Shareholder,
During the second quarter ending June 30, 1997, the New Germany Fund's
share price appreciated 12.5%, recording a new all time high. The Fund's net
asset value per share rose 7.7%, in US$ terms in the quarter, outperforming the
MDAX Index by 1.9%.
The recent merger announced by Bayerische Hypothekenbank and Bayerische
Vereinsbank is a clear indication of a growing trend towards a focus on
shareholder value and a new equity culture in Germany. An increase in takeover
activity is key for a dynamic market environment, as management is forced to
focus more on corporate profitability. Furthermore, data from other equity
markets around the world confirm that there is a positive correlation between
the level of merger activity and overall equity returns.
Proposed tax reform for 1999, the changes to equity market legislation, and
further privatizations of public assets should continue to support the German
equity market. The upturn in the market has also been driven by the softening of
the Deutsche Mark, boosting earnings of major exporters, as well as the positive
effects of the plan for EMU to start in 1999. Realistically, both the Monetary
Union and the tax reform--although with some modifications--ought to proceed on
schedule.
Despite the record levels of the equity market and the high valuation by
historical standards we consider the risks limited. Monetary policy should
continue to be accommodative, given the high unemployment, output gap, and lack
of scope for industry to pass on higher costs in prices. Also, the news flow
related to companies and the economy as a whole should remain positive in the
foreseeable future. Based on current earnings estimates for 1998, the market is
still reasonably valued relative to the bond market. Flow of fund patterns have
also been clearly in favor of the equity market. There has not been much strain
from new issues and IPO's so far this year. However, we do expect a pick-up in
the privatization of public assets as the government needs to finance its budget
shortfall.
Most international investors are still underweighted in German equities,
but recent figures suggest a net increase in demand. Furthermore, domestic
institutions have no suitable investment alternatives at the moment. German
insurers, for instance, are still raising their equity weightings in order to
meet the minimum returns promised to policyholders and investors. Based on this
scenario we believe the German equity market will remain attractive well into
1998.
Sincerely,
/s/ Dr. Ronaldo H. Schmitz /s/ G. Richard Stamberger
Dr. Ronaldo H. Schmitz G. Richard Stamberger
Chairman and President Chief Executive Officer
1
<PAGE>
FUND HISTORY AS OF JUNE 30, 1997
STATISTICS
Net Assets $661,874,959
Shares Outstanding 32,943,468
NAV Per Share $20.09
TOTAL RETURNS
Period NAV
6 months ended 6/30/97 16.80%
1 year ended 12/31/96 21.73%
3 years ended 12/31/96* 11.12%
5 years ended 12/31/96* 9.61%
*Average annual return
OTHER INFORMATION
NYSE Ticker Symbol GF
Dividend Reinvestment Plan Yes
Voluntary Cash Purchase Program Yes
Annual Expense Ratio .99%
DIVIDEND & CAPITAL GAIN DISTRIBUTIONS
Record Ordinary LT Capital
Date Income Gains
9/3/97 $0.21 $0.13
12/19/96 $0.37 $1.03
12/27/95 $0.16 $0.25
12/29/94 $0.16 --
PERFORMANCE
6 months ended Year ended
6/30/97 12/31/96
Net Asset Value 16.80% 21.73%
Market Value 17.76% 27.10%
MDAX 16.98% 7.16%
2
<PAGE>
PORTFOLIO BY MARKET SECTOR AS OF JUNE 30, 1997
Pharmaceuticals 18.2%
Financial Services 3.0%
Cosmetics 3.2%
Energy Sources 2.1%
Construction/Materials 9.7%
Food 3.8%
Machinery/Engineering 4.5%
Medical Equipment 7.6%
Electrical 4.1%
Telecommunications 2.5%
Retailing 3.0%
Insurance 4.1%
Apparel 15.3%
Healthcare 1.1%
Automotive 3.4%
Leisure & Tourism 1.5%
Publishing 0.7%
Chemical 11.2%
Banking 1.0%
10 LARGEST EQUITY HOLDINGS AS OF JUNE 30, 1997
% of % of
Portfolio Portfolio
--------- ---------
1. Adidas 9.5 6. Suedzucker 3.8
2. Altana 8.3 7. Heidelberger Zement 3.7
3. Fresenius 7.6 8. ING Group N.V. 3.4
4. Gehe 4.7 9. Dyckerhoff 3.4
5. Lahmeyer 4.0 10. Hugo Boss 3.3
3
<PAGE>
INTERVIEW WITH THE PORTFOLIO MANAGER
QUESTION: In your letter to shareholders you mentioned an increase in merger
activity in Germany and their benefits for equity investors. Mergers in Germany
do not seem to be as common as in some other European markets such as the United
Kingdom or the Netherlands. What makes you think we will see more activity in
the future?
ANSWER: First, it should be mentioned that mergers have not been uncommon in
Germany. Over the past five years we have witnessed fourteen mergers in excess
of two billion Deutsche Marks, eleven have been completed, two are still pending
and one has been withdrawn. This number might not match the activity in some
other countries, but nevertheless is quite significant for a so called 'highly
regulated market'. Interestingly enough, German regulation is less strict to
prevent takeovers than is neighboring Holland. German takeovers are governed by
a voluntary code, which in itself is not particularly extreme or stringent. The
obstacles arise from cross-share holdings and the capital gains tax implications
if a merger is successful.
QUESTION: O.K., so mergers are likely to happen again. I am still curious to
know how one can avoid the issues of cross-share holdings and taxation and how
it would affect future merger activity in Germany.
ANSWER: Corporations manage to avoid the 60% capital gains tax liability by
swapping shares. Restrictions, however, are tight and require that the assets
must be similar in value, type and function. Yet, interpretation can vary as
decisions are delivered by the State and not the Federal Government. In the case
of the Bavarian bank merger, the State's tax authorities have ruled that a share
swap involving stock in two different sectors (insurance and banks) qualifies to
reduce capital gains liabilities. Earlier this year the German ministry of
finance issued a draft decree stating that share swaps could involve equity of
any type of company. While there is still a question mark over how cross border
deals would be interpreted, there is no doubt that merger activity in Germany
will increase as market deregulation advances and restructuring continues.
QUESTION: You have mentioned the tax reform of 1999 and the proposed changes to
the equity market legislation. Could you please explain where these issues stand
regarding implementation and how these changes benefit the equity investor?
ANSWER: The seemingly endless debate on tax reform might possibly be brought to
a conclusion this September. There are currently two separate tax reform drafts
for the years 1998 and 1999, both of which were passed by the Bundestag at the
end of June. As expected, the SPD-dominated Bundesrat (upper House) rejected the
drafts earlier this summer. A final compromise will now have to be worked out by
a parliamentary mediation committee. It appears that the SPD's objections to the
proposed tax reform are not on issues affecting corporate Germany, but on how
the tax reform is to be financed and its implications on the individual taxpayer
(e.g. tax progression). Essentially, the opposition, too, is keen on
implementing the tax reform, although with different accents. The relevant
aspects of corporate tax reform include: 1) the reduction of the corporate
income tax rate from 45% to 35% on retained earnings and from 30% to 25% on
distributed earnings, 2) a reduction of the solidarity surcharge by two
percentage points to 5.5%, and 3) a broader tax base. In addition to the
proposed changes in the tax laws we expect the passage of the 'Third Financial
Market Promotion Bill', a new law to ease fund raising
('Kapitalaufnahmeerleichterungsgesetz') and to reform the equities law
('Aktienrecht'). All of these proposals would have a positive effect on the
overall equity market as the new laws would increase profitability, efficiency,
and transparency of corporate Germany.
Hanspeter Ackermann, Portfolio Manager of the New Germany Fund, Inc.
4
<PAGE>
REPORT OF INVESTMENT ADVISER AND MANAGER
OUTLOOK FOR THE GERMAN ECONOMY
Despite some weaker data for the month of May, the German economy returned
to above-trend growth in the second quarter. The composition of growth has
become more uneven still with exports exceeding even the most optimistic
expectations while domestic demand continues to lag behind. Export growth was
highest in Eastern Europe and the United States. For 1997 we expect GDP growth
to accelerate to 2.7%, an estimate that remains above consensus forecast. The
main driver for our forecast is export-led growth, aided by the weaker Deutsche
Mark, and an increase in capital spending.
Short-term interest rates are at record lows and monetary aggregates have
been growing strongly since early 1996. The recent decision by the Bundesbank
not to pre-announce weekly fixed-rate repo operations at the 3% level has led to
speculations about the introduction of variable repos in the near future. It is
obvious that the Bundesbank is unsatisfied with the rapid pace of the recent
decline in the Deutsche Mark. However, in our view, the Bundesbank is not yet
ready to increase interest rates any time soon. There are two main reasons for
our belief: First, despite the recent currency weakness, import price inflation
has remained relatively benign. Second, domestic costs are on the decline, as
wage growth has slowed and productivity is increasing. This combination is
likely to keep consumer price inflation below 2% for 1997 and early 1998 despite
the weaker currency.
The outlook for the German labor market is one of the more interesting and
controversial issues in the economy. The recent strong rise in unemployment
remains somewhat unusual at this stage of the economic cycle and our estimate of
an 11.2% unemployment rate in 1997 might prove too conservative. Usually,
unemployment only rises that strongly in times of a recession or severe slowdown
of the economy. There are, however, some encouraging signs such as the number of
labor participants working short-shifts that has fallen significantly since the
beginning of the year, and vacancies are pointing upwards. Also, corporate
investment seems to be rising at a faster pace, which has historically coincided
with rising employment.
THE FUND'S PORTFOLIO STRATEGY
The German equity market (MDAX) is currently trading at an earnings
multiple of 24.8 times estimated 1997 earnings and 19.9 times estimated 1998
earnings, which suggests fair value.
Comparing the Bond/Earnings Yield and the Bond/Dividend Yield ratios to
their long term history also suggest fair valuation levels, as both measures are
close to their mean. Analyzing enterprise value and cash flow based criteria in
all of Europe, German stocks continue to rate favorably in relative terms.
The New Germany Fund is highly geared to the abolition of the wealth tax
and the domestic economic recovery as many companies represented in the MDAX
have little exposure to the export market. Our analysis has shown that during
periods of increasing economic activity, the mid-cap segment of the stock market
outperforms the blue chips. Furthermore, our research indicates that GNP growth
rates in 1997 and 1998 are accelerating versus previous years, suggesting a
recovery of the domestic economy. Consistent with our belief that the mid-cap
segment will outperform the blue chips stocks over the next year we continued to
reduce the Fund's exposure to German blue chips from 21.6% in June 1996 to 3.6%
today.
Our stock selection concentrates on cost leadership, exposure to global
growth, and a strict commitment by management to enhance shareholder value.
During the second quarter the New Germany Fund maintained its underweight in the
financial sector. The Fund maintained a strong overweighted position in the
chemical/pharmaceutical sector. We believe that global pharmaceutical companies
with an effective product pipeline should continue to deliver attractive
investment returns. Consumer-oriented shares, however, such as producers of
luxury goods remain significantly overweighted.
5
<PAGE>
DISCOUNT TO NET ASSET VALUE
Some shareholders have expressed concern about the high discounts to net
asset value that closed-end country funds have been trading at in recent years.
While the Directors of your Fund share these concerns, they must also balance
the interests of all shareholders. As we know, and as was stated in your Fund's
initial offering prospectus, 'shares of closed-end funds frequently trade at a
discount from net asset value.' Sometimes the discounts widen when investors
seek opportunities elsewhere and there is an imbalance in demand. This has been
true since 1994, as the U.S. stock market has been steadily out-performing the
Western European markets. To the extent the sentiment changes and more investors
return to seek greater value overseas, a higher demand for Western European
country funds could help over-all discounts to narrow. This would have a
positive effect on your market price return.
For example, during the 12 months to June 30, 1997, your Fund's discount
narrowed from 26.34% to 21.60%. As a result, while the net asset value per share
increased 26.75% during the period, the market value increased 37.80%. (Both
calculations have been adjusted to include distributions.) Thus not only is
there value in a discount--the ability to effectively own shares of portfolio
securities at 78% of their market price--there is the added benefit that during
times of a decline in the discount, total market value return exceeds net asset
value return. Obviously, we cannot predict what will happen, but we want
shareholders to realize that the existence of a discount can also present an
opportunity.
Your Independent Directors review your Fund's discount at every Board
meeting and regularly consider steps aimed at reducing it. These steps include
open-market purchases of shares and increased marketing efforts. While special
SEC constraints do place some limitations on the extent of Fund repurchases, we
have tried to be active in the market. During the 12 months ended June 30, 1997,
your Fund repurchased 1,182,796 of its shares. A public relations firm has also
been retained and has assisted in obtaining favorable media coverage for your
Fund.
In conclusion, the Board believes that the closed-end format is
intentionally different from the open-end one. Its advantages are: i)
flexibility of portfolio management where cash position and security selection
do not depend on liquidity considerations and ii) predictable and relatively
constant asset size and resulting expense ratio. This has been the nature of
your Fund from the outset. The Board believes your Fund should be run in the
best interests of all shareholders and is working diligently towards that end.
6
<PAGE>
- ----------------------------------------------------------
THE NEW GERMANY FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
- -----------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -----------------------------------------------------------
<S> <C> <C>
INVESTMENTS
IN GERMAN
SECURITIES-- 77.6% OF NET ASSETS
COMMON STOCKS--60.0%
APPAREL--10.4%
550,000 Adidas AG..................... $ 60,939,204
7,000 Hugo Boss AG.................. 8,197,945
-------------
69,137,149
-------------
AUTOMOTIVE--3.3%
570,000 Kolbenschmidt AG*............. 9,653,252
16,000 Volkswagen.................... 12,280,843
-------------
21,934,095
-------------
CHEMICAL--9.9%
125,000 Henkel KGaA................... 6,637,867
500,000 Hoechst AG.................... 21,235,433
125,000 SGL Carbon AG................. 17,136,460
600,000 SKW Trostberg AG.............. 20,288,191
-------------
65,297,951
-------------
CONSTRUCTION MATERIALS--6.1%
30,000 Buderus AG.................... 16,533,670
250,000 Heidelberger Zement AG........ 23,681,038
-------------
40,214,708
-------------
COSMETICS--1.7%
16,450 Wella AG...................... 11,068,029
-------------
ELECTRICAL--2.8%
27,000 SAP AG........................ 5,425,111
260,000 Vossloh AG.................... 13,209,714
-------------
18,634,825
-------------
FINANCIAL SERVICES--2.9%
1,135,000 BHW Holding................... 19,221,827
-------------
HEALTHCARE--1.0%
50,000 Rhoen-Klinikum AG............. 6,601,986
-------------
INSURANCE--.7%
4,400 Victoria Holding.............. 4,458,350
-------------
MACHINERY/ENGINEERING--4.4%
16,000 Fried, Krupp AG Hoesch-
Krupp....................... 3,132,212
580,000 Lahmeyer...................... 25,871,749
-------------
29,003,961
-------------
<CAPTION>
- -----------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- -----------------------------------------------------------
<S> <C> <C>
MEDICAL EQUIPMENT--2.0%
65,100 Fresenius AG.................. $ 13,454,274
-------------
PHARMACEUTICALS--14.1%
50,000 Altana AG..................... 53,389,976
440,000 Gehe AG....................... 30,059,131
230,000 Merck KGaA.................... 10,160,457
-------------
93,609,564
-------------
PUBLISHING--.7%
5,200 Springer (Axel) AG............ 4,627,131
-------------
Total Common Stocks
(cost $295,927,329)......... 397,263,850
-------------
PREFERRED STOCKS--17.6%
APPAREL--2.9%
11,000 Hugo Boss AG.................. 13,261,381
10,000 Jil Sander AG................. 5,855,675
-------------
19,117,056
-------------
CHEMICAL--1.0%
50,000 Fuchs Petrolub AG............. 6,314,943
-------------
CONSTRUCTION
MATERIALS--3.2%
60,000 Dyckerhoff AG................. 21,700,442
-------------
COSMETICS--1.5%
14,300 Wella AG...................... 9,769,218
-------------
FOOD--3.6%
45,000 Suedzucker AG................. 24,154,659
-------------
HEALTHCARE--.1%
2,000 Rhoen-Klinikum AG............. 256,042
-------------
MEDICAL EQUIPMENT--5.3%
155,000 Fresenius AG.................. 35,237,384
-------------
Total Preferred Stocks
(cost $92,574,471).......... 116,549,744
-------------
Total Investments in German
Securities
(cost $388,501,800)......... 513,813,594
-------------
</TABLE>
- ------------------
* Non-income producing securities.
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
-----------------------------------------------------------
<S> <C> <C>
INVESTMENT IN
DANISH COMMON STOCK--1.1%
PHARMACEUTICALS--1.1%
65,000 Novo Nordisk--(B shares)
(Cost $5,946,215)........... $ 7,094,508
-------------
INVESTMENTS IN
DUTCH COMMON STOCKS--8.7%
APPAREL--1.5%
150,000 Gucci Group N.V............... 9,794,419
-------------
BANKING--1.0%
360,000 ABN-AMRO Holdings............. 6,721,420
-------------
INSURANCE--3.3%
475,000 Internationale Nederlanden
Groep....................... 21,929,041
-------------
RETAILING--2.9%
225,000 Ahold......................... 19,007,295
-------------
Total Investments in Dutch
Common Stocks
(cost $33,282,825).......... 57,452,175
-------------
INVESTMENT IN
FINNISH COMMON STOCKS--1.2%
ELECTRICAL--1.2%
103,000 Nokia (A shares)
(cost $6,416,993)........... 7,769,995
-------------
INVESTMENTS IN
FRENCH COMMON STOCKS--3.5%
ENERGY SOURCES--2.0%
135,000 Total (B shares).............. 13,659,825
-------------
LEISURE & TOURISM--1.5%
65,000 Accor......................... 9,743,633
-------------
Total Investments in French
Common Stocks
(cost $19,605,942).......... 23,403,458
-------------
INVESTMENT IN
ITALIAN COMMON STOCKS--1.3%
TELECOMMUNICATIONS--1.3%
2,500,000 Stet Savings Shares
(cost $9,640,417)........... 8,660,722
-------------
INVESTMENT IN
SPANISH COMMON STOCK--1.1%
TELECOMMUNICATIONS--1.1%
250,000 Telefonica de Espana
(cost $5,921,117)........... 7,238,497
-------------
<CAPTION>
- -----------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- -----------------------------------------------------------
<S> <C> <C>
INVESTMENT IN
SWISS COMMON STOCKS--2.4%
PHARMACEUTICALS--2.4%
10,000 Novartis
(cost $10,639,243).......... $ 16,026,918
-------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------
U.S. DOLLARS
(IN THOUSANDS)
- ---------------
<S> <C> <C>
REPURCHASE AGREEMENTS**--11.5%
19,924 Agreement with Lehman Brothers,
Inc., 5.95% dated 6/30/97, due
7/1/97 in the amount of
$19,927,490, collateralized by
FHGNs of $5,420,000, 7.41% due
3/5/07; $5,000,000, 7.00% due
5/1/01; $5,000,000, 6.11% due
11/20/01; $2,775,000, 6.55%
due 8/15/03 and $2,000,000,
5.99% due 3/6/01.............. 19,924,197
56,000 Agreement with J.P. Morgan
Securities Inc., 6.05% dated
6/30/97, due 7/1/97 in the
amount of $56,009,411,
collateralized by FNMAs of
$50,000,000, 7.03% due
10/25/06 and $6,605,000, 6.7%
due 11/16/05.................. 56,000,000
-------------
Total Repurchase Agreements
(cost $75,924,197)............ 75,924,197
-------------
Total Investments--108.4% (cost
$555,878,749)................. 717,384,064
Liabilities in excess of
cash and other
assets--(8.4)%................ (55,509,105)
-------------
NET ASSETS--100%................ $ 661,874,959
-------------
-------------
</TABLE>
- ------------------
** Investment of cash collateral received for portfolio securities on loan.
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
THE NEW GERMANY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $555,878,749)............................................................... $717,384,064
Cash and foreign currency (includes $5,669,193 equivalent in an interest-bearing Deutsche mark account
with Deutsche Bank AG)................................................................................ 10,421,095
Receivable for securities sold.......................................................................... 10,296,768
Foreign withholding tax refund receivable............................................................... 1,228,246
Dividends receivable.................................................................................... 1,414,536
Interest receivable..................................................................................... 359,611
Other assets............................................................................................ 11,129
------------
Total assets....................................................................................... 741,115,449
------------
LIABILITIES
Payable upon return of securities loaned................................................................ 75,924,197
Payable for securities purchased........................................................................ 2,227,350
Payable for securities lending brokers' rebate and agency fees.......................................... 275,865
Management fee payable.................................................................................. 299,280
Investment advisory fee payable......................................................................... 143,460
Payable for shares repurchased.......................................................................... 186,588
Accrued expenses and accounts payable................................................................... 183,750
------------
Total liabilities.................................................................................. 79,240,490
------------
NET ASSETS.............................................................................................. $661,874,959
------------
------------
Net assets consist of:
Paid-in capital, $.001 par (Authorized 80,000,000 shares)............................................... $462,801,469
Cost of 1,252,769 shares held in treasury............................................................... (13,654,905)
Undistributed net investment income..................................................................... 3,067,599
Undistributed net realized gain on investments and foreign currency transactions........................ 48,345,166
Net unrealized appreciation of investments and foreign currency......................................... 161,315,630
------------
Net assets.............................................................................................. $661,874,959
------------
------------
Net asset value per share ($661,874,959 divided by 32,943,468 shares of common stock issued and
outstanding).......................................................................................... $20.09
------
------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE NEW GERMANY FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six
months ended
June 30,
1997
------------
<S> <C>
NET INVESTMENT INCOME
Income
Dividends (net of foreign withholding taxes of $774,622).............................................. $ 5,893,552
Interest.............................................................................................. 148,617
------------
Total income....................................................................................... 6,042,169
------------
Expenses
Management fee........................................................................................ 1,674,586
Investment advisory fee............................................................................... 795,173
Reports to shareholders............................................................................... 126,585
Custodian and Transfer Agent's fees and expenses...................................................... 122,380
Directors' fees and expenses.......................................................................... 99,888
Legal fee............................................................................................. 83,790
Audit fee............................................................................................. 30,500
NYSE listing fee...................................................................................... 19,007
Miscellaneous......................................................................................... 22,661
------------
Total expenses..................................................................................... 2,974,570
------------
Net investment income................................................................................... 3,067,599
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Investments........................................................................................... 38,983,414
Foreign currency transactions......................................................................... (1,643,962)
Net change in unrealized appreciation/depreciation on:
Investments........................................................................................... 59,390,155
Translation of other assets and liabilities from foreign currency..................................... (177,577)
------------
Net gain on investments and foreign currency transactions............................................... 96,552,030
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............................................................................... $ 99,619,629
------------
------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- ---------------------------------------------------------
THE NEW GERMANY FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
For the
For the six year ended
months ended December 31,
June 30, 1997 1996
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income....... $ 3,067,599 $ 3,153,950
Net realized gain (loss) on:
Investments............... 38,983,414 54,296,083
Foreign currency
transactions............ (1,643,962) (1,158,622)
Net change in unrealized
appreciation/depreciation on:
Investments............... 59,390,155 48,436,535
Translation of other
assets and liabilities
from foreign currency... (177,577) (55,342)
------------- -------------
Net increase in net assets
resulting from
operations................ 99,619,629 104,672,604
------------- -------------
Distributions to shareholders
from:
Net investment income....... -- (2,022,438)
Net realized short term
capital gains*............ -- (9,810,013)
Net realized long term
capital gains............. -- (32,938,986)
------------- -------------
-- (44,771,437)
------------- -------------
Capital share transactions:
Net proceeds from
reinvestment of dividends
(1,500,466 and 516,627
shares, respectively)..... 20,068,733 6,651,573
Cost of shares repurchased
(492,196 and 1,050,800
shares, respectively)..... (6,939,934) (13,627,400)
------------- -------------
Net increase (decrease) in
net assets from capital
share transactions........ 13,128,799 (6,975,827)
------------- -------------
Total increase................ 112,748,428 52,925,340
NET ASSETS
Beginning of period........... 549,126,531 496,201,191
------------- -------------
End of period (including
undistributed net investment
income of $3,067,599 and
$-0-, respectively)......... $ 661,874,959 $ 549,126,531
------------- -------------
------------- -------------
</TABLE>
* Characterized as ordinary income for tax purposes.
See Notes to Financial Statements.
- ---------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- ---------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The New Germany Fund, Inc. (the 'Fund') was incorporated in Maryland on January
16, 1990 as a non-diversified, closed-end management investment company. The
Fund commenced investment operations on January 30, 1990.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION: Investments are stated at value. All securities for which
market quotations are readily available are valued at the last sales price on
the primary exchange on which they are traded prior to the time of valuation,
or, if no sales price is available at that time, at the price established by the
exchange. Securities that are traded in the unregulated market are valued, if
bid and asked quotations are available, at the current bid price. If bid and
asked quotations are not available, then such securities will be valued as
determined in good faith by the Board of Directors of the Fund. Investments in
securities having a maturity of 60 days or less are valued at amortized cost.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Cost of securities sold is calculated using the
identified cost method. Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Such dividend income is
recorded net of unrecoverable foreign withholding tax.
REPURCHASE AGREEMENTS: The Fund's custodian takes possession of collateral
pledged for investments in repurchase agreements, the market value of which is
required to be at least 102 percent of the resale amount at the time of
purchase. The value of the collateral is marked-to-market on a daily basis and
additional collateral is requested from the counterparty,
11
<PAGE>
as necessary, to ensure that its value is at least equal at all times to the
total amount of the repurchase obligation, including interest. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
commence with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
LOANS OF PORTFOLIO SECURITIES: The Fund may lend portfolio securities while it
continues to earn dividends on such securities loaned. The cash collateral
received is at least equal at all times to 105 percent of the market value of
the securities loaned, which are marked-to-market daily. Such collateral is
invested in short term instruments and any interest income in excess of agency
fees and of a predetermined rebate to the borrowers is earned by the Fund as
interest income.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are maintained
in United States dollars.
Assets and liabilities denominated in Deutsche mark ('DM') and other foreign
currency amounts are translated into United States dollars at the 10:00 A.M.
mid-point of the buying and selling spot rates quoted by the Federal Reserve
Bank of New York. Purchases and sales of investment securities, income and
expenses are reported at the rate of exchange prevailing on the respective dates
of such transactions. The resultant gains and losses arising from exchange rate
fluctuations are identified separately in the Statement of Operations, except
for such amounts attributable to investments which are included in net realized
and unrealized gains and losses on investments.
Foreign investments may involve certain considerations and risks not
typically associated with those of domestic origin as a result of, among others,
the possibility of political and economic developments and the level of
governmental supervision and regulation of foreign securities markets.
TAXES: No provision has been made for United States Federal income tax because
the Fund intends to meet the requirements of the United States Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to shareholders.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund records dividends and
distributions to its shareholders on the ex-dividend date. Income and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences, which could be temporary or permanent in nature, may result in
reclassification of distributions; however, net investment income, net realized
gains and net assets are not affected.
NOTE 2. MANAGEMENT AND INVESTMENT ADVISORY AGREEMENTS
The Fund has entered into a Management Agreement with and related undertaking
by (collectively, the 'Management Agreement') Deutsche Morgan Grenfell Inc. (the
'Manager') and an Investment Advisory Agreement with Deutsche Asset Management
GmbH (the 'Investment Adviser'). The Manager and the Investment Adviser are
affiliated companies.
The Management Agreement provides the Manager with a fee, computed weekly
and payable monthly, at the annual rates of .65% of the Fund's average weekly
net assets up to $100 million, .55% of such assets in excess of $100 million and
up to $500 million, and .50% of such assets in excess of $500 million. The
Investment Advisory Agreement provides the Investment Adviser with a fee,
computed weekly and payable monthly, at the annual rates of .35% of the Fund's
average weekly net assets up to $100 million and .25% of such assets in excess
of $100 million.
Pursuant to the Management Agreement, the Manager will be the corporate
manager and administrator of the Fund and, subject to the supervision of the
Board of Directors and pursuant to recommendations made by the Fund's Investment
Adviser, will determine the suitable securities for investment by the Fund. The
Manager will also provide office facilities and certain administrative, clerical
and bookkeeping services for the Fund. Pursuant to the Investment Advisory
Agreement, the Investment Adviser, in accordance with the Fund's stated
investment objective, policies and restrictions, will make recommendations to
the Manager with respect to the Fund's investments and, upon instructions given
by the Manager
12
<PAGE>
as to suitable securities for investment by the Fund, will transmit purchase and
sale orders and select brokers and dealers to execute portfolio transactions on
behalf of the Fund.
NOTE 3. TRANSACTIONS WITH AFFILIATES
For the six months ended June 30, 1997, Deutsche Bank AG, the German parent of
the Manager and Investment Adviser, and Deutsche Morgan Grenfell Group, a direct
subsidiary of Deutsche Bank AG, received $387,778 and $72,567, respectively, in
brokerage commissions as a result of executing agency transactions in portfolio
securities on behalf of the Fund.
For the six months ended June 30, 1997, interest income earned on the
Deutsche mark account with Deutsche Bank AG was $9,188.
Certain directors and officers of the Fund are also directors and officers
of either the Manager, the
Investment Adviser or Deutsche Bank AG.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the six months ended June 30, 1997, were $227,062,706 and $253,215,642,
respectively.
NOTE 5. PORTFOLIO SECURITIES LOANED
At June 30, 1997, the market value of the securities loaned and amount of
collateral received with respect to such loans were $71,716,155 and $75,924,197,
respectively. For the six months ended June 30, 1997, net earnings to the Fund
from investing such collateral were $139,429 after deducting borrowers' rebate
and agency fees of $1,724,184 and $50,563, respectively.
NOTE 6. CAPITAL
During the six months ended June 30, 1997 and the year ended December 31, 1996,
the Fund purchased 492,196 and 1,050,800 of its shares of common stock on the
open market at a total cost of $6,939,934 and $13,627,400, respectively. The
weighted average discount of these purchases comparing the purchase price to the
net asset value at the time of purchase was 22.32% and 23.71%, respectively.
These shares are held in treasury. During the six months ended June 30, 1997 and
the year ended December 31, 1996, the Fund issued 1,500,466 and 516,627 shares,
respectively to shareholders as a result of dividend reinvestment.
NOTE 7. DIVIDEND
On July 14, 1997, the Board of Directors of the Fund declared a dividend of
$0.34 per share to stockholders of record on September 3, 1997, payable on
September 16, 1997.
13
<PAGE>
- --------------------------------------------------------------------------------
THE NEW GERMANY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------
Selected data for a share of common stock outstanding throughout each of the
periods indicated:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
NET ASSET VALUE:
BEGINNING OF
PERIOD........ $ 17.20 $15.28 $14.54 $14.25 $11.00 $12.63
----------- ------ ------ ------ ------ ------
NET INVESTMENT
INCOME.......... .09 .10 .15 .14 .12 .14
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS AND
FOREIGN CURRENCY
TRANSACTIONS.... 2.92 3.09 .98 .88 3.21 (1.60)
----------- ------ ------ ------ ------ ------
INCREASE
(DECREASE) FROM
INVESTMENT
OPERATIONS...... 3.01 3.19 1.13 1.02 3.33 (1.46)
----------- ------ ------ ------ ------ ------
INCREASE
RESULTING FROM
SHARE
REPURCHASES..... .06 .13 .02 .01 .01 .01
----------- ------ ------ ------ ------ ------
DISTRIBUTIONS
FROM NET
INVESTMENT
INCOME.......... - (.06) (.13) (.14) (.06) (.14)
DISTRIBUTIONS
FROM NET
REALIZED FOREIGN
CURRENCY
GAINS+.......... - - (.03) (.02) (.03) (.04)
DISTRIBUTIONS
FROM NET
REALIZED SHORT
TERM CAPITAL
GAINS+.......... - (.31) - - - -
DISTRIBUTIONS
FROM NET
REALIZED LONG
TERM CAPITAL
GAINS........... - (1.03) (.25) - - (.03)
----------- ------ ------ ------ ------ ------
TOTAL
DISTRIBUTIONS... - (1.40) (.41) (.16) (.09) (.18)
----------- ------ ------ ------ ------ ------
DILUTION IN NAV
FROM DIVIDEND
REINVESTMENT.... (.18) - - - - -
----------- ------ ------ ------ ------ ------
DILUTION IN NAV
FROM RIGHTS
OFFERING........ - - - (.56) - -
----------- ------ ------ ------ ------ ------
OFFERING COSTS
CHARGED TO
CAPITAL......... - - - (.02) - -
----------- ------ ------ ------ ------ ------
NET ASSET
VALUE:..........
END OF PERIOD... $ 20.09 $17.20 $15.28 $14.54 $14.25 $11.00
----------- ------ ------ ------ ------ ------
----------- ------ ------ ------ ------ ------
MARKET VALUE:
END OF PERIOD... $ 15.75 $13.375 $11.63 $11.50 $13.375 $ 9.50
TOTAL INVESTMENT
RETURN FOR
PERIOD++
BASED UPON
MARKET
VALUE......... 17.76% 27.10% 4.65% (12.00)% 39.93% (10.99)%
BASED UPON NET
ASSET VALUE... 16.80% 21.73% 7.91% 4.19%+++ 32.19% (12.79)%
RATIO TO AVERAGE
NET ASSETS
TOTAL
EXPENSES...... .99%* 1.01% 1.01% 1.02% 1.07% 1.07%
NET INVESTMENT
INCOME........ 1.02%* .58% .93% .91% .93% 1.14%
PORTFOLIO
TURNOVER........ 38% 109% 45% 46% 48% 42%
AVERAGE BROKERAGE
COMMISSIONS**... $ 0.1345 $0.2149 - - - -
NET ASSETS AT END
OF PERIOD
(000'S
OMITTED)........ $ 661,875 $549,127 $496,201 $472,591 $386,603 $298,145
</TABLE>
- ------------------
+ CHARACTERIZED AS ORDINARY INCOME FOR TAX PURPOSES.
++ TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING THAT SHARES OF THE FUND'S
COMMON STOCK WERE PURCHASED AT THE CLOSING MARKET PRICE AS OF THE BEGINNING
OF THE PERIOD, DIVIDENDS, CAPITAL GAINS AND OTHER DISTRIBUTIONS WERE
REINVESTED AT THE LOWER OF THE NET ASSET VALUE OR THE CLOSING MARKET VALUE
AND THEN SOLD AT THE CLOSING MARKET PRICE PER SHARE ON THE LAST DAY OF THE
PERIOD. THE COMPUTATION DOES NOT REFLECT ANY SALES COMMISSION INVESTORS MAY
INCUR IN PURCHASING OR SELLING SHARES OF THE FUND. THE TOTAL INVESTMENT
RETURN BASED ON THE NET ASSET VALUE IS SIMILARLY COMPUTED EXCEPT THAT THE
FUND'S NET ASSET VALUE IS SUBSTITUTED FOR THE CLOSING MARKET VALUE.
+++ ADJUSTED FOR THE DILUTIVE EFFECT OF THE RIGHTS OFFERING COMPLETED IN JUNE
1994.
* ANNUALIZED.
** REPRESENTS AVERAGE BROKERAGE COMMISSION RATE PER SHARE OF TOTAL SECURITY
TRADES ON WHICH BROKERAGE COMMISSIONS WERE CHARGED. THIS INFORMATION IS ONLY
PRESENTED FOR THE PERIODS BEGINNING WITH THE YEAR ENDED DECEMBER 31, 1996.
- --------------------------------------------------------------------------------
REPORT OF
STOCKHOLDERS' MEETING (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund held its Annual Meeting of Stockholders on June 20, 1997. The two
matters voted upon by stockholders and the resulting votes for each matter were
as follows:
VOTING RESULTS*
---------------------------
AGAINST/
FOR WITHHELD ABSTAINED
------ -------- ---------
1. Election of the following
Directors:
Dr. Franz Wilhelm Hopp....... 22,311 2,618 -
Ernst-Ulrich Matz............ 22,386 2,544 -
Dr. Ronaldo H. Schmitz....... 22,358 2,571 -
Christian Strenger........... 22,357 2,573 -
Dr. Frank Tromel............. 22,384 2,546 -
Peter Zuhlsdorff............. 22,384 2,546 -
2. Selection of Independent
Accountants.................. 22,571 213 2,146
* In thousands of shares.
14
<PAGE>
EXECUTIVE OFFICES--
31 West 52nd Street, New York, NY 10019
(For latest net asset value, schedule of the Fund's largest holdings, dividend
data and shareholder inquiries, please call 1-800-GERMANY in the U.S. or
617-443-6918 outside of the U.S.)
MANAGER--
Deutsche Morgan Grenfell Inc.
INVESTMENT ADVISER--
Deutsche Asset Management GmbH
CUSTODIAN AND TRANSFER AGENT--
Investors Bank & Trust Company
LEGAL COUNSEL--
Sullivan & Cromwell
DIRECTORS AND OFFICERS--
DR. RONALDO H. SCHMITZ, Chairman,
President and Director
JOHN A. BULT, Director
JOHN H. CANNON, Director
RICHARD KARL GOELTZ, Director
DR. FRANZ WILHELM HOPP, Director
ERNST-ULRICH MATZ, Director
CHRISTIAN STRENGER, Director
DR. FRANK TROMEL, Director
ROBERT H. WADSWORTH, Director
PETER ZUHLSDORFF, Director
G. RICHARD STAMBERGER, Executive Vice President
and Chief Executive Officer
ROBERT R. GAMBEE, Chief Operating Officer
and Secretary
JOSEPH M. CHEUNG, Chief Financial Officer
and Treasurer
---------------
All investment management decisions are made by a committee of United States
and German advisors.
This report, including the financial statements herein, is transmitted to the
shareholders of The New Germany Fund, Inc. for their information. This is not
a prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report. The information
contained in the letter to shareholders, the interview with the portfolio
manager and the report of investment adviser and manager in this report is
derived from carefully selected sources believed reasonable. We do not
guarantee its accuracy or completeness, and nothing in this report shall be
construed to be a representation of such guarantee. Any opinions expressed
reflect the current judgment of the author, and do not necessarily reflect the
opinion of Deutsche Bank AG or any of its subsidiaries and affiliates.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
Comparisons between changes in the Fund's net asset value per share and
changes in the Deutsche Aktien index should be considered in light of the
Fund's investment policy and objectives, the characteristics and quality of
the Fund's investments, the size of the Fund and variations in the foreign
currency/Dollar exchange rate.
15
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF GENERAL INFORMATION
- --------------------------------------------------------------------------------
THE FUND
The New Germany Fund is a non-diversified, closed-end investment company
listed on the New York Stock Exchange with the symbol 'GF'. The Fund seeks
capital appreciation primarily through investment in German equities. It is
managed by Deutsche Morgan Grenfell Inc., using investment advice from the
Deutsche Asset Management GmbH unit of Deutsche Bank AG, Germany's largest
banking and financial services group.
SHAREHOLDER INFORMATION
Daily prices for the Fund's shares are published in the New York Stock
Exchange Composite Transactions section of newspapers under the designation
'NewGermanyFd'. Net asset value and market price information are published each
Monday in The Wall Street Journal and The New York Times, and each Saturday in
Barron's and other newspapers in a table called 'Closed End Funds'. Daily
information on the Fund's net asset value, together with the Deutsche mark
exchange rate and the DAX index, is available by calling: 1-800-GERMANY (in the
U.S.) or 617-443-6918 (outside of the U.S.). In addition, a schedule of the
Fund's largest holdings, dividend data and general shareholder information may
be obtained by calling these numbers.
For periodic updates please also visit our Web site: http://www.gffund.com.
THERE ARE THREE GERMANY FUNDS FOR YOUR SELECTION:
o Germany Fund--investing exclusively in German equities, primarily the 'blue
chip' corporations.
o New Germany Fund--investing primarily in the middle-market German companies,
and up to 20% outside Germany (with no more than 10% in any single country
outside of Germany).
o Central European Equity Fund--investing primarily in Central and Eastern
Europe as well as Russia.
Please consult your broker for advice on any of the above or call
1-800-GERMANY (in the U.S.) or 617-443-6918 (outside of the U.S.) for
shareholder reports.
14551
THE NEW GERMANY
FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1997
