<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
November 26, 1996
Dear Shareholder,
We are pleased to present to shareholders of The Emerging Germany Fund Inc.
the Fund's report for the quarter ended September 30, 1996.
The German economy continued its recovery in the third quarter. The Bundesbank
lowered short-term rates, foreign demand stimulated the German export industry,
consumer spending rose, and the GDP forecast for 1996 was revised upwards. An
improved business climate, the pick-up in manufacturing orders and strong
industrial production, as well as continued corporate restructuring, created a
favorable background for the German equity markets, and made it possible for all
major indices to reach new all-time highs.
At September 30, 1996, the Fund had net assets of $140.8 million, or $10.05
per share, compared with $9.86 per share at the beginning of the quarter. This
represented an increase in net asset value of 1.93% during the third quarter,
compared with a gain in the DAX100 Index of 2.78% in dollar terms.
At September 30, 1996, the Fund's invested position comprised 98% of net
assets and consisted of 47 common stocks and four preferred stocks of German
companies.
On October 4, 1996, the Fund's shareholders approved the selection of RCM
Capital Management, L.L.C. as the Fund's investment manager and administrator.
We thank our shareholders for their continued interest and support.
Sincerely,
<TABLE>
<S> <C>
[SIG] [SIG]
Rolf Passow George N. Fugelsang
Chairman President
</TABLE>
1
<PAGE>
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INVESTMENT REVIEW
- --------------------------------------------------------------------------------
POLITICAL AND ECONOMIC DEVELOPMENTS
The second-quarter GDP figures released in September were significantly better
than expected, with the Federal Statistics Office announcing a seasonally
adjusted real GDP rise of 1.5% quarter-over-quarter. The strong growth was due
in part to the seasonal effect of the impressive 11.5% quarter-over-quarter
growth of construction investments, which more than compensated for the 9.5%
shortfall of production in the first quarter. Foreign demand continued to play a
key role as exports grew by 1% in the second quarter. In addition, consumer
spending showed signs of recovery, rising by 0.9% in the second quarter, and the
portion of GDP tied to machinery and equipment showed a moderate increase of
0.3%. Government spending rose by 1.7%, mainly because of increased expenditures
relating to nursing care insurance. The strong second-quarter GDP figures led to
an upward revision in the GDP forecast for 1996, and the old estimates of
0.5%-1% were revised upwards to 1.3%-1.5%. The favorable business climate
indicators and the positive development of manufacturing orders, in particular
foreign orders, and industrial production during the course of the third quarter
point to a further improvement in GDP. In addition, higher capacity utilization
since the beginning of the third quarter indicates that investment in machinery
and equipment will pick up in the near future.
Despite clear signs of economic recovery, the unemployment rate in Germany
persisted at a level of 10% throughout the third quarter, and inflation remained
stable at about 1.4%.
In late August, at its first meeting after the summer recess, the Bundesbank
decided to cut the repo rate by 30 basis points to 3.00%, primarily because of
the slowdown of the money supply growth, the overall economic environment and
the absence of inflationary pressures; the discount and Lombard rates were left
unchanged at 2.50% and 4.50%, respectively.
Against the background of higher U.S. bond yields, the Bank of Japan's
commitment to a soft Yen and the Bundesbank's rate cut, the dollar appreciated
from DM1.47 to DM1.53 during the second half of the third quarter following a
significant drop early in the quarter. The strength of the dollar and the
depreciation of the DM versus other important currencies are creating a
favorable environment for the German export industry.
The political discussion in Germany is currently dominated by issues involving
the savings package and changes in the tax law. The savings package of
approximately DM35 billion focuses on spending cuts in the social security
system and the federal and state governments. The government's draft of the 1997
tax law contains the abolition of the wealth tax, and reform of inheritance,
automobile and trade taxes. In total, the proposed tax law is expected to burden
the budgets at all government levels by some DM5 billion.
STOCK MARKET REVIEW
During the third quarter, the German equity market outperformed most of the
other European markets. The DAX Index rose by 3.43% compared to gains of 0.66%
in the French equity index CAC40, 0.22% in the Swiss SMI index and 3.02% in the
Dutch EOE index. In addition, all major German indices hit all-time highs. The
only European equity market to outperform the DAX in the third quarter was the
UK market, where the FTSE Index rose by 6.12%. Even more surprising was the
DAX's outperformance of the US market: the Dow Jones Industrials Index gained
2.66%, while the S&P 500 rose by 1.96% in the third quarter. The DAX100 Index, a
broad, capitalization-weighted index combining the DAX and the MDAX, rose by
3.02% in the third quarter, while the MDAX gained only 1.24%.
A number of factors helped create a positive environment for the German stock
market. Short-term interest rates were cut to historically low levels, and
long-term rates declined during the third quarter from 6.51% to 6.10%. The low
interest rates also encouraged companies to embark on investment projects
planned earlier in the year but kept on hold because of the unfavorable economic
environment
2
<PAGE>
in the first months of 1996. On the currency front, the German export industry
benefited from the strength of the dollar and other major currencies. Last, but
not least, all indications now point to legislative passage of the Financial
Markets Promotion Law ("Finanzmarktforderungsgesetz") by early next year. The
German government intends to introduce a number of new measures through this
legislation, which currently include proposals to:
- allow companies to introduce stock option plans;
- permit share buy-backs of up to 10% of a company's capital;
- gradually phase out multiple voting rights; and
- broaden the duties of supervisory boards.
Although these positive external factors created a favorable environment, the
performance of the German equity market during the third quarter was mostly
influenced by specific developments within individual sectors and companies. The
semi-annual results published by almost all DAX100 companies over the course of
the third quarter held no negative surprises. Some company results were well
above consensus forecasts, mainly because of cost-cutting measures, a stronger
focus on core activities and the spinning off of non-core businesses.
The banking sector, in particular, performed well in the third quarter, as
opposed to the utilities and retail sectors, which underperformed. The strong
overall market performance, however, was primarily driven by substantial
investor interest in specific companies such as BASF, Schering, Munchener
Ruckversicherung, SAP and Mannesmann.
PORTFOLIO STRATEGY AND REVIEW
During the third quarter, the Fund's net asset value rose by 1.93% compared
with a rise in the DAX100 Index of 2.78% in dollar terms. In the same period,
the DAX Index gained 3.12% in dollar terms, while the MDAX rose only by 1.13%.
Since the broadening in April 1996 of the Fund's investment mandate to
authorize investments without limitation based on the size of the Fund's
portfolio companies, the weighting in small and mid-cap stocks has been steadily
reduced. Over the course of the third quarter, the Fund's positions in
Jungheinrich, IKB, Thyssen Industrie, Aachener und Munchener Versicherung, PWA,
Phonix, Sudzucker, Weru, Leifheit and Berliner Kraft und Licht were sold, and
positions in Victoria Holding and Gerresheimer Glas were reduced.
Conversely, large-cap positions were strengthened. The Fund's exposure to the
chemicals and pharmaceuticals sector was raised by increasing the positions in
Hoechst and Bayer, and by acquiring BASF, one of Germany's major chemical
companies. BASF's expansion of high-growth, high-margin and non-cyclical
businesses as well as its focus on cost-cutting and enhancing shareholder value,
combined with the stock's superior yield, make BASF an attractive investment. In
addition, the Fund acquired a position in GEHE, a wholesaler of pharmaceutical
products and medical supplies offering some of the most reliable prospects for
above-trend earnings growth over time.
At the end of the third quarter, the chemicals and pharmaceuticals sector
still represented the highest weighting in the Fund's portfolio.
The Fund continued to increase its weighting in the banking sector. The
Deutsche Bank position was added to, and a new position in BAYERISCHE
HYPOTHEKEN- UND WECHSEL-BANK was acquired. Following a prolonged period of
underperformance, the banking sector appears to be attractively valued, and
restructuring measures as well as the expectation of impending consolidation
have created a favorable sentiment for this sector.
In the insurance sector, the Fund's weighting in Munchener Ruckversicherung
was increased, and DBV HOLDING was newly acquired after selling Aachener und
Munchener Versicherung and reducing the
3
<PAGE>
Victoria Holding position. DBV's merger with the German arm of the Swiss insurer
Winterthur is expected to have a positive earnings impact, and the synergy
effect may lead to a significant reduction of fixed costs over the next several
years.
In the consumer goods and retail sectors, the Adidas position was increased
while Metro was disposed of. In the engineering sector, MAN was sold while a
position in MANNESMANN was gradually built up during the third quarter.
Mannesmann's restructuring measures in engineering and plant construction are
expected to result in an initial earnings improvement. In addition, the
company's stake in DBKom, the telecommunications subsidiary of Deutsche Bahn,
underlines the strategic importance of telecommunications, and makes it possible
for Mannesmann to become a genuine competitor to Deutsche Telekom.
Stocks of the following companies represented the Fund's ten largest positions
at September 30, 1996:
<TABLE>
<CAPTION>
PERCENT OF
COMPANY VALUE (IN $) NET ASSETS
- -------------------------------------------------- ------------ ----------
<S> <C> <C>
Bayer AG.......................................... $ 8,251,473 5.86%
Daimler-Benz AG................................... 8,241,650 5.85
Hoechst AG........................................ 8,204,322 5.83
Veba AG........................................... 6,540,603 4.64
Volkswagen AG..................................... 5,589,391 3.97
BASF AG........................................... 5,500,982 3.91
Munchener Ruckversicherungs-Gesellschaft AG....... 5,098,232 3.62
Siemens AG........................................ 5,005,697 3.55
SAP AG............................................ 4,960,707 3.52
Deutsche Bank AG.................................. 4,708,579 3.34
------------ -----
$ 62,101,636 44.09%
------------ -----
------------ -----
</TABLE>
November 26, 1996
RCM Capital Management, L.L.C.
4
<PAGE>
PERCENT OF NET ASSETS BY INDUSTRY
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY CLASS NET ASSETS
- ---------------------------------------------------------------------------------------------------- -------------
<S> <C>
Apparel............................................................................................. 2.21%
Appliance & Household............................................................................... 2.02
Automobiles......................................................................................... 9.82
Banking............................................................................................. 14.10
Building Materials & Components..................................................................... 2.08
Business & Publishing Services...................................................................... 0.52
Chemicals........................................................................................... 15.59
Construction & Housing.............................................................................. 1.43
Electrical & Electronics............................................................................ 7.49
Health & Personal Care.............................................................................. 6.21
Industrial Components............................................................................... 1.30
Insurance........................................................................................... 10.01
Machinery & Engineering............................................................................. 8.46
Merchandising....................................................................................... 2.32
Miscellaneous Materials............................................................................. 4.39
Multi-Industry...................................................................................... 1.62
Transportation/Airlines............................................................................. 0.76
Utilities/Electrical & Gas.......................................................................... 8.06
-----
Percent of Investments in German Securities....................................................... 98.39%
-----
-----
</TABLE>
5
<PAGE>
- --------------------------------------------
THE EMERGING GERMANY FUND INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
<C> <S> <C>
SHARES/
PAR VALUE DESCRIPTION VALUE
<CAPTION>
- ---------------------------------------------------------------------------
<C> <S> <C>
INVESTMENTS IN GERMAN
SECURITIES--98.39%
COMMON STOCKS--93.53%
APPAREL--0.97%
15,000 Adidas................................. $ 1,364,440
-------------------
APPLIANCE & HOUSEHOLD--0.48%
15,724 Henkel KGaA............................ 677,563
-------------------
AUTOMOBILES--9.82%
150,000 Daimler-Benz AG........................ 8,241,650
15,000 Volkswagen AG.......................... 5,589,391
-------------------
13,831,041
-------------------
BANKING--14.10%
100,000 Bankgesellschaft Berlin AG............. 1,997,381
75,000 Bayerische Vereinsbank AG.............. 2,603,143
125,000 Bayerische Hypotheken- und Wechsel-Bank
AG................................... 3,564,997
151,500 BHF-Bank AG............................ 3,918,959
5,000 Commerzbank AG......................... 1,141,126
100,000 Deutsche Bank AG....................... 4,708,579
50,000 DT Pfandbrief- und Hypothekenbank AG... 1,931,893
-------------------
19,866,078
-------------------
BUSINESS & PUBLISHING
SERVICES--0.52%
1,250 Axel Springer Verlag AG................ 736,739
-------------------
CHEMICALS--15.59%
225,000 Bayer AG............................... 8,251,473
175,000 BASF AG................................ 5,500,982
225,000 Hoechst AG............................. 8,204,322
-------------------
21,956,777
-------------------
CONSTRUCTION & HOUSING--1.43%
20,000 Bilfinger & Berger Bau AG.............. 844,794
30,000 Kampa-Haus AG.......................... 1,178,782
-------------------
2,023,576
-------------------
<CAPTION>
- ---------------------------------------------------------------------------
SHARES/
PAR VALUE DESCRIPTION VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
ELECTRICAL & ELECTRONICS--7.49%
15,000 eff-eff KGaA........................... $ 585,462
30,000 SAP AG................................. 4,960,707
95,000 Siemens AG............................. 5,005,697
-------------------
10,551,866
-------------------
HEALTH & PERSONAL CARE--6.21%
5,000 Altana AG.............................. 4,050,426
30,000 Gehe AG................................ 2,003,929
17,500 Schwarz Pharma AG...................... 1,298,461
18,000 Schering AG............................ 1,390,963
-------------------
8,743,779
-------------------
INDUSTRIAL COMPONENTS--1.30%
100,000 Continental AG......................... 1,827,767
-------------------
INSURANCE--10.01%
1,500 Allianz AG Holding..................... 2,646,365
1,500 Allianz AG Holding-New................. 2,624,754
17,500 CKAG Colonia Konzern AG................ 1,346,595
3,000 DBV Holding AG......................... 1,056,974
2,000 Victoria Holding AG.................... 1,322,855
2,250 Munchener Ruckversicherungs-
Gesellschaft AG...................... 5,098,232
-------------------
14,095,775
-------------------
MACHINERY & ENGINEERING--8.46%
2,500 Buderus AG............................. 1,110,020
60,000 Durr Beteiligungs-AG................... 2,172,888
5,000 IWKA AG................................ 1,112,967
3,500 Linde AG............................... 2,234,774
5,000 Mannesmann AG.......................... 1,872,954
4,000 Rheinelektra AG........................ 3,418,468
-------------------
11,922,071
-------------------
MERCHANDISING--2.32%
75,000 Douglas Holding AG..................... 3,266,208
-------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------
SHARES/
PAR VALUE DESCRIPTION VALUE
- ------------------------------------------------
MISCELLANEOUS MATERIALS--4.39%
<C> <S> <C>
6,000 Degussa AG.............. $ 2,170,923
25,000 Gerresheimer Glas AG.... 511,133
30,000 SGL Carbon AG........... 3,497,053
-----------
6,179,109
-----------
MULTI-INDUSTRY--1.62%
45,000 Industrieverwaltungs-
gesellschaft AG....... 1,529,470
3,000 Preussag AG............. 747,544
-----------
2,277,014
-----------
TRANPORTATION/AIRLINES--0.76%
7,500 Lufthansa AG............ 1,068,271
-----------
UTILITIES/ELECTRICAL & GAS--8.06%
3,800 Berliner Kraft- &
Licht-AG.............. 1,032,744
100,000 RWE AG (a).............. 3,772,102
125,000 Veba AG................. 6,540,603
-----------
11,345,449
-----------
Total Common Stocks
(cost $115,220,076)... 131,733,523
-----------
<CAPTION>
- ------------------------------------------------
SHARES/
PAR VALUE DESCRIPTION VALUE
- ------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS--4.86%
APPAREL--1.24%
1,500 Hugo Boss AG............ $ 1,748,527
-----------
APPLIANCE & HOUSEHOLD--1.54%
50,000 Henkel KGaA............. 2,175,999
-----------
BUILDING MATERIALS &
COMPONENTS--2.08%
7,000 Dyckerhoff AG........... 1,549,443
5,000 Friedrich Grohe AG...... 1,373,608
-----------
2,923,051
-----------
Total Preferred Stocks
(cost $6,133,741)..... 6,847,577
-----------
Total Investments
(cost $121,353,817)--
98.39%................ 138,581,100
-----------
Other assets in excess
of
liabilities--1.61%.... 2,265,185
-----------
Net Assets--100.00%..... $140,846,285
-----------
-----------
</TABLE>
- ----------------
Percentages are of net assets.
(a) All or part of this security is on loan.
7
<PAGE>
THE EMERGING GERMANY FUND INC.
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Rolf Passow, Chairman*
George N. Fugelsang, President*
Robert J. Birnbaum
Carroll Brown
Theodore J. Coburn
James E. Dowd**
Alfred W. Fiore
Siegfried A. Kessler**
Gottfried W. Perbix**
Jacob Saliba
* Interested person within the meaning of the Investment Company Act of 1940
** Member, Audit Committee
- --------------------------------------------------------------------------------
OFFICERS
Markus W. Bischofberger, Vice President
Herbert Doenges, Vice President
Alexandra Simou, Secretary
- --------------------------------------------------------------------------------
INVESTMENT MANAGER
RCM Capital Management, L.L.C.
Four Embarcadero Center
San Francisco, CA 94111-4189
- --------------------------------------------------------------------------------
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DIVIDEND PAYING AGENT
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8209
Boston, Massachusetts 02266-8209
LEGAL COUNSEL
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
<PAGE>
THE EMERGING GERMANY FUND INC.
SUMMARY OF GENERAL
INFORMATION
- ---------------------------------------
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transaction section of The Wall Street Journal (designation
"EmergGerFd" under the letter "G"). The Fund's NYSE trading symbol is "FRG."
Weekly comparative net asset value (NAV) and market price information about the
Fund is published each Monday in THE WALL STREET JOURNAL, each Sunday in THE NEW
YORK TIMES, as well as in BARRON'S and other newspapers in a table called
"Closed End Funds." Additional information about the Fund is available by
calling 1-800-356-6122.
DIVIDEND REINVESTMENT PLAN
Through the Fund's voluntary Dividend Reinvestment Plan, shareholders may
elect to receive dividends and capital gains distributions in the form of
additional shares of the Fund. A brochure describing the Plan is available from
the Plan Agent, State Street Bank and Trust Company, by calling 1-800-426-5523.
This report is furnished to shareholders of The Emerging Germany Fund
Inc. for their information. This is not a prospectus, circular or
representation intended for use in the purchase or sale of shares of the
Fund or any securities mentioned in this report.
All references in this report to "dollars" or "$" are to United States
dollars.
Comparisons between changes in the Fund's net asset value per share
and changes in the DAX100 Index should be considered in light of the
Fund's investment objective and policies, the characteristics and
quality of the Fund's investments, the size of the Fund and variations
in the Deutsche Mark/ dollar exchange rate.
[LOGO]
THE EMERGING
GERMANY FUND INC.
QUARTERLY REPORT
SEPTEMBER 30, 1996
