<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
February 25, 1997
Dear Shareholder,
We are pleased to present the annual report to shareholders of The Emerging
Germany Fund Inc. for the fiscal year ended December 31, 1996.
Overcoming a weak start, the German economy gathered steam in the second and
third quarters of 1996, only to lose momentum again in the fourth quarter.
Though unemployment has remained at record levels throughout 1996, the German
stock market benefited from low inflation, low interest rates and improving
corporate profits, and all major German indices reached new highs in the fourth
quarter. In addition, the privatization in November 1996 of Deutsche Telekom has
stimulated German private investors' interest in the equity market. The effect
on the economy of weak consumer demand and increased public consumption was
counterbalanced by healthy export activity, and the outlook for 1997 is
favorable, particularly in view of the continuing benefits resulting from
corporate restructuring and the development of an equity culture in Germany.
In the year ended December 31, 1996, the Fund's total net asset value return
rose by 16.2% and its total market price return rose by 12.3%, compared with an
increase in the DAX100 Index of 17.1% in dollar terms. In the fourth quarter
1996, the Fund's total net asset value return rose by 6.3% compared with an
increase in dollar terms of 6.7% for the DAX 100 Index. At December 31, 1996,
the Fund had net assets of $149.3 million, or $10.66 per share, compared with
$128.9 million or $9.20 per share at the end of fiscal 1995.
At December 31, 1996, the Fund's invested position comprised 99.9% of net
assets and consisted of 46 common stocks and four preferred stocks of German
companies.
We thank our shareholders for their continued interest and support.
Sincerely,
[SIGNATURE]
Rolf Passow
Chairman
1
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
POLITICAL AND ECONOMIC DEVELOPMENTS
After a downturn at the end of 1995 and in early 1996, the German economy
gathered momentum in the second and third quarters of 1996. Fourth-quarter data
has not yet been released, but preliminary estimates by the Federal Statistics
Office indicate GDP growth of 1.4% for 1996. The economy was mainly supported by
exports which rose 4.6%, while domestic demand remained relatively weak. Private
consumer demand edged up by a mere 1.4% while capital investment declined by 1%
due to weak construction activity. Public consumption, on the other hand,
expanded by 2.8% due to the introduction of nursing-care insurance.
The preliminary 1996 annual averages suggest that the fourth quarter saw
little growth, partly because of the volatility in export figures which rose
strongly in the third quarter, but which are likely to return to a more
sustainable growth rate in the fourth quarter. In addition, the performance of
the construction sector suffered in the fourth quarter as a result of bad
weather.
Over the second half of the year, jobless figures rose by an average of 40,000
a month to more than four million in December, bringing the unemployment rate to
almost 11%. This has affected consumer confidence and led to sluggish retail
spending in the Christmas shopping season, with department store sales in
December below their levels in December 1995. Although activity in the consumer
sector appears likely to recover only slowly in the first half of 1997, the
export outlook for the year remains favorable. The lower external value of the
DM, modest wage increases and productivity gains due to rationalization efforts
are expected to make German exports more competitive. Moreover, with a steady
increase in capacity utilization, investment in machinery and equipment should
pick up markedly. German bond yields nearly reached their all-time lows in
December 1996. With U.S. inflation expected to accelerate, monetary policy will
probably be tightened and, as a result, U.S. bond yields should rise, driving
international rates up as well. In Germany, on the other hand, moderate
non-inflationary growth, high unemployment rates and budget consolidation should
limit the risk of rising bond yields in 1997.
The political discussion in Germany is currently dominated by the planned
income tax reform in 1998/1999. Finance Minister Waigel aims to cut the top
income tax rate on private income from 53% to 39% by 1999. The marginal tax
rate, now at 29.5%, is scheduled to come down to 20%. The corporate tax on
retained profits is to be trimmed from 45% to 35%, and the current levy of 30%
on retained profits may be brought down to 25%. The lower tax rates are expected
to be financed mainly by a broadening of the tax base, by reducing corporate
depreciation allowances and provisioning, and by increasing the taxes on
pensions and the proceeds of life insurance policies. Increasing VAT, currently
at 15%, by one or two percentage points is also being considered.
STOCK MARKET REVIEW
During the fourth quarter 1996, the German stock market continued its positive
development causing all major German indices to reach new record levels.
Improved earnings forecasts, low interest rates and liquidity inflows provided
strong support. In DM terms the DAX-Index rose by 8.9% while the DAX100 and the
MSCI Germany returned 7.5% and 6.4% respectively. German midcap companies
however, gained only 1.3% as measured by the MDAX.
Hoechst's merger of its specialty chemicals division with Clariant and its
takeover bid for the remaining shares of its French subsidiary Roussel Uclaf
made for interesting corporate news, and stimulated share
2
<PAGE>
prices in the chemical sector. In the course of the fourth quarter, Hoechst's
share price gained more than 30%. The escalation of the dispute between
Volkswagen and General Motors combined with the risk of huge damage claims
depressed Volkswagen's share price. Nevertheless, the automobile sector achieved
a return of more than 20% in the fourth quarter. Siemens shares fell
significantly on the announcement of disappointing earnings forecasts for 1997,
and SAP shares fell by more than 20% in one day following the publication of
disappointing third-quarter results.
After long debate, store hours were extended in November 1996, but so far the
anticipated stimulating effect on business, and especially Christmas sales, has
failed to materialize. As a consequence, retailers underperformed the market by
more than 10%. Utility companies, by contrast, benefited from bad weather
conditions and managed to outperform the market.
A major event in the last three months of the year was the privatization of
Deutsche Telekom, which was accomplished through the single largest flotation in
Europe. The initial public offering of Deutsche Telekom shares created many
first-time investors and is changing German individuals' perception of the stock
market. German individual investors hold a very small percentage of their assets
in equities compared to U.S. investors.
PORTFOLIO STRATEGY AND REVIEW
In the year ended December 31, 1996, the Fund's total net asset value return
rose by 16.2% and its total market price return rose by 12.3%, compared with an
increase in the DAX100 Index of 17.1% in dollar terms. In the fourth quarter of
1996, the Fund's total net asset value return rose by 6.3% compared with a rise
in dollar terms of 6.7% in the DAX100 and 5.4% in the MSCI-Germany Index. In the
same period, the DAX Index gained 8.1% while the MDAX rose by only 0.5%.
However, since the broadening in April 1996 of the Fund's investment mandate
to permit the Fund to invest in the German equity market without regard to the
market capitalization of German companies, the Fund's total net asset value
return rose by 16.3% compared to a rise of 14.7% in the DAX, 15.2% in the DAX100
and 12.8% in the MSCI Germany.
The Fund continued significantly to overweight chemicals and healthcare
companies. Continuing restructuring, rising demand for chemicals worldwide and
favorable currency conditions imply further appreciation potential. At the end
of 1996, HOECHST represented the largest position in the Fund.
The Fund also continued to increase its weighting in banking by adding to its
positions in BAYERISCHE VEREINSBANK and BAYERISCHE HYPOTHEKEN- UND WECHSEL-BANK.
However, Bankgesellschaft Berlin was sold, as was Victoria Holding in the
insurance sector. In the utilities sector the Fund increased its position in
VEBA and RWE, and sold Berliner Kraft und Licht. In the consumer sector the Fund
acquired a position in WELLA, one of the world's leading hair care companies.
In the raw and basic materials sector the Fund sold its position in Preussag
and invested in KRUPP HOESCH, the world's largest stainless steel producer.
Krupp also operates in machinery, plant construction, automotive components,
processing and trading. Krupp is in the midst of an aggressive cost cutting
program and is considering a technology modernization plan. In the capital goods
sector the Fund reduced its positions in Siemens and Linde, and sold Kampa Haus.
The Fund participated in the privatization of DEUTSCHE TELEKOM by acquiring
American Depositary Shares representing shares of Deutsche Telekom.
3
<PAGE>
In the area of transportation services, the Fund acquired a position in SIXT.
Sixt is Germany's leading car rental company with an overall market share of
approximately 20% and a market share of almost 65% in the higher margin and less
cyclical business traveler segment. Sixt is also engaged in the leasing business
and trades the used motor vehicles from its rental fleet. Based on its first
class service, its aggressive and well received marketing efforts, and its
cooperation with Lufthansa, Deutsche Bahn, travel agents and hotel chains, Sixt
should continue to gain market share which should have a positive effect on
future earnings.
RCM Capital Management, L.L.C., the Fund's investment manager, believes that
the outlook for the stock market in 1997 remains favorable. Improved export
prospects due to the DM's lower external value, falling unit labor costs and
continuing restructuring measures should lead to strong profit growth. Moreover,
low interest rates have made equities more attractive, therefore investors
should tend to give preference to shares over bonds. This trend should be
supported by the anticipated reform of the German company law and the
development of an equity culture in Germany.
Stocks of the following companies represented the Fund's ten largest positions
at December 31, 1996:
<TABLE>
<CAPTION>
MARKET VALUE PERCENT OF
COMPANY IN USD NET ASSETS
- -------------------------------------------------- ------------ ----------
<S> <C> <C>
Hoechst AG........................................ $ 10,630,727 7.1%
Daimler-Benz AG................................... 10,333,398 6.9%
Bayer AG.......................................... 9,183,077 6.2%
Veba AG........................................... 8,676,156 5.8%
BASF AG........................................... 6,742,055 4.5%
Volkswagen AG..................................... 6,239,033 4.2%
Allianz AG Holding................................ 5,459,154 3.7%
Bayerische Hypotheken- und Wechsel-Bank AG........ 5,294,242 3.5%
Munchener Ruckversicherungs-Gesellschaft AG....... 4,997,725 3.3%
Bayerische Vereinsbank AG......................... 4,928,836 3.3%
------------ ---
$ 72,484,403 48.5%
------------ ---
------------ ---
</TABLE>
4
<PAGE>
PERCENT OF NET ASSETS BY INDUSTRY
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY CLASS NET ASSETS
- ---------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Chemicals and Textiles.............................................................................. 20.6%
Banking............................................................................................. 14.2%
Automotive Related.................................................................................. 12.3%
Utilities........................................................................................... 11.1%
Insurance........................................................................................... 8.7%
Industrial Equipment................................................................................ 7.7%
Drugs and Hospital Supplies......................................................................... 6.0%
Raw and Basic Materials............................................................................. 4.1%
Household Related Non-Durables...................................................................... 3.6%
Building and Construction........................................................................... 2.7%
Technology Services................................................................................. 2.7%
Communication Services.............................................................................. 2.0%
General Retail...................................................................................... 1.3%
Transportation Services............................................................................. 1.1%
Other Consumer Durables............................................................................. 0.9%
Media Services...................................................................................... 0.5%
Electronics and New Technology...................................................................... 0.4%
---
Percent of Net Assets in German Securities........................................................ 99.9%
---
---
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of The Emerging Germany Fund Inc.:
We have audited the accompanying statement of assets and liabilities of The
Emerging Germany Fund Inc. (the "Fund"), including the statement of investments
in securities and net assets, as of December 31, 1996, and the related statement
of operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods indicated therein. 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
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Emerging Germany Fund Inc. as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 20, 1997
6
<PAGE>
- -------------------------------------------------
THE EMERGING GERMANY FUND INC.
INVESTMENTS IN SECURITIES AND NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
<C> <S> <C>
SHARES EQUITY INVESTMENTS MARKET VALUE
<CAPTION>
- ---------------------------------------------------------------------------
<C> <S> <C>
CONSUMER DURABLES SECTOR--13.2%
AUTOMOTIVE RELATED--12.3%
100,000 Continental AG......................... $ 1,800,221
150,000 Daimler-Benz AG *...................... 10,333,398
15,000 Volkswagen AG.......................... 6,239,033
-------------------
18,372,652
-------------------
OTHER CONSUMER DURABLES--0.9%
5,000 Friedrich Grohe AG Pfd................. 1,381,036
-------------------
CONSUMER NON-DURABLES SECTOR--4.9%
GENERAL RETAIL--1.3%
50,000 Douglas Holding AG..................... 1,965,945
HOUSEHOLD RELATED
NON-DURABLES--3.6%
15,000 Adidas AG.............................. 1,296,549
1,500 Hugo Boss AG Pfd....................... 1,884,383
4,000 Wella AG............................... 2,144,668
-------------------
5,325,600
-------------------
CYCLICAL/CAPITAL GOODS SECTOR--36.2%
BUILDING AND CONSTRUCTION--2.7%
20,000 Bilfinger & Berger Bau AG.............. 734,386
7,000 Dyckerhoff AG Pfd...................... 1,933,450
7,500 Industrieverwaltungs-Gesellschaft
AG--New.............................. 250,049
30,000 Industrieverwaltungs-Gesellschaft AG... 1,035,290
-------------------
3,953,175
-------------------
CHEMICALS AND TEXTILES--20.6%
175,000 BASF AG................................ 6,742,055
225,000 Bayer AG............................... 9,183,077
30,000 Henkel KGaA Pfd........................ 1,507,116
15,724 Henkel KGaA *.......................... 754,163
225,000 Hoechst AG............................. 10,630,727
70,000 SKW Trostberg AG....................... 1,902,061
-------------------
30,719,199
-------------------
INDUSTRIAL EQUIPMENT--7.7%
2,500 Buderus AG............................. 1,234,809
47,500 Durr AG................................ 1,503,379
5,000 IWKA AG................................ 1,186,066
2,500 Linde AG............................... 1,527,263
8,500 Mannesmann AG.......................... 3,684,604
50,000 Siemens AG............................. 2,355,885
-------------------
11,492,006
-------------------
<CAPTION>
- ---------------------------------------------------------------------------
SHARES EQUITY INVESTMENTS MARKET VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
RAW AND BASIC MATERIALS--4.1%
2,500 Degussa AG............................. $ 1,131,637
7,500 Fried. Krupp AG Hoesch-Krupp........... 1,213,687
30,000 SGL Carbon AG.......................... 3,782,414
-------------------
6,127,738
-------------------
TRANSPORTATION SERVICES--1.1%
75,000 Lufthansa AG........................... 1,023,591
1,491 Sixt AG................................ 542,640
-------------------
1,566,231
-------------------
HEALTHCARE SECTOR--6.0%
DRUGS AND HOSPITAL SUPPLIES--6.0%
5,000 Altana AG.............................. 3,892,897
30,000 Gehe AG................................ 1,920,452
18,000 Schering AG............................ 1,519,594
22,500 Schwarz Pharma AG...................... 1,666,992
-------------------
8,999,935
-------------------
INTEREST SENSITIVE SECTOR--34.0%
BANKING--14.2%
175,000 Bayerische Hypotheken-und Wechsel-Bank
AG................................... 5,294,242
120,000 Bayerische Vereinsbank AG.............. 4,928,836
151,500 BHF-Bank AG **......................... 3,475,629
50,000 Commerzbank AG......................... 1,270,553
100,000 Deutsche Bank AG....................... 4,672,775
35,000 DT Pfandbrief- und Hypothekenbank AG... 1,580,198
-------------------
21,222,233
-------------------
INSURANCE--8.7%
3,000 Allianz AG Holding..................... 5,459,154
17,500 CKAG Colonia Konzern AG................ 1,444,401
3,000 DBV Holding AG......................... 1,019,692
2,000 Munchener Ruckversicherungs-
Gesellschaft AG...................... 4,997,725
-------------------
12,920,972
-------------------
UTILITIES--11.1%
4,000 Rheinelektra AG........................ 3,197,504
110,000 RWE AG **.............................. 4,661,078
150,000 Veba AG................................ 8,676,155
-------------------
16,534,737
-------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
SHARES EQUITY INVESTMENTS MARKET VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
TELEMEDIA/SERVICES SECTOR--2.5%
COMMUNICATION SERVICES--2.0%
150,000 Deutsche Telekom AG *.................. $ 3,056,250
-------------------
MEDIA SERVICES--0.5%
1,250 Axel Springer Verlag AG................ 743,322
-------------------
TECHNOLOGY SECTOR--3.1%
ELECTRONICS AND NEW TECHNOLOGY--0.4%
15,000 eff-eff Fritz Fuss GmbH & Co........... 623,905
-------------------
TECHNOLOGY SERVICES--2.7%
30,000 SAP AG................................. 4,084,616
-------------------
Total Equity Investments
(Cost $122,133,821)-- 99.9%.......... 149,089,552
Other Assets Less Liabilities--0.1%.... 209,293
-------------------
Net Assets--100.0%..................... $ 149,298,845
-------------------
-------------------
</TABLE>
- ----------------
Percentages are of net assets.
* Non-income producing security.
** Part of this security is on loan (Note 1).
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
- -------------------------------------------------
THE EMERGING GERMANY FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- --------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $122,133,821) (Note 1)..... $ 149,089,552
Cash............................... 94,231
Foreign currency, at value
(cost $1,041,432)................ 1,050,981
Dividends and dividend reclaims
receivable....................... 131,118
Prepaid assets..................... 19,468
Interest receivable................ 5,123
Cash held as collateral for
securities loaned (Note 1)....... 6,683,752
-------------
Total Assets................... 157,074,225
-------------
LIABILITIES:
Payable for investments
purchased........................ 534,548
Payable for dividend distribution
(Note 1)......................... 280,167
Payable for:
Investment advisory and
administrative fees (Note 5).... 115,814
Audit fees....................... 56,601
Custodian fees................... 45,278
Directors' fees and expenses..... 33,249
Accrued expenses................. 25,971
Collateral for securities loaned
(Note 1)......................... 6,683,752
-------------
Total Liabilities.............. 7,775,380
-------------
NET ASSETS......................... $ 149,298,845
-------------
-------------
NET ASSETS CONSIST OF:
Paid-in capital (Note 3)........... $ 142,013,476
Undistributed net investment
income........................... 2,793
Accumulated net realized loss on
investments and foreign currency
transactions..................... (19,676,454)
Net unrealized appreciation on
investments and translation of
other assets and liabilities in
foreign currency................. 26,959,030
-------------
NET ASSETS......................... $ 149,298,845
-------------
-------------
NET ASSET VALUE PER SHARE
($149,298,845 DIVIDED BY
14,008,334 shares outstanding)... $ 10.66
-------------
-------------
</TABLE>
- -------------------------------------------------
THE EMERGING GERMANY FUND INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (net of foreign
withholding tax of $254,581)..... $ 2,308,960
Interest.......................... 94,160
-----------
Total income.................... 2,403,120
-----------
Expenses:
Investment advisory and
administrative fees (Note 5)..... 1,297,639
Custodian fees.................... 142,951
Proxy solicitation................ 92,574
Legal fees........................ 81,476
Insurance......................... 77,245
Audit and tax fees................ 71,890
Directors' fees (Note 5).......... 70,000
Printing.......................... 50,591
NYSE listing...................... 24,230
Transfer agent.................... 18,671
Miscellaneous..................... 19,302
-----------
Total expenses.................. 1,946,569
-----------
Net investment income............... 456,551
-----------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain on investments.... 1,623,950
Net realized loss on foreign
currency transactions.............. (173,591)
-----------
Net realized gain................. 1,450,359
-----------
Net change in unrealized
appreciation on investments and
translation of other assets and
liabilities in foreign currency.... 18,739,790
-----------
Net realized and unrealized gain
during the year.................. 20,190,149
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS.................... $20,646,700
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
- -------------------------------------------------
THE EMERGING GERMANY FUND INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income...... $ 456,551 $ 996,206
Net realized gain (loss) on
investments and foreign
currency transactions.... 1,450,359 (9,174,549)
Net change in unrealized
appreciation on
investments and
translation of other
assets and liabilities in
foreign currency......... 18,739,790 8,173,490
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations............... 20,646,700 (4,853)
DISTRIBUTIONS TO
SHAREHOLDERS FROM: (NOTE
1)
Net investment income...... (280,167) --
-------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS............ 20,366,533 (4,853)
NET ASSETS:
Beginning of year.......... 128,932,312 128,937,165
-------------- --------------
End of year*............... $ 149,298,845 $ 128,932,312
-------------- --------------
-------------- --------------
- ----------------
*Includes undistributed net
investment income of..... $ 2,793 $ --
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
- --------------------------------------------
THE EMERGING GERMANY FUND INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The Emerging Germany Fund Inc. (the "Fund") was incorporated in the State of
Maryland on February 2, 1990 as a non-diversified, closed-end management
investment company and registered under the Investment Company Act of 1940.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with United States generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amount of assets and liabilities. Actual results may differ
from these estimates.
A. SECURITIES VALUATIONS: Investments for which market quotations are readily
available are valued at the closing price on the day of valuation. Securities
for which market quotations are not readily available will be valued in good
faith at fair value using methods determined by the Board of Directors. In
determining fair value, consideration is given to cost, operating and other
financial data.
Short-term debt securities that mature in less than 60 days are valued at
amortized cost.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security transactions
are recorded as of the date of purchase or sale. Realized gains and losses on
security transactions are determined on the identified cost basis for both
financial statement and federal income tax purposes. Interest income, foreign
taxes and expenses are accrued daily. Dividends are recorded on the ex-dividend
date.
C. FOREIGN CURRENCY TRANSLATIONS: The records of the Fund are maintained in
U.S. dollars. Foreign currencies, investments and other assets and liabilities
are translated into U.S. dollars at current exchange rates. Purchases and sales
of foreign securities and income and withholding taxes are translated on the
respective dates of such transactions. Net realized currency gains and losses
include foreign currency gains and losses between trade date and settlement date
and foreign currency transactions. The Fund does not isolate that portion of
foreign currency exchange fluctuation on investments from unrealized
appreciation and depreciation which arises from changes in market prices. Such
fluctuations are included with the net unrealized appreciation or depreciation
on investments.
D. FEDERAL INCOME TAXES: It is the policy of the Fund to comply with the
requirements for qualification as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). It is also the intention
of the Fund to make distributions sufficient to avoid imposition of any excise
tax under Section 4982 of the Code. Therefore, no provision has been made for
Federal or excise taxes on income and capital gains. At December 31, 1996, the
Fund had a capital loss carryforward of $18,933,193 available to offset future
capital gains, of which $2,994,152 expires in 2003, $1,223,907 expires in 2001,
$11,864,575 expires in 2000 and $2,850,559 expires in 1999.
In addition, from November 1, 1996 through December 31, 1996, the Fund
incurred approximately $743,261 of net realized capital losses. As permitted by
tax regulations, the Fund intends to elect to defer these losses and treat them
as arising in the fiscal year ending December 31, 1997.
E. LOANS OF PORTFOLIO SECURITIES: The Fund may lend portfolio securities while
it continues to earn dividends on such securities loaned. At December 31, 1996,
stocks with an aggregate value of $6,367,193 were on loan to brokers. The loans
were secured by cash collateral of $6,683,752, received by the Fund. For
international securities, cash collateral is received by the Fund against loaned
securities in an amount at least equal to 105% of the market value of the loaned
securities at the inception of each loan. This collateral must
11
<PAGE>
be maintained at not less than 104.5% of the market value of the loaned
securities during the period of the loan. For the year ended December 31, 1996,
net securities lending income was $30,581 and is included in interest income. As
with other extensions of credit, the Fund may bear the risk of delay in the
recovery of the loaned securities or in the foreclosure on collateral.
F. DISTRIBUTIONS: Distributions declared to shareholders in a given year are
recorded by the Fund at fiscal year end. Income and capital gain distributions
are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for foreign currency transactions, losses
as a result of wash sales and passive foreign investment companies.
On December 16, 1996 a dividend was declared to shareholders of record on
December 31, 1996. A $0.02 per share dividend from net investment income was
paid on January 15, 1997.
NOTE 2. INVESTMENT IN FOREIGN SECURITIES
Investing in foreign equity securities involves
significant risks, some of which are not typically
associated with investments of domestic origin. The Fund's investments in
foreign markets subject the Fund to the risk of foreign currency exchange rate
fluctuations, perceived credit risk and adverse economic and political
developments. In addition, foreign companies are not generally subject to the
same uniform accounting, auditing and financial rules as are American companies,
and there may be less governmental supervision and regulation. Foreign
investments may also be subject to foreign taxes, dividend collection fees and
settlement delays. Since the Fund concentrates its investments in German
companies, it may be subject to greater risks and market fluctuations than other
more diversified portfolios.
NOTE 3. CAPITAL SHARES
At December 31, 1996, the Fund had one class of common stock, par value $0.001
per share, of which 100,000,000 shares were authorized and 14,008,334 shares
were outstanding. There were no transactions in the Fund's capital stock for the
year ended December 31, 1996.
NOTE 4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1996, purchases and sales proceeds of investment
securities by the Fund, other than U.S. government obligations and short-term
securities, aggregated $126,724,864 and $119,718,496, respectively. Purchases
and maturities of U.S. government obligations aggregated $2,093,547 and
$2,227,000, respectively. At December 31, 1996, the aggregate cost of
investments was substantially the same for book and federal income tax purposes.
Gross unrealized appreciation and depreciation of investments aggregated
$29,445,953 and $2,490,222, respectively, resulting in net unrealized
appreciation of $26,955,731 at December 31, 1996.
NOTE 5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Effective November 1, 1996, RCM Capital Management, L.L.C. ("RCM"), a wholly
owned subsidiary of Dresdner Bank AG ("Dresdner Bank"), an international banking
organization headquartered in Frankfurt, Germany, became the Fund's investment
manager. Dresdner Kleinwort Benson North America LLC ("DKBNA") (Dresdner
Securities (USA) Inc. prior to September 1, 1996), the Fund's investment manager
prior to November 1, 1996, is also a wholly owned subsidiary of Dresdner Bank.
In connection with a reorganization of various investment management operations
of the Dresdner Bank group of companies, DKBNA transferred the investment
management functions to RCM. The Fund sought and obtained prior approval of a
new management agreement from the Fund's Board of Directors and from the Fund's
stockholders at a
12
<PAGE>
special meeting of stockholders of the Fund held on October 4, 1996. The terms
of the new management agreement are substantially the same as those of the
previous management agreement. Certain DKBNA personnel who provided portfolio
advisory and administrative services to the Fund continue to provide the Fund
with these services.
RCM manages the Fund's investments and provides various administrative
services, subject to the authority of the Board of Directors. The Fund pays
investment advisory and administrative fees monthly at an annual rate of 1.00%
of the average weekly net assets of the Fund up to $100,000,000 and at an annual
rate of 0.80% of such assets in excess of $100,000,000. For the year ended
December 31, 1996, the Fund recorded investment advisory and administrative fees
aggregating $1,297,639.
The Fund pays each of its Directors who is not an interested person of the
Fund $7,500 annually plus $750 for each meeting of the Board attended.
13
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6. FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK
OUTSTANDING DURING EACH OF THE SIX YEARS ENDED DECEMBER 31, 1996
AND THE PERIOD APRIL 5, 1990 TO DECEMBER 31, 1990
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996+ 1995 1994 1993 1992 1991 1990
----------- --------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.20 $ 9.20 $ 9.80 $ 7.45 $ 8.86 $ 9.40 $ 11.06*
----------- --------- ----------- ----------- --------- ----------- ---------
Net investment income......... 0.03 0.07 0.03 0.03 0.07 0.07 0.16
Net realized and unrealized
gain (loss) on investments... 1.45 (0.07) (0.51) 2.44 (1.37) (0.38) (1.62)
----------- --------- ----------- ----------- --------- ----------- ---------
Net increase (decrease) in net
asset value resulting from
investment operations........ 1.48 0.00 (0.48) 2.47 (1.30) (0.31) (1.46)
----------- --------- ----------- ----------- --------- ----------- ---------
Distributions:
Net investment income....... (0.02) (0.00) (0.00) (0.00) (0.07) (0.07) (0.16)
Net realized gain on
investments................ (0.00) (0.00) (0.12) (0.00) (0.04) (0.16) (0.04)
In excess of realized gains
and foreign currency
transactions............... (0.00) (0.00) (0.00) (0.12) (0.00) (0.00) 0.00
----------- --------- ----------- ----------- --------- ----------- ---------
Total distributions....... (0.02)+++ (0.00) (0.12)+++ (0.12)+++ (0.11) (0.23)+++ (0.20)
----------- --------- ----------- ----------- --------- ----------- ---------
NET ASSET VALUE, END OF
PERIOD....................... $ 10.66 $ 9.20 $ 9.20 $ 9.80 $ 7.45 $ 8.86 $ 9.40
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
MARKET VALUE, END OF
PERIOD***.................... $ 8.13 $ 7.25 $ 7.38 $ 9.38 $ 6.38 $ 7.75 $ 7.88
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
TOTAL MARKET VALUE
RETURN++++................... 12.34% (1.69%) (20.07%) 49.09% (16.50%) 1.10% 32.64%
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
RATIOS AND SUPPLEMENTAL DATA:
Average commission rate paid
per share++.................. $ 0.1762 -- -- -- -- -- --
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
Net assets, end of period (in
000's)....................... $ 149,299 $ 128,932 $ 128,937 $ 137,311 $ 104,399 $ 124,069 $ 131,747
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
Ratio of expenses to average
net assets................... 1.42% 1.51% 1.40% 1.46% 1.49% 1.70% 1.51%**
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
Ratio of net investment income
to average net assets........ 0.33% 0.76% 0.34% 0.40% 0.76% 0.76% 3.62%**
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
Portfolio turnover............ 90% 40% 91% 98% 54% 52% 13%
----------- --------- ----------- ----------- --------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ---------
</TABLE>
- --------------
+ On November 1, 1996, RCM Capital Management, L.L.C. became the
investment manager (see Note 5).
++ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may
vary from period to period and fund to fund depending on the mix of
trades executed in various markets where trading practices and
commission rate structures may differ.
* Represents initial net asset value of $12.00, less underwriting
commission of $0.84 and offering expenses of $0.10.
** Annualized.
*** Closing price -- New York Stock Exchange.
+++ The ex-dividend date was after the end of the fiscal year.
++++ The total market value return calculation includes reinvestment of
dividends in the year declared.
14
<PAGE>
THE EMERGING GERMANY FUND INC.
STOCKHOLDER MEETINGS RESULTS
(UNAUDITED)
An Annual Meeting of Stockholders of The Emerging Germany Fund Inc. (the
"Fund") was held on Friday, April 26, 1996. The number of shares issued,
outstanding and eligible to vote as of March 8, 1996 was 14,008,334. The matters
voted upon by stockholders and the resulting votes for each matter are presented
below:
1. To elect four Directors of the Fund, each to hold office for a term of three
years and until his successor is duly elected and qualified.
<TABLE>
<CAPTION>
FOR WITHHOLD
------------- ---------
<S> <C> <C>
Hansgeorg B. Hofmann.................................................. 10,760,949 909,944
James E. Dowd......................................................... 10,763,833 888,379
Siegfried A. Kessler.................................................. 10,760,633 891,582
Rolf Passow........................................................... 10,760,863 909,727
</TABLE>
2. To act upon a proposal to amend the Fund's investment policies (i) to reduce
from 90% to 65% the minimum amount of the Fund's total assets required to be
invested in equity and equity-linked securities of German companies, and (ii)
to authorize the Fund to invest in such securities without any restrictions
based on the size of German companies.
For: 7,421,678; Against: 748,310; Abstain: 93,905.
3. To ratify the selection by the Board of Directors of Coopers & Lybrand L.L.P.
as independent accountants of the Fund for the Fund's fiscal year ending
December 31, 1996.
For: 11,002,958; Against: 584,964; Abstain: 95,870.
A Special Meeting of Stockholders of the Fund was held on Friday, October 4,
1996. The number of shares issued, outstanding and eligible to vote as of August
20, 1996 was 14,008,334. The matter voted upon by stockholders and the resulting
votes for the matter are presented below:
1. To act upon a proposal to approve an Investment Advisory and Administration
Agreement between the Fund and RCM Capital Management, L.L.C., a wholly owned
subsidiary of Dresdner Bank AG, pursuant to which RCM Capital Management,
L.L.C. will provide all investment management and administrative services
necessary for the Fund's operations.
For: 10,184,952; Against: 489,158; Abstain: 145,633.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAX INFORMATION
(UNAUDITED)
During the taxable year ended December 31, 1996, the Fund paid foreign taxes
of $254,581 and the Fund recognized $2,618,613 of foreign source income.
Pursuant to Section 853 of the Code, the Fund designates $0.018 per share of
foreign taxes paid and $0.19 of income from foreign sources received in the
taxable year ended December 31, 1996.
15
<PAGE>
THE EMERGING GERMANY FUND INC.
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Rolf Passow, Chairman*
Robert J. Birnbaum
Carroll Brown
Theodore J. Coburn
James E. Dowd**
Alfred W. Fiore
George N. Fugelsang*
Siegfried A. Kessler**
Gottfried W. Perbix**
Jacob Saliba
* Interested person within the meaning of the Investment Company Act of 1940
** Member, Audit Committee
- --------------------------------------------------------------------------------
OFFICERS
William S. Stack, President
Barbel Lenz, Vice President
Alexandra Simou, Secretary
Caroline M. Hirst, Treasurer and Assistant Secretary
Judith W. O'Connell, Assistant Treasurer
Jennie M. Wong, Assistant Treasurer
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND MANAGER
RCM Capital Management, L.L.C.
Four Embarcadero Center
San Francisco, California 94111
- --------------------------------------------------------------------------------
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
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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
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, including the financial statements herein, 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.
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
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