<PAGE>
LETTER TO THE SHAREHOLDERS
- ------------------------------------------------------------------------------
June 1, 1998
Dear Shareholder,
In the second fiscal quarter ending April 30, 1998, the net asset
value per share of the Central European Equity Fund rose 14.5%, in US$ terms.
The share price was up 10.1% during the quarter. The Fund's performance during
the second quarter was impacted by the lack of confidence in the Russian
economy during the month of April. At quarter end, your Fund had an equity
exposure of 23% in Russia.
The economic turmoil in Russia has left equities down sharply from
their highs. However, it is our view that Russia will weather the storm, and
though it will remain susceptible to currency pressure until progress on
fiscal consolidation is firmly on track, there will be no rouble devaluation.
The attainment of currency stability has been the main achievement of Russia's
economic policy and the government's commitment to maintain a stable currency
is undeniable. In addition, the current situation is forcing the government to
improve its fiscal position. Under the new budget program, the federal
spending ceiling will be reduced and new measures to improve the collection of
tax arrears from major debtor companies have been implemented. Already, the
turmoil in Russia's financial market has begun to abate following both the
International Monetary Fund's announcement of a disbursement of a $670 million
tranche this month and strong signals of support from the financial community.
Interest rates have fallen to 60%, after reaching a high of 150%. At present
levels, share prices appear inexpensive by most criteria, and we view this as
an excellent buying opportunity.
The impact of the Russian situation on the region has been minimal
due to limited financial linkages. We expect Hungary, Poland, and the Czech
Republic to experience minor fluctuations in the short-term, but to come out
of the crisis unscathed over the coming months. In Poland, fundamentals
continue to be very strong with high growth, low budget deficits, and high
foreign reserves. Foreign investment is flowing in at a steady $6 billion a
year, and Poland's European Union membership talks offer foreign firms the
opportunity to enter the EU market through a low-wage, but fast growing
market. Hungary's austerity plan has begun to pay off, and annual growth is
expected to be 5.5% or more this year. The government's reform program, which
drastically cut state spending and privatized many companies, has established
Hungary as the most reformed country in the former Eastern Bloc. In the Czech
Republic, exports are supporting a modest economic recovery as the government
has finally begun to cultivate foreign investors and address their concerns.
News from Germany remains very positive. Industrial orders and
production are on an upward trend, and exports are growing at the fastest rate
in 20 years. Demand for German goods remains very strong in Western and
Eastern Europe as well as North America. While the impact of Asia's financial
crisis may cut into export demand, this region amounts to only 7% of total
exports. However, Germany's recovery is not entirely built on export growth.
There are signs that the engine for expansion will switch from exports to
domestic demand-led growth. Business and consumer surveys show improvements in
this area. The growth in equity market capitalization has outstripped nominal
GDP growth and the resulting wealth effects should boost consumption and
investment. Based on this scenario, we believe the German equity market will
remain attractive well into 1999.
At the April 30th Board of Directors' meeting, Dr. Schmitz announced
that due to a realignment of responsibilities at the Deutsche Bank AG board
level, Mr. Michael Dobson will take his place as Chairman of the Fund. Mr.
Dobson has had a long career in asset management and capital markets at Morgan
Grenfell in London. He has been given world-wide responsibilities of asset
management for the Deutsche Bank Group. In addition, Dr. Schmitz announced
that Richard Stamberger has accepted a position whereby he will be responsible
for establishing a new business area within Deutsche Bank's Private Bank.
Therefore, Dr. Schmitz has appointed Kenneth J. Tarr, Executive Vice President
of Deutsche Bank AG, New York Branch, and Head of Private Banking for the
Americas, as President and Chief Executive Officer of the Fund. Mr. Tarr has
had a long and distinguished career in asset management in the United States.
The Board of Directors of your Fund accepted the recommendations of Dr.
Schmitz and nominated Messrs. Dobson and Tarr effective May 1, 1998.
Sincerely,
/s/ Michael Dobson /s/ Kenneth J. Tarr
Michael Dobson Kenneth J. Tarr
Chairman President and Chief Executive Officer
1
<PAGE>
Fund History as of April 30, 1998
- ------------------------------------------------------------------------------
Statistics:
Net Assets ......................................... $296,186,271
Shares Outstanding ................................. 12,508,630
NAV Per Share ...................................... $23.68
Total Returns:
Period NAV
------ ---
6 months ended 4/30/98 ................................... 11.05%
1 year ended 10/31/97 .................................... 22.41%
3 years ended 10/31/97* .................................. 18.37%
5 years ended 10/31/97* .................................. 19.39%
* Average annual return
Dividend and Capital Gain Distributions:
Record Ordinary LT Capital
Date Income Gains Total
---- ------ ----- -----
11/17/97 ................... $1.55 $5.00** $6.55
9/3/97 ..................... -- $0.02 $0.02
12/19/96 ................... $0.11 $1.79 $1.90
12/27/95 ................... $0.16 $0.22 $0.38
** Includes $3.49 of capital gains taxable at the 20% tax rate
Other Information:
NYSE Ticker Symbol .......................................... CEE
Dividend Reinvestment Plan .................................. Yes
Voluntary Cash Purchase Program ............................. Yes
Annual Expense Ratio ........................................ 1.08%
Performance
[BAR CHART]
Net Asset 11.05%
Value 22.41%
Market 16.38%
Value 28.93%
MSCI+ 12.23%
+ MSCI is a customised composite index consisting of leading securities in
Central and Eastern Europe with the following country weightings: Germany
30%, Russia 20%, Hungary 17.5%, Poland 17.5%, and Czech Republic 15%.
2
<PAGE>
10 Largest Equity Holdings as of April 30, 1998
- ------------------------------------------------------------------------------
% of % of
Portfolio Portfolio
--------- ---------
1. Lukoil Holdings 7.6 6. Volkswagen 3.9
2. Unified Energy
System 6.7 7. Allianz Holdings 3.9
3. Elektrim 5.4 8. DaimlerBenz 3.8
4. SPT Telecom 4.2 9. VEBA 3.2
5. Matav 4.0 10. Exbud 3.0
Country % of Portfolio
Germany 25.3
Hungary 15.5
Russia 23.3
Poland 23.1
Czech Republic 6.8
Croatia 2.0
Estonia 1.4
Ukraine 1.1
Slovenia 0.6
Lithuania 0.6
Latvia 0.3
Total 100.0%
[PICTURE OF A MAP LISTING COUNTRIES]
3
<PAGE>
Interview with the Portfolio Manager
- ------------------------------------------------------------------------------
Question: What will the impact of the euro be on Eastern Europe?
Answer: Eastern Europe's trade links with the European Union are already close
following the successful integration of the region's trade in the past ten
years. More than 70% of the imports of the Czech Republic, Poland, and Hungary
now come from the European Union, while more than 60% of their exports go to
those countries that are joining the single currency in the first round.
Eastern European countries are expected to switch the bulk of their foreign
reserves holdings from the U.S. dollar to the euro to facilitate trade.
Therefore, as Western Europe's economic growth picks up, the euro should have
a positive impact on the growth of Eastern Europe's exports. Furthermore, the
European Commission has indicated 2002-3 as the entry date for the first wave
of new members. Negotiations have begun with the Czech Republic, Hungary,
Poland, Estonia and Slovenia. Membership in the European Union will provide a
powerful stimulus to Eastern Europe to undertake further market-oriented
reforms.
Question: Why does the Fund continue to invest a large portion in Germany?
Answer: The Fund intends to offer a well-diversified alternative to regional
funds with the addition of a developed market that reduces some of the market
risks associated with investing in emerging markets. It is the Fund's
intention to blend the economic importance of the countries in the region and
their market capitalization. In addition to the risk protection, recent
developments make investing in Germany highly attractive. On the political
front, the proposed tax reform, changes to the equity market legislation, and
the launch of the euro should continue to support the German equity market. It
is expected that, for the first time in Germany, companies will be allowed to
implement a share buy-back program, a practice that is common in the U.S. The
impact of the program is higher earnings per share, dividends per share, and
of course, the stock price itself. It is now considered a certainty that the
single currency will take place on schedule. The result of the single currency
will send a wave of competition through Europe, accelerating mergers and
restructuring, and should usher in an era of prosperity, built on stable
prices, fiscal discipline, and lower interest rates.
Question: What impact does the emerging market crisis have on Central and
Western Europe?
Answer: The events that are taking place in South-East Asia as well as in
Russia have a dis-inflationary effect on the global economy. The continued
import of dis-inflation into Europe coincides with the deregulation and
sell-off of industries such as electricity, telecommunications, airlines, and
energy, where prices are set to fall over the next few years. Continued low
inflation should put further downward pressure on rates throughout the region
and should help strengthen the economic recovery in Central and Eastern
Europe. Also, in the current period of poor liquidity and high risk in Asia,
international funds should continue to flow towards Europe.
Hanspeter Ackermann
Portfolio Manager
The Central European Equity Fund, Inc.
4
<PAGE>
Report from the Investment Adviser and Manager
- ------------------------------------------------------------------------------
Outlook for the Central and Eastern European Economies
Germany
The German stock market, driven by record low bond yields and an
acceleration of economic growth across Europe, reached an all-time high during
the second quarter of 1998. In addition, the recently proposed merger of
DaimlerBenz and Chrysler has fueled speculation of potential further corporate
links that should continue to drive the equity market upward. The introduction
of the euro acts as a catalyst and gives added momentum to the merger process.
To date, the corporate news during the first quarter has been positive and
exceeded expectations. During the first quarter of 1998, Germany's GDP grew
3.8% and we expect further recovery in domestic demand due to the following
factors: 1) a rise in employment, 2)stabilization in wage growth rates, and 3)
a reduction of the tax burden following the two-point fall in the solidarity
tax. The level of German consumer spending has been below that of many
European countries. We believe that there is significant pent-up demand from
consumers to participate in the economic recovery by spending some of their
accumulated wealth. Consumer confidence has been rising since last summer.
Poland
The Polish economy is growing strongly and fundamentals continue to
improve with low budget deficits, manageable external accounts, and high
foreign reserves. Standard & Poor's affirmed Poland's long-term foreign
currency rating at BBB- and its long-term local currency debt at A- with a
positive outlook. The rating agency cited government stability, continuing
bank restructuring, and rising foreign investors' confidence as the main
reasons for the rating affirmation. Moreover, the central bank has recently
started lowering interest rates in line with inflation and we expect further
interest rate cuts over the coming year. Due to strong macro fundamentals, the
Polish market fell significantly less than the Russian market in the emerging
market crisis.
Russia
The recent weakness of the Japanese Yen has led to a sharp correction
in emerging markets as investors expect competitive currency devaluations in
Asia. These fears have spread to Russia, where the fundamentals do not warrant
a devaluation. In the short term, developments in Russia continue to revolve
around speculation about an international support package. The G-7 members did
not announce a rescue package, but rather reiterated their readiness to
provide additional aid to Russia when deemed appropriate. The G-7 and the IMF
are unwilling to disperse large amounts of money to the Russian government
without strong conditions attached to it. Any package would require large
spending cuts, a substantial increase in revenue collection, and a
strengthening of the banking system. If the Russian government decides not to
request additional funding from the IMF, we could expect market volatility and
high interest rates to prevail until it is clear that the current government
will implement all of the previously announced fiscal measures. In any event,
we continue to believe that there is an unwavering commitment from the central
bank and from the international financial community to support the rouble and
to avoid devaluation. Meanwhile, some encouraging news has been released on
the actual fiscal performance during the first quarter. The federal budget
deficit fell to 3.7% of GDP from 8.7% in the same period last year. The
improvement has been caused by better tax collection at the federal level--up
to 8.4% of GDP from 7.5% in the first quarter last year.
The Fund's Portfolio Strategy
The Central European Equity Fund's 25% exposure to German equities
remains a stabilizing factor against price volatility in the emerging markets.
We expect to expand our equity exposure in Poland where we believe that
earnings growth is clearly supported by strong macro fundamentals. For the
moment we remain neutral in Russia, until signs emerge that the government is
willing to implement the needed reforms. We plan to increase our exposure in
Hungary, which remains one of the most attractive markets in the region, once
we obtain a clearer picture about the policy plans of the newly elected
government. Lastly, we will remain underweight in the Czech Republic until the
political uncertainty concerning the forthcoming June election is resolved and
economic fundamentals improve.
5
<PAGE>
Structure Of The Fund
- ------------------------------------------------------------------------------
A closed-end fund like your Fund does not issue new shares or redeem
shares each day. Instead, its shares trade freely on the New York Stock
Exchange like those of any public company. The market price of your Fund's
shares is influenced by supply and demand forces and other factors and can
trade at levels above their net asset value (called "market premium") or below
their net asset value (called "market discount"), just as an industrial
company's shares can trade above or below book value.
In contrast, an open-end fund's shares are not traded on any stock
exchange. Shareholders obtain liquidity by selling their shares back to the
open-end fund at their net asset value (called "redemption"). By law, an
open-end fund must continuously offer and sell new shares to offset these
redemptions, or else it will become too small to invest in an adequately
diversified portfolio and its fixed expenses will become a serious drag on
investment returns.
Each of the closed-end and open-end fund formats has its own
advantages. The open-end format works well when presented as part of a broad
family of open-end funds having a variety of investment objectives, investing
in highly liquid securities, offered with shareholder services such as
exchange privileges and sold through an established broker or direct-mail
distribution network.
The closed-end format is especially well-suited for specialty
investing, such as the stocks of a particular foreign country or region. As
some of those securities are less liquid, the closed-end format frees the
portfolio manager to concentrate on investments, rather than holding part of
the assets in easier-to-sell securities. The managers of foreign country funds
have strong local country investing expertise. For these situations the
closed-end format works very well.
SHARE BUY-BACKS INCREASED
- ------------------------------------------------------------------------------
The Directors of your Fund voted in March to increase the number of
shares authorized for repurchase each year. The authorized limit of 5% will be
net of all shares to be issued in the form of reinvested dividends, effective
January 1, 1998. Thus the number of shares purchased in the open market can be
considerably greater than 5%. For example, calendar year-to-date purchases of
CEE's shares represent 10.8% of the amount outstanding at the beginning of the
year.
Shares issued for dividends tend to remain in shareholders' accounts
and do not increase the float in the market. Your Directors continue to
believe the Fund represents excellent value.
6
<PAGE>
The Central European Equity Fund, Inc.
Schedule of Investments--April 30, 1998 (unaudited)
- ------------------------------------------------------------------------------
Shares Description Value
------ ----------- -----
INVESTMENTS IN GERMAN
COMMON STOCKS--25.3%
OF NET ASSETS
Apparel--1.6%
28,000 Adidas ..................................... $ 4,647,659
-----------
Automotive--7.7%
115,000 DaimlerBenz ................................ 11,241,422
14,400 Volkswagen ................................. 11,481,114
-----------
22,722,536
-----------
Banking--2.9%
220,000 Commerzbank ................................ 8,494,114
-----------
Chemical--1.1%
75,000 Bayer ...................................... 3,339,285
-----------
Insurance--3.9%
37,000 Allianz .................................... 11,395,414
-----------
Steel Manufacturing--2.5%
4,000 Mannesmann ................................. 3,178,039
19,000 Thyssen .................................... 4,348,491
-----------
7,526,530
-----------
Transportation--2.4%
300,000 Lufthansa .................................. 7,147,241
-----------
Utilities--3.2%
145,000 VEBA ....................................... 9,594,934
-----------
Total Investments in
German Common Stocks
(cost $55,116,760) ......................... 74,867,713
-----------
INVESTMENTS IN CROATIAN
COMMON STOCKS--2.0%
Banking--1.6%
185,000 Zagrebacka Banka (GDR)* .................... 4,860,875
-----------
Brewing--0.4%
10,887 Karlovacka Pivovara* ....................... 1,044,052
-----------
Total Investments in
Croatian Common Stocks
(cost $3,842,218)........................... 5,904,927
-----------
INVESTMENTS IN CZECH REPUBLIC
COMMON STOCKS--6.7%
Banking--0.5%
82,900 Komercni Banka* ............................ $ 1,502,841
-----------
Beverages & Tobacco--1.1%
11,995 Tabak ...................................... 3,145,383
-----------
Construction--0.5%
299,844 Metrostav .................................. 1,554,349
-----------
Electrical--0.5%
50,000 Ceske Energeticke Zavody* .................. 1,497,560
-----------
Telecommunications--4.1%
85,000 SPT Telecom ................................ 12,319,550
-----------
Total Investments in
Czech Republic Common
Stocks (cost $18,178,936)................... 20,019,683
-----------
INVESTMENT IN ESTONIAN
COMMON STOCK--1.4%
Banking--1.4%
557,000 Hansabank*
(cost $6,671,444)............................ 4,090,115
-----------
INVESTMENTS IN HUNGARIAN
COMMON STOCKS--15.5%
Automotive--1.2%
67,202 Mezogep* ................................... 1,751,047
77,634 North American Bus* ........................ 1,840,810
-----------
3,591,857
-----------
Chemical--1.1%
77,048 Pannonplast ................................ 3,266,911
-----------
Energy Sources--2.2%
215,000 Mol Magyar Olay ............................ 6,579,000
-----------
Food Manufacturing--1.2%
57,100 Pick Szeged ................................ 3,516,676
-----------
Leisure & Tourism--1.4%
170,000 Danubius Hotels* ........................... 4,151,743
-----------
- ---------
* Non-income producing securities.
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments (unaudited)--continued
Shares Description Value
------ ----------- -----
Manufacturing--1.2%
92,635 Graboplast ................................. $ 3,510,896
-----------
Pharmaceuticals--2.9%
44,000 Gedeon Richter ............................. 4,711,010
35,000 Gedeon Richter (GDR) ....................... 3,727,500
-----------
8,438,510
-----------
Telecommunications--4.0%
400,000 Matav ...................................... 11,800,000
-----------
Utilities--0.3%
29,187 Primagaz ................................... 625,001
18,000 Primagaz (Austrian Certs)................... 385,446
-----------
1,010,447
-----------
Total Investments in
Hungarian Common Stocks
(cost $37,360,435)......................... 45,866,040
-----------
INVESTMENT IN LATVIAN
COMMON STOCK--0.2%
Banking--0.2%
185,000 Latvijas Unibanka
(cost $888,000)............................. 786,250
-----------
INVESTMENT IN LITHUANIAN
COMMON STOCK--0.6%
Banking--0.6%
32,000 Bankas Hermis*
(cost $2,205,961)........................... 1,723,440
-----------
INVESTMENTS IN POLISH
COMMON STOCKS--23.1%
Automotive--2.0%
231,216 Debica ..................................... 5,863,927
-----------
Banking--4.3%
197,500 Bank Rozwoju Eksportu ...................... 5,678,635
80,000 Bank Przemyslowo-Handlowy................... 7,077,558
-----------
12,756,193
-----------
Brewing--1.2%
35,300 Zaklady Piwowarskie w
Zywcu ...................................... $ 3,518,549
-----------
Cables--1.9%
614,480 Bydgoska Fabryka Kabli* .................... 5,617,482
-----------
Chemicals--0.6%
530,583 Polifarb Cieszyn Wroclaw* .................. 1,971,497
-----------
Construction--5.1%
588,410 Budimex* ................................... 2,932,506
299,940 Exbud* ..................................... 3,493,845
470,000 Exbud (GDR)* ............................... 5,358,000
75,852 Mostostal Warszawa* ........................ 677,769
513,805 Mostostal Zabrze ........................... 2,727,364
-----------
15,189,484
-----------
Data Processing--0.7%
86,903 Computerland Poland* ....................... 1,973,321
-----------
Electrical--5.8%
1,124,414 Elektrim ................................... 16,082,005
86,563 Elektrobudowa* ............................. 1,135,964
-----------
17,217,969
-----------
Food & Household
Products--1.0%
520,000 Animex* .................................... 1,111,766
106,000 Jutrzenka .................................. 1,797,405
-----------
2,909,171
-----------
Industrial Components--0.3%
119,170 Stomil Olsztyn ............................. 836,404
-----------
Manufacturing--0.2%
55,803 Stomil Sanok* .............................. 633,564
-----------
Total Investments in Polish Common
Stocks
(cost $55,868,056) ........................ 68,487,561
-----------
- ---------
* Non-income producing securities.
See Notes to Financial Statements.
8
<PAGE>
Schedule of Investments (unaudited)--continued
- ------------------------------------------------------------------------------
Shares Description Value
------ ----------- -----
INVESTMENTS IN RUSSIAN
COMMON STOCKS--23.3%
Energy Sources--8.7%
149,000 Lukoil Holding (ADR) ....................... $ 9,917,815
188,500 Lukoil Holding 144A (ADR)++ ................ 12,547,035
175,000 Tatneft (ADR) .............................. 3,403,750
-----------
25,868,600
-----------
Telecommunications--4.3%
115 Rostelecom (RDC)* .......................... 4,156,100
160,000 Vimpel Communications
(ADR)* ..................................... 8,640,000
-----------
12,796,100
-----------
Utilities--10.3%
105 Irkutskenergo (RDC)* ....................... 4,263,000
180,000 AO Mosenergo 144A (ADR)++ .................. 6,427,495
595,000 Unified Energy Systems (GDR)* .............. 19,686,157
-----------
30,376,652
-----------
Total Investments in
Russian Common Stocks
(cost $61,391,689)......................... 69,041,352
-----------
INVESTMENTS IN SLOVENIAN
COMMON STOCKS--0.7%
Banking--0.3%
50,000 SKB Banka (GDR) ............................ 757,500
-----------
Real Estate--0.4%
193,000 BTC (GDR) .................................. 1,206,250
-----------
Total Investments in Slovenian Common
Stocks cost ($2,806,660)................... 1,963,750
-----------
INVESTMENTS IN UKRAINIAN
INVESTMENT FUNDS--1.1%
26,910 SGLT Ukraine Fund .......................... $ 2,206,620
121,750 Ukrainian Opportunity Fund+*................ 1,095,750
-----------
Total Investments in Ukrainian
Investment Funds
(cost $4,153,636)........................... 3,302,370
-----------
U.S. Dollars
(In Thousands) Repurchase Agreements**--13.0%
20,000 Agreement with J.P. Morgan
Securities, Inc., 5.55% dated
4/30/98, due 5/1/98 in the amount
of $20,003,083 collateralized by
FNMA of $19,955,000, 6.55%
due 7/15/02................................ 20,000,000
18,405 Agreement with Lehman Brothers, Inc.,
5.53%, dated 4/30/98, due 5/1/98 in the
amount of $18,407,677 collateralized by
FNMA of $18,170,000, 7.8% due 7/27/06...... 18,404,850
------------
Total Repurchase Agreements
(cost $38,404,850)......................... 38,404,850
------------
Total Investments--112.9%
(cost $286,888,645)........................ 334,458,051
Liabilities in excess of
cash and other assets--(12.9%) (38,271,780)
------------
Net Assets--100%............................ $296,186,271
============
- ---------
* Non-income producing securities.
** Investment of cash collateral received for portfolio securities on loan.
+ Illiquid security. Restricted to resale to institutional investors only.
++ 144A. Restricted to resale to institutional investors only.
See Notes to Financial Statements.
ADR -- American Depository Receipt
GDR -- Global Depository Receipt
RDC -- Russian Depository Certificate
9
<PAGE>
The Central European Equity Fund, Inc. Statement of Assets and Liabilities
April 30, 1998 (unaudited)
- ------------------------------------------------------------------------------
Assets
Investments, at value (cost $286,888,645) ................ $ 334,458,051
Foreign cash ............................................. 38,872
Receivable for securities sold ........................... 953,192
Interest receivable ...................................... 331,312
Dividends receivable ..................................... 174,600
Foreign withholding tax refund receivable ................ 35,351
Other assets ............................................. 10,408
--------------
Total assets .................................... 336,001,786
--------------
Liabilities
Payable upon return of securities loaned ................. 38,404,850
Payable for shares repurchased ........................... 442,687
Payable for securities lending brokers' rebate
and agency fees ................................. 132,216
Management fee payable ................................... 143,705
Investment advisory fee payable .......................... 69,818
Accrued expenses and accounts payable .................... 622,239
--------------
Total liabilities ............................... 39,815,515
--------------
Net Assets ............................................... $ 296,186,271
==============
Net assets consist of:
Paid-in capital, $.001 par (Authorized 80,000,000
shares of common stock) ......................... $ 229,178,908
Cost of 997,345 shares held in treasury .................. (18,455,424)
Accumulated net investment loss .......................... (522,850)
Undistributed net realized gain on investments
and foreign currency transactions ............... 38,407,585
Net unrealized appreciation of investments and
foreign currency ................................ 47,578,052
--------------
Net assets ............................................... $ 296,186,271
==============
Net asset value per share
($296,186,271 o 12,508,630 shares of
common stock issued and outstanding) ............ $ 23.68
=========
Statement of Operations
(unaudited)
- ------------------------------------------------------------------------------
For the six
months ended
April 30, 1998
--------------
Net Investment Loss
Income
Dividends (net of foreign withholding
taxes of $159,395) ........................ $ 386,669
Interest ........................................... 573,389
--------------
Total income ....................................... 960,058
--------------
Expenses
Management fee ..................................... 798,635
Investment advisory fee ............................ 390,141
Custodian and Transfer Agent's
fees and expenses ......................... 70,825
Directors' fees and expenses ....................... 68,000
Legal fee .......................................... 44,265
Audit fee .......................................... 27,500
Reports to shareholders ............................ 54,103
NYSE listing fee ................................... 14,256
Miscellaneous ...................................... 15,183
--------------
Total expenses ..................................... 1,482,908
--------------
Net investment loss ......................................... (522,850)
--------------
Realized and Unrealized Gain (Loss) on Investments and Foreign
Currency Transactions
Net realized gain on:
Investments ........................................ 38,265,899
Foreign currency transactions ...................... 38,153
Net change in unrealized appreciation/depreciation on:
Investments ........................................ (6,697,522)
Translation of other assets and liabilities from
foreign currency .......................... (188,705)
--------------
Net gain on investments and foreign currency
transactions ....................................... 31,417,825
--------------
Net Increase in Net Assets
Resulting from Operations .......................... $ 30,894,975
==============
See Notes to Financial Statements.
10
<PAGE>
The Central European Equity Fund, Inc.
Statements of Changes in Net Assets (unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six For the year
months ended ended
April 30, October 31,
1998 1997
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) ............................................. $ (522,850) $ 1,044,383
Net realized gain (loss) on:
Investments ..................................................... 38,265,899 76,928,523
Foreign currency transactions ................................... 38,153 (1,323,542)
Net change in unrealized appreciation/depreciation on:
Investments ..................................................... (6,697,522) (12,693,644)
Translation of other assets and liabilities from foreign currency (188,705) 170,824
------------- -------------
Net increase in net assets resulting from operations ..................... 30,894,975 64,126,544
------------- -------------
Distributions to shareholders from:
Net realized short term capital gains* ................................... (17,987,808) (1,323,775)
Net realized long term capital gains:
Taxable at 28% tax rate ......................................... (17,523,606) (20,965,478)
Taxable at 20% tax rate ......................................... (40,501,580) --
------------- -------------
(76,012,994) (22,289,253)
------------- -------------
Capital share transactions:
Net proceeds from reinvestment of dividends (2,082,692 and
592,008 shares, respectively, issued from treasury) ............. 37,618,631 12,082,868
Cost of shares repurchased (1,214,000 and 722,257 shares, respectively) .. (22,286,188) (17,080,984)
------------- -------------
Net increase (decrease) in net assets from capital share transactions .... 15,332,443 (4,998,116)
------------- -------------
Total increase (decrease) in net assets ........................................... (29,785,576) 36,839,175
Net Assets
Beginning of period ............................................................... 325,971,847 289,132,672
------------- -------------
End of period (including accumulated net
investment loss of $522,850 and $0, respectively) ................................. $ 296,186,271 $ 325,971,847
============= =============
</TABLE>
- ---------
* Characterized as ordinary income for tax purposes
See Notes to Financial Statements.
11
<PAGE>
The Central European Equity Fund, Inc.
Notes to Financial Statements (unaudited)
- ------------------------------------------------------------------------------
Note 1. Accounting Policies
The Central European Equity Fund, Inc. (the "Fund") was incorporated in
Maryland on February 7, 1990 as The Future Germany Fund, Inc., a
non-diversified, closed-end management investment company. The Fund commenced
investment operations on March 6, 1990. Pursuant to shareholder approvals, on
June 29, 1995, the Fund changed its name and investment objective to allow
investment in Central European countries, and on June 20, 1997, the Fund
changed its investment policies to permit increased flexibility in the
geographic distribution of the Fund's investments.
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.
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 and
interest 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, 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 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. In addition, certain
foreign markets may be substantially smaller, less developed, less liquid and
more volatile than the major markets of the United States.
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
12
<PAGE>
Notes to Financial Statements (unaudited)--continued
- ------------------------------------------------------------------------------
to regulated investment companies and to distribute substantially 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 Federal 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 Deutsche Bank Securities
Inc. (the "Manager"), formerly Deutsche Morgan Grenfell Inc., 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, and .55% of such assets in excess of $100 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 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 April 30, 1998, Deutsche Bank AG, the German parent
of the Manager and Investment Adviser, and Deutsche Bank Securities Inc., a
direct subsidiary of Deutsche Bank AG, received $99,614 and $25,952,
respectively, in brokerage commissions as a result of executing agency
transactions in portfolio securities on behalf of the Fund.
For the six months ended April 30, 1998, interest income earned on the
Deutsche mark account with Deutsche Bank AG was $13,356.
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 April 30, 1998 were $141,498,518 and
$185,882,122, respectively.
Note 5. Portfolio Securities Loaned
At April 30, 1998, the market value of the securities loaned and amount of
collateral received with respect to such loans were $36,819,602 and
$38,404,850, respectively. For the six months ended April 30, 1998, net
earnings to the Fund from investing such collateral were $129,866, after
deducting borrowers' rebate and agency fees of $617,390 and $55,890,
respectively.
Note 6. Capital
During the six months ended April 30, 1998 and the year ended October 31,
1997, the Fund purchased 1,214,000 and 722,257 of its shares of common stock
on the open market at a total cost of $22,286,188 and $17,080,984,
respectively. The weighted average discount of these purchases comparing the
purchase price to the net asset value at the time of purchase was 15.7% and
16.2%, respectively. These shares are held in treasury.
13
<PAGE>
The Central European Equity 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
April 30, For the year ended October 31,
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value:
Beginning of period .................... $ 28.00 $ 24.56 $ 20.70 $ 18.65 $ 16.76 $ 13.56
---------- ---------- ---------- -------------- -------------- --------------
Net investment income (loss) ........... (.04) .09 .17 .13 .19 .15
Net realized and unrealized gain on
investments and foreign
currency transactions ......... 2.28 5.26 3.93 2.03 1.76 3.35
---------- ---------- ---------- -------------- -------------- --------------
Increase from investment operations .... 2.24 5.35 4.10 2.16 1.95 3.50
---------- ---------- ---------- -------------- -------------- --------------
Increase resulting from share repurchases .33 .28 .14 .09 .02 --
---------- ---------- ---------- -------------- -------------- --------------
Distributions from net investment
income......................... -- (.11) (.13) (.19) (.08) (.17)
Distributions from net realized
foreign currency gains+........ -- -- (.03) (.01) -- (.13)
Distributions from net realized
short-term capital gains+...... (1.55) -- -- -- -- --
Distributions from net realized
long-term capital gains:
Taxable at 28% tax rate ....... (1.51) (1.81) (.22) -- -- --
Taxable at 20% tax rate ....... (3.49) -- -- -- -- --
---------- ---------- ---------- -------------- -------------- --------------
Total distributions .................... (6.55) (1.92) (.38) (.20) (.08) (.30)
---------- ---------- ---------- -------------- -------------- --------------
Dilution in NAV from dividend reinvestment (.34) (.27) -- -- -- --
---------- ---------- ---------- -------------- -------------- --------------
Net asset value:
End of period ................. $ 23.68 $ 28.00 $ 24.56 $ 20.70 $ 18.65 $ 16.76
========== ========== ========== ============== ============== ==============
Market value:
End of period ................. $ 19.75 $ 23.125 $ 19.625 $ 16.00 $ 15.25 $ 16.00
Total investment return for the period:++
Based upon market value ....... 16.38% 28.93% 25.28% 6.37% (3.42)% 33.88%
Based upon net asset value .... 11.05%* 22.41%* 20.74%* 12.22% 12.90% 29.55%
Ratio to average net assets:
Total expenses ................ 1.08%** 1.10% 1.08% 1.24% 1.14% 1.32%
Net investment income (loss) .. (.19)%** .32 .73% .68% 1.07% 1.12%
Portfolio turnover ..................... 49.49% 68.20% 52.30% 38.89% 32.38% 33.72%
Net assets at end of period (000's
omitted).......................$ 296,186 $ 325,972 $ 289,133 $ 247,529 $ 226,554 $ 204,388
</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 as provided for in the Fund's dividend reinvestment plan
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.
* Total investment return reflects the change in investment objectives of
the Fund (see Note 1).
** Annualized.
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 1-800-437-6269
in the U.S. or 617-443-6918 outside of the U.S.)
Manager
Deutsche Bank Securities Inc.
Investment Adviser
Deutsche Asset Management GmbH
Custodian and Transfer Agent
Investors Bank & Trust Company
Legal Counsel
Sullivan & Cromwell
Directors and Officers
MICHAEL DOBSON
Chairman and Director
DETLEF BIERBAUM
Director
JOHN A. BULT
Director
PROF. DR. CLAUS KOEHLER
Director
EDWARD C. SCHMULTS
Director
HANS G. STORR
Director
CHRISTIAN STRENGER
Director
DR. JUERGEN F. STRUBE
Director
ROBERT H. WADSWORTH
Director
WERNER WALBROEL
Director
OTTO WOLFF von AMERONGEN
Director
KENNETH J. TARR
President and Chief Executive Officer
ROBERT R. GAMBEE
Chief Operating Officer and Secretary
JOSEPH M. CHEUNG
Chief Financial Officer and Treasurer
LAURA J. WEBER
Assistant Secretary and Assistant Treasurer
VOLUNTARY CASH PURCHASE PROGRAM
AND DIVIDEND REINVESTMENT PLAN
The Fund offers stockholders a Voluntary Cash Purchase Program and Dividend
Reinvestment Plan ("Plan") which provides for optional cash purchases and for
the automatic reinvestment of dividends and distributions payable by the Fund
in additional Fund shares. A brochure is available by writing or telephoning
the plan agent:
Investors Bank & Trust Company
Shareholder Services
P.O. Box 1537
Boston, MA 02205-1537
Tel. 1-800-356-2754
This report, including the financial statements herein, is transmitted to the
shareholders of The Central European Equity 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 from the 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.
- ---------
All investment management decisions are made by a committee of United States
and German advisors.
15
<PAGE>
SUMMARY OF GENERAL INFORMATION
- ------------------------------------------------------------------------------
The Fund
The Central European Equity Fund is a non-diversified, closed-end investment
company listed on the New York Stock Exchange with the symbol "CEE". The Fund
seeks capital appreciation primarily through investment in Central and Eastern
European equities. It is managed by Deutsche Bank Securities 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
"CentEurEq". 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: 1-800-437-6269 (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.ceefund.com.
There are three closed-end 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
1-800-437-6269 (in the U.S.) or 617-443-6918 (outside of the U.S.)
for shareholder reports.
[LOGO]
The Central European
Equity Fund, Inc.
Semi-annual Report
April 30, 1998
