<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Semi-Annual Report of The United Kingdom
Fund Inc. On September 30, 1995, the end of the period under review, the Fund's
net assets totalled $59.1 million. This represents a net asset value per share
of $14.74, a rise of 91.33% from its initial value after taking into account
underwriting discounts, commissions, offering expenses and distributions. This
compares with an increase of 111.93% in the FTA All Share Index (U.S.$) over the
same time period. At the end of the period under review, the Fund was quoted at
$12.25 per share on the New York Stock Exchange, which represents a 16.89%
discount to the Fund's net asset value per share.
At the Annual Shareholders' Meeting on September 19, 1995, a proposal to
convert the Fund to an open-end investment company was submitted to shareholders
but was not approved.
We also enclose an investment review and United Kingdom market outlook
together with a summary of the major portfolio investments.
Yours sincerely,
<TABLE>
<C> <S>
[SIGNATURE] [SIGNATURE]
Anthony M. Solomon Richard J. Oldfield
Chairman of the Board President
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INVESTMENT MANAGER
- --------------------------------------------------------------------------------
INVESTMENT REVIEW
During the quarter, your Fund experienced a rise in net asset value of 8.22%,
which compared with a 7.47% increase in the FTA All Share Index. For 1995 year
to date, the Fund's net asset value has increased by 16.29%, which compares with
a 19.28% increase in the FTA All Share Index. These figures are recorded in
total return and dollar based terms.
The market made further progress during the third quarter, with the FT-SE 100
Index reaching a new closing high of 3580 on September 4, 1995. The return on
the FT-SE Actuaries All-Share Index was 8.0%, resulting in a total return of
17.9% (in Sterling terms) for the year to date. The market was aided by John
Major's re-election as leader of the Conservative Party, reducing political
uncertainty. This enabled it to re-focus on economic data suggesting a slowdown
in activity which reduced fears about inflation and prompted renewed speculation
about a reduction in interest rates. The market was also boosted by continued
takeover activity, particularly among the electricity companies.
The FT-SE 100 Index, returning 7.1%, underperformed the FTA All-Share Index
largely as a result of its underweighting in electricity companies. The FT-SE
Mid-250 Index, which contains most of the electricity companies, outperformed
the FT-SE Actuaries All-Share Index, returning 11.1%. The Index of small
capitalization companies performed roughly in line with the overall market,
returning 8.2%. These returns are in Sterling terms. The interim reporting
season produced generally strong results with encouraging growth in cash
generation and dividends as companies benefited from the cost cutting measures
implemented during the recession. Disappointments tended to be from companies
exposed to the building materials and construction industries and those cyclical
companies which had experienced inventory liquidation as customers anticipated
falling prices. Companies which were heavily exposed to the U.K. economy and
where there were additional concerns over the impact of the hot summer weather,
the National Lottery and hesitant consumer spending, tended to disappoint with
very cautious statements on current trading. The electricity sector was by far
the best performing area of the market with five of the twelve quoted regional
electricity companies receiving takeover bids during the quarter. The weakest
sectors were gas distribution and oils, reflecting the recent collapse in the
spot gas price and pressure on crude oil prices. The current fall in gas prices
caused problems for British Gas, due to its long-term purchase contracts.
Financial sectors performed well, as takeover speculation and the very
encouraging performance of world equity and bond markets continued. Banks
particularly benefited from these conditions, together with lower bad debt
provisions and their ongoing cost reduction programs.
Over the quarter, bonds lagged the equity market, although the U.K. long bond
yield hardened to 8.3%. Gains early in the period following John Major's
re-election were partially offset, as investors focused on government borrowing
levels, which were much higher than expected. A poorly supported gilt auction in
the last week of the quarter led to fears that the on going need to fund the
Public Sector Borrowing Requirement might restrict the government's room to
maneuver on interest rates. This was despite further evidence that the economy
was slowing, evidenced by manufacturing output falling year-on-year in August by
0.4%.
The Fund's and the FTA All Share Index's sector weightings expressed as a
percentage of total equities held at September 30, 1995 are outlined below:
<TABLE>
<CAPTION>
% FTA
% U.K. All Share
Fund Index
------------ ------------
<S> <C> <C>
Mineral Extraction........................ 8.3 8.6
General Manufacturing..................... 28.0 18.8
Consumer Goods............................ 19.9 19.2
Services.................................. 21.6 20.6
Utilities................................. 11.3 12.6
Finance................................... 10.9 16.6
Investment Trusts......................... 0.0 3.6
</TABLE>
2
<PAGE>
ECONOMIC AND MARKET OUTLOOK
Although there has been further evidence of a slowdown in the U.K. economy, a
cut in interest rates (that might be favored by the Chancellor of the Exchequer
for political reasons), is, in our opinion, unlikely. The last gilt auction was
poorly supported and the need to finance the growing Public Sector Borrowing
Requirement will make a reduction in interest rates difficult to achieve. Given
this, and the apparent slowdown over the summer, GDP growth could be slightly
less than 3% this year. The scope for restimulating growth, perhaps by tax cuts,
in the November Budget will also be restricted by the need to limit public
spending and maintain control over the current account deficit. This is against
a background of political pressures to help both the housing market and consumer
confidence prior to the next general election.
The interim reporting season provided clear evidence of the increased
profitability of the corporate sector following the rationalization undertaken
during the recession. Margin improvements following cost-cutting should enable
company profits to continue their growth even if the broader economy remains
relatively weak. In addition, the current strength of corporate balance sheets
means that acquisitions will be a major feature of the next twelve months as
companies look for new areas for cost savings and growth. Some sectors of the
economy look set to remain under pressure including commodity producers who are
now experiencing retreating prices and those companies involved in industries
with structural overcapacity such as building materials and construction.
Consumer confidence remains subdued although this may well improve following the
November Budget.
The U.K. equity market will remain influenced by moves in bond markets both in
the U.K. and particularly in the U.S. We believe that short-term interest rates
in the U.S. are likely to remain flat, although there may be some pick-up in
U.S. economic activity as companies begin to replenish inventory levels and the
consumer benefits from possible tax rebates. In the longer term the use of
technology to cut costs and a flexible global labor market suggest an optimistic
scenario for world inflation and a good outlook for long-term interest rates.
The long-term outlook for the U.K. economy remains positive. Capital
investment levels in manufacturing continue to rise with substantial
improvements in both productivity and flexible capacity. Inflation looks set to
remain within the government's target range of 1-4%. This suggests that there
will be no need to raise interest rates to slow the economy down to meet the
target. Given this benign environment, the medium term outlook for U.K. equities
continues to be positive, although in the short term, overseas influences and
increasing political uncertainty as we approach the next general election may
cast a shadow over the market.
3
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
- --------------------------------------------------------------------------------
The strategy during the quarter was to add to the holdings of special
situations in the portfolio. We purchased Smith (WH) Group, the newspaper
distributor and retailer, following an announcement of difficult trading. We
believe the value of Smith (WH) Group's wide ranging businesses exceeds the
current market capitalization by a significant margin. Other purchases included
Greggs, which operates a chain of retail bakeries; South West Water, which is a
potential bid candidate; and Persona Group, which distributes computer
networking software. We also purchased CPL Aromas, which is shortly to build a
new factory in Syria to manufacture essences and fragrances. Sales included
Ocean Group, where we were concerned over some of its subsidiaries' trading
performances. We also sold Pearson, which had disappointing performance
following its expensive acquisition of a U.S. software company, now incorporated
in its Mindscape division. We reduced Unipalm Group, which later received a bid
approach.
The Fund's ten largest equity holdings as of September 30, 1995 were:
SHELL TRANSPORT & TRADING
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 744p
Prospective Earnings per share (to December 1996)....... 56.8p
Prospective Earnings Multiple........................... 13.1 x
</TABLE>
Shell Transport & Trading ("Shell") is a leading oil company with substantial
production, refining and petrochemical activities. The chemicals interests
should benefit from a recent improvement in margins and rising oil production
should lead to higher profits from Shell's upstream activities. Shell's plastics
business should see a significant improvement resulting from recent polymer
prices.
STANDARD CHARTERED
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 451p
Prospective Earnings per share (to December 1996)....... 45.6p
Prospective Earnings Multiple........................... 9.9 x
</TABLE>
Standard Chartered is a U.K. based banking group which is rapidly recovering
following a period of disappointing results. The group has significant earnings
growth potential, based on U.K. economic recovery and its strong presence in the
fast growth markets of the Asia Pacific region and Africa. Given this, the
shares are trading on an attractively low multiple.
EAST MIDLANDS ELECTRICITY
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 859p
Prospective Earnings per share (to March 1997).......... 74.0p
Prospective Earnings Multiple........................... 11.6 x
</TABLE>
East Midlands Electricity is a medium-sized regional electricity company with
excellent dividend growth prospects. It has strong finances and is committed to
concentrating on the core electricity distribution business, with the intended
sale of all other activities. A special dividend is likely to follow the sale of
its holding in the National Grid Company. East Midlands Electricity remains a
potential takeover candidate.
POWERGEN
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 559p
Prospective Earnings per share (to March 1997).......... 60.2p
Prospective Earnings Multiple........................... 9.3 x
</TABLE>
PowerGen, a leading power generator in England and Wales, continues to reduce
its costs. PowerGen has recently made a recommended offer for Midlands
Electricity, which will prepare the company for the deregulated market in 1998.
PowerGen is likely to continue its strong dividend record.
4
<PAGE>
UNIPALM GROUP
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 428p
Prospective Earnings per share (to April 1997).......... 16.3p
Prospective Earnings Multiple........................... 26.3 x
</TABLE>
Unipalm Group supplies networking software and is a service provider to the
Internet. Current sales of Internet connections are growing extremely rapidly,
with monthly growth rates averaging 10%. Unipalm Group is likely to be taken
over by either a major telecommunications company or a global Internet service
provider and has recently announced a bid approach which is anticipated to lead
to an offer at 450 pence per share.
GREAT UNIVERSAL STORES
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 596p
Prospective Earnings per share (to March 1997).......... 42.8p
Prospective Earnings Multiple........................... 13.9 x
</TABLE>
Great Universal Stores is a retail, mail order, property and financial group
with a strong balance sheet and a consistent earnings record. Current trading in
the mail order division has been steady and there are still further
rationalization benefits which can be achieved. The company has a progressive
dividend policy and investors await further ways of increasing shareholder
value.
BRITISH PETROLEUM
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 475p
Prospective Earnings per share (to December 1996)....... 38.9p
Prospective Earnings Multiple........................... 12.2 x
</TABLE>
British Petroleum is a leading international oil company with a substantial
exploration and production profile. Its downstream activities have performed
well and chemicals should show a large recovery in margins helped by increased
volumes. Expectations of firm crude oil prices should underpin profits growth.
WHITECROFT
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 194p
Prospective Earnings per share (to March 1997).......... 14.8p
Prospective Earnings Multiple........................... 13.1 x
</TABLE>
Whitecroft is a diversified industrial group with interests in building
products, commercial lighting, textiles and medical cotton fibre. It has
recovered strongly from near bankruptcy three years ago and is experiencing
strong demand for its products. Earnings growth from the existing businesses is
expected to remain at high levels and may now be supplemented by the acquisition
of companies in related areas.
GLAXO WELLCOME
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 767p
Prospective Earnings per share (to June 1996)........... 52.5p
Prospective Earnings Multiple........................... 14.6 x
</TABLE>
Glaxo Wellcome is a leading international pharmaceuticals company. Following
the takeover of Wellcome by Glaxo, there is substantial scope for cost reduction
in eliminating duplicated research and marketing expenses. A new research
facility at Stevenage has recently opened which will enhance its drug discovery
and development capabilities. Glaxo Wellcome currently faces various challenges
to its patents on Zantac, its major drug product, which it is expected to
overcome.
BRITISH AIRWAYS
<TABLE>
<S> <C>
Market Price as of 09/29/95............................. 450p
Prospective Earnings per share (to March 1997).......... 44.9p
Prospective Earnings Multiple........................... 10.0 x
</TABLE>
British Airways operates international and domestic scheduled and charter air
services. It is experiencing strong demand for passenger and freight services
and is benefiting from increased premium passenger traffic. It has a substantial
stake in USAir, which has recently announced that it is in talks which may lead
to a merger.
5
<PAGE>
- -----------------------------------------------
The United Kingdom Fund Inc.
Statement of Investments
September 30, 1995 (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
<C> <S> <C>
Value (Note
Shares Description 1)
- ---------------------------------------------------------------
INVESTMENTS IN UNITED KINGDOM SECURITIES--
98.8% OF NET ASSETS
Common Stocks--98.8%
Banks--10.7%
200,000 Abbey National plc Ord 10p............. $ 1,715,646
150,000 Barclays plc Ord L1.................... 1,778,163
400,000 Standard Chartered plc Ord 25p......... 2,855,189
-----------
6,348,998
-----------
Building Materials & Merchants--6.9%
250,000 BPB Industries plc Ord 50p............. 1,258,246
300,000 Johnston Group plc Ord 10p............. 1,590,613
250,000 Marley plc Ord 25p..................... 431,286
400,000 Norcros plc Ord 25p.................... 538,118
101,000 Cape plc Ord 25p....................... 284,538
-----------
4,102,801
-----------
Chemicals--2.9%
200,000 Wardle Storeys plc Ord 10p............. 1,187,024
250,000 Allied Colloids plc Ord 10p............ 498,550
-----------
1,685,574
-----------
Distributors--1.4%
200,000 Persona Group plc Ord 5p............... 851,492
-----------
Diversified Industrials--4.3%
600,000 Whitecroft plc Ord 25p................. 1,842,262
50,000 Charter Ord 2p (Regd.)................. 682,935
-----------
2,525,197
-----------
Electricity--8.3%
200,000 East Midlands Electricity plc Ord
50p.................................. 2,719,077
250,000 PowerGen plc Ord 50p................... 2,211,822
-----------
4,930,899
-----------
Electronics--4.4%
240,000 Beales Hunter plc Ord 20p.............. 904,038
200,000 BICC plc Ord 50p....................... 955,950
150,000 General Electric Co. plc Ord 5p........ 753,760
-----------
2,613,748
-----------
Engineering-General--4.1%
750,000 Bridon plc Ord 25p..................... 1,756,796
246,186 Ash & Lacy plc Ord 5p.................. 635,111
-----------
2,391,907
-----------
Engineering-Vehicles--2.6%
500,000 Lucas Industries plc Ord 25p........... 1,551,045
-----------
Food Producers--6.5%
280,000 Barr (AG) plc Ord 25p.................. 1,493,435
510,000 Canadian Pizza plc Ord 10p............. 613,454
165,000 CPL Aromas plc Ord 10p................. 861,780
1,000,000 Finlay (James) plc Ord 25p............. 870,485
-----------
3,839,154
-----------
Health Care--2.4%
400,000 Scholl plc Ord 5p...................... 1,430,760
-----------
Household Goods--2.2%
317,500 Royal Doulton plc Ord L1............... 1,291,443
-----------
Leisure & Hotels--1.1%
355,000 Inspirations plc Ord 10p............... 679,849
-----------
<CAPTION>
- ---------------------------------------------------------------
Value (Note
Shares Description 1)
<C> <S> <C>
- ---------------------------------------------------------------
Oil & Gas--9.6%
200,000 British Gas plc Ord 25p................ $ 840,413
250,000 British Petroleum plc Ord 25p.......... 1,879,455
250,000 Shell Transport & Trading plc Ord 25p
(Regd.).............................. 2,943,821
-----------
5,663,689
-----------
Paper, Packaging, & Printing--0.8%
50,000 Smith (DS) Holdings plc Ord 20p........ 489,054
-----------
Pharmaceuticals--3.1%
150,000 Glaxo Holdings plc Ord 25p............. 1,820,895
-----------
Retailers-Food--4.0%
450,000 Nurdin & Peacock plc Ord 10p........... 1,317,597
53,000 Greggs plc Ord 20p..................... 1,025,890
-----------
2,343,487
-----------
Retailers-General--8.4%
200,000 Great Universal Stores plc Ord 25p..... 1,886,577
100,000 Kingfisher plc Ord 25p................. 797,680
100,000 Smith (WH) Group plc Ord 50p........... 584,016
175,000 Menzies (John) plc Ord 25p............. 1,686,762
-----------
4,955,035
-----------
Spirits, Wines & Ciders--0.7%
185,000 Merrydown plc Ord 25p.................. 406,991
-----------
Support Services--3.4%
295,000 Unipalm Group plc Ord 5p*.............. 1,998,316
-----------
Textiles & Apparel--3.8%
350,000 French plc Ord 10p..................... 415,459
165,000 Shiloh plc Ord 25p..................... 284,648
1,005,000 Sirdar plc Ord 25p..................... 1,526,988
-----------
2,227,095
-----------
Tobacco--2.8%
200,000 BAT Industries plc Ord 25p............. 1,674,496
-----------
Transport--3.0%
250,000 British Airways plc Ord 25p............ 1,782,515
-----------
Water--1.4%
100,000 South West Water plc Ord L1............ 813,507
-----------
Total Common Stocks
(cost $45,276,977)................... 58,417,947
-----------
UNITED STATES SHORT-TERM INVESTMENT--
0.1% OF NET ASSETS
<CAPTION>
Principal
Amount
(000)
<C> <S> <C>
US$48 Federated Trust for Short-term U.S.
Government Securities (cost
$48,211)............................. 48,211
-----------
Total Investments (cost $45,325,188)--
98.9%................................ 58,466,158
-----------
Cash and other assets in excess of
liabilities--1.1%.................... 666,694
-----------
Net Assets--100.0%..................... $59,132,852
-----------
-----------
Number of shares issued and
outstanding.......................... 4,011,655
-----------
-----------
Net asset value per share.............. $14.74
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
- -----------------------------------------------------------
The United Kingdom Fund Inc.
Statement of
Assets and Liabilities
September 30, 1995 (unaudited)
- ----------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$45,325,188)........................... $ 58,466,158
Cash (includes $68,327 equivalent in an
interest-bearing pound sterling
account)............................... 188,321
Dividends receivable.................... 473,900
United Kingdom withholding tax refund
receivable............................. 76,893
Other assets............................ 44,310
------------
Total assets...................... 59,249,582
------------
Liabilities
Investment management fee payable....... 36,305
Administration fee payable.............. 7,261
Accrued expenses and accounts payable... 73,164
------------
Total liabilities................. 116,730
------------
Net Assets.............................. $ 59,132,852
------------
------------
Net assets consist of:
Common stock, $0.01 par value
(Authorized 15,000,000 shares)....... $ 40,116
Paid-in-surplus....................... 45,882,806
Undistributed net investment income... 852,732
Accumulated net realized loss......... (787,110)
Net unrealized appreciation........... 13,144,308
------------
Net assets............................ $ 59,132,852
------------
------------
Net asset value per share
($59,132,852 DIVIDED BY 4,011,655
shares of common stock issued and
outstanding)......................... $14.74
</TABLE>
- ----------------------------------------------------
The United Kingdom Fund Inc.
Statement of Operations
For the six months ended
September 30, 1995 (unaudited)
- ----------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Dividends............................. $ 1,188,562
Interest.............................. 53,337
------------
1,241,899
------------
Less: United Kingdom withholding tax
on United Kingdom source dividends... 162,198
------------
Total income...................... 1,079,701
------------
Expenses
Investment management fee............. 210,086
Legal fee............................. 52,228
Administration fee.................... 42,017
Directors' fees and expenses.......... 33,866
Reports and notices to shareholders... 27,450
Audit fee............................. 20,862
Custodians' fees and expenses......... 13,370
Transfer agent's fees and expenses.... 10,779
NYSE listing fee...................... 8,394
Miscellaneous expenses................ 5,153
------------
Total expenses.................... 424,205
------------
Net investment income................... 655,496
------------
Realized and Unrealized Gain/(Loss) on
Investments and Pound
Sterling Transactions
Net realized gain/(loss) on:
Investments........................... 1,134,640
Pound sterling transactions........... (87,826)
Net change in unrealized appreciation
(depreciation) on:
Investments........................... 4,915,528
Pound sterling transactions........... (87,584)
------------
Net gain on investments and pound
sterling transactions.................. 5,874,758
------------
Net Increase in Net Assets Resulting
From Operations........................ $ 6,530,254
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
7
<PAGE>
- -----------------------------------------------------------
The United Kingdom Fund Inc.
Statement of Changes in Net Assets
- -----------------------------------------------
<TABLE>
<CAPTION>
For the six
months ended
September 30, For the
1995 year ended
(unaudited) March 31, 1995
-------------- ---------------
<S> <C> <C>
Increase in Net Assets
Operations:
Net investment income................. $ 655,496 $ 1,618,837
Net realized gain on investments...... 1,134,640 146,227
Net realized gain/(loss) on pound
sterling transactions................ (87,826) 228,760
Net change in unrealized appreciation
on investments and pound sterling
transactions......................... 4,827,944 3,300,199
-------------- ---------------
Net increase in net assets resulting
from operations...................... 6,530,254 5,294,023
-------------- ---------------
Distributions to shareholders from:
Net investment income ($0.07
and $0.40 per share)................. (280,816) (1,616,697)
Net realized gains ( -- and
$0.06 per share, respectively)....... -- (228,664)
-------------- ---------------
Total increase.......................... 6,249,438 3,448,662
Net Assets
Beginning of period................... 52,883,414 49,434,752
-------------- ---------------
End of period (including undistributed
net investment income of $852,732 and
$478,052, respectively).............. $ 59,132,852 $ 52,883,414
-------------- ---------------
-------------- ---------------
</TABLE>
See Notes to Financial Statements.
- -----------------------------------------------
The United Kingdom Fund Inc.
Notes to Financial Statements -- (Unaudited)
- -----------------------------------------------
Note 1. Significant The United Kingdom Fund
Accounting Policies Inc. (the "Fund") was
incorporated in the State of Maryland on May 28, 1987,
as a closed-end, diversified management investment company. Prior to commencing
investment operations on August 14, 1987, the Fund had no operations other than
the sale to Mercury Asset Management Group plc. (an affiliate to the "Investment
Adviser" and "Investment Manager") of 8,602 shares of common stock for $100,000
on August 4, 1987.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
VALUATION OF INVESTMENTS: All securities for which current market quotations
are readily available are valued at the last sales price prior to the time of
determination. If there is no sales price on that date, the securities would be
valued at the most recently available sales price. Unless otherwise determined
by the Fund's Board of Directors, United States short-term investments having a
maturity of 60 days or less are valued at amortized cost. Short-term United
Kingdom securities are valued at cost after reflecting any unrealized foreign
exchange gains or losses. Securities and assets for which current market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Forward currency contracts are valued at the current cost of covering or
offsetting the contracts. Any assets or liabilities initially expressed in terms
of pound sterling ("Sterling") are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers on the date of
valuation.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
recorded on the trade date (the date on which the order to buy or sell is
executed). Realized and unrealized gains and losses from security and foreign
currency transactions are calculated on the identified cost basis and interest
income is recorded on an accrual basis. Dividend income is recorded on the
ex-dividend date, except that certain dividends from U.K. securities are
recorded as soon as the Fund is informed of the ex-dividend date. Such dividend
income and interest income is recorded before United Kingdom withholding tax.
United Kingdom withholding tax is recorded as a reduction of investment income,
net of an amount receivable from the United Kingdom tax authorities pursuant to
the tax treaty with the United States.
8
<PAGE>
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars as follows:
(i) the foreign currency market value of investment securities and other
assets and liabilities stated in Sterling are translated at the exchange
rate prevailing at the end of the period; and
(ii) purchases, sales of investments, income and expenses are translated at
the rate of exchange prevailing on the respective dates of such
transactions.
The resultant exchange gains and losses are included in the Statement of
Operations.
The Fund does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market price of
investments. However, the Fund does isolate the effect of fluctuations in
Sterling rates when determining the gain or loss upon the sale or maturity of
Sterling-denominated debt obligations pursuant to U.S. federal income tax
regulations; such amount is categorized as foreign exchange gain or loss for
both financial reporting and income tax reporting purposes.
Net realized foreign exchange losses of $87,826 represent foreign exchange
gains and losses from holdings of Sterling, exchange gains or losses realized
between the trade date and settlement dates on security transactions, and the
difference between the amounts of interest and dividends recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received.
The 12:00 P.M. midpoint rate of exchange at September 30, 1995 was U.S.
$1.5827 to L1 Sterling.
FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign
currency exchange contracts ("Forward Contracts") in connection with planned
purchases or sales of securities or to hedge the U.S. dollar value of portfolio
securities denominated in Sterling.
The Fund may not position a hedge with respect to Sterling or another currency
to an extent greater than the aggregate market value (at the time of making such
transaction) of the securities held in its portfolio denominated or generally
quoted in or currently convertible into Sterling or such other currency. If the
Fund enters into a currency hedging transaction, the Fund's custodian will place
cash or U.S. government securities or other high quality short-term debt
obligations or a combination thereof in a segregated account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract, which value will be adjusted on a daily
basis. If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Fund's commitment with respect to the
contract. The Fund did not enter into such contracts during the period.
Risks may arise upon entering these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of the foreign currency relative to the U.S. dollar.
Fluctuations in the value of forward contracts are recorded for book purposes
as unrealized gains or losses by the Fund.
Realized gains and losses include net gains or losses recognized by the Fund
on forward contracts that the Fund has terminated by entering into offsetting
commitments.
U.S. FEDERAL TAX STATUS: The Fund intends to distribute all of its taxable
income and to comply with the other requirements of the U.S. Internal Revenue
Code applicable to regulated investment companies. Accordingly, no provision for
U.S. federal income taxes is required. In addition, by distributing during each
calendar year substantially all of its ordinary income and capital gains, if
any, the Fund intends not to be subject to a U.S. federal excise tax. At March
31, 1995, the Fund had capital loss carryforwards of approximately $420,000 and
$1,015,000 available as a reduction, to the extent provided in regulations, of
any future net capital gains realized before the end of fiscal 2001 and 2002,
respectively. To the extent that the loss is used to offset future capital
gains, it is probable that the gains so offset will not be distributed to
shareholders.
UNITED KINGDOM WITHHOLDING TAXES: Dividend income received from United
Kingdom corporations is subject to the advance corporation tax ("ACT"). Pursuant
to the U.K.-U.S. tax treaty, the Fund will generally be entitled to receive from
the United Kingdom Inland Revenue a payment equal to the ACT minus a 15%
withholding tax. The withholding tax is based upon the sum of the dividend
received plus the ACT. The Fund is not subject to U.K. taxes on capital gains
and interest income.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund records dividends and
distributions to its shareholders on the ex-dividend date.
Note 2. Agreements The Fund has entered into
Agreements with Mercury Asset Management International
(Channel Islands) Ltd. (the "Investment Manager"), Mercury Asset Management
International Ltd. (the "Investment Adviser"), and Bear Stearns Funds Management
Inc. (the "Administrator").
The Investment Management Agreement provides that the Fund pays the Investment
Manager a fee, computed weekly and payable monthly, at the following rates:
0.75% of the Fund's average weekly net assets up to $150 million, and 0.65% of
such assets in excess of $150 million. The Administration Agreement provides
that the Fund pays the Administrator a fee at the annual rate of 0.15% of the
Fund's average weekly net assets up to $200 million and 0.10% on such
9
<PAGE>
assets in excess of $200 million. The Investment Manager makes investment
decisions on behalf of the Fund on the basis of recommendations from the
Investment Adviser subject to the overall supervision of the Board of Directors
of the Fund. The Investment Manager pays a fee to the Investment Adviser for the
services rendered. The Administrator provides certain clerical and bookkeeping
services to the Fund.
Note 3. Transactions Of the 4,011,655 shares
with Affiliates outstanding at September 30,
1995, Mercury Asset Management Group plc (the
parent company of the Investment Adviser and
Investment Manager) owned 12,762 shares in respect of the Fund's initial capital
contribution (including 4,160 shares acquired through dividends reinvested).
Certain directors and officers of the Fund are also directors and officers of
either the Investment Manager, the Investment Adviser or Mercury Asset
Management Group plc.
Note 4. Investments in For U.S. federal income tax
Securities purposes, the cost of securi-
ties owned at September 30, 1995 was $45,325,188.
At September 30, 1995, the net unrealized appreciation of investments of
$13,140,970 was composed of gross appreciation of $14,362,786 for those
investments having an excess of value over cost and gross depreciation of
$1,221,816 for those investments having an excess of cost over value.
For the year ended September 30, 1995 aggregate purchases and proceeds from
the sales of portfolio securities (excluding short-term securities) were
$8,742,395 and $5,019,270, respectively.
Note 5. Concentration Investments in the United
of Risk Kingdom may involve certain
considerations and risks not typically associated
with investments in the United States as a result of,
among others, the possibility of future political and economic developments and
the level of the United Kingdom governmental supervision and regulation of its
securities markets.
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic and political developments in a
specific industry or region.
- --------------------------------------------------------------------------------
The United Kingdom Fund Inc.
Quarterly Results of Operations* (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Realized and
Unrealized
Net Investment Gain/(Loss) on
Investment Investments and
Pound Sterling
Income Income/ (Loss) Transactions
--------------- --------------- ---------------- Net Asset Value Market Value**
Per Per Per --------------- ---------------
Quarter Ended Total Share Total Share Total Share High Low High Low Volume**
- --------------------- ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1995........ $ 512 $ 0.13 $ 316 $ 0.08 $ 1,708 $ 0.43 $13.96 $13.10 $11.75 $10.75 434,900
September 30, 1995... 568 0.14 339 0.08 4,167 1.04 14.87 14.08 12.50 10.75 608,400
------ ------ ------ ------ ------- ------
$1,080 $ 0.27 $ 655 $ 0.16 $ 5,875 $ 1.47
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
June 30, 1994........ $ 378 $ 0.09 $ 198 $ 0.05 $ (833) $(0.21) $12.68 $11.98 $12.000 $10.250 481,500
September 30, 1994... 514 0.13 309 0.08 3,505 0.88 13.48 12.16 11.750 10.500 516,300
December 31, 1994.... 1,187 0.30 993 0.24 (605) (0.15) 13.64 12.75 11.875 10.500 748,300
March 31, 1995....... 297 0.07 119 0.03 1,608 0.40 13.18 12.49 11.000 10.500 433,900
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
$2,376 $ 0.59 $1,619 $ 0.40 $ 3,675 $ 0.92
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
June 30, 1993........ $ 240 $ 0.06 $ 68 $ 0.02 $ 714 $ 0.18 $11.36 $10.75 $10.875 $ 9.500 713,700
September 30, 1993... 531 0.13 355 0.08 2,605 0.65 12.04 10.50 12.125 10.500 576,300
December 31, 1993.... 155 0.04 (33) -- 4,688 1.17 12.91 11.58 13.875 10.625 734,200
March 31, 1994....... 460 0.12 288 0.07 (2,200) (0.55) 13.68 12.31 13.875 10.375 904,100
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
$1,386 $ 0.35 $ 678 $ 0.17 $ 5,807 $ 1.45
------ ------ ------ ------ ------- ------
------ ------ ------ ------ ------- ------
</TABLE>
- ------------------------------
* Totals expressed in thousands of dollars except per share amounts and New
York Stock Exchange trading volume of the Fund's common stock.
** As reported on the New York Stock Exchange.
10
<PAGE>
- --------------------------------------------------------------------------------
The United Kingdom Fund Inc.
Financial Highlights
- --------------------------------------------------------------------------------
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data for each period indicated. This information has been
derived from information provided in the financial statements and market price
data for the Fund's shares.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six For the
months Period from
ended August 14,
September For the Year ended March 31, 1987*
30, 1995 ---------------------------------------------------------------------------- to March
(unaudited) 1995 1994 1993 1992 1991 1990 1989 31, 1988
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............... $ 13.18 $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15 $ 10.94 $ 11.63
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Operations:
Net investment
income............. 0.16 0.40 0.17 0.26 0.40 0.38 0.36 0.25 0.20
Net realized and
unrealized
gain/(loss) on
investments and
pound sterling
transactions....... 1.47 0.92 1.45 1.19 (1.31) 1.64 (1.53) 1.61 (0.36)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from
operations....... 1.63 1.32 1.62 1.45 (0.91) 2.02 (1.17) 1.86 (0.16)
Distributions to
shareholders from:
Net investment
income............. (0.07) (0.40) (0.14) (0.14) (0.45) -- (0.35) (0.22) (0.13)
Net realized
gains.............. -- (0.06) -- (0.41) (0.38) (0.73) (0.25) (0.43) (0.22)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total from
distributions.... (0.07) (0.46) (0.14) (0.55) (0.83) (0.73) (0.60) (0.65) (0.35)
From capital
transactions:
Reduction in
offering costs..... -- -- -- 0.01 -- -- -- -- --
Offering costs
charged to
capital............ -- -- -- -- -- -- -- -- (0.18)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net asset value, end
of period............ $ 14.74 $ 13.18 $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15 $ 10.94
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Per share market
value, end of
period............... $ 12.25 $ 10.88 $ 10.50 $ 9.63 $ 9.13 $ 10.25 $ 8.75 $ 10.00 $ 8.88
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total investment
return at market
value**.............. 13.30%+ 7.93% 10.32% 11.45% (2.63)% 26.40% (7.40)% 20.68% (22.92)%+
Net assets at end of
period (000
omitted)............. $ 59,133 $ 52,883 $ 49,435 $ 43,467 $ 39,823 $ 46,775 $ 41,609 $ 48,707 $ 43,864
Ratio of operating
expenses to average
net assets........... 1.51%++ 1.47% 1.50% 1.78% 1.74% 2.19% 1.92% 1.89% 1.99%++
Ratio of net
investment income to
average net assets... 2.16%++ 3.15% 1.43% 2.43% 3.73% 3.34% 3.06% 4.10% 3.01%++
Portfolio turnover
rate................. 9.38%+ 19.73% 27.05% 45.54% 47.30% 36.37% 22.07% 40.91% 22.15%+
Average commission
rate per share....... $ 0.01
</TABLE>
- ------------------------
*Commencement of operations.
**Total investment return at market value, is based on the change in market
price of a share during the period and assumes reinvestment of distributions
at actual prices pursuant to the Fund's dividend reinvestment plan. Total
investment return does not reflect brokerage commissions.
+Not annualized.
++Annualized.
11
<PAGE>
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12
<PAGE>
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13
<PAGE>
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14
<PAGE>
------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
ANTHONY M. SOLOMON, Chairman of the Board and
Director
RICHARD J. OLDFIELD, President
GEORGE F. BENNETT, Director
LIVIO BORGHESE, Director
* SIR ARTHUR BRYAN, Director
PETER STORMONTH DARLING, Director
LEON LEVY, Director
* J. MURRAY LOGAN, Director
* JAMES S. MARTIN, Director
JAMES M. DONALD, Vice President, Treasurer and
Assistant Secretary
STEVEN GOLANN, Senior Vice President, Secretary and
Assistant Treasurer
THADDEA M. FELDMAN, Assistant Secretary
</TABLE>
* Member of the Audit Committee
----------------------------------------------------
EXECUTIVE OFFICES--
245 Park Avenue
8th Floor
New York, New York 10167
(For latest net asset value and market data,
please call (212) 272-6402; regarding shareholder
inquiries and requests for Fund reports, please
call 1-800-432-8224.)
INVESTMENT MANAGER--
Mercury Asset Management International (Channel
Islands) Ltd.
Forum House, Grenville Street
St Helier, Jersey JE4 8RL
Channel Islands
INVESTMENT ADVISER--
Mercury Asset Management International Ltd.
33 King William Street
London EC4R 9AS
England
ADMINISTRATOR--
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, New York 10167
CUSTODIAN--
Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
TRANSFER AGENT AND REGISTRAR--
The Bank of New York
Shareholder Relations Department-11E
P.O. Box 11258
Church Street Station
New York, New York 10286
LEGAL COUNSEL--
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
INDEPENDENT AUDITORS--
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
This report, including the financial statements herein, is transmitted to the
shareholders of The United Kingdom Fund Inc. for their information. The
financial information included herein is taken from the records of the Fund
without audit by the Fund's independent auditors who do not express an opinion
thereon. 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.
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 Financial Times Actuaries All- Share 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 U.S. dollar/pound sterling exchange rate.
<PAGE>
-------------------------------------------
SUMMARY OF GENERAL INFORMATION
---------------------------------------
THE FUND
The United Kingdom Fund is a diversified, closed-end management investment
company whose shares trade on the New York Stock Exchange. Its investment
objective is long-term capital appreciation through investments primarily in
United Kingdom equities. The Fund is managed by Mercury Asset Management
International (Channel Islands) Ltd., relying on investment advice from Mercury
Asset Management International Ltd.
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transactions section of newspapers under the designation "Utd
KingFd" or "UKing". The Fund's New York Stock Exchange trading symbol is UKM.
Weekly comparative net asset value (NAV) and market price information about The
United Kingdom Fund shares are published each Monday in THE WALL STREET JOURNAL,
THE NEW YORK TIMES, and BARRON'S as well as other newspapers in a table called
"Closed End Funds".
Shareholders interested in receiving the quarterly newsletter entitled "Closed
End Fund Focus" should call 1-800-543-6217 or 1-212-888-6941 and request to be
placed on the mailing list or send a request by mail to the Fund's address.
DIVIDEND REINVESTMENT PLAN-- SUMMARY
An automatic Dividend Reinvestment Plan is available to provide shareholders
with automatic reinvestment of their dividend income and capital gains
distributions in additional shares of the Fund's common stock. A brochure
describing the Plan is available from the Plan Agent, The Bank of New York, by
calling: 1-800-432-8224.
If you wish to participate and your shares are held in your own name, no
action is required on your part. However, if your shares are held in the name of
a brokerage firm, bank or other nominee, you should instruct your nominee to
participate in the Plan on your behalf. If your nominee is unable to participate
on your behalf you should request to register your shares in your own name which
will enable you to participate in the Plan.
[LOGO]
The United Kingdom Fund Inc.
Semi-Annual Report
September 30, 1995
