<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Annual Report of The United Kingdom Fund
Inc. On March 31, 1995, the end of the period under review, the Fund had net
assets of $52.9 million. This represents a net asset value per share of $13.18,
a rise of 70.08% from its initial value after taking into account underwriting
discounts, commissions, offering expenses and distributions. This compares with
an increase of 89.42% in the FTA All Share Index over the same time period. At
the end of the period under review, The United Kingdom Fund Inc. was quoted at
$10.875 per share on the New York Stock Exchange, which represents a 17.5%
discount to the Fund's net asset value per share.
During the 12 weeks ended March 31, 1995, The United Kingdom Fund Inc. traded
on the New York Stock Exchange at an average discount of 16.00%. Consequently,
in accordance with the Fund's charter, a proposal to convert the Fund to an
open-end investment company will be submitted to shareholders at the next annual
meeting for their consideration.
We also enclose an investment review and United Kingdom market outlook
together with a summary of the major portfolio investments.
Yours sincerely,
<TABLE>
<S> <C>
[SIGNATURE] [SIGNATURE]
Anthony M. Solomon Richard J. Oldfield
Chairman of the Board President
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INVESTMENT MANAGER
- --------------------------------------------------------------------------------
INVESTMENT REVIEW
During the first quarter of 1995, your Fund experienced a rise in the net
asset value of 3.4%, which compared with a 6.6% increase in the FTA All Share
Index. For the fiscal year ended March 31, 1995, the Fund's net asset value rose
by 11.5%, while the FTA All Share Index rose by 12.8%. These figures are
recorded in total return and dollar based terms.
The market advanced against a background of the greatest turbulence seen in
the foreign exchange markets since the ERM crisis in September 1992. The
potentially positive effect on exporters' earnings of a decline in sterling was
offset by a concern that the Bank of England would raise short term interest
rates in order to defend the currency. Anticipation of such a move, combined
with continued uncertainty over the future of the Conservative government, led
to a decline in equity prices during January; justifying this concern, interest
rates were raised by a half of one percent on February 2, 1995.
FT-SE 100 Index companies continued to outperform the broader market and
returned 3.9%, while the indices of medium sized and small capitalization
companies returned -1.2% and -0.9%, respectively (in sterling terms).
Pharmaceutical stocks once again represented the best performing area of the
market, with Glaxo Holdings' successful takeover of Wellcome causing
revaluations across the sector. The first signs of a resumption in loan demand,
combined with strong growth in dividends announced during the reporting season,
benefited bank shares; insurance stocks also performed well as long-term
interest rates declined. In contrast, the strong performance of the utilities in
the final quarter of 1994 was reversed following an announcement by the
regulator of the regional electricity companies that he was to reconsider the
current pricing regime.
Increased trading volumes reflected a shift in sentiment of investors who,
believing that short-term interest rates on both sides of the Atlantic were
nearing their peaks, focused on economic growth which appeared sustainable. In
early March, however, the sterling's weakness against the Deutschemark prompted
renewed fears of another increase in base rates and, exacerbated by the collapse
of Barings, the market weakened accordingly. The reporting season reflected
corporate profits growth in line or ahead of forecasts, while confident
statements accompanied dividend increases which exceeded expectations. In
addition, the prospect of increased corporate activity, coupled with further
evidence of economic slowdown in both the U.K. and the U.S., stimulated a late
rally in a market which had been consistently underpinned by the strength of
Wall Street.
The Fund's and the FTA All Share Index's sector weightings expressed as a
percentage of total equities held at March 31, 1995 are outlined below:
<TABLE>
<CAPTION>
% FTA
% U.K. All Share
Fund Index
------------ ------------
<S> <C> <C>
Mineral Extraction........................ 9.5 8.9
General Manufacturing..................... 31.0 19.5
Consumer Goods............................ 20.6 19.2
Services.................................. 18.9 20.1
Utilities................................. 9.8 12.7
Finance................................... 10.2 16.0
Investment Trusts......................... 0.0 3.6
</TABLE>
2
<PAGE>
ECONOMIC AND MARKET OUTLOOK
In the light of two interest rate increases during the second half of 1994 and
the most recent increase in February 1995, signs of weakness in consumer
spending have helped to allay fears that the economic recovery might fuel rising
inflation. We do not expect short-term interest rates to exceed 7.5% this year.
We expect GDP growth of approximately 3% in 1995, and we believe that consumer
confidence will improve, albeit slowly in the absence of any tax cuts.
Relaxation of the government's fiscal policy, however, may necessitate
additional monetary tightening in order to quell the threat of inflation.
The trend of strong corporate profits in 1994 has been reinforced by recent
company results, which broadly matched expectations, indicating a 15% earnings
growth rate. We have reduced our 1995 earnings growth forecast to 13%, owing to
the prospect of some economic slowdown, and expect earnings to grow by a further
11% in 1996. This growth will be driven to a large extent by rationalization and
cost cutting, as significant price rises will be difficult to achieve in an
environment of historically low inflation and high real interest rates.
Manufacturers will, however, be able to pass on a greater proportion of the
costs of rising commodity prices to the customer.
The U.K.'s financial markets will continue to be influenced by global bond
markets, which in turn will reflect the economic picture in the U.S. Recent
economic data from the U.S. suggests that short-term interest rates will be
raised again this year, although the consensus holds that base rates are near
the level sought by the Federal Reserve, sufficient to achieve a 2.5% growth
rate in 1995. In Continental Europe, the Bundesbank's decision to reduce the
German discount rate was a positive move to stimulate economic growth,
particularly that which is export led, via a weaker Deutschemark. Elsewhere,
most central banks have followed the Federal Reserve's lead in raising interest
rates to preempt inflationary pressures.
The outlook for the U.K. economy is favorable, with the manufacturing sector
leading the recovery and inflation likely to remain within the Chancellor's
1- 4% target band for some time. We do not expect significant inflationary
pressures to surface before 1996, a view that is consistent with the current low
levels of consumer confidence. Although average earnings appear to have
bottomed, and despite the fact that input price inflation is beginning to
increase, our medium term forecasts for inflation remain below consensus. Under
this economic scenario, the gilt and equity markets now look modestly valued; as
investor fears about inflation continue to subside, these valuations are
expected to rise. Strong cash generation, the key to both dividend growth and
corporate activity, is likely to be an important feature again this year, while
strong earnings growth should underpin equity performance.
3
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
- --------------------------------------------------------------------------------
Our strategy over the period was to add new holdings to the portfolio,
especially medium-sized companies capable of strong growth to replace some of
the large company holdings. We purchased positions in Ocean Group, Charter and
BICC and sold SmithKline Beecham and Peninsula & Oriental Steam Navigation. The
holding in Enterprise Oil was sold and the proceeds were switched into British
Petroleum.
A significant reduction took place in the holding of East Midlands Electricity
before the price fell sharply on the electricity regulator's announcement of a
proposed revision to price controls. We also reduced Abbey National and BAT
Industries after a period of outperformance. Other new holdings included the
specialty chemical company, Allied Colloids, the cotton spinner Shiloh, and
Cape, a manufacturer of high performance fire protection and insulation products
for the building industry.
The Fund's ten largest equity holdings as of March 31, 1995 were:
SHELL TRANSPORT & TRADING
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 709p
Prospective Earnings per share (to December 1995)....... 47.8p
Prospective Earnings Multiple........................... 14.8 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 the recent rise in
polymer prices.
EAST MIDLANDS ELECTRICITY
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 603p
Prospective Earnings per share (to March 1996).......... 74.5p
Prospective Earnings Multiple........................... 8.1 x
</TABLE>
East Midlands Electricity is a medium-sized regional electricity company with
excellent dividend growth prospects. It has strong finances and also holds a
share in the National Grid Company which will be floated later this year. The
management team is committed to enhancing shareholder value and the company
recently announced a substantial special dividend for shareholders. Another
special dividend is likely to follow the sale of the holding in the National
Grid Company.
STANDARD CHARTERED
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 295p
Prospective Earnings per share (to December 1995)....... 37.1p
Prospective Earnings Multiple........................... 8.0 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 at an attractively low level.
POWERGEN
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 464p
Prospective Earnings per share (to March 1996).......... 50.7p
Prospective Earnings Multiple........................... 9.2 x
</TABLE>
PowerGen is a leading power generator in England and Wales which continues to
reduce its costs. In February 1995, the U.K. government sold its remaining 40%
holding in the company. As part of the government's share sale, PowerGen bought
back 8% of its share capital. PowerGen has stated that it intends to pursue a
policy of strong dividend growth.
4
<PAGE>
WHITECROFT
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 163p
Prospective Earnings per share (to March 1996).......... 12.2p
Prospective Earnings Multiple........................... 13.4 x
</TABLE>
Whitecroft is a diversified industrial group with interests in building
products, commercial lighting, textiles and medical cotton fiber. It has
recovered strongly from near bankruptcy two years ago and is experiencing a
great demand for its products. Earnings growth is expected to remain at high
levels.
GREAT UNIVERSAL STORES
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 561p
Prospective Earnings per share (to March 1996).......... 40.0p
Prospective Earnings Multiple........................... 14.0 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 strong and there are still further
rationalization benefits which can be achieved. The company has recently
announced a special dividend of 30p a share in addition to its normal
progressive dividend policy. Further ways of increasing shareholder value are
awaited by investors.
BRITISH PETROLEUM
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 429p
Prospective Earnings per share (to December 1995)....... 31.8p
Prospective Earnings Multiple........................... 13.5 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.
GLAXO HOLDINGS
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 706p
Prospective Earnings per share (to June 1996)........... 50.1p
Prospective Earnings Multiple........................... 14.1 x
</TABLE>
Glaxo Holdings is a leading international pharmaceutical company which has
recently acquired Wellcome. There is substantial scope for cost reduction in
eliminating duplicated research and marketing expenses. Glaxo Holdings has
recently opened its new research facility at Stevenage which will enhance its
drug discovery and development capabilities.
BRIDON
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 141p
Prospective Earnings per share (to December 1995)....... 11.4p
Prospective Earnings Multiple........................... 12.4 x
</TABLE>
Bridon has been carrying out a restructuring plan to concentrate on its core
activities of rope manufacturing and distribution. The engineering businesses
have been sold and new acquisitions to build up Bridon's world-wide distribution
base are likely. There is substantial upside potential if the overcapacity
problems of the European wire rope market can be resolved. Bridon has closed a
wire rope plant in Belgium and has announced the future closure of its Ambergate
factory in Derbyshire with substantial cost savings.
LUCAS INDUSTRIES
<TABLE>
<S> <C>
Market Price as of 03/31/95............................. 197p
Prospective Earnings per share (to July 1996)........... 14.4p
Prospective Earnings Multiple........................... 13.7 x
</TABLE>
Lucas Industries is a motor component manufacturer which, following the
appointment of a new Chief Executive, has one of the strongest management teams
in its sector. There is substantial scope for further cost cutting which, when
combined with an eventual upturn in the automotive market in Continental Europe,
should dramatically increase profits. The company is currently benefiting from
the strength of diesel demand in the U.K. and the continued improvement in
demand for civil aerospace spares.
5
<PAGE>
- -----------------------------------------------
The United Kingdom Fund Inc.
Statement of Investments
March 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
<C> <S> <C>
Value
Shares Description (Note 1)
- ---------------------------------------------------------------
INVESTMENTS IN UNITED KINGDOM SECURITIES--
92.0% OF NET ASSETS
Common Stocks--92.0%
Banks--9.4%
200,000 Abbey National plc Ord 10p........... $ 1,532,701
150,000 Barclays plc Ord L1.................. 1,522,114
400,000 Standard Chartered plc Ord 25p....... 1,921,984
------------
4,976,799
------------
Building & Construction--0.3%
425,000 Edmond Holdings plc Ord 10p.......... 173,060
------------
Building Materials & Merchants--7.6%
250,000 BPB Industries plc Ord 50p........... 1,140,160
101,000 Cape plc Ord 25p..................... 325,728
306,000 Johnston Group plc Ord 10p........... 1,535,111
250,000 Marley plc Ord 25p................... 517,144
400,000 Norcros plc Ord 25p.................. 504,928
------------
4,023,071
------------
Chemicals--2.9%
250,000 Allied Colloids plc Ord 10p.......... 500,856
190,000 Wardle Storeys plc Ord 10p........... 1,021,257
------------
1,522,113
------------
Diversified Industrials--4.7%
50,000 Charter Ord 2p (Regd.)............... 642,562
700,000 Whitecroft plc Ord 25p............... 1,858,461
------------
2,501,023
------------
Electricity--7.3%
200,000 East Midlands Electricity plc Ord
50p................................ 1,964,332
250,000 PowerGen plc Ord 50p................. 1,889,408
------------
3,853,740
------------
Electronics--4.0%
165,000 Beales Hunter plc Ord 20p............ 628,880
100,000 BICC plc Ord 50p..................... 545,648
200,000 General Electric Co. plc Ord 5p...... 964,249
------------
2,138,777
------------
Engineering-General--3.3%
750,000 Bridon plc Ord 25p................... 1,722,456
------------
Engineering-Vehicles--3.2%
521,535 Lucas Industries plc Ord 25p......... 1,673,468
------------
Food Manufacturing--5.7%
255,000 Barr (AG) plc Ord 25p................ 1,466,165
510,000 Canadian Pizza plc Ord 10p........... 523,333
1,000,000 Finlay (James) plc Ord 25p........... 1,009,856
------------
2,999,354
------------
Health & Household--2.7%
317,500 Royal Doulton plc Ord L1............. 1,427,317
------------
<CAPTION>
- ---------------------------------------------------------------
Value
Shares Description (Note 1)
<C> <S> <C>
- ---------------------------------------------------------------
Media--2.6%
150,000 Pearson plc Ord 25p.................. $ 1,370,635
------------
Oil & Gas--10.5%
200,000 British Gas plc Ord 25p.............. 933,302
250,000 British Petroleum plc Ord 25p........ 1,746,888
250,000 Shell Transport & Trading plc Ord 25p
(Regd.)............................ 2,887,048
------------
5,567,238
------------
Pharmaceuticals--3.3%
150,000 Glaxo Holdings plc Ord 25p........... 1,724,899
------------
Retailers-Food--2.6%
450,000 Nurdin & Peacock plc Ord 10p......... 1,355,976
------------
Retailers-General--7.6%
200,000 Great Universal Stores plc Ord 25p... 1,827,513
100,000 Kingfisher plc Ord 25p............... 752,506
175,000 Menzies (John) plc Ord 25p........... 1,448,004
------------
4,028,023
------------
Spirits, Wines & Ciders--2.9%
200,000 Grand Metropolitan plc Ord 25p....... 1,303,040
185,000 Merrydown plc Ord 25p................ 235,036
------------
1,538,076
------------
Textiles & Apparel--4.1%
165,000 Shiloh plc Ord 25p................... 349,378
905,000 Sirdar plc Ord 25p................... 1,341,398
350,000 Thomas French & Sons plc Ord 10p..... 507,371
------------
2,198,147
------------
Tobacco--2.7%
200,000 BAT Industries plc Ord 25p........... 1,430,086
------------
Transport--4.6%
250,000 British Airways plc Ord 25p.......... 1,665,447
150,000 Ocean Group plc Ord 25p.............. 754,949
------------
2,420,396
------------
Total Common Stocks
(cost $40,419,212)--92.0%.......... 48,644,654
------------
Cash and other assets in excess of
liabilities--8.0%.................. 4,238,760
------------
Net Assets--100%..................... $ 52,883,414
------------
------------
Number of shares issued and
outstanding........................ 4,011,655
------------
------------
Net asset value per share............ $13.18
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
- ----------------------------------------------------
The United Kingdom Fund Inc.
Statement of
Assets and Liabilities
March 31, 1995
- ----------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$40,419,212).................... $48,644,654
Cash (includes $3,548,237
equivalent in an
interest-bearing pound sterling
account)........................ 3,852,439
Receivable for securities sold... 1,329,096
Dividends and interest
receivable...................... 446,521
United Kingdom withholding tax
reclaim receivable.............. 75,893
---------
Total assets............... 54,348,603
---------
Liabilities
Payable for securities
purchased....................... 1,351,553
Investment management fee
payable......................... 32,521
Administration fee payable....... 6,504
Accrued expenses and accounts
payable......................... 74,611
---------
Total liabilities.......... 1,465,189
---------
Net Assets....................... $52,883,414
---------
---------
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........................ 478,052
Accumulated net realized
loss.......................... (1,833,924)
Net unrealized appreciation.... 8,316,364
---------
Net assets....................... $52,883,414
---------
---------
Net asset value per share
($52,883,414 DIVIDED BY 4,011,655
shares of common stock issued
and outstanding).............. $13.18
</TABLE>
- ----------------------------------------------------
The United Kingdom Fund Inc.
Statement of Operations
For the year ended
March 31, 1995
- ----------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Dividends....................... $2,708,413
Interest........................ 113,979
---------
2,822,392
---------
Less: United Kingdom withholding
tax on United Kingdom source
dividends...................... 446,706
---------
Total income................ 2,375,686
---------
Expenses
Investment management fee....... 385,675
Administration fee.............. 77,135
Directors' fees and expenses.... 66,790
Reports and notices to
shareholders................... 54,847
Legal fee....................... 50,675
Audit fee....................... 43,506
Custodians' fees and expenses... 27,151
Transfer agent's fees and
expenses....................... 24,948
NYSE listing fee................ 16,743
Miscellaneous expenses.......... 9,379
---------
Total expenses.............. 756,849
---------
Net investment income............. 1,618,837
---------
Realized and Unrealized Gain on
Investments and Pound
Sterling Transactions
Net realized gain on:
Investments..................... 146,227
Pound sterling transactions..... 228,760
Net change in unrealized
appreciation on:
Investments..................... 3,193,033
Pound sterling transactions..... 107,166
---------
Net gain on investments and pound
sterling transactions............ 3,675,186
---------
Net Increase in Net Assets
Resulting From Operations........ $5,294,023
---------
---------
</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 Year ended
March 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Increase in Net Assets
Operations
Net investment income................ $1,618,837 $ 677,936
Net realized gain on investments..... 146,227 55,794
Net realized gain/(loss) on pound
sterling transactions............... 228,760 (45,100)
Net change in unrealized appreciation
on investments and pound sterling
transactions........................ 3,300,199 5,796,044
---------- ----------
Net increase in net assets resulting
from operations..................... 5,294,023 6,484,674
---------- ----------
Distributions to shareholders from:
Net investment income ($0.403
and $0.138 per share)............... (1,616,697) (553,302)
Net realized gains ($0.057 and
$0.00 per share).................... (228,664) --
From capital transactions:
Proceeds from 3,053 shares issued in
reinvestment of dividends........... -- 35,920
---------- ----------
Total increase......................... 3,448,662 5,967,292
Net Assets
Beginning of year.................... 49,434,752 43,467,460
---------- ----------
End of year (including undistributed
net investment income of $478,052
and $475,912, respectively)......... $52,883,414 $49,434,752
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements.
- -----------------------------------------------
The United Kingdom Fund Inc.
Notes to Financial Statements
- -----------------------------------------------
The United Kingdom Fund
Note 1. Significant
Inc. (the "Fund") was inAccounting
Policies
corporated 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 gains of $228,760 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 March 31, 1995 was U.S. $1.6288 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 year.
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.
The Fund has entered into
Note 2. Agreements
Agreements with Warburg Investment Management
International (Jersey) Ltd. (the "Investment Manager"), Warburg Investment
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.
Of the 4,011,655 shares
Note 3. Transactions outstanding at March 31, with Affiliates
1995, Mercury Asset Management Group plc (the parent
company of the Investment Adviser and Investment
Manager) owned 12,698 shares in respect of the Fund's initial capital
contribution (including 4,096 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.
For U.S. federal income tax
Note 4. Investments in
purposes, the cost of
securiSecurities
ties owned at March 31, 1995 was $40,419,212.
At March 31, 1995, the net unrealized appreciation of investments of
$8,225,442 was composed of gross apprecia-
tion of $9,941,399 for those investments having an excess of value over cost and
gross depreciation of $1,715,957 for those investments having an excess of cost
over value.
For the year ended March 31, 1995 aggregate purchases and proceeds from the
sales of portfolio securities (excluding short-term securities) were $9,577,825
and $11,394,456, respectively.
Investments in the United
Note 5. Concentration Kingdom may involve cerof Risk
tain 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 Income/ Gain/(Loss) on
Investments and
Investment Income Pound Sterling Market
(Loss) Transactions Net Asset Value Value**
---------------------- ---------------------- -------------------- ------------------------ ---------
Quarter Ended Total Per Share Total Per Share Total Per Share High Low High
- ------------------------- --------- ----- --------- ----- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1994............ $ 378 $ 0.09 $ 198 $ 0.05 $ (833) $ (0.21) $ 12.68 $ 11.98 $ 12.000
September 30, 1994....... 514 0.13 309 0.08 3,505 0.88 13.48 12.16 11.750
December 31, 1994........ 1,187 0.30 993 0.24 (605) (0.15) 13.64 12.75 11.875
March 31, 1995........... 297 0.07 119 0.03 1,608 0.40 13.18 12.49 11.000
--------- ----- --------- ----- --------- ---------
--------- ----- --------- ----- --------- ---------
$ 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
September 30, 1993....... 531 0.13 355 0.08 2,605 0.65 12.04 10.50 12.125
December 31, 1993........ 155 0.04 (33) -- 4,688 1.17 12.91 11.58 13.875
March 31, 1994........... 460 0.12 288 0.07 (2,200) (0.55) 13.68 12.31 13.875
--------- ----- --------- ----- --------- ---------
--------- ----- --------- ----- --------- ---------
$ 1,386 $ 0.35 $ 678 $ 0.17 $ 5,807 $ 1.45
--------- ----- --------- ----- --------- ---------
--------- ----- --------- ----- --------- ---------
<CAPTION>
Quarter Ended Low Volume**
- ------------------------- --------- ---------
<S> <C> <C>
June 30, 1994............ $ 10.250 481,500
September 30, 1994....... 10.500 516,300
December 31, 1994........ 10.500 748,300
March 31, 1995........... 10.500 433,900
June 30, 1993............ $ 9.500 713,700
September 30, 1993....... 10.500 576,300
December 31, 1993........ 10.625 734,200
March 31, 1994........... 10.375 904,100
</TABLE>
- ------------------------------
* Totals expressed in thousands of dollars except per share amounts and NYSE
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 Year ended March 31,
------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................... $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15 $ 10.94
---------- ---------- ---------- ----------- ---------- ----------- ----------
Operations:
Net investment income............... 0.40 0.17 0.26 0.40 0.38 0.36 0.25
Net realized and unrealized
gain/(loss) on investments and
pound sterling transactions........ 0.92 1.45 1.19 (1.31) 1.64 (1.53) 1.61
---------- ---------- ---------- ----------- ---------- ----------- ----------
Total from operations............. 1.32 1.62 1.45 (0.91) 2.02 (1.17) 1.86
Distributions to shareholders from:
Net investment income............... (0.40) (0.14) (0.14) (0.45) -- (0.35) (0.22)
Net realized gains.................. (0.06) -- (0.41 ) (0.38 ) (0.73 ) (0.25 ) (0.43)
---------- ---------- ---------- ----------- ---------- ----------- ----------
Total from distributions.......... (0.46 ) (0.14 ) (0.55 ) (0.83 ) (0.73 ) (0.60 ) (0.65)
From capital transactions:
Reduction in offering costs......... -- -- 0.01 -- -- -- --
Offering costs charged to capital... -- -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------- ----------
Net asset value, end of period........ $ 13.18 $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15
---------- ---------- ---------- ----------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ---------- ----------- ----------
Per share market value, end of
period............................... $ 10.88 $ 10.50 $ 9.63 $ 9.13 $ 10.25 $ 8.75 $ 10.00
---------- ---------- ---------- ----------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ---------- ----------- ----------
Total investment return, market
value**.............................. 7.93 % 10.32 % 11.45 % (2.63 )% 26.40 % (7.40 )% 20.68%
Net assets at end of period (000
omitted)............................. $ 52,883 $ 49,435 $ 43,467 $ 39,823 $ 46,775 $ 41,609 $ 48,707
Ratio of operating expenses to average
net assets........................... 1.47 % 1.50 % 1.78 % 1.74 % 2.19 % 1.92 % 1.89%
Ratio of net investment income to
average net assets................... 3.15 % 1.43 % 2.43 % 3.73 % 3.34 % 3.06 % 4.10%
Portfolio turnover rate............... 19.73 % 27.05 % 45.54 % 47.30 % 36.37 % 22.07 % 40.91%
<CAPTION>
For the
Period from
August 14, 1987*
to March 31, 1988
-----------------
<S> <C>
Net asset value, beginning of
period............................... $ 11.63
-------
Operations:
Net investment income............... 0.20
Net realized and unrealized
gain/(loss) on investments and
pound sterling transactions........ (0.36)
-------
Total from operations............. (0.16)
Distributions to shareholders from:
Net investment income............... (0.13)
Net realized gains.................. (0.22 )
-------
Total from distributions.......... (0.35 )
From capital transactions:
Reduction in offering costs......... --
Offering costs charged to capital... (0.18 )
-------
Net asset value, end of period........ $ 10.94
-------
-------
Per share market value, end of
period............................... $ 8.88
-------
-------
Total investment return, market
value**.............................. (22.92 )%+
Net assets at end of period (000
omitted)............................. $ 43,864
Ratio of operating expenses to average
net assets........................... 1.99 %++
Ratio of net investment income to
average net assets................... 3.01 %++
Portfolio turnover rate............... 22.15 %+
</TABLE>
- ------------------------
*Commencement of operations.
**Total investment return, 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>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders and
Board of Directors of
The United Kingdom Fund Inc.
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of The United Kingdom Fund Inc. as of
March 31, 1995, and the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
United Kingdom Fund Inc. at March 31, 1995, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.
[SIGNATURE]
New York, New York
May 2, 1995
12
<PAGE>
- --------------------------------------------------------------------------------
The United Kingdom Fund Inc.
U.S. Tax Information
- --------------------------------------------------------------------------------
The Fund is required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise its shareholders within 60 days of the Fund's fiscal year end
(March 31, 1995) as to the U.S. federal tax status of distributions received by
the Fund's shareholders in respect of such fiscal year. Domestic shareholders,
whether receiving these dividends in cash or reinvesting it under the Automatic
Dividend Reinvestment Plan, must report dividend income as follows:
SOURCES OF DIVIDENDS AND DISTRIBUTIONS
<TABLE>
<CAPTION>
Applicable Total
Ordinary Foreign Reportable
Dates Income Taxes Dividend
- --------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
June 1994................................................ $ 0.025 $ 0.036 $ 0.061
December 1994............................................ 0.435 0.088 0.523
----------- ----------- -----------
Totals............................................. $ 0.460 $ 0.124 $ 0.584
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Fund earned $2,810,385 of income from United Kingdom sources of which it
paid $0.124 per share in United Kingdom withholding taxes. The Fund has elected
to give the benefit of the $0.124 per share in foreign tax credit to its
shareholders. Accordingly, shareholders who must report their dividend in a U.S.
federal income tax return will be entitled to choose between a foreign tax
credit or an itemized deduction in computing their U.S. federal income tax
liability. Shareholders are required to include such $0.124 per share as
dividend income in addition to the per share dividends received. It is generally
more advantageous to claim credit rather than to take a deduction. The amount
allowable as a credit is subject to the general limitations on tax credits
imposed by Sections 904 of the U.S. Internal Revenue Code. The Fund did not earn
any dividend income that qualifies for the dividends received deduction that is
available to corporate shareholders.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of the actual dividends made by the Fund. They will generally not be
entitled to a U.S. foreign tax credit or deduction for the withholding taxes
paid by the Fund.
Generally, dividends received by tax-exempt recipients (e.g., IRA's and
Keoghs) need not be reported as taxable income for U.S. federal income tax
purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7)
plans) may need this information for their annual information reporting.
All shareholders are advised to consult their own tax advisers with respect to
the tax consequences of their investment in the Fund.
13
<PAGE>
- --------------------------------------------------------------------------------
The United Kingdom Fund Inc.
Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), shareholders
have all distributions automatically reinvested by The Bank of New York (the
"Plan Agent"). Shareholders who do not wish to participate in the Plan may elect
to receive all distributions in cash paid by check in dollars mailed directly to
the shareholder by the Plan Agent, as dividend paying agent. Shareholders whose
shares are held in the name of a broker or nominee should contact their broker
or nominee to determine whether they should participate in the Plan or how they
may withdraw from the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the directors of the Fund declare a dividend, participants in the Plan will
receive the equivalent in stock in the Fund valued at the lower of market price
or net asset value, in either case as determined on the record date for that
dividend. Whenever market price is equal to or exceeds net asset value at the
time shares are valued for the purpose of determining the number of shares
equivalent to the cash dividend or distribution, participants will be issued
shares of the Fund at a price equal to the greater of net asset value or an
amount equal to 95% of the then current market price of the Fund's shares. The
Fund will not issue shares under the Plan below net asset value. If net asset
value exceeds the market price of Fund shares at such time, or if the Fund
should declare a dividend or other distribution payable only in cash (i.e., if
the Board of Directors should preclude reinvestment at net asset value), the
Plan Agent will, as agent for the participants, buy Fund shares in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before the Plan Agent has completed its purchases, the market
price exceeds the net asset value of a Fund share, the average per share
purchase price paid by the Plan Agent may exceed the net asset value of the
Fund's shares, resulting in the acquisition of fewer shares than if the dividend
or distribution had been paid in shares issued by the Fund.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in the
name of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent administers the
Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are to participate in the
Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions. The Plan Agent's fees for the handling of reinvestment of
dividends and distributions are paid by the Fund. There are no brokerage charges
with respect to shares issued directly by the Fund as a result of dividends or
capital gains distributions payable either in stock or cash. However, each
participant pays a pro rata share of brokerage commissions incurred with respect
to the Plan Agent's open market purchases in connection with the reinvestment of
dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions does not relieve
participants of any U.S. income tax that may be payable on such dividends or
distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the change sent to the members of the Plan at least
90 days before the record date for such dividend or distribution. The Plan also
may be amended or terminated by the Plan Agent by at least 90 days' written
notice to members of the Plan. All correspondence concerning the Plan should be
directed to the Plan Agent at P.O. Box 11258, Church Street Station, New York,
New York 10286.
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 FELDMAN, Assistant Secretary
</TABLE>
* Member of the Audit Committee
----------------------------------------------------
EXECUTIVE OFFICES--
245 Park Avenue
13th Floor
New York, New York 10167
(For latest net asset value and market data,
please call (212) 272-6404; regarding shareholder
inquiries and requests for Fund reports, please
call 1-800-432-8224.)
INVESTMENT MANAGER--
Warburg Investment Management International
(Jersey) Ltd.
Forum House, Grenville Street
St Helier, Jersey JE4 SRL
Channel Islands
INVESTMENT ADVISER--
Warburg Investment 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. 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 Warburg Investment Management
International (Jersey) Ltd., relying on investment advice from Warburg
Investment 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 "UnitKingdm". 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.
Annual Report
March 31, 1995
