<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Semi-Annual Report of The United Kingdom
Fund Inc. (the "Fund"). On September 30, 1996, the end of the period under
review, the Fund's net assets totaled $63.8 million. This represents a net asset
value per share of $15.91, a rise of 130.58% from its initial value after taking
into account underwriting discounts, commissions, offering expenses and
distributions. This compares with an increase of 125.17% in the FT-SE Actuaries
All-Share Index (U.S.$) over the same time period. At the end of the period
under review, the Fund was quoted at $13.50 per share on the New York Stock
Exchange, which represents a 15.15% discount to the Fund's net asset value per
share.
At the Annual Meeting of the Fund on September 24, 1996, a vote of
shareholders was taken in accordance with the terms of the prospectus, which
state that if the average cumulative discount for the twelve weeks to the end of
March in any year exceeds 10%, an open-ending vote must take place. For the
twelve weeks to the end of March, 1996, the average cumulative discount was
17.28%. Votes cast in favor of open-ending the Fund accounted for 20.58% of all
shares outstanding and the Fund will therefore remain in its current closed-end
form.
We also enclose an investment review and United Kingdom market outlook
together with a summary of the major portfolio investments.
Yours sincerely,
/s/ Anthony M. Solomon /s/ J. Loughlin Callahan
Anthony M. Solomon J. Loughlin Callahan
Chairman of the Board President
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INVESTMENT MANAGER
- --------------------------------------------------------------------------------
INVESTMENT REVIEW
During the third quarter of 1996, your Fund experienced a rise in net asset
value of 3.54%, which compared with a 6.54% increase in the FT-SE Actuaries
All-Share Index. For the six months ended September 30, 1996, the Fund's net
asset value has increased by 9.85%, which compares with a 10.17% increase in the
FT-SE Actuaries All-Share Index. These figures are recorded with net dividends
reinvested and in U.S. dollar based terms.
A recovery in consumer spending helped retail sales and growing evidence of a
strengthening housing market contributed to a mood of optimism. Corporate
earnings generally matched expectations and a strong performance by sterling
encouraged solid buying of the leading stocks.
The best performing areas of the market were oil, banking and pharmaceuticals.
Banks continued to enjoy a re-rating, underpinned by strong current
profitability and the announcement of share buy-backs from both Barclays and
National Westminster. Pharmaceuticals were eagerly sought by investors, with the
major stocks climbing to new highs on fresh bid speculation and interest
stimulated by new drug approvals. The increased tension in the Middle East led
to a firmer oil price which buoyed the share prices of British Petroleum and the
other oil producers. The sectors which lagged over the quarter included tobacco,
where litigation in the U.S. impacted on BAT Industries and textiles, where
trading performances were disappointing. Despite the improving retail
background, both food and general retailers underperformed the market.
Sterling remained firm throughout most of the quarter and made substantial
headway against the deutschemark, as German short interest rates were reduced.
The strength of the U.K. economy and prospect of future inflationary pressures
meant that there was no corresponding cut in U.K. interest rates, which were
unchanged over the period.
The Fund's and the FT-SE Actuaries All-Share Index's sector weightings
expressed as a percentage of total equities held at September 30, 1996 are
outlined below:
<TABLE>
<CAPTION>
% FT-SE
ACTUARIES
% U.K. ALL-SHARE
FUND INDEX
--------------- -----------------
<S> <C> <C>
Mineral Extraction...................... 10.6 9.9
General Industrials..................... 28.4 18.0
Consumer Goods.......................... 18.3 16.7
Services................................ 21.8 24.4
Utilities............................... 7.0 9.7
Finance................................. 13.9 17.8
Investment Trusts....................... 0.0 3.5
</TABLE>
2
<PAGE>
ECONOMIC & MARKET OUTLOOK
We believe the outlook for the U.K. economy for the next six months is
positive. The recovery in consumer spending which we had anticipated due to the
combination of income tax reductions and lower interest rates is now taking
place, with consumer spending growing at an annual rate of 4%. This has also
been reflected in real estate prices which are rising steadily, with the
greatest increases in London and Southeast England. On the industrial side of
the economy, the problems caused by de-stocking seem to be abating and
manufacturing production is rising, although the recent strength of sterling
against the deutschemark and the slow recovery in the economies of Continental
Europe have not helped exports. The trade balance has been broadly stable but
there is the risk of deterioration, as increased domestic consumption attracts
imports.
We expect inflation to remain relatively subdued, although inflationary
pressures appear to be building. The broad money supply figures and the rise in
real estate prices both suggest that next year, inflation will be on an upward
trend. The recent 0.25% increase in interest rates imposed by the authorities
has given an encouraging sign that they will act to preempt these inflationary
pressures. In the U.S., with the presidential elections over, there is no longer
the pressure to keep a cap on interest rates.
The forthcoming budget may well feature tax cuts for the personal sector,
financed by an increased taxation burden on the corporate sector. As a result,
the next government may inherit a fast growing economy, rising inflation, and
burgeoning trade and budget deficits. An incoming Labour government would
probably look to raise interest rates as part of an anti-inflation strategy.
This prospect could lead to further strengthening in sterling. Otherwise, we
anticipate some weakness as we approach the election on concerns over the
widening trade deficit and heightened political uncertainty. Against this
background, the gilt market offers reasonably good value. We expect to see some
flattening of the yield curve as long gilt yields fall and short interest rates
rise and control is seen to have regained over inflation.
The third quarter saw a relatively strong performance by leading U.K. stocks
based on the improving economic environment. The outlook for most companies is
for steadily improving profits, but certain companies which are dependent on
trade with Continental Europe may still disappoint, given the sluggishness of
the French and German economies and the strength of sterling. The stream of
disappointing trading statements which has plagued the smaller company sector
over the last quarter will probably continue as the commercial environment
remains particularly competitive. A highly selective approach to U.K. equity
investments will therefore be needed over the next six months as some of the
previous supports to the market such as share buy-backs and special dividends
have now lost much of their tax-driven appeal. One final wave of takeover bids
and mergers is likely ahead of the election, although increased governmental
interference and the high level of stockmarket valuations may restrain activity.
Overall, there is the possibility for further positive returns from U.K.
equities but the political background may lead to increased volatility.
3
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
- --------------------------------------------------------------------------------
The portfolio strategy during the period was to take some profits in holdings
which had benefited from the improvement in domestic consumer spending. We
reduced Alexon Group which had shown a strong recovery in profitability and H&C
Furnishings, the furniture retailer. Holdings in industrial companies were
increased with additional purchases of Beauford Group, Cape Industries and CML
Microsystems. CML Microsystems manufactures electronic components for the
traffic control and communications industries. Holdings in Nurdin & Peacock were
increased, based on recovery prospects. Subsequently, Nurdin & Peacock was the
target of an agreed takeover by Booker.
The Fund's ten largest equity holdings as of September 30, 1996 were:
STANDARD CHARTERED
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 697p
Prospective Earnings per share (to December 1997)............. 64.0p
Prospective Earnings Multiple................................. 10.9x
</TABLE>
Standard Chartered is a U.K. based banking group which is showing strong
growth based on increased lending volumes in Hong Kong. Its major presence in
the other fast growth markets of the Asia Pacific region and Africa combined
with stringent cost control has led to substantially improved profitability.
Although the shares have performed well, they remain undervalued.
SHELL TRANSPORT & TRADING
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 875p
Prospective Earnings per share (to December 1997)............. 59.0p
Prospective Earnings Multiple................................. 16.5x
</TABLE>
Shell Transport & Trading is a leading oil company with substantial
production, refining and petrochemical activities. Profits from oil exploration
and production are expected to grow, helped by the recent recovery in the price
of crude oil. Cash flow remains highly positive despite a substantial increase
in exploration expenditure. We continue to expect strong dividend progression
for at least the next two years.
BRITISH PETROLEUM
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 663p
Prospective Earnings per share (to December 1997)............. 45.1p
Prospective Earnings Multiple................................. 14.7x
</TABLE>
British Petroleum ("BP") is a leading international oil company with a
substantial exploration and production profile. BP continues to develop its oil
production interests in the Gulf of Mexico, Colombia and the region West of
Shetlands. It is planning to cut its refining capacity to match production with
customer demand and has reduced the cyclicality of its chemicals operations.
Strong cash flow from the company will see a sharp reduction in the level of
borrowings and we expect excellent dividend progression.
GLAXO WELLCOME
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 1002p
Prospective Earnings per share (to December 1997)............. 61.2p
Prospective Earnings Multiple................................. 16.4x
</TABLE>
Glaxo Wellcome ("Glaxo") is a leading international pharmaceuticals company
with substantial scope for cost reduction through improving the productivity of
its research and development activities. Glaxo may now experience a sharp
decline in sales of Zantac as generic competition builds up, although some of
its new products have the potential to replace the Zantac turnover. These
include 3TC which has gained FDA approval for the treatment of HIV infection in
combination with Zovirax and a new drug, 1592, which may be effective against
AIDS.
4
<PAGE>
BARCLAYS
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 939p
Prospective Earnings per share (to December 1997)............. 108.4p
Prospective Earnings Multiple................................. 8.6x
</TABLE>
Barclays is one of the largest clearing banks in the U.K. It has shown a
strong recovery in profits following a reduction in bad debts and has been
successful in controlling costs through branch closures and centralization of
service functions. Although lending demand continues to be relatively subdued,
we believe that substantial further cost savings can be achieved through the
introduction of new technology and accompanying staff reductions.
JOHNSTON GROUP
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 465p
Prospective Earnings per share (to December 1997)............. 38.7p
Prospective Earnings Multiple................................. 12.0x
</TABLE>
Johnston Group is a diversified industrial group involved in road surfacing,
quarrying, the manufacture of concrete pipes, road sweepers, fire fighting
equipment and washroom equipment. The roadsweeper business has grown strongly
and the concrete pipes division has also performed well, due to substantial
ordering by water companies who are spending heavily to meet tighter
environmental standards. Johnston Group has recently been the subject of a
hostile tender offer from the conglomerate, TT Group, which the company
successfully defended.
JOHN MENZIES
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 545p
Prospective Earnings per share (to April 1998)................ 49.6p
Prospective Earnings Multiple................................. 11.0x
</TABLE>
John Menzies is major wholesaler of books, newspapers, magazines, home
entertainment products and office supplies and has a very efficient distribution
network. It is a leading retail news agent with 250 outlets and also owns the
U.K. retail chain, Early Learning Centre, which sells educational toys for
pre-school children. John Menzies is expected to experience steady earnings
growth.
BRITISH AIRWAYS
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 542p
Prospective Earnings per share (to March 1998)................ 53.2p
Prospective Earnings Multiple................................. 10.2x
</TABLE>
British Airways operates international and domestic scheduled air services. It
is experiencing strong demand for passenger and freight services and is
benefiting from increased premium passenger traffic. We expect their major cost
cutting programs to lead to further substantial improvements in profitability.
British Airways has recently announced a proposed alliance with American
Airlines.
GREAT UNIVERSAL STORES
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 641p
Prospective Earnings per share (to March 1998)................ 42.3p
Prospective Earnings Multiple................................. 15.2x
</TABLE>
Great Universal Stores is a retail, mail order, property and financial group
with a strong balance sheet and record of steady earnings growth. Improvements
in the systems of the mail order division are expected to reduce costs and
enhance the return on capital. The appointment of a new chairman is expected to
lead to further moves to restructure the group and return more value to
shareholders.
LUCASVARITY
<TABLE>
<S> <C>
Market Price as of 09/30/96................................... 255p
Prospective Earnings per share (to January 1998).............. 19.4p
Prospective Earnings Multiple................................. 13.1x
</TABLE>
LucasVarity was formed by the merger of Lucas Industries of the U.K. and
Varity Corporation of the U.S. Substantial cost-savings are anticipated under
the leadership of Mr. Victor Rice, the new Chief Executive of the enlarged
company. LucasVarity now has critical mass and should be able to achieve
increased sales to the world automotive manufacturers as a global supplier.
5
<PAGE>
- -----------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF INVESTMENTS
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
INVESTMENTS IN UNITED KINGDOM SECURITIES--
95.0% OF NET ASSETS
COMMON STOCKS--95.0%
ALCOHOLIC BEVERAGES--0.6%
195,000 Merrydown plc Ord 25p................................................. $ 353,641
-------------
BANKING--13.2%
200,000 Abbey National plc Ord 10p............................................ 1,855,755
150,000 Barclays plc Ord L1................................................... 2,202,047
400,000 Standard Chartered plc Ord 25p........................................ 4,355,629
-------------
8,413,431
-------------
BUILDING MATERIALS & MERCHANTS--7.7%
476,000 Cape Industries plc Ord 25p........................................... 1,134,871
300,000 Johnston Group plc Ord 10p............................................ 2,180,942
250,000 Marley plc Ord 25p.................................................... 510,059
400,000 Norcros plc Ord 25p*.................................................. 522,175
304,000 Universal Ceramic Materials plc Ord 5p................................ 582,210
-------------
4,930,257
-------------
CHEMICALS--2.0%
250,000 Allied Colloids plc Ord 10p........................................... 558,915
55,000 Wolstenholme Rink plc Ord 25p......................................... 724,440
-------------
1,283,355
-------------
DIVERSIFIED INDUSTRIALS--5.6%
50,000 Charter plc Ord 2p (Regd.)............................................ 643,339
200,000 Wardle Storeys plc Ord 10p............................................ 1,383,608
600,000 Whitecroft plc Ord 25p................................................ 1,543,075
-------------
3,570,022
-------------
ELECTRICITY--4.0%
200,000 East Midlands Electricity plc Ord 56 9/11p............................ 1,627,498
350,000 National Grid Group plc Ord 10p....................................... 932,958
-------------
2,560,456
-------------
ELECTRONICS & ELECTRICAL EQUIPMENT--3.8%
240,000 Beales Hunter plc Ord 20p............................................. 684,769
440,000 CML Microsystems plc Ord 5p........................................... 794,519
150,000 General Electric Co. plc Ord 5p....................................... 927,486
-------------
2,406,774
-------------
ENGINEERING--GENERAL--2.3%
301,186 Ash & Lacy plc Ord 5p................................................. 774,588
1,250,000 Beauford Group plc Ord 10p............................................ 713,301
-------------
1,487,889
-------------
ENGINEERING--VEHICLES--3.1%
500,000 LucasVarity plc Ord 25p*.............................................. 1,989,425
-------------
FOOD PRODUCERS--6.3%
280,000 Barr (AG) plc Ord 25p................................................. 1,416,127
510,000 Canadian Pizza plc Ord 10p............................................ 637,867
170,500 CPL Aromas plc Ord 10p................................................ 733,039
1,000,000 Finlay (James) plc Ord 25p............................................ 1,235,085
-------------
4,022,118
-------------
HEALTH CARE--2.5%
400,000 Scholl plc Ord 5p..................................................... 1,610,301
-------------
HOUSEHOLD GOODS--1.3%
192,500 Royal Doulton plc Ord L1.............................................. 857,720
-------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
LEISURE & HOTELS--3.0%
355,000 Inspirations plc Ord 10p.............................................. $ 763,134
142,000 Inspirations plc, 7.7% Convertible Preference 20p*.................... 257,523
275,000 MacDonald Hotels plc Ord 5p*.......................................... 859,869
-------------
1,880,526
-------------
OIL & GAS--11.0%
200,000 British Gas plc Ord 25p............................................... 623,796
250,000 British Petroleum plc Ord 25p......................................... 2,591,334
250,000 Shell Transport & Trading plc Ord 25p (Regd.)......................... 3,810,785
-------------
7,025,915
-------------
PHARMACEUTICALS--3.7%
150,000 Glaxo Wellcome plc Ord 25p............................................ 2,348,616
-------------
RETAILERS--FOOD--4.2%
53,000 Greggs plc Ord 20p.................................................... 1,128,969
450,000 Nurdin & Peacock plc Ord 10p.......................................... 1,559,490
-------------
2,688,459
-------------
RETAILERS--GENERAL--10.3%
250,000 Alexon Group plc Ord 10p*............................................. 633,177
52,500 Courts plc Ord 25p.................................................... 796,161
200,000 Great Universal Stores plc Ord 25p.................................... 2,004,277
250,000 John Menzies plc Ord 25p.............................................. 2,130,131
100,000 Kingfisher plc Ord 25p................................................ 990,413
-------------
6,554,159
-------------
TEXTILES & APPAREL--3.3%
350,000 French plc Ord 10p.................................................... 325,578
165,000 Shiloh plc Ord 25p.................................................... 272,149
1,175,000 Sirdar plc Ord 25p.................................................... 1,515,520
-------------
2,113,247
-------------
TOBACCO--2.1%
200,000 BAT Industries plc Ord 25p............................................ 1,330,453
-------------
TRANSPORT--3.3%
250,000 British Airways plc Ord 25p........................................... 2,118,406
-------------
WATER--1.7%
100,000 South West Water plc Ord L1........................................... 1,063,893
-------------
Total Common Stocks
(cost $45,216,124)................................................... 60,609,063
-------------
UNITED STATES SHORT-TERM INVESTMENT--
2.1% OF NET ASSETS
1,344,361 Federated Short-Term
U.S. Government Trust--Money Market Fund (cost $1,344,361)--2.1%..... 1,344,361
-------------
Total Investments (cost $46,560,485)--97.1%........................... 61,953,424
-------------
Cash and other assets in excess of
liabilities--2.9%.................................................... 1,867,699
-------------
NET ASSETS--100.0%.................................................... $ 63,821,123
-------------
-------------
NUMBER OF SHARES ISSUED AND OUTSTANDING............................... 4,011,655
-------------
-------------
NET ASSET VALUE PER SHARE.............................................
$15.91
-------------
-------------
</TABLE>
- ------------------------------
* Non-income producing security.
See Notes to Financial Statements.
6
<PAGE>
- -----------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF
ASSETS AND LIABILITIES
SEPTEMBER 30, 1996 (UNAUDITED)
- -----------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $46,560,485).............................. $ 61,953,424
Cash (includes $1,303,800 equivalent in an interest-bearing pound
sterling account).................................................... 1,353,455
Dividends receivable.................................................. 600,524
United Kingdom withholding tax refund receivable...................... 57,607
Other assets.......................................................... 4,815
--------------
Total assets.................................................... 63,969,825
--------------
LIABILITIES
Investment management fee payable..................................... 39,253
Administration fee payable............................................ 7,851
Accrued expenses and accounts payable................................. 101,598
--------------
Total liabilities............................................... 148,702
--------------
NET ASSETS............................................................ $ 63,821,123
--------------
--------------
Net assets consist of:
Common stock, $0.01 par value (Authorized 15,000,000 shares)........ $ 40,116
Paid-in-surplus..................................................... 45,960,154
Undistributed net investment income................................. 449,973
Accumulated net realized gains on investments and pound sterling
transactions....................................................... 1,924,297
Net unrealized appreciation on investments and translation of other
assets and liabilities denominated in pound sterling............... 15,446,583
--------------
Net assets.......................................................... $ 63,821,123
--------------
--------------
Net asset value per share
($63,821,123 DIVIDED BY 4,011,655 shares of common stock issued and
outstanding)....................................................... $15.91
--------------
--------------
</TABLE>
See Notes to Financial Statements.
- -----------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
- -----------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Income
Dividends........................................................... $ 1,424,922
Interest............................................................ 64,582
--------------
1,489,504
--------------
Less: United Kingdom withholding tax on United Kingdom source
dividends.......................................................... 168,483
--------------
Total income.................................................... 1,321,021
--------------
Expenses
Investment management fee........................................... 236,681
Administration fee.................................................. 47,022
Directors' fees and expenses........................................ 33,866
Reports and notices to shareholders................................. 32,850
Legal fee........................................................... 30,194
Audit fee........................................................... 20,862
Custodian's fees and expenses....................................... 20,070
NYSE listing fee.................................................... 8,085
Transfer agent's fees and expenses.................................. 7,320
Insurance fee....................................................... 2,665
Miscellaneous expenses.............................................. 6,232
--------------
Total expenses.................................................. 445,847
--------------
Net investment income................................................. 875,174
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND POUND STERLING
TRANSACTIONS
Net realized gain on:
Investments......................................................... 1,884,399
Pound sterling transactions......................................... 39,898
Net change in unrealized appreciation on:
Investments......................................................... 2,628,855
Pound sterling transactions......................................... 30,408
--------------
Net gain on investments and pound sterling transactions............... 4,583,560
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $ 5,458,734
--------------
--------------
</TABLE>
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 FOR THE
SEPTEMBER 30, YEAR ENDED
1996 MARCH 31,
(UNAUDITED) 1996
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations
Net investment income............................................... $ 875,174 $ 1,986,510
Net realized gain on investments.................................... 1,884,399 2,444,505
Net realized gain/(loss) on pound sterling transactions............. 39,898 (253,786)
Net change in unrealized appreciation on investments and pound
sterling transactions.............................................. 2,659,263 4,470,956
------------- -------------
Net increase in net assets resulting from operations................ 5,458,734 8,648,185
------------- -------------
Dividends and distributions to shareholders from
Net investment income ($0.212 and $0.376 per share, respectively)... (848,558) (1,508,832)
Net realized gains ($0.188 and $0.014 per share, respectively)...... (756,104) (55,716)
------------- -------------
Total increase........................................................ 3,854,072 7,083,637
NET ASSETS
Beginning of period................................................. 59,967,051 52,883,414
------------- -------------
End of period (including undistributed net investment income of
$449,973 and $423,357, respectively)............................... $ 63,821,123 $ 59,967,051
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
- -----------------------------------------------
THE UNITED KINGDOM FUND INC.
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)
- -----------------------------------------------
NOTE 1. SIGNIFICANT
ACCOUNTING POLICIES
The United Kingdom Fund 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 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.
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
8
<PAGE>
(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 $39,898 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, 1996 was U.S.
$1.5634 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.
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 amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with U.S. federal income tax
regulations which may differ from net investment income and net realized capital
gains as determined by generally accepted accounting principles. These
"book/tax" differences are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their U.S. federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent dividends and distributions exceed net
investment income and net realized capital gains for tax purposes, they are
reported as distributions of paid-in-surplus.
The Fund had permanent book/tax differences primarily attributable to dividend
redesignations. To reflect reclassifications arising from permanent book/tax
differences as of March 31, 1996, undistributed net investment income was
debited $532,373, accumulated net realized gains was credited $455,025, and
paid-in-surplus was credited $77,348.
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").
9
<PAGE>
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 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 WITH AFFILIATES
Of the 4,011,655 shares outstanding at September 30, 1996, Mercury Asset
Management Group plc (the parent company of the Investment Adviser and
Investment Manager) owned 13,418 shares in respect of the Fund's initial capital
contribution (including 4,816 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
SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at September
30, 1996 was $46,560,485.
At September 30, 1996, the net unrealized appreciation of investments of
$15,392,939 was composed of gross appreciation of $16,731,195 for those
investments having an excess of value over cost and gross depreciation of
$1,338,256 for those investments having an excess of cost over value.
For the six months ended September 30, 1996, aggregate purchases and proceeds
from the sales of portfolio securities (excluding short-term securities) were
$6,446,215 and $6,944,443, respectively.
NOTE 5. CONCENTRATION
OF RISK
Investments in the United 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.
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
MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED MARCH 31,
1996 ----------------------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990
------------- -------- -------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 14.95 $ 13.18 $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15
------------- -------- -------- -------- -------- --------- -------- ---------
Operations:
Net investment income............ 0.22 0.50 0.40 0.17 0.26 0.40 0.38 0.36
Net realized and unrealized gain/
(loss) on investments and pound
sterling transactions........... 1.14 1.66 0.92 1.45 1.19 (1.31) 1.64 (1.53)
------------- -------- -------- -------- -------- --------- -------- ---------
Total from operations.......... 1.36 2.16 1.32 1.62 1.45 (0.91) 2.02 (1.17)
Distributions to shareholders from:
Net investment income............ (0.21) (0.38) (0.40) (0.14) (0.14) (0.45) -- (0.35)
Net realized gains............... (0.19) (0.01) (0.06) -- (0.41) (0.38) (0.73) (0.25)
------------- -------- -------- -------- -------- --------- -------- ---------
Total from distributions....... (0.40) (0.39) (0.46) (0.14) (0.55) (0.83) (0.73) (0.60)
Capital transactions:
Reduction in offering costs...... -- -- -- -- 0.01 -- -- --
Offering costs charged to
capital......................... -- -- -- -- -- -- -- --
------------- -------- -------- -------- -------- --------- -------- ---------
Net asset value, end of period..... $ 15.91 $ 14.95 $ 13.18 $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38
------------- -------- -------- -------- -------- --------- -------- ---------
------------- -------- -------- -------- -------- --------- -------- ---------
Per share market value, end of
period............................ $ 13.50 $ 12.00 $ 10.88 $ 10.50 $ 9.63 $ 9.13 $ 10.25 $ 8.75
------------- -------- -------- -------- -------- --------- -------- ---------
------------- -------- -------- -------- -------- --------- -------- ---------
Total investment return, market
value**........................... 16.12%(a) 13.91% 7.93% 10.32% 11.45% (2.63)% 26.40% (7.40)%
Net assets at end of period (000
omitted).......................... $63,821 $59,967 $52,883 $49,435 $43,467 $39,823 $46,775 $41,609
Ratios of operating expenses to
average net assets................ 1.42%(b) 1.55% 1.47% 1.50% 1.78% 1.74% 2.19% 1.92%
Ratios of net investment income to
average net assets................ 2.79%(b) 3.45% 3.15% 1.43% 2.43% 3.73% 3.34% 3.06%
Portfolio turnover rate............ 11.01%(a) 20.85% 19.73% 27.05% 45.54% 47.30% 36.37% 22.07%
Average commission rate per share
(c)............................... $0.0047 -- -- -- -- -- -- --
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 14,
1987* TO
MARCH 31,
1989 1988
-------- ------------
<S> <C> <C>
Net asset value, beginning of
period............................ $ 10.94 $ 11.63
-------- ------------
Operations:
Net investment income............ 0.25 0.20
Net realized and unrealized gain/
(loss) on investments and pound
sterling transactions........... 1.61 (0.36)
-------- ------------
Total from operations.......... 1.86 (0.16)
Distributions to shareholders from:
Net investment income............ (0.22) (0.13)
Net realized gains............... (0.43) (0.22)
-------- ------------
Total from distributions....... (0.65) (0.35)
Capital transactions:
Reduction in offering costs...... -- --
Offering costs charged to
capital......................... -- (0.18)
-------- ------------
Net asset value, end of period..... $ 12.15 $ 10.94
-------- ------------
-------- ------------
Per share market value, end of
period............................ $ 10.00 $ 8.88
-------- ------------
-------- ------------
Total investment return, market
value**........................... 20.68% (22.92)%(a)
Net assets at end of period (000
omitted).......................... $48,707 $43,864
Ratios of operating expenses to
average net assets................ 1.89% 1.99%(b)
Ratios of net investment income to
average net assets................ 4.10% 3.01%(b)
Portfolio turnover rate............ 40.91% 22.15%(a)
Average commission rate per share
(c)............................... -- --
</TABLE>
- ----------------------------------
* Commencement of investment 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.
(a) Not annualized.
(b) Annualized.
(c) Disclosure is required for fiscal years beginning after September 1, 1995.
A fund is required to disclose its average commission rate per share for
security trades of a fund's portfolio.
11
<PAGE>
- --------------------------------------------------------------------------------
THE UNITED KINGDOM FUND INC.
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
- --------------------------------------------------------------------------------
On September 24, 1996, the annual meeting of shareholders of the Fund was held
and the following matters were voted upon:
(1) To elect directors to the Board of Directors of the Fund.
<TABLE>
<CAPTION>
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD NON-VOTES
- -------------------------------------------------------------------- ----------- --------------- -----------
<S> <C> <C> <C>
Anthony M. Solomon.................................................. 2,604,494 322,885 1,084,276
George F. Bennett................................................... 2,618,501 308,878 1,084,276
Livio Borghese...................................................... 2,613,214 314,165 1,084,276
Sir Arthur Bryan.................................................... 2,603,494 323,885 1,084,276
Peter Stormonth Darling............................................. 2,585,663 341,716 1,084,276
Leon Levy........................................................... 2,602,721 324,658 1,084,276
J. Murray Logan..................................................... 2,609,460 317,919 1,084,276
James S. Martin..................................................... 2,596,059 331,320 1,084,276
</TABLE>
(2) To ratify or reject the selection of Ernst & Young LLP, as independent
public accountants for the year ending March 31, 1997.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES WITHHELD NON-VOTES
- ----------- ------------- --------------- -----------
<S> <C> <C> <C>
2,831,324 75,379 20,076 1,084,876
</TABLE>
(3) To amend and restate the charter to convert the Fund from a closed-end
investment company to an open-end investment company.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES WITHHELD NON-VOTES
- ----------- ------------- --------------- -----------
<S> <C> <C> <C>
825,511 682,428 53,248 2,450,468
</TABLE>
12
<PAGE>
- ------------------------------------------------------------------
DIRECTORS AND OFFICERS
ANTHONY M. SOLOMON, Chairman of the Board and Director
J. LOUGHLIN CALLAHAN, 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
STEVEN GOLANN, Senior Vice President, Secretary and Assistant Treasurer
THADDEA M. FELDMAN, Assistant Secretary
* Member of the Audit Committee
- ----------------------------------------------------
EXECUTIVE OFFICES--
245 Park Avenue
15th Floor
New York, New York 10167
(For latest net asset value and market data, please call (212) 272-2323;
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
ADDITIONAL INFORMATION
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 FT-SE 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 Inc. 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
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.
All shareholders are automatically enrolled in the Plan unless they have
elected to receive distributions in cash. Therefore, if you wish to participate
and your shares are held in your own name, no action is required on your part.
If you have previously elected to receive distributions in cash and now wish to
participate in the plan, please call the Plan Agent at the number above. 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 it 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, 1996
