<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Quarterly Report of The United Kingdom
Fund Inc. (the "Fund"). On June 30, 1996, the end of the period under review,
the Fund's net assets totalled $63.6 million. This represents a net asset value
per share of $15.86, a rise of 122.69% from its initial value after taking into
account underwriting discounts, commissions, offering expenses and
distributions. This compares with an increase of 111.35% in the FT-SE Actuaries
All-Share Index (U.S.$) over the same time period. At the end of the period
under review, the Fund was quoted at $12.625 per share on the New York Stock
Exchange, which represents a 20.40% discount to the Fund's net asset value per
share.
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 J. Loughlin Callahan
Chairman of the Board President
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INVESTMENT MANAGER
- --------------------------------------------------------------------------------
INVESTMENT REVIEW
During the second quarter of 1996, your Fund experienced a rise in net asset
value of 6.09% which compared with an increase of 3.41% in the value of the
FT-SE Actuaries All-Share Index. These results are recorded with net dividends
reinvested and in U.S. dollar based terms.
During the same period the equity market continued to rise. A further cut in
short-term interest rates surprised the markets and was accompanied by increased
signs of a revival in consumer confidence. As a result, investors began to focus
on the improved short-term earnings prospects for companies, although there was
some concern about how much further interest rates could fall. Corporate
activity remained buoyant, with the announcement of a merger between Royal
Insurance and Sun Alliance and attempts at global alliances in the airline
industry. Increased governmental intervention and political uncertainty meant
that there was some doubt as to the sustainability of this level of activity.
The best performing areas of the market were those that benefited from the
perceived increase in consumer confidence. Retail and leisure stocks were
consequently strong performers, while expectations of an improving housing
market boosted building-related companies. After some profit-taking in the first
quarter, pharmaceuticals also performed strongly, while merger activity and
speculation helped the insurance sector. Underperforming stocks tended to be for
those companies where investors became worried that profit forecasts were
becoming unrealizable, as economic activity in Europe failed to recover. In
particular, the strength of Sterling relative to other European currencies was
felt to have impacted some companies' competitive position. Most utility stocks
underperformed as the election approached; the decision of the government to
prevent the power generators from acquiring regional electricity companies
helped to reduce bid speculation in the sector.
Bonds outperformed the equity market, with U.K. gilts returning 3.4% (in
Sterling terms). Much of this performance was based on valuation, rather than
fundamental changes in economic outlook. There were some signs that investor
worries of an incoming Labour government were declining in the fixed interest
markets, as the Labour leadership's stated belief in a tight monetary policy
gained credibility, which, in turn, led to some strength in Sterling. Investors
also focused on the relatively subdued short-term inflationary outlook, with
forecast growth of 2.5% in 1996.
The Fund's and the FT-SE Actuaries All-Share Index's sector weightings
expressed as a percentage of total equities held at June 30, 1996 are outlined
below:
<TABLE>
<CAPTION>
% FT-SE
ACTUARIES
% U.K. ALL-SHARE
FUND INDEX
------------ --------------
<S> <C> <C>
Mineral Extraction...................... 9.9 9.5
General Manufacturing................... 28.7 17.6
Consumer Goods.......................... 19.2 18.2
Services................................ 22.7 24.2
Utilities............................... 6.9 10.3
Finance................................. 12.6 16.6
Investment Trusts....................... 0.0 3.6
</TABLE>
2
<PAGE>
ECONOMIC & MARKET OUTLOOK
With a General Election imminent, the political necessity to restore consumer
confidence remains as high priority, as evidenced by the further interest rate
cut effected during the second quarter. The effects of this looser monetary
policy, combined with the stimulative effects of income tax reductions, mortgage
rate reductions and building society takeovers, are beginning to be seen in the
housing and retail markets in the U.K. This is expected to continue, with any
constraints likely to be delayed until after the election. While the broader
economy will see some benefit from this, continued weakness in Continental
European demand will limit growth from the key export markets. This may be
exacerbated by Sterling's current strength, impacting the U.K.'s competitive
position. With the U.S. also reluctant to raise rates for political reasons,
economic growth there is also expected to be strong.
This outlook leads to divergent prospects for U.K. corporate profits, with
companies focused on the U.K. and U.S. consumer likely to do well, while those
exporting to Continental Europe may see expectations downgraded. Ongoing
restructuring programs will continue to see companies improving margins and cash
generation despite the mixed outlook for demand and limited price inflation.
This should support dividend growth and make further share buy-backs likely,
particularly as companies fear that a Labour government may seek to regulate
this process. Takeover activity will also be supported by these trends, although
increased signs of governmental interference and the higher prices demanded by
stock market valuations may dampen this.
With the bond markets having recovered some of their poise over the quarter,
the immediate outlook for U.K. equities is broadly neutral. Further rate cuts in
the U.K. and U.S. are unlikely, given previous moves and the high level of
budget deficits in each country. Indeed, the improved prospects for economic
growth mean that the likely direction of the next move in rates is upwards,
which may cause disquiet in the bond markets. Political uncertainty could also
add to investor concerns.
The long-term outlook for the U.K. economy remains reasonable. Productivity
improvements continue to be made, aiding competitiveness. Despite renewed
consumer confidence and falling unemployment, both wage and price inflation look
likely to remain within the government's target range of 1 to 4%. While this
should support the long-term outlook for U.K. equities, the possibility of
interest rates beginning to rise and political uncertainty will tend to limit
further advances.
3
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
- --------------------------------------------------------------------------------
The portfolio strategy during the quarter was to increase exposure to
companies which will benefit from the improvement in domestic consumer spending.
We purchased Beauford Group and added to Universal Ceramic Materials, which both
supply ceramic components to manufacturers of consumer durable products. We also
purchased Wolstenholme Rink which manufactures metal powders for use in the
printing industry. The holding in Menzies (John) was increased in anticipation
of a continued improvement in its trading performance. We sold BPB Industries,
where we felt there was little prospect of further capital appreciation. We sold
Bridon, which we believed would continue to suffer from difficult trading
conditions in the wire rope industry.
We added to National Grid Group and also increased our holdings in Courts, the
furniture retailer, which we felt was enjoying much better trading conditions in
the U.K. We sold Persona Group and established a new holding in CML
Microsystems, which manufactures electronic components for traffic signaling and
the communications industry. Cape Industries was increased, as Rutland Trust
took management control.
The Fund's ten largest equity holdings as of June 30, 1996 were:
STANDARD CHARTERED
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 641p
Prospective Earnings per share (to December 1997)....... 58.4p
Prospective Earnings Multiple........................... 11.0x
</TABLE>
Standard Chartered is a U.K. based banking group which is showing strong
growth based on increased lending volume 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 06/28/96............................. 943p
Prospective Earnings per share (to December 1997)....... 58.4p
Prospective Earnings Multiple........................... 16.1x
</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, aided 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.
JOHNSTON GROUP
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 500p
Prospective Earnings per share (to December 1997)....... 42.1p
Prospective Earnings Multiple........................... 11.9x
</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, against which the company
is defending itself.
BRITISH PETROLEUM
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 564p
Prospective Earnings per share (to December 1997)....... 44.7p
Prospective Earnings Multiple........................... 12.6x
</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.
Continuing strong cashflow from the company is likely to result in a sharp
reduction in the level of borrowings.
4
<PAGE>
MENZIES (JOHN)
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 556p
Prospective Earnings per share (to April 1997).......... 45.0p
Prospective Earnings Multiple........................... 12.4x
</TABLE>
Menzies (John) is a 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. It is expected to show steady earnings growth.
BRITISH AIRWAYS
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 554p
Prospective Earnings per share (to March 1998).......... 52.1p
Prospective Earnings Multiple........................... 10.6x
</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. Major cost cutting programs
may lead to further substantial improvements in profitability. It has recently
announced a proposed alliance with American Airlines.
GREAT UNIVERSAL STORES
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 654p
Prospective Earnings per share (to March 1997).......... 41.3p
Prospective Earnings Multiple........................... 15.8x
</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.
GLAXO WELLCOME
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 866p
Prospective Earnings per share (to December 1997)....... 59.0p
Prospective Earnings Multiple........................... 14.7x
</TABLE>
Glaxo Wellcome (Glaxo) is a leading international pharmaceuticals company with
substantial capacity for cost reduction through improving the productivity of
its research and development activities. Glaxo may experience a decline in sales
of Zantac as generic competition builds up. However, 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.
WHITECROFT
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 209p
Prospective Earnings per share (to March 1997).......... 14.5p
Prospective Earnings Multiple........................... 14.4x
</TABLE>
Whitecroft is a diversified industrial group with interests in building
products, commercial lighting, textiles and medical cotton fiber. It has
recovered strongly over the last three years and is experiencing significant
demand for its products. Earnings growth from the existing businesses is
expected to remain at high levels and may now be supplemented by the acquisition
of companies in related areas.
BARCLAYS
<TABLE>
<S> <C>
Market Price as of 06/28/96............................. 773p
Prospective Earnings per share (to December 1997)....... 92.6p
Prospective Earnings Multiple........................... 8.3x
</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 the success in
controlling costs through branch closures and centralization of service
functions. Although lending demand continues to be subdued, we believe that
substantial further cost savings may be achieved through the introduction of new
technology and accompanying staff reductions.
5
<PAGE>
- -----------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------
<C> <S> <C>
INVESTMENTS IN UNITED KINGDOM SECURITIES--
93.4% OF NET ASSETS
COMMON STOCKS--93.4%
BANKS--11.7%
200,000 Abbey National plc Ord 10p......... $1,681,213
150,000 Barclays plc Ord L1................ 1,801,632
400,000 Standard Chartered plc Ord 25p..... 3,983,946
----------
7,466,791
----------
BUILDING MATERIALS & MERCHANTS--8.1%
426,000 Cape Industries plc Ord 25p........ 1,072,309
300,000 Johnston Group plc Ord 10p......... 2,330,702
250,000 Marley plc Ord 25p................. 501,101
400,000 Norcros plc Ord 25p*............... 652,596
304,000 Universal Ceramic Materials plc Ord
5p............................... 632,956
----------
5,189,664
----------
CHEMICALS--4.5%
250,000 Allied Colloids plc Ord 10p........ 508,870
200,000 Wardle Storeys plc Ord 10p......... 1,460,573
55,000 Wolstenholme Rink plc Ord 25p...... 869,973
----------
2,839,416
----------
DIVERSIFIED INDUSTRIALS--4.2%
50,000 Charter plc Ord 2p (Reg'd.)........ 720,964
600,000 Whitecroft plc Ord 25p............. 1,948,467
----------
2,669,431
----------
ELECTRICITY--4.0%
200,000 East Midlands Electricity plc Ord
56 9/11p......................... 1,619,061
350,000 National Grid Group plc Ord 10p.... 927,231
----------
2,546,292
----------
ELECTRONICS & ELECTRICAL EQUIPMENT--2.9%
240,000 Beales Hunter plc Ord 20p.......... 745,825
180,000 CML Microsystems plc Ord 5p........ 307,653
150,000 General Electric Co. plc Ord 5p.... 808,753
----------
1,862,231
----------
ENGINEERING-GENERAL--2.0%
301,186 Ash & Lacy plc Ord 5p.............. 837,690
800,000 Beauford Group plc Ord 10p......... 447,495
----------
1,285,185
----------
ENGINEERING-VEHICLES--2.8%
500,000 Lucas Industries plc Ord 25p....... 1,759,680
----------
FOOD PRODUCERS--7.0%
280,000 Barr (AG) plc Ord 25p.............. 1,487,920
510,000 Canadian Pizza plc Ord 10p......... 618,102
168,000 CPL Aromas plc Ord 10p............. 1,004,999
1,000,000 Finlay (James) plc Ord 25p......... 1,320,731
----------
4,431,752
----------
HEALTH CARE--2.5%
400,000 Scholl plc Ord 5p.................. 1,591,092
----------
HOUSEHOLD GOODS--1.3%
192,500 Royal Doulton plc Ord L1........... 822,543
----------
LEISURE & HOTELS--2.4%
355,000 Inspirations plc Ord 10p........... 711,563
275,000 MacDonald Hotels plc Ord 5p*....... 816,134
----------
1,527,697
----------
<CAPTION>
- ----------------------------------------------------------
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------
<C> <S> <C>
OIL & GAS--10.1%
200,000 British Gas plc Ord 25p............ $ 559,368
250,000 British Petroleum plc Ord 25p...... 2,192,802
250,000 Shell Transport & Trading plc Ord
25p (Reg'd.)..................... 3,663,086
----------
6,415,256
----------
PHARMACEUTICALS--3.2%
150,000 Glaxo Wellcome plc Ord 25p......... 2,019,553
----------
RETAILERS-FOOD--3.3%
53,000 Greggs plc Ord 20p................. 1,124,097
450,000 Nurdin & Peacock plc Ord 10p....... 978,895
----------
2,102,992
----------
RETAILERS-GENERAL--12.1%
750,000 Alexon Group plc Ord 10p*.......... 1,689,759
27,500 Cantors plc Ord 20p................ 74,777
52,500 Courts plc Ord 25p................. 732,539
200,000 Great Universal Stores plc Ord
25p.............................. 2,032,372
100,000 Kingfisher plc Ord 25p............. 1,005,309
250,000 Menzies (John) plc Ord 25p......... 2,159,784
----------
7,694,540
----------
SPIRITS, WINES & CIDERS--0.6%
185,000 Merrydown plc Ord 25p.............. 376,564
----------
TEXTILES & APPAREL--3.3%
350,000 French plc Ord 10p................. 342,613
165,000 Shiloh plc Ord 25p................. 294,834
1,175,000 Sirdar plc Ord 25p................. 1,442,316
----------
2,079,763
----------
TOBACCO--2.4%
200,000 BAT Industries plc Ord 25p......... 1,556,909
----------
TRANSPORT--3.4%
250,000 British Airways plc Ord 25p........ 2,152,015
----------
WATER--1.6%
100,000 South West Water plc Ord L1........ 1,019,293
----------
Total Common Stocks
(cost $44,972,341)............... 59,408,659
----------
UNITED STATES SHORT-TERM INVESTMENT--
4.9% OF NET ASSETS
3,127,264 Federated Trust for Short-Term U.S.
Government Securities--Money
Market Fund (cost $3,127,264).... 3,127,264
----------
Total Investments (cost
$48,099,605)--98.3%.............. 62,535,923
----------
Cash and other assets in excess of
liabilities--1.7%................ 1,078,849
----------
NET ASSETS--100.0%................. $63,614,772
----------
----------
NUMBER OF SHARES ISSUED AND
OUTSTANDING...................... 4,011,655
----------
----------
NET ASSET VALUE PER SHARE..........
$15.86
----------
----------
</TABLE>
- ------------------------------
* Non-income producing security.
6
<PAGE>
------------------------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
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
JAMES M. DONALD, Vice President, Treasurer and
Assistant Secretary
STEVEN GOLANN, Senior Vice President, Secretary and
Assistant Treasurer
THADDEA M. FELDMAN, Assistant Secretary
</TABLE>
* Member of the Audit Committee
----------------------------------------------------
EXECUTIVE OFFICES--
245 Park Avenue
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 Statement of Investments, 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.
QUARTERLY REPORT
JUNE 30, 1996
