<PAGE>
- - --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- - --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Annual Report of The United Kingdom Fund
Inc. (the "Fund"). On March 31, 1997, the end of the period under review, the
Fund had net assets of $67.1 million. This represents a net asset value per
share of $16.71, a rise of 159.10% from its initial value in August 1987 after
taking into account underwriting discounts, commissions, offering expenses and
distributions. This compares with an increase of 158.72% in the FTSE All-Share
Index (US$) over the same time period. At the end of the period under review,
the Fund was quoted at $13.75 per share on the New York Stock Exchange, which
represents a 17.71% discount to the Fund's net asset value per share.
During the 12 weeks prior to March 31, 1997, the Fund traded on the New York
Stock Exchange at an average discount of 15.48%. 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
(anticipated to be September 16, 1997) 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,
[SIG] [SIG]
Anthony M. Solomon J. Loughlin Callahan
Chairman of the Board President and Treasurer
<PAGE>
- - --------------------------------------------------------------------------------
REPORT OF INVESTMENT MANAGER
- - --------------------------------------------------------------------------------
INVESTMENT REVIEW
During the first quarter of 1997, your Fund experienced a decrease in net
asset value of 1.24%, which compared with an increase of 0.83% in the value of
the FTSE All-Share Index. For the fiscal year ending March 31, 1997, the Fund
experienced an increase in net asset value of 23.43%, compared to an increase of
26.59% in the FTSE All-Share Index. These results are recorded in total return
and U.S. dollar based terms.
The continued strength of U.S. and European stock markets and the buoyant
domestic economy inspired U.K. equities to reach a new high on March 11, 1997.
However, a rise in U.S. interest rates towards the end of the quarter deflated
investor sentiment and the market ended the period on a more cautious note.
The best performing areas of the equity market in the first quarter were
pharmaceuticals, building and construction, life insurance and household goods.
Positive news on the development of new drugs stimulated keen buying from U.S.
investors of Glaxo Wellcome, SmithKline Beecham and a number of smaller biotech
stocks. In the banking sector, HSBC Holdings and Lloyds TSB Group outperformed
on continued strong growth in profits although the other retail banks lagged the
market. Life Insurance was dominated by Prudential Corporation which moved
higher ahead of winning the bidding contest for Scottish Amicable. The building
and construction sector saw strong performances, particularly from house
builders. The strength of sterling again impacted on the industrial sectors with
chemicals, electronics and engineering faring the worst. Food retailers reversed
their outperformance of the previous quarter as year-end trading fell below
investors' expectations.
Bonds made relatively poor progress in the first quarter with U.K. long gilts
returning 0.5% (in sterling terms). The rise in the U.S. Fed funds rate in March
reversed the worldwide trend of falling bond yields and gilts retraced all the
quarter's earlier gains. Investors remained sanguine about the prospects for
inflation despite the likely change of government. Index-linked stocks
underperformed cash with a return of 0.7% (in sterling terms).
The Fund's and the FTSE All-Share Index's sector weightings expressed as a
percentage of total equities held at March 31, 1997 are outlined below:
<TABLE>
<CAPTION>
% OF FTSE
% U.K. ALL-SHARE
FUND INDEX
------------ ------------
<S> <C> <C>
Mineral Extraction........................ 9.9 9.8
General Industrials....................... 27.2 15.5
Consumer Goods............................ 25.6 17.5
Services.................................. 15.5 23.7
Utilities................................. 9.9 10.5
Finance................................... 11.9 19.6
Investment Trusts......................... 0.0 3.4
</TABLE>
2
<PAGE>
ECONOMIC & MARKET OUTLOOK
The outlook for the U.K. domestic economy for the remainder of 1997 is for
continued consumer-led economic expansion. Personal disposable incomes are
anticipated to show a significant increase in the current year which will keep
consumer spending growth at a high level. The substantial boost to consumer
confidence from the conversion of five major building societies over the next
few months will release over L20 billion of disposable assets into the hands of
consumers. Preliminary indications are that a quarter of the new shareholders
will sell their holdings immediately and either spend or reinvest the proceeds.
This may be a further stimulus to the housing market which has already moved
ahead sharply in London and the South East and where the recovery is expected to
become wider spread geographically.
Industrial companies are faced with the impact of sterling's renewed strength,
particularly against European currencies, which have depreciated on the prospect
of a weak euro (the proposed single European currency). Although there is
evidence of a return to growth in European economies, especially within
manufacturing industries, the negative translation effect of sterling's
appreciation has outweighed any benefit to U.K. companies.
Inflation has been relatively subdued although there are increasing signs that
it is likely to rise at some stage. Sterling's strength has contributed to a
steep fall in input prices which has kept inflation well within the target
range. However, sharp increases in house prices in the South East are a leading
indicator of inflationary pressures in the system. The small rise in bank base
rates immediately after the election of the new Labour government may be
followed by further increases. This could lead to further strengthening of
sterling which has already impacted on the competitiveness of U.K. exporters and
may eventually create a trade deficit problem. At the time of increasing base
rates by 0.25% to 6.25%, the Labour government made the important announcement
that, in future, interest rate policy would be set by the Bank of England to
meet the inflation targets set by the government. This caused a strong rally in
gilts which narrowed their yield premium over German bonds.
The outlook for the U.K. equity market remains mixed. Exporters are already
facing lower order books and pressure on pricing caused by the uncompetitive
level of sterling whereas suppliers to the consumer side of the economy are
preparing for a surge of business as consumers receive their building society
windfalls. The U.K. equity market itself is likely to make only slight progress
as it has to absorb the heavy supply of new equity from the converting building
societies and the Norwich Union de-privatization. The smaller company sector is
expected to maintain its recovery, as investors increase holdings in companies
with large domestic exposure. The market is now awaiting the first budget of the
new government which is likely to be in June and may include important changes
in corporate taxation. The equity market is likely to make modest progress,
helped by the fall in gilt yields but with investors nervous over the impact of
sterling on the profitability of UK manufacturing companies.
3
<PAGE>
- - --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
- - --------------------------------------------------------------------------------
The strategy over the quarter was to add selectively to smaller company
holdings. A new holding was established in Vibroplant, a plant hire company
which should benefit from increasing construction activity. We also increased
the positions in Manders, Norcros and Sirdar where we expect improved profits in
the current year. We substantially reduced Whitecroft, which we believed had too
great an exposure to commercial lighting where trading conditions remain highly
competitive. The holding in Charter was sold following its offer for Howden
Group.
The Fund's ten largest equity holdings as of March 31, 1997 were:
SHELL TRANSPORT & TRADING
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 1085p
Prospective Earnings per share (to December 1997)........... 61.0p
Prospective Earnings Multiple............................... 17.8x
</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 strength in the price
of crude oil. Cash flow remains highly positive, despite a substantial increase
in exploration expenditure and we continue to expect strong dividend progression
for at least the next two years.
BRITISH PETROLEUM
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 706p
Prospective Earnings per share (to December 1997)........... 47.2p
Prospective Earnings Multiple............................... 15.0x
</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 should see a sharp reduction in the level of
borrowings and we expect excellent dividend progression.
NATIONAL WESTMINSTER BANK
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 686p
Prospective Earnings per share (to December 1997)........... 78.7p
Prospective Earnings Multiple............................... 8.7x
</TABLE>
National Westminster Bank is a leading retail bank in the U.K. Like other
clearing banks it is undergoing a strategy of branch closures and reductions in
its workforce. It is rapidly expanding its investment banking activities and in
the last two years it has increased its investment management and corporate
advisory capabilities. Although the company has recently suffered from a trading
loss in its derivatives operation, profits are still expected to continue their
steady growth helped by low bad debts and increasing fee income.
GLAXO WELLCOME
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 1116p
Prospective Earnings per share (to December 1997)........... 54.4p
Prospective Earnings Multiple............................... 20.5x
</TABLE>
Glaxo Wellcome is a leading international pharmaceuticals company which is
expected to return to strong earnings growth in 1998. Although its patents on
Zovirax and Zantac expire this year, sales of newer drugs are likely to increase
rapidly. New compounds to treat hepatitis (B&C), malaria and influenza could
have significant long-term potential.
4
<PAGE>
BRITISH AIRWAYS
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 655p
Prospective Earnings per share (to March 1998).............. 53.5p
Prospective Earnings Multiple............................... 12.2x
</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. Major cost cutting programs
may lead to further substantial improvements in profitability. It has announced
a proposed alliance with American Airlines which is currently being reviewed by
various regulatory authorities.
JOHNSTON GROUP
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 523p
Prospective Earnings per share (to December 1997)........... 40.6p
Prospective Earnings Multiple............................... 12.9x
</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 was successful in its defense against a
hostile tender offer by the conglomerate, TT Group.
BARCLAYS
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 1021p
Prospective Earnings per share (to December 1997)........... 107.5p
Prospective Earnings Multiple............................... 9.5x
</TABLE>
Barclays has shown a strong recovery in banking profits following a reduction
in bad debts and success in controlling costs through branch closures and
centralization of service functions. Demand for consumer credit is now showing
good growth and the residential mortgage business is expected to develop further
this year. We believe that substantial further cost savings can be achieved
through the introduction of new technology and accompanying staff reductions.
BZW, the securities arm of Barclays, is expected to lift its return on capital
to more satisfactory levels.
ABBEY NATIONAL
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 745p
Prospective Earnings per share (to December 1997)........... 65.4p
Prospective Earnings Multiple............................... 11.4x
</TABLE>
Abbey National is one of the leading mortgage lenders in the U.K. It has
absorbed the National & Provincial Building Society and is expected to make
further acquisitions in financial services, such as another building society, to
maintain its share of the mortgage market. We are anticipating strong profits
growth helped by cost reductions and a more active residential property market.
Abbey National is expanding in the Far East, particularly in Hong Kong where it
has a relationship with Dah Sing.
SCHOLL
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 314p
Prospective Earnings per share (to December 1997)........... 17.8p
Prospective Earnings Multiple............................... 17.6x
</TABLE>
Scholl is a footwear and healthcare group which is undergoing a major
restructuring. The new chief executive has begun to re-focus the company on its
areas of greatest strength. It has disposed of its herbal remedies and French
antiseptic cleanser businesses and is also likely to dispose of further European
activities. This would provide funds for a beneficial global link-up with
Schering-Plough, the owner of the Dr. Scholl's brand in the U.S.
5
<PAGE>
ANGLIAN WATER
<TABLE>
<S> <C>
Market Price as of 03/27/97................................. 639p
Prospective Earnings per share (to March 1998).............. 88.2p
Prospective Earnings Multiple............................... 7.2x
</TABLE>
Anglian Water provides water supply to a population of 4 million people and
sewerage services to 5.3 million people in Eastern England. It also has a number
of unregulated international activities which contribute little to profits.
These include process engineering and membrane products for the water industry.
Despite an anticipated water shortage this year, we expect Anglian Water to
demonstrate combined growth in profits from its core water and sewerage business
and this should allow steady progression in dividends.
6
<PAGE>
- - ----------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1)
- - ----------------------------------------------------------------------------------------
<C> <S> <C>
INVESTMENTS IN UNITED KINGDOM SECURITIES--
97.4% OF NET ASSETS
COMMON STOCKS--97.4%
ALCOHOLIC BEVERAGES--3.4%
250,000 Allied Domecq plc Ord 25p................................... $ 1,887,638
270,000 Merrydown plc Ord 25p....................................... 401,956
---------------
2,289,594
---------------
Banking--11.6%
200,000 Abbey National plc Ord 10p.................................. 2,451,050
150,000 Barclays plc Ord 100p....................................... 2,519,318
250,000 National Westminster Bank plc Ord 100p...................... 2,823,231
---------------
7,793,599
---------------
BUILDING MATERIALS & MERCHANTS--8.6%
476,000 Cape Industries plc Ord 25p................................. 1,311,559
300,000 Johnston Group plc Ord 10p.................................. 2,583,473
550,000 Norcros plc Ord 25p......................................... 714,753
504,000 Universal Ceramic Materials plc Ord 5p...................... 800,062
344,370 Vibroplant plc Ord 5p....................................... 371,050
---------------
5,780,897
---------------
CHEMICALS--4.9%
600,000 Manders plc Ord 25p......................................... 1,692,705
55,000 Wolshenholme Rink plc Ord 25p............................... 599,397
250,000 Yorkshire Group plc Ord 25p................................. 962,325
---------------
3,254,427
---------------
DIVERSIFIED INDUSTRIALS--2.9%
200,000 Wardle Storeys plc Ord 10p.................................. 1,442,665
200,000 Whitecroft plc Ord 25p...................................... 498,435
---------------
1,941,100
---------------
ELECTRICITY--1.5%
300,000 National Grid Group plc Ord 10p............................. 1,033,883
---------------
ELECTRONICS & ELECTRICAL EQUIPMENT--5.0%
315,000 Beales Hunter plc Ord 20p................................... 790,217
440,000 CML Microsystems plc Ord 5p................................. 995,225
250,000 General Electric Co. plc Ord 5p............................. 1,536,019
---------------
3,321,461
---------------
ENGINEERING-GENERAL--2.7%
306,186 Ash & Lacy plc Ord 5p....................................... 959,503
1,250,000 Beauford Group plc Ord 10p.................................. 843,063
---------------
1,802,566
---------------
ENGINEERING-VEHICLES--2.4%
500,000 LucasVarity plc Ord 25p..................................... 1,612,100
---------------
FOOD PRODUCERS--6.6%
280,000 Barr (AG) plc Ord 25p....................................... 1,766,401
510,000 Canadian Pizza plc Ord 10p.................................. 708,913
170,500 CPL Aromas plc Ord 10p...................................... 294,496
1,000,000 Finlay (James) plc Ord 25p.................................. 1,636,775
---------------
4,406,585
---------------
HEALTH CARE--3.3%
425,000 Scholl plc Ord 5p........................................... 2,195,253
---------------
HOUSEHOLD GOODS--1.4%
192,500 Royal Doulton plc Ord 100p.................................. 942,071
---------------
<CAPTION>
- - ----------------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1)
- - ----------------------------------------------------------------------------------------
<C> <S> <C>
LEISURE & HOTELS--2.7%
355,000 Inspirations plc Ord 10p.................................... $ 452,581
142,000 Inspirations plc, 7.7% Convertible Preference 20p........... 198,552
325,000 MacDonald Hotels plc Ord 5p................................. 1,176,175
---------------
1,827,308
---------------
OIL & GAS--10.8%
200,000 BG plc Ord 25p.............................................. 534,625
250,000 British Petroleum plc Ord 25p............................... 2,905,481
200,000 Centrica plc Ord 5p*........................................ 208,915
200,000 Shell Transport & Trading plc Ord 25p
(Regd.)................................................... 3,571,295
---------------
7,220,316
---------------
PHARMACEUTICALS--4.1%
150,000 Glaxo Wellcome plc Ord 25p.................................. 2,754,964
---------------
RETAILERS-FOOD--2.3%
54,000 Greggs plc Ord 20p.......................................... 1,536,759
---------------
RETAILERS-GENERAL--6.1%
106,250 Courts plc Ord 25p.......................................... 967,414
250,000 John Menzies plc Ord 25p.................................... 1,945,213
100,000 Kingfisher plc Ord 25p...................................... 1,152,323
---------------
4,064,950
---------------
TEXTILES & APPAREL--3.6%
350,000 French plc Ord 10p.......................................... 331,056
165,000 Shiloh plc Ord 25p.......................................... 339,281
1,550,000 Sirdar plc Ord 25p.......................................... 1,746,579
---------------
2,416,916
---------------
TOBACCO--2.5%
200,000 BAT Industries plc Ord 25p.................................. 1,705,865
---------------
TRANSPORT--4.0%
250,000 British Airways plc Ord 25p................................. 2,695,744
---------------
WATER--7.0%
200,000 Anglian Water plc Ord 100p.................................. 2,102,310
100,000 South West Water plc Ord 100p............................... 1,100,505
250,000 Wessex Water plc Ord 60p.................................... 1,509,281
---------------
4,712,096
---------------
Total Common Stocks
(cost $50,276,029)........................................ 65,308,454
---------------
UNITED STATES SHORT-TERM INVESTMENT--
0.3% OF NET ASSETS
179,437 Federated Investors, Trust for Short-Term U.S. Government
Securities+--(cost $179,437).............................. 179,437
---------------
Total Investments (cost $50,455,466)--97.7%................. 65,487,891
---------------
Cash and other assets in excess of liabilities--2.3%........ 1,562,962
---------------
NET ASSETS--100.0%.......................................... $ 67,050,853
---------------
---------------
NUMBER OF SHARES ISSUED AND OUTSTANDING..................... 4,011,655
---------------
---------------
NET ASSET VALUE PER SHARE................................... $16.71
---------------
---------------
</TABLE>
- - ------------------
* Non-income producing security.
+ Money market fund.
See Notes to Financial Statements.
7
<PAGE>
- - -----------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF
ASSETS AND LIABILITIES
MARCH 31, 1997
- - ----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $50,455,466)........................................ $ 65,487,891
Receivable for securities sold.................................................. 676,917
Cash (includes $363,605 equivalent in an interest-bearing pound sterling
account)....................................................................... 367,525
Dividends and interest receivable............................................... 584,937
United Kingdom withholding tax refund receivable................................ 104,559
Other assets.................................................................... 13,905
------------
Total assets.............................................................. 67,235,734
------------
LIABILITIES
Investment management fee payable............................................... 42,246
Administration fee payable...................................................... 8,907
Accrued expenses................................................................ 133,728
------------
Total liabilities......................................................... 184,881
------------
NET ASSETS...................................................................... $ 67,050,853
------------
------------
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........................................... 169,788
Accumulated net realized gains on investments and pound sterling.............. 5,820,080
Net unrealized appreciation on investments and translation of other assets and
liabilities denominated in pound sterling.................................... 15,060,715
------------
Net assets.................................................................... $ 67,050,853
------------
------------
Net asset value per share
($67,050,853 DIVIDED BY 4,011,655 shares of common stock issued and
outstanding)................................................................. $16.71
------------
------------
</TABLE>
- - ----------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
MARCH 31, 1997
- - ----------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Income
Dividends..................................................................... $ 2,716,547
Interest...................................................................... 86,484
-----------
2,803,031
Less: United Kingdom withholding tax on United Kingdom source dividends....... 375,990
-----------
Total income.............................................................. 2,427,041
-----------
Expenses
Investment management fee..................................................... 487,653
Administration fee............................................................ 97,657
Directors' fees and expenses.................................................. 87,812
Legal fee..................................................................... 75,709
Reports and notices to shareholders........................................... 61,602
Audit fee..................................................................... 49,136
Custodian's fees and expenses................................................. 43,624
Transfer agent's fees and expenses............................................ 24,435
NYSE listing fee.............................................................. 16,523
Insurance fee................................................................. 5,445
Miscellaneous expenses........................................................ 40,008
-----------
Total expenses............................................................ 989,604
-----------
Net investment income........................................................... 1,437,437
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND POUND
STERLING TRANSACTIONS
Net realized gain on:
Investments................................................................... 8,484,000
Pound sterling transactions................................................... 384,938
Net change in unrealized appreciation on:
Investments................................................................... 2,268,341
Pound sterling transactions................................................... 5,054
-----------
Net gain on investments and pound sterling transactions......................... 11,142,333
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $12,579,770
-----------
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- - -----------------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
- - -----------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
--------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations
Net investment income................. $ 1,437,437 $ 1,986,510
Net realized gain on investments...... 8,484,000 2,444,505
Net realized gain/(loss) on pound
sterling transactions................ 384,938 (253,786)
Net change in unrealized appreciation
on investments and pound sterling
transactions......................... 2,273,395 4,470,956
-------------- ---------------
Net increase in net assets resulting
from operations...................... 12,579,770 8,648,185
-------------- ---------------
Dividends and distributions to
shareholders from
Net investment income ($0.422 and
$0.376 per share, respectively)...... (1,691,006) (1,508,832)
Net realized gains ($0.948 and $0.014
per share, respectively)............. (3,804,962) (55,716)
-------------- ---------------
Total dividends and distributions..... (5,495,968) (1,564,548)
-------------- ---------------
Total increase.......................... 7,083,802 7,083,637
NET ASSETS
Beginning of year..................... 59,967,051 52,883,414
-------------- ---------------
End of year (including undistributed
net investment income of $169,788 and
$423,357, respectively).............. $ 67,050,853 $ 59,967,051
-------------- ---------------
-------------- ---------------
</TABLE>
See Notes to Financial Statements.
- - -----------------------------------------------
THE UNITED KINGDOM FUND INC.
NOTES TO FINANCIAL STATEMENTS
- - -----------------------------------------------
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.
MANAGEMENT ESTIMATES: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
certain estimates and assumptions that may affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
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
9
<PAGE>
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
(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 $384,938 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, 1997 was U.S. $1.6373 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.
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
10
<PAGE>
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.
NOTE 2. AGREEMENTS
The Fund has entered into Agreements with Mercury Asset Management International
(Channel Islands) Ltd. (the "Investment Manager"), Mercury Asset Management
International Ltd. (the "Investment Adviser") and Bear Stearns Funds Management
Inc. (the "Administrator").
The Investment Management Agreement provides that the Fund pays the Investment
Manager a fee, computed weekly and payable monthly, at the following rates:
0.75% of the Fund's average weekly net assets up to $150 million, and 0.65% of
such assets in excess of $150 million. The Administration Agreement provides
that the Fund pays the Administrator a fee at the annual rate of 0.15% of the
Fund's average weekly net assets up to $200 million and 0.10% on such 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 March 31, 1997, Mercury Asset Management
Group plc (the parent company of the Investment Adviser and Investment Manager)
owned 9,446 shares in respect of the Fund's initial capital contribution
(including 844 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 March 31,
1997 was $50,455,466.
At March 31, 1997, the net unrealized appreciation of investments on a tax
basis of $15,032,425 was composed of gross appreciation of $18,165,301 for those
investments having an excess of value over cost and gross depreciation of
$3,132,876 for those investments having an excess of cost over value.
For the year ended March 31, 1997 aggregate purchases and proceeds from the
sales of portfolio securities (excluding short-term securities) were $20,108,808
and $20,936,605, 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.
11
<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,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <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 $ 10.94
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operations:
Net investment
income............. 0.36 0.50 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....... 2.77 1.66 0.92 1.45 1.19 (1.31) 1.64 (1.53) 1.61
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from
operations....... 3.13 2.16 1.32 1.62 1.45 (0.91) 2.02 (1.17) 1.86
Distributions to
shareholders from:
Net investment
income............. (0.42) (0.38) (0.40) (0.14) (0.14) (0.45) -- (0.35) (0.22)
Net realized
gains.............. (0.95) (0.01) (0.06) -- (0.41) (0.38) (0.73) (0.25) (0.43)
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from
distributions.... (1.37) (0.39) (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............ $ 16.71 $ 14.95 $ 13.18 $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Per share market
value, end of
period............... $ 13.75 $ 12.00 $ 10.88 $ 10.50 $ 9.63 $ 9.13 $ 10.25 $ 8.75 $ 10.00
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total investment
return, market
value**.............. 26.54% 13.91% 7.93% 10.32% 11.45% (2.63)% 26.40% (7.40)% 20.68%
Net assets at end of
period
(000 omitted)........ $ 67,051 $ 56,967 $ 52,883 $ 49,435 $ 43,467 $ 39,823 $ 46,775 $ 41,609 $ 48,707
Ratios of operating
expenses to average
net assets........... 1.53% 1.55% 1.47% 1.50% 1.78% 1.74% 2.19% 1.92% 1.89%
Ratios of net
investment income to
average net assets... 2.22% 3.45% 3.15% 1.43% 2.43% 3.73% 3.34% 3.06% 4.10%
Portfolio turnover
rate................. 32.58% 20.85% 19.73% 27.05% 45.54% 47.30% 36.37% 22.07% 40.91%
Average commission
rate per share (c)... $ 0.0155 -- -- -- -- -- -- -- --
<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)%(a)
Net assets at end of
period
(000 omitted)........ $ 43,864
Ratios of operating
expenses to average
net assets........... 1.99%(b)
Ratios of net
investment income to
average net assets... 3.01%(b)
Portfolio turnover
rate................. 22.15%(a)
Average commission
rate per share (c)... --
</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.
(a)Not annualized.
(b)Annualized.
(c)Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments subject to such commissions during the
period.
12
<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, 1997, 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 and financial statement highlights. Our procedures included
confirmation of securities owned as of March 31, 1997 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, 1997, 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 16, 1997
13
<PAGE>
-----------------------------------------------
THE UNITED KINGDOM FUND INC.
U.S. TAX INFORMATION (UNAUDITED)
-----------------------------------------------
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, 1997) 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:
SOURCE OF DIVIDENDS AND DISTRIBUTIONS
<TABLE>
<CAPTION>
NET
REALIZED
LONG- TERM APPLICABLE TOTAL
ORDINARY CAPITAL FOREIGN REPORTABLE
DATES INCOME GAINS TAXES DIVIDEND
- - -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
JUNE 1996..... $ 0.32 $ 0.08 $ 0.04 $ 0.44
DECEMBER
1996......... 0.36 0.61 0.05 1.02
----------- ----------- ----------- -----------
TOTAL..... $ 0.68 $ 0.69 $ 0.09 $ 1.46
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The Fund earned $404,449 of income from United Kingdom sources in the last
quarter of the fiscal year 1997 of which it paid $0.03 per share in United
Kingdom withholding taxes. The Fund intends to give the benefit of the $0.03 per
share in foreign tax as a credit to its shareholders. These amounts will be
reported to shareholders in their 1997 Form 1099-DIV which should be mailed in
January, 1998. 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. 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.
All shareholders are advised to consult their own tax advisers with respect to
the tax consequences of their investment in the Fund.
-----------------------------------------------
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>
VOTES
NAME OF DIRECTOR VOTES FOR WITHHELD NON-VOTES
- - ---------------------- ---------- ------------- ----------
<S> <C> <C> <C>
ANTHONY M. SOLOMON.... 2,604,494 322,885 1,084,276
GEORGE F. BENNET...... 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 auditors 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
VOTES FOR AGAINST VOTES WITHHELD NON-VOTES
- - --------- ------------ --------------- ----------
<S> <C> <C> <C>
825,511 682,428 53,248 2,450,468
</TABLE>
The proposal to open-end the Fund requires a favorable vote of the holders of
two-thirds of the Fund's outstanding shares.
14
<PAGE>
-----------------------------------------------
THE UNITED KINGDOM FUND INC.
AMENDED DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
TERMS AND CONDITIONS
-----------------------------------------------
1. Each shareholder of The United Kingdom Fund Inc. (the "Fund") will have all
distributions automatically reinvested by The Bank of New York (the "Plan
Agent"), in Fund shares pursuant to the Fund's Amended Dividend Reinvestment and
Cash Purchase Plan. Shareholders who do not wish to participate in the Plan may
elect to receive all distributions in cash paid by check in U.S. dollars mailed
directly to the shareholder by the Plan Agent, as dividend paying agent.
2. 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.
3. Participants have the option of making additional cash payments to the Plan
Agent, quarterly, in any amount from U.S. $100 to U.S. $3,000, for investment in
the Fund's common stock. The Plan Agent will use all funds received from
participants to purchase Fund shares in the open market on or about March 15,
June 15, September 15 and December 15 of each year. Any voluntary cash payments
received more than 30 days prior to these dates will be returned by the Plan
Agent, and interest will not be paid on any uninvested cash payments. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, participants should send in voluntary cash
payments to be received by the Plan Agent approximately ten days before March
15, June 15, September 15 or December 15, as the case may be. Optional cash
payments must be made in U.S. dollars. Optional cash payments drawn on a
non-U.S. bank will be subject to collection fees and must be collected by the
foregoing quarterly dates to be invested. A participant may withdraw a voluntary
cash payment by written notice, if the notice is received by the Plan Agent not
less than 48 hours before the payment is to be invested.
4. 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 will be 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.
5. In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
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. Shareholders whose shares are held in the name of a broker or nominee
should consult with the broker or nominee to determine whether they should
participate in the Plan or how they may withdraw from the Plan.
6. 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 will be paid by the Fund. There will be 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 will pay 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 Plan
Agent may use its wholly-owned subsidiary, BNY Brokerage Inc., for trading
activity relating to the Plan, on behalf of Plan participants.
7. With respect to purchases for voluntary cash payments, the Plan Agent will
charge U.S. $2.00 for each purchase for a participant, plus a pro rata share of
the brokerage commission. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than the
usual brokerage charges for these transactions
15
<PAGE>
because the Plan Agent will be purchasing stock for all participants in blocks
and prorating the lower commission thus attainable.
8. The automatic reinvestment of dividends and distributions will not relieve
participants of any U.S. income tax that may be payable on such dividends or
distributions.
9. Participants in the Plan may effect "book-to-book" transfers, which involve
transferring shares from an existing participant account in the Plan to a new
participant account, by contacting the Plan Agent.
10. 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, the Bank of New York, at P.O. Box 11002, Church
Street Station, New York, New York, 10249.
16
<PAGE>
- - ------------------------------------------------------------------
DIRECTORS AND OFFICERS
ANTHONY M. SOLOMON, Chairman of the Board and Director
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
J. LOUGHLIN CALLAHAN, President and Treasurer
STEVEN W. GOLANN, Vice President, Assistant Treasurer
RITA J. KLEINMAN, Secretary
THADDEA M. FELDMAN, Assistant Secretary
AMANDA J. MARSH, 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
Since the filing of the most recent amendment to the Fund's registration
statement with the Securities and Exchange Commission, there have been (i) no
material changes in the Fund's investment objectives or policies, (ii) no
changes to the Fund's charter or by-laws that would delay or prevent a change
of control of the Fund, (iii) no material changes in the principal risk
factors associated with investment in the Fund, and (iv) no change in the
person primarily responsible for the day-to-day management of the Fund's
portfolio, who is Thomas W.G. Charlton, the Portfolio Manager of the Fund.
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 FTSE 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. (Regulated by IMRO)
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 AND CASH PURCHASE PLAN--SUMMARY
An automatic Dividend Reinvestment and Cash Purchase 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 and
the opportunity to purchase additional shares of the Fund on a quarterly basis.
Information 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 Dividend Reinvestment 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.
ANNUAL REPORT
MARCH 31, 1997
