<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, 1998, the end of the period under review, the
Fund's net assets totaled $70.7 million. This represents a net asset value per
share of $17.61, with an average annual return of 11.85% from its initial value
in August 1987 after taking into account underwriting discounts, commissions,
offering expenses and distributions. This compares with an average annual return
of 12.76% for the FTSE All-Share Index over the same time period. At the end of
the period under review, the Fund was quoted at $15.5625 per share on the New
York Stock Exchange, which represents an 11.63% discount to the Fund's net asset
value per share and an average annual of return of 10.07% from its initial
value, assuming reinvestment of dividends and distributions.
During the 12 weeks prior to March 31, 1998, the Fund traded on the New York
Stock Exchange at an average discount of 11.25%. Consequently, in accordance
with the Fund's charter, a proposal to convert the Fund to an open-end
investment company, which requires the favorable vote of the shareholders of two
thirds of the Fund's outstanding shares, will be submitted to shareholders at
the next annual meeting (September 15, 1998) 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,
/s/ Anthony M. Solomon /s/ J. Loughlin Callahan
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 1998, your Fund experienced an increase in net
asset value of 12.74%, which compared with an increase of 18.15% in the value of
the FTSE All-Share Index. For the fiscal year ending March 31, 1998, the Fund
experienced an increase in net asset value of 27.04%, compared to an increase of
38.67% in the FTSE All-Share Index. The 10 largest U.K. shares by market cap
increased by 45.0% during the year, while the rest of the FTSE All-Share Index
increased by 33.2%. This made it difficult for broadly based funds, particularly
like the Fund, with an overweighting in mid-sized and smaller companies, to
perform well. These results are recorded in total return and U.S. dollar based
terms.
The U.K. equity market rose strongly in the first quarter of 1998, as U.K.
equities benefited from very buoyant European markets and the continued strength
of Wall Street. Substantial buying from overseas investors drove share prices,
particularly those of larger companies well-known to such investors, to
unprecedented levels at which domestic investors felt uncomfortable adding to
their positions. The Budget had little impact on the market which was also
relieved by no further increase in base interest rates from 7.25%.
Growth stocks performed well as investors re-evaluated ratings of
telecommunication and technology stocks, which appeared undervalued by
international standards. Large companies again remained in favor, although the
weak oil price held back British Petroleum and Shell Transport and Trading.
The best performing sectors over the quarter were telecommunications, support
services and insurance. The telecommunications sector encountered substantial
demand from overseas investors which triggered talk of consolidation among the
cable operators and speculation over British Telecommunication's acquisition
plans. Support services, which includes a number of computer software companies,
benefited from increased concern over the amount of spending necessary to cure
the "millennium bug". The insurance sector saw the proposed merger of Commercial
Union and General Accident and there was talk of further consolidation in the
European insurance industry.
The weakest sector was the oil exploration sector, which reflected the
depressed crude oil price following the very mild winter in North America and
continued over-production. Other resource stocks performed poorly, but
additional areas of weakness included general retailers and healthcare. The
retailing sector, having traded disappointingly over Christmas, had to suffer
unseasonable British weather and fickle consumer spending. The clothing store
"Next", disappointed the market with its trading statement, although Great
Universal Stores took advantage of the uncertainty in the sector to bid for
Argos, the catalogue retailer. The healthcare sector featured a number of
disappointing trading statements.
The Fund's and the FTSE All-Share Index's sector and market capitalization
weightings expressed as a percentage of total equities held at March 31, 1998
are outlined below:
<TABLE>
<CAPTION>
% OF FTSE
% U.K ALL-SHARE
FUND INDEX
----------- -------------
<S> <C> <C>
Mineral Extraction............................... 5.3 8.4
General Industrials.............................. 22.5 11.6
Consumer Goods................................... 30.3 17.8
Services......................................... 8.1 28.2
Utilities........................................ 17.1 5.5
Finance.......................................... 16.7 25.6
Investment Trusts................................ 0.0 2.9
</TABLE>
<TABLE>
<CAPTION>
FTSE 100 FT SMALLER
(LARGE CAP) FT MID-250 COMPANIES
------------- ------------- -------------
<S> <C> <C> <C>
Index................................. 76.2 17.6 6.2
UK Fund............................... 54.0 6.9 39.1
</TABLE>
2
<PAGE>
ECONOMIC & MARKET OUTLOOK
The U.K. equity market has had a sparkling start to 1998. Having returned over
100% since the start of 1995, the rise in the U.K. market has substantially
outperformed expectations and corporate earnings growth. Much of the recent
advance has been propelled by U.S. investors committing funds to the "safe"
region of Europe while Japan threatens to slip into a deflationary spiral and
the Asia Pacific region struggles to avoid a similar fate following last year's
economic shocks. As European markets get driven higher by the inflow of money,
we believe that many of the traditional valuation measures cease to be useful
guides to stock selection. As a result, domestic U.K. investors are likely to
focus on those companies which are certain to show some earnings growth and
might prove to be more resilient in an overall market setback.
The U.K. economy is displaying some signs of weakness. The retailing sector
has been hit by erratic trading and unseasonable weather, and is now faced with
significant upward pressure on high rents, wages and other occupancy costs.
Manufacturers are struggling with sterling remaining at an uncompetitive level
against European currencies and, consequently, many international companies have
curtailed their inward investment plans. Conversely, the service and financial
sectors are continuing to show healthy profit growth although the banking and
insurance industries are experiencing increasingly competitive trading
conditions.
There still remains the prospect of a continued imbalance between the supply
of new equity and the heavy ongoing demand from investors. Global deflationary
pressures and hesitancy over investing in the U.S. at the peak of its economic
cycle will mean that U.K. companies will be reluctant to issue new equity to
further their growth ambitions, although some cautious cash-financed
bargain-hunting in the Far East can be expected. Meanwhile, U.K. equities should
remain buoyed by the inflow of funds from cash takeovers and share buy-backs,
which continue to be a feature of the London market.
The next few months are likely to be a volatile time for the U.K. equity
market with wide-ranging and unpredictable divergences in performance between
companies, even ones within the same sector. Taking a cautious approach to stock
selection, and avoiding those companies which might succumb to difficult trading
conditions appears to be the safest route going forward.
As valuations for large cap stocks are well ahead of those of mid and small
cap stocks, increasing interest in smaller companies is being shown by both
industrial and financial investors. Having endured a weaker performance than the
FTSE All-Share Index over the last 18 months as a result of the Funds'
overweighting in mid-sized and smaller company shares, the intention is to
maintain this strategy in the expectation that it will result in outperformance
relative to the index over the medium term.
3
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
- --------------------------------------------------------------------------------
The strategy over the quarter was to take selective profits realized for the
period and reinvest the proceeds in companies with excellent near-term
prospects. We sold the holding in Greggs, the bakery chain, and also reduced
Paramount Foods, LucasVarity, MacDonald Hotels and Barr (AG). The holding in
Royal Doulton was sold following disappointing results. New, smaller company
holdings included Roxboro Group, an electronics group, and Hall Engineering
Holdings, a steel products group. New, larger company purchases were Sainsbury
(J) and SmithKline Beecham.
The Fund's ten largest equity holdings as of March 31, 1998 were:
BARCLAYS
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 1790p
Prospective Earnings per share (to December 1998)........... 118.6p
Prospective Earnings Multiple............................... 15.1x
</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. We believe that substantial further cost
savings can be achieved through the introduction of new technology and staff
reductions. Barclays has recently finalized the sale of BZW, its securities arm,
which should release significant capital on which a higher return can be
achieved. Barclays has bought back its own shares on a regular basis and we
expect a continued focus on improving shareholder value.
GLAXO WELLCOME
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 1607p
Prospective Earnings per share (to December 1998)........... 54.8p
Prospective Earnings Multiple............................... 29.3x
</TABLE>
Glaxo Wellcome is a leading international pharmaceuticals company which
recently attempted to merge with SmithKline Beecham. This merger would have
created the largest pharmaceuticals company in the world, with the potential for
significant synergy benefits. Although this merger did not proceed, it is
possible that the company could pursue another strategic merger which could have
similar synergy benefits.
NATIONAL WESTMINSTER BANK
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 1093p
Prospective Earnings per share (to December 1998)........... 75.5p
Prospective Earnings Multiple............................... 14.5x
</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 has recently reorganized its remaining investment banking
activities, having sold its securities operation to Bankers Trust. Profits are
expected to continue their steady growth helped by low bad debts and increasing
fee income. As the smallest of the four English clearing banks, National
Westminster Bank is a likely participant in any consolidation of the U.K.
banking sector.
SHELL TRANSPORT & TRADING
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 439p
Prospective Earnings per share (to December 1998)........... 20.8p
Prospective Earnings Multiple............................... 21.1x
</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, despite the recent setback 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.
4
<PAGE>
BRITISH PETROLEUM
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 862p
Prospective Earnings per share (to December 1998)........... 49.3p
Prospective Earnings Multiple............................... 17.5x
</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.
ALLIED DOMECQ
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 586p
Prospective Earnings per share (to August 1998)............. 39.6p
Prospective Earnings Multiple............................... 14.8x
</TABLE>
Allied Domecq is an international spirits company with several leading brands,
including Ballantine's and Canadian Club whiskies, Beefeater gin, Tia Maria and
Kahlua. It also is a liquor retailer through public houses and off-licenses and
owns the worldwide franchises to Dunkin' Donuts and Baskin-Robbins ice cream
parlors. We expect earnings to make steady progress as the management maximizes
the profitability of its brand portfolio.
SCHOLL
<TABLE>
<S> <C>
Market Price as at 03/31/98................................. 332p
Prospective Earnings per share (to December 1998)........... 20.7p
Prospective Earnings Multiple............................... 16.0x
</TABLE>
Scholl is a footwear and footcare group with a substantial European presence.
It is currently undergoing a major restructuring which will increase the
company's focus on exploiting the Scholl brand. It has recently expanded into
Latin America and is expected to show continued progress in developing its
overseas sales.
BARR (AG)
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 480p
Prospective Earnings per share (to January 1999)............ 41.7p
Prospective Earnings Multiple............................... 11.5x
</TABLE>
Barr (AG) is a manufacturer of branded soft drinks based in Scotland. It has
recently announced excellent results stemming from its investment in modern
manufacturing facilities in Cumbernauld. The fall in packaging prices and sugar,
two of its key import costs, have also helped profit margins to expand.
FINLAY (JAMES)
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 125p
Prospective Earnings per share (to December 1998)........... 10.7p
Prospective Earnings Multiple............................... 11.7x
</TABLE>
Finlay (James) is a major tea producer owning tea estates in Kenya and
Bangladesh. It also has a stake in a Ugandan tea estate and manages a group of
estates on behalf of the Sri Lankan government, which it has now agreed to
purchase. Finlay (James) also produces special teas, including instant tea and
packaged tea on an exclusive basis for Sainsbury (J), one of Britain's major
supermarket chains. Finlay (James) has benefited from the rise in tea prices and
is expected to show further strong profit growth over the next few years.
5
<PAGE>
JOHN MENZIES
<TABLE>
<S> <C>
Market Price as of 03/31/98................................. 490p
Prospective Earnings per share (to April 1999).............. 41.7p
Prospective Earnings Multiple............................... 11.8x
</TABLE>
John Menzies is a major wholesaler of books, newspapers, magazines, home
entertainment products and office supplies and also operates various retail
store chains. It has recently sold its retail business to its rival W.H. Smith
and is developing a high growth business in airport cargo logistics. We expect
the current revival in its share price to continue, reflecting the company's
strong growth potential.
6
<PAGE>
- ----------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF INVESTMENTS
MARCH 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------
<C> <S> <C>
INVESTMENTS IN UNITED KINGDOM SECURITIES--
97.9% OF NET ASSETS
COMMON STOCKS--97.9%
ALCOHOLIC BEVERAGES--3.9%
250,000 Allied Domecq plc Ord 25p......................... $ 2,451,181
270,000 Merrydown plc Ord 25p............................. 210,245
-----------
2,661,426
-----------
BANKING--16.3%
95,000 Abbey National plc Ord 10p........................ 1,840,626
150,000 Barclays plc Ord 100p............................. 4,496,274
200,000 National Westminster Bank plc Ord 100p............ 3,660,654
100,000 Royal Bank of Scotland Group plc Ord 25p.......... 1,554,020
-----------
11,551,574
-----------
BUILDING MATERIALS & MERCHANTS--6.3%
476,000 Cape plc Ord 25p.................................. 1,103,990
300,000 Johnston Group plc Ord 10p........................ 1,394,096
550,000 Norcros plc Ord 25p............................... 676,953
530,000 Universal Ceramic Materials plc Ord 5p............ 829,843
344,370 Vibroplant plc Ord 5p............................. 449,809
-----------
4,454,691
-----------
CHEMICALS--2.3%
35,000 Wolstenholme Rink plc Ord 25p..................... 366,317
325,000 Yorkshire Group plc Ord 25p....................... 1,292,574
-----------
1,658,891
-----------
DIVERSIFIED INDUSTRIALS--2.3%
200,000 Wardle Storeys plc Ord 10p........................ 1,624,352
-----------
ELECTRICITY--2.1%
255,000 National Grid Group plc Ord 10p................... 1,507,382
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT--6.4%
770,000 Alphameric plc Ord 2.5p*.......................... 460,973
315,000 Beales Hunter plc Ord 20p......................... 387,709
345,000 CML Microsystems plc Ord 5p....................... 1,117,914
240,000 General Electric Co. plc Ord 5p................... 1,900,995
150,000 Roxboro Group plc Ord 1p.......................... 624,203
-----------
4,491,794
-----------
ENGINEERING--GENERAL--3.3%
331,186 Ash & Lacy plc Ord 5p............................. 890,134
2,000,000 Beauford plc Ord 10p.............................. 452,139
250,000 Hall Engineering Holdings plc Ord 50p............. 958,703
-----------
2,300,976
-----------
ENGINEERING--VEHICLES--1.4%
250,000 LucasVarity plc Ord 25p........................... 1,011,034
-----------
FOOD PRODUCERS--8.1%
260,000 Barr (AG) plc Ord 25p............................. 2,089,888
200,000 CPL Aromas plc Ord 10p............................ 329,894
1,000,000 Finlay (James) plc Ord 25p........................ 2,084,865
237,500 Paramount Foods plc Ord 10p....................... 387,772
100,000 Sainsbury (J) plc Ord 25p......................... 859,483
-----------
5,751,902
-----------
HEALTHCARE--3.1%
400,000 Scholl plc Ord 5p................................. 2,223,856
-----------
<CAPTION>
- --------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------
<C> <S> <C>
LEISURE & HOTELS--1.8%
325,000 MacDonald Hotels plc Ord 5p....................... $ 1,265,362
-----------
OIL & GAS--11.1%
176,470 BG plc Ord 25p.................................... 916,096
226,974 British Petroleum plc Ord 25p..................... 3,276,362
200,000 Centrica plc Ord 5p*.............................. 376,783
450,000 Shell Transport & Trading plc Ord 25p (Regd.)..... 3,308,153
-----------
7,877,394
-----------
PHARMACEUTICALS--8.9%
150,000 Glaxo Wellcome plc Ord 25p........................ 4,036,599
41,000 SmithKline Beecham plc Ord 6.5p................... 518,369
40,000 Zeneca Group plc Ord 25p.......................... 1,724,158
-----------
6,279,126
-----------
RETAILERS--GENERAL--4.0%
106,250 Courts plc Ord 25p................................ 742,838
250,000 John Menzies plc Ord 25p.......................... 2,051,373
-----------
2,794,211
-----------
TELECOMMUNICATIONS--1.5%
100,000 British Telecommunications plc Ord 25p............ 1,088,484
-----------
TEXTILES & APPAREL--3.2%
350,000 French plc Ord 10p................................ 234,443
165,000 Shiloh plc Ord 25p................................ 250,058
1,550,000 Sirdar plc Ord 25p................................ 1,803,952
-----------
2,288,453
-----------
TOBACCO--2.5%
175,000 BAT Industries plc Ord 25p........................ 1,784,694
-----------
TRANSPORT--2.2%
150,000 British Airways plc Ord 25p....................... 1,525,970
-----------
WATER--7.2%
108,160 Anglian Water plc Ord 100p........................ 1,695,317
100,000 South West Water plc Ord 100p..................... 1,638,586
200,000 Wessex Water plc Ord 60p.......................... 1,736,550
-----------
5,070,453
-----------
TOTAL COMMON STOCKS
(cost $46,514,938).............................. 69,212,025
-----------
UNITED STATES SHORT-TERM INVESTMENT--
0.1% OF NET ASSETS
8,684 Federated Investors, Trust for Short-Term U.S.
Government Securities+--(cost $8,684)........... 8,684
-----------
Total Investments (cost $46,523,622)--98.0%....... 69,220,709
-----------
Cash and other assets in excess of
liabilities--2.0%............................... 1,441,818
-----------
NET ASSETS--100.0%................................ $70,662,527
-----------
-----------
NUMBER OF SHARES ISSUED AND OUTSTANDING........... 4,011,655
-----------
-----------
NET ASSET VALUE PER SHARE......................... $17.61
-----------
-----------
</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, 1998
- ----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $46,523,622)........................................ $ 69,220,709
Cash, at value (cost $1,246,914)................................................ 1,245,822
Dividends and interest receivable............................................... 493,759
United Kingdom withholding tax refund receivable................................ 111,279
------------
Total assets.............................................................. 71,071,569
------------
LIABILITIES
Payable for securities purchased................................................ 210,426
Investment management fee payable............................................... 43,398
Administration fee payable...................................................... 9,143
Accrued expenses................................................................ 146,075
------------
Total liabilities......................................................... 409,042
------------
NET ASSETS...................................................................... $ 70,662,527
------------
------------
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........................................... 362,941
Accumulated net realized gains on investments and pound sterling.............. 1,593,687
Net unrealized appreciation on investments and translation of other assets and
liabilities denominated in pound sterling.................................... 22,705,629
------------
Net assets.................................................................... $ 70,662,527
------------
------------
Net asset value per share
($70,662,527 DIVIDED BY 4,011,655 shares of common stock issued and
outstanding)................................................................. $17.61
------------
------------
</TABLE>
- ----------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
MARCH 31, 1998
- ----------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Income
Dividends..................................................................... $ 3,233,521
Interest...................................................................... 88,832
-----------
3,322,353
Less U.K. withholding tax..................................................... 443,237
-----------
Total income.............................................................. 2,879,116
-----------
Expenses
Investment management fee..................................................... 474,387
Administration fee............................................................ 98,385
Directors' fees and expenses.................................................. 87,330
Legal fee..................................................................... 71,555
Reports and notices to shareholders........................................... 66,970
Custodian's fees and expenses................................................. 44,530
Audit fee..................................................................... 37,610
Transfer agent's fees and expenses............................................ 30,725
NYSE listing fee.............................................................. 16,126
Miscellaneous expenses........................................................ 17,104
-----------
Total expenses............................................................ 944,722
-----------
Net investment income........................................................... 1,934,394
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND POUND
STERLING TRANSACTIONS
Net realized gain on:
Investments................................................................... 4,786,288
Pound sterling transactions................................................... 77,550
Net change in unrealized appreciation on:
Investments................................................................... 7,664,662
Pound sterling transactions................................................... (19,748)
-----------
Net gain on investments and pound sterling transactions......................... 12,508,752
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $14,443,146
-----------
-----------
</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,
--------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations
Net investment income................. $ 1,934,394 $ 1,437,437
Net realized gain on investments...... 4,786,288 8,484,000
Net realized gain on pound sterling
transactions......................... 77,550 384,938
Net change in unrealized appreciation
on investments and pound sterling
transactions......................... 7,644,914 2,273,395
-------------- ---------------
Net increase in net assets resulting
from operations...................... 14,443,146 12,579,770
-------------- ---------------
Dividends and distributions to
shareholders from
Net investment income ($0.434 and
$0.422 per share, respectively)...... (1,741,241) (1,691,006)
Net realized gains ($2.27 and $0.948
per share, respectively)............. (9,090,231) (3,804,962)
-------------- ---------------
Total dividends and distributions..... (10,831,472) (5,495,968)
-------------- ---------------
Total increase.......................... 3,611,674 7,083,802
NET ASSETS
Beginning of year..................... 67,050,853 59,967,051
-------------- ---------------
End of year (including undistributed
net investment income of $362,941 and
$169,788, respectively).............. $ 70,662,527 $ 67,050,853
-------------- ---------------
-------------- ---------------
</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 Ltd. (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 are
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 $77,550 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, 1998 was U.S. $1.67459
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 into 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
10
<PAGE>
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 and the Investment Advisory Agreements were approved
by shareholders at a special meeting held on February 25, 1998. Approval of the
agreements was necessary due to the acquisition of Mercury Asset Management
Group Ltd. ("MAM") by a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch") on December 22, 1997. MAM is the corporate parent of the
Investment Manager and the Investment Adviser. MAM is an indirect,
majority-owned subsidiary of Merrill Lynch.
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
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 Ltd.
NOTE 4. INVESTMENTS IN
SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at March 31,
1998 was $46,523,622.
At March 31, 1998, the net unrealized appreciation of investments on a tax
basis of $22,697,087 was composed of gross appreciation of $26,438,797 for those
investments having an excess of value over cost and gross depreciation of
$3,741,710 for those investments having an excess of cost over value.
For the year ended March 31, 1998 aggregate purchases and proceeds from the
sales of portfolio securities (excluding short-term securities) were $7,423,972
and $15,971,351, 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,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 16.71 $ 14.95 $ 13.18 $ 12.32 $ 10.84
----------- ----------- ---------- ---------- ----------
Operations:
Net investment income................. 0.48 0.36 0.50 0.40 0.17
Net realized and unrealized
gain/(loss) on investments and pound
sterling transactions................ 3.12 2.77 1.66 0.92 1.45
----------- ----------- ---------- ---------- ----------
Total from operations............... 3.60 3.13 2.16 1.32 1.62
Distributions to shareholders from:
Net investment income................. (0.43) (0.42) (0.38) (0.40) (0.14)
Net realized gains.................... (2.27) (0.95) (0.01) (0.06) --
----------- ----------- ---------- ---------- ----------
Total from distributions............ (2.70) (1.37) (0.39) (0.46) (0.14)
Net asset value, end of period.......... $ 17.61 $ 16.71 $ 14.95 $ 13.18 $ 12.32
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Per share market value, end of period... $ 15.56 $ 13.75 $ 12.00 $ 10.88 $ 10.50
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Total investment return, market
value*................................. 36.44% 26.54% 13.91% 7.93% 10.32%
Net assets at end of period (000
omitted)............................... $ 70,663 $ 67,051 $ 59,967 $ 52,883 $ 49,435
Ratios of operating expenses to average
net assets............................. 1.44% 1.53% 1.55% 1.47% 1.50%
Ratios of net investment income to
average net assets..................... 2.95% 2.22% 3.45% 3.15% 1.43%
Portfolio turnover rate................. 11.64% 32.58% 20.85% 19.73% 27.05%
Average commission rate per share (a)... $ 0.0070 $ 0.0155 -- -- --
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 9.93 $ 11.67 $ 10.38 $ 12.15 $ 10.94
---------- ---------- ---------- ---------- -----------
Operations:
Net investment income................. 0.26 0.40 0.38 0.36 0.25
Net realized and unrealized
gain/(loss) on investments and pound
sterling transactions................ 1.20** (1.31) 1.64 (1.53) 1.61
---------- ---------- ---------- ---------- -----------
Total from operations............... 1.46 (0.91) 2.02 (1.17) 1.86
Distributions to shareholders from:
Net investment income................. (0.14) (0.45) -- (0.35) (0.22)
Net realized gains.................... (0.41) (0.38) (0.73) (0.25) (0.43)
---------- ---------- ---------- ---------- -----------
Total from distributions............ (0.55) (0.83) (0.73) (0.60) (0.65)
Net asset value, end of period.......... $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Per share market value, end of period... $ 9.63 $ 9.13 $ 10.25 $ 8.75 $ 10.00
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Total investment return, market
value*................................. 11.45% (2.63)% 26.40% (7.40)% 20.68%
Net assets at end of period (000
omitted)............................... $ 43,467 $ 39,823 $ 46,775 $ 41,609 $ 48,707
Ratios of operating expenses to average
net assets............................. 1.78% 1.74% 2.19% 1.92% 1.89%
Ratios of net investment income to
average net assets..................... 2.43% 3.73% 3.34% 3.06% 4.10%
Portfolio turnover rate................. 45.54% 47.30% 36.37% 22.07% 40.91%
Average commission rate per share (a)... -- -- -- -- --
</TABLE>
- ------------------------
* Total investment return, market value, is based on the change in market
price of a share during the period and assumes reinvestment of dividends and
distributions at actual prices pursuant to the Fund's Dividend Reinvestment
Plan. Total investment return does not reflect brokerage commissions.
**Reflects a reduction of $0.01 in offering costs previously charged to paid in
capital.
(a) 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, 1998, 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 ten years 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 highlights. Our procedures included confirmation of
securities owned as of March 31, 1998 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, 1998, 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.
/s/ Ernst & Young LLP
New York, New York
May 11, 1998
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, 1998) 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>
LONG-TERM
CAPITAL GAINS
------------------------ APPLICABLE TOTAL
ORDINARY 28 PERCENT 20 PERCENT FOREIGN REPORTABLE
DATES INCOME RATE GAINS RATE GAINS TAXES DIVIDEND
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
JUNE 1997.. $ 0.40 $ 1.21 -- $ 0.05 $ 1.66
DECEMBER
1997...... 0.39 0.17 $ 0.53 0.06 1.15
----------- ----------- ----------- ----------- -----------
TOTAL... $ 0.79 $ 1.38 $ 0.53 $ 0.11 $ 2.81
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The Fund earned $593,440 of income from United Kingdom sources in the last
quarter of the fiscal year 1998 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 1998 Form 1099-DIV which should be mailed in
January, 1999. 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 as a credit rather than to
take a deduction. The amount allowable as a credit is subject to the general
limitations on tax credits imposed by Sections 904 of the U.S. Internal Revenue
Code. The Fund did not earn any dividend income that qualifies for the dividends
received deduction that is available to corporate shareholders.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of the actual dividends made by the Fund. They will generally not be
entitled to a U.S. foreign tax credit or deduction for the withholding taxes
paid by the Fund.
Generally, dividends received by tax-exempt recipients (e.g., IRA's and
Keoghs) need not be reported as taxable income for U.S. federal income tax
purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7)
plans) may need this information for their annual information reporting.
All shareholders are advised to consult their own tax advisers with respect to
the tax consequences of their investment in the Fund.
-----------------------------------------------
THE UNITED KINGDOM FUND INC.
RESULTS OF SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
-----------------------------------------------
On February 25, 1998, a special meeting of shareholders of the Fund was held
and the following matters were voted upon:
(1) To approve a new investment management agreement between the Fund and
Mercury Asset Management International Channel Islands Ltd., the Fund's
investment manager.
<TABLE>
<CAPTION>
VOTES
VOTES FOR AGAINST VOTES WITHHELD NON-VOTES
- ---------- ------------ --------------- ----------
<S> <C> <C> <C>
2,098,970 519,776 13,091 1,379,818
</TABLE>
(2) To approve a new investment advisory agreement between Mercury Asset
Management International Channel Islands Ltd., and Mercury Asset Management
International Ltd., the Fund's investment adviser.
<TABLE>
<CAPTION>
VOTES
VOTES FOR AGAINST VOTES WITHHELD NON-VOTES
- ---------- ------------ --------------- ----------
<S> <C> <C> <C>
2,094,610 522,076 15,151 1,379,818
</TABLE>
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. The Plan Agent serves as agent for the shareholders in administering the
Plan. If the directors of the Fund declare a dividend, participants in the Plan
will receive the equivalent in stock in the Fund valued at the lower of market
price or net asset value as determined on the record date for that dividend.
Whenever the 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
15
<PAGE>
for individual accounts through the Plan are expected to be less than the usual
brokerage charges for these transactions 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, market data, shareholder inquiries and requests for
Fund reports, please call (212) 272-2323.)
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," and are also available on REUTERS under the designation "MAMINDEX".
Shareholders interested in receiving the quarterly newsletter entitled "Closed
End Fund Focus" should call 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
A 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, 1998
