<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, 1999, the end of the period under review, the
Fund had net assets of $62.4 million. This represents a net asset value per
share of $16.11, a rise of 11.07% per annum from its initial value after taking
into account underwriting discounts, commissions, offering expenses and assuming
reinvestment of dividends and distributions. This compares with an 11.93%
increase in the FTSE All-Share Index over the same time period. At the end of
the period under review, the Fund was quoted at $14.8125 per share on the New
York Stock Exchange, which represents an 8.05% discount to the Fund's net asset
value per share and a return of 9.82% per annum from its initial value, assuming
reinvestment of dividends and distributions.
We also enclose an investment review and United Kingdom market outlook
together with a summary of the major portfolio investments.
At the Special Meeting of Stockholders held on April 14, 1999, the
Stockholders of the Fund approved the liquidation and dissolution of the Fund
pursuant to the Plan of Liquidation and Dissolution previously approved by the
Board of Directors. The proposal to liquidate and dissolve the Fund received the
favorable vote of approximately 60% of the Fund's outstanding shares.
Approximately 4% of the outstanding shares were cast against dissolving the
Fund. As a result, it was determined that the Fund should commence its
liquidation. At the close of business on April 26, 1999, the Fund ceased trading
on the New York Stock Exchange and the interests of holders in the net assets of
the Fund as of that date will remain fixed and no further investments will be
made pursuant to the Fund's Amended Dividend Reinvestment and Cash Purchase
Plan. Stockholders of record at the close of business on April 26, 1999, will be
entitled to receive the Fund's future distributions. Absent any unanticipated
delays, the Fund expects to make its first partial liquidating distribution in
June, 1999 and to complete its liquidating distributions before the end of the
year. If you have any questions, please contact our Transfer Agent and
Registrar, The Bank of New York, at (800) 432-8224.
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 1999, your Fund experienced a rise in net asset
value of 5.36%, which compared with an increase of 5.92% in the value of the
FTSE All-Share Index. For the fiscal year ending March 31, 1999, the Fund
experienced an increase in net asset value of 3.09%, compared to an increase of
3.46% in the FTSE All-Share Index. These results are recorded in total return
and U.S. dollar based terms, with net dividends and distributions reinvested.
During the quarter, the equity market made good progress with a return of 9.1%
in Sterling terms. Equities were encouraged by declining interest rates and the
increasing likelihood of the U.K economy avoiding a recession.
At the beginning of the quarter, the announcement of Vodafone Group's merger
discussions with Airtouch Communications Inc. propelled the telecommunications
sector to new highs. A cut in interest rates to 6% and continued strength from
Wall Street also reinforced the bullish tone. Interest rates were cut further in
February to 5.5%, boosting sentiment across a range of industrial sectors.
Despite frequent profit-warnings from manufacturing companies, the mood of the
market remained optimistic, aided by a steady flow of take-over and merger
announcements.
The best performing sectors were engineering, vehicles, extractive industries,
media and construction as investors began to favor cyclical stocks with exposure
to the domestic economy. Banks also performed well on the prospect of lower bad
debt provisions if the U.K. economy avoided a recession. The oil sector made
progress after the crude oil price strengthened following the OPEC production
cuts.
The worst performing sectors were the defensive areas that had performed well
last year by virtue of their predictable earnings. Utilities, food producers,
food retailers and life assurance stocks all significantly underperformed.
ECONOMIC & MARKET OUTLOOK
The U.K. equity market along with global equity markets has recovered strongly
from the depressed levels of last summer. Liquidity pressures have eased with
the lowering of U.S. interest rates and similar cuts in the U.K. As the
likelihood of further country defaults has diminished, investors have remained
keen to add to their equity weightings rather than invest in bonds at current
low yields. Furthermore, global investors are now searching for value in the
Asia Pacific region and other emerging markets as world growth forecasts are
beginning to be increased.
The U.K. economy is currently showing very slight growth following the
reductions in interest rates. Consumer confidence, however, has picked up
sharply with the housing construction business enjoying favorable selling
conditions and retailers reporting better than expected sales. Manufacturing
companies are also more optimistic, as the world economy begins to improve.
Although price deflation remains a problem in many industries, the impact is
reduced if volumes now begin to rise. Cost cutting will remain in evidence and
we expect further mergers and take-overs as companies seek pan-European and
global scale. Examples of this are BP Amoco's merger with Atlantic Richfield and
Kingfisher's merger with Asda Group. In both cases there will be significant
cost reduction benefits.
The heavy stream of corporate profit downgrades has probably run its course,
with companies generally announcing results in line with expectations.
Individual companies may continue to disappoint investors, but we do anticipate
some upward revisions to forecasts in several of the more economy-sensitive
sectors. Overall, we expect corporate earnings growth to be modest in 1999.
However, the abolition of ACT may lead to dramatic changes in the way companies
return value to their shareholders. Companies such as Greenalls Group, Scapa
Group and Inchcape have declared very sizeable special dividends from the
disposal proceeds of some of their key activities. Dividend flows will become
more closely linked to the cash requirements of the underlying businesses.
Companies will remain reluctant to issue equity and we expect to see a gradual
revival of the corporate bond market as companies increase their balance sheet
efficiency and reduce their cost of capital with higher levels of borrowing.
Although U.K. equity ratings are high, there remains a steady flow of new
money to be invested in the market. Special dividends and cash take-over bids
will also strengthen the liquidity case for further progress especially as
interest rates continue to edge downwards. We believe the market will remain
volatile and may be prone to substantial rotational shifts as investors search
for value in the more cyclical sectors. Although index-tracking funds will
continue to support the highly-rated large market capitalization stocks, active
managers are increasingly likely to turn their attention towards mid-cap and
smaller companies, where they may find better value.
2
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
- --------------------------------------------------------------------------------
The main emphasis during the period was on increasing the telecommunications
sector weighting where we purchased Cable & Wireless and Telewest
Communications. We added to the holding in Ash & Lacy in anticipation of an
improvement in sentiment towards the engineering sector.
We reduced the holdings in BP Amoco and Shell Transport & Trading on
expectations of a weaker oil price and also reduced Glaxo Wellcome after a
period of outperformance. We sold part of the holding of LucasVarity and
accepted the cash offer from TRW Inc. for the remainder.
During the quarter, the Fund repurchased and retired 90,000 shares of its
outstanding common stock.
The Fund's ten largest equity holdings as at March 31, 1999 were:
NATIONAL WESTMINSTER BANK
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 1428p
Prospective Earnings per share (to December 1999)........... 82.9p
Prospective Earnings Multiple............................... 17.2x
</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 through the establishment of new processing centers. It has
recently reorganized its remaining investment banking activities, having sold
its securities operation to Bankers Trust. The release of capital from this sale
leaves scope for a share buyback, which could significantly improve the return
on equity. Profits are expected to continue their steady growth helped by low
bad debts and increasing fee income. National Westminster Bank is a likely
participant in any consolidation of the U.K. banking sector.
GLAXO WELLCOME
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 2076p
Prospective Earnings per share (to December 1999)........... 56.3p
Prospective Earnings Multiple............................... 36.9x
</TABLE>
Glaxo Wellcome is the second largest stock in the U.K. equity market. It is
one of the world's major pharmaceuticals companies, with leading drugs in many
therapeutic areas. Two of its previous best-selling drugs, Zantac and Zovirax
continue to decline following the expiration of their U.S. patents, but sales
growth in the respiratory, HIV and central nervous system therapy areas remains
strong. Although highly rated, Glaxo Wellcome is expected to show continued
steady earnings growth.
BARCLAYS
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 1781p
Prospective Earnings per share (to December 1999)........... 110.4p
Prospective Earnings Multiple............................... 16.1x
</TABLE>
Barclays has shown a strong recovery in banking profits, following a reduction
in bad debts and has been successful 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 accompanying staff reductions. Barclays has sought to increase its return on
capital and we expect a continued focus on improving shareholder value.
3
<PAGE>
BRITISH TELECOMMUNICATIONS
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 1011p
Prospective Earnings per share (to March 2000).............. 36.1p
Prospective Earnings Multiple............................... 38.7x
</TABLE>
British Telecommunications ("BT") is the leading fixed line telecommunications
company in the U.K. It also has a number of European joint venture interests and
is currently making further investments in Spain and Japan to increase its
global reach. BT also has a stake in Cellnet Data Systems Inc., the second
largest mobile telephone company in the U.K., as well as valuable investments in
Syntegra and Yellow Pages. Although the shares have had a significant re-rating,
we believe BT remains an attractive growth stock.
BP AMOCO
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 1048p
Prospective Earnings per share (to December 1999)........... 33.0p
Prospective Earnings Multiple............................... 31.8x
</TABLE>
BP Amoco is a leading international oil company with a substantial exploration
and production profile, which was formed by the merger of British Petroleum with
Amoco. The merged group is the largest company in the U.K. market and ranks
alongside Exxon Corp in terms of reserves and capital employed. Amoco was the
market leader in gas production in the U.S. and the combined company is a major
force in gasoline retailing and chemicals. BP Amoco is currently acquiring
Atlantic Richfield to gain further benefits of scale. We expect steady dividend
progression based on the strong cashflow and a recovering crude oil price.
SHELL TRANSPORT & TRADING
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 416p
Prospective Earnings per share (to December 1999)........... 15.2p
Prospective Earnings Multiple............................... 27.4x
</TABLE>
Shell Transport & Trading is a leading oil company with substantial
production, refining and petrochemical activities. Profits in 1999 should be
helped by the recovering oil price. Shell Transport & Trading has recently
announced that it will be cutting refinery capacity and focusing on the low cost
oil fields of the Middle East. It continues to dispose of chemical businesses
and has significantly curtailed capital expenditure. We continue to expect
steady dividend progression for at least the next two years.
GENERAL ELECTRIC CO.
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 558p
Prospective Earnings per share (to March 2000).............. 28.1p
Prospective Earnings Multiple............................... 19.9x
</TABLE>
General Electric Co. ("GEC") is the U.K.'s leading electronics and electrical
systems company. GEC has recently agreed to the merger of Marconi, its defense
electronics business, with British Aerospace. GEC shareholders will receive
shares in the enlarged British Aerospace. GEC will become a focused
communications and technology company and has recently acquired Reltec
Corporation, a U.S. telecommunications company. It is expected to use its strong
balance sheet to fund further growth opportunities.
ZENECA GROUP
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 2928p
Prospective Earnings per share (to December 1999)........... 89.1p
Prospective Earnings Multiple............................... 32.9x
</TABLE>
Zeneca Group has subsequently merged with Astra Ab of Sweden to form
AstraZeneca. The group is expected to overcome the imminent expiration of patent
protection on its key anti-ulcer drug Losec with its successor drug, Perprazole
and its strong portfolio of respiratory and cardiovascular drugs. We expect
strong growth over the next few years from the newer products.
4
<PAGE>
ALLIED DOMECQ
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 461p
Prospective Earnings per share (to March 1999).............. 40.5p
Prospective Earnings Multiple............................... 11.4x
</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 its public houses and off-licenses
and owns the franchises to Dunkin' Donuts and Baskin-Robbins ice cream parlors.
We expect earnings to make steady progress and the management maximizes the
profitability of its brand portfolio. It has recently agreed to the sale of
Cantrell and Cochrane for $850 million and may look to dispose of other non-core
assets.
NATIONAL GRID GROUP
<TABLE>
<S> <C>
Market Price as at 03/31/99................................. 451p
Prospective Earnings per share (to March 2000).............. 23.7p
Prospective Earnings Multiple............................... 19.0x
</TABLE>
The National Grid Group is the monopoly owner of the electricity transmission
network in England and Wales between the generators, regional distribution
networks and industrial customers. It has recently agreed to purchase New
England Electric Systems, an electricity transmission and distribution business
based in Massachusetts, and plans to make further U.S. acquisitions. It also
owns a stake in Energis, a long distance telecommunications company. Energis is
growing rapidly in business telecommunications especially following the
acquisition of Planet Online, formerly the U.K.'s largest independent internet
service provider.
The Fund's and the FTSE All-Share Index's sector weightings expressed as a
percentage of total equities held at March 31, 1999 are outlined below:
<TABLE>
<CAPTION>
% OF
FTSE
% OF ALL-
U.K. SHARE
FUND INDEX
------ ------
<S> <C> <C>
Mineral Extraction.......................................... 8.8 10.9
General Industrials......................................... 18.1 8.9
Consumer Goods.............................................. 28.3 17.5
Services.................................................... 6.3 30.9
Utilities................................................... 19.3 4.7
Finance..................................................... 19.2 24.5
Investment Trusts........................................... 0.0 2.6
</TABLE>
YEAR 2000 COMPLIANCE DISCLOSURE
Many computer systems and other electronically controlled equipment used by
companies and other business organizations throughout the world express dates
using only the last two digits of the year, and thus will require modification
or replacement to accommodate the Year 2000 and beyond in order to avoid
malfunctions and consequential widespread commercial disruption.
The Fund anticipates being fully liquidated and dissolved before the Year
2000. See the Letter to Shareholders section of this report.
5
<PAGE>
- -----------------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF INVESTMENTS
MARCH 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------
<C> <S> <C>
INVESTMENTS IN UNITED KINGDOM SECURITIES--
98.1% OF NET ASSETS
COMMON STOCKS--98.1%
ALCOHOLIC BEVERAGES--3.2%
250,000 Allied Domecq plc Ord 25p......................... $ 1,860,492
437,299 Merrydown plc Ord 25p*............................ 183,543
-----------
2,044,035
-----------
BANKS, RETAIL--18.8%
60,000 Abbey National plc Ord 10p........................ 1,233,979
150,000 Barclays plc Ord 100p............................. 4,312,629
200,000 National Westminster Bank plc Ord 100p............ 4,610,469
75,000 Royal Bank of Scotland Group plc Ord 25p.......... 1,632,067
-----------
11,789,144
-----------
BUILDING MATERIALS & MERCHANTS--3.6%
285,000 Johnston Group plc Ord 10p........................ 1,483,753
550,000 Norcros plc Ord 25p............................... 745,811
-----------
2,229,564
-----------
CHEMICALS--2.5%
530,000 UCM Group plc Ord 5p.............................. 697,301
35,000 Wolstenholme Rink plc Ord 25p..................... 242,954
337,500 Yorkshire Group plc Ord 25p....................... 621,106
-----------
1,561,361
-----------
CONSTRUCTION--0.5%
344,370 Vibroplant plc Ord 5p............................. 283,519
-----------
DISTRIBUTORS--2.0%
250,000 John Menzies plc Ord 25p.......................... 1,263,198
-----------
DIVERSIFIED INDUSTRIALS--2.2%
200,000 Wardle Storeys plc Ord 10p........................ 1,359,249
-----------
ELECTRICITY--3.0%
255,000 National Grid Group plc Ord 10p................... 1,859,625
-----------
ELECTRONICS & ELECTRICAL EQUIPMENT--4.9%
370,000 CML Microsystems plc Ord 5p....................... 498,741
235,200 General Electric Co. plc Ord 5p................... 2,120,545
100,000 Roxboro Group plc Ord 1p.......................... 439,900
-----------
3,059,186
-----------
ENGINEERING-GENERAL--3.2%
781,186 Ash & Lacy plc Ord 5p............................. 1,506,986
233,333 Vickers plc Ord 50p............................... 502,858
-----------
2,009,844
-----------
ENGINEERING-VEHICLES--0.9%
120,000 LucasVarity plc Ord 25p........................... 555,968
-----------
FOOD PRODUCERS--5.0%
250,000 Barr (AG) plc Ord 25p............................. 1,785,830
200,000 CPL Aromas plc Ord 10p............................ 226,003
1,000,000 Finlay (James) plc Ord 25p........................ 1,130,017
-----------
3,141,850
-----------
GAS DISTRIBUTION--2.2%
176,470 BG plc Ord 25p.................................... 1,036,953
200,000 Centrica plc Ord 5p*.............................. 351,920
-----------
1,388,873
-----------
<CAPTION>
- --------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------
<C> <S> <C>
HOUSEHOLD GOODS & TEXTILES--3.1%
350,000 French plc Ord 10p*............................... $ 138,427
165,000 Shiloh plc Ord 25p................................ 375,569
1,550,000 Sirdar plc Ord 25p................................ 1,438,754
-----------
1,952,750
-----------
LEISURE & HOTELS--1.3%
275,000 MacDonald Hotels plc Ord 5p....................... 792,424
-----------
OIL, INTEGRATED--8.7%
190,000 BP Amoco plc Ord 25p.............................. 3,215,948
325,000 Shell Transport & Trading plc Ord 25p (Regd.)..... 2,186,482
-----------
5,402,430
-----------
PHARMACEUTICALS--13.1%
135,000 Glaxo Wellcome plc Ord 25p........................ 4,524,265
125,000 SmithKline Beecham plc Ord 6.5p................... 1,802,983
40,000 Zeneca Group plc Ord 25p.......................... 1,890,680
-----------
8,217,928
-----------
RETAILERS-GENERAL--0.9%
106,250 Courts plc Ord 25p................................ 536,001
-----------
SUPPORT SERVICES--2.4%
450,000 Alpha Airports Group plc Ord 10p.................. 454,025
950,000 Alphameric plc Ord 2.5p*.......................... 1,027,508
-----------
1,481,533
-----------
TELECOMMUNICATIONS--10.0%
200,000 British Telecommunications plc Ord 25p............ 3,264,135
69,000 Cable and Wireless plc............................ 862,138
61,000 Telewest Communications plc Ord 10p*.............. 264,646
100,000 Vodafone Group plc Ord 5p......................... 1,858,071
-----------
6,248,990
-----------
TOBACCO--1.2%
87,500 British American Tobacco plc Ord 25p.............. 728,861
-----------
TRANSPORT--1.7%
150,000 British Airways plc Ord 25p....................... 1,040,019
-----------
WATER--3.7%
93,333 Anglian Water plc Ord 100p........................ 1,145,837
75,000 Pennon Group plc Ord 100p......................... 1,155,039
-----------
2,300,876
-----------
TOTAL COMMON STOCKS
(cost $43,553,682).............................. 61,247,228
-----------
UNITED STATES SHORT-TERM INVESTMENT--
0.8% OF NET ASSETS
475,210 Federated Investors, Trust for Short-Term U.S.
Government Securities+--(cost $475,210)......... 475,210
-----------
Total Investments (cost $44,028,892)--98.9%....... 61,722,438
-----------
Cash and other assets in excess of
liabilities--1.1%............................... 656,677
-----------
NET ASSETS--100.0%................................ $62,379,115
-----------
-----------
NUMBER OF SHARES ISSUED AND OUTSTANDING........... 3,871,655
-----------
-----------
NET ASSET VALUE PER SHARE......................... $16.11
-----------
-----------
</TABLE>
- ------------------
* Non-income producing securities.
+ Money market fund.
6
<PAGE>
- -----------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF
ASSETS AND LIABILITIES
MARCH 31, 1999
- ----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $44,028,892)........................................ $ 61,722,438
Cash, at value (cost $309,859).................................................. 306,769
Dividends and interest receivable............................................... 578,618
Receivable for securities sold.................................................. 54,374
United Kingdom withholding tax refund receivable................................ 17,985
Other assets.................................................................... 14,840
-------------
Total assets.............................................................. 62,695,024
-------------
LIABILITIES
Investment management fee payable............................................... 38,835
Administration fee payable...................................................... 8,231
Accrued expenses................................................................ 268,843
-------------
Total liabilities......................................................... 315,909
-------------
NET ASSETS...................................................................... $ 62,379,115
-------------
-------------
Net assets consist of:
Common stock, $0.01 par value (Authorized 15,000,000 shares).................. $ 38,717
Paid-in-surplus............................................................... 43,969,478
Accumulated net realized gains on investments and pound sterling.............. 681,500
Net unrealized appreciation on investments and translation of other assets and
liabilities denominated in pound sterling.................................... 17,689,420
-------------
Net assets.................................................................... $ 62,379,115
-------------
-------------
Net asset value per share
($62,379,115 DIVIDED BY 3,871,655 shares of common stock issued and
outstanding)................................................................. $16.11
-------------
-------------
</TABLE>
- ----------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
MARCH 31, 1999
- ----------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Income
Dividends..................................................................... $ 2,706,553
Interest...................................................................... 177,110
------------
2,883,663
Less U.K. withholding tax..................................................... 358,603
------------
Total income................................................................ 2,525,060
------------
Expenses
Legal fee..................................................................... 601,960
Investment management fee..................................................... 488,563
Directors' fees and expenses.................................................. 115,470
Reports and notices to shareholders........................................... 112,250
Administration fee............................................................ 97,713
Audit fee..................................................................... 46,610
Miscellaneous expenses........................................................ 45,810
Custodian's fees and expenses................................................. 44,530
Transfer agent's fees and expenses............................................ 29,325
NYSE listing fee.............................................................. 16,126
Insurance fee................................................................. 5,314
------------
Total expenses............................................................ 1,603,671
------------
Net investment income........................................................... 921,389
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND POUND STERLING TRANSACTIONS
Net realized gain/(loss) on:
Investments................................................................... 4,990,104
Pound sterling transactions................................................... (65,259)
Net change in unrealized appreciation on:
Investments................................................................... (5,003,541)
Pound sterling transactions................................................... (12,668)
------------
Net loss on investments and pound sterling transactions......................... (91,364)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $ 830,025
------------
------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- -----------------------------------------------------------
THE UNITED KINGDOM FUND INC.
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
Operations
Net investment income................. $ 921,389 $ 1,934,394
Net realized gain on investments...... 4,990,104 4,786,288
Net realized gain/(loss) on pound
sterling transactions................ (65,259) 77,550
Net change in unrealized appreciation
on investments and pound sterling
transactions......................... (5,016,209) 7,644,914
-------------- --------------
Net increase in net assets resulting
from operations...................... 830,025 14,443,146
-------------- --------------
Dividends and distributions to
shareholders from
Net investment income ($0.320 and
$0.434 per share, respectively)...... (1,284,330) (1,741,241)
Net realized gains ($1.470 and $2.27
per share, respectively)............. (5,837,032) (9,090,231)
-------------- --------------
Total dividends and distributions..... (7,121,362) (10,831,472)
-------------- --------------
CAPITAL STOCK TRANSACTIONS
Cost of shares repurchased (Note 7)... (1,992,075) --
-------------- --------------
Total increase/(decrease)............... (8,283,412) 3,611,674
NET ASSETS
Beginning of year..................... 70,662,527 67,050,853
-------------- --------------
End of year........................... $ 62,379,115 $ 70,662,527*
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------
* Includes undistributed net investment income of $362,941.
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
8
<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 losses of $65,259 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, 1999 was U.S. $1.6112 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
9
<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. LIQUIDATION
At a meeting on November 24, 1998, the Fund's Board of Directors announced their
decision to pursue a formal plan of liquidation and dissolution of the Fund. The
Board's vote followed a special meeting of stockholders of the Fund held on
September 15, 1998 at which the Fund's Board of Directors announced its decision
to undertake one of the following three options: merging with an open-end fund,
open-ending, or liquidating. The Plan of Liquidation and Dissolution was
presented to stockholders for their consideration at a special meeting held on
April 14, 1999. The stockholders approved the Plan of Liquidation and
Dissolution. Further details of the special meeting of shareholders are
presented in the Letter to Shareholders section of this report.
On April 26, 1999, the Fund's shares were de-listed from the New York Stock
Exchange. The Fund anticipates that it will be able to make a substantial
distribution of its assets to stockholders (reserving a portion to cover
outstanding and anticipated liabilities and other contingencies) within six to
eight weeks following such vote, and de-register as an investment company under
the Investment Company Act of 1940, as amended thereafter.
NOTE 3. 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 4. 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 5. INVESTMENTS IN
SECURITIES
For U.S. federal income tax
purposes, the cost of securities owned at March 31, 1999 was $44,028,892.
At March 31, 1999, the net unrealized appreciation of investments on a tax
basis of $17,693,546 was composed of gross appreciation of $23,340,866 for those
investments having an excess of value over cost and gross depreciation of
$5,647,320 for those investments having an excess of cost over value.
For the year ended March 31, 1999 aggregate purchases and proceeds from the
sales of portfolio securities (excluding short-term securities) were $8,843,250
and $16,784,776, respectively.
NOTE 6. 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.
NOTE 7. CAPITAL STOCK TRANSACTIONS
On September 15, 1998, the Board of Directors announced that it had given the
Fund's Investment Adviser discretion to cause the Fund to repurchase its
outstanding shares depending on market conditions. During the year ended March
31, 1999, the Fund repurchased and retired 3.5% or 140,000 of its outstanding
shares.
10
<PAGE>
- --------------------------------------------------------------------------------
THE UNITED KINGDOM FUND INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CONTAINED BELOW IS PER SHARE OPERATING PERFORMANCE DATA FOR A SHARE OF COMMON
STOCK OUTSTANDING, TOTAL INVESTMENT RETURN, RATIOS TO AVERAGE NET ASSETS AND
OTHER SUPPLEMENTAL DATA FOR EACH PERIOD INDICATED. THIS INFORMATION HAS BEEN
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS AND MARKET PRICE
DATA FOR THE FUND'S SHARES.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $ 17.61 $ 16.71 $ 14.95 $ 13.18 $ 12.32
----------- ----------- ---------- ---------- ----------
Operations
Net investment income................. 0.23* 0.48 0.36 0.50 0.40
Net realized and unrealized
gain/(loss) on investments and pound
sterling transactions................ 0.06* 3.12 2.77 1.66 0.92
----------- ----------- ---------- ---------- ----------
Total from operations............... 0.29* 3.60 3.13 2.16 1.32
Distributions to shareholders from
Net investment income................. (0.32) (0.43) (0.42) (0.38) (0.40)
Net realized gains.................... (1.47) (2.27) (0.95) (0.01) (0.06)
----------- ----------- ---------- ---------- ----------
Total from distributions............ (1.79) (2.70) (1.37) (0.39) (0.46)
Net asset value, end of year............ $ 16.11 $ 17.61 $ 16.71 $ 14.95 $ 13.18
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Per share market value, end of year..... $ 14.81 $ 15.56 $ 13.75 $ 12.00 $ 10.88
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Total investment return, market
value***............................... 7.26% 36.44% 26.54% 13.91% 7.93%
Net assets at end of year (000
omitted)............................... $ 62,379 $ 70,663 $ 67,051 $ 59,967 $ 52,883
Ratios of operating expenses to average
net assets............................. 2.46% 1.44% 1.53% 1.55% 1.47%
Ratios of net investment income to
average net assets..................... 1.41% 2.95% 2.22% 3.45% 3.15%
Portfolio turnover rate................. 14.29% 11.64% 32.58% 20.85% 19.73%
<CAPTION>
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $ 10.84 $ 9.93 $ 11.67 $ 10.38 $ 12.15
---------- ---------- ---------- ---------- -----------
Operations
Net investment income................. 0.17 0.26 0.40 0.38 0.36
Net realized and unrealized
gain/(loss) on investments and pound
sterling transactions................ 1.45 1.20** (1.31) 1.64 (1.53)
---------- ---------- ---------- ---------- -----------
Total from operations............... 1.62 1.46 (0.91) 2.02 (1.17)
Distributions to shareholders from
Net investment income................. (0.14) (0.14) (0.45) -- (0.35)
Net realized gains.................... -- (0.41) (0.38) (0.73) (0.25)
---------- ---------- ---------- ---------- -----------
Total from distributions............ (0.14) (0.55) (0.83) (0.73) (0.60)
Net asset value, end of year............ $ 12.32 $ 10.84 $ 9.93 $ 11.67 $ 10.38
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Per share market value, end of year..... $ 10.50 $ 9.63 $ 9.13 $ 10.25 $ 8.75
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Total investment return, market
value***............................... 10.32% 11.45% (2.63)% 26.40% (7.40)%
Net assets at end of year (000
omitted)............................... $ 49,435 $ 43,467 $ 39,823 $ 46,775 $ 41,609
Ratios of operating expenses to average
net assets............................. 1.50% 1.78% 1.74% 2.19% 1.92%
Ratios of net investment income to
average net assets..................... 1.43% 2.43% 3.73% 3.34% 3.06%
Portfolio turnover rate................. 27.05% 45.54% 47.30% 36.37% 22.07%
</TABLE>
- ------------------------
* Based on weighted average shares outstanding.
** Reflects a reduction of $0.01 in offering costs previously charged to paid
in capital.
*** 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.
11
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders and
Board of Directors of
The United Kingdom Fund Inc.
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of The United Kingdom Fund Inc. as of
March 31, 1999, 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, 1999 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, 1999, 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 6, 1999
12
<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, 1999) 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 20 PERCENT FOREIGN REPORTABLE
DATES INCOME RATE GAINS TAXES DIVIDEND
- --------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
JUNE 1998............ $ 0.21 $ 0.39 $ 0.07 $ 0.67
DECEMBER 1998........ 0.26 $ 0.93 0.06 1.25
----------- ----------- ----------- -----------
TOTAL............ $ 0.47 $ 1.32 $ 0.13 $ 1.92
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The Fund earned $193,563 of income from United Kingdom sources in the last
quarter of the fiscal year 1999 of which it paid $0.01 per share in United
Kingdom withholding taxes. The Fund intends to give the benefit of the $0.01 per
share in foreign tax as a credit to its shareholders. The amounts disclosed in
the table were reported to shareholders in their 1998 Form 1099-DIV.
Accordingly, shareholders who must report their dividend in a U.S. federal
income tax return are 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.
13
<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. MAGUIRE, Assistant Secretary
* Member of the Audit Committee
ADDITIONAL INFORMATION
This report 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.
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 US
dollar/pound sterling exchange rate.
<PAGE>
- -------------------------------------------
EXECUTIVE OFFICES
575 Lexington Avenue
9th Floor
New York, New York 10022
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.
575 Lexington Avenue
New York, New York 10022
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
[LOGO]
THE UNITED KINGDOM FUND INC.
ANNUAL REPORT
MARCH 31, 1999
