<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Semi-Annual Report of The Europe Fund,
Inc. On June 30, 1996, the end of the period under review, the Fund's net assets
totalled $170.7 million. This represents a net asset value per share of $16.96,
a rise of 86.31% from its initial value after taking into account underwriting
discounts, commissions, offering expenses and distributions. This compares with
an 82.65% increase in the MSCI Europe Index over the same time period. At the
end of the period under review, The Europe Fund, Inc. was quoted at $14.25 per
share on the New York Stock Exchange, which represents a 15.98% discount to the
Fund's net asset value per share.
We also enclose an investment review and European market outlook together with
a summary of the major portfolio investments.
Yours sincerely,
(SIGNATURE) (SIGNATURE)
Anthony M. Solomon J. Loughlin Callahan
Chairman of the Board President
<PAGE>
INVESTMENT REVIEW
During the second quarter of 1996, your Fund experienced an increase in net
asset value of 6.80%, which compared with an increase of 2.62% in the value of
the MSCI Europe Index. These results are recorded in total return and dollar
based terms.
Markets in general were buoyant. The most significant political event that
took place was in Italy, where the election of a pragmatic left of center
alliance by a clear majority triggered bond yields to fall in excess of 130
basis points, the Lire to appreciate against the DM by over 4% and the equity
market to rise by 13%. The depressed economic background in Europe was little
changed from the first quarter, with weak consumer confidence indicators.
Against this background and with inflation remaining low, short-term interest
rates were cut again, led by the German discount rate cut. Financial sectors
underperformed, with both the banks and insurers lagging the market. Cyclicals
also underperformed, particularly the metals sector, which was undermined by
falling commodity prices. Among the sectors which produced the best returns were
utilities, retail and business services. Utilities were helped by a strong
performance in Italy, which led the market rise. In retail, corporate activity
in France and Germany boosted return. Business services have been performing
strongly in recognition of the growth available from outsourcing in Europe.
The performance of MSCI Indices for several European markets is listed below:
<TABLE>
<CAPTION>
MSCI MARKETS (RATES OF RETURN TO JUNE 30, 1996)
- ---------------------------------------------------------------------------------
COUNTRY 12 MONTHS 3 MONTHS 1 MONTH
- ---------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Austria................................. -8.2% -0.3% -6.1%
Belgium................................. 12.3 4.7 0.5
Denmark................................. 11.2 2.3 2.7
Finland................................. -17.5 5.5 -4.5
France.................................. 12.4 2.5 1.8
Germany................................. 8.3 -0.3 2.0
Ireland................................. 24.5 8.7 1.3
Italy................................... 15.9 13.4 0.4
Netherlands............................. 23.1 5.3 0.2
Norway.................................. 9.7 7.4 0.2
Spain................................... 29.1 7.4 4.2
Sweden.................................. 31.5 4.7 1.3
Switzerland............................. 22.1 -2.5 5.0
United Kingdom.......................... 12.5 2.5 -0.6
</TABLE>
2
<PAGE>
ECONOMIC AND MARKET OUTLOOK
Although we believe economic activity should improve in the second half,
short-term interest rates are expected to remain stable and low. While bond
markets are expected to be flat at best, in our opinion continued low interest
rates and structural developments combine to make the outlook for European
equities attractive.
PORTFOLIO SUMMARY
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of total equities held as of June 30, 1996 are outlined below:
<TABLE>
<CAPTION>
MSCI EUROPE
FUND INDEX
-------- ----------------
<S> <C> <C>
Austria..................................................... 0.0% 0.9%
Belgium..................................................... 0.0 2.3
Czech Republic.............................................. 0.8 0.0
Denmark..................................................... 0.5 1.6
Finland..................................................... 2.9 1.0
France...................................................... 16.4 13.1
Germany..................................................... 12.6 13.6
Ireland..................................................... 0.0 0.6
Italy....................................................... 1.8 5.5
<CAPTION>
MSCI EUROPE
FUND INDEX
-------- ----------------
<S> <C> <C>
Luxembourg.................................................. 1.0% 0.0%
Netherlands................................................. 7.1 8.4
Norway...................................................... 2.2 1.0
Spain....................................................... 3.6 3.7
Sweden...................................................... 12.2 4.4
Switzerland................................................. 6.7 11.7
United Kingdom.............................................. 32.2 32.2
-------- -----
100.0% 100.0%
-------- -----
-------- -----
</TABLE>
The Fund's ten largest equity holdings at June 30, 1996 were:
SHELL TRANSPORT & TRADING PLC
Shell is a leading oil company with substantial production, refining and
petrochemical activities. Profits from oil exploration and production are
expected to grow, aided by the recent recovery in the price of crude oil. Cash
flow remains highly positive, despite a substantial increase in exploration
expenditure. We continue to expect strong dividend progression for at least the
next two years.
BAYER AG
Bayer is one of the world's most diversified companies with business in
chemicals, healthcare and imaging technology and remains a core holding within
the pan-European chemicals sector. Management is very eager to embrace the
concept of shareholder value and have continued in their restructuring efforts
and extended incentive programs.
RHOEN KLINIKUM
The company operates 2 health care clinics, a neurological clinic, an
addiction treatment center and a cardiovascular surgery unit. The cardiovascular
surgery unit accounts for approximately 10% of heart operations in western
Germany and has the lowest mortality rate in that country. The company's
profitability is effectively underwritten by the inefficiency of its state run
competitors. Rhoen operates within the same fee structure as public hospitals
and, thus, any efficiencies achieved relative to its competitors result in
improved margins.
The state system has been brought under increased pressure by the process of
reunification. This has provided a major opportunity for Rhoen Klinikum, which
has moved quickly to establish itself in eastern Germany. We believe that the
company is a well managed and rationalized provider of acute hospital services.
We expect that its expanding range of services and geographical locations should
provide solid earnings growth in the foreseeable future.
ASEA AB
Asea forms 50% of the Asea Brown Boveri Group (ABB), having merged its
activities with those of the Swiss industrial, Brown Boveri, in the 1980s. ABB,
which is predominately involved in the provision of infrastructure, divides its
activities
3
<PAGE>
between more than 1,000 companies and is present in over 130 countries
worldwide. The bulk of its activities is related to the general and subsequent
distribution of power, while the remainder comprises a diverse spread ranging
from transportation and robotics to financial services. Geographically, while
predominately involved in Europe, ABB has, in recent years, sought to expand its
activities in the Far East. ABB has been proactive in switching its
manufacturing facilities from high cost countries towards lower cost countries
and, in our opinion, is well placed to benefit from a recovery in infrastructure
expenditure both in Europe and in lesser developed countries.
GKN PLC
GKN operates in the automotive components and defense engineering markets.
Recent interim results were well above expectations, driven mainly by the
automotive division. Demand rose strongly in continental Europe and Britain. We
believe that the company remains financially sound and is one of the leading
organizations in the sector.
HAYS PLC
The group operates in the business services and distribution market. It has a
strong position in its domestic markets and enticing expansion opportunities
abroad. A string of successful acquisitions has trebled the company's market
value over the last six years. We believe recent results have confirmed that
above average growth may be expected in the medium term.
TOTAL SA
Total is one of the leading French oil companies. It has the highest reserve
replacement ratio amongst its European peer group at over 200% and the second
lowest finding cost ratio. Total has a strong balance sheet and its production
profile is expected to increase by 70% by the year 2000 as a result of
discoveries made in the Far East and Latin America. In view of the earnings
outlook, we believe that the stock is attractively valued relative to its
European peer group.
M.L.P. (MARSCHOLLEK LAUTENSCHLAGER PARTNERS)
M.L.P. is Germany's leading independent insurance broker and provides a broad
range of insurance and financial services to university graduates in Germany,
where it holds high market shares among doctors and dentists. Expanding its
client base to graduates of other disciplines as well as broadening the product
range is expected to provide further strong earnings growth over the coming
years.
BUT SA
But is the second largest distributor of furniture and consumer durables in
France. The sale of Carrefour's 30% stake to institutional investors in France
and abroad has increased liquidity for what we believe to be a very interesting
growth company operating in a specialist niche area.
BIC
The group is involved in the manufacturing of pens, razors and lighters. We
expect BIC to grow as the result of a number of new products being launched,
cost-cutting measures being undertaken and the restructuring of less profitable
subsidiaries. In our opinion, the shares should gain further momentum thanks to
the strategic geographical expansion towards emerging market areas and
acquisitions of smaller companies.
4
<PAGE>
- -----------------------------------------------
THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
AS OF JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS & WARRANTS -- 82.9%
CZECH REPUBLIC--0.7%
50,000 +Central European Media Enterprises........ $ 1,250,000
--Consumer Goods
-------------
1,250,000
-------------
DENMARK--0.5%
23,000 Carli Grey International A/S............... 752,774
--Merchandising
-------------
752,774
-------------
FINLAND--0.5%
50,000 Outokumpu Oy............................... 840,047
--Metals--Non Ferrous
-------------
840,047
-------------
FRANCE--14.0%
10,000 +Axime..................................... 1,397,922
--Electrical & Electronics
23,000 BIC........................................ 3,264,343
--Recreation & Other Consumer Goods
50,000 But SA..................................... 3,417,144
--Services
5,000 Canal Plus................................. 1,222,211
--Services
23,000 Cie Generale des Eaux...................... 2,567,712
--Business & Public Services
20,000 Cipe France................................ 1,883,312
--Business & Public Services
12,000 Ecco Travail Temporaire.................... 955,247
--Business & Public Services
20,000 Elf Aquitaine.............................. 1,470,149
--Energy Sources
8,000 Pinault Printemps Redoute.................. 2,797,398
--Merchandising
200 Societe Eurafrance......................... 77,274
--Financial Services
<CAPTION>
- ----------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
66,000 Total SA Class B........................... $ 4,892,496
--Energy Sources
-------------
23,945,208
-------------
GERMANY--7.1%
11,440 +AGAB AG................................... 1,127,464
--Financial Services
1,320 +AGAB AG (Warrants)(a)..................... 3,035
--Financial Services
200,000 Bayer AG................................... 7,063,075
--Chemicals
16,000 HeidelBerger Zement (Warrants) (b)......... 120,894
--Building Materials & Components
13,700 Hornbach Baumarkt AG....................... 621,091
--Consumer Goods
7,900 Kiekert AG................................. 218,003
--Automobiles
23,200 Leifheit AG................................ 1,074,639
--Appliances & Household Durables
1,260 Marschollek Lautenschlager Partners
(Ordinary)............................... 1,423,916
--Financial Services
18,550 +Praktiker Bau Und Heimwerkermarkt......... 480,813
--Appliances & Household Durables
-------------
12,132,930
-------------
ITALY--1.6%
15,500 +Gucci Group NV............................ 999,750
--Consumer Goods
34,500 Industrie Natuzzi SPA (ADR) (1)............ 1,768,125
--Appliances & Household Durables
-------------
2,767,875
-------------
LUXEMBOURG--0.9%
12,000 Safra Republic Holding..................... 1,470,000
--Banking
-------------
1,470,000
-------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
NETHERLANDS--6.4%
17 +A.B. Capital Fund *....................... $ 440,154
--Business & Public Services
6,920 Aalberts Industries........................ 678,097
--Capital Equipment
60,000 ABN Amro Holding N.V....................... 3,219,118
--Finance
150,000 Elsevier................................... 2,275,523
--Broadcasting & Publishing
15,000 Nutricia Ver Bedrj......................... 1,585,837
--Food & Household Products
180,000 Ver Ned Uitgevers Bezit.................... 2,793,885
--Broadcasting & Publishing
-------------
10,992,614
-------------
NORWAY--2.0%
810,000 Christiania Bank OG Kreditkasse............ 1,907,613
--Banking
39,500 +Fokus Bank A/S............................ 215,236
--Finance
100,000 Schibsted A/S.............................. 1,292,984
--Broadcasting & Publishing
-------------
3,415,833
-------------
SPAIN--3.3%
7,100 Acerinox SA................................ 742,147
--Materials
41,037 Estacion Subterraneos SA................... 568,624
--Services
109,332 Europistas Concesionaria Espanola SA....... 879,094
--Business & Public Services
12,700 Gas Natural SDG............................ 2,666,901
--Utilities--Gas
350,000 +Sotogrande SA............................. 699,454
--Finance
-------------
5,556,220
-------------
SWEDEN--11.0%
40,000 Asea AB.................................... 4,215,337
--Utilities--Electric
90,000 Autoliv AB................................. 2,733,054
--Electrical & Electronics
100,000 Avesta Sheffield........................... 939,581
--Metals--Steel
<CAPTION>
- ----------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
18,000 Elekta AB (Series B)....................... $ 681,910
--Electrical & Electronics
21,700 Hennes & Mauritz........................... 2,006,269
--Merchandising
70,000 Hoganas AB (Series B)...................... 2,441,408
--Machinery & Engineering
120,000 Securitas AB (Series B).................... 2,507,554
--Health & Personal Care
120,000 Svedala Industrie.......................... 2,264,015
--Machinery & Engineering
80,000 Svenska Stal AB (Series B)................. 1,034,291
--Metals--Non Ferrous
-------------
18,823,419
-------------
SWITZERLAND--6.1%
700 Baloise Holding Ltd. (Registered).......... 1,521,982
--Insurance
560 Bobst AG (Bearer).......................... 807,994
--Machinery & Engineering
2,000 Ciba Geigy AG (Registered)................. 2,426,858
--Chemicals
5,000 Fust AG (Bearer)........................... 1,458,833
--Appliances & Household Durables
1,900 Hilti AG (Participating Certificates)...... 1,427,658
--Industrial Components
1,330 Phoenix Mecano AG.......................... 657,026
--Capital Equipment
2,100 Stratec Holding AG (Series B)
(Registered)............................. 2,039,568
--Medical Supplies
-------------
10,339,919
-------------
UNITED KINGDOM--28.8%
240,000 Bemrose Corp. PLC (Ordinary)............... 1,350,066
--Forest Products & Paper Materials
415,809 Birkby PLC (Ordinary)...................... 1,145,323
--Real Estate
250,000 British Airport Authority PLC (Ordinary)... 1,809,787
--Business & Public Services
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
76,500 +British Biotechnology Group PLC
(Ordinary)............................... $ 2,932,204
--Health & Personal Care
9,562 +British Biotechnology Group PLC
(Rights)................................. 62,321
--Health & Personal Care
250,000 Cable & Wireless PLC (Ordinary)............ 1,650,727
--Telecommunications
80,000 Cadbury Schweppes PLC (Ordinary)........... 631,893
--Food & Household Products
50,000 Domestic & General Group (Ordinary)........ 1,431,536
--Insurance
250,000 GKN PLC (Ordinary)......................... 3,832,946
--Machinery & Engineering
250,000 Great Universal Store PLC (Ordinary)....... 2,535,253
--Merchandising
666,666 Halma PLC (Ordinary)....................... 1,800,086
--Machinery & Engineering
550,000 Hays PLC (Ordinary)........................ 3,874,845
--Business & Public Services
318,000 Hewden-Stuart Plant PLC (Ordinary)......... 656,318
--Construction & Housing
160,000 Jarvis Porter Group PLC.................... 608,306
--Forest Products & Paper Materials
200,000 Marks & Spencer PLC (Ordinary)............. 1,460,244
--Merchandising
150,000 Pearson PLC (Ordinary)..................... 1,545,593
--Broadcasting & Publishing
100,000 Reuters Holdings PLC (Ordinary)............ 1,208,852
--Business & Public Services
<CAPTION>
- ----------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
300,000 Royal Bank of Scotland PLC (Ordinary)...... $ 2,295,112
--Banking
195,000 Serco Group PLC (Ordinary)................. 1,649,175
--Business & Public Services
10,000 Schroders PLC (Ordinary)................... 210,269
--Finance
500,000 Shell Transport & Trading PLC (Ordinary)... 7,316,737
--Utilities--Gas
100,000 Standard Chartered PLC (Ordinary).......... 994,704
--Banking
50,000 Thorn EMI PLC (Ordinary)................... 1,391,965
--Appliances & Household Durables
60,000 Unilever PLC (Ordinary).................... 1,191,782
--Food & Household Products
256,000 United News & Media PLC (Ordinary)......... 2,764,935
--Broadcasting & Publishing
1,003,483 Waterford Wedgwood PLC (Units)............. 1,284,877
--Food & Household Products
220,000 Wolseley PLC (Ordinary).................... 1,551,645
--Building Materials & Components
-------------
49,187,501
-------------
Total Common Stocks & Warrants
(cost--$112,579,758)..................... 141,474,340
-------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SHARES/FACE VALUE
AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS -- 5.8%
FINLAND--1.5%
70,000 Nokia AB (Oy).............................. $ 2,578,297
--Electrical & Electronics
-------------
2,578,297
-------------
GERMANY--4.3%
6,000 Fresenius AG............................... 1,085,085
--Health & Personal Care
2,000 Marschollek Lautenschlager Partners
(Non-Voting)............................. 2,102,497
--Financial Services
35,412 Rhoen Klinikum (Non-Voting)................ 4,083,315
--Health & Personal Care
-------------
7,270,897
-------------
Total Preferred Stocks
(cost--$6,295,703)....................... 9,849,194
-------------
CONVERTIBLE BONDS -- 1.3%
FINLAND--0.6%
FIM 4,550,000 Lansivoima, 7.425% due 3/29/01............. 1,019,256
--Utilities--Electric & Gas
-------------
1,019,256
-------------
<CAPTION>
- ----------------------------------------------------------------------------
VALUE
FACE AMOUNT DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
FRANCE--0.7%
FF 5,331,730 Virbac, 5% due 1/01/01..................... $ 1,263,194
--Health & Personal Care
-------------
1,263,194
-------------
Total Convertible Bonds
(cost--$1,897,753)....................... 2,282,450
-------------
OTHER INVESTMENT -- 0.2%
UNITED KINGDOM--0.2%
L215,016 Carlton Communications PLC Loan Note
Certificates, 2.256% due 1/31/99
--Business & Public Services
(cost--$318,331)......................... 333,662
-------------
333,662
-------------
Total Investments--90.2%
(cost--$121,091,545)(c).................. $ 153,939,646
Other Assets in Excess of
Liabilities--9.8%........................ 16,799,862
-------------
Net Assets--100.0%......................... $ 170,739,508
-------------
-------------
</TABLE>
- ------------------------------
(a) The warrants enable the holder to subscribe to one ordinary share for
every warrant held at DM 304 per share until November 30, 1997.
(b) The warrants enable the holder to subscribe to eleven ordinary shares
for every 100 warrants held at DM 1215 per share until June 13, 2000.
(c) The United States Federal income tax basis of the Fund's investments
at June 30, 1996 was $121,091,545 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $32,848,101
(gross unrealized appreciation--$37,535,243; gross unrealized
depreciation--$4,687,142).
(1) American Depositary Receipt (ADR).
+ Non-income producing security.
* Investment in restricted security with an aggregate value of $440,154,
representing 0.26% of net assets at June 30, 1996. The investment was
acquired on October 22, 1990 and September 5, 1991 for $759,153.
See Notes to Financial Statements.
8
<PAGE>
- ----------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF
ASSETS AND LIABILITIES
JUNE 30, 1996 (UNAUDITED)
- ----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $121,091,545) (Note 1).............................. $153,939,646
Domestic cash................................................................... 14,158,600
Foreign cash (Note 1)........................................................... 1,856,952
Receivable for securities sold.................................................. 802,733
Withholding tax refund receivable............................................... 617,136
Dividends receivable............................................................ 326,996
Interest receivable............................................................. 107,842
Prepaid expenses and other assets............................................... 26,744
-------------
Total assets.............................................................. 171,836,649
-------------
LIABILITIES
Investment management fee payable (Note 2)...................................... 105,576
Administration fee payable (Note 2)............................................. 35,192
Accrued expenses and other liabilities.......................................... 956,373
-------------
Total liabilities......................................................... 1,097,141
-------------
NET ASSETS...................................................................... $170,739,508
-------------
-------------
Net Assets consist of:
Common Stock, $.001 par value
(Authorized 100,000,000 shares)
(Note 4)..................................................................... $ 10,066
Paid-in surplus............................................................... 129,299,044
Undistributed net investment income........................................... 1,268,007
Accumulated net realized gains on investments and foreign currency related
transactions................................................................. 7,324,189
Net unrealized appreciation on investments and foreign currency related
transactions................................................................. 32,838,202
-------------
Net Assets.................................................................... $170,739,508
-------------
-------------
Net Asset Value per share
($170,739,508 DIVIDED BY 10,066,319 shares of common stock issued and
outstanding)................................................................... $16.96
------
------
</TABLE>
- ----------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1996 (UNAUDITED)
- ----------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Income
Dividends...................................................................... $ 2,218,599
Interest....................................................................... 311,699
-----------
2,530,298
Less: Withholding tax on foreign source dividends.............................. 303,372
-----------
Total income............................................................... 2,226,926
-----------
Expenses
Investment management fee (Note 2)............................................. 593,133
Administration fee (Note 2).................................................... 197,711
Legal fees..................................................................... 96,796
Custodian fees................................................................. 65,200
Directors' fees and expenses................................................... 54,568
Shareholder servicing fees..................................................... 48,625
Reports to shareholders........................................................ 29,733
Audit fees..................................................................... 23,919
NYSE listing fee............................................................... 12,064
Insurance expense.............................................................. 4,732
Miscellaneous.................................................................. 6,717
-----------
Total expenses............................................................. 1,133,198
-----------
Net investment income............................................................ 1,093,728
-----------
</TABLE>
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS
<TABLE>
<S> <C> <C>
Realized gain from:
Investments -- net............................................ 7,278,522
Foreign currency transactions................................. 157,795 7,436,317
-------------
Change in unrealized appreciation (depreciation) on:
Investments -- net............................................ 18,042,879
Foreign currency related transactions......................... (22,956) 18,019,923
------------- -------------
Net realized and unrealized gain on investments and foreign
currency related transactions.................................. 25,456,240
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $ 26,549,968
-------------
-------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE YEAR
ENDED ENDED
JUNE 30, 1996 DECEMBER 31,
(UNAUDITED) 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income....................................... $ 1,093,728 $ 1,403,305
Net realized gain on investments and foreign currency
related transactions....................................... 7,436,317 7,064,520
Change in unrealized appreciation on investments and foreign
currency related transactions.............................. 18,019,923 18,149,508
------------- -------------
Net Increase in Net Assets Resulting from Operations.......... 26,549,968 26,617,333
------------- -------------
Dividends and Distributions:
Net investment income ($0.100 per share).................... -- (1,008,363)
Net realized gain on investments and foreign currency
related transactions ($0.780 per share) (Note 1)........... -- (7,849,998)
------------- -------------
Net Decrease in Net Assets Resulting from Dividends and
Distributions................................................ -- (8,858,361)
------------- -------------
Total Increase................................................ 26,549,968 17,758,972
NET ASSETS
Beginning of period......................................... 144,189,540 126,430,568
------------- -------------
End of period (including undistributed net investment income
of $1,268,007 and $174,279, respectively).................. $170,739,508 $144,189,540
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following per share data and ratios have been derived from information
provided in the financial statements:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED JUNE FOR THE YEAR ENDED DECEMBER 31,
30, 1996 ------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
----------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 14.32 $ 12.56 $ 12.74 $ 10.74 $ 12.59 $ 13.73
----------- -------- --------- -------- --------- --------
Operations:
Net investment income................. 0.11 0.14 0.12 0.12 0.25 0.30
Net realized and unrealized gain
(loss) on investments and foreign
currency related transactions........ 2.53 2.50 0.66 2.63 (1.22) 0.30
----------- -------- --------- -------- --------- --------
Total from operations............... 2.64 2.64 0.78 2.75 (0.97) 0.60
----------- -------- --------- -------- --------- --------
Dividends and distributions to
shareholders from:
Net investment income................. -- (0.10) (0.15) (0.07) (0.25) (1.06)
Net realized gain on investments and
foreign currency related
transactions......................... -- (0.78) (0.81) (0.68) -- (0.55)
Paid-in surplus....................... -- -- -- -- (0.63) (0.13)
----------- -------- --------- -------- --------- --------
Total dividends and distributions... -- (0.88) (0.96) (0.75) (0.88) (1.74)
----------- -------- --------- -------- --------- --------
Net asset value, end of period.......... $ 16.96 $ 14.32 $ 12.56 $ 12.74 $ 10.74 $ 12.59
----------- -------- --------- -------- --------- --------
----------- -------- --------- -------- --------- --------
Per share market value, end of period... $ 14.25 $ 12.75 $ 10.75 $ 13.00 $ 9.88 $ 11.50
----------- -------- --------- -------- --------- --------
----------- -------- --------- -------- --------- --------
Total investment return, market
value*................................. 11.76% 26.26% (10.21)% 39.40% (7.03)% 16.58%
Net assets at end of period (000
omitted)............................... $170,740 $144,190 $ 126,431 $128,272 $ 89,587 $105,072
Ratio of operating expenses to average
weekly net assets...................... 1.44%** 1.42% 1.42% 1.46% 1.47% 1.56%
Ratio of net investment income to
average weekly net assets.............. 1.39%** 1.01% 0.90% 1.17% 1.98% 2.30%
Portfolio turnover rate................. 22% 52% 68% 184% 83% 95%
Average commission rate paid+........... $ 0.0454 N/A N/A N/A N/A N/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 distributions at
actual prices pursuant to the Fund's distribution reinvestment plan. Total
investment return for periods of less than one full year are not annualized.
** Annualized.
+ For fiscal years beginning after January 1, 1996, the Fund is required to
disclose its average commission rate paid per share for purchases and sales
of investment securities.
See Notes to Financial Statements.
11
<PAGE>
- ----------------------------------------------
THE EUROPE FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------
NOTE 1. ACCOUNTING
POLICIES
The Europe Fund, Inc. (the "Fund") was incorporated in Maryland on February 8,
1990, as a closed-end, diversified management investment company. Prior to the
commencement of operations on May 3, 1990, the Fund had no operations other than
those relating to organizational matters and the sale of 7,092 shares of common
stock on April 23, 1990 to Mercury Asset Management Group plc for $100,000.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITY VALUATION: All securities for which current market quotations are
readily available are valued at the last sale price prior to the time of
determination, or, if there is no sales price on such date, and if bid and ask
quotations are available, at the mean between the last current bid and asked
prices. Securities that are traded over-the-counter, if bid and asked quotations
are available, are valued at the mean between the current bid and asked prices,
or, if quotations are not available, are valued as determined in good faith by
the Board of Directors of the Fund. Short-term investments having a maturity of
60 days or less are valued at amortized cost. Securities and assets for which
current market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Directors of the Fund.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date, or as soon as the Fund is informed of the dividend, and
interest income is recorded on an accrual basis.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts and transactions are translated into
U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities at a
10:00 A.M. midpoint rate of exchange on valuation date.
(ii) purchases and sales of investment securities, income and expenses at the
10:00 A.M. midpoint 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 isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal period end, resulting
from changes in the exchange rate.
FOREIGN CURRENCY AS OF JUNE 30, 1996 CONSISTS OF:
<TABLE>
<CAPTION>
UNITS COST VALUE
----------- ----------- -----------
<S> <C> <C> <C>
British Pound...................... 9,222 $ 14,141 $ 14,311
Danish Krone....................... 147 25 25
German Deutschemark................ 2,776,698 1,833,077 1,824,371
Norwegian Krone.................... 363 55 56
Swiss Franc........................ 22,756 18,041 18,189
----------- ----------- -----------
2,809,186 $ 1,865,339 $ 1,856,952
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
12
<PAGE>
The Fund holds foreign currency in order to facilitate the purchases of
foreign securities.
FORWARD CURRENCY EXCHANGE CONTRACTS: The Fund enters into forward currency
exchange contracts to hedge certain purchase and sale commitments denominated in
foreign currencies. The Fund may enter into forward currency exchange contracts
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. Fluctuations in the value of forward
currency exchange contracts are recorded for book purposes as unrealized gains
or losses by the Fund. If the Fund enters into a closing transaction, the Fund
will realize a gain or loss equal to the difference between the value of forward
currency contracts to sell and the forward currency contracts to buy. Risks may
arise from the potential inability of a counterparty to meet the terms of a
contract and from unanticipated movements in the value of foreign currencies
relative to the U.S. dollar.
TAXES: No provision has been made for United States Federal income taxes
because the Fund intends to continue to meet the requirements of the United
States Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The Fund intends to
distribute to shareholders annually by the end of January an amount equal to at
least 7 percent of the Fund's net asset value determined as of the beginning of
the previous calendar year. If, for any calendar year, the aggregate of net
investment income and net realized capital gains (if any) is less than 7 percent
of the Fund's net asset value as of the beginning of that calendar year, the
difference will be distributed from the Fund's paid-in surplus.
RECLASSIFICATION OF COMPONENTS OF NET ASSETS: During the year ended December
31, 1995, accumulated net realized losses on foreign currency related
transactions of $440,424 were reclassified from accumulated net realized loss on
investments to undistributed net investment income as a result of permanent
book-to-tax differences. This reclassification had no effect on net assets or
net asset value per share.
NOTE 2. TRANSACTIONS
WITH AFFILIATES AND
AGREEMENTS
The Fund has entered into Agreements with Mercury Asset Management International
Channel Islands Ltd. (the "Investment Manager") and Mercury Asset Management
International Ltd. (the "Investment Adviser").
The Investment Management Agreement provides that the Fund will pay 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 $250 million, and
0.65% of such assets in excess of $250 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 for the Fund. The Investment Manager pays a fee to the Investment
Adviser for services rendered.
The Fund has entered into an Administration Agreement with Princeton
Administrators, L.P. ("Administrator"). The Administration Agreement provides
that the Fund will pay the Administrator a fee at the annual rate of 0.25% of
the Fund's average weekly net assets up to $200 million and 0.20% on such assets
in excess of $200 million. The Administrator performs administrative services
necessary for the operation of the Fund, including maintaining certain books and
records of the Fund and preparing certain reports and documents required by laws
and regulations, and provides the Fund with administrative office facilities.
Certain directors and officers of the Fund are also directors and officers of
either the Investment Manager, the Investment Adviser, and/or Mercury Asset
Management Group plc (the parent company of the Investment Adviser and
Investment Manager or "Mercury").
13
<PAGE>
NOTE 3. INVESTMENT
TRANSACTIONS
Purchases and sales of investment securities, other than short-term investments,
for the six months ended June 30, 1996 were $32,230,743 and $45,718,466,
respectively.
NOTE 4. CAPITAL
There are 100 million shares of $.001 par value common stock authorized. Of the
10,066,319 shares outstanding at June 30, 1996 Mercury owned 11,976 shares in
respect of the Fund's initial seed capital and reinvested distributions.
NOTE 5. QUARTERLY RESULTS OF OPERATIONS*
<TABLE>
<CAPTION>
NET REALIZED
AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS AND
NET INVESTMENT FOREIGN
CURRENCY
INVESTMENT INCOME (LOSS) RELATED
INCOME TRANSACTIONS
--------------- --------------- ---------------
PER PER PER
QUARTER ENDED TOTAL SHARE TOTAL SHARE TOTAL SHARE
- -------------------------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1994.................. $ 398 $0.04 $ (48) $(0.01) $2,985 $ 0.30
June 30, 1994................... 1,251 0.12 725 0.08 (3,236) (0.33)
September 30, 1994.............. 628 0.06 309 0.03 6,524 0.66
December 31, 1994............... 825 0.08 219 0.02 358 0.03
------ ------ ------ ------ ------ ------
Total........................... $3,102 $0.30 $1,205 $ 0.12 $6,631 $ 0.66
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
March 31, 1995.................. $ 652 $0.07 $ 215 $ 0.02 $4,484 $ 0.45
June 30, 1995................... 1,544 0.15 1,034 0.10 10,072 1.00
September 30, 1995.............. 643 0.06 135 0.02 7,161 0.71
December 31, 1995............... 548 0.06 19 0.00 3,497 0.34
------ ------ ------ ------ ------ ------
Total........................... $3,387 $0.34 $1,403 $ 0.14 $25,214 $ 2.50
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
March 31, 1996.................. $ 424 $0.04 $ (87) $(0.01) $15,704 $ 1.56
June 30, 1996................... 1,803 0.18 1,181 0.12 9,752 0.97
------ ------ ------ ------ ------ ------
Total........................... $2,227 $0.22 $1,094 $ 0.11 $25,456 $ 2.53
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
- ------------------------
* Totals expressed in thousands of dollars except per share amounts.
NOTE 6. PER SHARE SELECTED QUARTERLY
FINANCIAL DATA
<TABLE>
<CAPTION>
NET ASSET VALUE MARKET PRICE*
--------------- ---------------------
QUARTER ENDED HIGH LOW HIGH LOW VOLUME**
- ----------------------------------------- ------ ------ -------- -------- -------
<S> <C> <C> <C> <C> <C>
March 31, 1994........................... $13.78 $12.99 $14 $11 1/8 1,985
June 30, 1994............................ 13.40 12.72 12 3/4 10 7/8 930
September 30, 1994....................... 13.91 12.69 12 5/8 11 2,300
December 31, 1994........................ 14.13 12.18 12 1/8 10 1/2 1,784
March 31, 1995........................... 13.03 12.43 12 10 5/8 1,987
June 30, 1995............................ 14.13 13.03 12 3/4 11 3/8 1,817
September 30, 1995....................... 14.86 14.32 13 1/2 12 3/8 1,389
December 31, 1995........................ 14.90 14.10 13 1/2 12 1/4 2,490
March 31, 1996........................... 15.88 14.34 13 7/8 12 3/4 2,258
June 30, 1996............................ 16.96 16.02 14 1/4 13 1,579
</TABLE>
- ------------------------
* As reported on the New York Stock Exchange.
** In thousands.
14
<PAGE>
PROXY RESULTS
During the six month period ended June 30, 1996, The Europe Fund, Inc.
scheduled a special meeting of its shareholders for January 23, 1996. No quorum
was obtained at that time, and the directors determined to adjourn the meeting
until February 27, 1996, at which time again there was a failure to obtain a
quorum. The description of the proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHARES SHARES SHARES
VOTED VOTED VOTED
FOR AGAINST ABSTAIN
- -----------------------------------------------------------------------------------------------------
1. Consideration of conversion of the Fund from a closed-end
investment company to an open-end investment company....... 2,041,113 2,133,958 168,982
- ------------------------------------------------------------------------------------------------
</TABLE>
During the six month period ended June 30, 1996, The Europe Fund, Inc.
shareholders also voted on the following proposals at the annual shareholders'
meeting on June 12, 1996. The description of the proposals and number of shares
voted are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHARES SHARES VOTED
VOTED WITHOUT
FOR AUTHORITY
- ----------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of
Directors: George F. Bennett................. 7,515,993 157,820
Sir Arthur Bryan.................. 7,514,794 159,019
Peter Stormonth Darling........... 7,490,515 183,298
Leon Levy......................... 7,515,674 158,139
J. Murray Logan................... 7,525,345 148,468
James S. Martin................... 7,483,707 190,106
Francois-Xavier Ortoli............ 7,482,526 191,287
Anthony M. Solomon................ 7,517,556 156,257
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHARES SHARES SHARES
VOTED VOTED VOTED
FOR AGAINST ABSTAIN
- -----------------------------------------------------------------------------------------------------
2. To ratify the selection of Ernst & Young LLP as the Fund's
independent auditors....................................... 7,539,926 68,162 65,725
- ------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
-------------------------------------------------------------
DIRECTORS AND OFFICERS
ANTHONY M. SOLOMON, Chairman of the Board and
Director
GEORGE F. BENNETT, Director
* SIR ARTHUR BRYAN, Director
PETER STORMONTH DARLING, Director
LEON N. LEVY, Director
* J. MURRAY LOGAN, Director
* JAMES S. MARTIN, Director
FRANCOIS-XAVIER ORTOLI, Director
J. LOUGHLIN CALLAHAN, President
STEVEN W. GOLANN, Vice President and Secretary
JAMES M. DONALD, Vice President, Treasurer and
Assistant Secretary
THADDEA M. FELDMAN, Assistant Secretary
* Member of the Audit Committee
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.
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Fund shares.
The accompanying financial statements as of June 30, 1996, were not audited and,
accordingly, no opinion is expressed on them.
------------------------------------------------
EXECUTIVE OFFICES--
780 Third Avenue
New York, New York 10017
(For latest net asset value and requests for Fund
Reports, please call 1 (800) 543-6217 or (609)
282-4600.)
INVESTMENT MANAGER--
Mercury Asset Management International Channel Islands
Ltd.
Forum House
Grenville Street
St. Helier, Jersey
Channel Islands
INVESTMENT ADVISER--
Mercury Asset Management International Ltd.
33 King William Street
London EC4R 9AS
England
ADMINISTRATOR--
Princeton Administrators, L.P.
P.O. Box 9095
Princeton, New Jersey 08543-9095
CUSTODIAN--
The Bank of New York
Avenue des Arts 35
1040 Brussels
Belgium
TRANSFER AGENT AND REGISTRAR--
The Bank of New York
101 Barclay Street
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
<PAGE>
------------------------------------------------
SUMMARY OF GENERAL INFORMATION
-------------------------------------------
THE FUND
The Europe Fund, Inc. (the "Fund") is a closed-end investment company whose
shares trade on the New York Stock Exchange. The Fund seeks long-term capital
appreciation through investment primarily in European equity securities. The
Fund is managed by Mercury Asset Management International Channel Islands Ltd.,
relying on investment advice from Mercury Asset Management International Ltd.
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transactions section of newspapers under the designation
"Europe Fd." The Fund's New York Stock Exchange trading symbol is EF. Weekly
comparative net asset value (NAV) and market price information about the Fund's
shares are published each Monday in THE WALL STREET JOURNAL and THE NEW YORK
TIMES and other newspapers in a table called "Closed End Funds."
Shareholders interested in receiving the quarterly newsletter entitled "Closed
End Fund Focus" should call 1-800-543-6217 or 1-212-888-6941 and request to be
placed on the mailing list or send a request by mail to the Fund's address.
DISTRIBUTION REINVESTMENT PLAN-SUMMARY
An automatic Distribution Reinvestment Plan (the "Plan") is available to
provide shareholders with automatic reinvestment of their dividend income and
capital gains distributions in additional shares of the Fund's common stock. A
brochure describing the Plan is available from the Plan Agent, The Bank of New
York, by calling (800) 524-4458.
All shareholders are automatically enrolled in the Plan unless they have
elected to receive distributions in cash. Therefore, if you wish to participate
and your shares are held in your own name, no action is required on your part.
If you have previously elected to receive distributions in cash and now wish to
participate in the Plan, please call the Plan Agent at the number above. If your
shares are held in the name of a brokerage firm, bank or other nominee, your
nominee may have elected to receive distributions in cash on your behalf, and if
you wish to participate, 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.
TRANSFER AGENT:
The Bank of New York
Telephone Inquiries: 1-800-432-8224
Address Shareholder Inquiries To:
Shareholder Relations Department - 11 E
P.O. Box 11258
Church Street Station
New York, NY 10286
Send Certificates for Transfer and Address Changes to:
Receive and Deliver Department - 11 W
P.O. Box 11002
Church Street Station
New York, NY 10286
[LOGO]
THE EUROPE FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1996
