<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Third Quarter Report of The Europe Fund,
Inc. On September 30, 1996, the end of the period under review, the Fund's net
assets totalled $178.1 million. This represents a net asset value per share of
$17.69, a rise of 94.33% from its initial value on May 3, 1990, after taking
into account underwriting discounts, commissions, offering expenses and
distributions. This compares with an 89.62% 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 $15.625 per share on the New York Stock Exchange, which
represents an 11.67% 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 third quarter of 1996, your Fund experienced a rise in net asset
value of 4.30%, which compared with an increase of 3.82% in the value of the
MSCI Europe Index. For the first three quarters of 1996, the Fund's net asset
value increased by 23.53%, which compares with a 10.49% increase in the MSCI
Europe Index. These results are recorded in total return and dollar-based terms.
The European economic environment remained sluggish, although there are signs
of stabilization and modest improvement following the slowdown earlier in the
year. Against this background, inflation remains subdued. For example, the
latest annual consumer price index for Germany rose 1.3%. Interest rates were
also low, with further cuts seen during the quarter. For example, in
Switzerland, the discount rate fell to 1%. With the deadline approaching for
countries to achieve the Maastricht deficit criteria for European Monetary
Union, budgetary pressure remained intense. This was epitomized by France's 1997
budget, which included a number of non-recurring money raising exercises to
achieve the 3% budget deficit target.
ECONOMIC AND MARKET OUTLOOK
Despite some small improvement in economic activity, the slowness of recovery,
coupled with continued fiscal pressure is expected to keep short-term interest
rates low. This should continue to make the outlook for European equities
attractive for the medium-term.
PORTFOLIO SUMMARY
During the three months ended September 30, 1996, the Fund purchased new
holdings in Adecco, Standard Chartered, ABB, BASF and Unidanmark. Holdings in
Hennes & Mauritz were reduced. Shares of Gas Natural and Carli Grey were sold.
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of total equities held at September 30, 1996 are outlined below:
<TABLE>
<CAPTION>
MSCI EUROPE
FUND INDEX
-------- ----------------
<S> <C> <C>
Austria..................................................... 0.0% 0.8%
Belgium..................................................... 0.0 2.3
Czech Republic.............................................. 0.9 0.0
Denmark..................................................... 1.1 1.6
Finland..................................................... 2.5 1.1
France...................................................... 15.2 12.6
Germany..................................................... 12.7 13.7
Ireland..................................................... 0.0 0.6
Italy....................................................... 1.6 5.4
<CAPTION>
MSCI EUROPE
FUND INDEX
-------- ----------------
<S> <C> <C>
Luxembourg.................................................. 0.8% 0.0%
Netherlands................................................. 6.6 8.3
Norway...................................................... 2.3 0.9
Spain....................................................... 1.4 3.6
Sweden...................................................... 12.6 4.5
Switzerland................................................. 7.7 11.3
United Kingdom.............................................. 34.6 33.3
-------- -----
100.0% 100.0%
-------- -----
-------- -----
</TABLE>
The Fund's ten largest equity holdings at September 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 crude oil price. Cashflow
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 has continued in their restructuring efforts
and extended incentive programs.
TOTAL SA
Total is one of the leading French oil companies. It has the highest reserve
replacement ratio among 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.
2
<PAGE>
ABB AB
Asea Brown Boveri Group (ABB), which is primarily involved in the provision of
infrastructure services, divides its activities
between more than 1,000 companies and is present in over 130 countries
worldwide. The bulk of its business is related to the general and subsequent
distribution of power, while the remainder of its activities is spread among
such diverse areas as transportation, robotics and 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 its sector.
M.L.P. (MARSCHOLLEK, LAUTENSCHLAEGER UND PARTNER AG)
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.
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.
AUTOLIV AB
Autoliv is an automotive component company operating in three core areas: seat
belts, air bags and child safety. Following its merger with Morton
International's Automotive division in October, the company is now the world's
largest car safety company, with the broadest product range and widest
geographic coverage. It is expected that considerable operational synergies in
sales, purchasing, production, research and development may be possible as a
result of the merger. The company's main opportunities are in the U.S.,
following the Morton merger and in Germany, where it is not yet a major supplier
to the German Automotive sector. Both as a result of the merger and greater
efficiencies in the manufacturing process, Autoliv should continue to be able to
boost its margins in the coming years.
COMPAGNIE GENERALE DES EAUX
Compagnie General des Eaux is a multi-industry company with principal
activities in the water, energy, waste management, construction and property
areas. The organization's expected strong increase in international service
sales (primarily in the U.S. and U.K.), its industrial reorganization, as well
as lower losses in the property and construction sectors, make the company an
increasingly attractive investment.
VER NED UITGEVERS BEZIT
VNU is the largest Dutch publisher and among the ten largest in Europe. The
company specializes in the professional information field, especially computer
publications. In addition, the company owns participations in commercial TV
stations RTL and VTM. The company has indicated that it will increasingly
concentrate its investments in the business information field and intends to
become a leading player for software on the Internet. Considerable upside from
the newspaper and business information divisions should drive margins up.
3
<PAGE>
- -----------------------------------------------
THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
AS OF SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS & WARRANTS -- 88.7%
CZECH REPUBLIC--0.8%
50,000 +Central European Media Enterprises........ $ 1,475,000
--Consumer Goods
-------------
1,475,000
-------------
DENMARK--1.0%
37,516 Unidanmark A/S (Series A)(Registered)...... 1,794,104
--Banking
-------------
1,794,104
-------------
FINLAND--2.3%
70,000 Nokia AB Oy (Series A)..................... 3,135,404
--Electrical & Electronics
50,000 Outokumpu Oy............................... 941,826
--Metals--Non Ferrous
-------------
4,077,230
-------------
FRANCE--14.1%
12,288 +Axime..................................... 1,228,086
--Electrical & Electronics
23,000 BIC........................................ 3,020,337
--Recreation & Other Consumer Goods
50,000 But SA..................................... 3,350,765
--Services
5,092 Canal Plus................................. 1,252,535
--Services
32,808 Compagnie Generale des Eaux................ 3,564,844
--Business & Public Services
20,000 Cipe France................................ 2,060,817
--Business & Public Services
3,190 Ecco SA.................................... 764,908
--Business & Public Services
20,000 Elf Aquitaine.............................. 1,564,594
--Energy Sources
8,000 Pinault Printemps Redoute.................. 2,944,025
--Merchandising
67,745 Total SA Class B........................... 5,333,787
--Energy Sources
-------------
25,084,698
-------------
GERMANY--7.5%
89,841 BASF AG.................................... 2,825,929
--Chemicals
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
200,000 Bayer AG................................... $ 7,339,450
--Chemicals
33,769 Bayerische Hypotheken -- Und Wechsel Bank
AG....................................... 963,722
--Banking
13,700 Hornbach Baumarkt AG....................... 453,375
--Consumer Goods
4,100 Kiekert AG................................. 106,665
--Automobiles
12,600 Marschollek, Lautenschlaeger und Partner AG
(Ordinary)............................... 1,733,945
--Financial Services
-------------
13,423,086
-------------
ITALY--1.5%
15,500 Gucci Group NV............................. 1,123,750
--Consumer Goods
34,500 Industrie Natuzzi SPA (ADR)................ 1,604,250
--Appliances & Household Durables
-------------
2,728,000
-------------
LUXEMBOURG--0.8%
12,000 Safra Republic Holding..................... 1,404,000
--Banking
-------------
1,404,000
-------------
NETHERLANDS--6.1%
17 +A.B. Capital Fund *....................... 456,009
--Business & Public Services
6,920 Aalberts Industries........................ 723,824
--Capital Equipment
30,000 ABN Amro Holding N.V....................... 1,663,648
--Finance
150,000 Elsevier................................... 2,480,570
--Broadcasting & Publishing
15,067 NutriciaVer Bedrj.......................... 1,989,798
--Food & Household Products
180,000 Ver Ned Uitgevers Bezit.................... 3,523,637
--Broadcasting & Publishing
-------------
10,837,486
-------------
NORWAY--2.1%
810,000 Christiania Bank OG Kreditkasse............ 2,081,077
--Banking
39,500 Fokus Bank A/S............................. 220,592
--Finance
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
100,000 Schibsted A/S.............................. $ 1,461,538
--Broadcasting & Publishing
-------------
3,763,207
-------------
SPAIN--1.3%
7,100 Acerinox SA................................ 826,803
--Materials
109,332 Europistas Concesionaria Espanola SA....... 872,919
--Business & Public Services
350,000 +Sotogrande SA............................. 648,855
--Finance
-------------
2,348,577
-------------
SWEDEN--11.8%
49,000 ABB AB (Series B).......................... 5,181,582
--Electrical & Electronics
90,000 Autoliv AB................................. 3,888,453
--Electrical & Electronics
100,000 Avesta Sheffield........................... 1,042,359
--Metals-Steel
18,000 Elekta AB (Series B)....................... 609,100
--Electrical & Electronics
15,000 Hennes & Mauritz........................... 1,842,256
--Merchandising
70,000 Hoganas AB (Series B)...................... 2,178,379
--Machinery & Engineering
120,000 Securitas AB (Series B).................... 2,900,477
--Health & Personal Care
120,000 Svedala Industrie.......................... 2,084,718
--Machinery & Engineering
80,000 Svenska Stal AB (Series B)................. 1,232,703
--Metals--Non Ferrous
-------------
20,960,027
-------------
SWITZERLAND--7.2%
3,376 Adecco SA.................................. 929,174
--Services
700 Baloise Holding Ltd. (Registered).......... 1,465,896
--Insurance
560 Bobst AG (Bearer).......................... 728,201
--Machinery & Engineering
2,000 Ciba Geigy AG (Registered)................. 2,548,065
--Chemicals
16,241 CS Holding AG (Registered)................. 1,606,609
--Financial Services
5,000 Fust AG (Bearer)........................... 1,328,281
--Appliances & Household Durables
1,900 Hilti AG (Participating Certificates)...... 1,326,286
--Industrial Components
1,330 Phoenix Mecano AG.......................... 641,923
--Capital Equipment
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
2,100 +Stratec Holding AG -- (Series B)
(Registered)............................. $ 2,244,914
--Medical Supplies
-------------
12,819,349
-------------
UNITED KINGDOM--32.2%
240,000 Bemrose Corp. PLC (Ordinary)............... 1,361,424
--Forest Products & Paper Materials
415,809 Birkby PLC (Ordinary)...................... 1,111,132
--Real Estate
250,000 British Airport Authority PLC (Ordinary)... 1,929,935
--Business & Public Services
826,620 +British Biotechnology Group PLC
(Ordinary)............................... 2,751,447
--Health & Personal Care
250,000 Cable & Wireless PLC (Ordinary)............ 1,765,851
--Telecommunications
80,000 Cadbury Schweppes PLC (Ordinary)........... 640,082
--Food & Household Products
50,000 Domestic & General Group (Ordinary)........ 1,402,523
--Insurance
50,000 EMI Group PLC.............................. 1,043,102
--Entertainment
252,314 GKN PLC (Ordinary)......................... 4,427,889
--Machinery & Engineering
250,000 Great Universal Store PLC (Ordinary)....... 2,504,227
--Merchandising
666,666 Halma PLC (Ordinary)....................... 1,979,418
--Machinery & Engineering
550,000 Hays PLC (Ordinary)........................ 4,039,580
--Business & Public Services
318,000 Hewden-Stuart Plant PLC (Ordinary)......... 650,990
--Construction & Housing
160,000 Jarvis Porter Group PLC.................... 482,562
--Forest Products & Paper Materials
501,163 LucasVarity PLC............................ 1,989,245
--Machinery & Engineering
200,000 Marks & Spencer PLC (Ordinary)............. 1,550,198
--Merchandising
150,000 Pearson PLC (Ordinary)..................... 1,596,298
--Broadcasting & Publishing
100,000 Reuters Holdings PLC (Ordinary)............ 1,154,054
--Business & Public Services
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
300,000 Royal Bank of Scotland PLC (Ordinary)...... $ 2,292,481
--Banking
195,000 Serco Group PLC (Ordinary)................. 1,858,832
--Business & Public Services
85,000 Schroders PLC (Ordinary)................... 1,829,062
--Finance
500,000 Shell Transport & Trading PLC (Ordinary)... 7,618,163
--Utilities--Gas
200,000 Standard Chartered PLC (Ordinary).......... 2,181,529
--Banking
50,000 Thorn EMI PLC (Ordinary)................... 283,630
--Appliances & Household Durables
60,000 Unilever PLC (Ordinary).................... 1,281,258
--Food & Household Products
256,000 United News & Media PLC (Ordinary)......... 2,756,353
--Broadcasting & Publishing
200,000 Vendome Luxury Group PLC (Units)........... 1,843,986
--Merchandising
1,003,483 Waterford Wedgwood PLC (Units)............. 1,281,686
--Food & Household Products
220,000 Wolseley PLC (Ordinary).................... 1,670,838
--Building Materials & Components
-------------
57,277,775
-------------
Total Common Stocks & Warrants
(cost--$122,556,438)..................... 157,992,539
-------------
PREFERRED STOCKS -- 4.2%
GERMANY--4.2%
6,000 Fresenius AG............................... 1,108,781
--Health & Personal Care
20,000 Marschollek, Lautenschlaeger und Partner AG
(Non-Voting)............................. 2,516,383
--Financial Services
<CAPTION>
- ----------------------------------------------------------------------------
SHARES/
FACE AMOUNT DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
35,412 Rhoen Klinikum (Non-Voting)................ $ 3,944,980
--Health & Personal Care
-------------
7,570,144
-------------
Total Preferred Stocks
(cost--$3,431,271)....................... 7,570,144
-------------
CONVERTIBLE BONDS -- 1.3%
FINLAND--0.6%
FIM 4,550,000 Lansivoima, 7.425% due 3/29/01............. 1,061,361
--Utilities -- Electric & Gas
-------------
1,061,361
-------------
FRANCE--0.7%
FF 5,331,730 Virbac, 5% due 1/01/01..................... 1,150,616
--Health & Personal Care
-------------
1,150,616
-------------
Total Convertible Bonds
(cost--$1,897,753)....................... 2,211,977
-------------
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)......................... 336,006
-------------
336,006
-------------
Total Investments--94.4%
(cost--$128,203,793)(a).................. $ 168,110,666
Other Assets in Excess of
Liabilities--5.6%........................ 10,011,796
-------------
Net Assets--100.0%......................... $ 178,122,462
-------------
-------------
</TABLE>
- ------------------------------
+ Non-income producing security.
ADR American Depositary Receipt.
* Investment in restricted security with an aggregate value of $456,009,
representing 0.26% of net assets at September 30, 1996. The investment was
acquired on October 22, 1990 and September 5, 1991 for $759,153.
(a) The United States Federal income tax basis of the Fund's investments
at September 30, 1996 was $128,203,793 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $39,906,873
(gross unrealized appreciation--$42,864,427; gross unrealized
depreciation--$2,957,554).
6
<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
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.
------------------------------------------------
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 AND CASH PURCHASE PLAN-SUMMARY
An automatic Distribution Reinvestment and Cash Purchase 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.
QUARTERLY REPORT
SEPTEMBER 30, 1996
