<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Annual Report of The Europe Fund, Inc. On
December 31, 1997, the end of the period under review, the Fund's net assets
totaled $191.4 million. This represents a net asset value per share of $19.01, a
rise of 154.49% from its initial value on May 3, 1990, after taking into account
underwriting discounts, commissions, offering expenses and assuming reinvestment
of dividends and distributions. This compares with a 157.26% 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 $17.0625 per share on the New York
Stock Exchange, which represents a 10.2% discount to the Fund's net asset value
per share and a rise of 111.82% from its initial value, assuming reinvestment of
dividends and distributions. A total distribution of $2.52 per share has been
made as of December 31, 1997.
Further to the announcement made on November 19, 1997, Mercury Asset
Management International Ltd. and Mercury Asset Management International Channel
Islands Ltd. have become subsidiaries of Merrill Lynch & Co., Inc. on December
22, 1997. This transaction between Mercury and Merrill Lynch has created one of
the largest asset management groups in the world with combined assets under
management of approximately $450 billion, and it has substantially increased the
breadth and depth of our resources and expertise in order to better serve our
shareholders and other clients.
We also enclose an investment review and European market outlook together with
a summary of the major portfolio investments.
Yours sincerely,
[SIG] [SIG]
Anthony M. Solomon J. Loughlin Callahan
Chairman of the Board President and Treasurer
<PAGE>
INVESTMENT REVIEW
During the fourth quarter of 1997, your Fund experienced a rise in net asset
value of 1.06%, which compared with an increase of 0.07% in the value of the
MSCI Europe Index. For the year, the Fund's net asset value has increased by
19.57%, which compares with a 23.80% increase in the MSCI Europe Index. These
results are recorded in total return and U.S. dollar based terms, with net
dividends and distributions reinvested.
European stock markets had a volatile fourth quarter in 1997. Despite the
destabilizing influence of the financial crisis which was spreading across Asia,
they showed considerable resilience overall, although individual stocks showed a
highly contrasted performance. Investors looked for safety in the more defensive
sectors such as pharmaceuticals and foods, thereby explaining the good
performance of Roche and Novartis, two of the Fund's largest holdings. The
Italian stock market was the star performer in Europe (up 10% over the quarter)
largely because there was further evidence of restructuring in the traditionally
very inefficient Italian banking sector. For example, one of the Fund's
holdings, Banco Ambroveneto, merged with Cariplo to form Italy's second largest
bank in terms of assets, and the market leader in most of the richest regions of
the country.
ECONOMIC AND MARKET OUTLOOK
The Asian crisis will also have some positive consequences. The German
Bundesbank now looks unlikely to raise its key interest rates in the first
quarter of 1998. Many Asian companies will intensify their export effort to get
access to foreign currencies, and their dramatically lower currencies will allow
them to lower their export prices, thereby having a disinflationary impact on
the European economies.
Despite a less promising outlook for export performance, Europe could be the
only major region in the world to experience an acceleration in economic growth
in 1998, thanks to a recovery in domestic demand, which appears to be gathering
strength.
As we have mentioned in previous reports, this positive economic backdrop to
the European stock markets is supported by an intensification of the corporate
restructuring process. The merger of Union Bank of Switzerland and Swiss Bank
Corporation was the key event of the last month of 1997.
PORTFOLIO SUMMARY
During the three month period to December 31, 1997, notable performers
included Amvescap, Great Universal Store and Hays in the UK. On the Continent,
the Italian banks and the Dutch publisher, Ver Ned Uitgevers Bezit, also showed
strong gains. We added a new restructuring story to the portfolio by way of
Peugeot, the French car manufacturer. Peugeot has a new CEO at the helm, and we
expect to see some significant rationalization measures soon.
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of market value at December 31, 1997 are outlined below:
<TABLE>
<CAPTION>
MSCI EUROPE
FUND INDEX
--------- ---------------
<S> <C> <C>
Austria........................... -- 0.6%
Belgium........................... -- 1.9
Czech Republic.................... 0.7% --
Denmark........................... 1.5 1.7
Finland........................... 2.2 1.1
France............................ 16.3 11.9
Germany........................... 9.1 14.6
Ireland........................... 2.1 0.6
Italy............................. 10.4 6.0
<CAPTION>
MSCI EUROPE
FUND INDEX
--------- ---------------
<S> <C> <C>
Netherlands....................... 15.7% 8.5%
Norway............................ 2.7 0.8
Portugal.......................... -- 0.8
Spain............................. 0.7 4.0
Sweden............................ 5.1 3.9
Switzerland....................... 12.2 11.6
United Kingdom.................... 21.3 32.0
--------- -----
100.0% 100.0%
--------- -----
--------- -----
</TABLE>
2
<PAGE>
The Fund's ten largest equity holdings at December 31, 1997 were:
TOTAL
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 we expect its
production profile to increase by 70% by the year 2000 as a result of
discoveries made in the Far East and Latin America. In view of its earnings
outlook, we believe that the stock is attractively valued relative to its
European peer group.
ROYAL DUTCH PETROLEUM
The Royal Dutch/Shell Group is the largest oil company in the world and among
the ten biggest chemical companies. Because of its diversity, the Group's
earnings are less sensitive to oil prices than is the case with other oil
companies. We believe that the restructuring now being implemented by management
should yield positive results in the medium term. Merger discussions with Texaco
are ongoing in relation to the U.S. downstream operations of Shell. News on the
rationalization of the European refining and marketing business is expected in
the near future, while the chemicals business is also being reorganized.
Management is strongly committed to improving the Group's return on capital,
while the Group's financial flexibility (cash and cash equivalents in excess of
$12 billion) is expected to be used in a manner more rewarding to shareholders.
ROCHE HOLDINGS
Roche is Switzerland's second largest pharmaceuticals group and is
attractively valued, especially in relation to its U.S. peers. It has a very
strong financial position, which should allow it to take part in the continuing
consolidation of the pharmaceutical sector. There are a number of promising
drugs in development (particularly in the cardiovascular, virology and obesity
areas) which should allow for sustainable high single-digit sales growth as new
products take over from current drugs. In addition, diagnostics sales are
expected to grow strongly over the next few years, with new opportunities in
disease management. Roche has also recently acquired Tastemaster (a U.S. based
manufacturer of flavors), which strengthens its fragrances and flavors division.
COMPAGNIE GENERALE DES EAUX
Compagnie Generale des Eaux is a multi-industry company with principal
activities in the water, energy, waste management, construction and property
sectors. 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.
UNILEVER
Unilever is one of the world's largest producers of consumer goods involved in
the production of foods, drinks, detergents, and personal products. While
trading conditions continue to remain difficult, the company is in the midst of
a restructuring process under the leadership of a dynamic new management group.
As part of the restructuring process, the company has recently decided to sell
its specialty division, which may result in increasing shareholder value.
VER NED UITGEVERS BEZIT
VNU is a Dutch company operating in the media sector. The company is set to
benefit from increasing advertising revenue and falling newsprint prices. After
an in-depth strategic review, management will continue the company's involvement
in television production. Performance in the consumer magazine division is
strong, particularly due to cost cutting in their Belgian operations.
3
<PAGE>
ABB
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 generation 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.
ELF AQUITAINE
Elf Aquitaine is an integrated oil company with chemicals, pharmaceuticals and
beauty products interests. The company aims to break through a 12% return on
equity target within the medium term (extending its current objective of
reaching 10% by 1998), while accelerating growth in upstream production and
specialty chemicals. Further cost cutting, disciplined capital allocation and
management focus on shareholder value creation are central tenets of this
strategy. The company continues to trade at a discount to the European oil
sector average, but with a gross yield of 40% above that of the sector.
HAYS
The Hays Group operates in the business services and distribution market. It
has a strong position in its U.K. domestic market as well as expansion
opportunities abroad. A string of successful acquisitions has trebled the
company's market value over the last seven years. We believe recent results
indicate that above-average growth may be expected in the medium term.
MARSCHOLLEK, LAUTENSCHLAEGER UND PARTNER
MLP 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.
4
<PAGE>
- -----------------------------------------------
THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS, RIGHTS & WARRANTS--93.9%
CZECH REPUBLIC--0.7%
50,000 +Central European Media Enterprises (Series
A)....................................... $ 1,262,500
--Consumer Goods
-------------
1,262,500
-------------
DENMARK--1.4%
37,516 Unidanmark (Series A)...................... 2,754,583
--Banking
-------------
2,754,583
-------------
FINLAND--2.1%
55,000 Hackman Oy (Series A)...................... 1,817,514
--Consumer Goods
96,194 Metra (Series B)........................... 2,260,480
--Machinery & Engineering
-------------
4,077,994
-------------
FRANCE--16.0%
8,179 Accor...................................... 1,520,568
--Leisure & Tourism
14,240 +Atos...................................... 1,835,893
--Electrical & Electronics
28,600 But........................................ 1,297,667
--Services
45,000 Cipe France................................ 1,520,684
--Business & Public Services
40,000 Compagnie Generale des Eaux................ 5,582,323
--Business & Public Services
32,808 +Compagnie Generale des Eaux Warrants
(a)...................................... 22,294
--Business & Public Services
40,000 Elf Aquitaine.............................. 4,651,936
--Energy Sources
10,000 Peugeot.................................... 1,261,007
--Automobiles
8,000 Pinault Printemps Redoute.................. 4,267,819
--Merchandising
6,784 Seita...................................... 243,453
--Consumer Goods
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
67,745 Total (Class B)............................ $ 7,372,151
--Energy Sources
15,000 Valeo...................................... 1,017,279
--Consumer Goods
-------------
30,593,074
-------------
GERMANY--4.8%
89,841 BASF....................................... 3,184,522
--Chemicals
112,000 Bayer...................................... 4,184,821
--Chemicals
26,814 Veba....................................... 1,826,364
--Utilities
-------------
9,195,707
-------------
IRELAND--2.1%
259,970 Bank of Ireland............................ 4,000,753
--Banking
-------------
4,000,753
-------------
ITALY--10.2%
326,679 Banca Popolare di Brescia.................. 3,046,690
--Banking
200,000 Banco Ambrosiano Veneto.................... 765,318
--Banking
141,440 +Banco Ambrosiano Veneto Stock Rights
(b)...................................... 601,592
--Banking
141,440 +Banco Ambrosiano Veneto Bond Rights (c)... 89,539
--Banking
895,999 Credito Italiano (Ordinary)................ 2,762,647
--Banking
137,933 Industrie Natuzzi (ADR).................... 2,844,868
--Appliances & Household Durables
400,000 La Rinascente.............................. 2,984,400
--Merchandising
50,000 Luxottica Group (ADR)...................... 3,125,000
--Health & Personal Care
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
172,444 Mediolanum................................. $ 3,245,752
--Insurance
-------------
19,465,806
-------------
NETHERLANDS--15.4%
150,000 Elsevier................................... 2,427,232
--Broadcasting & Publishing
27,650 Gucci Group (NY Registered)................ 1,157,844
--Consumer Goods
94,403 ING Groep.................................. 3,977,314
--Financial Services
100,000 N.V. Koninklijke KNP....................... 2,303,897
--Consumer Goods
75,335 Nutricia Ver Bedrj......................... 2,285,694
--Food & Household Products
128,000 Royal Dutch Petroleum Company.............. 7,028,318
--Oil Refining & Marketing
85,200 Unilever................................... 5,254,070
--Consumer Goods
180,000 Ver Ned Uitgevers Bezit.................... 5,079,428
--Broadcasting & Publishing
-------------
29,513,797
-------------
NORWAY--2.6%
810,000 Christiania Bank Kreditkasse............... 3,268,075
--Banking
100,000 Schibsted.................................. 1,712,700
--Broadcasting & Publishing
-------------
4,980,775
-------------
SPAIN--0.7%
17 +A.B. Capital Fund*........................ 352,910
--Business & Public Services
7,100 Acerinox................................... 1,046,443
--Materials
-------------
1,399,353
-------------
SWEDEN--5.0%
410,000 ABB (Series B)............................. 4,829,971
--Electrical & Electronics
75,000 Hoganas (Series B)......................... 2,296,237
--Machinery & Engineering
37,169 Securitas (Series B)....................... 1,123,935
--Health & Personal Care
80,000 Svenska Stal (Series B).................... 1,320,415
--Metals-Non-Ferrous
-------------
9,570,558
-------------
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND--12.0%
3,376 Adecco..................................... $ 979,405
--Services
1,500 +Baloise Holding Ltd. (Registered)......... 2,777,435
--Insurance
500 Bobst (Bearer)............................. 736,402
--Machinery & Engineering
7,391 Hero (Bearer).............................. 4,176,993
--Food & Household Products
2,688 Novartis (Registered)...................... 4,363,995
--Health & Personal Care
600 Roche Holdings (Bearer).................... 5,961,776
--Health & Personal Care
7,000 SMH (Bearer)............................... 3,864,913
--Consumer Goods
-------------
22,860,919
-------------
UNITED KINGDOM--20.9%
512,000 Amvescap (Ordinary)........................ 4,384,533
--Financial Services
265,000 Bemrose (Ordinary)......................... 1,923,907
--Forest Products & Paper Materials
250,000 British Airport Authority (Ordinary)....... 2,047,278
--Business & Public Services
166,228 Devro (Ordinary)........................... 1,030,512
--Food & Household Products
179,303 Diageo (Ordinary).......................... 1,642,291
--Food & Household Products
55,000 Forth Ports (Ordinary)..................... 560,740
--Food & Household Products
200,000 GKN (Ordinary)............................. 4,101,134
--Machinery & Engineering
250,000 Great Universal Store (Ordinary)........... 3,153,137
--Merchandising
1,551,910 Halma (Ordinary)........................... 2,934,755
--Machinery & Engineering
341,210 Hays (Ordinary)............................ 4,547,768
--Business & Public Services
380,000 Marks & Spencer (Ordinary)................. 3,742,983
--Merchandising
100,000 Reuters Holdings (Ordinary)................ 1,093,526
--Business & Public Services
65,843 Schroders (Ordinary)....................... 2,071,248
--Finance
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
195,000 Serco Group (Ordinary)..................... $ 2,789,725
--Business & Public Services
200,000 United News & Media (Ordinary)............. 2,279,138
--Broadcasting & Publishing
220,000 Wolseley (Ordinary)........................ 1,750,631
--Building Materials & Components
-------------
40,053,306
-------------
Total Common Stocks, Rights
& Warrants
(cost--$128,585,951)..................... 179,729,125
-------------
PREFERRED STOCKS--4.1%
GERMANY--4.1%
17,363 Marschollek, Lautenschlaeger Und Partner
(Non-Voting)............................. 4,392,641
--Financial Services
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
35,412 Rhoen Klinikum (Non-Voting)................ $ 3,445,705
--Health & Personal Care
-------------
7,838,346
-------------
Total Preferred Stocks
(cost--$3,335,797)....................... 7,838,346
-------------
Total Investments--98.0%
(cost--$131,921,748) (d)................. 187,567,471
Unrealized Depreciation on Foreign Currency
Exchange Contracts--0.0% (e)............. (1,106)
Other Assets in Excess of
Liabilities--2.0%........................ 3,807,737
-------------
Net Assets--100.0%......................... $ 191,374,102
-------------
-------------
</TABLE>
- ------------------------------
+ Non-income producing security.
ADR American Depositary Receipt.
* Investment in restricted security with an aggregate value of $352,910,
representing 0.18% of net assets at December 31, 1997. The investment was
acquired on October 22, 1990 and September 5, 1991 for $759,153.
(a) The warrants enable the holder to subscribe to one ordinary share for
every 40 warrants held at FF 900 per share until May 2, 2001.
(b) The rights enable the holder to subscribe to two ordinary shares and
two warrants for every right held at ITL 3200 per share until January 2,
1998.
(c) The rights enable the holder to subscribe to one convertible floating
rate bond for every two rights held at ITL 3500 per share until January 2,
1998.
(d) The United States Federal income tax basis of the Fund's investments
at December 31, 1997 was $131,957,220 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $55,610,251
(gross unrealized appreciation--$57,748,949; gross unrealized
depreciation--$2,138,698).
(e) Foreign currency exchange contracts incurred to hedge purchase and
sale commitments as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Sales Net
In Unrealized
Contracts to Exchange Settlement Appreciation
Deliver For Date Value (Depreciation)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------
IEP 398,850 $568,361 1/5/98 $567,284 $ 1,077
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
In
Contracts to Exchange Settlement
Purchases Receive For Date Value Net
Unrealized
Appreciation
(Depreciation)
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEM 284,310 $160,265 1/2/98 $158,082 ($ 2,183)
-------------
Total ($ 1,106)
-------------
-------------
- ------------------------------------------------------------------------
</TABLE>
DEM German Deutschemark
IEP Irish Punt
See Notes to Financial Statements.
7
<PAGE>
- ----------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF
ASSETS AND LIABILITIES
DECEMBER 31, 1997
- ----------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $131,921,748) (Note 1).......... $ 187,567,471
Domestic cash............................................... 3,527,745
Foreign cash (Note 1)....................................... 27,379
Receivable for securities sold.............................. 1,787,359
Withholding tax refund receivable........................... 321,763
Interest receivable......................................... 104,629
Dividends receivable........................................ 98,195
Prepaid expenses............................................ 1,403
---------------
Total assets.......................................... 193,435,944
---------------
LIABILITIES
Payable for securities purchased............................ 1,682,683
lnvestment management fee payable (Note 2).................. 102,052
Administration fee payable (Note 2)......................... 42,082
Net unrealized depreciation on foreign currency exchange
contracts.................................................. 1,106
Accrued expenses and other liabilities...................... 233,919
---------------
Total liabilities..................................... 2,061,842
---------------
NET ASSETS.................................................. $ 191,374,102
---------------
---------------
Net Assets consist of:
Common Stock, $.001 par value
(Authorized 100,000,000 shares)
(Note 4)................................................. $ 10,066
Paid-in surplus........................................... 129,454,057
Accumulated undistributed net investment income+.......... 200,618
Accumulated undistributed net realized gain on
investments.............................................. 6,105,089
Net unrealized appreciation on investments and foreign
currency related transactions............................ 55,604,272
---------------
Net Assets................................................ $ 191,374,102
---------------
---------------
Net Asset Value per share
($191,374,102 DIVIDED BY 10,066,319 shares of common stock
issued and outstanding).................................... $19.01
-------
-------
</TABLE>
- --------------------------
+ Net realized gains (losses) on foreign currency related transactions are
distributed as net investment income in accordance with provisions of the
Internal Revenue Code.
- ----------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1997
- ----------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Income
Dividends................................................. $ 3,782,520
Interest.................................................. 723,493
---------------
4,506,013
Less: Withholding tax on foreign source dividends......... 463,002
---------------
Total income.......................................... 4,043,011
---------------
Expenses
Investment management fee (Note 2)........................ 1,469,629
Administration fee (Note 2)............................... 496,061
Custodian fees............................................ 143,392
Directors' fees and expenses.............................. 118,458
Shareholder servicing fees................................ 80,634
Legal fees................................................ 59,084
Audit fees................................................ 47,500
Reports to shareholders................................... 35,473
NYSE listing fee.......................................... 25,945
Insurance expense......................................... 12,205
Miscellaneous............................................. 25,252
---------------
Total expenses........................................ 2,513,633
---------------
Net investment income....................................... 1,529,378
---------------
</TABLE>
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
<TABLE>
<S> <C> <C>
Net realized gain (loss) from:
Investments..................................... $ 26,143,948
Foreign currency related transactions........... (51,444) 26,092,504
--------------
Change in net unrealized appreciation
(depreciation) on:
Investments..................................... 6,300,748
Foreign currency related transactions........... (82,501) 6,218,247
-------------- --------------
Net realized and unrealized gain on investments
and foreign currency related transactions........ 32,310,751
--------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $ 33,840,129
--------------
--------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income....................................... $ 1,529,378 $ 1,242,005
Net realized gain on investments and foreign currency
related transactions....................................... 26,092,504 13,644,128
Change in net unrealized appreciation (depreciation) on
investments and foreign currency related transactions...... 6,218,247 34,567,746
------------ ------------
Net increase in net assets resulting from operations.......... 33,840,129 49,453,879
------------ ------------
Dividends and distributions to shareholders from:
Net investment income ($0.144 and $0.158 per share,
respectively).............................................. (1,448,724) (1,589,956)
Net realized gain on investments ($2.380 and $0.903 per
share, respectively) (Note 1).............................. (23,980,156) (9,090,610)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions................................................ (25,428,880) (10,680,566)
------------ ------------
Total increase................................................ 8,411,249 38,773,313
------------ ------------
NET ASSETS
Beginning of year........................................... 182,962,853 144,189,540
------------ ------------
End of year (including accumulated undistributed net
investment income of $200,618 and $171,408,
respectively).............................................. $191,374,102 $182,962,853
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
9
<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 YEAR ENDED
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................ $ 18.18 $ 14.32 $ 12.56 $ 12.74 $ 10.74
-------- -------- -------- -------- --------
Operations:
Net investment income*.......................... 0.15 0.12 0.14 0.12 0.12
Net realized and unrealized gain on investments
and foreign currency related transactions...... 3.20 4.80 2.50 0.66 2.63
-------- -------- -------- -------- --------
Total from operations......................... 3.35 4.92 2.64 0.78 2.75
-------- -------- -------- -------- --------
Dividends and distributions to shareholders from:
Net investment income**......................... (0.14) (0.16) (0.10) (0.15) (0.07)
Net realized gain on investments................ (2.38) (0.90) (0.78) (0.81) (0.68)
-------- -------- -------- -------- --------
Total dividends and distributions............. (2.52) (1.06) (0.88) (0.96) (0.75)
-------- -------- -------- -------- --------
Net asset value, end of year...................... $ 19.01 $ 18.18 $ 14.32 $ 12.56 $ 12.74
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Per share market value, end of year............... $ 17.06 $ 16.13 $ 12.75 $ 10.75 $ 13.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return, market value+............ 21.00% 34.78% 26.26% (10.21)% 39.40%
Net assets at end of year (000 omitted)........... $191,374 $182,963 $144,190 $126,431 $128,272
Ratio of expenses to average weekly net assets.... 1.26% 1.42% 1.42% 1.42% 1.46%
Ratio of net investment income to average weekly
net assets....................................... 0.77% 0.74% 1.01% 0.90% 1.17%
Portfolio turnover rate........................... 39% 48% 52% 68% 184%
Average commission rate paid++.................... $ 0.0166 $ 0.0624 N/A N/A N/A
</TABLE>
- --------------------------
* Based on average shares outstanding during the year.
** Net realized gains (losses) on foreign currency related transactions are
distributed as net investment income in accordance with provisions of the
Internal Revenue Code.
+ Total investment return, market value, is based on the change in market price
of a share during the period and assumes reinvestment of dividends and
distributions at actual prices pursuant to the Fund's distribution
reinvestment and cash purchase plan.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate paid per share for purchases
and sales of investment securities. This amount includes commissions paid to
foreign brokers which may materially affect the rate shown. Amounts paid in
foreign currencies have been converted into U.S. dollars using the prevailing
exchange rate on the date of the transaction.
See Notes to Financial Statements.
10
<PAGE>
- ----------------------------------------------
THE EUROPE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 1. SIGNIFICANT
ACCOUNTING POLICIES
The Europe Fund, Inc. (the "Fund") was incorporated in Maryland on February 8,
1990, as a closed-end, diversified management investment company. The Fund's
investment objective is long-term capital appreciation through investment
primarily in European equity securities.
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, and 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 year-end, resulting
from changes in the exchange rate.
FOREIGN CURRENCY AS OF DECEMBER 31, 1997 CONSISTS OF:
<TABLE>
<CAPTION>
UNITS COST VALUE
------------ ------------ ------------
<S> <C> <C> <C>
Netherlands
Guilder............ 53,603 $ 26,856 $ 26,446
Spanish Peseta...... 142,000 955 933
------------ ------------
$ 27,811 $ 27,379
------------ ------------
------------ ------------
</TABLE>
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 the 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 the
forward
11
<PAGE>
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 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.
USE OF ESTIMATES: The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.
RECLASSIFICATION OF COMPONENTS OF NET ASSETS: During the year ended December
31, 1997, net realized losses on foreign currency related transactions of
$51,444 were reclassified from accumulated undistributed net realized gain on
investments to accumulated undistributed net investment income. This
reclassification was a result of permanent book-to-tax differences and 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"). (See also Note 5.)
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.
The Administrator is a wholly-owned affiliate of Merrill Lynch & Co., Inc.
("Merrill Lynch").
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").
NOTE 3. INVESTMENT
TRANSACTIONS
Purchases and sales of investment securities, other than U.S. government
securities and short-term investments, for the year ended December 31, 1997 were
$72,452,957 and $88,469,163, respectively.
NOTE 4. CAPITAL
There are 100 million shares of $.001 par value common stock authorized. Of the
10,066,319 shares outstanding at December 31, 1997 Mercury owned 900 shares in
respect of the Fund's initial seed capital and reinvested distributions.
12
<PAGE>
NOTE 5. SUBSEQUENT EVENT
On November 19, 1997, the boards of directors of Merrill Lynch and Mercury
announced that they had agreed on terms of a recommended cash offer pursuant to
which Merrill Lynch, through its subsidiary ML Invest plc, would seek to acquire
all of the issued share capital of Mercury. On December 22, 1997, Merrill Lynch
acquired control of Mercury. Both the Investment Adviser and the Investment
Manager are now subsidiaries of Mercury.
A special meeting of shareholders is scheduled for February 25, 1998, whereby
shareholders will vote on new investment advisory and new investment management
agreements for the Fund to take effect retroactive to January 12, 1998. The new
agreements, which have been approved by the Fund's Board of Directors, will be
substantially identical to the Fund's most recent agreements, except for the
dates of execution, effectiveness and termination and certain escrow
arrangements. During the interim period from December 22, 1997 through January
12, 1998, the Investment Adviser and Investment Manager provided the Fund
services similar to those provided under the Fund's most recent agreements at
fees not in excess of the actual cost of performing those services. The
Investment Adviser and the Investment Manager received an exemptive order from
the Securities and Exchange Commission allowing them to operate under the new
agreements beginning on January 12, 1998 and continuing until shareholders
approve the new agreements (which must take place by June 10, 1998 for the new
agreements to remain effective).
NOTE 6. QUARTERLY
RESULTS OF OPERATIONS*
(UNAUDITED)
<TABLE>
<CAPTION>
NET REALIZED
AND
UNREALIZED
GAIN ON
INVESTMENTS
NET AND FOREIGN
INVESTMENT 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, 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
September 30,
1996............... 848 0.08 232 0.02 7,151 0.71
December 31, 1996... 553 0.06 (84) (0.01) 15,605 1.56
-------- -------- -------- ------- --------- --------
Total............... $ 3,628 $ 0.36 $ 1,242 $ 0.12 $ 48,212 $ 4.80
-------- -------- -------- ------- --------- --------
-------- -------- -------- ------- --------- --------
March 31, 1997...... $ 565 $ 0.06 $ (44) $ 0.00 $ 8,707 $ 0.86
June 30, 1997....... 1,922 0.19 1,303 0.12 10,616 1.06
September 30,
1997............... 974 0.10 327 0.03 12,450 1.23
December 31, 1997... 582 0.06 (57) 0.00 538 0.05
-------- -------- -------- ------- --------- --------
Total............... $ 4,043 $ 0.41 $ 1,529 $ 0.15 $ 32,311 $ 3.20
-------- -------- -------- ------- --------- --------
-------- -------- -------- ------- --------- --------
</TABLE>
- ------------------------
* Totals expressed in thousands of dollars except per share amounts.
NOTE 7. PER SHARE
SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET MARKET
VALUE PRICE*
------------ ------------------
QUARTER ENDED HIGH LOW HIGH LOW VOLUME**
- -------------------------------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
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
September 30,
1996............... 17.62 16.38 15 5/8 13 1/4 1,580
December 31, 1996... 19.23 17.80 17 1/4 15 3/8 1,342
March 31, 1997...... 18.90 18.04 17 3/8 15 1/4 1,331
June 30, 1997....... 20.35 18.40 17 3/4 15 5/8 1,084
September 30,
1997............... 21.51 19.80 19 1/8 16 1/4 1,142
December 31, 1997... 21.81 18.47 18 1/4 15 1/2 1,472
</TABLE>
- ------------------------
* As reported on the New York Stock Exchange.
** In thousands.
13
<PAGE>
ADDITIONAL
INFORMATION
(UNAUDITED)
During the period, there have been no material changes in the Fund's investment
objective or fundamental policies that have not been approved by the
shareholders. There have been no changes in the Fund's charter or By-Laws that
would delay or prevent a change in control of the Fund which have not been
approved by shareholders. There have been no changes in the principal risk
factors associated with investment in the Fund.
We are pleased to announce that as of November, 1997, Michel Legros is
co-portfolio manager of the Fund. Michel Legros is a Director of Mercury Asset
Management. He was born in 1964 and received an MBA degree from a leading
business school in France, Ecole Superieur des Sciences Economiques et
Commerciales. Before joining Mercury in 1991, he spent five years with the fund
management team of Robert Fleming & Co. in London. His major role at Mercury has
been managing mutual funds since 1992. Within Mercury's European team, he has
been instrumental in driving the implementation of EVA (Economic Value Added) as
an evaluation and valuation tool used by the team in its research work.
Consuelo Brooke, who has been the Senior Manager of the Fund from the outset,
continues in that position.
14
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Shareholders and Board of Directors
The Europe Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
Europe Fund, Inc., including the schedule of investments, as of December 31,
1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended and financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Europe Fund, Inc. at December 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the indicated
periods, in conformity with generally accepted accounting principles.
[SIG]
New York, New York
February 5, 1998
15
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Dear Shareholder:
The following information summarizes all of the 1997 per share distributions
payable by the Fund on December 31, 1997 for shareholders of record on December
22, 1997.
<TABLE>
<CAPTION>
FOREIGN
DOMESTIC FOREIGN TOTAL TAXES LONG-TERM
ORDINARY SOURCE ORDINARY PAID OR CAPITAL
INCOME INCOME INCOME WITHHELD GAINS
- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$0.685166 $0.326580 $1.011746 $0.048583 $1.514389
</TABLE>
The foreign taxes paid or withheld per share represent taxes incurred by the
Fund on dividends received by the Fund from foreign sources. Foreign taxes paid
or withheld should be included in taxable income with an offsetting deduction
from gross income or as a credit for taxes paid to foreign governments. You
should consult your tax counsel or other tax advisers regarding the appropriate
treatment of foreign taxes paid. The Taxpayer Relief Act of 1997 adjusted the
tax rate for long-term capital gains. Currently, long-term capital gains are
taxed at a 20% or 28% rate depending upon how long the security was held. The
Fund declared a long-term capital gain distribution in the amount of $1.514389
per share, which was payable on December 31, 1997. Of this amount, 9.97% is
subject to the 20% rate, and 90.03% is subject to the 28% rate.
- --------------------------------------------------------------------------------
DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN
- --------------------------------------------------------------------------------
Pursuant to the Fund's Distribution Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders will have all distributions, net of any applicable U.S.
withholding tax (including, in the case of non-U.S. shareholders, backup
withholding taxes), automatically reinvested by The Bank of New York (the "Plan
Agent"), in Fund shares pursuant to the Plan. Shareholders who do not wish to
participate in the Plan or who wish to terminate participation in the Plan may
elect, by notifying the Plan Agent in writing, to receive all distributions, net
of any applicable U.S. withholding tax, in cash paid by check in U.S. dollars
mailed directly to the shareholder by the Plan Agent, as dividend paying agent.
In the case of shareholders, such as banks, brokers or nominees, that hold
shares for others who are beneficial owners, the Plan Agent will administer the
Plan on the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in the shareholders'
name and held for the account of beneficial owners who are to participate in the
Plan. A beneficial owner of shares registered in the name of a bank, broker or
other nominee should consult with the nominee to determine whether they should
participate in the Plan or how they may withdraw from the Plan. A beneficial
owner holding shares through a nominee may not be able to transfer their shares
and continue to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the directors of the Fund declare a distribution, participants in the Plan
will receive the equivalent in shares of the Fund valued as set forth below.
Whenever market price is equal to or exceeds net asset value at the time shares
are valued for the purpose of determining the number of shares equivalent to the
cash distribution, participants will be issued shares of the Fund at a price
equal to the greater of net asset value or an amount equal to 95 per cent of the
then current market price of the Fund's shares. The Fund will not issue shares
under the Plan below net asset value. If net asset value exceeds the market
price of Fund shares at that time, or if the Fund should declare a distribution
payable only in cash (i.e., if the Board of Directors should preclude
reinvestment at net asset value), the Plan Agent will buy, as agent for the
participants, Fund shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts. Purchases by the Plan Agent will be
made on or shortly after the payment date for the distribution and in no event
more than 30 days after that date except where temporary curtailment or
suspension of purchase is necessary to comply with U.S. Federal securities laws.
If, before the Plan Agent has completed its
16
<PAGE>
purchases, the market price exceeds the net asset value of a Fund share, the
average per share purchase price paid by the Plan Agent may exceed the net asset
value of the Fund's shares, resulting in the acquisition of fewer shares than if
the distribution had been paid in shares issued by the Fund on the dividend
payment date. Because of the foregoing difficulty with respect to open-market
purchases, the Plan provides that if the Plan Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period or if the
market discount shifts to a market premium during the purchase period, the Plan
Agent will cease making open-market purchases and will invest the uninvested
portion of the dividend amount in newly issued shares at the close of business
on the last purchase date.
Participants have the option of making additional cash payments to the Plan
Agent, quarterly, in any amount from U.S. $100 to U.S. $3,000, for investment in
the Fund's Common Stock. The Plan Agent will use all funds received from
participants to purchase Fund shares in the open market on or about March 15,
June 15, September 15 and December 15 of each year. Any voluntary cash payments
received more than 30 days prior to these dates will be returned by the Plan
Agent, and interest will not be paid on any uninvested cash payments. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, it is suggested that participants send in
voluntary cash payments to be received by the Plan Agent approximately ten days
before March 15, June 15, September 15 or December 15, as the case may be.
Optional cash payments must be made in U.S. dollars. Optional cash payments
drawn on a non-U.S. bank will be subject to collection fees and must be
collected by the foregoing quarterly dates to be invested. A participant may
withdraw a voluntary cash payment by written notice, if the notice is received
by the Plan Agent not less than 48 hours before the payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each shareholder's proxy will include those
shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting distributions. The Plan
Agent's fees for the reinvestment of distributions will be paid by the Fund.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of distributions payable either in stock or in cash. However,
each participant will pay a PRO RATA share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with
voluntary cash payments made by the participant or any distributions payable
only in cash.
With respect to purchases with voluntary cash payments, the Plan Agent will
charge U.S. $2.00 for each purchase for a participant, plus a PRO RATA share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than the
usual brokerage charges for these transactions because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the
proportionately lower commission thus attainable.
The receipt of distributions under the Plan will not relieve participants of
any income tax (including withholding tax) which may be payable on the
distributions. Under presently outstanding regulations, shareholders receiving
dividends or distributions in the form of additional shares pursuant to the Plan
should be treated, for U.S. Federal income tax purposes, as receiving a taxable
distribution in an amount equal to the amount of money that the shareholders
receiving cash dividends will receive, and should have a cost basis in the
shares received equal to such amount.
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any voluntary cash payments made and any distribution paid
subsequent to notice of the termination sent to members of the Plan at least 30
days before the record date for the distribution. The Plan also may be amended
by the Fund or the Plan Agent, but only by at least 30 days' written notice to
participants in the Plan (except when necessary or appropriate to comply with
applicable law, rules or policies of a regulatory authority). Further
information concerning the Plan may be obtained by contacting the Plan Agent at
P.O. Box 11260, Church Street Station, New York, New York 10277-0760, Attention:
Dividend Reinvestment Service, or by calling 1 (800) 524-4458.
17
<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 and Treasurer
STEVEN W. GOLANN, Vice President
RITA J. KLEINMAN, Secretary
THADDEA M. FELDMAN, Assistant Secretary
AMANDA J. MARSH, 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.
Comparisons between changes in the Fund's net asset value per share and changes
in the MSCI Europe Index should be considered in light of the Fund's investment
policy and objectives, the characteristics and quality of the Fund's investments
and the size of the Fund.
- ------------------------------------------------
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.
(Regulated by IMRO.)
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transactions section of newspapers under the designation
"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," and are also
available on Reuters under "MAMINDEX."
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.
ANNUAL REPORT
DECEMBER 31, 1997
