<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, 1999, the end of the period under review, the Fund's net assets
totaled $193.2 million. This represents a net asset value per share of $19.20, a
rise of 12.82% per annum from its initial value, after taking into account
underwriting discounts, commissions, offering expenses and assuming reinvestment
of dividends and distributions. This compares with a 13.64% 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 $17.25 per share on the New York Stock
Exchange, which represents a 10.16% discount to the Fund's net asset value per
share and a rise of 10.59% per annum from its initial value, assuming
reinvestment of dividends and distributions.
We also enclose an economic review, a market review and European market
outlook together with a summary of the major portfolio investments.
Yours sincerely,
/s/ Anthony M. Solomon /s/ Stephen M. M. Miller
Anthony M. Solomon Stephen M. M. Miller
Chairman of the Board President
<PAGE>
ECONOMIC REVIEW
Euro weakness persisted in the second quarter. While US economic growth
continued to be strong, European economic growth failed to surprise on the
upside. Meanwhile the Federal Reserve Board (the "Fed") indicated a tighter
monetary stance. The Fed subsequently increased interest rates at the end of the
quarter but a more neutral stance was indicated. The European Central Bank (ECB)
cut interest rates, as did the Bank of England. Euro/dollar interest rate
differentials widened. The prospect of higher interest rates in the US and
weakness in the US bond market had a negative influence on European bond
markets. Euro weakness was exacerbated by concerns about Italy's inability to
achieve the public sector deficit target set for this year, and by president
elect of the European Union Commission's comments about the viability of Italy
continuing to participate in the monetary union.
European economic growth statistics gave some mixed signals: steady if
unspectacular growth continued in most countries with the notable exceptions of
Germany and Italy, although there was limited evidence that business and
consumer confidence was picking up from depressed levels. The latest German
Institut Fur Wirtschaftforschung business survey showed a slight improvement.
Inflationary pressure remained absent, and with unemployment in the Eurozone of
10.5% showing little improvement, wage pressure is unlikely to drive prices up.
Spanish unemployment, however, continued to improve from high levels and reached
a 20-year low. The German budget was well received. This provides for 30 billion
Deutsche Marks of spending cuts in 2000, which would bring the public sector
deficit down to 2% of gross domestic product.
MARKET REVIEW
European stock markets rose 3.2% in local currency terms over the second
quarter. The period saw a high level of market volatility. Markets fell during
May against a background of rising bond yields and the tighter monetary stance
indicated by the Fed. Confidence returned during June and with flat US
inflation, supporting the Fed's indication of a more neutral stance at the end
of the month, the markets finished the quarter on an upbeat note.
The quarter also saw a high level of sector rotation. Cyclical industry
groups, such as Basic Materials and Capital Equipment, outperformed and the
Energy sector performed well with a strong recovery in oil prices. The
best-performing sectors were Electricals and Chemicals. With the markets
focusing increasingly on cyclicals, consumer goods stocks underperformed. Among
the worst-performing sectors were Healthcare and Insurance. The Insurance sector
was particularly affected by weakness in the bond markets.
The best-performing markets were Sweden and Finland, driven by strong
performances by ABB and Nokia Oyj. The worst-performing markets were peripheral
markets such as Ireland and Portugal. The Italian market was also sharply lower
over the period.
Corporate activity continued to underpin markets although both the first and
second quarters of 1999 have been well below the exceptional levels seen in the
fourth quarter of 1998. The quarter saw Olivetti finally gaining control of
Telecom Italia as shareholders backed this option in preference to a merger with
Deutsche Telekom. There was no resolution of the corporate battle in the French
banking sector, with Societe Generale bidding for Compagnie Financiere de
Paribas and BNP subsequently bidding for both banks. Since the quarter-end Total
Fina has launched a bid for Elf Aquitaine, then followed by a counterbid by the
latter for its aggressor.
There were a number of other corporate deals announced. GEC bid $4.5 billion
for Fore Systems. Air Liquide bid for BOC and both of the French water companies
made acquisitions: Vivendi is to buy Pathe while Suez Lyonnaise announced the
acquisition of Nalco, a water treatment chemicals company. Banca Intesa bid for
70% of BCI in Italy.
Strong performances were seen by stocks with sensitivity to either the Asian
economies, such as Standard Chartered, or global economic growth. Restructuring
stories, such as Siemens and Philips, also performed well. Philips in particular
benefited from an improvement in the outlook for semi-conductors.
2
<PAGE>
PORTFOLIO ACTIVITY
We added to our position in Sidel, following a breakthrough by the company in
PET plastic beer bottles. In May we reduced our Pharmaceutical weighting. We
believe that expirations of patents look set to constrain the sustainable growth
rate of European pharmaceutical companies. We also increased our holdings in
Electricals and in July 1999 purchased ABB. This is a cyclical sector in which
the larger players exercise a degree of pricing power. June saw the conclusion
of the Olivetti bid for Telecom Italia. As this was partly for bonds and cash we
have added further to our other telecom holdings. We continued to establish
positions in a number of smaller companies in the nascent but fast expanding
Technology sector.
EUROPEAN MARKET OUTLOOK
Although the Euro may now stabilize, it is unlikely to recover without
evidence of improved communication between the ECB, the Commission and Finance
Ministers. Further evidence that lower interest rates are feeding through to a
recovery in economic activity in Europe would also support the Euro.
Reported earnings have been in line with expectations so far this year. The
outlook may now improve if there is further evidence of recovery in the weaker
economies. Recovery in the emerging markets should also have a positive impact.
Corporate activity should continue to underpin the markets, even though this
may slow ahead of Y2K. In the longer term, we expect the markets to be supported
by the emerging European equity culture and increasing management focus on
shareholder value.
PORTFOLIO SUMMARY
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of total market value at June 30, 1999 are outlined below:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
FUND
Finland 1.4%
France 19.7%
Germany 12.5%
Greece 1.5%
Ireland 1.0%
Italy 11.4%
Netherlands 7.3%
Norway 0.9%
Spain 4.1%
Sweden 2.0%
Switzerland 10.5%
United Kingdom 27.7%
MSCI
Finland 2.7%
France 13.9%
Germany 14.2%
Ireland 0.6%
Italy 6.3%
Netherlands 8.1%
Norway 0.6%
Spain 4.3%
Sweden 3.3%
Switzerland 9.8%
United Kingdom 32.1%
Other* 4.1%
*Countries include Austria, Belgium, Denmark and
Portugal.
</TABLE>
3
<PAGE>
The Fund's ten largest equity holdings expressed as a percentage of total net
assets at June 30, 1999 were:
<TABLE>
<S> <C>
Siemens............................ 2.6%
Shell Transport & Trading.......... 2.5
Banco Bilbao Vizcaya............... 2.4
GKN (Ordinary)..................... 2.2
Total Fina......................... 2.0
ING Groep.......................... 2.0
Accor.............................. 2.0
Roche Holdings (Bearer)............ 1.9
Amvescap (Ordinary)................ 1.8
Vivendi............................ 1.8
---
21.2%
---
---
</TABLE>
The Fund's sector weightings (some of which may include several industries)
expressed as a percentage of net assets at June 30, 1999 were:
<TABLE>
<S> <C>
Services........................... 35.3%
Finance............................ 21.1
Consumer Goods..................... 18.2
Capital Equipment.................. 11.8
Energy............................. 7.9
Materials.......................... 3.0
Cash............................... 3.7
Other Liabilities in Excess of
Assets............................ (1.0)
-----
100.0%
-----
-----
</TABLE>
YEAR 2000 COMPLIANCE DISCLOSURE
Many computer systems and other electronically controlled equipment used by
companies and other business organizations throughout the world express dates
using only the last two digits of the year, and thus will require modification
or replacement to accommodate the Year 2000 and beyond in order to avoid
malfunctions and consequential widespread commercial disruption.
The Fund could be adversely affected if the computer systems and equipment
used by its service providers or the companies in which it invests, or other
organizations with which any of them deal, do not properly address this problem
before January 1, 2000. The strategy of the Investment Manager and the
Investment Adviser is to take steps that they believe are reasonably designed to
address that the computer systems and equipment they use are adequate to deal
with Year 2000 issues and to seek the same of their suppliers and the Fund's
other service providers. As of the date of this writing, however, there can be
no assurance that these steps will be sufficient to avoid any adverse impact to
the Fund.
4
<PAGE>
- ----------------------------------------------
THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
AS OF JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--94.8%
FINLAND--1.4%
20,000 Nokia Oyj (Series A)....................... $ 1,753,890
--Electrical & Electronics
40,000 Sonera Group Oyj........................... 874,882
--Telecommunications
-------------
2,628,772
-------------
FRANCE--19.1%
15,000 Accor...................................... 3,768,284
--Leisure & Tourism
31,488 Aerospatiale Matra......................... 726,066
--Airlines
12,500 AXA........................................ 1,525,626
--Insurance
20,000 Compagnie Financiere de Paribas............ 2,242,916
--Banks & Finance
9,000 Elf Aquitaine.............................. 1,321,298
--Energy Sources
10,000 Etablissements Economiques du Casino
Guichard- Perrachen...................... 876,945
--Merchandising
7,500 Guilbert................................... 1,044,596
--Merchandising
2,442 Hachette Filipacchi Medias................. 568,127
--Broadcasting & Publishing
4,000 LVMH....................................... 1,171,598
--Beverages & Tobacco
4,000 +LVMH rights(a)............................ 116,995
--Beverages & Tobacco
35,000 +Marionnaud Parfumeriers................... 1,870,472
--Merchandising
60,000 +Naf Naf................................... 597,354
--Textiles & Apparel
20,000 Pinault Printemps Redoute.................. 3,433,498
--Merchandising
9,000 PSA Peugeot Citroen........................ 1,420,651
--Automobiles
25,000 Sidel...................................... 3,040,936
--Machinery & Engineering
7,500 Societe Generale........................... 1,322,381
--Banking
50,000 Societe Generale d'Entreprises............. 2,424,495
--Construction & Housing
30,000 Total Fina................................. 3,871,970
--Energy Sources
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
25,000 Valeo...................................... $ 2,063,400
--Automobiles
43,817 Vivendi.................................... 3,550,931
--Business & Public Services
-------------
36,958,539
-------------
GERMANY--9.6%
10,000 Allianz.................................... 2,775,273
--Insurance
55,000 Bayer...................................... 2,292,437
--Chemicals
25,125 DaimlerChrysler............................ 2,177,403
--Automobiles
32,500 Metro...................................... 2,018,521
--Merchandising
65,000 Siemens.................................... 5,016,125
--Electrical & Electronics
40,000 Software................................... 1,279,308
--Software Applications
25,000 VEBA....................................... 1,470,172
--Utilities--Electric & Gas
25,000 Volkswagen................................. 1,601,714
--Automobiles
-------------
18,630,953
-------------
GREECE--1.5%
120,000 +Panafon Hellenic Telecom SA............... 2,894,620
--Telecommunications
-------------
2,894,620
-------------
IRELAND--1.0%
110,000 Bank of Ireland............................ 1,849,838
--Banking
-------------
1,849,838
-------------
ITALY--11.1%
500,000 Banca Intesa............................... 2,403,861
--Banking
50,000 Banca Popolare di Brescia.................. 2,143,357
--Banking
17,088 Gucci Group (NY Registered)................ 1,196,160
--Consumer Goods
56,000 Industrie Natuzzi (ADR).................... 1,088,500
--Appliances & Household Durables
270,000 La Rinascente.............................. 2,044,623
--Merchandising
90,000 Luxottica Group (ADR)...................... 1,400,625
--Health & Personal Care
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
120,000 Mondadori Arnoldo Editore.................. $ 2,079,907
--Broadcasting & Publishing
981,460 Seat Pagine Gialle......................... 1,341,658
--Publishing
740,000 Tecnost.................................... 1,824,665
--Computers
360,000 Telecom Italia (Savings)................... 1,953,627
--Telecommunications
600,000 Telecom Italia Mobile...................... 2,209,901
--Telecommunications
400,000 Unicredito Italiano........................ 1,758,017
--Banking
-------------
21,444,901
-------------
NETHERLANDS--7.1%
22,500 Akzo Nobel................................. 947,101
--Chemicals
20,000 +Equant.................................... 1,844,680
--Data Processing & Reproduction
70,000 ING Groep.................................. 3,791,498
--Insurance
60,000 Numico..................................... 2,126,334
--Food & Household Products
26,785 Unilever................................... 1,805,887
--Food & Household Products
80,000 Wolters Kluwer............................. 3,185,890
--Broadcasting & Publishing
-------------
13,701,390
-------------
NORWAY--0.9%
50,000 Ekornes.................................... 384,395
--Appliances & Household Durables
400,000 NCL Holdings............................... 1,336,807
--Leisure & Tourism
-------------
1,721,202
-------------
SPAIN--4.0%
17 +A.B. Capital Fund*........................ 28,155
--Business & Public Services
325,000 Banco Bilbao Vizcaya....................... 4,697,588
--Banking
50,000 Endesa..................................... 1,067,294
--Utilities--Electric & Gas
100,000 Telefonica Publicidad e Informacion........ 1,996,340
--Publishing
-------------
7,789,377
-------------
SWEDEN--1.9%
80,000 Electrolux (Series B)...................... 1,679,840
--Appliances & Household Durables
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
73,438 +Pricer (Series B)......................... $ 55,445
--Electrical & Electronics
130,000 Securitas (Series B)....................... 1,947,623
--Business & Public Services
-------------
3,682,908
-------------
SWITZERLAND--10.2%
6,000 Adecco..................................... 3,217,666
--Business & Public Services
10,000 Credit Suisse Group........................ 1,731,797
--Banking
600 Kuoni Reisen Holdings...................... 2,315,715
--Leisure & Tourism
2,200 Novartis (Registered)...................... 3,215,090
--Health & Personal Care
350 Roche Holdings (Bearer).................... 3,600,721
--Health & Personal Care
6,000 +Swisscom.................................. 2,259,705
--Telecommunications
1,500 The Swatch Group (Bearer).................. 1,010,107
--Consumer Goods
8,000 UBS (Registered)........................... 2,389,751
--Banking
-------------
19,740,552
-------------
UNITED KINGDOM--27.0%
400,000 Amvescap (Ordinary)........................ 3,562,890
--Financial Services
170,000 BAA (Ordinary)............................. 1,634,830
--Business & Public Services
50,000 Barclays (Ordinary)........................ 1,455,110
--Banking
200,000 Boots (Ordinary)........................... 2,375,786
--Merchandising
150,000 BP Amoco (Ordinary)........................ 2,688,721
--Energy Sources
110,000 Carlton Communications..................... 912,163
--Communications
100,000 Compass (Ordinary)......................... 991,619
--Business & Public Services
220,000 Diageo (Ordinary).......................... 2,312,593
--Beverages & Tobacco
250,000 GKN (Ordinary)............................. 4,268,374
--Machinery & Engineering
70,000 Glaxo Wellcome (Ordinary).................. 1,945,559
--Health & Personal Care
500,000 Halma (Ordinary)........................... 835,545
--Machinery & Engineering
300,000 Hays (Ordinary)............................ 3,135,658
--Business & Public Services
70,000 HSBC Holdings (Ordinary)................... 2,479,677
--Banking
200,000 Lloyds TSB (Ordinary)...................... 2,711,580
--Banking
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
100,000 Marks & Spencer (Ordinary)................. $ 580,940
--Merchandising
200,000 NXT (Ordinary)............................. 1,466,145
--Electrical & Electronics
200,000 Peninsular & Oriental Steam Navigation..... 3,003,232
--Transportation--Shipping
150,000 Serco Group (Ordinary)..................... 3,381,592
--Business & Public Services
650,000 Shell Transport & Trading (Registered)..... 4,875,129
--Oil & Related
175,000 SmithKline Beecham (Ordinary).............. 2,274,692
--Health & Personal Care
1,000,000 Thomson Travel (Ordinary).................. 2,167,688
--Leisure & Tourism
140,000 United News & Media (Ordinary)............. 1,346,331
--Broadcasting & Publishing
220,000 Wolseley (Ordinary)........................ 1,661,316
--Building Materials & Components
-------------
52,067,170
-------------
Total Common Stocks
(cost--$148,216,054)..................... $ 183,110,222
-------------
<CAPTION>
- ----------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS--2.5%
GERMANY--2.5%
14,000 Henkel (Non-Voting)........................ 956,180
--Chemicals
4,000 Marschollek, Lautenschlaeger Und Partner
(Non-Voting)............................. 1,906,582
--Financial Services
20,000 Rhoen-Klinikum (Non-Voting)................ 1,960,230
--Health & Personal Care
-------------
Total Preferred Stocks
(cost--$2,872,796)....................... 4,822,992
-------------
Total Investments--97.3%
(cost--$151,088,850)(b).................. 187,933,214
Unrealized Appreciation on Foreign Currency
Exchange Contracts--0.0%(c).............. 5,220
Other Assets in Excess of
Liabilities--2.7%........................ 5,289,266
-------------
Net Assets--100.0%......................... $ 193,227,700
-------------
-------------
</TABLE>
- ------------------------------
+ Non-income producing security.
ADR American Depositary Receipt.
* Investment in restricted security with an aggregate value of $28,155,
representing 0.01% of net assets at June 30, 1999. The investment was
acquired on October 22, 1990 and September 5, 1991 and has an adjusted basis
of $334,461.
(a) Rights entitlement of 1 LVMH common share for every 10 rights
exercised. There is no cost to exercise. Ability to exercise rights expires
on September 21, 1999.
(b) The United States Federal income tax basis of the Fund's investments
at June 30, 1999 was $151,088,850 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $36,844,364
(gross unrealized appreciation--$42,702,112; gross unrealized
depreciation--$5,857,748).
(c) Foreign currency exchange contracts entered into to hedge purchase
and sale commitments as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Sales
In Net
Contracts to Exchange Settlement Unrealized
Deliver For Date Value Appreciation
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EUR 1,527,855 $1,581,330 7/01/99 $1,576,288 $5,042
GBP 9,207 14,556 7/01/99 14,515 41
EUR 457,581 472,223 7/02/99 472,086 137
------
Total $5,220
------
------
- --------------------------------------------------------------------------
</TABLE>
EUR Euro
GBP British Pound
7
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $151,088,850) (Note 1).......... $ 187,933,214
Domestic cash............................................... 5,289,175
Foreign cash (Note 1)....................................... 1,868,390
Receivable for securities sold.............................. 2,051,621
Withholding tax refunds receivable.......................... 409,084
Dividends receivable........................................ 209,569
Interest receivable......................................... 6,365
Net unrealized appreciation on foreign currency exchange
contracts.................................................. 5,220
Prepaid expenses............................................ 4,669
---------------
Total assets.......................................... 197,777,307
---------------
LIABILITIES
Payable for securities purchased............................ 4,202,475
Investment management fee payable (Note 2).................. 121,529
Administration fee payable (Note 2)......................... 40,510
Accrued expenses and other liabilities...................... 185,093
---------------
Total liabilities..................................... 4,549,607
---------------
NET ASSETS.................................................. $ 193,227,700
---------------
---------------
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........... 1,056,963
Accumulated undistributed net realized gain on
investments.............................................. 25,898,441
Net unrealized appreciation on investments and foreign
currency related transactions............................ 36,808,173
---------------
Net Assets................................................ $ 193,227,700
---------------
---------------
Net Asset Value per share
($193,227,700/10,066,319 shares of common stock issued and
outstanding)............................................... $19.20
-------
-------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME
Income
Dividends....................................... $ 2,415,403
Interest........................................ 69,893
---------------
2,485,296
Less: Withholding tax on foreign source
dividends...................................... 327,736
---------------
Total income................................ 2,157,560
---------------
Expenses
Investment management fee (Note 2).............. 733,907
Administration fee (Note 2)..................... 244,635
Directors' fees and expenses.................... 78,450
Custodian fees.................................. 67,198
Shareholder servicing fees...................... 44,262
Legal fees...................................... 35,562
Audit fees...................................... 23,555
Reports to shareholders......................... 17,519
NYSE listing fee................................ 12,031
Insurance expense............................... 5,175
Miscellaneous................................... 10,320
---------------
Total expenses.............................. 1,272,614
---------------
Net investment income............................. 884,946
---------------
</TABLE>
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
<TABLE>
<S> <C> <C>
Net realized gain from:
Investments--net................................ $ 11,407,826
Foreign currency related transactions........... 4,610 11,412,436
--------------
Change in unrealized appreciation on:
Investments--net................................ (15,499,525)
Foreign currency related transactions........... (49,800) (15,549,325)
-------------- --------------
Net realized and unrealized loss on investments
and foreign currency related transactions........ (4,136,889)
--------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $ (3,251,943)
--------------
--------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED FOR THE
JUNE 30, YEAR ENDED
1999 DECEMBER 31,
(UNAUDITED) 1998
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income....................................... $ 884,946 $ 1,426,725
Net realized gain on investments and foreign currency
related transactions....................................... 11,412,436 42,061,453
Change in unrealized appreciation (depreciation) on
investments and foreign currency related transactions...... (15,549,325) (3,246,774)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................... (3,251,943) 40,241,404
------------ ------------
Dividends and distributions to shareholders from:
Net investment income ($0 and $0.130172 per share,
respectively).............................................. -- (1,310,353)
Net realized gain on investments and foreign currency
related transactions ($0 and $3.360266 per share,
respectively) (Note 1)..................................... -- (33,825,510)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions................................................ -- (35,135,863)
------------ ------------
Total increase (decrease)..................................... (3,251,943) 5,105,541
------------ ------------
NET ASSETS
Beginning of period......................................... 196,479,643 191,374,102
------------ ------------
End of period (including accumulated undistributed net
investment income of $1,056,963 and $172,017,
respectively).............................................. $193,227,700 $196,479,643
------------ ------------
------------ ------------
</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 FOR THE YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1999 -----------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
---------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period...... $ 19.52 $ 19.01 $ 18.18 $ 14.32 $ 12.56 $ 12.74
---------------- --------- --------- --------- --------- ---------
Operations:
Net investment income*.................. 0.09 0.14 0.15 0.12 0.14 0.12
Net realized and unrealized gain (loss)
on investments and foreign currency
related transactions................... (0.41) 3.86 3.20 4.80 2.50 0.66
---------------- --------- --------- --------- --------- ---------
Total from operations..................... (0.32) 4.00 3.35 4.92 2.64 0.78
---------------- --------- --------- --------- --------- ---------
Dividends and distributions to
shareholders from:
Net investment income**................. -- (0.13) (0.14) (0.16) (0.10) (0.15)
Net realized gain on investments........ -- (3.36) (2.38) (0.90) (0.78) (0.81)
---------------- --------- --------- --------- --------- ---------
Total dividends and distributions..... -- (3.49) (2.52) (1.06) (0.88) (0.96)
---------------- --------- --------- --------- --------- ---------
Net asset value, end of period............ $ 19.20 $ 19.52 $ 19.01 $ 18.18 $ 14.32 $ 12.56
---------------- --------- --------- --------- --------- ---------
---------------- --------- --------- --------- --------- ---------
Per share market value, end of period..... $ 17.25 $ 18.56 $ 17.06 $ 16.13 $ 12.75 $ 10.75
---------------- --------- --------- --------- --------- ---------
---------------- --------- --------- --------- --------- ---------
Total investment return, market value+.... (7.07)% 27.84% 21.00% 34.78% 26.26% (10.21)%
Net assets at end of period (000
omitted)................................. $ 193,228 $ 196,480 $ 191,374 $ 182,963 $ 144,190 $ 126,431
Ratio of expenses to average weekly net
assets................................... 1.31% 1.27% 1.26% 1.42% 1.42% 1.42%
Ratio of net investment income to average
weekly net assets........................ 0.91%*** 0.65% 0.77% 0.74% 1.01% 0.90%
Portfolio turnover rate................... 24%*** 54% 39% 48% 52% 68%
</TABLE>
- --------------------------
* Based on average shares outstanding during the period.
** Net realized gains (losses) on foreign currency related transactions, if
any, are included with and distributed as net investment income in
accordance with provisions of the Internal Revenue Code.
*** Annualized.
+ 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. Total investment return for periods of
less than one full year are not annualized.
See Notes to Financial Statements.
11
<PAGE>
- ----------------------------------------------
THE EUROPE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------
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 include 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 JUNE 30, 1999 CONSISTS OF:
<TABLE>
<CAPTION>
UNITS COST VALUE
--------- ---------- ----------
<S> <C> <C> <C>
British Pound....... 9,207 $ 14,774 $ 14,514
Euro................ 1,790,525 1,863,547 1,847,285
Swiss Franc......... 10,237 6,640 6,591
--------- ---------- ----------
1,809,969 $1,884,961 $1,868,390
--------- ---------- ----------
--------- ---------- ----------
</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 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
12
<PAGE>
to the difference between the value of the 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 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% 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 % 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. Income dividends
and capital gains distributions are determined in accordance with income tax
regulations, which may differ from generally accepted accounting principles.
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.
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. The Investment Manager pays a fee to the Investment Adviser for
services rendered. The Investment Manager and Investment Adviser are
subsidiaries of Mercury Asset Management Ltd, whose immediate parent is Mercury
Asset Management Group Ltd. The ultimate parent of Mercury Asset Management
Group Ltd. is Merrill Lynch & Co., Inc.
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.
Certain directors and officers of the Fund are also directors and officers of
either the Administrator, the Investment Manager, the Investment Adviser, and/or
Mercury Asset Management Group Ltd.
NOTE 3. INVESTMENT
TRANSACTIONS
Purchases and sales of investment securities, other than U.S. government
securities and short-term investments, for the six months ended June 30, 1999
were $45,277,536 and $48,002,614, 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, 1999, Mercury Asset Management Ltd.
owned 1,057 shares in respect of the Fund's initial seed capital and reinvested
distributions.
13
<PAGE>
NOTE 5. QUARTERLY RESULTS OF OPERATIONS*
(UNAUDITED)
<TABLE>
<CAPTION>
NET REALIZED
AND
UNREALIZED
GAIN ON
INVESTMENTS
AND FOREIGN
NET CURRENCY
INVESTMENT INVESTMENT RELATED
INCOME INCOME/(LOSS) TRANSACTIONS
------------- ------------- ---------------
PER PER PER
QUARTER ENDED TOTAL SHARE TOTAL SHARE TOTAL SHARE
- -------------------- ------ ----- ----- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
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
------ ----- ----- ------ ------- ------
------ ----- ----- ------ ------- ------
March 31, 1998...... $ 754 $0.06 $ 228 $ 0.02 $36,547 $ 3.63
June 30, 1998....... 2,216 0.22 1,380 0.14 8,759 0.87
September 30,
1998............... 657 0.07 (88) (0.01) (43,935) (4.36)
December 31, 1998... 575 0.06 (93) (0.01) 37,444 3.72
------ ----- ----- ------ ------- ------
$4,202 $0.41 $1,427 $ 0.14 $38,815 $ 3.86
------ ----- ----- ------ ------- ------
------ ----- ----- ------ ------- ------
March 31, 1999 $ 535 $0.05 $(111) $(0.01) $(1,764) $(0.17)
June 30, 1999 1,623 0.16 996 0.10 (2,373) (0.24)
------ ----- ----- ------ ------- ------
$2,158 $0.21 $ 885 $ 0.09 $(4,137) $(0.41)
------ ----- ----- ------ ------- ------
------ ----- ----- ------ ------- ------
</TABLE>
- --------------------------
* Totals expressed in thousands of dollars except per share amounts.
NOTE 6. 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, 1997...... $18.90 $18.17 $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
March 31, 1998...... 22.74 18.75 20 3/4 16 1,557
June 30, 1998....... 24.49 22.95 22 5/8 19 7/8 1,420
September 30,
1998............... 25.19 19.75 23 3/8 15 3/16 1,949
December 31, 1998... 22.58 18.17 20 7/16 15 1/16 1,417
March 31, 1999...... 20.79 18.77 21 3/8 16 1/2 1,851
June 30, 1999....... 19.91 18.81 17 15/16 16 1/4 1,131
</TABLE>
- --------------------------
* Based on closing prices as reported on the New York Stock Exchange.
** In thousands.
PROXY RESULTS
On June 15, 1999, The Europe Fund, Inc. shareholders voted on the following
proposals at the annual shareholders' meeting. The description of the proposals
and number of shares voted are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SHARES SHARES
VOTED WITHHELD/ VOTED
FOR AGAINST
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of
Directors: George F. Bennett....................... 8,046,554 98,500
Sir Arthur Bryan........................ 8,047,823 97,231
Peter Stormonth Darling................. 8,024,087 120,967
Leon Levy............................... 8,046,503 98,551
J. Murray Logan......................... 8,056,659 88,395
James S. Martin......................... 8,024,880 120,174
Francois-Xavier Ortoli.................. 8,018,451 126,603
Anthony M. Solomon...................... 8,048,273 96,781
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SHARES
VOTED SHARES VOTED SHARES
FOR AGAINST ABSTAINING
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as
the Fund's independent auditors..................................... 8,072,408 17,485 55,160
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<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
STEPHEN M. M. MILLER, President
STEVEN W. GOLANN, Vice President
DONALD C. BURKE, Treasurer
RITA J. KLEINMAN, 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 or any securities mentioned in
this report.
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.
The accompanying financial statements as of June 30, 1999 were not audited and
accordingly, no opinion is expressed on them.
- ------------------------------------------------
EXECUTIVE OFFICES--
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(For latest net asset value and requests for Fund Reports, please call
1-800-543-6217 or 1-609-282-4600.)
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 and the US Securities and Exchange Commission.)
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. Net asset
value (NAV) and market price information about the Fund's shares are published
weekly 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." Daily NAV and market price information is available on the internet
at www.wsj.com.
The quarterly newsletter entitled "The Closed End Fund Focus" will no longer
be published in a printed format. An abbreviated version, providing information
only pertaining to THE EUROPE FUND, INC., may be available via e-mail, depending
upon demand. Those interested in receiving the newsletter in this manner should
forward their e-mail address with "Closed End Fund Focus" in the subject line to
Ms. Michelle Lau of Princeton Administrators, L.P. at: [email protected].
DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN--SUMMARY
A 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.
SEMI-ANNUAL REPORT
JUNE 30, 1999
