<PAGE>
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LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the First Quarter Report of The Europe Fund,
Inc. On March 31, 1999, the end of the period under review, the Fund's net
assets totaled $194.6 million. This represents a net asset value per share of
$19.33, a rise of 13.28% per annum since inception (May 3, 1990) through March
31, 1999, after taking into account underwriting discounts, commissions, and
offering expenses, and assuming reinvestment of dividends and distributions.
This compares with a 14.08% increase in the MSCI Europe Index over the same time
period. On March 31, 1999, The Europe Fund, Inc.'s common stock was quoted at
$16.8125 per share on the New York Stock Exchange, which represents a 13.02%
discount to the Fund's net asset value per share of $19.33. Assuming
reinvestment of dividends and distributions, the Fund's market price has risen
10.58% per annum from its initial value through March 31, 1999.
For the three months ended March 31, 1999, the Fund experienced a decrease in
net asset value of 0.97%, which compared with a fall of 2.11% in the value of
the MSCI Europe Index. Based on the market price of the Fund's shares as of
March 31, 1999, the total investment return for the first quarter of 1999 was
- -9.43%.
We also enclose the economic review together with a summary of the major
portfolio investments.
Yours sincerely,
[SIGNATURE] [SIGNATURE]
Anthony M. Solomon Stephen M. M. Miller
Chairman of the Board President
<PAGE>
ECONOMIC REVIEW
The economic condition of Europe, and notably the Eurozone, continues to
present a dilemma for the European Central Bank (ECB). The industrial sector
remains a concern, with poor production numbers and a low level of business
confidence, particularly in Germany. At the same time, consumer confidence is
back to historically high levels -- new car sales in February were up 13.3%
year-over-year in France, up 24.6% in Spain and modestly down by 3.7% in
Germany.
The resignation of Oskar Lafontaine in early March from his post of German
finance minister is likely to signal a turning point in the German economic
policy. He represented the traditional left-wing of the Social Democratic Party.
Prior to his surprise departure, he had met with strong opposition from German
business leaders against his proposed tax reform. His departure could lead to a
recovery in business confidence in Germany, and may encourage the ECB to cut
interest rates without feeling exposed to accusations of succumbing to political
pressures.
In line with the weaker-than-expected trends of the Eurozone economies, the
euro has weakened against all other major currencies consistently and steadily
since its launch.
The UK economy appears to be showing signs of stabilization, possibly as a
result of the aggressive wave of rate cuts by the Bank of England over recent
months. At 5.5% currently, interest rates have the prospect of decreasing
further.
PORTFOLIO SUMMARY
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of total market value at
March 31, 1999 are outlined below:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FUND
<S> <C>
Finland 1.2%
France 19.0%
Germany 11.7%
Greece 1.7%
Ireland 1.2%
Italy 10.6%
Netherlands 9.5%
Norway 0.7%
Spain 3.6%
Sweden 2.0%
Switzerland 13.5%
United Kingdom 25.3%
MSCI EUROPE INDEX
Finland 2.5%
France 13.1%
Germany 13.3%
Ireland 0.7%
Italy 7.0%
Netherlands 8.3%
Norway 0.6%
Spain 4.4%
Sweden 3.8%
Switzerland 10.3%
United Kingdom 31.4%
Other 4.6%*
*Countries include Austria, Belgium, Denmark and
Portugal.
</TABLE>
2
<PAGE>
The Fund's ten largest equity holdings expressed as a percentage of total net
assets at March 31, 1999 were:
<TABLE>
<S> <C>
Telecom Italia..................... 3.2%
ING Groep.......................... 2.9
Roche Holdings (Bearer)............ 2.9
Accor.............................. 2.6
Total (Class B).................... 2.6
Novartis (Registered).............. 2.6
Banco Bilbao Vizcaya............... 2.5
GKN (Ordinary)..................... 2.4
Siemens............................ 2.3
Adecco............................. 2.2
---
26.2%
---
---
</TABLE>
The Fund's sector weightings expressed as a percentage of total net assets at
March 31, 1999 were:
<TABLE>
<S> <C>
Services........................... 35.8%
Finance............................ 22.4
Consumer Goods..................... 20.0
Capital Equipment.................. 9.2
Energy............................. 6.2
Materials.......................... 3.8
Cash............................... 2.2
Other Assets Less Liabilities...... 0.4
-----
100.0%
-----
-----
</TABLE>
3
<PAGE>
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THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
AS OF MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION MARKET VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--94.5%
FINLAND--1.2%
10,000 Nokia Oyj (Series A)....................... $ 1,621,425
--Electrical & Electronics
40,000 Sonera Group Oyj........................... 668,459
--Telecommunications
-------------
2,289,884
-------------
FRANCE--18.5%
20,000 Accor...................................... 4,972,370
--Leisure & Tourism
10,000 AXA........................................ 1,327,407
--Insurance
9,000 Elf Aquitaine.............................. 1,223,852
--Energy Sources
10,000 Establissements Economiques du Casino
Guichard-- Perrachen..................... 888,541
--Merchandising
20,000 +Flo (Groupe).............................. 748,017
--Leisure & Tourism
7,500 Guilbert................................... 1,134,998
--Merchandising
5,000 Hachette Filipacchi Medias................. 1,167,966
--Broadcasting & Publishing
4,000 Louis Vuitton.............................. 992,312
--Beverages & Tobacco
35,000 +Marionnaud Parfumeriers................... 1,638,180
--Merchandising
60,000 +Naf Naf................................... 655,056
--Textiles & Apparel
23,000 Pinault Printemps Redoute.................. 3,674,581
--Merchandising
13,500 PSA Peugeot Citroen........................ 1,943,764
--Automobiles
14,000 Sidel...................................... 1,097,164
--Machinery & Engineering
7,500 Societe Generale........................... 1,443,068
--Banking
50,000 Societe Generale d'Entreprises............. 2,356,471
--Construction & Housing
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION MARKET VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
40,000 Total (Class B)............................ $ 4,933,456
--Energy Sources
27,500 Valeo...................................... 2,155,144
--Automobiles
15,000 Vivendi.................................... 3,695,228
--Business & Public Services
-------------
36,047,575
-------------
GERMANY--8.5%
10,000 Allianz.................................... 3,048,279
--Insurance
75,000 Bayer...................................... 2,813,172
--Chemicals
25,125 DaimlerChrysler............................ 2,189,005
--Automobiles
12,500 HypoVereinsbank............................ 748,558
--Banking
32,500 Metro...................................... 2,036,537
--Merchandising
65,000 Siemens.................................... 4,349,202
--Electrical & Electronics
25,000 VEBA....................................... 1,316,057
--Utilities--Electric & Gas
-------------
16,500,810
-------------
GREECE--1.6%
120,000 +Panafon Hellenic Telecom SA............... 3,121,169
--Telecommunications
-------------
3,121,169
-------------
IRELAND--1.2%
110,000 Bank of Ireland............................ 2,306,747
--Banking
-------------
2,306,747
-------------
ITALY--10.4%
420,000 Banca Intesa............................... 2,478,835
--Banking
50,000 Banca Popolare di Brescia.................. 1,545,758
--Banking
26,750 Gucci Group (NY Registered)................ 2,153,375
--Consumer Goods
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION MARKET VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
55,000 Industrie Natuzzi (ADR).................... $ 907,500
--Appliances & Household Durables
90,000 Luxottica Group (ADR)...................... 1,158,750
--Health & Personal Care
80,000 Mondadori Arnoldo Editore.................. 1,197,693
--Broadcasting & Publishing
1,000,000 Telecom Italia............................. 5,945,225
--Telecommunications
600,000 Telecom Italia Mobile...................... 2,321,881
--Telecommunications
450,000 Unicredito Italiano........................ 2,432,137
--Banking
-------------
20,141,154
-------------
NETHERLANDS--9.2%
50,100 Akzo Nobel................................. 1,857,537
--Chemicals
20,000 +Equant.................................... 1,521,978
--Data Processing & Reproduction
100,000 ING Groep.................................. 5,518,250
--Insurance
70,000 Numico..................................... 2,686,161
--Food & Household Products
40,000 Unilever................................... 2,782,365
--Food & Household Products
20,000 Wolters Kluwer............................. 3,631,992
--Broadcasting & Publishing
-------------
17,998,283
-------------
NORWAY--0.7%
50,000 Ekornes.................................... 466,333
--Appliances & Household Durables
400,000 NCL Holdings............................... 860,126
--Leisure & Tourism
-------------
1,326,459
-------------
SPAIN--3.5%
17 +A.B. Capital Fund*........................ 29,499
--Business & Public Services
325,000 Banco Bilbao Vizcaya....................... 4,848,061
--Banking
80,000 Endesa..................................... 2,021,809
--Utilities--Electric & Gas
-------------
6,899,369
-------------
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION MARKET VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
SWEDEN--1.9%
80,000 Electrolux (Series B)...................... $ 1,588,307
--Appliances & Household Durables
36,719 +Pricer (Series B)......................... 58,589
--Electrical & Electronics
36,719 +Pricer (Series B), Rights(a).............. 36,227
--Electrical & Electronics
130,000 Securitas (Series B)....................... 2,058,465
--Business & Public Services
-------------
3,741,588
-------------
SWITZERLAND--13.1%
8,000 Adecco..................................... 4,067,429
--Business & Public Services
5,000 Barry Callebaut............................ 1,007,041
--Food & Household Products
10,000 Credit Suisse Group........................ 1,868,526
--Banking
600 Kuoni Reisen Holdings...................... 2,234,107
--Leisure & Tourism
3,000 Novartis (Registered)...................... 4,876,447
--Health & Personal Care
450 Roche Holdings (Bearer).................... 5,498,951
--Health & Personal Care
6,000 +Swisscom.................................. 2,347,844
--Telecommunications
1,750 The Swatch Group (Bearer).................. 1,113,669
--Consumer Goods
8,000 UBS (Registered)........................... 2,518,448
--Banking
-------------
25,532,462
-------------
UNITED KINGDOM--24.7%
400,000 Amvescap (Ordinary)........................ 4,051,674
--Financial Services
250,000 BAA (Ordinary)............................. 2,787,747
--Business & Public Services
50,000 Barclays (Ordinary)........................ 1,447,488
--Banking
200,000 Boots (Ordinary)........................... 2,880,824
--Merchandising
150,000 BP Amoco (Ordinary)........................ 2,537,143
--Energy Sources
100,000 Compass (Ordinary)......................... 1,171,237
--Business & Public Services
220,000 Diageo (Ordinary).......................... 2,477,208
--Beverages & Tobacco
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION MARKET VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
300,000 GKN (Ordinary)............................. $ 4,584,789
--Machinery & Engineering
70,000 Glaxo Wellcome (Ordinary).................. 2,344,252
--Health & Personal Care
500,000 Halma (Ordinary)........................... 759,285
--Machinery & Engineering
300,000 Hays (Ordinary)............................ 3,128,416
--Business & Public Services
70,000 HSBC Holdings (Ordinary)................... 2,261,700
--Banking
200,000 Lloyds TSB (Ordinary)...................... 3,037,140
--Banking
100,000 Marks & Spencer (Ordinary)................. 655,893
--Merchandising
200,000 NXT (Ordinary)............................. 1,525,032
--Electrical & Electronics
200,000 Peninsular & Oriental Steam Navigation..... 2,859,435
--Transportation--Shipping
150,000 Serco Group (Ordinary)..................... 3,568,236
--Business & Public Services
200,000 SmithKline Beecham (Ordinary).............. 2,888,514
--Health & Personal Care
140,000 United News & Media (Ordinary)............. 1,334,403
--Broadcasting & Publishing
220,000 Wolseley (Ordinary)........................ 1,670,427
--Building Materials & Components
-------------
47,970,843
-------------
Total Common Stocks
(cost--$142,064,898)..................... 183,876,343
-------------
<CAPTION>
- ----------------------------------------------------------------------------
SHARES DESCRIPTION MARKET VALUE
- ----------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS--2.9%
GERMANY--2.9%
14,000 Henkel (Non-Voting)........................ $ 1,029,064
--Chemicals
5,000 Marschollek, Lautenschlaeger Und Partner
(Non-Voting)............................. 2,707,780
--Financial Services
20,000 Rhoen-Klinikum (Non-Voting)................ 1,945,710
--Health & Personal Care
-------------
5,682,554
-------------
Total Preferred Stocks
(cost--$3,002,074)....................... 5,682,554
-------------
Total Investments--97.4%
(cost--$145,066,972) (b)................... 189,558,897
Assets in Excess of Liabilities--2.6%...... 5,046,479
-------------
Net Assets--100.0%......................... $ 194,605,376
-------------
-------------
</TABLE>
- ------------------------------
+ Non-income producing security.
ADR American Depositary Receipt.
* Investment in restricted security with an aggregate value of $29,499,
representing 0.02% of net assets at March 31, 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 Pricer common share for each right exercised
at a price of 5 Swedish Krona.
(b) The United States Federal income tax basis of the Fund's investments
at March 31, 1999 was $145,066,972 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $44,491,925
(gross unrealized appreciation--$49,882,540; gross unrealized
depreciation--$5,390,615).
6
<PAGE>
- -------------------------------------------------------------
DIRECTORS AND OFFICERS
ANTHONY M. SOLOMON, Chairman of the Board and Director
GEORGE F. BENNETT, Director
* SIR ARTHUR BRYAN, Director
PETER STORMONTH DARLING, Director
LEON N. LEVY, Director
* J. MURRAY LOGAN, Director
* JAMES S. MARTIN, Director
FRANCOIS-XAVIER ORTOLI, Director
STEPHEN M. M. MILLER, President
STEVEN W. GOLANN, Vice President
DONALD C. BURKE, Treasurer
RITA J. KLEINMAN, Secretary
THADDEA M. MAGUIRE, 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 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.
- ------------------------------------------------
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 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 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.
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
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.
QUARTERLY REPORT
MARCH 31, 1999
