<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Third Quarter Report of The Europe Fund,
Inc. (the "Fund"). On September 30, 1999, the end of the period under review,
the Fund's net assets totaled $192.8 million. This represents a net asset value
per share of $19.15, a rise of 12.42% 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
13.38% increase in the MSCI Europe Index over the same time period. At the end
of the period under review, the Fund was quoted at $16.625 per share on the New
York Stock Exchange, which represents a 13.19% discount to the Fund's net asset
value per share and a rise of 9.86% per annum from its initial value, assuming
reinvestment of dividends and distributions.
We also enclose an economic review, a market review and market outlook
together with a summary of the major portfolio investments and Year 2000
compliance disclosure.
Yours sincerely,
<TABLE>
<S> <C>
/s/ Anthony M. Solomon /s/ Stephen M. M. Miller
Anthony M. Solomon Stephen M. M. Miller
Chairman of the Board President
</TABLE>
- --------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
- --------------------------------------------------------------------------------
ECONOMIC REVIEW
After consistent weakness over the first half of the year, the euro recovered
during the third quarter. Having reached a low of 1.01 against the US dollar
early in July, the euro strengthened to 1.07 by the end of the third quarter.
This was in spite of a second interest rate hike by the US Federal Reserve Board
in August and an increase in the US dollar/euro interest rate differential.
While the European central bank made no change, with short-term euro rates
remaining at 2.5%, the Bank of England increased the base rate by 0.25% to
5.25%. In expectation of further increases in rates, bond yields rose. The
German long bond yield reached the highest level seen since January 1998, at
5.2%.
The recovery in the euro was driven by evidence of an economic recovery in
Europe. This was particularly evident in Germany, where manufacturing new orders
rose by 5.1% year-on-year in August. In July the French business outlook index
recorded its second biggest rise in 25 years. Confidence in the economy
reflected the beneficial effect of a weak euro on export demand, particularly
from the Far East. Italy, the one weak area, continued to report weak industrial
output figures although consumer confidence continued to recover.
<PAGE>
The outlook for inflation in the Eurozone remains benign, although higher
energy prices, driven by the rise in the oil price, did have an impact on
reported Consumer Price Index figures. Nevertheless, with unemployment remaining
above 10%, we continue to see little risk of inflationary wage increases.
In Germany, the Social Democratic Party performed poorly in three state
elections and lost its majority in the Bundesrat. The new European Commission
was confirmed by the European Parliament.
MARKET REVIEW
European markets were volatile over the third quarter. A more positive tone in
the bond markets heard near the end of August helped the equity markets recover
the losses of the previous month, but in September there was further concern
about the prospects of higher interest rates in the US and the markets ended on
a weak note. Over the third quarter the MSCI Europe Index rose by 1.17%.
The best performing sectors were once again the more 'value focused' areas of
the market, with Capital Goods and Materials outperforming. However, Healthcare
and Food also outperformed and Insurance, normally one of the most interest
rate-sensitive sectors, recovered from an oversold position. Services and
Consumer Goods underperformed. The Auto sector was particularly weak.
The best performing markets were Norway and Denmark. Both markets benefited
from the effect of a higher oil price on energy services. The Scandinavian
markets outperformed. Of the major markets, the strongest performer was France,
with the Oil, Retail and Non-Ferrous Metals sectors performing strongly, driven
by corporate activity (see page 3). The United Kingdom and Germany both
underperformed.
Corporate activity continued to support the market, with Total Fina finally
winning control of Elf Aquitaine and Deutsche Telekom bidding for One2One. A
three-way merger was announced in the Aluminium sector between Alcan, Alusuisse
Lonza and Pechiney. Carrefour and Promodes announced their intention to merge in
the French Retail sector. In the United Kingdom, Bank of Scotland bid for
National Westminster Bank. However, the share prices of VEBA and Viag fell
following the announcement of a merger as the market remained skeptical about
the speed of asset disposals. The announcement at the end of the quarter that
Olivetti intended to use Telecom Italia Mobile's dividend stream to finance its
leveraged bid for Telecom Italia was taken very negatively by the market. Under
the terms of the offer, Telecom Italia shareholders' controlling stake in
Telecom Italia Mobile would be diluted.
PORTFOLIO ACTIVITY
Notable reductions in weightings were made in Novartis, Unilever, Wolters
Kluwer, Vivendi and Metro as we identified opportunities with better near term
prospects.
We initiated holdings in ABB and Nestle and increased the holdings in Nokia
Oyj, Bayer, Tesco and Barclays Bank at what we believe were attractive prices.
MARKET OUTLOOK
The economic background should continue to reflect a recovery as business
confidence improves. The anticipated recovery should continue to underpin the
euro.
High unemployment across the Eurozone (10.2% in August) together with excess
capacity and deflationary pressure from the introduction of the single currency
should keep inflation low. While domestic demand is putting upward pressure on
interest rates in the US, this is not yet the case in Europe.
The markets may however be unsettled by the prospect of further interest rate
hikes in the US. The exceptional level of corporate activity seen in Europe is
likely to slow as a result of concerns about Year 2000 during the fourth
quarter.
2
<PAGE>
PORTFOLIO SUMMARY
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of total market value at September 30, 1999 are outlined below:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
FUND
Finland 2.4%
France 19.0%
Germany 14.0%
Greece 1.7%
Ireland 0.9%
Italy 10.8%
Netherlands 5.6%
Norway 0.7%
Spain 3.4%
Sweden 1.8%
Switzerland 12.2%
United Kingdom 27.5%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
MSCI
Finland 2.8%
France 14.3%
Germany 14.2%
Ireland 0.8%
Italy 6.3%
Netherlands 8.2%
Norway 0.6%
Spain 4.2%
Sweden 3.3%
Switzerland 9.9%
United Kingdom 31.2%
Other * 4.2%
*Countries include Austria, Belgium, Denmark and Portugal.
</TABLE>
The Fund's ten largest equity holdings expressed as a percentage of total net
assets at September 30, 1999 were:
<TABLE>
<S> <C>
Siemens...................................... 2.8%
Shell Transport & Trading.................... 2.5
Roche Holdings (Bearer)...................... 2.1
GKN (Ordinary)............................... 2.1
ING Groep.................................... 2.0
Total Fina................................... 2.0
Accor........................................ 1.8
Bayer........................................ 1.8
Nokia Oyj (Series A)......................... 1.7
Adecco (Registered).......................... 1.7
----
20.5%
====
</TABLE>
The Fund's sector weightings expressed as a percentage of net assets at
September 30, 1999 were:
<TABLE>
<S> <C>
Services..................................... 37.0%
Finance...................................... 20.6
Consumer Goods............................... 17.6
Capital Equipment............................ 11.5
Energy....................................... 7.8
Materials.................................... 4.1
Cash......................................... 1.2
Other Assets in Excess of Liabilities........ 0.2
-----
100.0%
=====
</TABLE>
3
<PAGE>
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 those steps will be sufficient to avoid any adverse impact to
the Fund.
4
<PAGE>
- ----------------------------------------------
THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
as of September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--96.4%
FINLAND--2.3%
37,500 Nokia Oyj (Series A)...... $ 3,359,059
--Electrical & Electronics
40,000 Sonera Group Oyj.......... 1,158,829
--Telecommunications
------------
4,517,888
------------
FRANCE--18.7%
15,000 Accor..................... 3,497,256
--Leisure & Tourism
17,500 AXA....................... 2,214,343
--Insurance
29,000 Banque Nationale de
Paris................... 2,315,048
--Banking
13,500 Elf Aquitaine............. 2,358,131
--Energy Sources
10,000 Etablissements Economiques
du Casino Guichard-
Perrachen............... 1,150,308
--Merchandising
7,500 Guilbert.................. 990,543
--Merchandising
4,400 LVMH...................... 1,319,233
--Beverages & Tobacco
35,000 +Marionnaud
Parfumeriers............ 1,908,659
--Merchandising
60,000 +Naf Naf.................. 798,825
--Textiles & Apparel
17,500 Pinault Printemps
Redoute................. 3,317,787
--Merchandising
6,500 PSA Peugeot Citroen....... 1,302,937
--Automobiles
25,000 Sidel..................... 2,545,589
--Machinery & Engineering
7,500 Societe Generale.......... 1,545,726
--Banking
42,500 Societe Generale
d'Entreprises........... 2,141,117
--Construction & Housing
30,000 Total Fina................ 3,770,454
--Energy Sources
25,000 Valeo..................... 1,809,339
--Automobiles
43,375 Vivendi................... 3,046,805
--Business & Public
Services
------------
36,032,100
------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ------------------------------------------------------
<C> <S> <C>
GERMANY--11.6%
10,000 Allianz................... $ 2,882,161
--Insurance
85,000 Bayer..................... 3,390,479
--Chemicals
25,125 DaimlerChrysler........... 1,731,413
--Automobiles
20,000 Deutsche Bank............. 1,342,026
--Banking
20,000 Mannesmann................ 3,217,028
--Telecommunications
17,517 Metro..................... 912,345
--Merchandising
65,000 Siemens................... 5,368,903
--Electrical & Electronics
40,000 Software.................. 1,350,547
--Data Processing &
Reproduction
25,000 VEBA...................... 1,369,985
--Utilities--Electric &
Gas
13,000 Volkswagen................ 725,546
--Automobiles
------------
22,290,433
------------
GREECE--1.7%
120,000 Panafon Hellenic
Telecom................. 3,265,306
--Telecommunications
------------
3,265,306
------------
IRELAND--0.9%
220,000 Bank of Ireland........... 1,792,563
--Banking
------------
1,792,563
------------
ITALY--10.7%
350,000 Banca Intesa.............. 1,465,045
--Banking
50,000 BIPOP..................... 2,140,851
--Banking
17,088 Gucci Group (NY
Registered)............. 1,426,848
--Consumer Goods
34,000 Industrie Natuzzi (ADR)... 667,250
--Appliances & Household
Durables
270,000 La Rinascente............. 2,027,418
--Merchandising
90,000 Luxottica Group (ADR)..... 1,715,625
--Consumer Goods
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ------------------------------------------------------
<C> <S> <C>
120,000 Mondadori Arnoldo
Editore................. $ 2,096,117
--Broadcasting &
Publishing
981,460 Seat Pagine Galle......... 1,434,224
--Broadcasting &
Publishing
800,000 Tecnost................... 1,678,598
--Telecommunications
360,000 Telecom Italia
(Savings)............... 1,809,818
--Telecommunications
600,000 Telecom Italia Mobile..... 2,211,148
--Telecommunications
400,000 Unicredito Italiano....... 1,955,523
--Banking
------------
20,628,465
------------
NETHERLANDS--5.5%
22,500 Akzo Nobel................ 958,590
--Chemicals
20,000 +Equant................... 1,627,473
--Telecommunications
70,000 ING Groep................. 3,813,591
--Insurance
60,000 Numico.................... 2,485,943
--Food & Household
Products
50,000 Wolters Kluwer............ 1,714,811
--Broadcasting &
Publishing
------------
10,600,408
------------
NORWAY--0.7%
50,000 Ekornes................... 392,966
--Appliances & Household
Durables
300,000 NCL....................... 869,677
--Leisure & Tourism
------------
1,262,643
------------
SPAIN--3.3%
17 +A.B. Capital Fund*....... 29,067
--Business & Public
Services
230,000 Banco Bilbao Vizcaya...... 3,032,766
--Banking
65,000 Telefonica................ 1,040,549
--Telecommunications
100,000 Telefonica Publicidad e
Informacion............. 2,311,267
--Broadcasting &
Publishing
------------
6,413,649
------------
SWEDEN--1.8%
80,000 Electrolux (Series B)..... 1,492,137
--Appliances & Household
Durables
130,000 Securitas (Series B)...... 1,949,287
--Business & Public
Services
------------
3,441,424
------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ------------------------------------------------------
<C> <S> <C>
SWITZERLAND--12.0%
10,000 ABB....................... $ 1,032,989
--Electrical & Electronics
6,000 Adecco (Registered)....... 3,354,883
--Business & Public
Services
1,000 Alusuisse Lonza
(Registered)............ 1,151,616
--Metals Non-Ferrous
10,000 Credit Suisse
(Registered)............ 1,832,722
--Banking
600 Kuoni Reisen
(Registered)............ 2,361,213
--Leisure & Tourism
1,250 Nestle (Registered)....... 2,349,217
--Food & Household
Products
2,000 Novartis (Registered)..... 2,967,011
--Health & Personal Care
350 Roche (Bearer)............ 4,050,483
--Health & Personal Care
3,000 Swisscom (Registered)..... 935,688
--Telecommunications
1,400 The Swatch Group
(Bearer)................ 1,089,770
--Consumer Goods
7,000 UBS (Registered).......... 1,973,342
--Banking
------------
23,098,934
------------
UNITED KINGDOM--27.2%
300,000 Amvescap (Ordinary)....... 2,444,161
--Financial Services
100,000 BAA (Ordinary)............ 1,004,822
--Business & Public
Services
110,000 Barclays Bank
(Ordinary).............. 3,221,640
--Banking
160,000 Boots (Ordinary).......... 1,780,205
--Merchandising
150,000 BP Amoco (Ordinary)....... 2,716,772
--Energy Sources
110,000 Carlton Communications
(Ordinary).............. 827,104
--Broadcasting &
Publishing
100,000 Compass (Ordinary)........ 985,894
--Business & Public
Services
220,000 Diageo (Ordinary)......... 2,248,629
--Beverages & Tobacco
250,000 GKN (Ordinary)............ 3,978,963
--Machinery & Engineering
110,000 Glaxo Wellcome
(Ordinary).............. 2,849,711
--Health & Personal Care
500,000 Halma (Ordinary).......... 946,392
--Machinery & Engineering
300,000 Hays (Ordinary)........... 3,239,526
--Business & Public
Services
240,000 HSBC (Ordinary)........... 2,749,311
--Banking
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ------------------------------------------------------
<C> <S> <C>
160,000 Lloyds TSB (Ordinary)..... $ 1,975,080
--Banking
100,000 Marks & Spencer
(Ordinary).............. 517,636
--Merchandising
200,000 NXT (Ordinary)............ 1,471,435
--Electrical & Electronics
200,000 Peninsular & Oriental
Steam Navigation........ 3,020,786
--Transportation--Shipping
125,000 Serco (Ordinary).......... 2,798,030
--Business & Public
Services
650,000 Shell Transport & Trading
(Registered)............ 4,857,051
--Energy Sources
175,000 SmithKline Beecham
(Ordinary).............. 1,998,946
--Health & Personal Care
700,000 Tesco (Ordinary).......... 2,186,628
--Merchandising
1,000,000 Thomson Travel
(Ordinary).............. 1,695,277
--Leisure & Tourism
140,000 United News & Media
(Ordinary).............. 1,352,601
--Broadcasting &
Publishing
220,000 Wolseley (Ordinary)....... 1,518,603
--Building Materials &
Components
------------
52,385,203
------------
Total Common Stocks
(cost--$153,522,792).... 185,729,016
------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS--2.2%
GERMANY--2.2%
14,000 Henkel (Non-Voting)....... $ 881,264
--Chemicals
6,000 Marschollek,
Lautenschlaeger Und
Partner (Non-Voting).... 1,040,389
--Financial Services
20,000 Rhoen-Klinikum
(Non-Voting)............ 2,407,126
--Health & Personal Care
------------
4,328,779
------------
Total Preferred Stocks
(cost--$2,590,525)...... 4,328,779
------------
Total Investments--98.6%
(cost--$156,113,317)(a)... 190,057,795
Other Assets in Excess of
Liabilities--1.4%....... 2,724,043
------------
Net Assets--100.0%........ $192,781,838
============
</TABLE>
- ------------------------------
+ Non-income producing security.
ADR American Depositary Receipt
* Investment in restricted security with an aggregate value of $29,067,
representing 0.02% of net assets at September 30, 1999. The investment was
acquired on October 22, 1990 and September 5, 1991 and has an adjusted basis
of $334,461.
(a) The United States Federal income tax basis of the Fund's investments
at September 30, 1999 was $156,113,317 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $33,944,478
(gross unrealized appreciation--$41,444,885; gross unrealized
depreciation--$7,500,407).
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
* J. MURRAY LOGAN, Director
* JAMES S. MARTIN, Director
FRANCOIS-XAVIER ORTOLI, Director
STEPHEN M. M. MILLER, President
DONALD C. BURKE, Vice President and Treasurer
ROBERT E. PUTNEY, III, 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--
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.
QUARTERLY REPORT
SEPTEMBER 30, 1999
