EUROPE FUND INC, N-30D, 2000-02-23

EUROPE FUND INC
N-30D, 2000-02-23

Previous: NDC AUTOMATION INC, 10KSB, 2000-02-23

Next: AUSPEX SYSTEMS INC, SC 13G, 2000-02-23

<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------

Dear Shareholder:

We are pleased to present to you the Annual Report of The Europe Fund, Inc. On
December 31, 1999, the end of the period under review, the Fund's net assets
totaled $207.8 million. This represents a net asset value per share of $20.64, a
rise of 14.49% 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 14.90% 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 $18.875 per share on the New York Stock
Exchange, which represents a 8.55% discount to the Fund's net asset value per
share and a rise of 12.77% per annum from its initial value, assuming
reinvestment of dividends and distributions.

We also enclose an economic review, a market review, a summary of portfolio
activity and 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>
- --------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
- --------------------------------------------------------------------------------

ECONOMIC REVIEW

The rally staged by the Euro against the US dollar during the third quarter
went into reverse in the fourth quarter. A poor US Producer Price Index figure
sparked concern about US dollar assets, but as confidence was restored by
subsequent reported data, the US dollar recovered strongly against the Euro.
Having reached 1.09 against the US dollar by mid October, the Euro fell steadily
and was retesting parity by the end of the fourth quarter. A 50 basis point
increase in the repo rate by the European Central Bank (ECB) in November was
followed by a further interest rate hike by the US Federal Reserve and did
little to reverse this trend. The Bank of England also increased its base rate
by 25 basis points. With global interest rates rising, European bond yields
increased further over the quarter.

Economic activity continued to recover over the period. Although Germany
continued to lag behind the rest of Europe, business confidence improved
further. Germany saw a sharp rise in export demand. Italy, the other major
economy that has been lagging behind the rest of Europe, reported
stronger-than-expected industrial orders and in November, the Italian Purchasing
Managers' Index saw its fourth consecutive monthly rise. Growth remained strong
in the United Kingdom and the French economy continued to gain strength: the
October Institut National des Statistiques et des Etudes Economiques survey of
consumer confidence saw the biggest rise since the survey started in 1987.

In spite of the increase in short-term interest rates, general liquidity
remained accommodative, partly due to the ECB's concern about Y2K and this was
reflected in money supply figures. European Monetary Union's money supply rating
of M3 was growing at 6.1% in October (up from 5.7%) and was still growing at 6%
in November. A stronger oil price contributed to a higher inflation rate but
underlying inflation continued to fall.

Shortly before the year end, the German government announced plans to cut
income tax and abolish capital gains tax on the sale of cross-holdings (two
companies own shares in each other as part of a shareholder agreement) in quoted
companies.

MARKET REVIEW

After a weak September, European equity markets had an exceptionally strong
rebound during the fourth quarter. The MSCI Europe index rose by 22.8% in local
currency terms. Most of this increase came in December. The rise was driven by
corporate activity and stellar performances by the Telecommunications (Telecoms)
and Technology sectors as investors realized that growth rates in voice and data
transmission would be higher than expected. Towards the end of the year, market
confidence that there would be minimal disruption as a result of Y2K related
problems increased.

The best-performing sector within the MSCI Europe Index over the quarter was
Electricals and Electronics, but both Telecoms and Broadcasting and Publishing
were both up over 50%. These sectors are all beneficiaries of the growth in data
transmission. Of the cyclical industry sectors, Metals performed strongly. Among
the worst-performing areas were sectors that have been seen in the past as
growth sectors, such as Food and Household Products, and Beverages and Tobacco.
These sectors are little affected by the current technology boom.

Country performance was driven by the weighting of the Telecom and Technology
sectors in each country index and individual stock moves. Only five countries
out of fifteen in the MSCI Europe outperformed: Germany (Mannesmann, Siemens and
SAP), Finland (Nokia Oyj), Sweden (Ericsson), Spain (Telefonica) and France
(France Telecom and the Media sector).

2
<PAGE>
The approach of Y2K appeared to have little impact on corporate activity as
1999's European take-over boom climaxed with the announcement of the largest
ever hostile take-over with Vodafone AirTouch bidding for Mannesmann. This was
after announcements in the Telecom sector of France Telecom's acquisition of E
Plus, Mannesmann's bid for Orange and Deutsche Telekom's bid for One2One.
Telecom Italia (TI) and Telecom Italia Mobile (TIM) both performed strongly
following Olivetti's decision not to transfer TI's stake in TIM to Tecnost on
terms that would have disadvantaged TI shareholders. This decision was largely
due to shareholder activism. Outside the Telecom sector, AstraZeneca and
Novartis announced the proposed merger of their agrochemicals business and Royal
Bank of Scotland bid for National Westminster. Bids for European companies
during 1999 as a whole were more than twice the level seen in 1998.

PORTFOLIO ACTIVITY

There were no changes to our European sector strategy over the period. As a
result of this fact, low liquidity ahead of the year end and market volatility,
portfolio activity was relatively low, with the exception of sales necessary to
raise cash for the Fund's dividend payment.

At the stock level, we increased our holding in Nestle following a positive
meeting with the company. We took advantage of relative weakness in the Banking
sector to increase our holdings in Banca Intesa and Unicredito Italiano. We also
selectively took advantage of market volatility to increase our holdings in
Telecoms (e.g. Telecom Italia) and Technology (e.g. Ericsson).

The portfolio was well positioned to take advantage of the moves in Telecoms
and Technology. Positions have been built up over a longer period in NXT, Nokia
Oyj, Sonera Group Oyj, Ericsson, TIM, TI, Telefonica, Siemens and Mannesmann.
These were all among the best performing stocks in Europe over the period.

MARKET OUTLOOK

We believe European growth should continue to recover. This will underpin the
Euro and we therefore expect the currency to recover over the year. The
deflationary impact of the Euro and lack of corporate pricing power should curb
inflationary pressure.

With any concerns about Y2K disruption now virtually over, corporate activity
is expected to continue to support the market. Changes in tax regulations in
Germany may reinforce this further.

The ECB is however expected to move rates higher this year. The prospect of
higher rates may unsettle the markets. This has already been seen in the first
days of 2000.

The views expressed herein are current to the date of this report. These views
and the composition of the portfolio are subject to change at any time based on
market and other conditions.

3
<PAGE>
PORTFOLIO SUMMARY
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of total market value at December 31, 1999 are outlined below:

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
FUND
Finland 3.7%
France 17.1%
Germany 16.9%
Ireland 0.8%
Italy 10.3%
Netherlands 5.9%
Spain 5.1%
Sweden 4.3%
Switzerland 10.8%
United Kingdom 25.1%
</TABLE>

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
MSCI
Finland 4.5%
France 15.4%
Germany 15.7%
Ireland 0.6%
Italy 6.4%
Netherlands 7.9%
Norway 0.6%
Spain 4.0%
Sweden 4.0%
Switzerland 8.5%
United Kingdom 28.9%
Other * 3.5%
* Countries include Austria, Belgium, Denmark and Portugal.
</TABLE>

The Fund's ten largest equity holdings expressed as a percentage of total net
assets at December 31, 1999 were:

<TABLE>
<S> <C>
Mannesmann................................... 4.1%
Siemens...................................... 3.5
Nokia Oyj (Series A)......................... 3.0
BP Amoco (Ordinary).......................... 2.8
Total Fina................................... 2.6
Shell Transport & Trading (Registered)....... 2.4
Hays (Ordinary).............................. 2.0
Adecco....................................... 2.0
Pinault Printemps Redoute.................... 1.9
ING Groep.................................... 1.9
----
26.2%
====
</TABLE>

The Fund's sector weightings expressed as a percentage of net assets at
December 31, 1999 were:

<TABLE>
<S> <C>
Services..................................... 34.9%
Finance...................................... 19.7
Capital Equipment............................ 16.9
Consumer Goods............................... 14.9
Energy....................................... 8.1
Materials.................................... 3.4
Cash......................................... 1.3
Other Assets in Excess of Liabilities........ 0.8
-----
100.0%
=====
</TABLE>

4
<PAGE>
- -----------------------------------------------
THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 1999

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--95.5%
FINLAND--3.6%
34,000 Nokia Oyj (Series A)....................... $ 6,166,206
--Electrical & Electronics
20,000 Sonera Group Oyj........................... 1,371,276
--Telecommunications
------------
7,537,482
------------
FRANCE--16.8%
67,500 Accor...................................... 3,262,422
--Leisure & Tourism
15,500 AXA........................................ 2,161,396
--Insurance
25,000 Banque Nationale de Paris.................. 2,307,289
--Banking
4,398 Legrand.................................... 1,047,094
--Electrical & Electronics
4,400 LVMH....................................... 1,971,453
--Beverages & Tobacco
31,470 +Marionnaud Parfumeriers................... 2,270,264
--Merchandising
18,908 +Naf Naf................................... 266,711
--Textiles & Apparel
15,000 Pinault Printemps Redoute.................. 3,959,671
--Merchandising
5,750 PSA Peugeot Citroen........................ 1,305,835
--Automobiles
26,359 Sidel...................................... 2,722,196
--Machinery & Engineering
6,000 Societe Generale........................... 1,396,464
--Banking
35,000 Societe Generale d'Entreprises............. 1,639,788
--Construction & Housing
40,000 Total Fina................................. 5,340,015
--Energy Sources
20,000 Valeo...................................... 1,543,567
--Automobiles
40,000 Vivendi.................................... 3,613,074
--Business & Public Services
------------
34,807,239
------------
</TABLE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------
<C> <S> <C>
GERMANY--14.2%
9,000 Allianz.................................... $ 3,024,161
--Insurance
75,000 Bayer...................................... 3,551,614
--Chemicals
13,500 DaimlerChrysler............................ 1,050,069
--Automobiles
17,500 Deutsche Bank.............................. 1,478,454
--Banking
20,000 Kamps...................................... 1,380,344
--Food & Household Products
35,000 Mannesmann................................. 8,445,788
--Telecommunications
57,500 Siemens.................................... 7,317,080
--Electrical & Electronics
40,000 Software................................... 2,438,271
--Data Processing & Reproduction
40,000 Viag....................................... 733,496
--Utilities - Electric & Gas
------------
29,419,277
------------
IRELAND--0.8%
200,000 Bank of Ireland............................ 1,591,929
--Banking
------------
ITALY--10.1%
450,000 Banca Intesa............................... 1,827,192
--Banking
30,000 BIPOP...................................... 2,655,398
--Banking
14,000 Gucci Group (NY Registered)................ 1,603,000
--Consumer Goods
125,000 La Rinascente.............................. 802,262
--Merchandising
100,000 Mondadori Arnoldo Editore.................. 3,173,782
--Broadcasting & Publishing
850,000 Seat Pagine Galle.......................... 2,791,921
--Broadcasting & Publishing
90,000 Telecom Italia (Ordinary).................. 1,269,513
--Telecommunications
</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------
<C> <S> <C>
360,000 Telecom Italia (Savings)................... $ 2,194,444
--Telecommunications
550,000 Telecom Italia Mobile...................... 2,621,141
--Telecommunications
425,000 Unicredito Italiano........................ 2,089,659
--Banking
------------
21,028,312
------------
NETHERLANDS--5.7%
22,500 Akzo Nobel................................. 1,128,960
--Chemicals
15,000 +Equant.................................... 1,703,263
--Data Processing & Reproduction
65,000 ING Groep.................................. 3,925,516
--Insurance
55,000 Numico..................................... 2,052,581
--Food & Household Products
36,200 VNU........................................ 1,903,177
--Broadcasting & Publishing
35,000 Wolters Kluwer............................. 1,184,879
--Broadcasting & Publishing
------------
11,898,376
------------
SPAIN--5.0%
17 +A.B. Capital Fund*........................ 27,496
--Business & Public Services
110,000 +Amadeus Global Travel..................... 1,745,581
--Business & Public Services
230,000 Banco Bilbao Vizcaya....................... 3,276,754
--Banking
130,000 Telefonica................................. 3,248,341
--Telecommunications
42,500 Telefonica Publicidad e Informacion........ 2,066,107
--Broadcasting & Publishing
------------
10,364,279
------------
SWEDEN--4.2%
50,000 Atlas Copco................................ 1,479,412
--Machinery & Engineering
80,000 Electrolux (Series B)...................... 2,014,118
--Appliances & Household Durables
50,000 Ericsson................................... 3,217,647
--Electrical & Electronics
</TABLE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
VALUE
SHARES DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------
<C> <S> <C>
115,000 Securitas (Series B)....................... $ 2,083,529
--Business & Public Services
------------
8,794,706
------------
SWITZERLAND--10.5%
10,000 ABB........................................ 1,223,150
--Electrical & Electronics
5,250 Adecco (Registered)........................ 4,088,682
--Business & Public Services
10,000 Credit Suisse (Registered)................. 1,987,816
--Banking
530 Kuoni Reisen (Registered).................. 2,200,289
--Leisure & Tourism
1,000 +Lonza..................................... 607,964
--Chemicals
1,350 Nestle (Registered)........................ 2,473,276
--Food & Household Products
1,800 Novartis (Registered)...................... 2,643,135
--Health & Personal Care
300 Roche (Bearer)............................. 3,561,110
--Health & Personal Care
1,200 The Swatch Group (Bearer).................. 1,382,239
--Consumer Goods
6,250 UBS (Registered)........................... 1,687,916
--Banking
------------
21,855,577
------------
UNITED KINGDOM--24.6%
150,000 Airtours................................... 913,226
--Leisure & Tourism
180,000 Amvescap (Ordinary)........................ 2,092,910
--Financial Services
100,000 Barclays Bank (Ordinary)................... 2,872,907
--Banking
570,000 BP Amoco (Ordinary)........................ 5,752,382
--Energy Sources
90,000 Carlton Communications (Ordinary).......... 874,226
--Broadcasting & Publishing
100,000 Compass (Ordinary)......................... 1,372,665
--Business & Public Services
100,000 Diageo (Ordinary).......................... 807,531
--Beverages & Tobacco
200,000 GKN (Ordinary)............................. 3,275,017
--Machinery & Engineering
100,000 Glaxo Wellcome (Ordinary).................. 2,835,764
--Health & Personal Care
</TABLE>

6
<PAGE>

- ------------------------------

+ Non-income producing security.

* Investment in restricted security with an aggregate value of $27,496,
representing 0.01% of net assets at December 31, 1999. The investment was
acquired on October 22, 1990 and September 5, 1991 and has an adjusted cost
basis of $334,461.

(a) The United States Federal income tax basis of the Fund's investments
at December 31, 1999 was $137,048,693 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $66,223,903
(gross unrealized appreciation--$68,858,929; gross unrealized
depreciation--$2,635,026).

(b) Foreign currency exchange contracts entered into to hedge sale
commitments as of December 31, 1999 were as follows:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Sales In Net
Contracts to Exchange Settlement Unrealized
Deliver For Date Value Depreciation
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EUR 140,804 $141,438 1/4/00 $141,867 $ (429)
=======
- ----------------------------------------------------------------------
</TABLE>

EUR Euro

See Notes to Financial Statements.

7
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF
ASSETS AND LIABILITIES
DECEMBER 31, 1999
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $137,048,693) (Note 1).......... $203,272,596
Cash........................................................ 2,798,977
Receivable for securities sold.............................. 1,793,893
Withholding tax refunds receivable.......................... 383,545
Dividends receivable........................................ 64,164
Interest receivable......................................... 29,732
Prepaid expenses and other assets........................... 2,333
------------
Total assets.......................................... 208,345,240
------------
LIABILITIES
Payable for securities purchased............................ 237,190
lnvestment management fee payable (Note 2).................. 130,649
Administration fee payable (Note 2)......................... 39,421
Net unrealized depreciation on foreign currency exchange
contracts................................................. 429
Accrued expenses and other liabilities...................... 168,737
------------
Total liabilities..................................... 576,426
------------
NET ASSETS.................................................. $207,768,814
============
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........... 86,861
Accumulated undistributed net realized gain on
investments.............................................. 12,010,213
Net unrealized appreciation on investments and foreign
currency related transactions............................ 66,207,617
------------
Net Assets................................................ $207,768,814
============
Net Asset Value per share
($207,768,814/10,066,319 shares of common stock issued and
outstanding).............................................. $20.64
-----
-----
</TABLE>

See Notes to Financial Statements.

8
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1999
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
NET INVESTMENT INCOME
Income
Dividends................................................. $ 4,017,993
Interest.................................................. 151,937
--------------
4,169,930
Less: Withholding tax on foreign source dividends......... 444,031
--------------
Total income.......................................... 3,725,899
--------------
Expenses
Investment management fee (Note 2)........................ 1,480,013
Administration fee (Note 2)............................... 492,822
Custodian fees............................................ 153,345
Directors' fees and expenses.............................. 148,180
Shareholder servicing fees................................ 83,439
Legal fees................................................ 77,690
Audit fees................................................ 47,500
Reports to shareholders................................... 32,856
NYSE listing fee.......................................... 24,260
Insurance expense......................................... 9,848
Miscellaneous............................................. 12,593
--------------
Total expenses........................................ 2,562,546
--------------
Net investment income....................................... 1,163,353
--------------
</TABLE>

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY RELATED TRANSACTIONS

<TABLE>
<S> <C> <C>
Net realized gain on:
Investments..................................... $ 23,515,786
Foreign currency related transactions........... 104,384 23,620,170
-------------
Change in unrealized appreciation on:
Investments--net................................ 13,880,015
Foreign currency related transactions........... (29,896) 13,850,119
------------- -------------
Net realized and unrealized gain on investments and foreign
currency related transactions................................... 37,470,289
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $ 38,633,642
=============
</TABLE>

See Notes to Financial Statements.

9
<PAGE>
- --------------------------------------------------------------------------------
THE EUROPE FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income....................................... $ 1,163,353 $ $1,426,725
Net realized gain on investments and foreign currency
related transactions....................................... 23,620,170 42,061,453
Change in unrealized appreciation (depreciation) on
investments and foreign
currency related transactions.............................. 13,850,119 (3,246,774)
------------ ------------
Net increase in net assets resulting from operations.......... 38,633,642 40,241,404
------------ ------------
Dividends and distributions to shareholders from:
Net investment income ($0.134398 and $0.130172 per share,
respectively).............................................. (1,352,893) (1,310,353)
Net realized gain on investments and foreign currency
related transactions
($2.582034 and $3.360266 per share, respectively)
(Note 1)................................................... (25,991,578) (33,825,510)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions................................................ (27,344,471) (35,135,863)
------------ ------------
Total increase................................................ 11,289,171 5,105,541
------------ ------------
NET ASSETS
Beginning of year........................................... 196,479,643 191,374,102
------------ ------------
End of year (including accumulated undistributed net
investment income of $86,861 and $172,017, respectively)... $207,768,814 $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 YEAR ENDED
DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................ $ 19.52 $ 19.01 $ 18.18 $ 14.32 $ 12.56
-------- -------- -------- -------- --------
Operations:
Net investment income*.......................... 0.12 0.14 0.15 0.12 0.14
Net realized and unrealized gain (loss) on
investments and foreign currency related
transactions................................... 3.72 3.86 3.20 4.80 2.50
-------- -------- -------- -------- --------
Total from operations......................... 3.84 4.00 3.35 4.92 2.64
-------- -------- -------- -------- --------
Dividends and distributions to shareholders from:
Net investment income**......................... (0.14) (0.13) (0.14) (0.16) (0.10)
Net realized gain on investments and foreign
currency related transactions.................. (2.58) (3.36) (2.38) (0.90) (0.78)
-------- -------- -------- -------- --------
Total dividends and distributions............. (2.72) (3.49) (2.52) (1.06) (0.88)
-------- -------- -------- -------- --------
Net asset value, end of year...................... $ 20.64 $ 19.52 $ 19.01 $ 18.18 $ 14.32
======== ======== ======== ======== ========
Per share market value, end of year............... $ 18.88 $ 18.56 $ 17.06 $ 16.13 $ 12.75
======== ======== ======== ======== ========
Total investment return, market value+............ 18.05% 27.84% 21.00% 34.78% 26.26%
Net assets at end of year (000 omitted)........... $207,769 $196,480 $191,374 $182,963 $144,190
Ratio of expenses to average weekly net assets.... 1.30% 1.27% 1.26% 1.42% 1.42%
Ratio of net investment income to average weekly
net assets....................................... 0.59% 0.65% 0.77% 0.74% 1.01%
Portfolio turnover rate........................... 47% 54% 39% 48% 52%
</TABLE>

- --------------------------
* Based on average shares outstanding during the year.

** 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.

+ 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.

See Notes to Financial Statements.

11
<PAGE>
- ----------------------------------------------
THE EUROPE FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------

NOTE 1. SIGNIFICANT
ACCOUNTING POLICIES
The Europe Fund, Inc. (the "Fund") was incorporated in Maryland on February 8,
1990, as a closed-end, diversified management investment company. The Fund's
investment objective is long-term capital appreciation through investment
primarily in European equity securities.

The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

SECURITY VALUATION: All securities for which current market quotations are
readily available are valued at the last sale price prior to the time of
determination, or, if there is no sales price on such date, and if bid and asked
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 on 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.

The Fund may hold 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 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

12
<PAGE>
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 accounting principles generally accepted in the United States which may
require the use of management estimates and assumptions. Actual results could
differ from those estimates.

RECLASSIFICATION OF COMPONENTS OF NET ASSETS: During the year ended
December 31, 1999, net realized gains on foreign currency related transactions
of $104,384 were reclassified from accumulated undistributed net realized gain
on investments to accumulated undistributed net investment income. This
reclassification was a result of permanent book-to-tax differences and had no
effect on net assets or net asset value per share.

NOTE 2. TRANSACTIONS
WITH AFFILIATES AND
AGREEMENTS
The Fund has entered into Agreements with Mercury Asset Management International
Channel Islands Ltd. (the "Investment Manager"), and Mercury Asset Management
International Ltd. (the "Investment Adviser").

The Investment Management Agreement provides that the Fund will pay the
Investment Manager a fee, computed weekly and payable monthly, at the following
annual 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. (the "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, excluding short-term investments,
for the year ended December 31, 1999 were $90,799,117 and $118,326,146,
respectively.

NOTE 4. CAPITAL
There are 100 million shares of $.001 par value common stock authorized. Of the
10,066,319 shares outstanding at December 31, 1999, Mercury Asset Management
Ltd. owned 1,217 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
NET AND FOREIGN
INVESTMENT CURRENCY
INVESTMENT INCOME/ RELATED
INCOME (LOSS) TRANSACTIONS
------------------- ------------------- -------------------
PER PER PER
QUARTER ENDED TOTAL SHARE TOTAL SHARE TOTAL SHARE
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
------ ----- ------ ------ -------- ------
Total................ $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)
September 30, 1999... 779 0.08 162 0.02 (637) (0.06)
December 31, 1999.... 789 0.08 116 0.01 42,244 4.19
------ ----- ------ ------ -------- ------
Total................ $3,726 $0.37 $1,163 $ 0.12 $ 37,470 $ 3.72
====== ===== ====== ====== ======== ======
</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, 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
September 30, 1999........ 20.00 18.81 17 5/16 16 1/2 972
December 31, 1999......... 22.08 19.01 19 3/4 16 3/8 1,155
</TABLE>

- ------------------------
* In thousands.
** Based on closing prices as reported on the New York Stock Exchange.

ADDITIONAL
INFORMATION
(UNAUDITED)
During the period, there have been no material changes in the Fund's investment
objective or fundamental policies that have not been approved by the
shareholders. There have been no changes in the Fund's charter or By-Laws that
would delay or prevent a change in control of the Fund which have not been
approved by shareholders. There have been no changes in the principal risk
factors associated with investment in the Fund. There have been no changes in
the persons who are primarily responsible for the day-to-day management of the
Fund's portfolio.

14
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------

Shareholders and Board of Directors
The Europe Fund, Inc.

We have audited the accompanying statement of assets and liabilities of The
Europe Fund, Inc., including the schedule of investments, as of December 31,
1999, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended and financial highlights for each of the years indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 1999 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Europe Fund, Inc. at December 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the indicated years,
in conformity with accounting principles generally accepted in the United
States.

/s/ Ernst & Young LLP

New York, New York
February 1, 2000

15
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------

Dear Shareholder:

The following information summarizes all of the 1999 per share distributions
payable by the Fund on December 31, 1999 for shareholders of record on
December 20, 1999.

<TABLE>
<CAPTION>
FOREIGN
DOMESTIC FOREIGN TOTAL TAXES LONG-TERM
ORDINARY SOURCE ORDINARY PAID OR CAPITAL
INCOME INCOME INCOME WITHHELD GAINS
- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$0.123428 $0.131628 $0.255056 $0.043627 $2.461376*
</TABLE>

The foreign taxes paid or withheld per share represent taxes incurred by the
Fund on dividends received by the Fund from foreign sources. Foreign taxes paid
or withheld should be included in taxable income with an offsetting deduction
from gross income or as a credit for taxes paid to foreign governments. You
should consult your tax counsel or other tax advisors regarding the appropriate
treatment of foreign taxes paid.

* The entire distribution is subject to the 20% tax rate.
- --------------------------------------------------------------------------------
DISTRIBUTION REINVESTMENT AND CASH PURCHASE PLAN (UNAUDITED)
- --------------------------------------------------------------------------------

Pursuant to the Fund's Distribution Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders will have all distributions, net of any applicable U.S.
withholding tax (including, in the case of non-U.S. shareholders, backup
withholding taxes) automatically reinvested by The Bank of New York (the "Plan
Agent") in Fund shares pursuant to the Plan. Shareholders who do not wish to
participate in the Plan or who wish to terminate participation in the Plan may
elect, by notifying the Plan Agent in writing, to receive all distributions, net
of any applicable U.S. withholding tax, in cash paid by check in U.S. dollars
mailed directly to the shareholder by the Plan Agent, as dividend paying agent.
In the case of shareholders, such as banks, brokers or nominees, that hold
shares for others who are beneficial owners, the Plan Agent will administer the
Plan on the basis of the number of shares certified from time to time by the
shareholders as representing the total amount registered in the shareholders'
name and held for the account of beneficial owners who are to participate in the
Plan. A beneficial owner of shares registered in the name of a bank, broker or
other nominee should consult with the nominee to determine whether they should
participate in the Plan or how they may withdraw from the Plan. A beneficial
owner holding shares through a nominee may not be able to transfer their shares
and continue to participate in the Plan.

The Plan Agent serves as agent for the shareholders in administering the Plan.
If the directors of the Fund declare a distribution, participants in the Plan
will receive the equivalent in shares of the Fund valued as set forth below.
Whenever market price is equal to or exceeds net asset value at the time shares
are valued for the purpose of determining the number of shares equivalent to the
cash distribution, participants will be issued shares of the Fund at a price
equal to the greater of net asset value or an amount equal to 95% of the then
current market price of the Fund's shares. The Fund will not issue shares under
the Plan below net asset value. If net asset value exceeds the market price of
Fund shares at that time, or if the Fund should declare a distribution payable
only in cash (i.e., if the Board of Directors should preclude reinvestment at
net asset value), the Plan Agent will buy, as agent for the participants, Fund
shares in the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts. Purchases by the Plan Agent will be made on or shortly
after the payment date for the distribution and in no event more than 30 days
after that date except where temporary curtailment or suspension of purchase is
necessary to comply with U.S. Federal securities laws. If, before the Plan Agent
has completed its purchases, the market price exceeds the net asset value of a
Fund share, the average per share purchase price paid by the Plan Agent may

16
<PAGE>
exceed the net asset value of the Fund's shares, resulting in the acquisition of
fewer shares than if the distribution had been paid in shares issued by the Fund
on the dividend payment date. Because of the foregoing difficulty with respect
to open-market purchases, the Plan provides that if the Plan Agent is unable to
invest the full dividend amount in open-market purchases during the purchase
period or if the market discount shifts to a market premium during the purchase
period, the Plan Agent will cease making open-market purchases and will invest
the uninvested portion of the dividend amount in newly issued shares at the
close of business on the last purchase date.

Participants have the option of making additional cash payments to the Plan
Agent, quarterly, in any amount from U.S. $100 to U.S. $3,000, for investment in
the Fund's Common Stock. The Plan Agent will use all funds received from
participants to purchase Fund shares in the open market on or about March 15,
June 15, September 15 and December 15 of each year. Any voluntary cash payments
received more than 30 days prior to these dates will be returned by the Plan
Agent, and interest will not be paid on any uninvested cash payments. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, it is suggested that participants send in
voluntary cash payments to be received by the Plan Agent approximately ten days
before March 15, June 15, September 15 or December 15, as the case may be.
Optional cash payments must be made in U.S. dollars. Optional cash payments
drawn on a non-U.S. bank will be subject to collection fees and must be
collected by the foregoing quarterly dates to be invested. A participant may
withdraw a voluntary cash payment by written notice, if the notice is received
by the Plan Agent not less than 48 hours before the payment is to be invested.

The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in an account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each shareholder's proxy will include those
shares purchased pursuant to the Plan.

There is no charge to participants for reinvesting distributions. The Plan
Agent's fees for the reinvestment of distributions will be paid by the Fund.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of distributions payable either in stock or in cash. However,
each participant will pay a PRO RATA share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with
voluntary cash payments made by the participant or any distributions payable
only in cash.

With respect to purchases with voluntary cash payments, the Plan Agent will
charge U.S. $2.00 for each purchase for a participant, plus a PRO RATA share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than the
usual brokerage charges for these transactions because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the
proportionately lower commission thus attainable.

The receipt of distributions under the Plan will not relieve participants of
any income tax (including withholding tax) which may be payable on the
distributions. Under presently outstanding regulations, shareholders receiving
dividends or distributions in the form of additional shares pursuant to the Plan
should be treated, for U.S. Federal income tax purposes, as receiving a taxable
distribution in an amount equal to the amount of money that the shareholders
receiving cash dividends will receive, and should have a cost basis in the
shares received equal to such amount.

Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any voluntary cash payments made and any distribution paid
subsequent to notice of the termination sent to members of the Plan at least 30
days before the record date for the distribution. The Plan also may be amended
by the Fund or the Plan Agent, but only by at least 30 days' written notice to
participants in the Plan (except when necessary or appropriate to comply with
applicable law, rules or policies of a regulatory authority). Further
information concerning the Plan may be obtained by contacting the Plan Agent at
P.O. Box 11260, Church Street Station, New York, New York 10277-0760, Attention:
Dividend Reinvestment Service, or by calling 1 (800) 524-4458.

17
<PAGE>
- -------------------------------------------------------------

DIRECTORS AND OFFICERS

ANTHONY M. SOLOMON, Chairman of the Board and Director
GEORGE F. BENNETT, Director
* SIR ARTHUR BRYAN, Director
PETER STORMONTH DARLING, Director
* 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.
ANNUAL REPORT
DECEMBER 31, 1999