<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the First Quarter Report of The Europe
Fund, Inc. On March 31, 2000, the end of the period under review, the Fund's net
assets totaled $211.2 million. This represents a net asset value per share of
$20.98, a rise of 14.29% 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 14.51%
increase in the MSCI Europe Index over the same time period. At the end of the
period under review, the share price was quoted at $17.875 per share on the New
York Stock Exchange, which represents a 14.80% discount to the Fund's net asset
value per share and a rise of 11.81% 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, performance attribution 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
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PORTFOLIO COMMENTARY
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ECONOMIC REVIEW
The level of economic growth continued to pick up during the first quarter of
2000. Consumer confidence remained strong throughout Europe. Business confidence
data was also positive, with the German Chamber of Commerce reporting the
highest level of confidence since 1995. Unemployment fell to 9.6% for the
Eurozone.
The combination of stronger consumer spending, higher energy prices and a weak
Euro contributed to higher inflation. The Consumer Price Index for the Eurozone
increased from 1.6% for the 12 month period ended November 30, 1999 to 2.0% for
the 12 month period ended January 31, 2000.
Concern about inflation led the monetary authorities to increase short-term
interest rates. The European Central Bank did not move interest rates at the
beginning of the year but has since increased rates twice, each time by 25 basis
points. This brought the repo rate to 3.5% by the end of the quarter. The Bank
of England also increased rates twice, bringing the base rate up to 6%.
In spite of higher short-term interest rates, Euro weakness has persisted. The
Euro broke through parity with the US dollar in mid January and continued to
weaken over the quarter, reaching a level of $0.96 to the Euro by the end of
March.
<PAGE>
MARKET REVIEW
The markets started the year on a weak note caused by the anticipation of
higher interest rates. However, February saw a recovery, and the MSCI Europe
Index finished the quarter up 3.2% overall. Volatility remained at exceptional
levels and there was also a high level of sector rotation. 'New economy' stocks
led the market until early March. Since then, there has been a rotation back
into 'old economy' shares.
In spite of weakness late in the quarter, Telecoms, Technology and Media were
among the best performing sectors. Telecoms also benefited from the successful
ending of the bid for Mannesmann by Vodafone AirTouch. Investors focusing on
continental Europe (without Vodafone AirTouch in the benchmark) purchased stocks
such as Deutsche Telekom and France Telecom to replace Mannesmann. British
Telecommunications plc, however, issued a profit warning and underperformed.
Stocks with exposure to the Internet outside Telecoms, Media and Technology
performed strongly. The Materials and Financials sectors underperformed, with
the exception of the German insurance companies, which rose in anticipation of
changes in German tax regulations.
On a country basis, the markets were driven by stock specific issues. The best
performing stock markets were again Finland and Sweden, driven by Nokia Oyj and
Ericsson. The worst performing market was Belgium. This was largely due to the
poor performance of Fortis and Electrabel.
Corporate activity slowed from the exceptional levels seen in the last quarter
of 1999. However, a number of deals were announced. The most important ones were
in the Financial sector: Deutsche Bank and Dresdner Bank announced plans to
merge, as did Merita Nordbanken and Unibank. The Deutsche Bank--Dresdner Bank
merger was later abandoned.
PORTFOLIO ACTIVITY
In March we reduced our exposure to retailers to underweight in recognition of
the pressure that new business distribution models would exert on the sector. We
also increased our exposure to pharmaceuticals, bringing the Fund's weighting
closer to the level within the MSCI Europe Index, given that the sector's
valuation had become more attractive. Furthermore, although not part of the 'new
economy', we believe this industry will not face the same structural pressure as
some other sectors of the 'old economy' as a result of new technologies, the
Internet and new business models.
We also selectively increased our exposure to the Oil sector and took profits
on some of our Media and Technology holdings that had performed well.
PERFORMANCE ATTRIBUTION
Our Telecom holdings contributed positively to performance although we
suffered from not having positions in France Telecom and Deutsche Telekom. A
number of other large positions performed well: Siemens, which benefited from
accelerating growth in semi-conductors and Vivendi, which announced the
forthcoming launch of MAP, a joint venture between the telecom and media assets
of Vivendi, Vodafone AirTouch and Canal +. The underweighting in the German
banks was also positive.
OUTLOOK
European economies should continue to recover. We believe this will underpin
the Euro and we expect the currency to improve over the year, although in the
short term there may be further downward pressure.
Corporate activity slowed in the first quarter but should continue to support
the market. When introduced next year, changes in tax regulations in Germany
should notably accelerate the restructuring of the corporate landscape there.
On the other hand, there is likely to be further upward pressure on interest
rates given that inflation is now picking up slightly. The prospect of higher
interest rates may upset the markets. This has already been by far the most
important factor unsettling the markets in the past few weeks. With some
volatility developing also on Wall Street, European stock markets are likely to
consolidate further over the coming weeks.
2
<PAGE>
PORTFOLIO SUMMARY
The Fund's and the MSCI Europe Index's country weightings expressed as a
percentage of total market value at March 31, 2000 are outlined below:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FUND
<TABLE>
<S> <C>
Finland 3.9%
France 15.8%
Germany 14.2%
Ireland 0.7%
Italy 10.6%
Netherlands 5.1%
Norway 0.0%
Spain 4.7%
Sweden 5.4%
Switzerland 10.2%
United Kingdom 29.4%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MSCI EUROPE INDEX
<TABLE>
<S> <C>
Finland 5.0%
France 15.9%
Germany 14.2%
Ireland 0.6%
Italy 6.2%
Netherlands 7.6%
Spain 4.1%
Sweden 4.7%
Switzerland 8.0%
United Kingdom 29.9%
Other* 3.8%
</TABLE>
* Countries include Austria, Belgium, Denmark, Norway and Portugal.
The Fund's ten largest equity holdings expressed as a percentage of total net
assets at March 31, 2000 were:
<TABLE>
<S> <C>
Vodafone AirTouch............................ 5.2%
Nokia Oyj (Series A)......................... 3.4
Siemens...................................... 3.1
Total Fina................................... 2.8
BP Amoco (Ordinary).......................... 2.8
Shell Transport & Trading (Registered)....... 2.7
Ericsson..................................... 2.7
Software..................................... 2.4
Vivendi...................................... 2.2
Roche (Bearer)............................... 2.1
Telefonica................................... 1.8
----
31.2%
====
</TABLE>
The Fund's sector weightings expressed as a percentage of net assets at
March 31, 2000 were:
<TABLE>
<S> <C>
Services..................................... 36.8%
Finance...................................... 19.1
Capital Equipment............................ 17.4
Consumer Goods............................... 13.4
Energy....................................... 9.4
Materials.................................... 3.1
Cash......................................... 0.5
Other Assets in Excess of Liabilities........ 0.3
-----
100.0%
=====
</TABLE>
3
<PAGE>
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THE EUROPE FUND, INC.
SCHEDULE OF INVESTMENTS
AS OF MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--95.8%
FINLAND--3.9%
34,000 Nokia Oyj (Series A)....................... $ 7,202,169
--Electrical & Electronics
15,000 Sonera Group Oyj........................... 1,025,116
--Telecommunications
------------
8,227,285
------------
FRANCE--15.7%
67,500 Accor...................................... 2,652,649
--Leisure & Tourism
15,500 AXA........................................ 2,200,285
--Insurance
25,000 Banque Nationale de Paris.................. 1,976,906
--Banking
5,373 Legrand.................................... 1,001,679
--Electrical & Electronics
4,400 LVMH....................................... 1,843,847
--Beverages & Tobacco
31,470 +Marionnaud Parfumeriers................... 2,473,448
--Merchandising
11,500 Pinault Printemps Redoute.................. 2,134,004
--Merchandising
5,750 PSA Peugeot Citroen........................ 1,245,571
--Automobiles
12,500 SEB........................................ 724,866
--Appliances & Household Durables
26,359 Sidel...................................... 1,718,027
--Machinery & Engineering
6,000 Societe Generale........................... 1,198,508
--Banking
35,000 Societe Generale d'Entreprises............. 1,338,881
--Construction & Housing
7,000 Suez Lyonnaise des Eaux.................... 1,205,026
--Utilities - Gas & Electric
40,000 Total Fina................................. 6,000,210
--Energy Sources
16,000 Valeo...................................... 789,037
--Automobiles
</TABLE>
<TABLE>
<CAPTION>
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MARKET
SHARES DESCRIPTION VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
40,000 Vivendi.................................... $ 4,619,970
--Business & Public Services
------------
33,122,914
------------
GERMANY--10.7%
9,000 Allianz.................................... 3,670,576
--Insurance
75,000 Bayer...................................... 3,371,524
--Chemicals
13,500 DaimlerChrysler............................ 885,079
--Automobiles
17,500 Deutsche Bank.............................. 1,164,937
--Banking
20,000 Kamps...................................... 1,165,536
--Food & Household Products
45,000 Siemens.................................... 6,491,441
--Electrical & Electronics
45,000 Software................................... 5,003,370
--Data Processing & Reproduction
40,000 Viag....................................... 812,808
--Utilities - Electric & Gas
------------
22,565,271
------------
IRELAND--0.6%
200,000 Bank of Ireland............................ 1,418,580
--Banking
------------
ITALY--10.6%
450,000 Banca Intesa............................... 1,557,083
--Banking
20,000 BIPOP...................................... 2,106,783
--Banking
14,000 Gucci Group (NY Registered)................ 1,245,125
--Consumer Goods
86,200 Mondadori Arnoldo Editore.................. 2,201,895
--Broadcasting & Publishing
830,000 Olivetti................................... 2,983,331
--Telecommunications
728,295 Seat Pagine Galle.......................... 3,616,007
--Broadcasting & Publishing
120,000 Telecom Italia (Ordinary).................. 1,794,312
--Telecommunications
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
360,000 Telecom Italia (Savings)................... $ 2,456,827
--Telecommunications
550,000 Telecom Italia Mobile...................... 2,635,875
--Telecommunications
425,000 Unicredito Italiano........................ 1,694,628
--Banking
------------
22,291,866
------------
NETHERLANDS--5.1%
22,500 Akzo Nobel................................. 961,855
--Chemicals
15,000 +Equant.................................... 1,246,529
--Data Processing & Reproduction
65,000 ING Groep.................................. 3,526,322
--Insurance
55,000 Numico..................................... 2,037,531
--Food & Household Products
36,200 VNU........................................ 2,135,643
--Broadcasting & Publishing
35,000 Wolters Kluwer............................. 805,140
--Broadcasting & Publishing
------------
10,713,020
------------
SPAIN--4.6%
17 +A.B. Capital Fund*........................ 25,834
--Business & Public Services
20,193 Acerinox................................... 799,361
--Metals
230,000 Banco Bilbao Vizcaya Argentaria............ 3,386,189
--Banking
150,000 Telefonica................................. 3,795,660
--Telecommunications
40,000 Telefonica Publicidad e Informacion........ 1,744,086
--Broadcasting & Publishing
------------
9,751,130
------------
SWEDEN--5.3%
50,000 Atlas Copco................................ 1,215,841
--Machinery & Engineering
80,000 Electrolux (Series B)...................... 1,514,590
--Appliances & Household Durables
65,000 Ericsson................................... 5,712,714
--Electrical & Electronics
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
115,000 Securitas (Series B)....................... $ 2,783,117
--Business & Public Services
------------
11,226,262
------------
SWITZERLAND--10.2%
10,000 ABB........................................ 1,150,810
--Electrical & Electronics
5,250 Adecco (Registered)........................ 3,637,706
--Business & Public Services
10,000 Credit Suisse (Registered)................. 1,994,336
--Banking
530 Kuoni Reisen (Registered).................. 2,458,878
--Leisure & Tourism
1,500 Nestle (Registered)........................ 2,693,258
--Food & Household Products
1,800 Novartis (Registered)...................... 2,466,229
--Health & Personal Care
400 Roche (Bearer)............................. 4,352,594
--Health & Personal Care
900 The Swatch Group (Bearer).................. 1,051,455
--Consumer Goods
6,250 UBS (Registered)........................... 1,645,629
--Banking
------------
21,450,895
------------
UNITED KINGDOM--29.1%
150,000 Airtours (Ordinary)........................ 805,743
--Leisure & Tourism
180,000 Amvescap (Ordinary)........................ 2,447,381
--Financial Services
100,000 Barclays Bank (Ordinary)................... 2,650,724
--Banking
650,000 BP Amoco (Ordinary)........................ 5,945,390
--Energy Sources
90,000 Carlton Communications (Ordinary).......... 1,065,181
--Broadcasting & Publishing
100,000 Compass (Ordinary)......................... 1,307,371
--Business & Public Services
100,000 Diageo (Ordinary).......................... 750,960
--Beverages & Tobacco
200,000 GKN (Ordinary)............................. 2,478,475
--Machinery & Engineering
100,000 Glaxo Wellcome (Ordinary).................. 2,862,846
--Health & Personal Care
530,000 Hays (Ordinary)............................ 3,467,831
--Business & Public Services
215,000 HSBC (Ordinary)............................ 2,540,915
--Banking
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
140,000 Lloyds TSB (Ordinary)...................... $ 1,478,153
--Banking
90,000 Marks & Spencer (Ordinary)................. 359,570
--Merchandising
75,000 NXT (Ordinary)............................. 2,183,019
--Electrical & Electronics
175,000 Peninsular & Oriental Steam Navigation..... 1,818,386
--Transportation--Shipping
75,000 Serco (Ordinary)........................... 3,259,577
--Business & Public Services
700,000 Shell Transport & Trading (Registered)..... 5,805,436
--Energy Sources
240,000 SmithKline Beecham (Ordinary).............. 3,169,385
--Health & Personal Care
900,000 Tesco (Ordinary)........................... 2,996,418
--Merchandising
120,000 United News & Media (Ordinary)............. 1,579,495
--Broadcasting & Publishing
1,965,088 Vodafone AirTouch (Ordinary)............... 10,922,404
--Telecommunications
200,000 Williams (Ordinary)........................ 1,014,458
--Business & Public Services
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
SHARES DESCRIPTION VALUE
- ---------------------------------------------------------------------------
<C> <S> <C>
100,000 Wolseley (Ordinary)........................ $ 558,215
--Building Materials & Components
------------
61,467,333
------------
Total Common Stocks
(cost--$143,392,688)..................... 202,234,556
------------
PREFERRED STOCKS--3.4%
GERMANY--3.4%
16,000 Henkel (Non-Voting)........................ 923,227
--Chemicals
6,000 Marschollek, Lautenschlaeger Und Partner
(Non-Voting)............................. 3,571,371
--Financial Services
60,000 Rhoen-Klinikum (Non-Voting)................ 2,720,223
--Health & Personal Care
------------
Total Preferred Stocks
(cost--$2,723,242)....................... 7,214,821
------------
Total Investments--99.2%
(cost--$146,115,930) (a)................... 209,449,377
Unrealized Appreciation on Foreign Currency
Exchange Contracts--0.0% (b)............. (834)
Other Assets in Excess of
Liabilities--0.8%........................ 1,733,033
------------
Net Assets--100.0%......................... $211,181,576
============
</TABLE>
- ------------------------------
+ Non-income producing security.
ADR American Depositary Receipt
* Investment in restricted security with an aggregate value of $25,834,
representing 0.01% of net assets at March 31, 2000. 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 March 31, 2000 was $146,115,930 and, accordingly, net unrealized
appreciation for United States Federal income tax purposes was $63,333,447
(gross unrealized appreciation--$69,882,144; gross unrealized
depreciation--$6,548,697).
(b) Foreign currency exchange contracts entered into to hedge purchase
and sale commitments as of March 31, 2000 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Purchases In Net
Contracts to Exchange Settlement Unrealized
Receive For Date Value Appreciation
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EUR 116,001 $110,665 4/3/00 $111,187 $ 522
SEK 4,066,918 $469,485 4/3/00 $470,926 1,441
-------
$ 1,963
-------
- ----------------------------------------------------------------------
Sales Contracts to In Settlement Value Net
Deliver Exchange Date Unrealized
For Depreciation
- ----------------------------------------------------------------------
CHF 569,841 $340,814 4/3/00 $343,340 $(2,526)
EUR 339,240 $324,890 4/4/00 $325,161 (271)
-------
$(2,797)
-------
Total $ (834)
=======
- ----------------------------------------------------------------------
</TABLE>
CHF Swiss Franc
EUR Euro
SEK Swedish Krona
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.
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, 2000
