<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
Dear Fellow Shareholder:
The European Warrant Fund, Inc. (the 'Fund') turned in an impressive
performance with a gain for the 12 month period ending September 30, 1996 of
46.57% based on net asset value and 32.81% based on share price. During this
period, the Fund was ranked #2 out of 162 funds by Lipper Analytical in their
Closed-End Equity Fund Universe, as was reported in the Mutual Fund Scorecard by
the Wall Street Journal on October 21, 1996. Of course, past performance does
not guarantee future results. For the six months ended September 30, 1996, the
Fund's total return was 11.23% based on net asset value and 6.25% based on share
price. The European equity markets performed well on the back of the bull run in
the United States equity markets. The Fund continues to make progress in
outperforming the European equity indices. The Fund's nine-month net asset value
performance for the period January 1, 1996 through September 30, 1996 was 30.65%
versus MSCI Europe 10.10%.
Although the Fund has had a strong market performance, the increased
awareness of the investing public did not help to decrease the average discount
on the Fund shares to the net asset value during the six month period ending
September 30, 1996. The Board of Directors of the Fund has considered
extensively the Fund's share price discount from net asset value and alternative
methods to reduce the discount, including share repurchases and selective
analysts meetings. In September 1990, the Fund's Board of Directors approved a
share repurchase program that allows the Fund from time to time to buy up to 10%
(815,371) of the Fund's outstanding shares if and when the shares are trading at
a discount to net asset value of at least 15%. Although the discount has
exceeded 15%, the Fund has not repurchased any of its shares to date but will,
however, continue to discuss this alternative as well as others at future Board
meetings.
ECONOMIC REVIEW
The dominating theme in Europe is the creation of the 'EURO' in 1999 by the
formation of the European Monetary Union. The process seems to be firmly on
track, given a strong political commitment by the European political leaders.
However, in order to fulfill the planned Maastricht criteria, particularly the
annual budget deficit spending target of 3% of Gross National Product, most
countries will have to employ a very tight fiscal and budgetary policy to cut
government spending and keep tax revenues high for the time being. This will
slow down growth, in an even more very sluggish economy. In order to counter
those restrictive measurements, the monetary policies have been relaxed steadily
leading to record low short-term interest rates throughout Europe. This combined
policy mix will unlikely lead to any significant growth, leaving the risk for
increased inflation very low. Governments in Europe continue with their
privatization programs to close budgetary gaps (planned privatizations:
Germany-Deutsche Telekom; Italy--ENI; Spain--Endesa). The privatized companies
will be more efficiently managed by cutting overhead and streamlining their
business activities. We believe that this scenario favors equity markets in
Europe.
INVESTMENT POLICY
Looking at corporate governance in Europe, we see a trend to an Anglo Saxon
policy. An increasing number of companies have installed management compensation
policies linked to share price performance. As a result, companies have started
to concentrate on profitability rather than turnover growth. Corporate
restructuring activities are proceeding on a fierce pace by focusing on core
activities, streamlining non-core activities, relocating production facilities
to lower cost areas such as Eastern and Central
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
Europe and expanding the business to Asia and other emerging markets. Therefore,
we expect substantial earnings growth, particularly in countries where
restructuring activities have not yet peaked.
Consequently we have increased the Fund's holdings in Southern and Central
Europe and continue to overweight global growth companies. Most European
domestic economies are sluggish and are subject to increasing competition as
global leaders profit from export growth to the faster growing Asian countries
and the United States. These companies can lower their production costs by
shifting to low cost countries in Eastern and Central Europe.
PORTFOLIO INFORMATION
As of the close of business on November 7, 1996 the Fund was 71.16%
invested in warrants with an average weighted life of derivatives at 451.37
days. The percentage of foreign currencies hedged to invested assets was 2.61%
and the net asset value per share was $14.19. For a complete analysis, as well
as the Fund's investment weighting by country, please refer to the chart on
Page 4.
Shareholders can call Investors Bank and Trust Company, the Fund's Transfer
Agent, at the Fund's toll free number 1-800-EUROWRS for weekly information on
portfolio holdings and geographic diversification.
DIVIDEND REINVESTMENT PROGRAM
All income dividends and capital gains distributions declared by the Fund
may be reinvested. We wish to remind shareholders holding stock in their own
name that they automatically participate in the Fund's Dividend Reinvestment
Plan. The Dividend Reinvestment Plan can be of value to shareholders in
maintaining their proportional ownership interest in the Fund in an easy and
convenient way. Any shareholder wishing to discontinue participating in this
Plan, so as to receive future dividends and distributions in cash, should write
to the Plan Agent of the Fund, Investors Bank and Trust Company, P.O. Box 1537,
Boston, MA 02205-1537 or call 1-800-EUROWRS. Be sure to include in your
correspondence your name exactly as it appears on your share registration, your
Social Security or Tax Identification number and a reference to The European
Warrant Fund, Inc. The Fund also offers shareholders a voluntary Cash Purchase
Program. For a copy of the complete terms and conditions of these Plans, please
write to the Plan Agent at the above address. Shareholders whose shares are held
in the name of brokers/dealers or other nominees should contact their broker or
servicing agent if they wish to participate in either of these programs.
In closing, the future promises to be full of challenges as well as
opportunities as we continue to focus on the ever changing investment world. We
greatly appreciate the support that we have received from our shareholders and
we hope that the coming year will even be more rewarding.
Sincerely,
/s/ Bernard Spilko
Bernard Spilko
November 8, 1996 President
2
<PAGE>
THE EUROPEAN WARRANT FUND, INC. FACT SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY WEIGHTINGS SECTOR WEIGHTINGS
<S> <C>
Germany 30% Index Warrants 30%
U.S. Cash Equivalents U.S. Cash Equivalents and
and Net Other Assets Net Other Assets and
and Liabilities 14% Liabilities 14%
Switzerland 14% Chemicals/Pharmaceuticals 12%
Neterlands 11% Financials 10%
France 10% Mutual Funds 7%
Spain 5% Consumer Goods 7%
Italy 5% Telecommunications 5%
United Kingdom 5% Capital Goods 5%
Other 3% High Technology 2%
Sweden 3% Natural Resources 2%
Utilities 2%
Other 2%
Interest Rate Warrants 2%
September 30, 1996 September 30, 1996
<CAPTION>
MISCELLANEOUS TOP TEN EQUITY WARRANT HOLDINGS
SEPTEMBER 30, 1996+
<S> <C>
Average Life of Derivatives
(9/30/96) 1.29 years
Average Gearing (9/30/96)++ 6.0
Average Premium (9/30/96) 2.20% MARKET VALUE PERCENTAGE
Average Annual Premium (9/30/96) 1.20% 1 CAC 40 Index Cap Call, exp.
Year to Date Total Return* 7/31/97 $4,711,970 5.05%
(1/1/96-9/30/96) 30.65% 2 SMI Index, exp. 9/18/98 3,155,630 3.38%
One Year Total Return* 3 CAC 40 Index Cap Call, exp.
(10/1/95-9/30/96) 46.57% 12/31/96 2,923,858 3.13%
Inception to Date Total Return* 4 DAX Call, STK 1800, exp.
(7/17/90-9/30/96) 76.98% 8/21/97 2,898,313 3.10%
5 Sandoz AG, exp. 12/20/96 2,689,457 2.88%
6 Bayer AG, exp. 8/28/97 2,415,589 2.59%
7 DAX Call, STK 1700, exp.
8/21/97 2,248,895 2.41%
8 Ahold, exp. 7/25/99 2,178,738 2.33%
9 Zurich Insurance, exp. 3/21/97 2,151,566 2.30%
10 DAX Cap Call, exp. 3/13/97 2,126,740 2.28%
Currency Hedge At September
30, 1996 .51%
</TABLE>
WARRANT CHARACTERISTICS
The cost of a warrant is substantially
less than the cost of the underlying
securities themselves, and price
movements in the underlying securities
are generally magnified in the price
movements of the warrant. This
leveraging effect enables an investor to
gain exposure to the underlying
instrument with a relatively low capital
investment. Currently, the underlying
equity exposure of a Fund share is
approximately 2.7 times the value of the
share.
GLOSSARY OF TERMS
<TABLE>
<S> <C>
Annual Premium: The premium divided by the number of years until expiration of
the warrant.
Gearing: The value of the number of shares underlying each warrant
compared to the value of the warrant. This serves as an
indicator of the warrant price's sensitivity to a movement in
the underlying stock price.
Premium: The amount by which the sum of a warrant's exercise price and
purchase price exceeds the current stock price (in the case of
put warrants, the premium is the amount by which the sum of the
warrant's exercise price and purchase price is less than the
current share price). This is expressed as a percentage of the
current stock price.
</TABLE>
*Total returns are based on Net Asset Value.
+Percentages are based on Market Value of Portfolio Assets invested.
++The average gearing is based on the derivative portion of the portfolio.
3
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS
(percentages of total net assets)
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--70.8%
[ALL NON-INCOME PRODUCING SECURITIES]
<S> <C> <C>
GERMANY--26.7%
10,000 Allianz Holdings, expires 2/23/98.................... $ 504,339
200,000 Altana AG, expires 1/22/98........................... 270,509
15,000 BASF, expires 6/26/97................................ 307,811
17,000 BASF, expires 4/09/01................................ 1,937,449
16,000 Bayer AG, expires 8/28/97............................ 2,415,589
10,000 BMW, expires 8/31/98................................. 89,078
500,000 Bund (Commerzbank), expires 11/22/96................. 946,455
250,000 Bund (SBV), expires 3/14/97.......................... 697,560
30,000 Commerzbank, expires 12/10/99........................ 371,377
25,000 Continental AG, expires 7/6/00....................... 1,359,096
300,000 DAX Call, expires 3/12/97............................ 377,272
200,000 DAX Call, expires 6/20/97............................ 525,299
250,000 DAX Call, expires 12/09/97........................... 644,343
350,000 DAX Call, STK 1700, expires 8/21/97.................. 2,248,895
500,000 DAX Call, STK 1800, expires 8/21/97.................. 2,898,313
60,000 DAX Call, STK 1900, expires 12/30/96................. 1,159,325
10,000 DAX Call, STK 2600, expires 12/30/96................. 167,349
1,700,000 DAX Cap Call, expires 3/13/97........................ 2,126,740
50,000 Floor C Zerti, expires 1/19/98....................... 144,097
50,000 German Construction Basket, expires 1/13/97.......... 43,884
50,000 Heidelberger Cement, expires 6/13/00................. 419,191
50,000 Hoechst (Rabobank), expires 12/30/97................. 757,820
10,000 Kaufhof Holdings Finance, expires 9/1/98............. 622,237
80,000 Mannesmann AG, expires 12/20/96...................... 593,155
100,000 Mannesmann AG, expires 6/18/97....................... 587,850
217,000 Muncher Ruck Amer. Call, expires 12/31/97............ 1,500,914
3,500 Preussag AG, expires 4/30/2001....................... 121,041
12,500 RWE AG, expires 6/26/97.............................. 112,985
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
<S> <C> <C>
GERMANY--(CONTINUED)
10,000 SAP Vz Cap. Lepo. (Salomon), expires 1/8/97.......... $ 1,557,557
500,000 SAP Vz (DG), expires 1/8/97.......................... 388,079
10,000 Siemens, expires 6/2/98.............................. 966,105
500,000 Siemens (Rabobank), expires 6/19/98.................. 921,000
5,000 Veba, expires 4/6/98................................. 1,385,296
1,000 Volkswagen AG, expires 10/27/98...................... 125,430
-----------
29,293,440
-----------
SWITZERLAND--12.1%
25,000 ABB AG, expires 1/12/99.............................. 388,477
20,000 Alusuisse, expires 2/17/97........................... 408,001
50,000 BIC Bohemia Investment Co Sa, expires 5/14/01........ 124,512
20,000 Credit Suisse Holdings, expires 11/13/98............. 296,438
5,000 ENR Eastern Natural, expires 5/30/00................. 17,930
30,000 Nestle SA, expires 12/12/97.......................... 400,430
5,000 Roche Holdings, expires 1/17/97...................... 222,627
25,000 Roche Holdings, expires 7/16/99...................... 461,705
25,000 Roche Holdings, expires 12/1/00...................... 470,157
75,000 Sandoz AG, expires 12/20/96.......................... 2,689,457
50,000 Sandoz AG, expires 6/17/97........................... 1,284,963
100,000 SBV, expires 6/30/98................................. 844,689
50,000 SBV, expires 6/30/00................................. 133,477
4,100 SIG Class B, expires 2/11/97......................... 235,238
5,000 SMI Index, expires 9/18/98........................... 3,155,630
50,000 Zurich Insurance, expires 3/21/97.................... 2,151,566
-----------
13,285,297
-----------
NETHERLANDS--10.8%
150,000 ABN Amro, expires 5/8/98............................. 1,660,339
1,000,000 Ahold, expires 7/25/99............................... 2,178,738
5,000 Akzo, expires 3/20/98................................ 92,567
350,000 Elsevier, expires 9/26/97............................ 911,799
100,000 Heineken NV, expires 9/18/98......................... 224,005
180,000 ING, expires 7/23/97................................. 1,212,792
100,000 ING, expires 9/26/97................................. 1,214,369
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
<S> <C> <C>
NETHERLANDS--(CONTINUED)
20,000 Philips Electronics, expires 6/30/98................. $ 338,785
50,000 Royal Dutch, expires 10/15/97........................ 1,322,815
180 Unilever, expires 10/17/97........................... 904,206
20,000 Wolters Kluwer, expires 12/20/96..................... 876,168
40,000 Wolters Kluwer, expires 2/23/98...................... 902,570
-----------
11,839,153
-----------
FRANCE--8.2%
800,000 CAC 40 Index Cap Call, expires 12/31/96.............. 2,923,858
110,000 CAC 40 Index Cap Call (Ibex), expires 7/29/97........ 847,000
110,000 CAC 40 Index Cap Call, expires 7/31/97............... 4,711,970
28,500 Schneider, expires 6/30/97........................... 280,916
10,000 SGA Nv, expires 2/22/99.............................. 235,728
-----------
8,999,472
-----------
ITALY--4.8%
500,000 Italian Telephone Basket, expires 3/30/98............ 1,003,612
450,000 MIB 30 Cap (Bankers Trust), expires 12/30/96......... 545,276
1,650,000 MIB 30 Cap (Bankers Trust), expires 6/27/97.......... 1,740,749
1,300,000 MIB 30 Cap (Lehman Brothers), expires 12/30/96....... 1,579,499
250,000 Telecom Italia, expires 3/30/98...................... 443,277
-----------
5,312,413
-----------
SPAIN--4.4%
40,000 Endesa, expires 5/30/97.............................. 382,714
5,000 Iberia Telecom Basket, expires 9/17/98............... 1,034,325
100,000 Ibex Call, expires 1/3/97............................ 887,322
325,000 Ibex Cap Call, expires 12/20/96...................... 647,126
410,000 Ibex Cap Call, expires 12/30/96...................... 864,713
300,000 Ibex Cap Call, expires 6/27/97....................... 1,048,301
-----------
4,864,501
-----------
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
<S> <C> <C>
UNITED KINGDOM--2.7%
1,850,000 Baring Emerging Europe Trust, expires 8/31/04........ $ 665,260
1,000 FTSE 100 Index, expires 12/31/96..................... 781,042
100,000 Glaxo Wellcome, expires 11/10/97..................... 626,273
5,525 Industrial Gases, expires 7/10/98.................... 128,913
1,000,000 Templeton Emerging Markets, expires 9/30/04.......... 758,977
-----------
2,960,465
-----------
SWEDEN--0.6%
35,000 ABB Class B, expires 8/19/98......................... 654,572
-----------
PORTUGAL--0.4%
250,000 PSI 20 Cap Call (DB), expires 09/09/97............... 442,116
-----------
AUSTRIA--0.1%
9,100 Bank Austria, expires 2/28/97........................ 1,450
2,500 EVN Energy, expires 6/20/01.......................... 136,173
-----------
137,623
-----------
TOTAL WARRANTS
(Cost $62,559,740)................................. 77,789,052
-----------
</TABLE>
EQUITIES--5.7%
<TABLE>
<S> <C> <C>
SWITZERLAND--1.9%
1,325 APG.................................................. 581,779
115 Ares-Serono Group--Class B........................... 113,635
100 Baloise Holdings--Registered......................... 209,180
150 BB Biotech AG Schaffhausen........................... 176,308
400 BB Medtech Inc....................................... 430,313
150 Phonak Holding AG--Registered Class B............... 141,047
500 Publicitas Holding--Registered...................... 82,875
250 Schweizerhall Holding AG--Registered................ 256,993
-----------
1,992,130
-----------
SWEDEN--1.5%
50,000 Ericsson L M Telephone--ADR.......................... 1,268,750
25,000 Nordictel Holdings AB*............................... 403,582
-----------
1,672,332
-----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
EQUITIES--(CONTINUED)
<S> <C> <C>
FRANCE--1.1%
20,455 Rhone Poulenc Class 'A'.............................. $ 570,395
2,000 Roussel.............................................. 482,184
2,500 SGS--Thomson Microelectronics*....................... 119,529
-----------
1,172,108
-----------
GERMANY--0.4%
4,000 SGL Carbon AG........................................ 466,350
-----------
UNITED KINGDOM--0.3%
34,447 Standard Chartered Plc............................... 375,456
-----------
SPAIN--0.2%
7,400 Sol Melia SA *....................................... 190,438
-----------
NETHERLANDS--0.1%
3,000 CSM N.V.............................................. 152,979
-----------
CZECH REPUBLIC--0.1%
1,000 SPT Telecom AS *..................................... 121,172
-----------
NORWAY--0.1%
3,000 Kvaerner Class B..................................... 103,770
-----------
TOTAL EQUITIES
(Cost $5,576,187).................................. 6,246,735
-----------
</TABLE>
MUTUAL FUNDS--6.0%
<TABLE>
<S> <C> <C>
GERMANY--2.2%
80,000 Emerging Germany Fund................................ 640,000
133,821 The New Germany Fund................................. 1,840,044
-----------
2,480,044
-----------
RUSSIA--0.9%
100,000 First NIS Regional Fund.............................. 1,050,000
-----------
MULTI-NATIONAL--0.7%
500,000 Baring Emerging Europe Trust Fund.................... 515,000
20,000 Scudder New Europe Fund.............................. 275,000
-----------
790,000
-----------
UNITED KINGDOM 0.7%
55,000 United Kingdom Fund.................................. 742,500
-----------
SPAIN--0.4%
35,000 Growth Fund of Spain................................. 411,250
-----------
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
MUTUAL FUNDS--(CONTINUED)
<S> <C> <C>
ITALY--0.3%
40,000 Italy Fund Inc....................................... $ 355,000
-----------
FRANCE--0.3%
30,000 France Growth Fund................................... 311,250
-----------
AUSTRIA--0.2%
20,000 Austria Fund......................................... 172,500
-----------
CZECHOSLOVAKIA--0.2%
6,721 The Czech Republic Fund.............................. 99,130
2,785 Komercni Banka Investment Fund....................... 71,506
-----------
170,636
-----------
HUNGARY--0.1%
1,500 Hungarian Fund....................................... 140,250
-----------
TOTAL MUTUAL FUNDS (Cost $6,131,938)................. 6,623,430
-----------
</TABLE>
PAR
VALUE
FOREIGN CORPORATE BONDS--0.7%
<TABLE>
<S> <C> <C>
PORTUGAL--0.6%
ECU BCP Bank & Trust 8.75%, due 5/21/02..................
500,000 646,125
-----------
ITALY--0.1%
USD INA Convertible Bond, 5.00%, due 6/28/01.............
100,000 101,250
-----------
TOTAL FOREIGN CORPORATE BONDS
(Cost $781,573) 747,375
-----------
</TABLE>
U.S. GOVERNMENT AGENCY OBLIGATION--2.7%
<TABLE>
<S> <C> <C>
UNITED STATES--2.7%
USD Resolution Funding Corp. Coupon Strip,
30,000,000 due 4/15/30
(Cost $2,664,734).................................. 2,933,700
-----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- -------- ------ ----------
OPTIONS PURCHASED--2.6%
<S> <C> <C> <C> <C>
SWEDEN--1.1%
60,000 OMX Capped Call OTC, expires 7/10/97.......... SEK 1444 $1,267,322
----------
UNITED KINGDOM--0.9%
500,000 3I Group OTC Call, expires 6/12/98............ GBP 4.5 618,136
500 FTSE 100 OTC Call, expires 5/14/97............ GBP 3500 405,309
----------
1,023,445
----------
SPAIN--0.3%
100,000 Repsol OTC Calls, expires 5/22/97............. ESP 4000 360,833
----------
SWITZERLAND--0.2%
400 EMS OTC Put, expires 10/18/96................. CHF 4800 83,513
1,000 SMI & EOE OTC Put, expires 12/11/96........... CHF 7200 47,813
2,500 Valora OTC Call, expires 12/31/97............. CHF 200 62,455
----------
193,781
----------
FRANCE--0.1%
10,000 Michelin OTC Call, expires 12/30/97........... FRF 256 64,679
----------
TOTAL OPTIONS PURCHASED (Cost $2,621,015)..... 2,910,060
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
- ---------
SHORT-TERM INVESTMENTS--7.0%
<S> <C> <C>
UNITED STATES--7.0%
USD
7,268,032 Investors Bank & Trust Repurchase Agreement, dated
9/30/96, due 10/01/96, with a maturity value
of $7,269,102, and an effective yield of 5.30%,
collateralized by a Federal National
Mortgage Association Obligation, with a rate of
6.50% a maturity date of 7/01/2014 and a market
value of $7,631,663................................ 7,268,032
USD
425,000 U.S. Treasury Bill, 4.87% due 12/26/96(a)............ 419,768
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $7,687,800)....... 7,687,800
-----------
TOTAL INVESTMENTS--95.5% (Cost $88,022,987)...................... $104,938,152
-----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- -------- ------ ----------
WRITTEN OPTIONS--(3.5)%
<S> <C> <C> <C> <C>
SWITZERLAND--(1.5)%
2,500 ABB OTC Call, expires 12/17/96................ CHF 1600 $ (48,590)
400 Baloise (Reg.) OTC Put, expires 12/30/96...... CHF 2500 (28,369)
20,000 CS Holding OTC Put, expires 2/28/97........... CHF 123.5 (106,302)
400 EMS Chemie OTC Put, expires 10/18/96.......... CHF 4800 (76,500)
1,250 Hilti Ps OTC Put, expires 12/20/96............ CHF 850 (30,162)
3,000 Intershop Holding OTC Put, expires 10/30/96... CHF 700 (33,206)
1,600 Nestle OTC Call, expires 12/30/96............. CHF 1550 (7,586)
1,500 Novartis OTC Call, expires 12/17/96........... CHF 1500 (98,016)
1,000 Novartis OTC Call, expires 12/17/96........... CHF 1475 (62,156)
1,000 Novartis OTC Call, expires 12/17/96........... CHF 1450 (71,719)
2,000 Novartis OTC Call, expires 12/20/96........... CHF 1475 (122,719)
2,000 Novartis OTC Call, expires 12/20/96........... CHF 1450 (146,625)
500 Richemont OTC Put, expires 12/10/96........... CHF 2000 (23,823)
1,000 SBV OTC Put, expires 8/28/97.................. CHF 1350 (119,962)
1,000 SBV OTC Put, expires 8/28/97.................. CHF 1300 (94,868)
5,000 Sika OTC Put, expires 10/30/96................ CHF 300 (93,952)
1,000 SMI OTC Call, expires 12/11/96................ CHF 3750 (71,528)
2,000 SMI OTC Call, expires 2/14/97................. CHF 3700 (235,875)
1,000 Swissair OTC Put, expires 06/06/97............ CHF 1050 (70,261)
1,380 Winterthur Insurance OTC Put, expires
12/30/96.................................... CHF 725 (15,550)
5,000 Zurich Insurance OTC Put, expires 1/3/97...... CHF 325 (31,078)
----------
(1,588,847)
----------
GERMANY--(1.2)%
30,000 BASF OTC Call, expires 12/30/96............... DEM 42.5 (117,701)
2,500 DAX OTC Call, expires 1/17/97................. DEM 2600 (198,133)
2,000 DAX OTC Call, expires 1/29/97................. DEM 2600 (161,782)
1,000 DAX OTC Call, expires 8/21/97................. DEM 2750 (79,908)
3,000 DAX OTC Call, expires 8/21/97................. DEM 2600 (391,027)
16,000 Metro OTC Call, expires 12/27/96.............. DEM 155.97 (15,720)
1,000 Muncher Ruck OTC Call, expires 10/31/96....... DEM 3250 (151,302)
10,000 SAP Vz OTC Put, expires 11/29/96.............. DEM 225 (21,615)
13,000 SGL-Carbon OTC Put, expires 6/17/97........... DEM 175 (136,237)
25,000 SKW Trostberg OTC Put, expires 2/28/97........ DEM 40 (13,918)
----------
(1,287,343)
----------
NETHERLANDS--(0.5)%
50,000 ABN Amro OTC Call (Db), expires 1/17/97....... NLG 95 (124,416)
30,000 AHOLD OTC Call, expires 1/17/97............... NLG 100 (46,612)
5,000 Heineken OTC Put, expires 12/31/96............ NLG 300 (23,744)
80,000 ING OTC Call, expires 12/17/96................ NLG 55 (74,299)
20,000 Philips OTC Call, expires 12/17/96............ NLG 59 (53,621)
17,000 Royal Dutch OTC Call, expires 1/31/97......... NLG 270 (74,971)
8,000 Unilever OTC Call, expires 1/17/97............ NLG 275 (27,196)
10,000 Wolters Kluwer OTC Call, expires 12/20/96..... NLG 225 (67,173)
20,000 Wolters Kluwer OTC Call, expires 12/20/96..... NLG 210 (104,673)
----------
(596,705)
----------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- -------- ------ ----------
WRITTEN OPTIONS--(CONTINUED)
<S> <C> <C> <C> <C>
UNITED KINGDOM--(0.3%)
100,000 HSBC OTC Put, expires 1/30/97................. GBP 12.5 $ (96,241)
100,000 HSBC OTC Put, expires 1/30/97................. GBP 12 (87,165)
100,000 HSBC OTC Put, expires 1/30/97................. GBP 11.5 (59,466)
100,000 Reuters OTC Put, expires 1/30/97.............. GBP 775 (53,989)
----------
(296,861)
----------
SWEDEN--0.0%
50,000 Ericsson OTC Put, expires 12/30/96............ SEK 160 (47,147)
----------
FRANCE--0.0%
10,000 Alcatel OTC Put, expires 12/30/96............. FRF 400 (14,950)
10,000 General Des Eaux OTC Put, expires 10/30/96.... FRF 550 (17,912)
20,000 Michelin OTC Put, expires 11/29/96............ FRF 245 (11,619)
----------
(44,481)
----------
FINLAND--0.0%
200 Nokia ADR Put, expires 1/17/97................ USD 40 (30,000)
85 Nokia ADR Put, expires 1/17/97................ USD 35 (3,719)
----------
(33,719)
----------
SPAIN--0.0%
60,000 Telefonica Espana OTC Call, expires
10/11/96.................................... ESP 2500 (2,630)
----------
CURRENCY OPTIONS--0.0%
10,000,000 USD Put / CHF Call expires 10/16/96........... USD 1.185 (1,000)
----------
TOTAL WRITTEN OPTIONS (Premiums received $3,841,859).... (3,898,733)
----------
Other Assets and Liabilities (net)--8.0%................ 8,823,937
----------
TOTAL NET ASSETS--100.0%
$109,863,356
----------
----------
</TABLE>
- ------------------
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
* Non-income producing security.
(a) This security is held as collateral for open futures contracts.
See accompanying notes to financial statements.
9
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS AND FINANCIAL
FUTURES CONTRACTS
September 30, 1996 (Unaudited)
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
<TABLE>
<CAPTION>
CONTRACTS TO RECEIVE
------------------------------- IN NET UNREALIZED
EXPIRATION LOCAL VALUE IN EXCHANGE (DEPRECIATION)
DATE CURRENCY USD FOR USD OF CONTRACTS
- ------------- ------------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
10/01/96 ESP 30,700,000 239,038 239,610 $ (572)
10/02/96 ITL 78,500,000 51,543 51,613 (70)
--------------
$ (642)
--------------
</TABLE>
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
<TABLE>
<CAPTION>
CONTRACTS TO DELIVER
------------------------------- IN NET UNREALIZED
EXPIRATION LOCAL VALUE IN EXCHANGE APPRECIATION
DATE CURRENCY USD FOR USD OF CONTRACTS
- ------------- ------------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
10/01/96 DEM 365,172 239,199 239,610 $ 411
10/02/96 DEM 78,677 51,539 51,612 73
10/01/96 ESP 30,700,000 239,038 239,610 572
--------------
$ 1,056
--------------
NET UNREALIZED APPRECIATION OF FORWARD FOREIGN
EXCHANGE CONTRACTS.... $ 414
--------------
--------------
</TABLE>
SCHEDULE OF OPEN FINANCIAL FUTURES CONTRACTS SOLD
<TABLE>
<CAPTION>
NET UNREALIZED
NUMBER OF EXPIRATION CONTRACT DEPRECIATION
CONTRACTS CONTRACTS DATE VALUE OF CONTRACTS
- --------- ----------------- --------- ----------- --------------
<S> <C> <C> <C> <C>
German Bund
100...... (LIFFE Dec 96) 11/22/96 $ (92,192) $ (96,789)
German Bund
100...... (LIFFE Dec 96) 11/22/96 (142,295) (46,282)
--------------
NET UNREALIZED DEPRECIATION OF OPEN FUTURES
CONTRACTS........................................... $ (143,071)
--------------
--------------
</TABLE>
<TABLE>
<S> <C>
GLOSSARY OF TERMS
CHF -- Swiss Franc
DEM -- German Deutsche Mark
ECU -- European Currency Unit
ESP -- Spanish Peseta
FRF -- French Franc
GBP -- British Pound
ITL -- Italian Lira
NLG -- Netherlands Guilder
SEK -- Swedish Krona
USD -- United States Dollar
</TABLE>
See accompanying notes to the financial statements.
10
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $88,022,987)
(Note 1).................................... $104,938,152
Cash......................................... 23,462
Foreign currency, at value (Cost $15,020,289)
(Note 1).................................... 14,690,087
Receivable for investment securities sold.... 3,181,012
Receivable for variation margin on open
financial futures contracts (Note 1)........ 16,375
Net unrealized appreciation of forward
foreign exchange contracts.................. 414
Dividends and interest receivable............ 96,995
Prepaid expenses............................. 41,276
------------
Total assets.......................... 122,987,773
------------
LIABILITIES:
Written options, at value (Premiums received,
$3,841,859) (Notes 1 and 3)................. 3,898,733
Payable for investment securities
purchased................................... 8,713,296
Investment advisory fee payable (Note 2)..... 310,934
Accrued expenses and other payables.......... 201,454
------------
Total liabilities..................... 13,124,417
------------
TOTAL NET ASSETS.................................. $109,863,356
------------
------------
NET ASSETS CONSIST OF:
Accumulated net realized gain on
investments................................. $ 9,336,717
Net unrealized appreciation on investments... 16,456,230
Net investment loss.......................... (486,638)
Par value.................................... 8,154
Paid-in capital in excess of par value....... 84,548,893
------------
TOTAL NET ASSETS (equivalent to $13.47 per share
based on 8,153,712 shares of common stock
outstanding from 100,000,000 authorized with
$0.001 par value)............................... $109,863,356
------------
------------
</TABLE>
See accompanying notes to the financial statements.
11
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 1996 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................... $ 250,784
Dividends (net of foreign withholding taxes
of $23,324)................................. 207,975
-----------
Total Investment Income................. 458,759
EXPENSES:
Investment advisory fee (Note 2)............. 629,236
Administration and custodian fees............ 170,039
Legal and audit fees......................... 75,374
Transfer agent fees.......................... 30,000
Printing and postage fees.................... 19,078
Directors' fees and expenses (Note 2)........ 18,000
Amortization of organizational costs......... 8,080
Other........................................ 27,555
-----------
Total Expenses.......................... 977,362
Less: Fees paid indirectly (Note
2).............................. (31,965)
-----------
Net expenses................................. 945,397
-----------
NET INVESTMENT LOSS............................... (486,638)
-----------
REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain (loss) on:
Securities transactions................. 9,181,219
Written option transactions............. 1,087,903
Futures contracts....................... 118,187
Forward foreign exchange contracts...... (613,695)
Foreign currencies and net other
assets................................ (8,584)
-----------
Net realized gain on investments during the
period...................................... 9,765,030
-----------
Net change in net unrealized appreciation
(depreciation) of:
Securities.............................. 3,093,249
Written options......................... (758,508)
Futures contracts....................... (200,517)
Forward foreign exchange contracts...... 414
Foreign currencies and net other
assets................................ (281,292)
-----------
Net unrealized appreciation of investments
during the period........................... 1,853,346
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS... 11,618,376
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $11,131,738
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, 1996 YEAR ENDED
(UNAUDITED) MARCH 31, 1996
------------------ --------------
<S> <C> <C>
CHANGE IN NET ASSETS FROM OPERATIONS
Net investment loss..................... $ (486,638) $ (670,877)
Net realized gain on investments during
the period............................ 9,765,030 11,071,893
Net unrealized appreciation of
investments during the period......... 1,853,346 26,900,292
------------------ --------------
Net increase in net assets resulting
from operations....................... 11,131,738 37,301,308
NET ASSETS:
Beginning of year....................... 98,731,618 61,430,310
------------------ --------------
End of period (including net investment
loss of $486,638 and $0,
respectively)......................... $109,863,356 $ 98,731,618
------------------ --------------
------------------ --------------
</TABLE>
See accompanying notes to the financial statements.
13
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
FINANCIAL HIGHLIGHTS
For a Fund share outstanding throughout each period
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
1996 MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
(UNAUDITED) 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of
period.............................. $ 12.11 $ 7.53 $ 13.34 $ 8.95 $ 7.57 $ 9.88
------------- ---------- ---------- ---------- ---------- ------------
Net investment loss*.................. (0.06) (0.08) (0.01) (0.12) (0.02) (0.07)
Net realized and unrealized gain
(loss) on investments............... 1.42 4.66 (3.90) 5.10 1.56 (1.80)
------------- ---------- ---------- ---------- ---------- ------------
Net increase/(decrease) in net assets
resulting from investment
operations.......................... 1.36 4.58 (3.91) 4.98 1.54 (1.87)
Capital effect of rights offering..... -- -- -- (0.50) -- --
Distributions:
Dividends from net investment
income.............................. -- -- -- -- -- (0.02)
Distributions from net realized
gains............................... -- -- (1.90) (0.09) -- --
Distributions from capital............ -- -- -- -- (0.16) (0.42)
------------- ---------- ---------- ---------- ---------- ------------
Total distributions:.................. -- -- (1.90) (0.09) (0.16) (0.44)
------------- ---------- ---------- ---------- ---------- ------------
NET ASSET VALUE, END OF PERIOD.......... $ 13.47 $ 12.11 $ 7.53 $ 13.34 $ 8.95 $ 7.57
------------- ---------- ---------- ---------- ---------- ------------
------------- ---------- ---------- ---------- ---------- ------------
MARKET VALUE, END OF PERIOD............. $ 10.625 $ 10.00 $ 6.875 $ 11.875 $ 8.25 $ 6.375
------------- ---------- ---------- ---------- ---------- ------------
------------- ---------- ---------- ---------- ---------- ------------
Total investment return............... 6.25% 45.45% (26.37)% 44.89% 32.13% (9.78)%
------------- ---------- ---------- ---------- ---------- ------------
------------- ---------- ---------- ---------- ---------- ------------
Ratios to average net
assets/supplemental data: *
Net assets, end of period (000's)..... $ 109,863 $ 98,732 $ 61,430 $107,689 $ 54,178 $ 45,741
Ratio of net investment income/(loss)
to average net assets............... (0.95)%+ (0.86)% (0.11)% (0.93)% (0.21)% (0.79)%
Ratio of operating expenses to average
net assets.......................... 1.91%+ 2.03% 1.74% 1.73% 2.13% 2.44%
Portfolio turnover rate............... 94% 148% 104% 150% 164% 100%
</TABLE>
- ------------------------
*For the following periods, the operating expenses of the fund reflect a waiver
of fees by the investment advisor. Had such action not been taken, the net
investment loss per share and the operating expense ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment loss per share.......... -- ($0.09) ($0.04) ($0.14) ($0.03) --
Ratio of operating expenses to average
net assets............................ -- 2.15% 1.99% 1.90% 2.26% --
</TABLE>
For the following periods, the ratio of operating expenses to average net
assets includes indirectly paid expenses. Excluding indirectly paid
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
expenses, the expense ratio would have
been:.................................. 1.85%+ 1.94% -- -- -- --
</TABLE>
+Annualized
See accompanying notes to the financial statements.
14
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The European Warrant Fund, Inc. (the 'Fund') was incorporated under the
laws of the State of Maryland on May 23, 1990 and is a diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's investment objective is enhanced capital growth,
which the Fund seeks to achieve by investing primarily in equity warrants of
Western European issuers. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.
Portfolio valuation: All non-German securities for which market
quotations are readily available are valued at the last sales price prior
to the time of determination, or, if no sales price is available at that
time, at the mean between the bid and asked quotations. If bid and ask
quotations are not available, the security is priced at the bid quotation.
If this is unavailable, the security is priced at the last available quoted
price. German securities which trade on the German exchange are first
valued at the last sale price prior to the time of determination. If this
quotation is not available, the securities are valued at the Kassa closing
price of the exchange. Securities that are traded over-the-counter are
valued, if bid and asked quotations are available, at the mean between the
current bid and asked prices. If bid and asked quotations are not
available, then over-the-counter securities will be valued as determined in
good faith by the Fund's Board of Directors. In making this determination,
the Board will consider, among other things, publicly available information
regarding the issuer, market conditions and values ascribed to comparable
companies. In instances where the price determined above is deemed not to
represent fair market value, the price is determined in such manner as the
Board may prescribe. Investments in short-term debt securities having a
maturity of 60 days or less are valued at amortized cost or by amortizing
their value on the 61st day prior to maturity if their term to maturity
from the date of purchase was more than 60 days, unless this is determined
by the Fund's Board of Directors not to represent fair value. All other
securities and assets are taken at fair value as determined in good faith
by the Fund's Board of Directors, although the actual calculation may be
done by others.
Warrants: Under normal market conditions, the Fund invests primarily
in European warrants. The Fund's holdings of European warrants may consist
of equity warrants, index warrants, covered warrants, interest rate
warrants, currency options and long-term options of, or relating to,
European issuers. At the time of issue, the cost of a warrant is
substantially less than the cost of the underlying securities themselves,
and price movements in the underlying securities are generally magnified in
the price movements of the warrant. Warrants generally pay no dividends and
confer no voting or other rights other than to purchase the underlying
security. If the market price of the underlying security is below the
exercise price of the warrant on its expiration date, the warrant will
generally expire without value.
Foreign currency: The books and records of the Fund are maintained in
United States (U.S.) dollars. Foreign currencies, investments and other
assets and liabilities are translated into U.S. dollars at the exchange
rates prevailing at the end of the period, and purchases and sales of
15
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
investment securities, income and expenses are translated on the respective
dates of such transactions. Unrealized gains or losses which result from
changes in foreign currencies have been included in the unrealized
appeciation/(depreciation) of investments. Net realized currency gains and
losses include foreign currency gains and losses between trade date and
settlement date on investment securities transactions, foreign currency
transactions and the difference between the amounts of interest and
dividends recorded on the books of the Fund and the amount actually
received. The portion of foreign currency gains and losses related to
fluctuations in exchange rates between the initial purchase trade date and
subsequent sale trade date is included in realized gains and losses on
security transactions.
Options: Purchases of put and call options are recorded as an
investment, the value of which is marked-to-market at each valuation date.
When a purchased option expires, the Fund will realize a loss equal to the
premium paid. When the Fund enters into a closing sale transaction, the
Fund will realize a gain or loss depending on whether the sales proceeds
from the closing sale transaction are greater or less than the cost of the
option. When the Fund exercises a put option, it will realize a gain or
loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid.
When the Fund exercises a call option, the cost of the security which
the Fund purchases upon exercise will be increased by the premium
originally paid. When the Fund writes a call option or a put option, an
amount equal to the premium received by the Fund is recorded as a
liability, the value of which is marked-to-market at each valuation date.
When a written option expires, the Fund realizes a gain equal to the amount
of the premium originally received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium originally received when
the option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is
eliminated. When a call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such
sale are increased by the premium originally received. When a put option is
exercised, the amount of the premium originally received will reduce the
cost of the security which the Fund purchased upon exercise.
Unlike options on specific securities, all settlements of options on
stock indices are in cash and gains or losses depend on general movements
in the stocks included in the index rather than price movements in a
particular stock. There is no physical delivery of securities.
The risk associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is that the Fund may
forego the opportunity for profit if the market price of the underlying
security increases and the option is exercised. The risk in writing a put
option is that the Fund may incur a loss if the market price of the
underlying security decreases and the option is exercised. There is also
the risk the Fund may not be able to enter into a closing transaction
because of an illiquid secondary market. In addition, the Fund could be
exposed to risks if the counterparties to the transaction are unable to
meet the terms of the contracts.
16
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Over-the-counter options: The Fund may invest in options on
securities which are traded in the over-the-counter market. The applicable
accounting principles used are the same as those for options discussed
above.
Forward foreign currency contracts: Forward foreign currency
contracts are valued at the forward rate and are marked-to-market at each
valuation date. The change in market value is recorded by the Fund as an
unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
As part of its investment strategy, the Fund uses forward foreign
currency contracts to hedge the Fund's portfolio holdings against currency
risks. With respect to the Fund's obligations to purchase or sell
currencies under forward foreign currency contracts, the Fund will either
deposit with its custodian in a segregated account cash or other high-grade
liquid debt obligations having a value at least equal to its obligations,
or continue to own or have the right to sell or acquire, respectively, the
currency subject to the forward foreign currency contract.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's portfolio securities,
but it does establish a rate of exchange that can be achieved in the
future. Although forward foreign currency contracts limit the risk of loss
due to a decline in the value of the currency holdings, they also limit any
potential gain that might result should the value of the currency increase.
In addition, the Fund could be exposed to risks if the counterparties to
the contracts are unable to meet the terms of the contracts.
Futures contracts: Upon entering into a futures contract, the Fund is
required to deposit with the broker an amount of cash or cash equivalents
equal to a certain percentage of the contract amount. This is known as the
'initial margin'. Subsequent payments ('variation margin') are made or
received by the Fund each day, depending on the daily fluctuation of the
value of the contract.
For long futures positions, the asset is marked-to-market daily. For
short futures positions, the liability is marked-to-market daily. The daily
changes in the contract are recorded as unrealized gains or losses. The
Fund recognizes a realized gain or loss when the contract is closed.
There are several risks in connection with the use of futures
contracts as a hedging device. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in value of the hedged investments. In
addition, there is the risk the Fund may not be able to enter into a
closing transaction because of an illiquid secondary market.
Securities transactions and investment income: Securities
transactions are recorded as of the trade date. Realized gains and losses
from securities sold are recorded on the identified cost basis. Dividend
income and distributions to shareholders are recorded on the ex-dividend
date except that certain dividends from foreign securities are recorded as
soon after the ex-date as the Fund is informed of the dividend. Interest
income is recorded on the accrual basis.
17
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Organization costs: Costs incurred by the Fund, in connection with
its organization, were amortized on a straight-line basis over 60 months
starting at the commencement of the Fund's operations and concluded during
this reporting period.
Dividends and distributions to shareholders: The Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income. The Fund will determine annually whether to
distribute any net realized long-term capital gains in excess of net
realized short-term capital losses; however, it currently expects to
distribute any excess annually to its shareholders. Additional
distributions of net investment income and capital gains may be made at the
discretion of the Fund's Board of Directors to avoid the application of a
4% nondeductible excise tax on certain undistributed amounts of ordinary
income and capital gains. Income distributions and capital gain
distributions on a Fund level are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and
gains on various investment securities held by the Fund, foreign currency
transactions, other timing differences and differing characterization of
distributions made by the Fund as a whole.
Federal income taxes: The Fund intends to continue to qualify as a
regulated investment company for Federal income tax purposes. Accordingly,
no income tax provision is required. It is expected that certain capital
gains earned by the Fund and certain dividends and interest received by the
Fund will be subject to foreign withholding taxes.
Management estimates: The presentation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS
Julius Baer Securities Inc. (the 'Adviser') serves as the Fund's investment
adviser pursuant to an advisory agreement with the Fund. The Fund pays the
Adviser a fee for its advisory services at an annual rate of 1.25% of the value
of the Fund's average weekly net assets.
For the six months ended September 30, 1996, the Fund incurred total
brokerage commissions of $137,822 of which $36,381 was paid in total to Bank
Julius Baer, Frankfurt and Bank Julius Baer, Zurich (affiliates of the Adviser).
No director, officer or employee of the Adviser or any affiliates of those
entities will receive any compensation from the Fund for serving as an officer
or director of the Fund. The Fund pays each of its directors who is not a
director, officer or employee of the Adviser or any affiliate thereof an annual
fee of $7,500 plus $250 for each Board of Directors meeting attended. In
addition, the Fund reimburses these directors for travel and out-of-pocket
expenses incurred in connection with Board of Directors meetings.
18
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Fund has entered into an expense offset arrangement as part of its
custody agreement with Investors Bank & Trust. Under this arrangement, the
Fund's custody fees are reduced when the Fund maintains cash on deposit at the
custodian. For the six months ended September 30, 1996, the Fund incurred total
custody fees in the amount of $170,039 which, after receiving a credit of
$31,965 pursuant to the expense offset arrangement, resulted in a net expense of
$138,074.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended September 30, 1996 amounted to
$83,525,568 and $84,980,525, respectively.
Activity in written options for the period ended September 30, 1996 was as
follows:
<TABLE>
<CAPTION>
PREMIUM FACE VALUE
----------- ------------
<S> <C> <C>
Options outstanding at March 31, 1996...................... $ 2,246,649 $ 40,321,800
Options written............................................ 8,194,962 41,808,695
Options exercised.......................................... -- --
Options expired............................................ (701,636) (30,031,500)
Options closed............................................. (5,898,116) (41,150,680)
----------- ------------
Options outstanding at September 30, 1996.................. $ 3,841,859 $ 10,948,315
----------- ------------
----------- ------------
</TABLE>
At September 30, 1996, aggregated gross unrealized appreciation for all
securities in which there is an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value amount to $19,341,883 and $2,426,718, respectively.
4. EUROPEAN WARRANTS
The Fund's investments in European warrants involve certain considerations
not typically associated with investment in securities of U.S. companies or the
United States Government, including risks relating to (1) price volatility in
and relative illiquidity of European warrant markets; (2) currency exchange
matters; (3) restrictions on foreign investment; (4) the absence of uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements and less government supervision and regulation; and (5) certain
economic and political conditions.
5. CAPITAL LOSS CARRYFORWARD
The Fund has available for Federal income tax purposes an unused capital
loss carryover of $401,332 expiring in the year 2003.
19
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NET
NET REALIZED AND INCREASE/(DECREASE)
NET INVESTMENT UNREALIZED GAIN/(LOSS) IN NET ASSETS FROM
INVESTMENT INCOME INCOME (LOSS) ON INVESTMENTS OPERATIONS
------------------- -------------------- ----------------------- -----------------------
QUARTER ENDED TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
- ---------------------------- -------- --------- --------- --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1994............... $314,903 $ .04 $(118,849) $ (.02) $(18,524,870) $ (2.29) $(18,643,719) $ (2.31)
September 30, 1994.......... 384,980 .05 (5,985) (.00) (5,886,405) (.73) (5,872,390) (.73)
December 31, 1994........... 340,776 .04 (42,311) (.01) (513,049) (.06) (555,360) (.07)
March 31, 1995.............. 346,477 .04 70,149 .02 (6,437,724) (.82) (6,367,575) (.80)
June 30, 1995............... 412,950 .05 107,316 .01 9,890,418 1.22 9,997,734 1.23
September 30, 1995.......... 231,303 .03 (153,475) (.02) 3,619,793 .45 3,466,318 .43
December 31, 1995........... 153,146 .02 (242,940) (.03) 9,446,364 1.15 9,203,424 1.12
March 31, 1996.............. 58,543 .01 (381,778) (.04) 15,015,610 1.84 14,633,832 1.80
June 30, 1996............... 250,496 .03 (210,380) (.03) 8,001,429 .98 7,791,049 .95
September 30, 1996.......... 208,263 .03 (276,258) (.03) 3,616,947 .44 3,340,689 .41
</TABLE>
20
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION
PORTFOLIO MANAGEMENT
In managing the day-to-day operations of the Fund, including the making of
all investment decisions, the Adviser employs Hansruedi Huber as the Fund's
Portfolio Manager. Mr. Huber has been employed as a Vice President with the
Adviser since July 1992 and is currently also a Senior Vice President of Julius
Baer Asset Management Ltd., an affiliate of the Adviser.
ADDITIONAL INVESTMENT STRATEGIES
As discussed in footnote 1, the Fund may employ various investment
strategies. In prior years, the written options on securities and foreign
currencies were limited to written calls; the writing of put options on
securities and foreign currencies represents an additional investment strategy
employed by the Fund. Additionally, the Fund may both purchase and sell interest
rate futures contracts that are traded on regulated exchanges, including
non-U.S. exchanges to the extent permitted by the U.S. Commodity Futures Trading
Commission.
INVESTMENT POLICY CHANGES
The Board of Directors of the Fund has approved the following changes to
the non-fundamental investment policies of the Fund.
1. The Fund may write put options with total market value not exceeding 5%
of total assets.
2. The policy that limits the value of the underlying securities on which
covered call options are written to 35% of the total assets of the Fund has been
eliminated.
3. The Fund may enter into repurchase agreements with primary government
securities dealers recognized by the Federal Reserve Bank of New York, member
banks of the Federal Reserve System or its custodian.
4. The Board has further clarified the existing policy that the Fund is
required to concentrate at least 25% of its assets in securities issued by banks
or bank holding companies by eliminating the inconsistent disclosure that the
Investment Adviser does not anticipate that it will have more than 25% of its
assets in bank issued warrants or similar bank issued equity securities.
5. The Fund may use portfolio securities (as opposed to cash or cash
equivalents) to satisfy asset segregation requirements in connection with
certain trading practices.
QUARTERLY EARNINGS RELEASE
The Fund issues, via a press release, interim earnings statements on a
quarterly basis which compare the Fund's current quarterly performance against
the corresponding quarter from the previous fiscal year. In addition, the Fund
sends unaudited semi-annual and audited annual reports, including a list of
investments held, to its stockholders.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the 'Plan'),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by Investors Bank & Trust ('IBT') as
agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in 'street name') may be reinvested by the broker or
nominee in additional shares under the Plan, but only if the service is provided
by the broker or nominee, unless the shareholder elects to receive distributions
in cash. A shareholder who holds Common Stock registered in the name of a broker
or other nominee may
21
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(Continued)
not be able to transfer the Common Stock to another broker or nominee of a
broker or other nominee and continue to participate in the Plan. Investors who
own Common Stock registered in street name should consult their broker or
nominee for details regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. If the
market price per share on the valuation date equals or exceeds net asset value
per share on that date, the Fund will issue new shares to participants valued at
net asset value or, if the net asset value is less than 95% of the market price
on the valuation date, then valued at 95% of the market price. If net asset
value per share on the valuation date exceeds the market price per share on that
date, participants in the Plan will receive shares of stock from the Fund valued
at market price. The valuation date is the dividend or distribution payment date
or, if that date is not a New York Stock Exchange trading day, the next
preceding trading day. To the extent the Fund issues shares of Common Stock to
participants in the Plan at a discount to net asset value, the remaining
shareholders' interests in the Fund's net assets will be diluted
proportionately. If the Fund should declare an income dividend or capital gains
distribution payable only in cash, IBT will, as agent for the participants, buy
Fund shares in the open market, on the New York Stock Exchange or elsewhere, for
the participants' accounts on, or shortly after, the payment date.
Participants in the Plan have the option of making additional semi-annual
cash payments to IBT in any amount from $100 to $3,000 for investment in Fund
shares. IBT uses all funds so received to purchase Fund shares in the open
market on or about February 15 and August 15 of each year.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant, however, bears a pro rata
share of brokerage commissions incurred with respect to IBT's open market
purchases of Fund shares in connection with voluntary cash payments or the
reinvestment of dividends or capital gains distributions payable only in cash.
The automatic reinvestment of dividends and capital gains distributions
does not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan is treated
for federal income tax purposes as having received, on the dividend payment
date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares.
A shareholder may terminate participation in the Plan at anytime by
notifying IBT in writing. A termination will be effective immediately if notice
is received by IBT not less than 10 days before any dividend or distribution
record date. Otherwise, the termination will be effective, and only with respect
to any subsequent dividends or distributions, on the first trading day after the
dividend or distribution has been credited to the participant's account in
additional shares of Common Stock of the Fund. Upon termination and according to
a participant's instructions, IBT will either (a) issue certificates from the
whole shares credited to your Plan account and a check representing any
fractional shares or (b) sell the shares in the market. There will be a $5.00
fee assessed for liquidation service, plus brokerage commissions, and IBT is
authorized to sell a sufficient number of a participant's shares to cover such
amounts.
The Plan is described in more detail on pages 40-42 of the Fund's
Prospectus dated September 3, 1993. Information concerning the Plan may be
obtained from IBT at 1-(800) 387-6977.
22
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
330 Madison Ave.,
New York, New York 10017
ADDITIONAL INFORMATION
INVESTMENT ADVISER
Julius Baer Securities Inc.
330 Madison Ave.
New York, New York 10017
ADMINISTRATOR, CUSTODIAN
& TRANSFER AGENT
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
OFFICERS
Bernard Spilko
President
Hansruedi Huber
Chief Investment Officer
Robert Discolo
Chief Financial Officer
and Secretary
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
COUNSEL
Baker & McKenzie
805 Third Avenue
New York, New York 10022
DIRECTORS
Antoine Bernheim
David Bodner*
Lawrence A. Fox
Thomas J. Gibbons
Harvey B. Kaplan
Bernard Spilko
*Chairman of the Board
<PAGE>
---------------------------------------------------------
THE EUROPEAN WARRANT FUND, INC.
SEMI-ANNUAL
REPORT
SEPTEMBER 30, 1996
[LOGO]
THE EUROPEAN WARRANT FUND, INC.
330 MADISON AVENUE
NEW YORK, NEW YORK 10017
This report is sent to the shareholders of The European Warrant Fund, Inc. for
their information. It is not a Prospectus, circular or representation intended
for use in the purchase or sale of shares of the Fund or of any securities
mentioned in the report.
