<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
Dear Fellow Shareholder:
The European Warrant Fund, Inc. (the 'Fund'), now in its seventh year of
existence, has had its best year in terms of performance for the year ending
September 30, 1997. The year was marked by an extended period of economic
stability and high investor confidence, which contributed to robust investment
activity. Subsequent to September 30, 1997, however, there was a sharp fall in
Asian markets as a result of pressures on several currencies. The European (and
American) equity markets followed suit and the Fund's Net Asset Value ('NAV')
and share price was affected as well. We anticipate continued volatility for the
period immediately ahead, but remain confident that long term investors will be
rewarded for their patience. As always, shareholders should weigh the risks of
any investment and, in general take a long-term investment approach.
The Fund turned in an impressive performance with a gain for the
twelve-month period ending September 30, 1997 of 105.09% based on net asset
value and 107.37% based on share price. During this period the Fund was ranked
#2 out of 143 funds for the 12 months ending September 30, 1997 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 24, 1997. Of course
past performance does not guarantee future results.
ECONOMIC REVIEW
Prior to the correction in August, the European stock markets had advanced
by as much as 50% in 1997. Stock indices in Germany, Switzerland, the
Netherlands and United States have approximately doubled in value since the
beginning of 1995. One would have to go as far back as the 1950's to find a
comparable three-year period in the United States. In quite the opposite
direction of Europe and the United States, the equity markets of Asia and many
emerging markets declined sharply in 1997. The Russian market advanced
eight-fold over the last two years, although some gains were reversed in the
latter part of October 1997. Countries that had the fewest structural problems
had the best equity markets. The United States led the list, followed by
continental Europe, where although the corporate sector is undertaking the
necessary restructuring there is not sufficient stimulus from the government,
especially relating to the labor market and fiscal policies.
There are very clear signs of how the economic turmoil in Southeast Asia is
forcing Japanese companies to revamp their strategies in the region. With
Southeast Asia's economy now contracting, many Japanese domestic oriented
companies will also have to contract due to sluggish sales.
Several months ago it seemed that corporate Europe would forever be tagged
as sclerotic, and Asia as booming. Times certainly have changed. Turmoil in the
currency and equity markets has raised doubts about the underlying strength of
Asia's corporate structure, while European businesses are posting solid
third-quarter earnings growth. The recovery is here and the gains are
impressive. Europe is buffered from the recent Asian turbulence because in prior
years European corporations had largely failed in their efforts to expand into
high growth emerging Asian markets. The recent devaluation of Asian currencies
will make it even tougher for European exports to countries such as Thailand and
Malaysia. However, with the prospects improving in Europe, that will not have
much of an impact on the bottom line. In general, corporate Europe seems poised
to prosper for the rest of the year and into 1998. Big businesses have taken on
major restructuring, and some are starting to taste the fruits of their labor.
Basically, corporate
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
Europe was restructuring in 1995 and 1996. Now, 1997 is the first year without
large restructuring costs. At the same time there has been a general
acceleration of growth due to the increase in the value of the U.S. dollar.
Nevertheless, a more cautious positioning is now more advisable than at the
beginning of this year as the high valuations of warrants are vulnerable. In
addition, short-term interest rates are rising slightly in Core Europe and
strongly in the United Kingdom ('UK'). This results from the convergence
necessary for a common European monetary policy and also from a further
acceleration in the economic recovery. Anticipating a 4% money market level for
entering Maastricht, some Southern European countries, like Italy, will find it
necessary to lower short-term interest rates.
INVESTMENT POLICY
In the summer of 1997, the Fund lowered the Delta-Leverage from 2.2 to a
range of 1.7-2.0 (still in the upper end of the neutral range). Having been
cautious early assisted greatly in coping with the turbulence in October 1997.
Delta-Ratio measures the total leverage to the NAV. When the Delta-Ratio is 2
and the European market increases by $1.00, then the NAV of the Fund generally
should by $2.00. Conversely, if the European market decreases by $1.00, then the
NAV of the Fund generally should by $2.00. Strategically we define our
Delta-Ratio Range in three different scenarios: 2-3 is bullish with no clouds on
the investment horizon; 1.5-2 means mildly bullish with some risks of
corrections, 1.25-1.5 shows caution in a flat market. In sell-off situations
such as October's, we can defend the Fund's value, not by selling cyclical long
positions in sharply declining markets with huge bid-offer spreads, but by
writing OTC-Options with extremely high volatility, in a contrarian manner.
Regarding our country allocation, in the UK post election we heavily
increased our UK exposure through a large position of a long term warrant on the
FTSE 100 Index. The UK is relatively cheap and offers long-term convergence
potential. At the same time, we decreased Germany and France where we took some
profits in dollar sensitive stocks. We overweight Italy in anticipation it will
be a starting member of the European Monetary Union ('EMU') and benefit from
lower interest rates.
Our principal sector focus is in the finance industry with its mega mergers
such as CS Group with Winterthur, Zurich with BAT and Bayerisch Vereinsbank with
Bayerisch Hypo. The restructuring theme in the finance sector in Europe (with
about 10,000 different banks) has not yet been exhausted. With the EMU coming
closer we see a lot of mergers and takeovers in the banking industry to come,
especially in France and Italy. It is anticipated that the Fund will create a
European Restructuring Finance Basket. On the interest rate side, we prefer to
invest the Fund's cash holdings in long term U.S. Treasuries.
PORTFOLIO AND ADDITIONAL INFORMATION
As of the close of business on November 6, 1997 the Fund was 74.96%
invested in warrants with an average weighted life of derivatives of 464.44
days. The percentage of foreign currencies hedged to invested assets was 1.60%
and the net asset value per share was $22.80. For a complete analysis as well as
the Fund's investment weighting by country, please refer to the chart on Page 3.
2
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
On various occasions, the Board of Directors has considered several
alternatives to address the Fund's discount. The Board will continue to discuss
alternatives at future Board meetings.
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 about the existence of 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 in cash, should
write to the Plan Agent of the Fund, Investors Bank and Trust Company, P.O. Box
9130, Boston, MA 02117-9130 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.
We congratulate our colleagues for their dedication and hard work
throughout the year and we thank you, our shareholders, for your continued
confidence and support.
Sincerely,
/s/ Bernard Spilko
Bernard Spilko
President
November 6, 1997
3
<PAGE>
THE EUROPEAN WARRANT FUND, INC. FACT SHEET
(UNAUDITED)
COUNTRY WEIGHTINGS
[PIE CHART]
U.S. Cash Equivalents and Net Other Assets and Liabilities 4%
Switzerland 11%
Netherlands 8%
France 11%
Spain 6%
Italy 10%
United Kingdom 16%
Eastern Europe 6%
Sweden 6%
Multi-national 6%
Germany 16%
September 30, 1997
MISCELLANEOUS
Average Life of Derivatives (9/30/97) 1.30 years
Average Gearing (9/30/97)++ 5.40%
Average Premium (9/30/97) 2.55%
Average Annual Premium (9/30/97) 1.20%
Year to Date Total Return* (1/1/97-9/30/97) 70.89%
One Year Total Return* (10/1/96-9/30/97) 105.09%
Average Annual Total Return Since Inception*
(7/17/90-9/30/97) 19.57%
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 with corresponding risk. Currently, the
underlying equity exposure of a Fund share is approximately 1.87 times the value
of the share.
SECTOR WEIGHTINGS
[PIE CHART]
U.S. Cash Equivalent and Net Other Assets and Liabilities 4%
Chemicals/Pharmaceuticals 6%
Financials 11%
Mutual Funds 9%
Consumer Goods 3%
Capital Goods 6%
Telecommunications 2%
Utilities 3%
Interest Rate 6%
Natural Resources 3%
Food 2%
Index Warrants 45%
September 30, 1997
TOP TEN EQUITY WARRANT HOLDINGS SEPTEMBER 30, 1997
MARKET VALUE PERCENTAGE+
1 FTSE 100 Index (SBC),
exp. 5/16/99 $25,346,004 11.80%
2 CAC 40 Index Cap Call (BP),
exp. 2/06/98 9,081,168 4.23%
3 CAC 40 Index Cap Call (BNP),
exp. 12/31/97 8,162,053 3.80%
4 OMX Cap Call (SBC), exp. 3/05/98 6,743,792 3.14%
5 MIB 30 Cap Call (MS), exp. 1/13/98 6,589,301 3.07%
6 DAX Cap Call (SOG), exp. 12/30/97 5,575,998 2.60%
7 MIB 30 Cap Call (BT), exp. 5/19/00 5,547,768 2.58%
8 E-Top 100 (DB), exp. 6/30/00 5,396,600 2.51%
9 MIB 30 Cap Call (MS), exp. 1/13/98 4,585,338 2.13%
10 IBEX Cap Call (Citi), exp. 9/17/98 4,502,713 2.10%
Currency Hedge At September 30, 1997 1.28%
GLOSSARY OF TERMS
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.
*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.
4
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS
(percentages of total net assets)
September 30, 1997 (Unaudited)
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--79.7%
[ALL NON-INCOME PRODUCING SECURITIES]
GERMANY--15.1%
50,000 Allianz Range (COBA), expires 4/06/98................ $ 199,547
100,000 BASF AG (LB), expires 1/15/99........................ 1,267,478
150,000 Bayer AG (Citi), expires 6/15/00..................... 2,050,665
10,000 Commerzbank, expires 12/10/99........................ 832,154
7,000 Continental AG, expires 7/06/00...................... 1,010,473
250,000 DAX Cap Call (DG), STK 2400, expires 12/09/97 ....... 2,513,445
2,500,000 DAX Cap Call (SBC), STK 2900, expires 12/19/97 ...... 3,424,851
5,000,000 DAX Cap Call (SOG), STK 2400, expires 12/30/97 ...... 5,575,998
1,000,000 DAX Cap Call (TB), STK 2800, expires 12/30/97 ....... 1,106,708
150,000 Deutsche Bank, expires 12/19/97...................... 850,835
300,000 Deutsche Telekom Capped Put (TB), expires 12/19/97... 477,215
10,000 Dresdner Bank AG, expires 1/05/99.................... 520,804
25,000 Dresdner Bank AG, expires 4/30/02.................... 441,551
50,000 Floor C Zerti (WLB), expires 1/19/98................. 43,023
25,000 Hoechst AG (Citi), expires 6/05/98................... 353,807
10,000 Mannesmann AG (DB), expires 6/18/98.................. 99,632
150,000 MDAX Call (DB), STK 3500, expires 12/19/97........... 364,280
1,500,000 MDAX Cap Call (DB), STK 2700, expires 12/30/97 ...... 1,672,799
500,000 MDAX Cap Call (DB), STK 3300, expires 12/30/97 ...... 551,939
100,000 MDAX Call (DB), STK 4000, expires 6/19/98............ 139,258
25,000 Metallgesellschaft (DB), expires 6/18/98............. 119,587
5,000 Metro Holdings Finance, expires 9/01/98.............. 851,967
10,000 Preussag AG, expires 4/30/01......................... 764,223
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
GERMANY--(CONTINUED)
250,000 Siemens (Rabo), expires 6/19/98...................... $ 1,422,304
10,000 Siemens, expires 6/02/98............................. 2,824,795
100,000 Veba AG (Citi), expires 1/15/99...................... 1,862,440
2,500 Volkswagen AG Preferred, expires 10/27/98............ 962,355
-----------
32,304,133
-----------
UNITED KINGDOM--13.2%
150,000 British Petroleum (SBC), expires 11/10/97............ 1,195,423
10,000 FTSE 100 Index (SBC), STK 4000, expires 5/16/99...... 25,346,004
1,000 FTSE Mid 250 Index (SBC), STK 4700, expires
9/26/98............................................ 902,691
100,000 Glaxo Welcome (SBC), expires 3/24/98................. 461,803
100,000 Marks & Spencer (SBC), expires 8/07/98............... 268,765
100,000 Pilkington, expires 5/04/98.......................... 70,092
-----------
28,244,778
-----------
FRANCE--10.4%
1,000,000 Axa (SOG), expires 2/09/99 .......................... 1,358,879
200,000 CAC 40 Index Cap Call (BNP), STK 2110, expires
12/31/97........................................... 8,162,053
300,000 CAC 40 Index Cap Call (BP), STK 2360, expires 2/06/98
................................................... 9,081,168
150,000 CAC 40 Index Cap Call (BNP), STK 2560, expires
6/30/98 ........................................... 3,717,463
-----------
22,319,563
-----------
ITALY--9.3%
500,000 Italian Telephone Basket (BZW), expires 3/30/98...... 2,752,825
4,000,000 MIB 30 Cap Call (MS), STK 14000, expires 1/09/98..... 4,585,338
6,000,000 MIB 30 Cap Call (MS), STK 17000, expires 1/13/98..... 6,589,301
1,333,000 MIB 30 (BT), STK 19000, expires 5/19/00.............. 5,547,768
1,000,000 Generale (NAT), expires 1/29/99...................... 375,543
-----------
19,850,775
-----------
See accompanying notes to financial statements.
5
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1997 (Unaudited)
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
NETHERLANDS--7.2%
85,000 ABN Amro (SBC), expires 5/08/99...................... $ 2,723,674
750,000 Ahold (GS), expires 7/23/99 ......................... 3,715,129
10,000 Akzo (ABN), expires 4/29/98 ......................... 634,582
200,000 Hoogovens (GS), expires 10/16/98..................... 628,361
200,000 ING (ML), expires 1/06/99 ........................... 2,816,788
50,000 Royal Dutch (SBC), expires 5/14/99................... 3,929,379
25,000 Wolters Kluwer (ML), expires 2/23/98................. 1,016,587
-----------
15,464,500
-----------
SWITZERLAND--7.0%
17,000 ABB AG (GBK), expires 1/12/99........................ 830,695
350,000 Alusuisse (SBC), expires 1/15/02..................... 1,917,412
50,000 Castle Alternative Invest AG (LGT), expires
9/10/98............................................ 103,235
20,000 EMS Chemie (GS), expires 2/20/98..................... 137,646
100,000 Holderbank (ML), expires 2/18/00..................... 426,703
300,000 Nestle SA (SBC), expires 1/15/02..................... 1,399,862
300,000 Novartis (SBC), expires 12/30/99..................... 4,170,681
5,000 Pirelli (OZ), expires 6/17/98........................ 95,492
35,000 Roche Holdings (SBC), expires 12/01/00............... 1,782,519
500 Saurer (BB), expires 4/08/98 ........................ 197,522
70,000 SPI Machinery Index (Von), expires 12/18/97.......... 693,737
180,000 Zurich Insurance (SBC), expires 10/16/98............. 3,233,310
-----------
14,988,814
-----------
MULTINATIONAL--5.3%
10,000 E-Top 100 (DB), STK 1970, expires 6/30/00............ 5,396,600
100,000 Euro Blue Star (ABN), expires 5/12/00................ 1,407,389
50,000 European Restructuring Basket (JPM), expires
2/12/98............................................ 3,382,500
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
MULTINATIONAL--(CONTINUED)
5,525 Industrial Gas Basket (SBC), expires 7/10/98......... $ 282,296
1,000,000 Templeton Emerging Markets, expires 9/30/04.......... 837,876
-----------
11,306,661
-----------
SPAIN--5.2%
100,000 Iberia Telecom Basket (ML), expires 11/16/98......... 1,693,737
1,000,000 IBEX Cap Call (Sal), STK 4500, expires 12/10/97 ..... 1,951,056
1,000,000 IBEX Cap Call (Sal), STK 5500, expires 5/18/98....... 2,976,869
2,500,000 IBEX Cap Call (Citi), STK 4600, expires 9/17/98...... 4,502,713
-----------
11,124,375
-----------
SWEDEN--4.2%
20,000 ABB Class B (ML), expires 8/19/98.................... 1,113,761
50,000 Ericsson (SBC), expires 6/22/98...................... 1,178,885
250,000 OMX (SBC), STK 2400, expires 12/18/98................ 6,743,792
-----------
9,036,438
-----------
EASTERN EUROPE--1.8%
4,200,000 Baring Emerging Europe Trust, expires 8/31/04........ 3,780,000
80,000 Templeton Central & Eastern European Investment Co.,
expires 5/31/03.................................... 98,000
-----------
3,878,000
-----------
POLAND--0.6%
2,500,000 WIG 20 (BT), STK .01, expires 2/26/99................ 1,275,000
-----------
AUSTRIA--0.2%
100,000 ATX (GS), STK 1200, expires 2/09/98.................. 208,605
2,500 EVN Energy, expires 6/25/01.......................... 118,056
-----------
326,661
-----------
CZECH REPUBLIC--0.1%
100,000 BIC Bohemia Investment Co Sa, expires 5/14/01........ 271,851
-----------
See accompanying notes to financial statements.
6
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1997 (Unaudited)
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
RUSSIA--0.1%
20,000 ENR Eastern Natural Resources, expires 5/30/00 ...... $ 200,964
-----------
TOTAL WARRANTS
(Cost $109,241,669)................................ 170,592,513
-----------
INVESTMENT FUNDS--6.1%
RUSSIA--1.8%
200,000 First NIS Regional Fund.............................. 3,800,000
10,000 Morgan Stanley Russia & New Europe Fund.............. 341,250
-----------
4,141,250
-----------
GERMANY--1.2%
169,456 The New Germany Fund................................. 2,647,750
-----------
EASTERN EUROPE--0.7%
61,829 GT Global Greater Eastern Europe Fund................ 1,213,394
50,000 Templeton Central & Eastern European Investment Co.
................................................... 227,500
-----------
1,440,894
-----------
ITALY--0.5%
100,000 Italy Fund Inc....................................... 1,043,750
-----------
UNITED KINGDOM--0.4%
55,000 United Kingdom Fund.................................. 766,563
-----------
MULTINATIONAL--0.3%
20,000 Foreign & Colonial Emerging Middle East Fund, Inc.... 363,750
20,000 Scudder New Europe Fund ............................. 331,250
-----------
695,000
-----------
SPAIN--0.3%
35,000 Growth Fund of Spain................................. 564,375
-----------
ROMANIA--0.2%
5,000 Romania Fund......................................... 532,500
-----------
AUSTRIA--0.2%
45,000 Austria Fund......................................... 480,938
-----------
FRANCE--0.2%
30,000 France Growth Fund................................... 350,625
-----------
HUNGARY--0.1%
1,500 Hungarian Fund....................................... 240,000
-----------
PORTUGAL--0.1%
10,000 Portugal Fund........................................ 185,000
-----------
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
INVESTMENT FUNDS--(CONTINUED)
CZECH REPUBLIC--0.1%
2,785 Komercni Banka Investment Fund....................... $ 56,756
6,721 The Czech Republic Fund.............................. 89,473
-----------
146,229
-----------
TOTAL INVESTMENT FUNDS
(Cost $10,583,271)................................. 13,234,874
-----------
EQUITIES--5.8%
SWITZERLAND--3.5%
300 BB Medtech Inc *..................................... 349,966
500 Komax Holding AG-- Registered *...................... 189,264
1,900 India Investment AG.................................. 536,132
150 Phonak Holding AG-- Registered Class B............... 110,461
100 Sez Holding AG....................................... 177,564
20,000 Swiss Bank Corp.--
Registered *....................................... 5,409,498
2,500 Valora Holding AG.................................... 532,519
-----------
7,305,404
-----------
PORTUGAL--0.7%
40,000 Banco Comercial Portugues, SA........................ 844,726
10,000 EDP--Electricidade de Portugal SA.................... 171,898
5,000 Telecel--Comunicacoes Pessoai, SA *.................. 405,691
-----------
1,422,315
-----------
GREECE--0.4%
10,000 Hellenic Telecommunication Organization SA........... 250,547
54,000 Hellenic Telecommunication Organization SA--GDR...... 661,500
-----------
912,047
-----------
FRANCE--0.2%
721 Axa--UAP............................................. 48,440
5,000 SGS--Thomson Microelectronics *...................... 471,810
-----------
520,250
-----------
SWEDEN--0.2%
10,000 Ericsson L M Telephone--ADR.......................... 479,375
-----------
UNITED KINGDOM--0.2%
35,057 Standard Chartered Plc............................... 478,730
-----------
See accompanying notes to financial statements.
7
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1997 (Unaudited)
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
EQUITIES--(CONTINUED)
NORWAY--0.2%
5,000 Norsk Hydro ASA--ADR................................. $ 299,375
15,000 Storebrand ASA *..................................... 108,742
-----------
408,117
-----------
RUSSIA--0.2%
2,500 ENR Eastern Natural Resources *...................... 332,932
-----------
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
EQUITIES--(CONTINUED)
NETHERLANDS--0.1%
5,128 Koninklijke Ptt Nederland Nv......................... $ 201,563
-----------
GERMANY--0.1%
4,000 ProSieben Media AG Preferred *....................... 199,038
-----------
TOTAL EQUITIES
(Cost $9,006,661).................................. $12,259,771
-----------
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- -------- ------ ----------
OPTIONS PURCHASED--4.7%
[ALL NON-INCOME PRODUCING SECURITIES]
<S> <C> <C> <C> <C>
UNITED KINGDOM--1.8%
250,000 3 I Group OTC Call, expires 6/12/98........... GBP 4.5 $ 357,709
200,000 HSBC Holdings OTC Call, expires 12/31/97...... GBP 12.5 3,065,659
50,000 Siebe OTC Call, expires 5/13/98............... GBP 950 254,537
----------
3,677,905
----------
SWEDEN--1.2%
106,666 Astra A OTC Call, expires 12/31/97............ SEK 105 659,071
66,666 Astra A OTC Call, expires 1/30/98............. SEK 93.75 423,156
50,000 Ericsson OTC Call, expires 12/30/97........... SEK 225 921,811
1,000,000 OMX OTC Cap Call (SBC), STK 1800, expires
3/05/98..................................... SEK 2300 609,973
----------
2,614,011
----------
NETHERLANDS--0.8%
150 Akzo (Listed) Call, expires 10/16/98.......... NLG 210 931,138
20,000 Unilever OTC Call, expires 7/05/99............ DEM 380 842,423
----------
1,773,561
----------
FRANCE--0.5%
80,000 Michelin OTC Call, expires 12/30/97........... FRF 256 1,100,608
----------
SPAIN--0.4%
50,000 Repsol OTC Call, expires 12/31/97............. ESP 4000 830,372
----------
MULTINATIONAL--0.0%
2,500 European Index Basket OTC Put, expires
11/28/97.................................... USD 21500 0
----------
TOTAL OPTIONS PURCHASED (Cost $5,665,777)..... 9,996,457
----------
</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, 1997 (Unaudited)
PAR VALUE
VALUE (NOTE 1)
- -------- ----------
U.S. TREASURY OBLIGATIONS--4.7%
UNITED STATES--4.7%
USD 10,000,000 U.S. Treasury Note 6.375%, due 8/15/27 (Cost
$9,843,644)(b).............................. $ 9,956,250
------------
MUNICIPAL OBLIGATIONS--0.7%
UNITED STATES--0.7%
USD 10,000,000 New Jersey Economic Development 0%, due
2/15/23 (Cost $1,556,000)(b)................ 1,529,100
------------
SHORT-TERM INVESTMENTS--0.7%
UNITED STATES--0.7%
USD 1,053,692 Investors Bank & Trust Company Repurchase
Agreement, dated 9/30/97, due 10/01/97, at a
rate of 5.62% and a maturity value of
$1,053,856, collateralized by a U.S.
Government Agency Obligation with a rate of
6.4375%, a maturity date of 11/15/2023 and a
market value of $1,110,483.................. 1,053,692
USD 500,000 U.S. Treasury Bill, 5.10%, due 1/02/98 (a)... 493,684
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,546,968)............... 1,547,376
------------
TOTAL INVESTMENTS--102.4% (Cost $147,443,990)................ 219,116,341
OTHER ASSETS AND LIABILITIES (NET)--(2.4%)................... (5,152,497)
------------
TOTAL NET ASSETS--100.0%..................................... $213,963,844
------------
------------
- ------------------
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
GDR Global Depositary Receipt
* Non-income producing security.
(a) This security is held as collateral for open futures contracts.
(b) This security is held as collateral for open written options.
See accompanying notes to financial statements.
9
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF WRITTEN OPTIONS
September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- -------- ------ ----------
<S> <C> <C> <C> <C>
SWITZERLAND
6,000 Ciba OTC Call, expires 12/30/97............... CHF 140 $ 36,339
10,000 CS Group OTC Put, expires 11/03/97............ CHF 188 19,408
500 EMS OTC Put, expires 11/11/97................. CHF 6500 10,582
2,000 Holderbank OTC Put, expires 12/13/97.......... CHF 1250 27,240
1,000 Novartis OTC Call, expires 11/03/97........... CHF 2600 5,561
1,000 Novartis OTC Put, expires 11/03/97............ CHF 2300 82,319
115 Roche Holdings OTC Put, expires 12/30/97...... CHF 13650 78,897
500 SGS OTC Put, expires 12/17/97................. CHF 3000 167,959
1,000 SMI OTC Call, expires 11/03/97................ CHF 6000 61,432
500 Sulzer OTC Call, expires 12/05/97............. CHF 1250 4,591
500 Sulzer OTC Put, expires 12/05/97.............. CHF 1250 53,114
10,000 Swiss Bank Corp OTC Call, expires 12/30/97.... CHF 428 83,620
500 Swissair OTC Put, expires 9/16/98............. CHF 2000 88,971
5,000 Valora OTC Put, expires 12/30/97.............. CHF 300 49,105
----------
769,138
----------
GERMANY
5,000 Allianz OTC Put, expires 12/30/97............. DEM 450 94,820
25,000 BASF OTC Call, expires 11/03/97............... DEM 67.5 35,381
1,000 BMW OTC Put, expires 12/30/97................. DEM 1400 28,078
1,000 DAX OTC Call, expires 12/09/97................ DEM 4400 51,797
25,000 Dresdner OTC Call, expires 11/10/97........... DEM 85 25,474
5,000 Fresenius Medical Care OTC Put, expires
10/31/97.................................... DEM 150 71,865
10,000 Siemens OTC Call, expires 12/30/97............ DEM 120 45,853
2,500 Volkswagen AG OTC Put, expires 12/30/97....... DEM 1200 106,142
----------
459,410
----------
FRANCE
5,000 Carrefour OTC Put, expires 12/30/97........... FRF 4050 376,789
10,000 Sanofi OTC Put, expires 12/31/97.............. FRF 550 55,064
10,000 Societe Generale OTC Put, expires 11/03/97.... FRF 750 3,207
----------
435,060
----------
CURRENCY OPTIONS
10,000,000 USD Put/ DEM Call, expires 12/29/97.......... DEM 1.75 182,281
8,547,008 USD Put/ FRF Call, expires 12/29/97.......... USD 5.85 79,236
----------
261,517
----------
FINLAND
25,000 Nokia OTC Put, expires 7/23/98................ FIM 430 173,853
100 Nokia (Listed) ADR Put, expires 1/16/98....... USD 85 36,250
100 Nokia (Listed) ADR Put, expires 1/16/98....... USD 80 17,500
----------
227,603
----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF WRITTEN OPTIONS--(Continued)
September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- -------- ------ ----------
<S> <C> <C> <C> <C>
NETHERLANDS
40,000 ABN Amro OTC Call, expires 12/30/97........... NLG 48 $ 15,280
10,000 AEX OTC Call, expires 11/10/97................ NLG 1000 21,915
100,000 Elsevier OTC Put, expires 10/17/97............ NLG 31 108,570
20,000 ING OTC Call, expires 11/03/97................ NLG 100 16,487
100 Royal Dutch (Listed) Call, expires 1/18/98.... USD 55 37,500
----------
199,752
----------
UNITED KINGDOM
100,000 BAT OTC Put, expires 12/31/97................. GBP 600 95,985
100,000 EMI OTC Put, expires 7/31/98.................. GBP 5.68 41,346
250,000 Rolls Royce OTC Put, expires 10/14/97......... GBP 230 7,251
----------
144,582
----------
PORTUGAL
90,000 EDP OTC Put, expires 12/22/97................. PTE 3300 123,742
----------
ITALY
1,000,000 Credito Italiano OTC Put, expires 12/22/97.... ITL 3750 20,139
250,000 Fiat OTC Put, expires 11/05/97............... ITL 5863.6 10,338
100 Gucci (Listed) ADR Put, expires 4/18/98...... USD 40 32,500
----------
62,977
----------
SWEDEN
37,000 Volvo OTC Put, expires 12/30/97............... SEK 215 47,527
----------
HUNGARY
500 HTX OTC Put, expires 8/07/98.................. USD 2000 42,575
----------
TOTAL WRITTEN OPTIONS (Premiums received $3,549,814).................... $2,773,883
----------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS AND
FINANCIAL FUTURES CONTRACTS
September 30, 1997 (Unaudited)
FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
CONTRACTS TO DELIVER
------------------------------- IN NET UNREALIZED
EXPIRATION LOCAL VALUE IN EXCHANGE DEPRECIATION
DATE CURRENCY USD FOR USD OF CONTRACTS
- ------------- ------------------- ---------- ---------- --------------
12/30/97 CHF 4,000,000 2,746,875 2,783,219 $ (36,344)
--------------
NET UNREALIZED DEPRECIATION OF FORWARD FOREIGN CURRENCY
CONTRACTS............................................... (36,344)
--------------
--------------
SCHEDULE OF OPEN FINANCIAL FUTURES CONTRACTS PURCHASED
NET UNREALIZED
NUMBER OF EXPIRATION CONTRACT APPRECIATION
CONTRACTS CONTRACTS DATE VALUE OF CONTRACTS
- --------- ----------------- --------- ----------- --------------
100 British Gilt 11/21/97 $ 197,437 $ 163,627
10 FTSE Index 12/19/97 2,057,813 91,105
10 MIB 30 Index 12/19/97 1,358,467 21,589
--------------
NET UNREALIZED APPRECIATION OF OPEN FUTURES
CONTRACTS........................................... $ 276,321
--------------
--------------
GLOSSARY OF TERMS
CHF -- Swiss Franc
DEM -- German Deutsche Mark
ESP -- Spanish Peseta
FIM -- Finnish Markka
FRF -- French Franc
GBP -- British Pound
ITL -- Italian Lira
NLG -- Netherlands Guilder
PTE -- Portuguese Escudo
SEK -- Swedish Krona
USD -- United States Dollar
See accompanying notes to the financial statements.
12
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997 (Unaudited)
ASSETS:
Investments, at value (Cost $147,443,990)
(Note 1).................................... $219,116,341
Cash......................................... 7,961
Foreign currency, at value (Cost $332,522)
(Note 1).................................... 321,324
Dividends and interest receivable............ 166,338
Prepaid expenses............................. 41,206
------------
Total assets.......................... 219,653,170
------------
LIABILITIES:
Written options, at value (Premiums received
$3,549,814) (Notes 1 and 3)................. 2,773,883
Payable for investment securities
purchased................................... 1,998,611
Investment advisory fee payable (Note 2)..... 629,805
Payable for variation margin on open
financial futures contracts (Note 1)........ 54,567
Unrealized depreciation of forward foreign
currency contracts.......................... 36,344
Accrued expenses and other payables.......... 196,116
------------
Total liabilities..................... 5,689,326
------------
TOTAL NET ASSETS.................................. $213,963,844
------------
------------
NET ASSETS CONSIST OF:
Par value.................................... $ 8,154
Paid-in capital in excess of par value....... 84,548,893
Undistributed accumulated net investment
income...................................... 28,163,422
Accumulated net realized gain on
investments................................. 28,563,796
Net unrealized appreciation on investments... 72,679,579
------------
TOTAL NET ASSETS (equivalent to $26.24 per share
based on 8,153,712 shares of common stock
outstanding from 100,000,000 authorized with
$0.001 par value)............................... $213,963,844
------------
------------
See accompanying notes to the financial statements.
13
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 1997 (Unaudited)
INVESTMENT INCOME:
Interest..................................... $ 316,168
Dividends (net of foreign withholding taxes
of $1,793).................................. 453,763
-----------
Total Investment Income............... 769,931
-----------
EXPENSES:
Investment advisory fee (Note 2)............. 1,119,506
Administration and custodian fees (Note 2)... 195,534
Legal and audit fees......................... 61,964
Transfer agent fees.......................... 30,083
Printing and postage fees.................... 20,055
Directors' fees and expenses (Note 2)........ 18,049
Other........................................ 34,479
-----------
Total Expenses........................ 1,479,670
-----------
NET INVESTMENT LOSS............................... (709,739)
-----------
REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain (loss) on:
Securities transactions................. 23,597,475
Written option transactions............. 403,318
Financial futures contracts............. (455,371)
Forward foreign currency contracts...... (186,568)
Foreign currencies and net other
assets................................ 147,178
-----------
Net realized gain on
investments.................. 23,506,032
-----------
Net change in net unrealized appreciation
(depreciation) of:
Securities.............................. 38,821,123
Written options......................... 706,434
Financial futures contracts............. 636,801
Forward foreign currency contracts...... (36,799)
Foreign currencies and net other
assets................................ (336,392)
-----------
Net unrealized appreciation of
investments.................. 39,791,167
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS... 63,297,199
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $62,587,460
-----------
-----------
See accompanying notes to financial statements.
14
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED
(UNAUDITED) MARCH 31, 1997
------------------ --------------
CHANGE IN NET ASSETS FROM OPERATIONS
Net investment loss..................... $ (709,739) $ (1,024,638)
Net realized gain on investments........ 23,506,032 41,548,082
Net unrealized appreciation of
investments........................... 39,791,167 18,285,528
------------------ --------------
Net increase in net assets resulting
from operations....................... 62,587,460 58,808,972
Distributions to shareholders from:
Net realized gains on investments..... -- (6,164,206)
------------------ --------------
Net increase in net assets.............. 62,587,460 52,644,766
NET ASSETS:
Beginning of year..................... 151,376,384 98,731,618
------------------ --------------
End of period (including accumulated
undistributed net investment income
of $28,163,422 and $28,873,161,
respectively)...................... $213,963,844 $151,376,384
------------------ --------------
------------------ --------------
See accompanying notes to the financial statements.
15
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
FINANCIAL HIGHLIGHTS
For a Fund share outstanding throughout each period
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, --------------------------------------------------------------------
1997 MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
(UNAUDITED) 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of
period.............................. $ 18.57 $ 12.11 $ 7.53 $ 13.34 $ 8.95 $ 7.57
------------- ---------- ---------- ---------- ---------- ------------
Net investment loss................... (0.09) (0.13) (0.08) (0.01) (0.12) (0.02)
Net realized and unrealized gain
(loss) on investments............... 7.76 7.35 4.66 (3.90) 5.10 1.56
------------- ---------- ---------- ---------- ---------- ------------
Net increase/(decrease) in net assets
resulting from investment
operations.......................... 7.67 7.22 4.58 (3.91) 4.98 1.54
------------- ---------- ---------- ---------- ---------- ------------
Capital effect of rights offering..... -- -- -- -- (0.50) --
------------- ---------- ---------- ---------- ---------- ------------
Distributions:
Distributions from net realized
gains............................... -- (0.76) -- (1.90) (0.09) --
Distributions from capital............ -- -- -- -- -- (0.16)
------------- ---------- ---------- ---------- ---------- ------------
Total distributions:.................. -- (0.76) -- (1.90) (0.09) (0.16)
------------- ---------- ---------- ---------- ---------- ------------
NET ASSET VALUE, END OF PERIOD.......... $ 26.24 $ 18.57 $ 12.11 $ 7.53 $ 13.34 $ 8.95
------------- ---------- ---------- ---------- ---------- ------------
------------- ---------- ---------- ---------- ---------- ------------
MARKET VALUE, END OF PERIOD............. $ 20.688 $ 13.500 $ 10.000 $ 6.875 $ 11.875 $ 8.250
------------- ---------- ---------- ---------- ---------- ------------
------------- ---------- ---------- ---------- ---------- ------------
Total investment return............... 53.24% 43.69% 45.45% (26.37)% 44.89% 32.13%
------------- ---------- ---------- ---------- ---------- ------------
------------- ---------- ---------- ---------- ---------- ------------
Ratios to average net
assets/supplemental data:*
Net assets, end of period (000's)..... $ 213,964 $151,376 $ 98,732 $ 61,430 $107,689 $ 54,178
Ratio of net investment loss to
average net assets.................. (0.78)%+ (0.89)% (0.86)% (0.11)% (0.93)% (0.21)%
Ratio of operating expenses to average
net assets**........................ 1.62%+ 1.88% 2.03% 1.74% 1.73% 2.13%
Portfolio turnover rate............... 49% 191% 148% 104% 150% 164%
Average broker commission rate#....... $ 0.00077 $0.00233 N/A N/A N/A N/A
</TABLE>
- ------------------------
*For the following periods, the operating expenses of the fund reflect a waiver
of fees by the Fund's investment adviser. Had such action not been taken,
the net investment income 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%
**For the following periods, the ratio of operating expenses to average net
assets includes indirectly paid expenses. Excluding indirectly paid expenses,
the expense ratio would have been: -- 1.85% 1.94% -- -- --
</TABLE>
+Annualized
#The average broker commission rate will vary depending on the markets in which
trades are executed.
See accompanying notes to the financial statements.
16
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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 non-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 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.
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 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 reported 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
17
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
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.
Repurchase Agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, a Fund
takes possession of underlying debt securities subject to an obligation of
the seller to repurchase, and the Fund to resell such securities at an
agreed-upon price and time, thereby determining the yield during the Fund's
holding period. This arrangement results in a fixed rate of return that is
not subject to market fluctuations during the Fund's holding period. The
value of the securities subject to the repurchase agreement at all times
will be equal to at least 100% of the total amount of the repurchase
obligation, including interest. In the event of counterparty default, the
Fund has the right to use such securities to offset losses incurred. There
is potential loss to a Fund in the event the Fund is delayed or prevented
from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period while the Fund seeks to assert its rights. The
Fund's investment adviser, acting under the supervision of the Board of
Directors, reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase
agreements to evaluate potential risks.
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 exchange rates
prevailing at the end of the period; purchases and sales of investment
securities and 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.
18
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
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 amount of 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.
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 liquid
securities 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
19
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
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.
Financial 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 realizes a gain or loss when the contract is closed.
There are several risks connected 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 that 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.
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.
20
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
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, 1997, the Fund incurred total
brokerage commissions of $59,794 of which $8,493 was paid in total to Bank
Julius Baer, Zurich (an affiliate 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.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the six months ended September 30, 1997 amounted to
$103,136,394 and $82,795,950, respectively.
Activity in written options for the six months ended September 30, 1997 was
as follows:
<TABLE>
<CAPTION>
NUMBER OF
PREMIUM CONTRACTS
----------- -----------
<S> <C> <C>
Options outstanding at March 31, 1997........................ $ 2,506,580 1,668,250
Options written.............................................. 6,540,041 30,965,328
Options exercised............................................ -- --
Options expired.............................................. (1,429,324) (4,279,750)
Options closed............................................... (4,067,483) (7,645,805)
----------- -----------
Options outstanding at September 30, 1997.................... $ 3,549,814 20,708,023
----------- -----------
----------- -----------
</TABLE>
At September 30, 1997, 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 $72,936,111 and $1,263,760, 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.
21
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(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, 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
December 31, 1996........... 471,569 .06 (75,210) (.01) 19,177,933 2.36 19,102,723 2.35
March 31, 1997.............. 183,718 .03 (462,790) (.06) 29,037,301 3.57 28,574,511 3.51
June 30, 1997............... 366,775 .04 (316,510) (.04) 33,213,380 4.07 32,896,870 4.03
September 30, 1997.......... 403,156 .05 (393,229) (.05) 30,083,819 3.69 29,690,590 3.64
</TABLE>
22
<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. Philipp Burger serves
as the co-Portfolio Manager of the Fund. Mr. Burger has been employed as an
Assistant Vice President of the Adviser since the first quarter of 1997 and a
Vice President of Julius Baer Asset Management since May 1996.
ELECTION OF INTERESTED DIRECTOR
Martin Vogel was elected a Director of the Fund initially by the Board of
Directors at their meeting held on March 13, 1997 and subsequently by Fund
shareholders at the June 26, 1997 annual meeting.
INVESTMENT POLICY CHANGES
The following changes to the non-fundamental investment policies of the
Fund and additional investment strategies have been implemented since the
issuance of the Fund's Prospectus dated September 3, 1993.
1. The Fund may write put options on securities and foreign currencies
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 has begun using portfolio securities (as opposed to cash
or cash equivalents) to satisfy asset segregation requirements in
connection with certain trading practices.
6. The policy which allows the Fund to invest up to 5% of its total
assets in Eastern European equity securities or warrants has been amended
to allow the Fund to invest up to 10% of its total assets in such
instruments and the definition of Eastern Europe was expanded to include
the Newly Independent States of the ex-Soviet Union.
7. 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.
8. Fund shareholders changed the Fund's status from a diversified to a
non-diversified management investment company at the Fund's June 26, 1997
annual meeting.
QUARTERLY EARNINGS RELEASE
The Fund issues, in 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.
23
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(Continued)
In addition, the Fund sends unaudited semi-annual and audited annual reports,
including a list of investments held, to its stockholders.
OTHER MATTERS
The Fund calculates and reports a weekly net asset value per share. On
October 23, 1997, the Fund released a net asset value of $23.87. This amount was
restated to $24.63 on October 30 and a press release was issued.
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 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
proceeding 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
24
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(Continued)
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.
25
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(CONTINUED)
INVESTMENT ADVISER
Julius Baer Securities Inc.
330 Madison Ave.
New York, New York 10017
ADMINISTRATOR, CUSTODIAN
& TRANSFER AGENT
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
OFFICERS
Bernard Spilko
President
Hansruedi Huber
Chief Investment Officer
Philipp Burger
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
Martin Vogel
*Chairman of the Board
<PAGE>
---------------------------------------------------------
THE EUROPEAN WARRANT FUND, INC.
SEMI-ANNUAL
REPORT
SEPTEMBER 30, 1997
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.
