<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
Dear Fellow Shareholder:
There is renewed energy in the management of The European Warrant Fund, Inc.
(the 'Fund'). It is evident by the last twelve months performance and the
addition of Philipp M. Burger to the management team in the first quarter of
1997.
The Fund turned in an impressive performance with a gain for the twelve
month period ending March 31, 1997 of 61.44% based on net asset value and 43.69%
based on share price. During this period the Fund was ranked #3 out of 158 funds
for the 12 months ending March 31, 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 April 24, 1997. Of course past performance does not guarantee
future results. The investment environment for the reported period was ideal for
the Fund. Corporate profits exploded in Europe based on restructuring efforts. A
slowly improving economy and a liquid monetary policy all over continental
Europe boosted equity markets to new highs.
The Board of Directors of the Fund continues to closely monitor the Fund's
share price discount from net asset value and evaluates alternative methods to
reduce the discount. 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% (800,000) of the Fund's shares outstanding, if and when the shares are
trading at a discount to net asset value of at least 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
While most of the economic developments in the United States ('U.S.') have
been on the positive side, Germany, which is the engine of the European economy,
is continually having to battle with setbacks. Due to the weaker state of the
economy, yields on most European bonds have declined since the beginning of
1997, despite the rise in interest rates in the U.S. This kind of 'decoupling'
from the movement of U.S. interest rates, which also occurred sporadically in
the spring of 1996, is likely to occur more often in the context of the 'EURO',
since the integrated European capital markets may, in the future, represent an
increasingly significant counterweight to the U.S. market.
The strong U.S. Dollar and lower than expected capital market yields in
Europe boosted the European equity markets. After these impressive price
advances, the question of company valuation arises. In our opinion, the
longer-term upside potential has not, as yet, been exhausted because we
anticipate continuing earnings growth in Europe resulting from a strengthening
U.S. dollar and the still favorable monetary environment. The risk of a large
correction, however, is increasing. Our main concern is a scenario with a sharp
turnaround of the Japanese Yen versus the U.S. Dollar, leading to a closing of
Yen loans and an unwinding of U.S. Dollars and European assets.
INVESTMENT POLICY
With the European Monetary Union coming closer and the growing uncertainity
in the U.S. market, we lowered our Delta-Exposure from 2.80 times net asset
value in November 1996 to 2.20 at the end of March 1997. We capitalized on the
advancing stock markets in February to take some profits in large capitalization
stocks and warrants, especially in Germany, Switzerland and the Netherlands. The
realized gains were partly allocated into more cyclical sectors such as the
German automotive industry and medium to small capital stocks and warrants,
along with warrants on such indices such as MDAX (Mid Cap Index) or SPI
Machinery Index (Industrial Sector Machinery). While having sold almost all
interest related warrants we currently see more potential in the equities
related warrant markets. With actual Delta-Exposure slightly above 2 times net
asset value we anticipate a cautious, yet bullish, scenario to continue for
European equity markets.
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
Due to the exciting investment opportunities in eastern European markets,
and understanding the accompanying risks, we have increased our position to
approximately 5% of the total portfolio. We are concentrating our purchases in
long maturing warrants (up to 8 years) of excellently managed investment
companies (i.e., Baring Emerging Europe). In accordance with the Board of
Directors' approval at the last Board Meeting of an increase in the maximum
exposure in Eastern Europe to 10%, we will slowly begin to increase our
exposure.
In view of the continued uncertainty and wide price swings in March 1997, we
started to sell high volatility through over-the-counter options. Our strategy
is to act in a contrarian manner, meaning to sell puts after market setbacks and
write calls against positions after a market rally. Our goal is to capture
volatility, that is 5 or more points higher than historic levels, with a strong
emphasis on risk management regarding the total Delta-Exposure and cash levels.
PORTFOLIO INFORMATION
As of the close of business on May 8, 1997 the Fund was 69.57% invested in
warrants with an average weighted life of derivatives at 503 days. The
percentage of foreign currencies hedged to invested assets was 1% and the net
asset value per share was $19.49. For a complete analysis as well as the Fund's
investment weighting by country, please refer to the chart on Page 3.
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 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. Shareholders whose shares are held in the name of
broker/dealers or other nominees should contact their broker or servicing agent
if they wish to participate in either of these programs.
Finally, I am pleased to say that with a focused management team of talented
and dedicated employees we have reason to be as confident as ever about the
future of this Fund. We look forward to the future with enthusiasm and
confidence and are grateful to our shareholders for their continued support.
Sincerely,
/s/ Bernard Spilko
Bernard Spilko
May 12, 1997 President
2
<PAGE>
THE EUROPEAN WARRANT FUND, INC. FACT SHEET
(UNAUDITED)
- -------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
- -------------------------------------------------------------------------------
[PIE CHART]
Sweden ......................................................... 0.06
Germany ........................................................ 0.20
United Kingdom ................................................. 0.04
Italy .......................................................... 0.08
Other .......................................................... 0.03
Spain .......................................................... 0.08
France ......................................................... 0.12
Netherlands .................................................... 0.09
Multi-national ................................................. 0.04
U.S. Cash Equivalents and Net Other Assets And Liabilities ..... 0.14
Switzerland .................................................... 0.09
Eastern Europe ................................................. 0.03
March 31, 1997
- -------------------------------------------------------------------------------
MISCELLANEOUS
- -------------------------------------------------------------------------------
Average Life of Derivatives
(3/31/97) 1.45 years
Average Gearing (3/31/97)++ 7.90%
Average Premium (3/31/97) 1.40%
Average Annual Premium (3/31/97) .45%
Year to Date Total Return*
(1/1/97-3/31/97) 23.31%
One Year Total Return*
(4/1/96-3/31/97) 61.44%
Inception to Date Total Return*
(7/17/90-3/31/97) 156.87%
- -------------------------------------------------------------------------------
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 2.2 times the value
of the share.
- -------------------------------------------------------------------------------
SECTOR WEIGHTINGS
- -------------------------------------------------------------------------------
[PIE CHART]
Index Warrants .............................................. 0.40
Other ....................................................... 0.01
U.S. Cash Equivalents and Net Other Assets and Liabilities ... 0.14
Chemicals/Pharmaceutical ..................................... 0.11
Telecommunication ............................................ 0.03
Mutual Funds ................................................. 0.07
Consumer Goods ............................................... 0.05
Financials ................................................... 0.08
Natural Resources ............................................ 0.02
Capital Goods ................................................ 0.07
Utilities..................................................... 0.02
March 31, 1997
- -------------------------------------------------------------------------------
TOP TEN EQUITY WARRANT HOLDINGS MARCH 31, 1997
- -------------------------------------------------------------------------------
MARKET VALUE+ PERCENTAGE+
1 CAC 40 Index Cap Call (BNP),
exp. 12/31/97 $7,330,126 5.56%
2 CAC 40 Index Cap Call (BP), exp.
2/6/98 5,891,392 4.47%
3 DAX Cap Call (SOG), STK 2,400,
exp.12/30/97 5,609,720 4.26%
4 IBEX Cap Call (Sal), exp.
12/10/97 4,787,460 3.63%
5 European Restructured Basket (JPM),
exp. 2/12/98 4,010,000 3.04%
6 MIB 30 Cap Call (MS), exp.
1/09/98 3,683,816 2.80%
7 Ahold (GS), exp.
7/25/99 3,545,134 2.69%
8 IBEX Cap Call (Citi), exp.
9/17/98 3,446,333 2.62%
9 MIB 30 Cap Call (BT), exp.
6/27/97 3,391,157 2.57%
10 Iberia Telecom Basket (ML), exp.
9/17/98 3,072,981 2.33%
- -------------------------------------------------------------------------------
Currency Hedge At March 31,
1997 1.00%
- -------------------------------------------------------------------------------
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.
3
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS
(percentages of total net assets)
March 31, 1997
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--69.8%
[ALL NON-INCOME PRODUCING SECURITIES]
GERMANY--17.8%
135,000 BASF AG (LB), expires 1/15/99.......................... $ 1,738,173
170,000 Bayer AG (Citi), expires 6/15/00....................... 2,208,190
50,000 Commerzbank (Citi), expires 8/26/98.................... 220,489
10,000 Continental AG, expires 7/6/00......................... 1,010,949
100,000 DAX Cap Call (DG), STK 2400, expires 9/16/97........... 634,768
250,000 DAX Cap Call (DG), STK 2400, expires 12/09/97.......... 1,622,919
5,000,000 DAX Cap Call (SOG), STK 2400, expires 12/30/97......... 5,609,720
2,500,000 DAX Cap Call (DB), STK 2800, expires 12/30/97.......... 2,699,865
1,000,000 DAX Cap Call (SBC), STK 2900, expires 12/30/97......... 1,193,940
20,000 Dresdner Bank AG, expires 1/5/99....................... 413,979
50,000 Floor C Zerti (WLB), expires 1/19/98................... 85,496
10,000 Heidelberger Cement, expires 6/13/00................... 227,989
10,000 Hoechst (Rabo), expires 12/30/97....................... 261,887
50,000 Mannesmann AG (COBA), expires 6/18/97.................. 407,380
1,500,000 MDAX Cap Call (DB), STK 2700, expires 12/30/97......... 1,736,913
500,000 MDAX Cap Call (DRB), STK 3300, expires 12/30/97........ 414,087
25,000 Metallgesellschaft (DB), expires 6/18/98............... 120,594
10,000 Metro Holdings Finance, expires 9/1/98................. 1,157,942
10,000 Preussag AG, expires 4/30/01........................... 587,971
750,000 Siemens (Rabo), expires 6/19/98........................ 1,934,903
5,000 Siemens, expires 6/02/98............................... 632,968
100,000 Veba AG (Citi), expires 1/15/99........................ 1,319,934
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
GERMANY--(CONTINUED)
2,000 Volkswagen AG Preferred, expires 10/27/98.............. $ 552,572
-----------
26,793,628
-----------
FRANCE--9.3%
250,000 Axa (CL), expires 6/30/97.............................. 491,938
200,000 CAC 40 Index Cap Call (BNP), expires 12/31/97.......... 7,330,126
250,000 CAC 40 Index Cap Call (BP), expires 2/6/98............. 5,891,392
150,000 Societe Generale (GOT), expires 4/22/98................ 232,496
100,000 Societe Generale (GOT), expires 7/18/97................ 119,366
-----------
14,065,318
-----------
SWITZERLAND--8.7%
25,000 ABB AG (GBK), expires 1/12/99.......................... 471,797
25,000 Alusuisse (GS), expires 12/30/98....................... 672,876
100,000 Alusuisse (ML), expires 2/20/98........................ 950,557
75,000 Alusuisse (SBC), expires 1/15/02....................... 251,741
1,000 BB Biotech (BB), expires 4/16/97....................... 22,981
100,000 CS Group (SBC), expires 1/21/00........................ 493,036
55,100 Feldschloesschen Holdings, expires 12/15/98............ 84,799
700,000 Nestle SA (SBC), expires 1/15/02....................... 1,759,749
350,000 Novartis (SBC), expires 12/30/99....................... 2,461,699
10,000 Roche Holdings (BT), expires 7/16/99................... 442,723
50,000 Roche Holdings (SBC), expires 12/01/00................. 2,172,702
2,000 Saurer (BB), expires 4/08/98 .......................... 187,674
50,000 SBC, expires 6/30/98................................... 1,051,532
100,000 SPI Machinery Index (Von), expires 12/18/97............ 515,320
250,000 Zurich Insurance (SBC), expires 10/16/98............... 1,662,604
-----------
13,201,790
-----------
See accompanying notes to financial statements.
4
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
March 31, 1997
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
NETHERLANDS--7.9%
70,000 ABN Amro (SBC), expires 5/08/98........................ $ 1,831,786
1,000,000 Ahold (GS), expires 7/25/99 ........................... 3,545,134
15,000 Akzo (ML), expires 2/20/98 ............................ 122,599
10,000 Akzo (ML), expires 3/20/98 ............................ 459,721
200,000 Elsevier (ML), expires 9/26/97 ........................ 630,602
50,000 Heineken NV (GS), expires 9/18/98...................... 134,993
250,000 ING (ML), expires 1/06/99.............................. 1,828,585
10,000 Philips Electronics, expires 6/30/98................... 282,757
40,000 Royal Dutch (SBC), expires 10/15/97.................... 2,402,507
30,000 Wolters Kluwer (ML), expires 2/23/98................... 674,296
-----------
11,912,980
-----------
ITALY--7.8%
250,000 ENI (SBC), expires 10/30/97............................ 826,903
500,000 Italian Telephone Basket (BZW), expires 3/30/98........ 1,543,912
2,500,000 MIB 30 Cap Call (BT), expires 6/27/97.................. 3,391,157
4,000,000 MIB 30 Cap Call (MS), expires 1/09/98.................. 3,683,816
4,000,000 MIB 30 Cap Call (MS), expires 1/13/98.................. 2,243,888
100,000 Stet SPA (BZW), expires 4/14/98........................ 155,532
-----------
11,845,208
-----------
SPAIN--7.5%
4,000 Iberia Telecom Basket (ML), expires 9/17/98............ 3,072,981
2,350,000 IBEX Cap Call (Citi), expires 9/17/98.................. 3,446,333
2,650,000 IBEX Cap Call (Sal), expires 12/10/97.................. 4,787,460
-----------
11,306,774
-----------
SWEDEN--4.3%
25,000 ABB Class B (ML), expires 8/19/98...................... 710,234
50,000 Ericsson (SBC), expires 6/22/98........................ 599,970
100,000 OMX Cap Call (ML), expires 12/10/97.................... 2,299,552
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
SWEDEN--(CONTINUED)
145,000 OMX Cap Call (SBC), expires 3/05/98.................... $ 2,960,992
-----------
6,570,748
-----------
MULTINATIONAL--3.4%
10,000 CAC 40 (Ibex) Index Cap
Call (BT), expires 7/29/97 .......................... 149,700
100,000 European Restructuring Basket (JPM), expires 2/12/98... 4,010,000
5,525 Industrial Gas Basket (SBC), expires 7/10/98........... 162,058
50,000 JGB Put (Citi), expires 7/31/97........................ 3,600
1,000,000 Templeton Emerging Markets, expires 9/30/04............ 823,000
-----------
5,148,358
-----------
EASTERN EUROPE--2.0%
3,400,000 Baring Emerging Europe Trust, expires 8/31/04.......... 2,482,000
100,000 BIC Bohemia Investment Co Sa, expires 5/14/01.......... 369,081
80,000 Templeton Central & Eastern European Investment Co.,
expires 5/31/03...................................... 176,000
-----------
3,027,081
-----------
PORTUGAL--0.4%
300,000 PSI 20 Cap Call (DB), expires 09/09/97................. 606,570
-----------
POLAND--0.4%
1,000,000 IFC Poland Index (BT), expires 2/26/99................. 530,000
-----------
RUSSIA--0.1%
23,000 ENR Eastern Natural
Resources, expires 5/30/00 .......................... 164,972
-----------
AUSTRIA--0.1%
2,500 EVN Energy, expires 6/20/01............................ 161,051
-----------
UNITED KINGDOM--0.1%
313,500 Hanson Plc, expires 9/30/97 ........................... 12,288
100,000 Marks & Spencer (SBC), expires 8/07/98................. 88,884
100,000 Pilkington, expires 5/04/98 ........................... 27,982
-----------
129,154
-----------
TOTAL WARRANTS
(Cost $77,015,633)................................... 105,463,632
-----------
See accompanying notes to financial statements.
5
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
March 31, 1997
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
EQUITIES--4.5%
UNITED KINGDOM--1.5%
100,000 Glaxo Wellcome Plc..................................... $ 1,837,759
34,650 Standard Chartered Plc................................. 484,218
-----------
2,321,977
-----------
SWEDEN--1.1%
50,000 Ericsson L M Telephone--ADR............................ 1,693,750
-----------
FRANCE--0.7%
20,455 Rhone Poulenc Class 'A'................................ 693,495
5,000 SGS-Thomson Microelectronics........................... 351,862
-----------
1,045,357
-----------
SWITZERLAND--0.4%
500 BB Medtech Inc......................................... 557,103
100 Phonak Holding AG-- Registered Class B................. 70,682
20 Schweizerhall Holdings AG-Registered................... 16,992
-----------
644,777
-----------
PORTUGAL--0.3%
5,000 Telecel-Comunicacoes Pessoai, SA....................... 410,093
-----------
RUSSIA--0.2%
2,500 ENR Eastern Natural Resources.......................... 295,961
-----------
NETHERLANDS--0.1%
5,000 Koninklijke Ptt Nederland Nv .......................... 185,393
-----------
CZECH REPUBLIC--0.1%
1,000 SPT Telecom AS......................................... 118,794
-----------
NORWAY--0.1%
15,000 Storebrand ASA......................................... 103,439
-----------
TOTAL EQUITIES
(Cost $5,719,912).................................... 6,819,541
-----------
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
INVESTMENT FUNDS--7.1%
GERMANY--2.0%
80,000 Emerging Germany Fund.................................. $ 690,000
165,701 The New Germany Fund................................... 2,319,814
-----------
3,009,814
-----------
RUSSIA--1.7%
150,000 First NIS Regional Fund................................ 2,362,500
10,000 Morgan Stanley Russia & New Europe Fund................ 238,750
-----------
2,601,250
-----------
EASTERN EUROPE--0.9%
62,200 GT Global Greater Eastern Europe Fund.................. 940,775
1,000 Romania Fund........................................... 100,100
50,000 Templeton Central & Eastern European Investment Co..... 251,250
-----------
1,292,125
-----------
ITALY--0.6%
100,000 Italy Fund Inc......................................... 850,000
-----------
UNITED KINGDOM--0.5%
55,000 United Kingdom Fund.................................... 756,250
-----------
MULTINATIONAL--0.3%
10,000 Foreign & Colonial Emerging Middle East Fund, Inc...... 162,500
20,000 Scudder New Europe Fund................................ 295,000
-----------
457,500
-----------
SPAIN--0.3%
35,000 Growth Fund of Spain................................... 441,875
-----------
SWITZERLAND--0.2%
1,400 India Investment AG.................................... 375,348
-----------
FRANCE--0.2%
30,000 France Growth Fund..................................... 333,750
-----------
HUNGARY--0.1%
1,500 Hungarian Fund......................................... 197,250
-----------
AUSTRIA--0.1%
20,000 Austria Fund........................................... 182,500
-----------
CZECH REPUBLIC--0.1%
2,785 Komercni Banka Investment Fund......................... 60,153
6,721 The Czech Republic Fund................................ 90,734
-----------
150,887
-----------
See accompanying notes to financial statements.
6
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
March 31, 1997
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
INVESTMENT FUNDS--(CONTINUED)
PORTUGAL--0.1%
10,000 Portugal Fund.......................................... $ 148,750
-----------
TOTAL INVESTMENT FUNDS
(Cost $9,583,507).................................... 10,797,299
-----------
PAR VALUE
VALUE (NOTE 1)
- ---------- -----------
FOREIGN CORPORATE BONDS--1.0%
FRANCE--0.6%
USD General Des Eaux Zero Coupon Convertible Bond, due
1,000,000 4/1/03.............................................. $ 959,000
PORTUGAL--0.4%
ECU 500,000 BCP Bank & Trust 8.75%, due 5/21/02................... 616,522
-----------
TOTAL FOREIGN CORPORATE BONDS
(Cost $1,665,231)................................... 1,575,522
-----------
<TABLE>
<CAPTION>
STRIKE
PRICE
------------
CONTRACTS
- -----------
OPTIONS PURCHASED--6.3%
[ALL NON-INCOME PRODUCING SECURITIES]
<S> <C> <C> <C> <C>
UNITED KINGDOM--2.6%
500,000 3 I Group OTC Call, expires 6/12/98........... GBP 4.5 $ 677,329
30,000 FTSE 100 Cap OTC Call (Knock Out), expires
6/10/97..................................... GBP 4400 1,146,604
1,000 FTSE 100 OTC Call, expires 5/14/97............ GBP 3500 1,261,215
200,000 HSBC Holdings OTC Call, expires 12/31/97...... GBP 12.5 885,219
-----------
3,970,367
-----------
NETHERLANDS--1.1%
150 Akzo (Listed) Call, expires 10/16/98.......... NLG 210 492,157
100 Unilever (Listed) Call, expires 10/17/97...... NLG 185 970,977
-----------
1,463,134
-----------
SWEDEN--0.8%
40,000 Astra A OTC Call, expires 12/31/97............ SEK 280 495,843
25,000 Astra A OTC Call, expires 1/30/98............. SEK 250 389,783
50,000 Ericsson OTC Call, expires 12/30/97........... SEK 225 374,059
-----------
1,259,685
-----------
FRANCE--0.7%
25,000 CAC Cap OTC Call (Knock Out), expires
6/10/97..................................... FRF 2700 96,873
70,000 Michelin OTC Call, expires 12/30/97........... FRF 256 1,008,284
-----------
1,105,157
-----------
SPAIN--0.6%
65,000 Repsol OTC Call, expires 12/31/97............. ESP 4000 960,609
-----------
SWITZERLAND--0.2%
1,000 Holderbank OTC Call, expires 12/23/97......... CHF 850 176,184
2,500 Valora OTC Call, expires 12/31/97............. CHF 200 196,727
-----------
372,911
-----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
March 31, 1997
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- ----------- ------------ ------------
OPTIONS PURCHASED--(CONTINUED)
<S> <C> <C> <C> <C>
CURRENCY OPTIONS--0.2%
5,000,000 FRF Put/DEM Call, expires 6/16/97............. FRF 3.45 $ 13,362
20,000,000 USD Put/DEM Call, expires 6/16/97............. DEM 1.7 238,700
------------
252,062
------------
MULTINATIONAL--0.1%
1,500 European Index Basket OTC Put, expires
11/28/97.................................... USD 21500 153,000
------------
TOTAL OPTIONS PURCHASED (Cost $7,357,408)..... 9,536,925
------------
SHORT-TERM INVESTMENTS--3.4%
UNITED STATES--3.4%
4,926,790 Investors Bank & Trust Company Repurchase Agreement, dated
3/31/97, due 4/01/97, at a rate of 5.85% and a maturity
value of $4,927,591, collateralized by the Federal Home
Loan Mortgage Corporation, with a rate of 7.91%, a maturity
date of 3/01/2024 and a market value of $5,173,407......... 4,926,790
280,000 U.S. Treasury Bill, 5.39%, due 6/26/97 (a)................... 276,305
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $5,203,095)............... 5,203,095
------------
TOTAL INVESTMENTS--92.1% (Cost $106,544,786)*................ 139,396,014
OTHER ASSETS AND LIABILITIES (NET)--7.9%..................... 11,980,370
------------
TOTAL NET ASSETS--100%....................................... $151,376,384
============
</TABLE>
NOTES TO THE PORTFOLIO OF INVESTMENTS:
ADR American Depositary Receipt
* Aggregate identified cost for federal income tax and book purposes (Note 3).
(a) This security is held as collateral for open futures contracts.
See accompanying notes to financial statements.
8
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF WRITTEN OPTIONS
March 31, 1997
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- ----------- ------------ -----------
<S> <C> <C> <C> <C>
UNITED KINGDOM
100,000 BAT OTC Put, expires 8/01/97.................. GBP 600 $ 166,279
200,000 BAT OTC Put, expires 8/01/97.................. GBP 500 114,496
100,000 EMI OTC Put, expires 9/11/97.................. GBP 1200 179,629
100,000 Glaxo Wellcome OTC Put, expires 12/03/97...... GBP 1050 65,840
100,000 HSBC Holdings OTC Put, expires 5/09/97........ GBP 1450 43,800
200,000 Prudential OTC Put, expires 6/03/97........... GBP 550 72,226
100,000 Reuters OTC Put, expires 5/02/97.............. GBP 750 228,794
100,000 Safeway OTC Put, expires 7/16/97.............. GBP 425 135,976
100,000 Siebe OTC Put, expires 9/23/97................ GBP 1000 69,922
-----------
1,076,962
-----------
NETHERLANDS
10,000 Ahold OTC Call, expires 6/30/97............... NLG 110 123,613
200,000 Elsevier OTC Call, expires 4/18/97............ NLG 29 215,536
100,000 Elsevier OTC Put, expires 7/07/97............. NLG 29 53,350
10,000 Royal Dutch OTC Call, expires 7/08/97......... NLG 325 95,391
-----------
487,890
-----------
SPAIN
100,000 Telefonica Espana OTC Call, expires
12/22/97.................................... ESP 3205 378,271
-----------
SWITZERLAND
500 Baloise (Reg.) OTC Put, expires 12/30/97...... CHF 2500 27,855
500 Richemont OTC Put, expires 7/04/97............ CHF 2000 45,961
250 Roche Holdings OTC Call, expires 6/13/97...... CHF 12500 68,767
5,000 Sika OTC Put, expires 5/13/97................. CHF 350 23,642
1,000 Swiss Reinsurance OTC Put, expires 8/28/97.... CHF 1350 20,613
3,000 Winterthur Insurance OTC Put, expires
5/06/97..................................... CHF 825 21
-----------
186,859
-----------
FINLAND
100 Nokia (Listed) ADR Put, expires 4/18/97....... USD 50 2,500
100 Nokia (Listed) ADR Put, expires 4/18/97....... USD 45 1,250
100 Nokia (Listed) ADR Put, expires 7/18/97....... USD 65 53,750
100 Nokia (Listed) ADR Put, expires 7/18/97....... USD 60 50,000
100 Nokia (Listed) ADR Put, expires 7/18/97....... USD 55 24,375
-----------
131,875
-----------
GERMANY
2,000 BMW OTC Put, expires 9/25/97.................. DEM 1250 76,736
20,000 Hoechst OTC Call, expires 4/19/97............. DEM 72.5 8,160
13,000 SGL-Carbon OTC Put, expires 6/17/97........... DEM 175 1,560
2,500 Volkswagen AG OTC Put, expires 6/10/97........ DEM 800 10,349
-----------
96,805
-----------
SWEDEN
100,000 Ericsson OTC Put, expires 9/11/97............. SEK 225 78,421
-----------
TOTAL WRITTEN OPTIONS (Premiums received $2,506,580)......... 2,437,083
-----------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
AND FINANCIAL FUTURES CONTRACTS
March 31, 1997
FORWARD FOREIGN CURRENCY CONTRACTS TO BUY
<TABLE>
<CAPTION>
CONTRACTS TO RECEIVE
- ----------------------------------------------------------------- NET UNREALIZED
IN APPRECIATION
EXPIRATION VALUE IN EXCHANGE (DEPRECIATION)
DATE LOCAL CURRENCY USD FOR USD OF CONTRACTS
- --------- ------------------------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
4/03/97 CHF 66,000 45,976 45,502 $ 474
4/01/97 DEM 140,000 84,001 82,779 1,222
4/02/97 FRF 2,174,700 387,492 381,265 6,227
4/01/97 NLG 152,500 81,365 80,170 1,195
4/03/97 NLG 100,000 53,362 53,095 267
4/04/97 NOK 686,120 104,246 102,608 1,638
--------------
11,023
--------------
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
<TABLE>
<CAPTION>
CONTRACTS TO DELIVER
- -----------------------------------------------------------------
IN
EXPIRATION VALUE IN EXCHANGE
DATE LOCAL CURRENCY USD FOR USD
- --------- ------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
4/03/97 CHF 50,000 34,830 34,471 (359)
4/02/97 DEM 645,235 387,175 381,265 (5,910)
4/04/97 DEM 173,372 104,047 102,608 (1,439)
4/01/97 NLG 365,000 194,743 191,883 (2,860)
--------------
(10,568)
--------------
NET UNREALIZED APPRECIATION OF FORWARD FOREIGN CURRENCY
CONTRACTS........................................................ $ 455
==============
</TABLE>
SCHEDULE OF OPEN FINANCIAL FUTURES CONTRACTS PURCHASED
<TABLE>
<CAPTION>
NET UNREALIZED
NUMBER OF EXPIRATION CONTRACT DEPRECIATION
CONTRACTS CONTRACTS DATE VALUE OF CONTRACTS
- --------- ------------------------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
100 British Gilt 5/22/97 $ 215,410 $ (144,026)
100 British Gilt 5/22/97 225,560 (159,457)
--------------
(303,483)
--------------
</TABLE>
SCHEDULE OF OPEN FINANCIAL FUTURES CONTRACTS SOLD
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION CONTRACT
CONTRACTS CONTRACTS DATE VALUE
- --------- ------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
10 DAX Index 5/22/97 $(1,971,339) (56,997)
--------------
NET UNREALIZED DEPRECIATION OF OPEN FUTURES CONTRACTS............ $ (360,480)
==============
</TABLE>
GLOSSARY OF TERMS
CHF -- Swiss Franc
DEM -- German Deutsche Mark
ECU -- European Currency Unit
ESP -- Spanish Peseta
FRF -- French Franc
GBP -- British Pound
NLG -- Netherlands Guilder
NOK -- Norwegian Krone
SEK -- Swedish Krona
USD -- United States Dollar
10
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $106,544,786) (Note 1)........................ $139,396,014
Foreign currency, at value (Cost $17,845,068) (Note 1).................... 18,146,184
Initial margin on open financial futures contracts (Note 1)............... 245,227
Receivable for investment securities sold................................. 2,607,751
Unrealized appreciation of forward foreign currency contracts............. 11,023
Dividends and interest receivable......................................... 114,276
Prepaid expenses.......................................................... 25,881
------------
Total assets......................................................... 160,546,356
------------
LIABILITIES:
Written options, at value (Premiums received $2,506,580) (Notes 1 and
3)...................................................................... $ 2,437,083
Payable for investment securities purchased............................... 6,066,342
Investment advisory fee payable (Note 2).................................. 459,974
Unrealized depreciation of forward foreign currency contracts............. 10,568
Accrued expenses and other payables....................................... 196,005
------------
Total liabilities 9,169,972
------------
TOTAL NET ASSETS............................................................... $151,376,384
============
NET ASSETS CONSIST OF:
Par value................................................................. $ 8,154
Paid-in capital in excess of par value.................................... 84,548,893
Undistributed accumulated net investment income (Note 1).................. 28,873,161
Accumulated net realized gain on investments.............................. 5,057,764
Net unrealized appreciation on investments................................ 32,888,412
------------
TOTAL NET ASSETS (equivalent to $18.57 per share based on 8,153,712 shares of
common stock outstanding from 100,000,000 authorized with $0.001 par
value)....................................................................... $151,376,384
============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................... $ 457,357
Dividends (net of foreign withholding taxes of
$25,774).............................................. 656,689
-----------
Total Investment Income........................... 1,114,046
-----------
EXPENSES:
Investment advisory fee (Note 2)....................... 1,467,244
Administration and custodian fees (Note 2)............. 363,294
Legal and audit fees................................... 132,212
Transfer agent fees.................................... 60,000
Printing and postage fees.............................. 38,155
Directors' fees and expenses (Note 2).................. 36,000
Other.................................................. 73,744
-----------
Total Expenses.................................... 2,170,649
Less: Fees paid indirectly (Note 2).......... (31,965)
-----------
Net expenses...................................... 2,138,684
-----------
NET INVESTMENT LOSS......................................... (1,024,638)
-----------
REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain (loss) on:
Securities transactions........................... 43,962,310
Written option transactions....................... (36,536)
Financial futures contracts....................... (334,122)
Forward foreign currency contracts................ (2,611,627)
Foreign currencies and net other assets........... 568,057
-----------
Net realized gain on investments....................... 41,548,082
-----------
Net change in net unrealized appreciation
(depreciation) of:
Securities........................................ 19,029,312
Written options................................... (632,137)
Financial futures contracts....................... (417,926)
Forward foreign currency contracts................ 455
Foreign currencies and net other assets........... 305,824
-----------
Net unrealized appreciation of investments............. 18,285,528
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 59,833,610
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $58,808,972
===========
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
CHANGE IN NET ASSETS FROM OPERATIONS
Net investment loss.......................... $ (1,024,638) $ (670,877)
Net realized gain on investments............. 41,548,082 11,071,893
Net unrealized appreciation of investments... 18,285,528 26,900,292
-------------- --------------
Net increase in net assets resulting from
operations................................. 58,808,972 37,301,308
Distributions to shareholders from:
Net realized gains on investments.......... (6,164,206) --
-------------- --------------
Net increase in net assets................... 52,644,766 37,301,308
NET ASSETS:
Beginning of year.......................... 98,731,618 61,430,310
-------------- --------------
End of year (including accumulated
undistributed net investment income of
$28,873,161 and $0, respectively)....... $151,376,384 $ 98,731,618
============== ==============
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
FINANCIAL HIGHLIGHTS
For a Fund share outstanding throughout each period
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period................. $ 12.11 $ 7.53 $ 13.34 $ 8.95 $ 7.57
---------- ---------- ---------- ---------- ------------
Net investment loss.................................. (0.13) (0.08) (0.01) (0.12) (0.02)
Net realized and unrealized gain (loss) on
investments........................................ 7.35 4.66 (3.90) 5.10 1.56
---------- ---------- ---------- ---------- ------------
Net increase/(decrease) in net assets
resulting from investment operations............... 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......................... $ 18.57 $ 12.11 $ 7.53 $ 13.34 $ 8.95
========== ========== ========== ========== ============
MARKET VALUE, END OF PERIOD............................ $ 13.500 $ 10.000 $ 6.875 $ 11.875 $ 8.250
========== ========== ========== ========== ============
Total investment return.............................. 43.69% 45.45% (26.37)% 44.89% 32.13%
========== ========== ========== ========== ============
Ratios to average net
assets/supplemental data:*
Net assets, end of period (000's).................... $151,376 $ 98,732 $ 61,430 $107,689 $ 54,178
Ratio of net investment loss to average net assets... (0.89)% (0.86)% (0.11)% (0.93)% (0.21)%
Ratio of operating expenses to average net assets.... 1.88% 2.03% 1.74% 1.73% 2.13%
Portfolio turnover rate.............................. 191% 148% 104% 150% 164%
Average broker commission rate....................... $0.00233 N/A N/A N/A N/A
- ------------------
* 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 income per share and the operating expense ratios would have been:
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>
See accompanying notes to financial statements.
14
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
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 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
15
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Repurchase agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, a Fund
takes possession of an underlying debt obligation subject to an obligation
of the seller to repurchase, and the Fund to resell, the obligation 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 collateral at all times is equal to at least 100% of the total
amount of the repurchase obligations, including interest. In the event of
counterparty default, the Fund has the right to use the collateral 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 investments' underlying 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 investment gains and losses related to foreign
currency 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.
16
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(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 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 value of the currency holdings, they also limit any
potential gain that might result should the value of
17
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
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. As of March 31, 1997, the Fund
reclassified $29,897,799 of accumulated net realized gains to undistributed
accumulated net investment income primarily to reflect the treatment of
short-term capital gains as ordinary income for federal income tax
purposes. This reclassification has no impact on net investment income,
realized gain/loss and net asset value of the Fund.
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
18
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 year ended March 31, 1997, the Fund incurred total brokerage
commissions of $294,098 of which $52,301 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.
The Fund has entered into an expense offset arrangement as part of its
custody agreement with Investors Bank & Trust Company. Under this arrangement,
the Fund's custody fees are reduced when the Fund maintains cash on deposit at
the custodian. For the year ended March 31, 1997, the Fund incurred total
administration and custody fees in the amount of $363,294 which, after receiving
a credit of $31,965 pursuant to the expense offset arrangement, resulted in a
net expense of $331,329.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended March 31, 1997 amounted to
$197,303,366 and $212,771,691, respectively.
Activity in written options for the year ended March 31, 1997 was as
follows:
NUMBER OF
PREMIUM CONTRACTS
----------- -----------
Options outstanding at March 31, 1996........ $ 2,246,649 40,321,800
Options written.............................. 13,832,816 64,577,350
Options exercised............................ -- --
Options expired.............................. (1,667,740) (50,697,665)
Options closed............................... (11,905,145) (52,533,235)
----------- -----------
Options outstanding at March 31, 1997........ $ 2,506,580 1,668,250
----------- -----------
----------- -----------
At March 31, 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 $35,301,580 and $2,450,352, respectively.
19
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. FEDERAL TAX INFORMATION (UNAUDITED)
The Fund has designated 100% of the distribution paid during the year ended
March 31, 1997 as a long term capital gain dividend.
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
</TABLE>
20
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
INDEPENDENT AUDITORS' REPORT
[LOGO]
To the Board of Directors
The European Warrant Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
European Warrant Fund, Inc., including the portfolio of investments, as of March
31, 1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of March 31, 1997 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
European Warrant Fund, Inc. as of March 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the years in
the two-year period then ended, and the financial highlights for each of the
years in the five-year period then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
May 12, 1997
21
<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
At the Board of Directors meeting held on March 13, 1997, Martin Vogel was
elected a Director of the Fund.
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.
22
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(Continued)
Additionally, the Board of Directors has approved, subject to the approval
of the Fund's shareholders, a change in the Fund's status from a diversified to
a non-diversified management investment company and to eliminate a fundamental
investment restriction relating to a diversified management investment company.
The change in the Fund's status from diversified to non-diversified is being
proposed to allow the Fund more flexibility in the determining the size of its
investments. This matter will be presented at the Annual Meeting of Shareholders
of the Fund on June 26, 1997.
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.
OTHER MATTERS
The Fund calculates and reports a weekly net asset value per share. During
the period from June 1996 to October 1996 the reported net asset value per share
was understated by amounts which were deemed to be immaterial by Fund management
and the Board of Directors.
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 Company ('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
23
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(Continued)
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.
24
<PAGE>
========= THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION
INVESTMENT ADVISER INDEPENDENT ACCOUNTANTS
Julius Baer Securities Inc. KPMG Peat Marwick LLP
330 Madison Ave. 99 High Street
New York, New York 10017 Boston, MA 02110
ADMINISTRATOR, CUSTODIAN COUNSEL
& TRANSFER AGENT Baker & McKenzie
Investors Bank & Trust Company 805 Third Avenue
200 Clarendon Street New York, New York 10022
Boston, Massachusetts 02116
DIRECTORS
OFFICERS Antoine Bernheim
Bernard Spilko David Bodner*
President Lawrence A. Fox
Hansruedi Huber Thomas J. Gibbons
Chief Investment Officer Harvey B. Kaplan
Robert Discolo Bernard Spilko
Chief Financial Officer Martin Vogel
and Secretary *Chairman of the Board
<PAGE>
=========================================================
THE EUROPEAN WARRANT FUND, INC.
ANNUAL REPORT
March 31, 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. [LOGO]
