<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
Dear Fellow Shareholder:
I am extremely pleased at having been elected President of the European
Warrant Fund (the 'Fund') at our last Board of Directors Meeting. Bernard
Spilko, the prior President, was elected Chairman of the Board at the same
meeting, replacing David Bodner. Management wishes to thank Mr. Bodner for his
dedication and hard work throughout his tenure with the Fund.
It was another successful year for the Fund. The Fund turned in an
impressive performance with a gain for the twelve month-period ending March 31,
1998 of 86.07% based on net asset value and 148.77% based on share price,
comfortably outperforming the benchmark FT Europe index in United States Dollars
('USD') which increased by 38.59%. Of course, past performance does not
guarantee future results.
Market interest is focusing again on European equity investments in general,
and increasingly into the Fund, resulting in a significant narrowing of the
Fund's discount to net asset value from 27.30% on March 31, 1997 to 2.81% as of
March 31, 1998. As of close of business April 16, 1998, the discount has
increased to 7.15%. In December 1997, the Fund made a substantial capital gain
distribution of USD 6.65 per share. Sixty two percent of shareholders elected to
reinvest their distribution proceeds into new shares of the Fund through the
Fund's Dividend Reinvestment Program. We thank those shareholders for their
support.
Despite the significant increases in European equity markets over the last
12 months, we believe the outlook for Europe still remains positive given the
background of low interest rates and the forthcoming euro. The Asian crisis has
not impacted the United States and European economies so far, but has helped to
reinforce the disinflationary trend with lower oil and other commodity prices.
Therefore, we see no immediate danger of higher interest rates in Europe, which
should support the equity markets. We believe that given an unchanged interest
rate scenario, the risk premium of European equities compares quite favorably to
the United States equities market.
ECONOMIC REVIEW
The formation of the upcoming European Monetary Union ('EMU') commencing on
January 1, 1999 will create a country bloc of members referred to as 'Euroland.'
Euroland will cover a large part of Western Europe, bounded on its periphery by
Finland in the north, Ireland and Portugal in the west, Italy in the south and
Austria in the east of core Europe. Five percent of the world's population
(roughly 290 million people), live in this area and they produce no less than
twenty-four percent of global economic output. With the entry of Great Britain
in the next millenium, Euroland will no longer lag behind the United States as
far as economic clout and size of financial markets. Instead of being a
collection of small and medium-sized countries with high export to gross
domestic product ('GDP') ratios, Euroland will become the equivalent of a
'large' country with a similarly low export to GDP ratio as that of United
States and Japan. Euroland's growth rate is expected to increase to 2.8%
projected for 1998 from a 2.4% growth rate in 1997 with higher expected growth
in the peripheral countries of Spain, Portugal, Finland and Ireland.
We believe that at the start of the next millenium, the EMU and Euroland
could expand further. Greece, with its currency now into the European Exchange
Rate Mechanism, will try very hard to push ahead effectively with its
convergence efforts into the EMU. It is conceivable that Greece could
participate in the second phase of the EMU in the years 2001 through 2003 along
with the other European countries such as the United Kingdom, Denmark and Sweden
which voluntarily opted not to join in the first phase of EMU. There is already
the start of negotiations of an Eastern enlargement of EMU in the years 2003
through 2005 with Poland, Czech Republic, Hungary, Slovenia, Cyprus and the
Baltics potentially leading to new investment opportunities for the Fund.
We also believe that the common market will lead to more fiscal competition
throughout Europe and, in general, national governments will be forced to
conduct a more business-friendly policy to combat the high unemployment rate.
The rapid pace of de-regulation and privatization in Europe should continue,
concentrating on telecommunications, utilities and transportation as the next
sectors.
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
New European benchmarks, with the introduction of the Dow Jones Stoxx family
and indices on pan European Blue Chips, will create additional demand for the
leading companies. The fact that the 'home' market of institutional investors
will be expanded from one single country to the entire Euroland will lead to a
massive cross country flow of funds. The creation of funded pension plan schemes
in Germany, France, Italy and Spain will lead to increased institutional demand
for European equities.
On the micro-economic level, we see in Europe a change to a more Anglo Saxon
policy of corporate governance and shareholder value creation with management
compensation tied to stock market movement and the concentration on core
competences.
Our two main concerns to our positive European equity outlook are first, a
deepening recession in Japan and second, a declining U.S. dollar. A Japanese
recession could lead to a destabilization of the Japanese Banking system
creating a liquidity problem for other Asian markets with potential spill over
effects into the Western markets. A declining U.S. dollar could impact the
profit growth of European exporting companies which could result in
disappointing corporate earnings and re-rating of European equity markets.
Overall, we remain confident that the historic transformation of the
fragmented small economies in Europe to a united common market will provide
attractive investment opportunities for the Fund.
INVESTMENT POLICY
Since the global stock market turbulence in October 1997 we have kept the
Fund's delta-leverage around 1.75 which is mildly bullish. We continue to take
advantage of the historically high volatility by writing OTC-Options on
equities, especially Put options on single European stocks.
Regarding our country allocation, Italy is currently our favorite market. In
anticipation of a nearly perfect macro-economic situation, with falling interest
rates due to EMU convergency and an improving economy, we heavily overweighted
Italy through our investment in the MIB30 (Milan Stock Exchange) index warrant.
In the United Kingdom ('UK'), where the economic picture has been mixed for some
time, domestic stocks on one hand are benefiting from the good development of
consumption and on the other hand export-oriented sectors have been hurt by the
appreciation of the british pound and the effects of the Asian economic crisis.
The current tight monetary policy in the UK gives us reason to continue to
underweight the UK market.
With the introduction of the euro, the second largest capital market and
second largest equities market after the United States will be created. The euro
will revolutionize the whole investment process in European stocks. From a top
down investment approach, sector allocation will be of much greater significance
than country selection. We expect that the demand for the European sector
leaders will increase further.
Our favorite sector is finance where more than one third of the Fund's delta
exposure is invested in various types of instruments. In the insurance industry,
we intend to continue with the traditional 'plain vanilla' warrants on ING, AXA,
Zurich Insurance and Generale. We cover most bank stocks with regional (France)
and Pan-European basket warrants. On very high volatility stocks we buy the
underlying stock and sell OTC calls and puts or we develop an 'exotic' warrant
(e.g. Munich Re, which collects .05 deutsche mark each day when the underlying
closing price is above the strike price). With the EMU coming closer and the
pressure created by the mega mergers in the United States, the restructuring
theme in the European finance industry has just begun. Our own creation of the
European Restructuring Finance Basket with 10 stocks each equally weighted (SBC,
Deutsche Bank, Credit Commerciale de France, Paribas, Credito Italiano, INA,
Banco Popular, Barclays Bank, Legal & General and Commercial Union) is a perfect
example of the unique consolidation of the finance sector occurring in Europe.
Since the beginning of November 1997 when we purchased the European
Restructuring Finance Basket the aggregated underlying value of the basket has
gained more than 60% and three bank stocks in the basket (SBC/UBS, Commercial
Union/General Accident and Credito Italiano/Unicredito) are now in the process
of merging.
2
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO AND ADDITIONAL INFORMATION
At the close of business on April 16, 1998, the Fund was 72.22% invested in
warrants with an average weighted life of 609 days. The net asset value of the
Fund was $24.30.
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.
Although the Fund's discount to net asset value is at a more reasonable
level today than in prior years, the Board of Directors will continue to discuss
alternatives to further reduce the discount.
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.
We wish to congratulate and thank our portfolio managers Hansruedi Huber and
Philipp Burger for their continued excellent work. We truly believe that we have
one of the best European teams in the investment universe, which is made evident
by the superior performance of the Fund over the last six years. Most of all we
thank you, our shareholders, for your continued support.
Sincerely,
/s/ Robert Discolo
-----------------------
Robert Discolo
April 20, 1998 President
The views expressed in this shareholder letter reflect those of the
President of the Fund only through the end of the period covered by the report
as stated on the cover. This shareholder letter contains certain forward looking
statements regarding the intent, belief or current expectations of the
President. Shareholders are cautioned that such forward looking statements are
not guarantees of future performance and involve risks and uncertainties and
that actual results may differ materially from those in the forward looking
statements, as a result of various factors. The President's views are subject to
change based on market and other conditions.
3
<PAGE>
THE EUROPEAN WARRANT FUND, INC. FACT SHEET
(UNAUDITED)
COUNTRY WEIGHTINGS
[PIE CHART]
U.S. Cash Equivalents and Net Other Assets and Liabilities 11%
Switzerland 10%
Netherlands 9%
France 8%
Spain 5%
Italy 8%
United Kingdom 19%
Eastern Europe 6%
Sweden 3%
Multi-national 11%
Germany 10%
March 31, 1998
MISCELLANEOUS
Average Life of Derivatives (3/31/98) 1.17 years
Average Gearing (3/31/98)++ 3.86%
Average Premium (3/31/98) 1.44%
Average Annual Premium (3/31/98) .62%
Year to Date Total Return* (1/1/98-3/31/98) 36.98%
One Year Total Return* (4/1/97-3/31/98) 86.07%
Average Annual Total Return Since Inception*
(7/17/90-3/31/98) 22.49%
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 1.77 times the value
of the share.
SECTOR WEIGHTINGS
[PIE CHART]
U.S. Cash Equivalents and Net Other Assets and Liabilities 11%
Chemicals/Pharmaceuticals 7%
Financials 20%
Consumer Goods 3%
Capital Goods 4%
Investment Funds 7%
Telecommunications 5%
Utilities 1%
Natural Resources 2%
Food 2%
Index Warrants 38%
March 31, 1998
TOP TEN EQUITY WARRANT HOLDINGS MARCH 31, 1998
MARKET VALUE PERCENTAGE+
1 FTSE 100 Index (SBC) STK 4000,
exp. 5/16/99 $36,045,035 15.35%
2 MIB 30 (BT), STK 19000,
exp. 5/19/00 18,034,780 7.68%
3 E-Top 100 (DB), STK 1970,
exp. 6/30/00 8,860,000 3.77%
4 CAC 40 Index Cap Call (BNP), STK 2560,
exp. 6/30/98 7,798,709 3.32%
5 Dow Jones EURO STOXX 50 Index
Cap Call (DB), STK.01 exp. 9/16/99 7,158,293 3.05%
6 Zurich Insurance (SBC), exp 10/16/98 5,988,212 2.55%
7 Novartis (SBC), exp, exp 12/30/99 5,579,568 2.38%
8 ING (ML), exp. 1/06/99 4,948,810 2.11%
9 Axa (SOG), exp. 2/09/99 4,739,680 2.02%
10 Baring Emerging Europe Trust,
exp. 8/31/04 4,635,000 1.97%
Currency Hedge At March 31, 1998 0.00%
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.
4
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS
(percentages of total net assets)
March 31, 1998
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
WARRANTS--72.7%
[ALL NON-INCOME PRODUCING SECURITIES]
<S> <C> <C>
UNITED KINGDOM--14.5%
10,000 FTSE 100 Index (SBC), STK 4000, expires 5/16/99........ $36,045,035
-----------
MULTINATIONAL--9.5%
250,000 Dow Jones EURO STOXX 50 Index Cap Call (DB), STK .01
expires 9/16/99...................................... 7,158,293
10,000 E-Top 100 (DB), STK 1970, expires 6/30/00.............. 8,860,000
190,000 Euro Blue Star (ABN), STK 1970, expires 5/12/00........ 4,346,033
500,000 European Bank Basket (GS), expires 2/24/99............. 2,189,357
100,000 Swiss & German Machine Basket (GS), expires 1/15/99.... 168,304
1,000,000 Templeton Emerging Markets, expires 9/30/04............ 569,330
-----------
23,291,317
-----------
SWITZERLAND--8.3%
350,000 Alusuisse (SBC), expires 1/15/02....................... 3,254,748
77,000 Castle Alternative Invest AG (LGT), expires 9/10/98.... 153,798
50,000 Government of Switzerland, 4.00% due 4/08/28 (ML),
expires 3/25/99...................................... 98,232
267,000 Nestle SA (SBC), expires 1/15/02....................... 2,561,591
300,000 Novartis (SBC), expires 12/30/99....................... 5,579,568
25,000 Roche Holdings (SBC), expires 12/01/00................. 2,095,612
50,000 Swiss Bank Corp., expires 4/02/01...................... 785,855
180,000 Zurich Insurance (SBC), expires 10/16/98............... 5,988,212
-----------
20,517,616
-----------
GERMANY--8.2%
25,000 BASF AG (LB), expires 1/15/99.......................... 521,475
10,000 BASF AG, expires 4/09/01............................... 2,668,828
150,000 Bayer AG (Citi), expires 6/15/00....................... 2,881,686
100,000 BMW Range (CB), expires 10/09/98....................... 290,113
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
<S> <C> <C>
GERMANY--(CONTINUED)
10,000 Commerzbank, expires 12/10/99.......................... $ 858,995
7,000 Continental AG, expires 7/06/00........................ 1,028,633
50,000 Dresdner Bank AG, expires 4/30/02...................... 888,709
80,000 Hoechst AG Range (COBA), expires 9/11/98............... 231,226
200,000 Muenchener Rueckversicherungs-Gesellschaft AG Range
(CL), expires 12/02/98............................... 733,657
25,000 Muenchener Rueckversicherungs-Gesellschaft AG (SalOp),
expires 12/14/00..................................... 402,080
10,000 Preussag AG, expires 4/30/01........................... 1,447,866
25,000 RWE AG (Rabo), expires 12/30/98........................ 309,022
100,000 SAP AG Range (CL), expires 11/25/98.................... 443,004
15,000 Siemens, expires 6/02/98............................... 4,424,635
100,000 Veba AG (Citi), expires 1/15/99........................ 3,099,406
-----------
20,229,335
-----------
ITALY--7.8%
1,000,000 Generale (NAT), expires 1/29/99........................ 1,134,160
2,000,000 MIB 30 (BT), STK 19000, expires 5/19/00................ 18,034,780
-----------
19,168,940
-----------
FRANCE--7.1%
1,000,000 Axa (SOG), expires 2/09/99 ............................ 4,739,680
250,000 CAC 40 Index Cap Call (BNP), STK 2560, expires
6/30/98.............................................. 7,798,709
25,000 CAC 40 Index Cap Call (BNP), STK 2900, expires
3/31/99.............................................. 658,961
2,150,000 Compagnie Generale des Eaux, expires 5/02/01........... 2,408,934
300,000 French Bank Basket (SOG), expires 3/05/99.............. 1,831,548
-----------
17,437,832
-----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
March 31, 1998
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
<S> <C> <C>
NETHERLANDS--7.0%
62,500 ABN Amro (SBC), expires 5/08/99........................ $ 2,761,827
700,000 Ahold (GS), expires 7/25/99............................ 4,546,719
250,000 Elsevier (ML), expires
2/02/01.............................................. 961,469
200,000 ING (ML), expires 1/06/99.............................. 4,948,810
50,000 Royal Dutch (SBC), expires 5/14/99..................... 4,199,535
-----------
17,418,360
-----------
SPAIN--5.0%
100,000 Iberia Telecom Basket (ML), expires 11/16/98........... 4,099,542
1,000,000 IBEX Cap Call (Sal), STK 5500, expires 5/18/98......... 3,086,223
2,500,000 IBEX Cap Call (Citi), STK 4600, expires 9/17/98........ 4,725,200
40,000 IBEX Call (ML), STK 8499, expires 2/09/99.............. 551,524
-----------
12,462,489
-----------
SWEDEN--2.8%
100,000 Ericsson (SBC), expires 6/22/98........................ 2,379,254
1,000,000 OMX Call (SBC), STK 2300, expires 12/18/98............. 848,007
2,000,000 OMX Cap Call (GS), STK 2300, expires 2/27/99........... 3,835,764
-----------
7,063,025
-----------
EASTERN EUROPE--1.9%
4,500,000 Baring Emerging Europe Trust, expires 8/31/04.......... 4,635,000
-----------
POLAND--0.5%
2,500,000 IFC Poland Index (BT), STK .01, expires 2/26/99........ 1,312,500
-----------
CZECH REPUBLIC--0.1%
99,000 BIC Bohemia Investment Co Sa, expires 5/14/01.......... 162,083
-----------
TOTAL WARRANTS
(Cost $89,085,430)................................... 179,743,532
-----------
EQUITIES--10.0%
UNITED KINGDOM--2.8%
200,000 HSBC Holdings Plc...................................... 6,523,852
35,057 Standard Chartered Plc................................. 508,074
-----------
7,031,926
-----------
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
EQUITIES--(CONTINUED)
<S> <C> <C>
SWITZERLAND--1.5%
100 Disetronic Holding AG.................................. $ 290,111
500 Komax Holding AG-Registered *.......................... 243,942
350 Schindler Holding AG-Registered........................ 515,717
100 Sez Holding AG......................................... 176,817
2,500 Valora Holding AG...................................... 627,046
3,300 Zurich Versicherungs-Gesellschaft-Registered........... 1,912,574
-----------
3,766,207
-----------
NETHERLANDS--1.2%
4,000 Hagemeyer NV........................................... 193,732
1 Koninklijke Ptt Nederland NV .......................... 52
20,000 Wolters Kluwer NV...................................... 2,858,033
-----------
3,051,817
-----------
GERMANY--1.1%
1,000 Bayerische Motoren Werke AG............................ 1,104,808
4,000 ProSieben Media AG Preferred *......................... 208,536
2,500 Volkswagen AG Preferred *.............................. 1,283,090
2,500 Volkswagen AG--Rights *................................ 45,381
-----------
2,641,815
-----------
PORTUGAL--0.9%
40,000 Banco Comercial Portugues, SA.......................... 1,290,084
10,000 Brisa-Auto Estradas de Portugal, SA *.................. 456,224
3,000 Telecel-Comunicacaoes Pessoai, SA *.................... 465,190
-----------
2,211,498
-----------
FRANCE--0.8%
25,000 Compagnie Generale des Etablissements Michelin Class
B.................................................... 1,490,823
5,000 SGS-Thomson Microelectronics *......................... 392,475
-----------
1,883,298
-----------
SWEDEN--0.6%
66,666 Astra AB--Class A...................................... 1,371,763
-----------
HUNGARY--0.3%
20,000 Matav Rt.--ADR *....................................... 622,500
-----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
March 31, 1998
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
EQUITIES--(CONTINUED)
<S> <C> <C>
AUSTRIA--0.2%
10,000 Erste Bank Der Oesterreichischen Sparkassen AG *....... $ 597,026
-----------
FINLAND--0.2%
5,000 Nokia Corporation--ADR................................. 539,688
-----------
NORWAY--0.2%
10,000 Norsk Hydro ASA--ADR................................... 500,000
-----------
GREECE--0.1%
10,000 Hellenic Telecommunication Organization SA............. 250,548
-----------
RUSSIA--0.1%
2,500 ENR Eastern Natural Resources *........................ 221,022
-----------
TOTAL EQUITIES
(Cost $17,932,732)................................... 24,689,108
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
- -----------
U.S. GOVERNMENT & AGENCY OBLIGATIONS--5.9%
<S> <C> <C>
USD Resolution Funding Corporation, 0% Coupon Strip,
15,000,000 effective yield 6.101%, due 4/15/29.................... 2,453,997
USD Resolution Funding Corporation, 0% Coupon Strip,
10,000,000 effective yield 6.090%, due 4/15/30.................... 1,543,430
USD U.S. Treasury Bond 6.375%, due 8/15/27 (a)............. 10,565,625
10,000,000 -----------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $13,628,162)................................... 14,563,052
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
INVESTMENT FUNDS--4.6%
<S> <C> <C>
RUSSIA--1.9%
200,000 First NIS Regional Fund*............................... $ 3,800,000
25,000 Fleming Russia Securities Fund*........................ 450,000
25,000 Morgan Stanley Russia & New Europe Fund................ 604,688
-----------
4,854,688
-----------
GERMANY--1.1%
169,456 The New Germany Fund................................... 2,838,388
-----------
EASTERN EUROPE--0.7%
10,000 East Europe Development Fund*.......................... 407,500
61,829 GT Global Greater Eastern Europe Fund.................. 761,270
50,000 Templeton Central & Eastern European Investment Co.*... 204,790
25,000 The Central European Value Fund........................ 321,875
-----------
1,695,435
-----------
MULTINATIONAL--0.2%
20,000 Foreign & Colonial Emerging Middle East Fund, Inc...... 322,500
-----------
AUSTRIA--0.2%
50,000 Austria Fund........................................... 600,000
-----------
ROMANIA--0.2%
5,000 Romania Fund*.......................................... 442,500
-----------
PORTUGAL--0.1%
10,000 Portugal Fund.......................................... 213,125
-----------
CZECH REPUBLIC--0.1%
10,000 Komercni Banka Investment Fund*........................ 178,282
-----------
HUNGARY--0.1%
1,000 Hungarian Fund*........................................ 173,500
-----------
TOTAL INVESTMENT FUNDS
(Cost $9,772,302).................................... 11,318,418
-----------
</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, 1998
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- ----------- ------ -----------
OPTIONS PURCHASED--1.8%
[ALL NON-INCOME PRODUCING SECURITIES]
<S> <C> <C> <C> <C>
NETHERLANDS--1.2%
100 Akzo (Listed) Call, expires 10/16/98.......... NLG 210 $ 1,046,826
80,000 Unilever OTC Call, expires 12/30/99........... NLG 95 1,760,855
------------
2,807,681
------------
MULTINATIONAL--0.6%
25,000 European Restructuring Finance Basket OTC
Call,
expires 11/24/00............................ USD 95 1,599,185
------------
TOTAL OPTIONS PURCHASED (Cost $1,627,641)........... 4,406,866
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
- ----------
FOREIGN GOVERNMENT BONDS--1.6%
<S> <C> <C>
UNITED KINGDOM--1.6%
GBP United Kingdom War Loans 3.50% due, 12/29/49 (Cost
4,000,000 $3,716,581).......................................... 3,976,938
------------
FOREIGN CORPORATE BONDS--0.3%
MULTINATIONAL--0.3%
ITL International Bank for Reconstruction and Development
250,000,000 0% Coupon Strip, due 3/20/28 (Cost $726,609)......... 722,164
------------
REPURCHASE AGREEMENTS--0.0%
UNITED STATES--0.0%
USD 82,446 Investors Bank & Trust Company Repurchase Agreement,
dated 3/31/98, due 4/01/98, at a rate of 5.43% and a
maturity value of $82,458, collateralized by the
Federal National Mortgage Association, with a rate of
6.90%, a maturity date of 10/25/22 and a market value
of $94,208 (Cost $82,446)............................ 82,446
------------
TOTAL INVESTMENTS--96.9%
(Cost $136,571,903).................................. 239,502,524
OTHER ASSETS AND LIABILITIES (NET)--3.1%............... 7,667,967
------------
TOTAL NET ASSETS--100.0%............................... $247,170,491
------------
------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
* Non-income producing security.
(a) Security is segregated as collateral for uncovered written call options.
See accompanying notes to financial statements.
8
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF WRITTEN OPTIONS
March 31, 1998
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- ----------- ------ -----------
<S> <C> <C> <C> <C>
UNITED KINGDOM
100,000 Bank of Ireland OTC Put, expires 6/30/98...... GBp 1,250 $ 176,877
100,000 EMI OTC Put, expires 7/31/98.................. GBp 568 113,866
50,000 Glaxo Wellcome OTC Put, expires 5/29/98....... GBp 1,650 86,237
50,000 Glaxo Wellcome OTC Put, expires 6/09/98....... GBp 1,650 120,127
100,000 HSBC Holdings OTC Call, expires 1/14/99....... GBp 1,500 766,200
-----------
1,263,307
-----------
SWITZERLAND
500 Baloise OTC Put, expires 6/30/98.............. CHF 2,750 22,505
10,000 Ciba OTC Put, expires 7/27/98................. CHF 160 19,790
10,000 CS Group OTC Put, expires 12/30/98............ CHF 240 77,675
1,000 Holderbank OTC Put, expires 12/30/98.......... CHF 1,250 30,175
1,000 Holderbank OTC Put, expires 12/30/98.......... CHF 1,325 33,759
1,000 Novartis OTC Put, expires 10/28/98............ CHF 2,000 21,119
1,000 Novartis OTC Put, expires 5/15/98............. CHF 2,500 29,088
1,000 Novartis OTC Put, expires 2/01/99............. CHF 2,500 130,301
100 Roche Holdings OTC Put, expires 6/30/98....... CHF 16,500 58,110
200 Roche Holdings OTC Put, expires 11/16/98...... CHF 13,000 35,421
2,500 Sulzer OTC Put, expires 8/31/98............... CHF 1,000 75,320
10,000 Swiss Bank Corp OTC Put, expires 6/30/98...... CHF 525 184,165
1,000 Swissair OTC Put, expires 9/16/98............. CHF 2,000 81,792
5,000 Tag Heuer OTC Put, expires 4/06/98............ CHF 180 24,181
5,000 Zurich Versicherungs-Gesellschaft OTC Call,
expires 6/10/98 (a)......................... CHF 800 332,940
-----------
1,156,341
-----------
GERMANY
5,000 Addidas OTC Put, expires 4/7/98............... DEM 230 540
5,000 Addidas OTC Put, expires 4/7/98............... DEM 270 14
15,000 BASF OTC Call, expires 5/29/98 (a)............ DEM 67.50 121,556
1,000 BMW OTC Call, expires 8/28/98 (a)............. DEM 1,400 394,181
10,000 Fresenius Medical Care OTC Put, expires
6/15/98..................................... DEM 120 26,472
5,000 Fresenius Medical Care OTC Put, expires
6/30/98..................................... DEM 130 16,478
3,000 Mannesmann OTC Put, expires 6/30/98........... DEM 1,000 10,535
25,000 Metro OTC Put, expires 11/30/98............... DEM 80 126,148
5,000 SAP OTC Put, expires 9/15/98.................. DEM 550 35,116
5,000 SAP OTC Put, expires 9/15/98.................. DEM 750 170,610
10,000 SGL-Carbon OTC Put, expires 8/26/98........... DEM 200 89,142
-----------
990,792
-----------
CURRENCY OPTIONS
5,000,000 DEM Put/GBP Call, expires 6/15/98............. GBP 3.04 567,656
-----------
FRANCE
10,000 LVMH OTC Put, expires 7/15/98................. FRF 1,100 55,026
25,000 Michelin OTC Call, expires 12/30/98 (a)....... FRF 400 123,551
-----------
178,577
-----------
SPAIN
150,000 Endesa OTC Put, expires 9/30/98............... ESP 3,500 174,302
-----------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- ----------- ------ -----------
<S> <C> <C> <C> <C>
SWEDEN
25,000 Hennes & Mauritz OTC Put, expires 12/18/98.... SEK 400 $ 113,140
100 Pharmacia Upjohn (Listed) Put, expires
1/16/99..................................... USD 35 10,625
-----------
123,765
-----------
ITALY
300,000 Credito Italiano OTC Put, expires 6/30/98..... ITL 6,500 8,881
250,000 Fiat OTC Put, expires 12/30/98................ ITL 6,250 51,318
100 Gucci (Listed) ADR Put, expires 4/18/98....... USD 40 1,250
-----------
61,449
-----------
NETHERLANDS
25,000 Ahold OTC Call, expires 11/30/98 (a).......... NLG 70 58,743
-----------
HUNGARY
500 HTX OTC Put, expires 8/07/98.................. USD 2,000 16,325
-----------
FINLAND
100 Nokia (Listed) ADR Put, expires 4/18/98....... USD 100 7,500
-----------
TOTAL WRITTEN OPTIONS (Premiums Received $4,478,926)......... $4,598,757
-----------
-----------
</TABLE>
NOTES TO THE SCHEDULE OF WRITTEN OPTIONS:
(a) All or a portion of the written call option is uncovered. A sufficient
amount of collateral has been set aside to purchase the underlying
security in the event the option is exercised.
GLOSSARY OF TERMS
CHF -- Swiss Franc
DEM -- German Deutsche Mark
ESP -- Spanish Peseta
FRF -- French Franc
GBP -- British Pound
GBp -- British Pence
ITL -- Italian Lira
NLG -- Netherlands Guilder
SEK -- Swedish Krona
USD -- United States Dollar
See accompanying notes to financial statements.
10
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $136,571,903) (Note 1)........................................ $239,502,524
Foreign currency, at value (Cost $13,180,136) (Note 1).................................... 12,954,668
Receivable for investment securities sold................................................. 1,443,026
Dividends and interest receivable......................................................... 312,239
Prepaid expenses.......................................................................... 25,959
------------
Total assets......................................................................... 254,238,416
------------
LIABILITIES:
Written options, at value (Premiums received $4,478,926) (Notes 1 and 3).................. $ 4,598,757
Payable for investment securities purchased............................................... 1,609,309
Investment advisory fee payable (Note 2).................................................. 649,573
Accrued expenses and other payables....................................................... 210,286
------------
Total liabilities.................................................................... 7,067,925
------------
TOTAL NET ASSETS............................................................................... $247,170,491
------------
------------
NET ASSETS CONSIST OF:
Par value................................................................................. $ 10,676
Paid-in capital in excess of par value.................................................... 117,443,345
Undistributed accumulated net investment income........................................... 15,620,004
Accumulated net realized gain on investments.............................................. 11,505,382
Net unrealized appreciation on investments................................................ 102,591,084
------------
TOTAL NET ASSETS (equivalent to $23.15 per share based on 10,675,768
shares of common stock outstanding from 100,000,000 authorized with
$0.001 par value)............................................................................ $247,170,491
------------
------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................... $ 825,666
Dividends (net of foreign withholding taxes of
$20,114).............................................. 502,047
------------
Total Investment Income........................... 1,327,713
------------
EXPENSES:
Investment advisory fee (Note 2)....................... 2,379,293
Administration and custodian fees (Note 2)............. 404,835
Legal and audit fees................................... 136,636
Printing and postage fees.............................. 67,545
Transfer agent fees.................................... 60,000
Registration and filing fees........................... 48,363
Insurance premium expense.............................. 46,990
Directors' fees and expenses (Note 2).................. 37,000
Other.................................................. 124,521
------------
Total Expenses.................................... 3,305,183
Less: Fees paid indirectly (Note 2).......... (144,654)
------------
Net expenses...................................... 3,160,529
------------
NET INVESTMENT LOSS......................................... (1,832,816)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain (loss) on:
Securities transactions........................... 47,220,918
Written option transactions....................... 2,159,604
Realized gain distributions from investment
company shares................................... 886,053
Financial futures contracts....................... (1,456,383)
Forward foreign currency contracts................ (983,305)
Foreign currencies and net other assets........... 271,794
------------
Net realized gain on investments............. 48,098,681
------------
Net change in net unrealized appreciation
(depreciation) of:
Securities........................................ 70,079,393
Financial futures contracts....................... 360,480
Written options................................... (189,328)
Forward foreign currency contracts................ (455)
Foreign currencies and net other assets........... (547,418)
------------
Net unrealized appreciation of investments... 69,702,672
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 117,801,353
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $115,968,537
------------
------------
</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, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
CHANGE IN NET ASSETS FROM OPERATIONS
Net investment loss.......................... $ (1,832,816) $ (1,024,638)
Net realized gain on investments............. 48,098,681 41,548,082
Net unrealized appreciation of investments... 69,702,672 18,285,528
-------------- --------------
Net increase in net assets resulting from
operations................................. 115,968,537 58,808,972
Distributions to shareholders from:
Net realized gains on investments.......... (54,222,184) (6,164,206)
Net increase in net assets resulting from
Fund share transactions (Note 4)........... 34,047,754 --
-------------- --------------
Net increase in net assets................... 95,794,107 52,644,766
NET ASSETS:
Beginning of year.......................... 151,376,384 98,731,618
-------------- --------------
End of year (including accumulated
undistributed net investment income of
$15,620,004 and $28,873,161,
respectively)........................... $247,170,491 $151,376,384
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
FINANCIAL HIGHLIGHTS
For a Fund share outstanding throughout each year
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of year................... $ 18.57 $ 12.11 $ 7.53 $ 13.34 $ 8.95
---------- ---------- ---------- ---------- ------------
Net investment loss(4)............................... (0.21) (0.13) (0.08) (0.01) (0.12)
Net realized and unrealized gain (loss) on
investments........................................ 12.50 7.35 4.66 (3.90) 5.10
---------- ---------- ---------- ---------- ------------
Net increase/(decrease) in net assets resulting from
investment operations.............................. 12.29 7.22 4.58 (3.91) 4.98
---------- ---------- ---------- ---------- ------------
Capital effect of rights offering...................... -- -- -- -- (0.50)
Capital effect of dividend reinvestment................ (1.06) -- -- -- --
Distributions:
Distributions from net realized gains................ (6.65) (0.76) -- (1.90) (0.09)
---------- ---------- ---------- ---------- ------------
NET ASSET VALUE, END OF YEAR........................... $ 23.15 $ 18.57 $ 12.11 $ 7.53 $ 13.34
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
MARKET VALUE, END OF YEAR.............................. $ 22.500 $ 13.500 $ 10.000 $ 6.875 $ 11.875
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Total investment return on market value.............. 148.77% 43.69% 45.45% (26.37)% 44.89%
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Ratios to average net
assets/supplemental data:
Net assets, end of year (000's)...................... $247,170 $151,376 $ 98,732 $ 61,430 $107,689
Ratio of net investment loss to average net
assets(1).......................................... (0.95)% (0.89)% (0.86)% (0.11)% (0.93)%
Ratio of operating expenses to average net
assets(1)(2)....................................... 1.72% 1.88% 2.03% 1.74% 1.73%
Portfolio turnover rate.............................. 95% 191% 148% 104% 150%
Average broker commission rate(3).................... $0.00148 $0.00233 N/A N/A N/A
- ------------------
(1) For the following years, the operating expenses of the fund reflect a waiver of fees by the investment adviser. 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)
Ratio of operating expenses to average
net assets....................................... -- -- 2.15% 1.99% 1.90%
(2) For the following years, the ratio of operating expenses to average net assets includes indirectly paid expenses.
Excluding indirectly paid expenses, the expense ratio would have been:
1.65% 1.85% 1.94% -- --
(3) The average broker commission rate will vary depending on the markets in which trades are executed and the instruments
traded.
(4) Based on average shares outstanding during the period.
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
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 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.
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, 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 under the direction of 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 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 according to
procedures established by the Fund's Board of Directors.
15
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Warrants: Under normal market conditions, the Fund invests primarily
in European warrants. The Fund's holdings of European warrants may consist
of equity warrants, basket warrants, index warrants, covered warrants,
interest rate warrants, currency options and long-term options of, or
relating to, European issuers. At the time of issue, the cost of a warrant
is substantially less than the cost of the underlying securities
themselves, and price movements in the underlying securities are generally
magnified in the price movements of the warrant. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security. If the market price of the underlying security is
below the exercise price of the warrant on its expiration date, the warrant
will generally expire without value.
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
16
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
realize a gain or loss depending on whether the sales proceeds from the
closing sale transaction are greater or less than the cost of the option.
When the Fund exercises a put option, it will realize a gain or loss from
the sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Fund exercises a call
option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
When the Fund writes a call option or a put option, an amount equal to
the premium received by the Fund is recorded as a liability, the value of
which is marked-to-market at each valuation date. When a written option
expires, the Fund realizes a gain equal to the amount of the premium
originally received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium originally received when the
option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is
eliminated. When a call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such
sale are increased by the 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. Further,
when the Fund writes an uncovered call option, the Fund must set aside
collateral sufficient to cover the cost of purchasing the underlying
security in the event that the counterparty to the transaction exercises
the contract.
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.
17
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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 or to segregate for the
benefit of 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 when earned.
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 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
18
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 temporary
and permanent differences and differing characterization of distributions
made by the Fund as a whole. As of March 31, 1998, the Fund increased
accumulated net realized gains by $12,571,121 and reduced undistributed net
investment income by $11,420,341 primarily to reflect the treatment of
short-term capital gains and distributions from short-term capital gains as
ordinary income and distributions from ordinary income, respectively, for
federal income tax purposes. These reclassifications have no impact on net
investment income, realized gain/loss or 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 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, 1998, the Fund incurred total brokerage
commissions of $137,039 of which $20,714 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.
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, 1998, the Fund incurred total
administrative and custody fees in the amount of $404,835 which, after receiving
a credit of $144,654 pursuant to the expense offset arrangement, resulted in a
net expense of $260,181.
19
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1998 amounted to
$171,048,788 and $183,200,777, respectively.
Activity in written options for the year ended March 31, 1998 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............................................. 16,388,077 101,170,320
Options exercised........................................... (957,554) (201,000)
Options expired............................................. (3,587,129) (61,808,450)
Options closed.............................................. (9,871,048) (34,505,020)
----------- -----------
Options outstanding at March 31, 1998....................... $ 4,478,926 6,324,100
----------- -----------
----------- -----------
</TABLE>
At March 31, 1998, 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 $103,024,902 and $1,245,052, respectively. Tax
cost for investment securities at March 31, 1998 was $137,722,674.
4. COMMON STOCK
The common stock transactions for the year ended March 31, 1998 were as
follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- -----------
<S> <C> <C>
Issued as reinvestment of dividends........................... 2,522,056 $34,047,754
</TABLE>
5. SUBSEQUENT EVENT
On April 16, 1998, the Board of Directors of the Fund approved a
transferable rights offering to the Fund's shareholders, subject to market
conditions and shareholder approval at the Fund's Annual Shareholder Meeting. A
shareholder will have the right to acquire one additional share of the Fund for
each three shares held as of the record date. If approved at the Fund's Annual
Shareholder Meeting, the rights offering is expected to occur in the first half
of the Fund's current fiscal year.
20
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. FEDERAL TAX INFORMATION (UNAUDITED)
The Fund has designated 13.68% of the distribution paid during the year
ended March 31, 1998, as a long term capital gain dividend.
7. 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, 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
December 31, 1997......... 405,692 .05 (426,219) (.04) (12,968,057) (1.59) (13,394,276) (1.63)
March 31, 1998............ 152,090 .01 (696,858) (.08) 67,472,211 6.33 66,775,353 6.25
</TABLE>
21
<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, 1998, 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, 1998 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, 1998, 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.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
April 24, 1998
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 is employed as a Senior Vice President of
Investments with the Adviser and is currently also a Senior Vice President and a
member of the Management Committee 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 a Vice President of Investments with
the Adviser since the second quarter of 1997 and a First Vice President of
Julius Baer Asset Management since January 1998.
YEAR 2000 AND EUROPEAN MONETARY UNION ('EMU') RISKS
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Adviser and the Fund's other service providers and
counter-parties do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the 'Year
2000 Problem.' The Adviser is taking steps to address the Year 2000 Problem with
respect to the computer systems that it uses and to obtain assurances that
comparable steps are being taken by the Fund's other major service providers. At
this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Fund.
The Fund is also taking steps to ensure that there will be no
accommodations necessary for the Fund to prepare for the upcoming EMU
conversion. The EMU is scheduled to begin on January 1, 1999 and will ultimately
result in the replacement of certain European currencies with the 'Euro.' At
this time, there can be no assurance that these steps will be sufficient to
avoid adverse impact on the Fund.
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.
23
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(Continued)
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. 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.
24
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(Continued)
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 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
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
Robert Discolo
President
Hansruedi Huber
Chief Investment Officer
Philipp Burger
Investment Officer
Michael Quain
Chief Financial Officer
and Secretary
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
COUNSEL
Paul, Weiss, Rifkind,Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
DIRECTORS
Antoine Bernheim
Lawrence A. Fox
Thomas J. Gibbons
Harvey B. Kaplan
Bernard Spilko*
Martin Vogel
* Chairman of the Board
<PAGE>
---------------------------------------------------------
THE EUROPEAN WARRANT FUND, INC.
ANNUAL REPORT
March 31, 1998
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]
