<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
Dear Shareholder:
Having been elected President of the European Warrant Fund (the "Fund") at
the May 22, 1998 Board Meeting, this marks the first occasion that I will be
reporting on the Fund's performance to you. Robert Discolo, the prior President,
tendered his resignation from the Fund in order to pursue other career
interests. Management wishes to thank Mr. Discolo for his dedication and hard
work throughout his tenure with the Fund.
The last six months, especially the last quarter, have been a very
tumultuous period for the global financial markets and consequently, the Fund
was not immune to the developing contagion. For the six-month period ended
September 30, 1998, the Fund had negative aggregate total returns of 27.39%
based on net asset value ("NAV") and 36.67% based on market price. The Fund was
outperformed by the FT/S&P Actuaries Europe Index in United States ("U.S.")
Dollars ("benchmark"), which had a negative return of 11.46% for the same
period. The reasons for the Fund's underperformance for the last six months
relative to the benchmark are detailed in the "Investment Policy" section below.
We believe that despite the volatile last quarter for global financial
markets, a worldwide recession is not imminent. Although there will be a
slowdown of GNP and corporate earnings in the U.S. and Europe, it should not be
severe. This means that even if corporate earnings are lower than forecast,
Europe should still show the best earnings growth worldwide. When you consider
the current bond-yield to earnings-yield ratio, the European equity markets are
again at an attractive level. Generally, the formation of Euroland* has had a
strong stabilizing effect for European economies in general and especially for
peripheral members such as Finland and Portugal. Both Finland and Portugal would
most certainly have been greatly harmed by the devaluation of their currencies
if not for the European Monetary Union ("EMU").
ECONOMIC REVIEW
The first half of 1998 was marked by a period of economic stability and
growth in global markets following the Asian crisis in the Fall of 1997. These
positive trends were the result of a decline in bond yields and positive
earnings reports, particularly in Europe. However, any hopes of a sustained
recovery and increased corporate earnings slowly faded during the third quarter.
The first wave of corrections in July was triggered by high valuations and the
impact of the Asian crisis on first half corporate results (e.g. Ericsson, ABB,
Imperial Chemical Industries). However, the real downturn in stock prices
occurred after the devaluation of the Russian Rouble and the Russian
government's announcement on August 17 of a moratorium on debt repayment.
Despite the comparatively minor importance of the Russian economy--less than 2%
of global economic output--the events compelled the global financial community
to reassess the prudence of investing in fundamentally unstable markets
worldwide. It was a widely held belief of private creditors that the
International Monetary Fund ("IMF") would always be able to step in and prevent
major credit losses when there were indications of acute economic turmoil. In
spite of past successes in Mexico and to a lesser extent in Asia, the IMF's
$20 billion rescue package to Russia was insufficient to bring about
stabilization in Russian financial markets. This in turn has enhanced the risk
of loss for private lenders such as banks and their shareholders and investors
in emerging markets. Credit risks, which were previously "socialized" via the
IMF, are now being privatized. The realization of this fact has led to the
sudden withdrawal of investors from volatile global markets and investments.
Significant amounts of money flowed out of global equity
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
markets, corporate bonds and emerging market countries into the safety and
quality of cash and government securities of leading nations such as the U.S.,
the United Kingdom ("UK") and Germany.
The worldwide flight to quality dramatically increased credit spreads, which
led to the collapse of many hedge funds and consequently big losses for most of
the international operating banks and brokers. The result was the liquidation
and "de-leveraging" of speculative positions that resulted in the weakening of
the U.S. dollar against all major currencies. As a rule, the reaction of
financial institutions to diminishing credit quality is to reduce credit volume
and raise interest rates. Fears of a worldwide credit crunch with a deflationary
spiral for the economy forced the Federal Reserve to lower interest rates twice
within a short time frame. The second reduction, which was unexpected when made
in October, inspired the investment community and led to a market rally in all
the key global equity markets.
INVESTMENT POLICY
Delta-Ratio measures the total leverage to the NAV. When the Delta-Ratio is
2 and the European market increases by $1.00, then the NAV of the Fund generally
should increase by $2.00. Conversely, if the European market decreases by $1.00,
then the NAV of the Fund generally should decrease by $2.00. Strategically we
define our Delta-Ratio Range in three different scenarios: 2-3 is bullish with
no clouds on the investment horizon; 1.5-2 means mildly bullish with some risks
of corrections; 1.25-1.5 shows caution in a flat market. The Fund entered the
financial turbulence of the last quarter with a Delta-Ratio of around 1.8 (upper
end of our neutral range). During this turbulence the Fund lowered the
Delta-Ratio to 1.5 (bottom level of our neutral range). Nevertheless, the Fund's
NAV lost approximately 31.4% this past quarter compared to a decrease in value
of 13.2 % for our benchmark. In theory, our Delta-Ratio of 1.8 during the
financial turbulence would have resulted in a NAV loss of 23.76 % (1.8 x -13.2%
benchmark loss) in the last quarter when matched to our benchmark. The Fund's
underperformance relative to the benchmark during the last quarter, and
consequently for this six month reporting period, is mostly attributable to four
key factors: 1) the Fund was underweight the UK which performed well in
comparison to continental Europe, 2) the Fund was overweight financials which
were severely hurt by the financial turmoil which developed, 3) the Fund held
6% of its portfolio in Eastern Europe which is not a component of the benchmark
index and 4) the Fund was somewhat hurt by cash held in U.S. Dollars which
weakened during the last quarter. The U.S. Dollar is also not a component of the
benchmark index.
Our underweighting in the UK helped the Fund in the past to outperform its
benchmark index, yet not in the last quarter. The Fund will increase its UK
exposure incrementally over the next few months because it appears as though
interest rates in the UK have peaked and the British Pound should weaken
further. This economic trend should brighten the outlook for UK equities,
especially exporters and domestic banks.
Our largest positions in Euroland were financial stocks that were held in
anticipation of large scale corporate restructuring and mergers. As a result of
the global financial turbulence and the extreme negative impact to the banking
industry, we lowered our exposure in bank financial stocks to underweighting
relative to our benchmark. During this period, volatility in the equity markets
was more severe in Continental Europe than in the U.S. due to the fact that more
than 30% of European listed equities are in the financial sector,
2
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
which is more than double that of the U.S. In the immediate future we are likely
to choose insurance companies over banks in the financial sector. The corporate
earnings of the big pan-European insurance companies are solid and more
predictable when compared to the more volatile banking industry, especially
those with large credit exposure to emerging markets.
The Fund gradually lowered its exposure in Eastern Europe. In Russia, for
example, we sold nearly all of our positions before the complete collapse of the
Russian financial system. We still believe in the EMU convergence likelihood of
Poland, the Czech Republic and Hungary and will gain exposure to these markets
with our large warrant position (maturity of nearly 6 years) in the well-managed
Baring Emerging Europe Trust.
Our strategy to sell OTC equity put options has benefited the Fund
considerably by compensating the Fund for the extremely high-implied volatility
of over 50% of the warrant positions in the portfolio. The Fund is required to
segregate cash in an amount that is equal to the underlying share value of the
written puts. At the end of the period the cash that was segregated for this
purpose represented 25% of the Fund's assets. The Fund currently holds
approximately 15% of our total assets in U.S dollars, mostly in the form of U.S.
Treasuries.
Theoretically, we attempt to purchase more longer-maturing warrants on
companies (issued by the company itself) that have good management and are
financially sound, such as ING JANUARY 2008, VIVENDI 2001 OR MUNICH RE JUNE
2002. These warrants are less volatile and will therefore stabilize the
portfolio during periods of market turmoil. Although there has been a recent
rally in the European equity markets, we are cautiously optimistic and look for
signs of a consistent and stable financial universe. Then we will slowly
increase the Fund's Delta-Ratio to the upper level of the neutral range of
1.5--2. We in turn hope to then make up for the Fund's underperformance in the
last quarter.
PORTFOLIO AND ADDITIONAL INFORMATION
The Fund's policy under normal market conditions is to invest 65% of total
assets in European Warrants. In response to the market turmoil of the last
quarter we decreased our European warrant holdings to below 65% in order to
minimize our exposure to the market turbulence. As a result of the recent market
rally in all key global equity markets, we have slowly increased our European
warrant holdings. At the close of business on November 12, 1998, the Fund was
62.41% invested in warrants with an average weighted life of 511 days. The net
asset value of the Fund was $18.92.
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.
3
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
The last six months have been a great challenge to the Fund. We believe that
the Fund has weathered the financial storm of the last quarter and shareholders
should benefit as soon as the financial universe becomes more stable. We would
like to thank the Fund's shareholders for their continued support and management
will continue to provide you with our best professional investment management
capabilities over the coming year.
Sincerely,
/s/ Michael Quain
---------------------
Michael Quain
President
November 12, 1998
* Euroland is comprised of the following countries: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
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.
4
<PAGE>
THE EUROPEAN WARRANT FUND, INC. FACT SHEET
(UNAUDITED)
- -------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
- -------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
% of Net Assets
U.S. Cash Equivalents and
Net Other Assets and
Liabilities 23%
Switzerland 10%
Eastern Europe 3%
Ireland 1%
Germany 14%
United Kingdom 17%
Italy 7%
Sweden 5%
France 7%
Netherlands 6%
Multinational 7%
September 30, 1998
- -------------------------------------------------------------------------------
MISCELLANEOUS
- -------------------------------------------------------------------------------
Average Life of Derivatives (9/30/98) 1.23 years
Average Gearing (9/30/98)++ 2.17%
Average Premium (9/30/98) 5.10%
Average Annual Premium (9/30/98) 1.19%
Year to Date Total Return* (1/1/98-9/30/98) (0.53)%
One Year Total Return* (10/1/97-9/30/98) (4.38)%
Average Annual Total Return Since Inception*
(7/17/90-9/30/98) 16.36%
- -------------------------------------------------------------------------------
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 1.83 times the
value of the share.
- -------------------------------------------------------------------------------
SECTOR WEIGHTINGS
- -------------------------------------------------------------------------------
SECTOR WEIGHTINGS
% of Net Assets
Index Warrants 33%
US Cash Equivalents and
Net Other Assets and
Liabilities 23%
Finance/Bank 6%
Consumer Goods/Services 10%
Finance/Insurance 8%
Utilities 5%
Mutual Funds 5%
Capital Goods 4%
interest Rate 2%
Basic Industries 2%
Energy 1%
Transport/Storage 1%
September 30, 1998
- -------------------------------------------------------------------------------
TOP TEN EQUITY WARRANT HOLDINGS SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------
MARKET VALUE PERCENTAGE+
1 FTSE 100 Index (WDR),
STK 4000, expires 5/16/99 $23,188,903 16.24%
2 MIB 30 (BT), STK 19000,
expires 5/19/00 11,777,737 8.25%
3 Scandinavian Telecommunication
Basket (WDR), expires 6/02/03 7,748,009 5.43%
4 DAX Cap Lepo (SOG), STK 5500,
expires 12/17/99 7,219,314 5.05%
5 CAC 40 Index Cap Call (BNP),
STK 2900, expires 3/31/99 5,551,343 3.89%
6 E-Top 100 (DB), STK 1970,
expires 6/30/00 4,415,500 3.09%
7 Baring Emerging Europe Trust,
expires 8/31/04 4,364,625 3.06%
8 Novartis/Ciba (WDR), expires
12/30/99 3,801,593 2.66%
9 Euro Blue Star (ABN), STK 1970,
expires 5/12/00 3,634,049 2.54%
10 Vivendi, expires 5/02/01 3,068,962 2.15%
Currency Hedge At September 30, 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.
5
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS
(percentages of total net assets)
September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--62.1%
[ALL NON-INCOME PRODUCING SECURITIES]
<S> <C> <C>
UNITED KINGDOM--13.4%
50,000 British Aerospace, expires 11/15/00.................. $ 755,588
10,000 FTSE 100 Index (WDR), STK 4000, expires 5/16/99...... 23,188,903
-----------
23,944,491
-----------
GERMANY--10.3%
10,000 BASF AG, expires 4/09/01............................. 1,962,485
100,000 Bayer AG (Citi), expires 6/15/00..................... 1,325,874
200,000 BMW Range (CB), expires 2/08/99...................... 58,635
7,000 Continental AG, expires 7/06/00...................... 850,211
50,000 Daimler-Benz AG (DB), expires 12/16/98............... 1,368,056
300,000 DAX Cap Lepo (SOG), STK 5500, expires 12/17/99....... 7,219,314
100,000 Dresdner Bank AG, expires 4/30/02.................... 1,238,520
200,000 Muenchener Rueckversicherungs-Gesellschaft AG Range
(CL), expires 12/02/98............................. 913,034
50,000 Muenchener Rueckversicherungs-Gesellschaft AG,
expires 6/03/02.................................... 1,974,452
10,000 Preussag AG, expires 4/30/01......................... 1,226,553
200,000 SAP AG Range (CL), expires 2/01/99................... 215,395
-----------
18,352,529
-----------
ITALY--6.6%
2,000,000 MIB 30 (BT), STK 19000, expires 5/19/00.............. 11,777,737
-----------
FRANCE--6.4%
890,000 Axa (SOG), STK 13100, expires 2/09/99................ 2,937,818
250,000 CAC 40 Index Cap Call (BNP), STK 2900, expires
3/31/99............................................ 5,551,343
2,000,000 Vivendi, expires 5/02/01............................. 3,068,962
-----------
11,558,123
-----------
MULTINATIONAL--6.1%
100,000 Dow Jones EURO STOXX 50 Index Cap Lepo (DB), STK
3000, expires 9/16/99.............................. 2,895,863
10,000 E-Top 100 (DB) STK 1970, expires 6/30/00............. 4,415,500
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
<S> <C> <C>
MULTINATIONAL--6.1%(CONTINUED)
250,000 Euro Blue Star (ABN), STK 1970, expires 5/12/00...... $ 3,634,049
-----------
10,945,412
-----------
SWITZERLAND--5.6%
350,000 Alusuisse (WDR), expires 1/15/02..................... 2,052,860
250,000 Nestle SA (WDR), expires 1/15/02..................... 2,353,367
300,000 Novartis/Ciba (WDR), expires 12/30/99................ 3,801,593
25,000 Roche Holdings (WDR), expires 12/01/00............... 1,860,065
100,000 Schweizerische Industrie-Gesellschaft Holding AG
(Von), expires 11/11/99............................ 29,689
-----------
10,097,574
-----------
NETHERLANDS--4.9%
25,000 ABN Amro (WDR), expires 5/08/99...................... 421,099
350,000 Ahold (GS), expires 7/25/99.......................... 1,922,730
100,000 ING Groep NV (ML), expires 1/06/99................... 180,376
100,000 ING Groep NV, expires 1/05/08........................ 1,840,898
50,000 Royal Dutch (WDR), expires 5/14/99................... 2,224,197
42,500 Wolters Kluwer NV (ML), expires 8/22/01.............. 2,234,409
-----------
8,823,709
-----------
SWEDEN--4.9%
1,000,000 OMX Cap Call (GS), STK 2300, expires 2/27/99......... 1,053,041
10,000,000 Scandinavian Telecommunication Basket (WDR), expires
6/02/03............................................ 7,748,009
-----------
8,801,050
-----------
EASTERN EUROPE--2.4%
7,725,000 Baring Emerging Europe Trust, expires 8/31/04........ 4,364,625
-----------
GREECE--0.7%
2,500,000 Greek Banks (BT), expires 4/26/04.................... 1,286,385
-----------
SPAIN--0.7%
100,000 Iberia Telecom Basket (ML), expires 11/16/98......... 1,279,508
-----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
SHARE VALUE
AMOUNT (NOTE 1)
- ---------- -----------
WARRANTS--(CONTINUED)
<S> <C> <C>
CZECH REPUBLIC--0.1%
99,000 BIC Bohemia Investment Co Sa, expires 5/14/01........ $ 154,127
-----------
TOTAL WARRANTS
(Cost $92,589,628)................................. 111,385,270
-----------
<CAPTION>
EQUITIES--10.1%
<S> <C> <C>
SWITZERLAND--3.9%
2,500 SAirGroup-Registered................................. 515,025
1,000 Valora Holding AG.................................... 226,285
13,000 Zurich Allied AG *................................... 6,467,053
-----------
7,208,363
-----------
GERMANY--2.2%
50,000 Siemens AG........................................... 2,761,241
25,000 Volkswagen AG Preferred *............................ 1,114,369
-----------
3,875,610
-----------
UNITED KINGDOM--1.2%
100,000 HSBC Holdings Plc (GBP .75 par)...................... 1,871,141
35,582 Standard Chartered Plc............................... 250,728
-----------
2,121,869
-----------
IRELAND--1.0%
100,000 Bank of Ireland...................................... 1,777,754
-----------
PORTUGAL--0.8%
30,000 Banco Comercial Portugues, SA........................ 810,295
10,000 Brisa-Auto Estradas de Portugal, SA.................. 455,806
1,000 Telecel-Comunicacaoes Pessoai, SA.................... 129,266
-----------
1,395,367
-----------
FRANCE--0.7%
25,000 Compagnie Generale des Etablissements Michelin
Class B............................................ 981,354
5,000 SGS-Thomson Microelectronics *....................... 231,956
-----------
1,213,310
-----------
NORWAY--0.2%
10,000 Norsk Hydro ASA ADR.................................. 358,750
-----------
GREECE--0.1%
11,110 Hellenic Telecommunication Organization SA........... 266,177
-----------
TOTAL EQUITIES
(Cost $13,768,522)................................. 18,217,200
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
PAR VALUE (NOTE 1)
- ---------- -----------
U.S. TREASURY SECURITIES--8.2%
<S> <C> <C>
USD 3,000,000 U.S. Treasury Bill, 4.40%, due
12/24/98 (a)....................................... $ 2,954,000
USD 10,000,000 U.S. Treasury Bond 6.375%, due
8/15/27 (b) ....................................... 11,773,438
-----------
TOTAL U.S. TREASURY SECURITIES
(Cost $12,797,644)................................. 14,727,438
-----------
<CAPTION>
FOREIGN GOVERNMENT BONDS--2.7%
UNITED KINGDOM--2.7%
<S> <C> <C>
GBP 4,000,000 United Kingdom War Loans 3.50% due, 12/29/49
(Cost $3,720,237).................................. 4,904,953
-----------
<CAPTION>
SHARE
AMOUNT
- ----------
INVESTMENT FUNDS--2.4%
<S> <C> <C>
GERMANY--1.4%
169,456 The New Germany Fund................................. 2,404,157
-----------
AUSTRIA--0.2%
50,000 Austria Fund......................................... 440,625
-----------
RUSSIA--0.2%
100,000 First NIS Regional Fund *............................ 400,000
-----------
EASTERN EUROPE--0.2%
10,000 East Europe Development Fund *....................... 124,000
50,000 Templeton Central & Eastern European Investment
Co.*............................................... 203,750
-----------
327,750
-----------
ROMANIA--0.1%
5,000 Romania Fund *....................................... 177,500
-----------
PORTUGAL--0.1%
10,000 Portugal Fund........................................ 168,750
-----------
IRELAND--0.1%
10,000 Irish Investment Fund, Inc........................... 165,000
-----------
CZECH REPUBLIC--0.1%
10,000 Komercni Banka Investment Fund *..................... 160,349
-----------
TOTAL INVESTMENT FUNDS
(Cost $5,449,166).................................. 4,244,131
-----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS--(Continued)
(percentages of total net assets)
September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- --------- ------ ----------
OPTIONS PURCHASED--1.0%
[ALL NON-INCOME PRODUCING SECURITIES]
<S> <C> <C> <C> <C>
NETHERLANDS--0.8%
80,000 Unilever OTC Call, expires 12/30/99........... NLG 95 $1,536,380
----------
SWEDEN--0.2%
4,000,000 OMX Call (WDR), STK 2300, expires 12/18/98.... SEK 575 305,957
----------
TOTAL OPTIONS PURCHASED (Cost $1,416,372)..................... 1,842,337
----------
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
- ---------
FOREIGN CORPORATE BONDS--0.4%
MULTINATIONAL--0.4%
<S> <C> <C>
ITL 250,000,000 International Bank for Reconstruction and
Development 0% Coupon Strip, 16.76%
effective rate, due 3/20/28 (Cost
$726,609)............................................... 700,567
----------
<CAPTION>
REPURCHASE AGREEMENTS--5.0%
UNITED STATES--5.0%
<S> <C> <C>
USD 8,973,301 Investors Bank & Trust Repurchase Agreement,
dated 9/30/98, due 10/01/98, with a maturity
value of $8,974,550, and an effective yield
of 5.01%, collateralized by a Federal
National Mortgage Association Obligation,
with a rate of 6.12%, a maturity date of
5/01/36 and a market value of $9,421,966
(Cost $8,973,301)....................................... 8,973,301
----------
TOTAL INVESTMENTS--91.9%
(Cost $139,441,479)................................................... 164,995,197
OTHER ASSETS AND LIABILITIES (NET)--8.1%................................ 14,476,727
-----------
TOTAL NET ASSETS--100.0%.............................................. $179,471,924
------------
------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
* Non-income producing security.
(a) This security is held as collateral for open futures contracts.
(b) 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
September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- --------- ------ ----------
<S> <C> <C> <C> <C>
GERMANY
10,000 Adidas OTC Put, expires 12/30/98.............. DEM 300 $ 810,423
2,500 BMW OTC Put, expires 12/30/98................. DEM 1,000 124,899
1,000 DAX OTC Put, expires 10/16/98................. DEM 4,200 65,815
1,000 DAX OTC Put, expires 12/18/98................. DEM 4,000 137,912
10,000 Fresenius Medical Care OTC Put, expires
12/30/98.................................... DEM 120 194,454
50,000 Lufthansa OTC Put, expires 12/30/98........... DEM 42 302,151
10,000 Mannesmann OTC Put, expires 12/30/98.......... DEM 160 92,440
25,000 Metro OTC Put, expires 11/30/98............... DEM 79.92 7,479
1,200 SAP (Listed) Put, expires 12/18/98............ USD 35 487,501
5,000 SAP OTC Put, expires 12/30/98................. DEM 1,250 1,254,974
50,000 Siemens OTC Call, expires 12/30/98............ DEM 125 77,781
100,000 Veba OTC Put, expires 12/30/98................ DEM 90 320,100
----------
3,875,929
----------
SWITZERLAND
1,000 Baloise OTC Put, expires 2/19/99.............. CHF 1,400 370,449
1,500 Baloise OTC Put, expires 7/29/99.............. CHF 800 108,617
6,000 Ciba OTC Call, expires 12/30/98 (a) .......... CHF 200 3,259
15,000 CS Group OTC Put, expires 12/30/98............ CHF 180 285,445
10,000 CS Group OTC Put, expires 12/30/98............ CHF 300 950,232
1,000 Holderbank OTC Put, expires 12/31/98.......... CHF 2,000 360,779
2,000 Novartis OTC Call, expires 12/30/99........... CHF 2,500 410,166
500 Novartis OTC Put (ML), expires 10/28/98....... CHF 2,000 4,914
500 Novartis OTC Put (WDR), expires 10/28/98...... CHF 2,000 3,995
200 Roche Holdings OTC Put, expires 11/16/98...... CHF 13,000 28,989
100 Roche Holdings OTC Put, expires 12/30/98...... CHF 15,000 86,787
5,000 Tag Heuer OTC Put , expires 12/30/98.......... CHF 178 339,757
3,000 Zurich Versicherungs-Gesellschaft OTC Call,
expires 12/21/98............................ CHF 1,000 15,604
----------
2,968,993
----------
UNITED KINGDOM
500,000 BAT OTC Put, expires 10/16/98................. GBP 3 8,490
3,333 FTSE 100 OTC Call, expires 5/12/99............ GBP 5,700 1,659,411
50,000 HSBC Holdings OTC Call, expires 1/14/99....... GBP 15 36,728
800,000 Lloyds TSB Group OTC Put, expires 12/30/98.... GBP 700 828,600
----------
2,533,229
----------
SWEDEN
1,000 Ericsson (Listed) Call, expires 10/18/98
(a) ........................................ USD 30 12,501
1,000 Ericsson (Listed) Put, expires 10/18/98....... USD 25 662,500
90,000 OMX OTC Call, expires 12/18/98................ SEK 575 778,124
100 Pharmacia Upjohn (Listed) Put, expires
1/16/99..................................... USD 35 4,063
----------
1,457,188
----------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
SCHEDULE OF WRITTEN OPTIONS--(Continued)
September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
STRIKE VALUE
CONTRACTS PRICE (NOTE 1)
- --------- ------ ----------
NETHERLANDS
<S> <C> <C> <C> <C>
100,000 ABN Amro OTC Call, expires 5/08/99............ NLG 50 $ 29,738
25,000 Ahold OTC Call, expires 11/30/98.............. NLG 70 11,539
10,000 ASML OTC Put, expires 10/19/98................ NLG 60 141,595
100,000 Elsevier OTC Put, expires 12/31/98............ NLG 30 67,866
50,000 ING Groep NV OTC Call, expires 1/06/99........ NLG 90 289,663
----------
540,401
----------
MULTINATIONAL
10,000 Dow Jones EURO STOXX 50 OTC Call, expires
11/30/98 (a)................................ ECU 3,200 502,161
----------
UNITED STATES
600 Chrysler (Listed) Put, expires 1/16/99........ USD 50 352,500
----------
FRANCE
25,000 Michelin OTC Call, expires 12/30/98 (a) ...... FRF 400 16
30,000 Rhone Poulenc OTC Put, expires 12/30/98....... FRF 300 295,049
----------
295,065
----------
CURRENCY OPTIONS
5,000,000 USD Put/DEM Call, expires 12/14/98............ USD 1.75 267,748
----------
SPAIN
100,000 Endesa OTC Put, expires 12/30/98.............. ESP 3,500 247,861
----------
ITALY
300,000 BD Roma OTC Put, expires 12/30/98............. ITL 3,200 79,063
200,000 MIB 30 OTC Call, expires 12/18/98............. ITL 39,000 6,243
----------
85,306
----------
FINLAND
25,000 Nokia OTC Call, expires 12/18/98 (a).......... FIM 500 76,889
----------
TOTAL WRITTEN OPTIONS (Premiums received $12,523,749)................... $13,203,270
-----------
-----------
</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.
See accompanying notes to financial statements.
10
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC,
SCHEDULE OF OPEN FINANCIAL FUTURES CONTRACTS SOLD
September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
NET UNREALIZED
NUMBERS OF EXPIRATION CONTRACT APPRECIATION
CONTRACTS CONTRACTS DATE VALUE OF CONTRACTS
- -------------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
7 DAX Index 12/18/98 $ (1,861,250) $ 196,847
1 DAX Index 12/18/98 (265,893) 28,151
2 DAX Index 12/18/98 (531,786) 56,840
1 DAX Index 12/18/98 (265,893) 28,540
39 DAX Index 12/18/98 (10,369,821) 1,117,719
20 MIB 30 Index 12/18/98 (3,384,420) 537,861
----------
NET UNREALIZED APPRECIATION OF OPEN FUTURES CONTRACTS $1,965,958
----------
----------
</TABLE>
GLOSSARY OF TERMS
CHF -- Swiss Franc
DEM -- German Deutsche Mark
ECU -- European Currency Unit
ESP -- Spanish Peseta
FIM -- Finnish Markka
FRF -- French Franc
GBP -- British Pound
ITL -- Italian Lira
NLG -- Netherlands Guilder
SEK -- Swedish Krona
USD -- United States Dollar
See accompanying notes to financial statements.
11
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $139,441,479)
(Note 1).................................... $164,995,197
Foreign currency, at value (Cost $22,406,947)
(Note 1) *.................................. 22,993,306
Receivable for investment securities sold.... 9,572,521
Receivable for variation margin on open
financial futures contracts (Note 1)........ 657,885
Dividends and interest receivable............ 381,829
Prepaid expenses............................. 116,691
------------
Total assets.......................... 198,717,429
------------
LIABILITIES:
Written options, at value (Premiums received
$12,523,749) (Notes 1 and 3)................ $ 13,203,270
Payable for investment securities
purchased................................... 5,194,498
Investment advisory fee payable (Note 2)..... 592,774
Shareholder servicing fee payable
(Note 2).................................... 148,193
Accrued expenses and other payables.......... 106,770
------------
Total liabilities..................... 19,245,505
------------
TOTAL NET ASSETS.................................. $179,471,924
------------
------------
NET ASSETS CONSIST OF:
Par value.................................... $ 10,676
Paid-in capital in excess of par value....... 117,443,345
Undistributed accumulated net investment
income...................................... 14,596,068
Accumulated net realized gain on
investments................................. 19,927,029
Net unrealized appreciation on investments... 27,494,806
------------
TOTAL NET ASSETS (equivalent to $16.81 per share
based on 10,675,768 shares of common stock
outstanding from 100,000,000 authorized with
$0.001 par value)............................... $179,471,924
------------
------------
</TABLE>
- ------------------
* Balance consists of German Deutsche Mark valued at $17,939,166 and
various other currencies with value totaling $5,054,140.
See accompanying notes to the financial statements.
12
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 1998 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................... $ 576,380
Dividends (net of foreign withholding taxes
of $62,410)................................. 455,892
------------
Total Investment Income............... 1,032,272
------------
EXPENSES:
Investment advisory fee (Note 2)............. 1,544,069
Legal and audit fees......................... 322,385
Administration and custodian fees
(Note 2).................................... 237,849
Shareholder servicing fee (Note 2)........... 148,193
Printing and postage fees.................... 79,852
Transfer agent fees.......................... 30,083
Insurance premium expense.................... 23,452
Directors' fees and expenses (Note 2)........ 18,225
Other........................................ 14,428
------------
Total Expenses........................ 2,418,536
Less: Fees paid indirectly
(Note 2)........................ (214,135)
Less: Fees waived (Note 2)......... (148,193)
------------
Net expenses.......................... 2,056,208
NET INVESTMENT LOSS............................... (1,023,936)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain (loss) on:
Securities transactions................. 7,256,717
Written option transactions............. (2,009,809)
Realized gain distributions from
investment company shares............. 1,253,750
Financial futures contracts............. 1,125,181
Forward foreign currency contracts...... 965,126
Foreign currencies and net other
assets................................ (169,318)
------------
Net realized gain on
investments.................. 8,421,647
------------
Net change in net unrealized appreciation
(depreciation) of:
Securities.............................. (77,376,903)
Financial futures contracts............. 1,965,958
Written options......................... (559,690)
Foreign currencies and net other
assets................................ 874,357
------------
Net unrealized depreciation of
investments.................. (75,096,278)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS... (66,674,631)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $(67,698,567)
------------
------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, 1998 YEAR ENDED
(UNAUDITED) MARCH 31, 1998
------------------ --------------
<S> <C> <C>
CHANGE IN NET ASSETS FROM OPERATIONS
Net investment loss..................... $ (1,023,936) $ (1,832,816)
Net realized gain on investments........ 8,421,647 48,098,681
Net unrealized appreciation
(depreciation) of investments......... (75,096,278) 69,702,672
------------ ------------
Net increase (decrease) in net assets
resulting from operations............. (67,698,567) 115,968,537
Distributions to shareholders from:
Net realized gains on investments..... -- (54,222,184)
Net increase in net assets resulting
from 0 and 2,522,056 shares issued
from dividend reinvestment............ -- 34,047,754
------------ ------------
Net increase (decrease) in net assets... (67,698,567) 95,794,107
NET ASSETS:
Beginning of year..................... 247,170,491 151,376,384
------------ ------------
End of period (including accumulated
undistributed net investment income
of $14,596,068 and $15,620,004
respectively)...................... $179,471,924 $247,170,491
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the financial statements.
14
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
FINANCIAL HIGHLIGHTS
For a Fund share outstanding throughout each period
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, ------------------------------------------------------------------
1998 MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
(UNAUDITED) 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of
period............................... $ 23.15 $ 18.57 $ 12.11 $ 7.53 $ 13.34 $ 8.95
--------- -------- -------- -------- -------- --------
Net investment loss(3)................. (0.10) (0.21) (0.13) (0.08) (0.01) (0.12)
Net realized and unrealized gain (loss)
on investments....................... (6.24) 12.50 7.35 4.66 (3.90) 5.10
--------- -------- -------- -------- -------- --------
Net increase/(decrease) in net assets
resulting from investment
operations........................... (6.34) 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 PERIOD........... $ 16.81 $ 23.15 $ 18.57 $ 12.11 $ 7.53 $ 13.34
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
MARKET VALUE, END OF PERIOD.............. $ 14.250 $ 22.500 $ 13.500 $ 10.000 $ 6.875 $ 11.875
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
Total investment return on market
value................................ (36.67)% 148.77% 43.69% 45.45% (26.37)% 44.89%
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
Ratios to average net assets/supplemental
data:
Net assets, end of period (000's)...... $ 179,472 $247,170 $151,376 $ 98,732 $ 61,430 $107,689
Ratio of net investment loss to average
net assets(1)........................ (0.82)%+ (0.95)% (0.89)% (0.86)% (0.11)% (0.93)%
Ratio of operating expenses to average
net assets(1)(2)..................... 1.83%+ 1.72% 1.88% 2.03% 1.74% 1.73%
Portfolio turnover rate................ 37% 95% 191% 148% 104% 150%
</TABLE>
- ------------------------
(1) For the following periods, the operating expenses of the Fund reflect a
waiver of fees by the Fund's investment adviser. Had such action not been
taken, the net investment income per share and the operating expense ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment loss per share......... $ (0.11) -- -- $(0.09) $(0.04) $(0.14)
Ratio of operating expenses to
average
net assets.......................... 1.96%+ -- -- 2.15% 1.99% 1.90%
(2) 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:
1.66%+ 1.65% 1.85% 1.94% -- --
</TABLE>
(3) Based on average shares outstanding
during the period.
+Annualized
See accompanying notes to the financial statements.
15
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The European Warrant Fund, Inc. (the "Fund") was incorporated under the
laws of the State of Maryland on May 23, 1990 and is a non-diversified,
closed-end management investment company registered under the Investment Company
Act of 1940, as amended. The Fund's investment objective is enhanced capital
growth, which the Fund seeks to achieve by investing primarily in equity
warrants of Western European issuers.
The 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.
16
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(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
17
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
loss equal to the premium paid. When the Fund enters into a closing sale
transaction, the Fund will realize a gain or loss depending on whether the
sales proceeds from the closing sale transaction are greater or less than
the cost of the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid.
When the Fund exercises a call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally
paid.
When the Fund writes a call option or a put option, an amount equal to
the premium received by the Fund is recorded as a liability, the value of
which is marked-to-market at each valuation date. When a written option
expires, the Fund realizes a gain equal to the amount of the premium
originally received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium originally received when the
option was sold) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is
eliminated. When a call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such
sale are increased by the 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
18
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
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 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-
19
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
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 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.
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 net assets.
Effective July 1, 1998, the Fund pays Julius Baer Asset Management .25% of
the value of the Fund's average net assets for shareholder servicing and other
services. These services replace services previously provided by the Adviser and
were approved by the Board of Directors at a special meeting on July 23, 1998.
At the same time, the Adviser agreed to waive .25% of its 1.25% advisory fee.
For the six months ended September 30, 1998, the Fund incurred total
brokerage commissions of $191,776 of which $20,116 was paid in total to
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 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 six months ended September 30, 1998, the Fund incurred
total administrative and custody fees in the amount of $237,849 which, after
receiving a credit of $214,135 pursuant to the expense offset arrangement,
resulted in a net expense of $23,714.
20
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)--(Continued)
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the six months ended September 30, 1998 amounted to
$83,540,002 and $99,462,816, respectively.
Activity in written options for the six months ended September 30, 1998 was
as follows:
<TABLE>
<CAPTION>
NUMBER OF
PREMIUM CONTRACTS
----------- -----------
<S> <C> <C>
Options outstanding at March 31, 1998........................ $ 4,478,926 6,324,100
Options written.............................................. 16,110,875 27,832,275
Options exercised............................................ (153,579) (13,300)
Options expired.............................................. (2,833,327) (19,754,242)
Options closed............................................... (5,079,146) (6,656,300)
----------- -----------
Options outstanding at September 30, 1998.................... $12,523,749 7,732,533
----------- -----------
----------- -----------
</TABLE>
At September 30, 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 $36,902,364 and $11,348,646, respectively.
4. 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
June 30, 1998............... 634,783 .06 (361,820) (.04) 14,679,500 1.38 14,317,680 1.34
September 30, 1998.......... 397,489 .04 (662,116) (.06) (81,354,131) (7.62) (82,016,247) (7.68)
</TABLE>
21
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION (Unaudited)--(Continued)
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 Ltd. since January 1998.
YEAR 2000
Like other funds and business organizations around the world, the Fund
could be adversely affected if the computer systems used by the Adviser and the
Fund's other service providers do not properly process and calculate
date-related information for the year 2000 and beyond. The Fund has been
informed that the Adviser, and the Fund's other service providers (i.e.,
Administrator, Transfer Agent, Distributor and Custodian) have developed and are
implementing clearly defined and documented plans to minimize the risk
associated with the Year 2000 problem. These plans include the following
activities: inventorying of software systems, determining inventory items that
may not function properly after December 31, 1999, reprogramming or replacing
such systems and retesting for Year 2000 readiness. In addition, the service
providers are obtaining assurances from their vendors and suppliers in the same
manner. Non-compliant Year 2000 systems upon which the Fund is dependent may
result in errors and account maintenance failures. The Fund has no reason to
believe that (1) the Year 2000 plans of the Adviser and the Fund's other service
providers will not be completed by December, 1999, and (2) the costs currently
associated with the implementation of their plans will have a material adverse
impact on the business, operations or financial condition of the Fund or its
service providers.
In addition, the Year 2000 problem may adversely affect the companies in
which the Fund invests. For example, these companies may incur substantial costs
to correct the problem and may suffer losses caused by data processing errors.
Since the ultimate costs or consequences of incomplete or untimely resolution of
the Year 2000 problem by the Fund's service providers are unknown to the Fund at
this time, no assurance can be made that such costs or consequences will not
have a material adverse impact on the Fund or its service providers.
The Fund and the Adviser will continue to monitor developments relating to
the Year 2000 problem, including the development of contingency plans for
providing back-up computer services in the event of a systems failure.
EUROPEAN ECONOMIC AND MONETARY UNION
Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro."
Each such participating country anticipates replacing its existing currency with
the Euro on January 1, 1999. Other European countries may participate after that
date. This conversion presents unique uncertainties, including whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the legal treatment of certain
outstanding
22
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION (Unaudited)--(Continued)
financial contracts after January 1, 1999 that refer to existing currencies
rather than the Euro; the establishment of exchange rates for existing
currencies and the Euro; and the creation of suitable clearing and settlement
payment systems for the new currency. These or other factors, including
political and economical risks, could cause market disruptions before or after
the interaction of the Euro, and could adversely affect the value of securities
held by the Fund.
The Fund has been informed that the Adviser, and the Fund's other service
providers, as applicable, are taking steps to minimize the risk associated with
the conversion. In addition, where appropriate, certain service providers are
obtaining assurances from their vendors in the same manner.
Since the ultimate consequences of the conversion are unknown to the Fund
at this time, no assurance can be made that such consequences will not have a
material adverse impact on the Fund. The Fund and the Adviser will continue to
monitor developments relating to the conversion.
INVESTMENT POLICY CHANGES
The following changes to the non-fundamental investment policies of the
Fund and additional investment strategies have been implemented since the
issuance of the Fund's Prospectus dated September 3, 1993.
1. The Fund may write put options on securities and foreign currencies
with total market value not exceeding 5% of total assets.
2. The policy that limits the value of the underlying securities on
which covered call options are written to 35% of the total assets of the
Fund has been eliminated.
3. The Fund may enter into repurchase agreements with primary
government securities dealers recognized by the Federal Reserve Bank of New
York, member banks of the Federal Reserve System or its custodian.
4. The Board has further clarified the existing policy that the Fund
is required to concentrate at least 25% of its assets in securities issued
by banks or bank holding companies by eliminating the inconsistent
disclosure that the Investment Adviser does not anticipate that it will
have more than 25% of its assets in bank issued warrants or similar bank
issued equity securities.
5. The Fund has begun using portfolio securities (as opposed to cash
or cash equivalents) to satisfy asset segregation requirements in
connection with certain trading practices.
6. The policy which allows the Fund to invest up to 5% of its total
assets in Eastern European equity securities or warrants has been amended
to allow the Fund to invest up to 10% of its total assets in such
instruments and the definition of Eastern Europe was expanded to include
the Newly Independent States of the ex-Soviet Union.
7. The Fund may both purchase and sell interest rate futures contracts
that are traded on regulated exchanges, including non-U.S. exchanges to the
extent permitted by the U.S. Commodity Futures Trading Commission.
8. Fund shareholders changed the Fund's status from a diversified to a
non-diversified management investment company at the Fund's June 26, 1997
annual meeting.
23
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION (Unaudited)--(Continued)
RIGHTS OFFERING
On April 17, 1998, the Board of Directors approved a transferable rights
offering to shareholders subject to their approval at the Fund's Annual
Shareholder meeting on May 28, 1998. Shareholders approved the proposal at the
Annual meeting by a majority of 80% of shares voting. However, on August 11,
1998, the Board of Directors decided to defer the rights offering upon the
recommendation of the Fund's management and Salomon Smith Barney, Inc., the lead
manager of the proposed rights offering. The Board considered several factors at
that time including the wider spread in the discount between the Fund's NAV and
its market price and the volatility in both the U.S. and European equity
markets. The Board may reconsider the possibility of a rights offering in 1999.
DISCOUNT
On various occasions, the Board of Directors has considered several
alternatives to address the Fund's discount. The Board will continue to discuss
alternatives at future Board meetings.
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.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by Investors Bank & Trust ("IBT") as
agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") may be reinvested by the broker or
nominee in additional shares under the Plan, but only if the service is provided
by the broker or nominee, unless the shareholder elects to receive distributions
in cash. A shareholder who holds Common Stock registered in the name of a broker
or other nominee may not be able to transfer the Common Stock to another broker
or nominee of a broker or other nominee and continue to participate in the Plan.
Investors who own Common Stock registered in street name should consult their
broker or nominee for details regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. If the
market price per share on the valuation date equals or exceeds net asset value
per share on that date, the Fund will issue new shares to participants valued at
net asset value or, if the net asset value is less than 95% of the market price
on the valuation date, then valued at 95% of the market price. If net asset
value per share on the valuation date exceeds the market price per share on that
date, participants in the Plan will receive shares of stock from the Fund valued
at market price. The valuation date is the dividend or distribution payment date
or, if that date is not a New York Stock Exchange trading day, the next
proceeding trading day. To the extent the Fund issues shares of Common Stock to
participants in the Plan at a discount to net asset value, the remaining
shareholders' interests in the Fund's net assets will be diluted
proportionately. If the Fund should declare an income dividend or capital gains
distribution payable only in cash, IBT will, as agent for the participants, buy
Fund
24
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION (Unaudited)--(Continued)
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.
DIVIDEND REINVESTMENT PRIVILEGE
Under the Fund's Dividend Reinvestment Privilege (the "Reinvestment
Privilege"), a stockholder who is not otherwise participating in the Dividend
Reinvestment and Cash Purchase Plan will have all distributions to which the
Reinvestment Privilege applies reinvested automatically by Investors Bank &
Trust ("IBT") as agent under the Reinvestment Privilege, unless the stockholder
elects to receive cash.
Whenever the Directors of the Fund declare a capital gains distribution or
an income dividend payable either in shares or cash, the Fund will send
stockholders who are not otherwise participating in the Plan a notice (the
"Notice") indicating a distribution payable in cash or additional shares issued
by the Fund. Stockholders who are not otherwise participating in the Plan will
be given the option to receive the distribution in additional shares or cash,
net of any applicable U.S. withholding tax. Stockholders who desire to receive
the distribution in additional shares need do nothing further. Stockholders who
desire the distribution in cash must notify the Fund in the form specified in
the Notice. Any cash payments will be paid by the Fund in U.S. dollars by check,
mailed directly to the stockholder by IBT as the Fund's dividend paying agent.
25
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION (Unaudited)--(Continued)
Whenever market price per share is equal to or exceeds net asset value per
share at the time shares are valued for the purpose of determining the number of
shares equivalent to the cash dividend or capital gains distribution, 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 of the shares on the valuation
date, then valued at 95% of the market price. If net asset value of the shares
on the valuation date exceeds the market price of shares on that date,
participants will receive shares from the Fund valued at market price. The
valuation date is the dividend or distribution payment date or, if that date is
not a New York Stock Exchange trading day, the next preceding trading day. To
the extent the Fund issues shares of Common Stock to participants in the Plan at
a discount to net asset value, the remaining shareholders' interests in the
Fund's net assets will be diluted proportionately. If the Fund should declare an
income dividend or capital gains distribution payable only in cash, participants
in the Reinvestment Privilege will receive cash while participants in the
Dividend Reinvestment and Cash Purchase Plan will receive the distribution as
provided for in such Plan.
IBT will confirm in writing to the stockholder each acquisition made for
her or his account as soon as practicable but not later than 60 days after the
date thereof. Although the stockholder may from time to time have an undivided
fractional interest (computed to three decimal places) in a share of the Fund,
no certificates for a fractional share will be issued. However, dividends and
distributions on fractional shares will be credited to the stockholder's account
under the Reinvestment Privilege, the IBT will adjust for any such undivided
fractional interest in cash at the market value of the shares at the time of
termination. Any stock dividends or split shares distributed by the Fund on
shares held by IBT for the stockholder will be credited to the stockholder's
account.
The Reinvestment Privilege may be terminated by IBT or the Fund as applied
to any dividend or distribution paid subsequent to notice of the termination in
writing mailed to the participants in the Reinvestment Privilege at least 30
days prior to the record date for the payment of any dividend or distribution by
the Fund. Upon any termination of the Reinvestment Privilege with respect to the
reinvestment of dividends and distributions generally, 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.
These terms and conditions may be amended or supplemented by IBT or the
Fund at any time or times but, except when necessary or appropriate to comply
with applicable law or the rules or policies of the Securities and Exchange
Commission or any other regulatory authority, only by mailing to participants in
the Reinvestment Privilege appropriate written notice at least 30 days prior to
the effective date thereof. Upon any such appointment of a successor agent for
the purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor agent, for stockholders' accounts, all
dividends and distributions payable on the shares held in the stockholders' name
or under the Reinvestment Privilege for retention or application by such
successor agent as provided in these terms and conditions.
Information concerning the Reinvestment Privilege may be obtained from IBT
at 1-(800) 387-6977.
26
<PAGE>
- --------- THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION--(CONTINUED)
INVESTMENT ADVISER
Julius Baer Securities Inc.
330 Madison Ave.
New York, New York 10017
ADMINISTRATOR, CUSTODIAN
& TRANSFER AGENT
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
OFFICERS
Michael Quain
President, Chief Financial Officer,
Treasurer and Secretary
Hansruedi Huber
Chief Investment Officer
Philipp Burger
Investment Officer
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
SHAREHOLDER SERVICING AGENT
Julius Baer Asset Management Ltd., Zurich
Brandschenkestrasse 40
CH-8010 Zurich
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.
SEMI-ANNUAL
REPORT
SEPTEMBER 30, 1998
THE EUROPEAN WARRANT FUND, INC.
330 MADISON AVENUE
NEW YORK, NEW YORK 10017
[LOGO]
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.
