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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06017
---------------------------------------------
The European Warrant Fund, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
330 Madison Avenue, New York, NY 10017
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Michael Quain
330 Madison Avenue, New York, NY 10017
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-297-3600
------------------
Date of fiscal year end: 03/31/2004
--------------------------
04/01/2003-
Date of reporting period: 03/31/2004
-------------------------
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ITEM 1. REPORTS TO STOCKHOLDERS.
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THE EUROPEAN WARRANT FUND, INC.
ANNUAL REPORT
MARCH 31, 2004
[EWF LOGO]
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THE EUROPEAN WARRANT FUND, INC.
Dear Fellow Stockholder:
In mid-January, I conveyed to you that the Board of Directors ( the
"Board") had concluded that The European Warrant Fund's ( the "Fund") current
investment strategy of outperforming European equity markets in bullish markets
was unlikely to be realized in the future. After considering a number of
alternatives, the Board, subject to stockholder approval, determined it was in
the best interest of the Fund and its stockholders to convert the Fund from a
closed-end to open-end fund structure and change the principal investment
strategy to a global equity policy.
A proxy was sent to stockholders of record on February 11, 2004 and
stockholders have responded positively to the proposals. In fact, at the
stockholder meeting which occurred on March 24, 2004, a majority of the
outstanding shares voted in favor of the Board's recommendations. The proxy also
asked stockholders to alter the Board's classified structure and to elect
directors for an indefinite, rather than a three-year term. The intent was to
conform the Board's structure to that of a traditional open-end mutual fund.
This proposal, however, required a 75% vote . Therefore, to date, neither this
proposal nor the proposals that were contingent upon its approval have
succeeded. After two adjournments of the stockholders meeting, the Board met
again in an attempt to achieve the solution desired by the vast majority of
stockholders. As a result, the Board determined to clarify the vote required to
open-end the Fund.
On June 3, 2004, the stockholders meeting will reconvene. As of today,
nearly 69% of all outstanding shares have been voted with approximately 93% of
the voted shares favoring the Board's recommendation. Stockholders have the
opportunity to change their votes until the meeting reconvenes by contacting
D.F. King & Co., Inc. the Fund's proxy solicitation agent at 1-866-342-4881. If
the voting results remain substantially the same, we expect that the proposals
to open-end the Fund and change its investment objective will be approved.
Thereafter, action will be taken to delist the Fund's shares from the New York
Stock Exchange and stockholders who wish to do so, may redeem their shares at
net asset value ("NAV"). Despite the fact that a 2% redemption fee will be
imposed on redemptions as a tool to discourage short-term and frequent trading,
such a fee will not be imposed on shares held at the time of the conversion to
an open-end fund. The Board feels strongly that current Fund stockholders should
be afforded immediate liquidity.
During the fiscal year ended March 31, 2004 ("Reporting Period"), the Fund
continued to operate under its current strategy. During the greater part of the
Reporting Period, portfolio management took a market neutral position. The
Fund's leverage was low, averaging approximately 1.00 over the Reporting Period
and exposure to single issuers was limited. In fact, at the end of the Reporting
Period, 100% of the Fund's investments were in index options on the DAX, SMI and
Pan-European indices. On the sector side, the Fund has been overweight resources
and oil companies. The holding in the DJ Stoxx energy Index has been a positive
contributor to performance following the strong rise in crude oil prices since
October 2003.
Past performance is no indication of future results. More recent returns may be
more or less than those shown. Performance figures given assume reinvestment of
dividends at market and do not take into account any adjustment for taxes
payable on reinvested distributions. Performance data for the Fund reflects
expense waivers in effect. Without such waivers, total returns for the Fund
would have been lower. Investment returns and principal value will fluctuate so
that an investor's shares when sold may be worth more or less than their
original cost. Indices do not incur expenses and are not available for
investment.
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As of the end of the Reporting Period, however, the Fund's performance
remained poor. Its annualized total returns based on NAV for the one, three,
five, and ten year periods were 4.98%, (30.65%), (28.75%), and (4.99%),
respectively. Based on market price, the Fund's performance was 19.80%,
(29.26%), (25.09%), and (4.05%) over the same periods. When compared to its
benchmark, the Financial Times/Standard & Poor's Actuaries Europe Index in the
U.S., the Fund's NAV over the same periods under performed its benchmark which
posted returns of 50.38%, 0.45%, (1.99%) and 6.80%. The reason for the Reporting
Period underperformance is primarily related to the Fund's low delta level
during the equity market rebound in the second and third quarters of 2003
together with volatility decline during the same period. During the second half
of the Reporting Period the Fund's NAV did slightly outperform its benchmark by
posting a return of 21.63% compared to the benchmark return of 20.37%. The
benchmark is a broad index of the European equity markets in U.S. Dollars which
includes the major European countries including the United Kingdom, but
excluding Eastern Europe. The Fund is a unique product, which invests primarily
in warrants of Western European companies or indices comprised of Western
European companies. In view of the fact that neither the Fund's benchmark nor
any other benchmark composite includes warrants as part of its index, it is
important to bear in mind the correlation between the Fund and its benchmark is
imperfect.
We would like to refer stockholders to the website of the Fund,
www.europeanwarrantfund.com. Stockholders visiting the address can find detailed
information such as the current share price, net asset value, premium, discount
and delta. In addition, the website can be a useful tool for stockholders to
read recent press releases on the Fund as well as helpful stockholder
information and guidance on issues related to the open-end conversion if it does
occur.
Despite the disappointing performance results, I am hopeful about the
Fund's new direction if the stockholders approve the conversion to an open-end
Fund. As an open-end Fund with a global equity mandate, the Fund will be managed
by Brett Gallagher and Rudolph-Riad Younes of Julius Baer Investment Management,
LLC, who have demonstrated solid performance results in the firm's global equity
mandate. Consequently, we look forward to a brighter future in the days to come
for stockholders and are grateful to our stockholders for their continued
support.
Sincerely,
/s/ Michael Quain
Michael Quain
President and Chief Executive Officer
May 18, 2004
The views expressed in this stockholder 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 stockholder letter contains certain forward looking
statements regarding the intent, belief or current expectations of the
President. Stockholders 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.
2
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THE EUROPEAN WARRANT FUND, INC. FACT SHEET
(UNAUDITED)
[CHART]
COUNTRY WEIGHTINGS+
<Table>
Multinational 56%
Germany 27%
Switzerland 17%
</Table>
March 31, 2004
[CHART]
SECTOR WEIGHTINGS+
<Table>
Index Warrants 100%
</Table>
March 31, 2004
MISCELLANEOUS
<Table>
Average Life of Derivatives (3/31/04) 1.34 years
Average Gearing (3/31/04)++ 1.10 times
Average Premium (3/31/04) 0.03%
Average Annual Premium (3/31/04) 0.12%
Year to Date Total Return* (1/1/04-3/31/04) (1.56%)
One Year Total Return* (4/1/03-3/31/04) 4.98%
Three Year Total Return* (4/1/01-3/31/04) (30.65%)
Five Year Total Return* (4/1/99-3/31/04) (29.75%)
Ten Year Total Return* (4/1/94-3/31/04) (4.99%)
Average Annual Total Return Since Inception*
(7/17/90-3/31/04) (1.35%)
</Table>
WARRANT CHARACTERISTICS
The cost of a warrant is substantially less than the cost of the underlying
securities themselves, and price movements in the underlying securities are
generally magnified in the price movements of the warrant. This leveraging
effect enables an investor to gain exposure to the underlying instrument with a
relatively low capital investment with corresponding risk. Currently, the
underlying equity exposure of a Fund share is approximately 0.94 times the value
of the share.
WARRANT HOLDINGS AT MARCH 31, 2004
<Table>
<Caption>
MARKET VALUE PERCENTAGE+
1 Dow Jones Energy STOXX (EXA),
STK 135, expires 10/28/04 $ 7,797,100 22.85%
2 Dow Jones EURO STOXX 50 (JPM)
expires 9/10/07 6,817,937 19.98%
3 Swiss Market Index (ZKB), STK 3000,
expires 12/17/06 5,602,873 16.42%
4 Dax Discount (CITI), STK 2800,
expires 6/18/04 5,472,046 16.03%
5 Dow Jones EURO Stoxx 50 Discount
(DB), STK 2700, expires 12/17/04 4,606,532 13.50%
6 Dax Discount (SALO), STK 3200,
expires 9/24/04 3,829,867 11.22%
</Table>
<Table>
Currency Hedge at March 31, 2004 0.00%
</Table>
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 warrants. 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 Investments.
++The average gearing is based on the derivative portion of the portfolio.
3
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THE EUROPEAN WARRANT FUND, INC.
PORTFOLIO OF INVESTMENTS
(PERCENTAGES OF TOTAL NET ASSETS)
MARCH 31, 2004
<Table>
<Caption>
SHARE VALUE
AMOUNT (NOTE 1)
- --------------- ------------
WARRANTS--92.4%
[ALL NON-INCOME PRODUCING SECURITIES]
MULTINATIONAL--52.0%
46,000 Dow Jones Energy Stoxx
(EXA), STK 135,
expires 10/28/04 $ 7,797,100
2,000 Dow Jones EURO Stoxx
50 (JPM), expires
9/10/07 6,817,937
150,000 Dow Jones EURO Stoxx
50 Discount (DB), STK
2700, expires
12/17/04 4,606,532
------------
19,221,569
------------
GERMANY--25.2%
160,000 Dax Discount (CITI),
STK 2800, expires
6/18/04 5,472,046
100,000 Dax Discount (SALO),
STK 3200, expires
9/24/04 3,829,867
------------
9,301,913
------------
SWITZERLAND--15.2%
1,400,000 Swiss Market Index (ZKB),
STK 3000, expires
12/17/06 $ 5,602,873
------------
TOTAL WARRANTS
(Cost $27,931,620) 34,126,355
------------
TOTAL INVESTMENTS--92.4%
(Cost $27,931,620) 34,126,355
OTHER ASSETS AND LIABILITIES (NET)--7.6% 2,803,179
------------
TOTAL NET ASSETS--100.00% $ 36,929,534
============
</Table>
See accompanying notes to financial statements.
4
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THE EUROPEAN WARRANT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2004
<Table>
ASSETS:
Investments, at value (Cost $27,931,620) (Note 1) $ 34,126,355
Foreign currency, at value (Cost $3,034,271) (Note 1) 3,022,795
Tax reclaim receivable 947
Prepaid expenses and other assets 20,847
---------------
Total assets 37,170,944
---------------
LIABILITIES:
Due to bank 300
Investment advisory fee payable (Note 2) 31,947
Accrued expenses and other payables 209,163
---------------
Total liabilities 241,410
---------------
TOTAL NET ASSETS $ 36,929,534
===============
NET ASSETS CONSIST OF (NOTE 1):
Par value $ 14,585
Paid-in capital in excess of par value 174,138,003
Accumulated net realized loss on investments and foreign currency (143,406,574)
Net unrealized appreciation on investments and translation of net other
assets in foreign currencies 6,183,520
---------------
TOTAL NET ASSETS (equivalent to $2.53 per share based on 14,585,366 shares
of common stock outstanding from 100,000,000 authorized with $0.001 par
value) $ 36,929,534
===============
</Table>
See accompanying notes to financial statements.
5
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2004
<Table>
INVESTMENT INCOME:
Interest $ 374
---------------
Total investment income 374
---------------
EXPENSES:
Investment advisory fee (Note 2) 421,191
Administration and custodian fees 209,540
Legal and audit fees 160,436
Printing and postage expense 111,558
Shareholders servicing fee (Note 2) 84,238
Insurance expense 75,194
Transfer agent fees 60,000
Directors' fees and expenses (Note 2) 34,250
Other 52,771
---------------
Total expenses 1,209,178
Less: Custodian offset arrangement (Note 2) (19,833)
Shareholder servicing fees waived (Note 2) (84,238)
---------------
Net expenses 1,105,107
---------------
NET INVESTMENT LOSS (1,104,733)
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
(Notes 1 and 3)
Net realized gain (loss) on:
Securities transactions (6,167,140)
Written options transactions (145,624)
Forward foreign currency contracts 220,370
Foreign currencies and net other assets 114,776
---------------
Net realized loss on investments and foreign currency (5,977,618)
---------------
Net change in unrealized appreciation or depreciation of:
Securities 8,830,477
Written options 181,086
Foreign currencies and net other assets (121,807)
---------------
Net change in unrealized appreciation of investments and
translation of net other assets in foreign currencies 8,889,756
---------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,912,138
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,807,405
===============
</Table>
See accompanying notes to financial statements.
6
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STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003
---------------- ----------------
CHANGE IN NET ASSETS FROM OPERATIONS
Net investment loss $ (1,104,733) $ (909,753)
Net realized loss on investments and foreign currency (5,977,618) (22,428,556)
Net change in unrealized appreciation (depreciation) of
investments and translation of net other assets in
foreign currencies 8,889,756 (3,186,558)
---------------- ----------------
Net increase (decrease) in net assets resulting from operations 1,807,405 (26,524,867)
Distributions to shareholders from net investment income -- (394,680)
---------------- ----------------
Net increase (decrease) in net assets 1,807,405 (26,919,547)
NET ASSETS:
Beginning of period 35,122,129 62,041,676
---------------- ----------------
End of period (including accumulated net investment
income (loss) of $0 and $(110,391),
respectively) $ 36,929,534 $ 35,122,129
================ ================
</Table>
See accompanying notes to financial statements.
7
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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,
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of year $ 2.41 $ 4.25 $ 7.66 $ 23.00 $ 18.52
----------- ----------- ----------- ----------- -----------
Income (Loss) from investment operations:
Net investment loss(1)(2) (0.08) (0.06) (0.07) (0.14) (0.11)
Net realized and unrealized gain (loss) on
investments and foreign currency(2) 0.20 (1.75) (3.34) (13.33) 8.41
----------- ----------- ----------- ----------- -----------
Total income (loss) from investment operations 0.12 (1.81) (3.41) (13.47) 8.30
----------- ----------- ----------- ----------- -----------
Capital effect of dividend reinvestment -- -- -- (0.27) (0.47)
Less distributions:
Distributions from net investment income -- (0.03) -- -- --
From net realized gains on investments -- -- -- (1.60) (3.35)
----------- ----------- ----------- ----------- -----------
Total distributions -- (0.03) -- (1.60) (3.35)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR $ 2.53 $ 2.41 $ 4.25 $ 7.66 $ 23.00
=========== =========== =========== =========== ===========
MARKET VALUE, END OF YEAR $ 2.360 $ 1.970 $ 3.970 $ 6.750 $ 17.375
=========== =========== =========== =========== ===========
Total return 19.80% (49.75)% (41.19)% (54.60)% 46.77%
=========== =========== =========== =========== ===========
Ratios/Supplemental data:
Net assets, end of year (000's) $ 36,930 $ 35,122 $ 62,042 $ 111,737 $ 306,738
Ratio of net investment loss to average net assets (3.25)% (2.21)% (1.11)% (0.84)% (0.55)%
Ratio of net expenses to average net assets(4) 3.31% 2.93% 2.13% 1.61% 1.60%
Ratio of net expenses to average net assets(3) 3.25% 2.82% 1.85% 1.48% 1.54%
Portfolio turnover rate 605% 1024% 778% 216% 65%
</Table>
- ----------
(1) The net expenses of the Fund reflect a waiver of fees by an affiliate of
the investment adviser. Had such action not been taken, the net loss per
share and the operating expense ratios would have been:
<Table>
Net investment loss per share $ (0.08) $ (0.07) $ (0.08) $ (0.18) $ (0.18)
Ratio of net expenses to average net
assets(3) 3.50% 3.07% 2.10% 1.86% 1.85%
Ratio of gross expenses to average net
assets(4) 3.56% 3.18% 2.38% 1.99% 1.91%
</Table>
(2) Based on average shares outstanding during the period.
(3) Ratio of expenses after expense offset arrangement.
(4) Ratio of expenses before expense offset arrangement.
See accompanying notes to financial statements.
8
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THE EUROPEAN WARRANT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
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 investments 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 accounting
principles generally accepted in the United States of America 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 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 quoted closing price. 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
according to procedures established by the Fund's Board of Directors. In
making this determination, the Fund's Valuation Committee 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 Fund's Valuation
Committee 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.
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
9
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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 on investments which
result from changes in foreign currencies have been included in the
unrealized appreciation/(depreciation) of investments. Net realized
currency gains and losses include foreign currency gains and losses between
trade date and settlement date on investment securities transactions,
foreign currency transactions and the difference between the amounts of
interest and dividends recorded on the books of the Fund and the amount
actually received. The portion of foreign currency gains and losses related
to fluctuations in exchange rates between the initial purchase trade date
and subsequent sale trade date is included in realized gains and losses on
security transactions.
OPTIONS: Purchases of put and call options are recorded as an
investment, the value of which is marked-to-market at each valuation date.
When a purchased option expires, the Fund will realize a loss equal to the
premium paid. When the Fund enters into a closing sale transaction, the
Fund will realize a gain or loss depending on whether the sales proceeds
from the closing sale transaction are greater or less than the cost of the
option. When the Fund exercises a put option, it will realize a gain or
loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the
10
<Page>
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/written) 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.
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,
11
<Page>
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.
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, if any, and any net realized long-term capital
gains in excess of net realized short-term capital losses. Income
distributions and capital gain distributions 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. For financial statement presentation purposes, the
components of net assets in the Statement of Assets and Liabilities have
been adjusted to reflect their tax basis attributes.
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 weekly average net assets. The Fund pays Julius Baer Asset
Management Ltd., Zurich, an affiliate of the adviser, 0.25% of the value of the
Fund's weekly average net assets for shareholder servicing and other services
all of which was waived during the year ended March 31, 2004.
No director, officer or employee of the Adviser or any affiliates of the
Adviser will receive any compensation from the Fund for serving as an officer or
director of the Fund.
12
<Page>
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 administration and custodian fees are reduced when the Fund maintains
cash on deposit at the custodian. For the year ended March 31, 2004 custodian
fees were reduced by $19,833.
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, 2004 amounted to
$189,808,623 and $192,571,709, respectively.
Activity in written options for the year ended March 31, 2004 was as
follows:
<Table>
<Caption>
NUMBER OF
PREMIUM CONTRACTS
------------- -------------
Options outstanding at March 31, 2003 $ 575,966 31,000
Options written 294,908 46,000
Options closed (870,874) (77,000)
------------- -------------
Options outstanding at March 31, 2004 $ 0 0
============= =============
</Table>
At March 31, 2004, aggregate 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 $6,508,951 and $314,216, respectively. Tax cost
for investment securities at March 31, 2004 was $27,931,620.
At March 31, 2004, the unrealized depreciation on assets and liabilities
denominated in foreign currency was $11,215.
4. FEDERAL TAX INFORMATION
At March 31, 2004, the Fund had $14,562,281, $92,632,637, $28,922,938 and
$7,288,718 available as capital loss carryforwards which expire in 2009, 2010,
2011 and 2012, respectively.
As of March 31, 2004, the components of Distributable Earnings on a tax
basis were as follows:
<Table>
Undistributed/Overdistributed Ordinary Income $ 0
Unrealized Appreciation/Depreciation $ 6,183,520
Capital and Other Losses $ (143,406,574)
</Table>
Income dividends and capital gains distributions are determined in
accordance with U.S. federal income tax regulations which may differ from U.S.
GAAP. During the years ended March 31, 2004 and March 31, 2003, the tax basis of
distributions paid from ordinary income were $0 and $394,680, respectively.
13
<Page>
5. SUBSEQUENT EVENTS
A Special Meeting of the Stockholders ("Special Meeting") of the Fund was
held on March 24, 2004. The Special Meeting was adjourned until April 28, 2004
to permit stockholders further time to respond to the solicitation of proxies.
The purpose of the Special Meeting is to ask stockholders to consider the
approval of the conversion of the Fund from a closed-end investment company to
an open-end investment company and, contingent upon the approval of such
conversion: the election of directors for an indefinite term of office, the
approval of revisions to the investment objective and certain fundamental
investment policies of the Fund, the approval of a 12b-1 plan, and the approval
of a new investment advisory agreement. These proposals are more fully described
in the Proxy Statement, dated February 11, 2004 (the "Proxy").
At the reconvened Special Meeting held on April 28, 2004, 62.887% of the
Fund's outstanding shares entitled to vote at the Special Meeting voted in favor
of Proposal 2, the proposal to open-end the Fund and make certain amendments to
the Fund's Articles of Incorporation (the "Charter"). However, because Proposal
2 did not receive the affirmative vote of 75% of the outstanding shares entitled
to vote, the meeting was further adjourned until June 3, 2004, in order to allow
further solicitation of proxies.
On May 18, 2004, the Fund issued a press release announcing a modification
to the Proxy, in connection with the Special Meeting. The purpose of the
modification is to clarify the stockholder vote required to approve the items in
Proposal 2, the proposal to open-end the Fund and make certain amendments to the
Fund's Articles of Incorporation (the "Charter").
Currently, the Proxy states that 75% of the outstanding shares of the Fund
is required to approve all items in Proposal 2. In fact, under the Charter and
Maryland corporate law, a majority vote is sufficient to open-end the Fund
provided that 75% of the Continuing Directors (as defined in the Charter)
approve. All of the Directors approved the proposal to open-end the Fund.
Therefore, if a majority of the outstanding shares approves Proposal 2, the
proposal to open-end the Fund will pass.
Furthermore, under the Charter a majority vote is also sufficient to
approve certain proposed amendments to the Charter. These amendments will also
pass if a majority of the outstanding shares approves Proposal 2. Other
amendments included in Proposal 2 require the approval of 75% of the outstanding
shares and will not pass unless such vote is obtained.
In connection with this modification of the Proxy, stockholders who have
already voted will have the opportunity to change their vote up to the
reconvening of the Special Meeting on June 3, 2004.
14
<Page>
THE EUROPEAN WARRANT FUND, INC.
INDEPENDENT AUDITORS' REPORT
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, 2004, 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 auditing standards generally
accepted in the United States of America. 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. Our procedures included confirmation of
securities owned as of March 31, 2004 by correspondence with the custodian. 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, 2004, 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 accounting
principles generally accepted in the United States of America.
KPMG LLP
Boston, Massachusetts
May 18, 2004
15
<Page>
THE EUROPEAN WARRANT FUND, INC.
ADDITIONAL INFORMATION (UNAUDITED)
PORTFOLIO MANAGEMENT
In managing the day-to-day operations of the Fund, the Adviser employs
Peter Reinmuth as Portfolio Manager of the Fund. Mr. Reinmuth is responsible for
making all investment decisions for the Fund. Mr. Reinmuth has been employed as
Chief Investment Officer of the Fund since September 2002 and Vice President of
Investments of the Adviser since 1999. Stefan Froehlich has served as Vice
President of the Fund and Assistant Vice President of the Adviser since 2002.
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 the Fund's 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 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.
9. The Fund will normally invest at least 80% of its net assets
(including borrowings for investment purposes) in European warrants.
16
<Page>
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.
The Fund currently intends to repurchase shares of the Fund on the open
market if Fund management believes such action is in the best interest of the
Fund. There can be no assurance that the Fund will repurchase any shares of the
Fund under any given circumstances.
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.
STOCKHOLDER MEETING RESULTS (UNAUDITED)
The Fund held its annual meeting of stockholders on June 25, 2003.
14,585,366.037 common shares were outstanding on May 1, 2003, the record date
for shares eligible to vote at the meeting. 9,162,967.994 (62.823% of the record
date common shares) were represented at the meeting. The matters below were
voted by the stockholders. Stockholders did not approve Proposal II.
PROPOSAL I: The election of Bernard Spilko and Harvey Kaplan as Class III
Directors of the Fund.
<Table>
<Caption>
NOMINEES FOR CLASS III DIRECTOR NUMBER OF SHARES
ELECTED BY ALL SHAREHOLDERS AFFIRMATIVE WITHHELD
------------------------------- ----------- ---------
Bernard Spilko 7,427,585 1,735,383
Harvey Kaplan 8,093,890 1,069,079
</Table>
Messrs. Antoine Bernheim, Thomas J. Gibbons, Robert S. Matthews, and Martin
Vogel continue in office as directors.
PROPOSAL II: Revision of the fundamental investment policy of the Fund regarding
concentration.
<Table>
Affirmative 3,320,220
Against 916,306
Abstain 64,271
Broker Non-votes 4,862,171
</Table>
A Special Meeting of Stockholders ("Special Meeting") of the Fund was held
on March 24, 2004. The Special Meeting has been adjourned to another date to
permit stockholders further time to respond to the solicitation of proxies. The
purpose of the Special Meeting is to ask stockholders to consider the following
proposals: election of directors if the conversion (as defined below) occurs,
approval of conversion of the fund from a closed-end investment company to an
open-end investment company (the "conversion"),
17
<Page>
approval of revisions to investment objective and certain fundamental investment
policies to take effect upon the conversion, approval of 12b-1 plan to take
effect upon the conversion, and approval of new investment advisory agreement to
take effect upon the conversion. These proposals are more fully described in the
Proxy Statement, dated February 11, 2004.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in his own name will have all
distributions reinvested automatically by Investors Bank & Trust Company ("IBT")
as agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") may be reinvested by the broker or
nominee in additional shares under the Plan, but only if the service is provided
by the broker or nominee, unless the shareholder elects to receive distributions
in cash. A shareholder who holds Common Stock registered in the name of a broker
or other nominee may not be able to transfer the Common Stock to another broker
or nominee of a broker or other nominee and continue to participate in the Plan.
Investors who own Common Stock registered in street name should consult their
broker or nominee for details regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. If the
market price per share on the valuation date equals or exceeds net asset value
per share on that date, the Fund will issue new shares to participants valued at
net asset value or, if the net asset value is less than 95% of the market price
on the valuation date, then valued at 95% of the market price. If net asset
value per share on the valuation date exceeds the market price per share on that
date, participants in the Plan will receive shares of stock from the Fund valued
at market price. The valuation date is the dividend or distribution payment date
or, if that date is not a New York Stock Exchange trading day, the next
preceding trading day. To the extent the Fund issues shares of Common Stock to
participants in the Plan at a discount to net asset value, the remaining
shareholders' interests in the Fund's net assets will be diluted
proportionately. If the Fund should declare an income dividend or capital gains
distribution payable only in cash, IBT will, as agent for the participants, buy
Fund shares in the open market, on the New York Stock Exchange or elsewhere, for
the participants' accounts on, or shortly after, the payment date.
Participants in the Plan have the option of making additional semi-annual
cash payments to IBT in any amount from $100 to $3,000 for investment in Fund
shares. IBT uses all funds so received to purchase Fund shares in the open
market on or about February 15 and August 15 of each year. Plan participants are
not subject to any charge for reinvesting dividends or capital gains
distributions. Each Plan participant, however, bears a pro rata share of
brokerage commissions incurred with respect to IBT's open market purchases of
Fund shares in connection with voluntary cash payments or the reinvestment of
dividends or capital gains distributions payable only in cash.
The automatic reinvestment of dividends and capital gains distributions
does not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the
18
<Page>
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 shareholder 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 IBT as agent under
the Reinvestment Privilege, unless the shareholder elects to receive cash.
Whenever the Directors of the Fund declare a capital gains distribution or
an income dividend payable either in shares of Common Stock ("Shares") or cash,
the Fund will send shareholders 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. Shareholders 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. Shareholders who
desire to receive the distribution in additional Shares need do nothing further.
Shareholders 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 Shareholder by IBT as the Fund's
dividend paying agent.
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 to participants in the Plan at a discount to
19
<Page>
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 shareholder each acquisition made for
her or his account as soon as practicable but not later than 60 days after the
date thereof. Although the shareholder 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 shareholder's account
under the Reinvestment Privilege, 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 shareholder will be credited to the shareholder'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 the Participant's 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 shareholders' accounts, all
dividends and distributions payable on the Shares held in the shareholders' 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.
PROXY VOTING POLICIES
A description of the Fund's proxy voting policies and procedures is
available without charge, upon request, (1) on the Fund's website
[www.europeanwarrantfund.com], (2) on the Securities and Exchange Commission's
website [www.sec.gov], and (3) by calling toll-free at 1-800-387-6977.
20
<Page>
THE EUROPEAN WARRANT FUND AS OF MARCH 31, 2004
INVESTMENT MANAGEMENT
THE EUROPEAN WARRANT FUND, INC.
Disinterested Directors:
<Table>
<Caption>
POSITION(S) TERM OF OFFICE(1) OTHER
NAME, AGE, HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
AND ADDRESS FUND TIME SERVED DURING THE PAST 5 YEARS HELD BY DIRECTOR
- -------------------------- ------------ ----------------- ------------------------------------- ----------------------
Antoine Bernheim, Director Since 1990 President, Dome Capital None
Age 49 Management, Inc.; Chairman, Dome
405 Park Ave. Ste. 500, Securities Corp.
New York, NY 10022
Thomas J. Gibbons, Director Since 1993 President, Cornerstone Associates None
Age 56 Management (consulting firm).
18 Links Ct.,
Sparta, NJ 07871
Harvey B. Kaplan, Director Since 1990 Controller (Chief Financial Officer), Trustee, Julius Baer
Age 66 Easter Unlimited, Inc. (toy company) Investment Funds
80 Voice Road
Carle Place, NY 11514
Robert S. Matthews, Director Since 2002 Partner, Matthews & Co. (certified Trustee, Julius Baer
Age 60 public accountants) Investment Funds
331 Madison Avenue,
New York, NY 10017
Interested Directors:
<Caption>
POSITION(S) TERM OF OFFICE(1) OTHER
NAME, AGE, HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
AND ADDRESS FUND TIME SERVED DURING THE PAST 5 YEARS HELD BY DIRECTOR
- -------------------------- ------------ ----------------- ------------------------------------- ----------------------
Bernard Spilko, (2) Director and Since 1993 General Manager and Senior Vice Julius Baer
Age 62, Chairman President of Bank Julius Baer & Co., Investment Funds
330 Madison Avenue, Ltd., New York Branch; Managing
New York, NY 10017 Director of Julius Baer Securities
Inc.; Chairman of the Board of
Trustees of Julius Baer Investment
Funds
Martin Vogel, (3) Director Since 1997 Head of Management and Asset Pooling, Trustee of Julius Baer
Age 40 Julius Baer Holdings, Ltd., (2002- Investment Funds
Julius Baer Holdings, Ltd. present); member of Management
Bahnhafstrasse 36 Committee, Julius Baer, Ltd. (1996-
Zurich, Switzerland 2002).
</Table>
(1) The term of office for each director is 3 years and until each successor is
duly elected and qualified.
(2) Mr. Spilko is deemed to be "interested", as defined in the 1940 Act,
because of his position with Julius Baer Securities, Inc., the Fund's
Investment Adviser, and with Bank Julius Baer & Co. New York Branch, Ltd.,
an affiliate of the Adviser.
(3) Mr. Vogel is deemed to be "interested", as defined in the 1940 Act, because
of his position with Julius Baer Holdings, Ltd., an affiliate of the
Adviser.
21
<Page>
Principal Officers Who are Not Directors:
<Table>
<Caption>
POSITION(S) TERM OF OFFICE(1)
NAME, AGE, HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S)
AND ADDRESS FUND TIME SERVED DURING THE PAST 5 YEARS
- --------------------- ------------- ------------------ -----------------------------------------------------------------
Michael Quain, President and Since 1997 First Vice President of Julius Baer Investment Management, Inc.
Age 45 Chief (since August 2002); First Vice President of Julius Baer
330 Madison Avenue, Executive Securities Inc.; First Vice President, Bank Julius Baer & Co.,
New York, NY 10017 Officer Ltd., New York Branch (1998-2002); President and Chief Executive
Officer of Julius Baer Investment Funds (!998-present).
Peter Reinmuth, Vice Vice President Vice President of Investments, Julius Baer Securities, Inc.
Age 34 President and since 1999;
Bradschenkestrasse 40 Chief Chief Investment
Postfach CH-8010 Investment Officer since
Zurich, Switzerland Officer 2002
Stefan Froehlich, Vice Since 2002 Assistant Vice President of Julius Baer Securities Inc., (since
Age 31 President 2002); Consultant, the Enrico AG, Zurich, Switzerland
Bradschenkestrasse 40 (1998-2002).
Postfach CH-8010
Zurich, Switzerland
Denise Downey, Vice Since 2003 First Vice President of Julius Baer Investment Management, Inc.
Age 42 President (since 2002); First Vice President, Head of Product Development,
330 Madison Avenue, Bank Julius Baer (2001-2002); Vice President, Deputy Chief
New York, NY 10017 Investment Officer, Bank Julius Baer (1995-2001)
Craig Giunta, Treasurer, Treasurer and Vice President, Julius Baer Investment Management, Inc., (2002-
Age 32 Secretary Secretary since present); Assistant Vice President, Bank Julius Baer & Co., Ltd.,
330 Madison Avenue, and Chief 2001; Chief New York Branch (2001-2002); Supervisor of Fund Accounting,
New York, NY 10017 Financial Financial Officer Neuberger Berman LLC (1994-2001); Secretary and Treasurer
Officer since 2003 (since 2001) and Chief Financial Officer (since 2003) of
Julius Baer Investment Funds
Cynthia J. Surprise, Assistant Since 1999 Director and Counsel, Investors Bank & Trust Company, (1999-
Age 57 Secretary present); Vice President, State Street Bank and Trust Company,
200 Clarendon St., (1994-1999).
Boston, MA 02116
Victoria McFarlane, Assistant Since 2003 Director, Mutual Fund Administration, Investors Bank & Trust
Age 37 Treasurer Company (2002-present); Manager/Assistant Vice President of
200 Clarendon St., Fund Treasury for MFS Investment Services (1997-2002).
Boston, MA 02116
</Table>
(1) The term of office for each officer is one year and until each successor is
chosen and duly qualified.
22
<Page>
THE EUROPEAN WARRANT FUND, INC.
330 MADISON AVENUE
NEW YORK, NEW YORK 10017
www.europeanwarrantfund.com
This report is sent to the stockholders of The European Warrant Fund, Inc. (the
"Fund") 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.
<Page>
ITEM 2. CODE OF ETHICS.
As of September 24, 2003, the Registrant has adopted a Code of Ethics
that applies to the Principal Executive Officer and Principal Financial
Officer pursuant to the Sarbanes-Oxley Act of 2002. For the year ended
March 31, 2004, there were no amendments to a provision of the Code of
Ethics nor were there any waivers granted from a provision of the Code of
Ethics. A copy of the Registrant's Code of Ethics is filed with this
Form N-CSR under item 11 (a).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board of Directors has determined that the Registrant
has at least one audit committee financial expert serving on its audit
committee. The audit committee financial expert serving on the
Registrant's audit committee is Harvey Kaplan who is "independent" as
defined in Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES: The aggregate fees paid and accrued by the Registrant
for professional services rendered by its independent auditors, KPMG
LLP, for the audit of the Registrant's annual financial statements
for 2004 and 2003 were $30,000 and $41,500, respectively.
(b) AUDIT RELATED FEES: No such fees were billed to the Registrant by
KPMG LLP for 2004 or 2003.
(c) TAX FEES: The aggregate fees paid or accrued by the Registrant for
professional services rendered by KPMG LLP for the review of Form
1120-RIC, Form 8613, and review of excise tax distribution
calculations for 2004 and 2003 were $4,500 and $4,500, respectively.
(d) ALL OTHER FEES: KPMG LLP received a fee of $13,500 for 2004 and
$0 in 2003 in connection with assisting management in documenting
their controls over financial reporting, tax consulting, and the
review of fair valuation procedures.
(e) (1) AUDIT COMMITTEE PRE-APPROVAL POLICY: The Registrant's audit
committee pre-approves all audit and non-audit services to be
performed by the Registrant's accountant before the accountant is
engaged by the Registrant to perform such services.
(e) (2) Not applicable.
(f) Not applicable.
(g) Not applicable.
(h) Not applicable.
ITEMS 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
The registrant has an audit committee. The members of the audit committee
are: Antoine Bernheim, Thomas Gibbons, Robert Matthews and Harvey Kaplan.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable to this filing.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The registrant's Board of Directors has delegated proxy voting
responsibilities to the Adviser subject to the Board's general oversight.
In delegating proxy responsibilities, the Board has directed that proxies
be voted consistent with the registrant's and its shareholder's best
interests and in compliance with all applicable proxy voting rules and
regulations. The Adviser has retained Institutional Shareholders Services
("ISS") to serve as its proxy service provider and intends to vote in
accordance with ISS's recommendations to address, among other things, any
material conflict of interest that may arise between the interests of the
Fund and the interests of the Adviser or its affiliates. A summary of
ISS's Proxy Voting Guidelines is filed with this N-CSR as item 11 (b).
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ITEMS 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILITAED PURCHASERS.
Not applicable to this filing.
ITEMS 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Nominees recommended by stockholders will be considered by the Nominating
Committee. Recommendations should be submitted in writing to the
Secretary of the Fund.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Registrant's Principal Executive Officer and Principal Financial
Officer concluded that the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act
of 1940) were effective as of a date within 90 days prior to the filing
date of this report (the "Evaluation Date"), based on their evaluation of
the effectiveness of the Registrant's disclosure controls and procedures
as of the Evaluation Date.
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the Registrant's last fiscal
half-year (the Registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a) Code of ethics attached
(b) Proxy voting policies attached
(c) Certifications attached
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) European Warrant Fund
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By (Signature and Title) /s/ Michael Quain
--------------------------------------------------------
Michael Quain, President and Chief
Executive Officer
Date 06/04/2004
---------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) * /s/ Craig Giunta
------------------------------------------------------
Craig Giunta,
Treasurer, Secretary and Chief Financial Officer
Date 06/04/2004
---------------------------
By (Signature and Title) * /s/ Michael Quain
-----------------------------------------------------
Michael Quain, President and Chief
Executive Officer
<Page>
Date 06/04/2004
---------------------------
* Print the name and title of each signing officer under his or her signature.