The First Australia
Fund, Inc.
- -------------------------------------------------------------------
Semi-Annual Report
April 30, 1996
Highlights
-------------------------------------------
- - The Fund's total investment return based on NAV was 15.6% over the six months
and 23.5% over the twelve months ended April 30, 1996 (assuming reinvestment
of dividends and distributions).
- - The Fund's total investment return based on share price was 20.5% over the
six months and 14.3% over the past twelve months ended April 30, 1996
(assuming reinvestment of dividends and distributions).
- - The Fund's performance was enhanced by exposure to the Australian resource
sector.
- - The Australian dollar accelerated reflecting stronger commodity prices.
<PAGE>
LETTER TO SHAREHOLDERS
June 13, 1996
Dear Shareholder,
We are pleased to present the report for The First Australia Fund, Inc. for
the six months ended April 30, 1996, prepared by the Investment Manager,
EquitiLink International Management Limited. An overview of the Australian
economy and financial markets is also included.
During the six months ended April 30, 1996, the Fund's total investment
return based on Net Asset Value (NAV) was 15.6% and 23.5% over the past twelve
months, assuming reinvestment of dividends and distributions. The Fund's total
investment return based on share price was 20.5% over the past six months and
14.3% over the past twelve months ended April 30, 1996, assuming reinvestment
of dividends and distributions.
The Fund's strong performance reflects its substantial exposure to Australian
resource companies. Over the past six months the Australian resource sector has
outperformed the industrial sector due to a pick-up in world economic growth and
the associated rise in commodity prices. The Australian Stock Exchange (ASX) All
Resources Accumulation Index gained 16.9% compared with a return of 12.5% for
the ASX All Industrial Accumulation Index. The Fund also benefited from its
exposure to smaller growth stocks, which comprise some 38% of the portfolio. The
ASX Small Ordinaries Accumulation Index gained 17.9% over the six months to
April 30, 1996.
The Australian dollar strengthened by 3.5% against the US dollar over the six
months to April 30, 1996. Rising commodity prices and attractive interest rate
differentials in Australia, together with continued Japanese buying of
Australian dollar assets, have been the principal factors supporting the dollar.
Today, the Board of Directors declared a semi-annual distribution of US$0.15
per share. This distribution is composed of US$0.077 per share in net investment
income and US$0.073 per share short term capital gains. In July 1995 the Fund
paid a US$0.12 per share dividend from net investment income and in January 1996
a US$0.344 per share dividend and distribution.
Dividend Reinvestment and Cash Purchase Plan
We invite you to consider joining the shareholders who currently participate
in the Fund's Dividend Reinvestment and Cash Purchase Plan, which offers a
number of features. Most importantly, the Plan allows shareholders to
automatically reinvest their dividends in shares of the Fund's common stock. If
the market price equals or exceeds the NAV on the payment date, participants in
the Plan will receive new shares issued by the Fund at a discount of up to 5%
from the market price. If the market price is less than the NAV on the payment
date, participants will receive shares purchased at market price.
The Plan also provides shareholders, who own shares in their own name, with
the option of making additional cash investments in the Fund, in any amount over
$100, on a monthly basis. For each additional investment, participants pay only
a service fee of 75 cents and a pro rata share of brokerage commissions on all
open market purchases. As the Plan Agent purchases the Fund's shares for all
participants in blocks, this normally results in lower commissions for each
individual.
A brochure containing information and an authorization form can be obtained
by contacting State Street Bank and Trust Company, PO Box 8200, Boston, MA
02266-8200, or by telephone at 1-800-451-6788.
If you wish to participate and your shares are held in your own name, simply
complete and mail the enrollment form in the back of the brochure or call State
Street Bank and Trust Company at the toll-free number and enroll by telephone.
If your shares are held in the name of a brokerage firm, bank or other nominee,
you should instruct your
1
<PAGE>
nominee to participate on your behalf. If your nominee is unable to participate
on your behalf, you should request it to reregister your shares in your own name
which will enable you to participate in the Plan.
Other advantages of participation in the Plan include:
- Lower costs--You will build holdings in the Fund automatically, at
reduced or no brokerage cost.
- Convenience--You will receive a detailed account statement from State
Street Bank, your Plan Agent, showing total dividends and distributions,
date of investment, shares acquired and price per share, as well as the
total shares of record held by you and by the Plan Agent for you.
- Safety--As long as you participate in the Plan, State Street Bank, as
your Plan Agent, will hold the shares it has acquired for you in
safekeeping, in non-certificated form. This convenience provides added
protection against loss, theft or inadvertent destruction of
certificates.
Toll Free Information
Information on The First Australia Fund, Inc. is available on a recorded
message from a toll-free number in the United States. The message includes
weekly updates of share price, NAV, and details of recent distributions and
announcements by the Directors. The number is 1-800-323-9995 (outside New York)
and is toll-free for calls made from within the United States.
Yours sincerely,
Laurence S. Freedman Brian M. Sherman
Chairman and Vice President President
REPORT BY THE INVESTMENT MANAGER
Distribution
Today the Board of Directors declared a semi-annual distribution of US$0.15
per share. This distribution is composed of US$0.077 per share in net investment
income and US$0.073 per share short-term capital gains. In July 1995 the Fund
paid a US$0.12 per share dividend from net investment income and in January 1996
a US$0.344 per share dividend and distribution.
NAV Performance
The Fund's total investment return based on Net Asset Value (NAV) was 15.6%
over the six months ended April 30, 1996, assuming reinvestment of dividends and
distributions. Over the past twelve months the Fund's total investment return
based on NAV was 23.5% also assuming reinvestment of dividends and
distributions.
Share Price Performance
In share price terms, the Fund's total investment return was 20.5% over the
six month period and 14.3% over the past twelve months ended April 30, 1996,
assuming reinvestment of dividends and distributions.
2
<PAGE>
Quality of the Portfolio
The quality of the portfolio remains high, with 57% of the stocks by value
being included in the Australian Stock Exchange's Fifty Leaders Index. The
remaining stocks represent a selection of smaller growth and value companies.
Increasingly, these are attracting the attention of investors. In addition, a
rising number of these undervalued companies are becoming the subject of
potential takeover activity. The Fund's strategy focuses on identifying value
in individual stocks rather than on market sectors.
Portfolio Composition
The following chart and table summarize the composition of the Fund's
portfolio, expressed as a percentage of net assets. Resource stocks comprise
44.9% of net assets and continue to represent a significant overweighting
relative to the 34.6% weighting of resource stocks in the ASX's All Ordinaries
Index.
[CHART TO COME]
Selected Equity Holdings
The following notes highlight the Fund's top ten holdings as of April 30,
1996.
Broken Hill Proprietary Company (BHP) Limited 10.4% of total assets
BHP is Australia's largest corporation and one of the world's largest
resource companies. It has high quality assets, financial strength and growth
potential from both existing and new projects. Group sales amount to A$20
billion from three main operating divisions: steel, petroleum and minerals. BHP
has a number of new projects which are likely to contribute to strong growth in
the latter part of this decade. The recent acquisition of Magma copper has
improved BHP's short-term profit outlook and strengthened the mineral division's
exposure to copper. The Company provides excellent leverage to Asia-Pacific
economic activity through BHP's extensive exports to, and operations within, the
region.
News Corporation Limited 7.4% of total assets
News Corporation is the most geographically diverse media/entertainment group
in the world. This Company has assembled a vast array of software production and
rights in sport and television, superimposed on a rapidly expanding distribution
network. News recently agreed to create a worldwide joint venture with MCI to
develop seamless network infrastructures covering telephony, information and
entertainment services. The introduction of capital from MCI significantly
reduces the Company's financial risk. News now owns 100% of Asia's Star
Television which has the potential to reach an audience of 3.6 billion people.
3
<PAGE>
Westpac Banking Corporation 5.0% of total assets
Westpac is Australia's second largest bank. It holds some 17% of all
Australian banking assets and 18% of housing loans. Westpac reorganized its
operating structures over the last three years and has concentrated its
activities within Australian retail banking. The acquisition of Challenge Bank
is expected to increase earnings per share by around 5%.
Western Mining Corporation Holdings Limited 4.9% of total assets
Western Mining Corporation is a world class diversified mining company with
interests in nickel, alumina, aluminium, copper, uranium, gold, oil and gas. The
Company recently embarked on a most significant expansion phase. Capital
expenditure on planned and potential developments through to 2000 totals A$5
billion.
Bank of Western Australian Limited 4.5% of total assets
BankWest represents an exposure to the rapidly growing West Australian
financial market. The Bank provides a range of retail and commercial financial
products and services. The Bank has the unique characteristics of having a
leading market share (24%) in its home state, a loan book that is not skewed to
housing and a relatively low domestic liability deposit base (60%). The Bank of
Scotland, which owns 51%, has expertise in 24 hour telephone banking. The market
share gains it has generated in the UK could result in similar opportunities for
BankWest domestically.
National Australia Bank Limited 2.9% of total assets
NAB is Australia's largest bank, as measured by both total assets and
profits. It combines superior management, balance sheet strength and a cost of
funds advantage. NAB's offshore operations in New Zealand and the UK should
provide solid future profit growth. The Bank's acquisition of Michigan National
Bank of the US has provided further strategic diversification.
Qantas Airways Limited 2.9% of total assets
Qantas is Australia's largest airline, with a long history of both
international and domestic coverage. The airline's domestic market share has
expanded, following the recent merger with Australian Airlines, and now is above
54%. International competitiveness has been further enhanced by an alliance with
British Airways. This could be extended to include further airlines. Qantas is
positioned in the fastest growing international routes, Asia-Europe and
Trans-Pacific and is also expected to benefit from the strong increase in
tourist numbers from Asia to Australia.
Pioneer International Limited 2.7% of total assets
Pioneer is one of four major building materials companies in Australia.
Pioneer also has a global spread of building material assets, particularly from
Asia and Eastern Europe. By 1996/97, 48% of group earnings before interest and
taxes is expected to come from outside Australia. Pioneer's other business is
downstream petroleum, which has now been merged with Caltex to form the largest
refiner/marketer in Australia. This has freed up Pioneer's balance sheet to
enable a possible return of capital or a substantial acquisition.
Savage Resources Limited 2.6% of total assets
Savage is a strongly growing resource company with a 49% interest in a major
copper/gold project in Queensland. The project is likely to develop into a
large, low cost open-cut mine in 1997, with the potential to become a premier
producer. In addition, Savage has an expanding coal operation in the Hunter
Valley region of Australia's east coast. The purchase of the Tennessee zinc
assets of Union Miniere in 1994 appears to be paying off. Stronger zinc prices,
together with operational improvements have led to a turnaround in profits.
Pasminco Limited 2.2% of total assets
Pasminco is one of the world's largest miners and smelters of lead and zinc.
Significant restructuring over the last five years has repositioned the Company
as a low cost producer with expansion opportunities at its mining and smelting
operations in Australia. The Company is leveraged to expected improvement in
lead and zinc prices over the next few years.
4
<PAGE>
REVIEW AND OUTLOOK FOR THE AUSTRALIAN
FINANCIAL MARKETS
Economy
The Australian economy is experiencing steady growth, with only moderate
price pressures. In the March quarter, Australian GDP growth increased by 1.8%
bringing the annual growth rate to 4.8%. A strong rise in consumption, business
investment and government spending led to the pick-up in growth. The Australian
economy should continue to strengthen over the remainder of 1996.
A Liberal/National Coalition government came to power in March following 13
years of Labor Government. The new government's major economic platforms are:
- endorsement of the Reserve Bank of Australia's 2% to 3% underlying
inflation target;
- a commitment to wind back the projected A$7.6 billion underlying deficit
in 1996-97 to a surplus within two years;
- acceleration of the move to more enterprise-based wage outcomes, with less
role for centralized wage setting; and
- industrial relations reform, which will see a much reduced role for unions.
These wage determination and labor market measures are likely to improve
Australia's longer-term economic performance.
March quarter price data confirmed the peak in underlying inflation this
cycle, a little above the Reserve Bank of Australia's longer-term 2% to 3%
inflation target. After rising above 5% in 1995, headline inflation fell to 3.7%
in the March quarter. Underlying CPI inflation should remain subdued for the
remainder of 1996.
Stock Market
Australian share prices strengthened during the quarter, particularly
resource stocks, as commodity prices firmed and more signs emerged of the
international economic recovery. Resource stocks outperformed industrials over
the past six months. The ASX All Resources Accumulation Index gained 16.9%
compared with a return of 12.5% for the ASX All Industrials Accumulation Index.
Weakness in the bond market and some concerns over the short-term outlook for
earnings dampened sentiment in Industrial shares. Small growth stocks also
performed well, with the ASX Small Ordinaries Accumulation Index gaining 17.9%
over the six months to April 30, 1996.
Over the next twelve months, the Australian equity market is expected to
perform well, led by the resource sector. Resource companies, particularly base
metal producers, should benefit from higher earnings as commodity prices rise,
with the pick-up in the global economy and as new production comes on line. Over
the near term, industrial companies may continue to experience earnings
downgrades, reflecting the weaker domestic economy. However, as the Australian
economy starts to gather strength again, industrial earnings forecasts are
likely to be revised upwards.
Currency
The Australian dollar strengthened by 3.5% against the US dollar over the six
months ended April 30, 1996. Stronger world growth, the associated improvement
in commodity price sentiment and attractive short-term interest rate
differentials in Australia, along with continued Japanese buying of Australian
dollar assets, have been the principal factors supporting the dollar. Attractive
interest rate differentials and a stronger global economy should continue to
support the Australian dollar over the medium term. At the end of April, the
currency was trading at US$0.7875 and on the date of this report the dollar was
trading at US$0.7928.
EquitiLink International Management Limited
5
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
April 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--95.5%
Common Stocks And Equivalents--95.5%
Diversified Industries--11.0%
6,288,000 Australian Topmaking
Services
Limited*(D)............... $ 866,525
2,250,000 Bellara Medical Products
Limited*(D)............... 248,051
2,075,000 Circadian Technologies
Limited*.................. 2,140,523>
4,000,000 Citistate Corporation
Limited*.................. 1,480,432
1,447,300 Fletcher Challenge
Limited................... 3,161,231
2,702,644 Hydromet Corporation
Limited................... 851,293
201,129 Lend Lease Corporation
Limited................... 3,072,606
1,049,984 Multistack International
Limited................... 338,998
1,500,000 National Foods Limited...... 1,901,725
1,684,300 Pioneer International
Limited................... 5,132,877
1,122,580 Polartechnics Limited*...... 1,564,664
68,080# Polartechnics Limited*
Call options expiring June
'96 @ A$1.25.............. 24,125
------------
20,783,050
------------
Resources and Mining--44.9%
5,167,674 Amalg Resources NL*......... 2,807,855
3,000,000 Associated Gold Fields
NL*....................... 614,222
1,295,228 Broken Hill Proprietary
Company Limited........... 19,980,720
377,525 Burmine Limited............. 1,367,521
513,000 Comalco Limited............. 3,110,560
883,976 Delta Gold NL*.............. 2,213,595
9,631,000 Dome Resources NL*(D)....... 2,464,820
1,257,000 Eagle Mining Corporation
NL*(D).................... 2,860,643
12,617,027 Equatorial Mining NL*....... 1,788,381
606,763 Forrestania Gold Limited.... 1,027,278
300,000 Highlands Gold Limited...... 177,179
2,000,000 Mallina Holdings Limited*... 291,361
1,342,000# M.I.M. Holdings Limited*
Call options expiring July
'96 @ A$1.75.............. 179,652
1,456,875 Niugini Mining Limited...... 3,326,984
1,273,397 North Limited............... 3,840,547
2,048,984 Oil Search Limited.......... 2,097,550
9,437,800 Pact Resources NL*.......... 1,672,183
2,852,000 Pasminco Limited............ 4,177,274
70,000 Placer Dome, Inc............ 1,943,066
1,031,000 QNI Limited................. 2,557,406
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
499,600 Resolute Samantha Limited... $ 1,247,131
1,456,994 Ross Mining NL.............. 1,893,094
960,800 Santos Limited.............. 3,434,941
5,548,988 Savage Resources Limited.... 4,893,981
554,898# Savage Resources Limited*
Warrants expiring Nov.
'98....................... 142,013
4,650,000 Striker Resources NL*(D).... 842,192
4,475,000# Striker Resources NL*
Call options expiring June
'97 @ A$0.20.............. 334,771
1,011,000 Ticor Limited*.............. 1,512,639
1,288,950 Western Mining Corporation
Holdings Limited*......... 9,419,211
462,750 Woodside Petroleum
Limited................... 2,681,975
------------
84,900,745
------------
Services--39.6%
3,844,062 AAPC Limited(D)............. 2,573,000
450,170 Ausmelt Limited*............ 1,364,796
781,818 Australia & New Zealand
Banking Group Limited..... 3,743,171
300,000# Australia & New Zealand
Banking Group Limited*
Call options expiring July
'96 @ A$6.00.............. 59,060
450,000# Australia & New Zealand
Banking Group Limited*
Call options expiring July
'96 @ A$6.25.............. 49,610
4,490,000 Bank of Western Australia... 8,662,493
249,300 Brambles Industries
Limited................... 3,425,691
190,500 Crown Limited*.............. 391,531
1,044,637 Energy Developments
Limited................... 1,538,288
1,002,530 GIO Australia Holdings
Limited................... 2,328,895
5,217,453 Guinness Peat Group
Limited................... 3,204,672
475,000 Keycorp Limited............. 991,220
800,000# Mayne Nickless Limited
Call options expiring Aug.
'97
@ A$7.00.................. 535,475
615,114 National Australia Bank
Limited................... 5,531,618
1,797,418 News Corporation Limited.... 10,558,893
708,035 News Corporation Limited
Voting Preferred Stock.... 3,651,964
1,763,000 Norvet Limited*(D).......... 1,665,958
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
Services--(cont'd)
781,500# Norvet Limited*
Call options expiring Dec.
'98 @ A$0.50.............. $ 553,862
500,000 Pacific Magazines & Printing
Limited................... 1,299,315
2,812,812 Qantas Airways Limited*..... 5,517,715
300,000 Seven Network Limited....... 897,708
2,003,300 Shomega Limited............. 2,792,221
2,901,767 Spectrum Network Systems
Limited*.................. 1,828,029
188,000# Spectrum Network Systems
Limited*
Call options expiring June
'96 @ A$0.20.............. 148,043
1,500,000# TNT Limited
8% Redeemable Convertible
Cumulative Preferred
Stock..................... 2,149,776
1,960,000 Westpac Banking Corp........ 9,538,389
------------
75,001,393
------------
Total common stocks and
equivalents
(cost US$153,976,482)..... 180,685,188
------------
Principal
Amount
(000) SHORT-TERM INVESTMENT--0.3%
- -----------
Repurchase Agreement--0.3%
US$ 534 Repurchase Agreement, State
Street Bank and Trust
Company, 2.00% dated
4/30/96, due 5/1/96 in the
amount of $534,030 (cost
$534,000; collateralized
by $555,000 U.S. Treasury
Bill, due 8/22/96; value
including accrued
interest - US$546,142).... 534,000
------------
Total Investments Before
Outstanding Options
Written--95.8%
(cost $154,510,482; Note
3)........................ 181,219,188
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Contracts Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
OUTSTANDING CALL OPTIONS
WRITTEN*--(0.2%)
141 Brambles Industries Limited
Expiring June '96 @
A$16.00................... $ (173,210)
500 GIO Australia Holdings
Limited
Expiring June '96 @
A$3.00.................... (39,373)
Mayne Nickless Limited
104 Expiring May '96 @ A$7.00... (52,414)
216 Expiring May '96 @ A$7.50... (40,822)
400 Pioneer International
Limited
Expiring June '96 @
A$3.75.................... (56,697)
200 Westpac Banking Corp.
Expiring June '96 @
A$6.25.................... (22,049)
------------
Total outstanding call
options written
(premiums received
US$209,792)............... (384,565)
------------
Total Investments, Net of
Outstanding Call Options
Written--95.6%............ 180,834,623
Other assets in excess of
liabilities--4.4%......... 8,331,854
------------
Net Assets--100%............ $189,166,477
------------
------------
</TABLE>
- ------------------
# Expressed in number of shares into which position can be
exercised or converted.
* Non-income producing security.
(D) Investment in affiliated party. Fund owns 5% or more of outstanding stock
of issuer.
See Notes to Financial Statements.
7
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
April 30, 1996
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$154,510,482)........................ $181,219,188
Foreign currency, at value (cost
$9,550,049).......................... 9,608,652
Cash................................... 473
Receivable for investments sold........ 779,962
Dividends and interest receivable...... 442,168
Other assets........................... 26,414
------------
Total assets....................... 192,076,857
------------
Liabilities
Payable for investments purchased...... 2,072,453
Outstanding call options written, at
value (premiums received $209,792)... 384,565
Accrued expenses and other
liabilities.......................... 323,280
Investment management fee payable...... 122,948
Administration fee payable............. 7,134
------------
Total liabilities.................. 2,910,380
------------
Net Assets $189,166,477
------------
------------
Net assets were comprised of:
Common stock, $.01 par value......... $ 169,143
Paid-in capital in excess of par..... 150,731,653
------------
150,900,796
Undistributed net investment
income............................... 1,320,097
Accumulated net realized gains on
investments.......................... 5,271,877
Net unrealized appreciation on
investments.......................... 16,452,247
Accumulated net realized and
unrealized foreign exchange gains.. 15,221,460
------------
Net assets........................... $189,166,477
------------
------------
Net asset value per share:
($189,166,477 / 16,914,278 shares of
common stock issued and
outstanding)......................... $11.18
------------
------------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Six Months Ended April 30, 1996
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Dividends (net of foreign withholding
taxes of $86,589)................... $ 2,467,533
Interest.............................. 340,323
-----------
Total income........................ 2,807,856
-----------
Expenses
Investment management fee............. 760,258
Custodian's fees and expenses......... 154,000
Shareholder communications............ 109,000
Independent accountant's fees and
expenses.............................. 57,000
Directors' fees and expenses.......... 55,000
Administration fee.................... 43,590
Legal fees and expenses............... 35,000
Transfer agent's fees and expenses.... 19,000
Insurance expense..................... 5,000
Miscellaneous......................... 15,720
-----------
Total operating expenses.............. 1,253,568
-----------
Net investment income................... 1,554,288
-----------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain on investment
transactions.......................... 4,993,786
Net realized loss on written options
transactions.......................... (93,035)
Net change in unrealized appreciation on
investments........................... 14,528,637
Net change in unrealized depreciation on
written options....................... (174,773)
-----------
Net gain on investments................. 19,254,615
-----------
Net increase in net assets resulting
from operations before net foreign
exchange gains........................ 20,808,903
Net realized and unrealized foreign
exchange gains........................ 4,477,130
-----------
Net Increase In Net Assets
Resulting From Operations............... $25,286,033
-----------
-----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
8
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Six months
ended Year ended
Increase (Decrease) April 30, October 31,
in Net Assets 1996 1995
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 1,554,288 $ 3,634,680
Net realized gain on
investments and
written options
transactions.......... 4,900,751 2,711,476
Net change in unrealized
appreciation
(depreciation) on
investments and
written options....... 14,353,864 (18,736,546)
------------ ------------
Net increase (decrease)
in net assets resulting
from operations before
net foreign exchange
gains................. 20,808,903 (12,390,390)
Net realized and
unrealized foreign
exchange gains........ 4,477,130 4,859,840
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ 25,286,033 (7,530,550)
Dividends to shareholders
from net investment
income.................. (2,561,730) (3,646,284)
Distributions to
shareholders from net
realized capital gains.. (3,197,943) (14,893,100)
Net proceeds from rights
offering of Fund
shares.................. -- 220,812
Net asset value of shares
issued to shareholders
in connection with
distribution paid in
stock................... 1,529,405 7,107,913
------------ ------------
Total increase
(decrease).............. 21,055,765 (18,741,209)
Net Assets
Beginning of period....... 168,110,712 186,851,921
------------ ------------
End of period............. $189,166,477 $168,110,712
------------ ------------
------------ ------------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Notes to Financial Statements
(Unaudited)
- ----------------------------------------------------------
The First Australia Fund, Inc. (the ``Fund'') was incorporated in Maryland
on
September 30, 1985 as a closed-end, diversified investment company. The Fund's
principal investment objective is long-term capital appreciation through
investment primarily in equity securities of Australian companies listed on
Australian stock exchanges. The Fund's secondary investment objective is current
income. It is expected that normally at least 65% of the Fund's total assets
will be invested in equity securities listed on Australian stock exchanges and
that current income will be derived primarily from dividends and interest on
Australian corporate and governmental securities. The ability of issuers of debt
securities, including foreign currency balances on deposit with the Fund's
Australian subcustodian bank, held by the Fund to meet their obligations may be
affected by economic or political developments in a specific industry or region.
Note 1. Accounting The following is a summary of
Policies significant accounting policies
followed by the Fund in the preparation of its
financial statements.
Basis of Presentation: The financial statements of the Fund are prepared in
accordance with United States generally accepted accounting principles using
the United States dollar as both the functional and reporting currency.
Security Valuation: Investments are stated at value. Investments for which
market quotations are readily available are valued at the last reported sales
prices. If there is no sales price on the date of valuation, then investments
are valued at the most recently available sales price or at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian take possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest. To the extent
that any repurchase transaction exceeds one business
See Notes to Financial Statements.
9
<PAGE>
day, the collateral is valued on a daily basis to determine its adequacy. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation: Australian dollar (``A$'') amounts are translated
into United States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities
at the exchange rates at the end of the fiscal period;
(ii) purchases and sales of investment securities, income and expenses at
the rate of exchange prevailing on the respective dates of such
transactions.
The Fund isolates that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the fluctuations arising
from changes in the market prices of securities held at fiscal period end.
Similarly, the Fund isolates the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of portfolio
securities sold during the fiscal period.
Net realized and unrealized foreign exchange gains of $4,477,130 includes
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid and changes in unrealized foreign exchange gains and
losses in the value of portfolio securities and other assets and liabilities
arising as a result of changes in the exchange rate. Accumulated net realized
and unrealized foreign exchange gains shown in the composition of net assets at
April 30, 1996 represent foreign exchange gains for book purposes that may not
yet have been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rate for the Australian dollar at April 30, 1996 was US$.7875
to
A$1.00.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
or currency underlying the written option. The Fund, as purchaser of an option,
bears the risk of the potential inability of the counterparties to meet the
terms of their contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Dividends and Distributions: It is the Fund's current policy to distribute to
stockholders, at least annually, substantially all of its net investment income
and net realized capital gains. Dividends and distributions are recorded on the
ex-dividend date. Income distributions and capital and currency gains
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 for foreign currencies.
Taxes: For federal income and excise tax purposes, substantially all of the
Fund's transactions are accounted for using the Australian dollar as the
functional currency. Accordingly, only realized currency gains and losses
resulting from the repatriation of Australian dollars into United States dollars
are recognized for tax purposes.
10
<PAGE>
No provision has been made for United States income taxes because it is the
Fund's policy to continue to meet the requirements of the United States Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to shareholders. Australia imposes a withholding tax of
15% on certain dividends and 10% on certain interest.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with AICPA Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
During the period ended April 30, 1996, the Fund increased undistributed net
investment income by $644,472, increased accumulated net realized gains on
investments by $128,872, and decreased accumulated realized and unrealized
foreign exchange gains by $773,344. Net investment income, net realized gains
and net assets were not affected by this change.
Note 2. Agreements The Fund has agreements
with EquitiLink International Management Limited
(the ``Investment Manager''), EquitiLink Australia Limited (the ``Investment
Adviser''), The Prudential Insurance Company of America (the ``Consultant''),
and Prudential Mutual Fund Management, Inc. (the ``Administrator''). The
Investment Manager and the Investment Adviser are affiliated companies; the
Administrator is an indirect wholly-owned subsidiary of the Consultant.
The Investment Manager makes investment decisions on behalf of the Fund on
the basis of recommendations and information furnished to it by the Investment
Adviser and the Consultant, including the selection of and the placement of
orders with brokers and dealers to execute portfolio transactions on behalf of
the Fund.
The management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 1.10% of the Fund's
average weekly net assets up to $50 million, 0.90% of such assets between $50
million and $100 million and 0.70% of such assets in excess of $100 million. The
administration agreement provides the Administrator with a fee at the annual
rate of the greater of $25,000 or 0.05% of the Fund's average weekly net assets.
The Investment Manager pays fees to the Investment Adviser and the Consultant
for their services rendered. The Investment Manager informed the Fund that it
paid $193,756 to the Investment Adviser and $25,603 to the Consultant during the
six months ended April 30, 1996.
Note 3. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the six months ended
April 30, 1996 aggregated $45,827,670 and $46,197,760, respectively.
Transactions in options written during the six months ended April 30, 1996
were as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options written..................... 2,931 $507,143
Options terminated in closing
purchase transactions............. (1,220) (273,077)
Options exercised................... (147) (23,985)
Options expired..................... (3) (289)
--------- --------
Options outstanding at April 30,
1996.............................. 1,561 $209,792
--------- --------
--------- --------
</TABLE>
The United States federal income tax basis of the Fund's investments at April
30, 1996 was $164,592,168 and accordingly, net unrealized appreciation for
United States federal income tax purposes was $16,627,020 (gross unrealized
appreciation--$27,486,814; gross unrealized depreciation--$10,859,794).
Note 4. Capital There are 20 million shares of
$.01 par value common stock authorized. Of the
16,914,278 shares issued and outstanding at April 30, 1996, the Investment
Manager owned 38,626 shares. During the six months ended April 30, 1996, the
Fund issued 171,122 shares in connection with a cash dividend paid in stock.
During the fiscal year ended October 31, 1995, the Fund issued 848,706 shares
in connection with a cash dividend paid in stock.
Note 5. Transactions During the six months ended
with Affiliates April 30, 1996, Prudential
Securities Incorporated, an affiliate of the
Administrator, earned approximately $100 in brokerage commissions as a result
of executing transactions in portfolio securities on behalf of the Fund.
Note 6. Dividend On June 13, 1996 the Board
and Distribution of Directors of the Fund
declared a dividend of $0.077 per share from net
investment income and a distribution of $0.073 per share from short-term capital
gains payable on July 12, 1996 to shareholders of record on June 28, 1996.
11
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months
ended Years
ended October 31,
April 30,
- ----------------------------------------------------------
1996 1995 1994
1993 1992 1991
<S> <C> <C> <C>
<C> <C> <C>
---------- -------- --------
-------- ------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 10.04 $ 11.76 $ 11.37
$ 8.46 $ 11.03 $ 9.14
---------- -------- --------
-------- ------- -------
Net investment income.................. 0.09 0.22 0.14
0.15 0.19 0.30
Net realized and unrealized gain (loss)
on
investments and foreign currencies... 1.41 (0.71) 1.84
4.09 (2.50) 2.02
---------- -------- --------
-------- ------- -------
Total from investment operations..... 1.50 (0.49) 1.98
4.24 (2.31) 2.32
---------- -------- --------
-------- ------- -------
Dividends from net investment income... (0.15) (0.22) (0.10)
(0.16) (0.26) (0.42)
Distributions from net capital and
currency gains....................... (0.19) (0.94) (0.11)
-- -- (0.01)
---------- -------- --------
-------- ------- -------
Total dividends and distributions.... (0.34) (1.16) (0.21)
(0.16) (0.26) (0.43)
---------- -------- --------
-------- ------- -------
Capital reduction with respect to
issuance of Fund shares.............. (0.02) (0.07) (1.38)
(1.17) -- --
---------- -------- --------
-------- ------- -------
Net asset value, end of period......... $ 11.18 $ 10.04 $ 11.76
$ 11.37 $ 8.46 $ 11.03
---------- -------- --------
-------- ------- -------
---------- -------- --------
-------- ------- -------
Market price per share, end of
period............................... $ 9.50 $ 8.19 $ 10.13
$ 10.38 $ 7.75 $ 9.75
---------- -------- --------
-------- ------- -------
---------- -------- --------
-------- ------- -------
TOTAL INVESTMENT RETURN BASED ON#:
Market value........................... 20.46% (7.84)%
(0.56)% 36.39% (18.24)% 39.66%
Net asset value........................ 15.60% (2.70)% 5.39%
36.93% (21.11)% 27.48%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net
assets............................... 1.44%* 1.50% 1.45%
1.87% 1.90% 2.25%
Ratio of net investment income to
average net assets................... 1.79%* 2.24% 1.42%
1.50% 1.86% 3.11%
Portfolio turnover rate................ 28% 45% 46%
108% 39% 82%
Net assets, end of period (000
omitted)............................. $ 189,166 $168,111 $186,852
$111,230 $50,946 $66,374
Average net assets (000 omitted)....... $ 175,008 $162,228 $149,801
$ 67,341 $61,645 $57,762
Average commission rate per share...... $ 0.0078 N/A N/A
N/A N/A N/A
</TABLE>
- ---------------
* Annualized.
# Total investment return is calculated assuming a purchase of common
stock on the first day and a sale on the last day of each period
reported. Dividends and distributions are assumed, for purposes of this
calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total investment return does not reflect
brokerage commissions.
NOTE: Contained above is operating performance for a share of common stock
outstanding, total investment return, ratios to average net assets and
other supplemental data for each of the periods indicated. This
information has been determined based upon financial information
provided in the financial statements and market value data for the
Fund's shares.
See Notes to Financial Statements.
12
<PAGE>
OTHER INFORMATION
Dividend Reinvestment and Cash Purchase Plan. Shareholders may elect to have
all distributions of dividends and capital gains automatically reinvested in
Fund shares pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan
(the Plan). Shareholders who do not participate in the Plan will receive all
distributions in cash paid by check in United States dollars mailed directly to
the shareholders of record (or if the shares are held in street or other nominee
name, then to the nominee) by the custodian, as dividend disbursing agent.
Shareholders who wish to participate in the Plan should contact the Fund at
(800) 451-6788.
State Street Bank & Trust Co. (the Plan Agent) serves as agent for the
shareholders in administering the Plan. If the Fund declares a dividend or
capital gains distribution and the net asset value per share of the Fund's
common stock exceeds the market price per share on the distribution payable
date, Plan Participants will receive shares purchased on the open market with
the proceeds of the distribution. In all other cases, Plan Participants will
receive a number of newly-issued shares determined by dividing the dollar amount
of the distributions by the net asset value per share of the Fund's common stock
on the distribution payable date, provided that the discount from current market
price will not exceed 5%.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below. The
Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Fund. There will be no brokerage commissions
charged with respect to shares issued directly by the Fund. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and distributions. The automatic reinvestment of
dividends and distributions will not relieve participants of any federal income
tax that may be payable on such dividends and distributions.
The Plan has been amended to allow participants to make optional cash
investments in Fund shares through the Plan Agent on the open market on a
monthly basis in amounts of at least $100.
The Fund reserves the right to amend or terminate the Plan either in full or
partially upon 90 days' written or telephone notice to shareholders of the Fund.
Participants in the Plan may withdraw from the Plan in whole or in part upon
written notice to the Plan Agent and will receive certificates for whole Shares
and cash for fractional Shares. In the alternative, by giving proper notice to
the Plan Agent, participants may receive cash in lieu of shares in an amount
which is reduced by brokerage commissions in connection with the sale of shares
and a $2.50 service fee.
All correspondence concerning the Plan should be directed to the Plan Agent,
State Street Bank & Trust Company, P.O. Box 8200, Boston, MA 02266-8200.
13
<PAGE>
Supplemental Proxy Information
The Annual Meeting of Shareholders of The First Australia Fund, Inc. (Fund)
was held on Thursday, March 14, 1996 at the offices of Prudential Securities
Incorporated, One Seaport Plaza, New York, New York. The meeting was held for
the following purposes:
(1) To elect the following five Directors to serve as Class II Directors
for a three-year term expiring in 1999:
- Rt. Hon. Malcolm Fraser
- Harry A. Jacobs, Jr.
- Howard A. Knight
- Richard H. McCoy
- Brian M. Sherman
Directors whose term of office continued beyond this meeting are as
follows: Anthony E. Aaronson, John A. Calvert-Jones, Sir Roden Cutler,
David L. Elsum, Laurence S. Freedman, Michael R. Horsburgh, Roger C.
Maddock, William J. Potter and John T. Sheehy;
(2) To ratify the selection of Price Waterhouse LLP as independent public
accountants of the Fund for the fiscal year ending October 31, 1996;
(3) To transact such other business as may properly come before the
meeting or any adjournment thereof.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Auditor Votes for Votes against
Votes withheld Abstentions
------------------------ ---------------- ---------------
- ---------------- -------------
<S> <C> <C> <C> <C>
<C>
(1) Rt. Hon. Malcolm Fraser 13,146,439.3689 --
692,246.2101 --
Harry A. Jacobs, Jr. 13,205,678.9659 --
633,006.6171 --
Howard A. Knight 13,161,653.8922 --
677,031.6908 --
Richard H. McCoy 13,168,699.1417 --
669,986.4413 --
Brian M. Sherman 13,165,456.9872 --
673,228.5958 --
(2) Price Waterhouse LLP 13,359,251.0822 110,608.3103
-- 368,826.1905
(3) There was no other business voted upon at the Annual Meeting of
Shareholders.
</TABLE>
14
<PAGE>
Directors
Anthony E. Aaronson
John A. Calvert-Jones
Sir Roden Cutler
David Lindsay Elsum
Rt. Hon. Malcolm Fraser
Laurence S. Freedman, Chairman
Michael R. Horsburgh
Harry A. Jacobs, Jr.
Howard A. Knight
Roger C. Maddock
Richard H. McCoy
William J. Potter
John T. Sheehy
Brian M. Sherman
Officers
Brian M. Sherman, President
Laurence S. Freedman, Vice President
Ouma Sananikone-Fletcher, Assistant Vice President
and Chief Investment Officer
David Manor, Treasurer
Roy M. Randall, Secretary
Eugene S. Stark, Assistant Treasurer
Barry G. Sechos, Assistant Treasurer
Kenneth T. Kozlowski, Assistant Treasurer
Allan S. Mostoff, Assistant Secretary
Margaret A. Bancroft, Assistant Secretary
The accompanying financial statements as of April 30, 1996 were not audited and
accordingly, no opinion is expressed on them.
This report, including the financial statements herein, is transmitted to the
shareholders of The First Australia Fund, Inc. for their information. This is
not a prospectus, circular or representation intended for use in the purchase
of shares of the Fund or any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase, from time to time, shares of
its common stock in the open market.
<PAGE>
- ------------------------------------------------------
Investment Manager
EquitiLink International Management Limited
Union House, Union Street
St. Helier, Jersey, Channel Islands
Investment Adviser
EquitiLink Australia Limited
190 George Street
Sydney, NSW 2000, Australia
Consultant
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07101
Administrator
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, New York 10292
Custodian and Transfer Agent
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
Freehill, Hollingdale and Page
19-29 Martin Place
Sydney, NSW 2000, Australia
One Seaport Plaza
New York, NY 10292
toll free (800) 362-3277
or for information regarding net asset value
(800) 451-6788
Shares of The First Australia Fund, Inc. are traded on the
American Stock Exchange and on the Pacific Stock Exchange under the
symbol ``IAF''. Information about the Fund's net asset value and
market price is published weekly in Barron's and in the Monday
edition of The Wall Street Journal.
For a weekly update of the Fund's net asset value
and share price, or to receive more information on the Fund, call
toll-free:
1-800-323-9995
318652104
