The First Australia
Fund, Inc.
- -------------------------------------------------------------------
Annual Report
October 31, 1995
Highlights
-------------------------------------------
- Positive outlook for Australian resource
stocks as global growth accelerates in
1996.
- Substantial resource sector earnings
growth expected.
- Dividend and distribution of US34.4
cents per share declared, bringing
total dividends and distributions to
US46.4 cents per share for the
calendar year.
- Australian dollar expected to rise in
line with strong commodity markets.
<PAGE>
LETTER TO SHAREHOLDERS
December 12, 1995
Dear Shareholder,
We are pleased to present the report for The First Australia Fund, Inc. for
the year ended October 31, 1995, prepared by the Investment Manager, EquitiLink
International Management Limited. An overview of the Australian economy and
financial markets is also included.
In summary, the Fund expects to benefit from its holdings of Australian
resource stocks over the course of 1996. With global economic growth set to
accelerate, industrial production should rise strongly, creating increased
demand for industrial raw materials and generating significant upward price
pressures for base metals and other hard commodities. Australian resource stocks
are expected to gain from these developments as strong earnings growth should
lead to substantial share price appreciation. The Fund remains overweight in
resource stocks on the basis of this forecast.
In the October quarter, the Net Asset Value (NAV) of the Fund increased by
1.5%. Over the year ended October 31, 1995, the NAV decreased by 2.7% assuming
reinvestment of dividends and distributions, reflecting a correction in the
resources sector of the Australian stock market during the first half of the
year. Since July 1995 the resources sector has firmed, reflecting the continuing
decline in commodity stockpiles and signs of a strengthening global economy.
Over the quarter the Fund's market value eased by 1.5%. For the twelve months
ended October 31, 1995 the Fund returned -7.8% assuming reinvestment of
dividends and distributions.
The Board of Directors on December 12, 1995, declared a final dividend and
distribution of US34.4 cents per share, consisting of US19.1 cents per share
paid out of long term capital gains and US15.3 cents per share paid out of net
investment income. This follows a semi-annual distribution of US12 cents per
share paid out of net investment income in July 1995, and brings total dividends
and distributions to US46.4 cents per share for the calendar year.
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 from
$100 to $3,000, on a semi-annual 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,
Sir Roden Cutler Brian M. Sherman
Chairman President
2
<PAGE>
REPORT BY THE INVESTMENT MANAGER
NAV Performance
The Fund's Net Asset Value (NAV) increased by 1.5% over the quarter ended
October 31, 1995. Over the past twelve months the NAV decreased by 2.7%,
assuming reinvestment of dividends and distributions.
Share Price Performance
In share price terms, the Fund returned -1.5% over the quarter and -7.8% over
the past twelve months, assuming reinvestment of dividends.
Dividends and Distributions
On December 12, 1995, the Board of Directors declared a final dividend of
US15.3 cents per share and a capital gains distribution of US19.1 cents per
share, bringing the total for the calendar year to US46.4 cents per share.
Quality of the Portfolio
The quality of the portfolio remains high, with 56% of the stocks by value
being included in the Australian Stock Exchange's Fifty Leaders Index and the
remainder in selected growth stocks. The Fund's strategy focuses on individual
stock characteristics rather than market sector themes.
Portfolio Composition
The following chart and table summarize the composition of the Fund's
portfolio, expressed as a percentage of total investments. Resource stocks
comprise 45.4% of total assets and continue to represent a significant
overweighting relative to the 32.7% weighting of resource stocks in the
Australian Stock Exchange's All Ordinaries Index.
[CHART TO COME]
Selected Equity Holdings
The following notes highlight the Fund's top ten holdings at October 31,
1995.
Broken Hill Proprietary Company Limited (BHP) 12.3% 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
3
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<PAGE>
contribute to strong growth in the latter part of this decade. The company
provides excellent leverage to Asia-Pacific economic activity through BHP's
extensive exports to, and operations within, the region.
News Corporation Limited 6.7% of total assets
News Corporation is the most geographically diverse media/entertainment group
in the world. News 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 telephone, information and
entertainment services. The introduction of capital from MCI significantly
reduces News' financial risk. News now owns 100% of Asia's Star Television which
has a potential audience reach of 3.6 billion people.
Western Mining Corporation Holdings Limited 5.5% 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 has embarked on its most significant expansion phase since the late
1960s. Capital expenditure on planned and potential developments through to 2000
totals A$5 billion. WMC last year expanded its alumina interests by acquiring
a
40% stake in Alcoa's world-wide bauxite and alumina business.
National Australia Bank Limited 5.4% 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 United Kingdom
promise solid future profit growth. The Bank's acquisition of Michigan National
Bank has provided further strategic diversification through entry into the U.S.
market.
Westpac Banking Corp. 4.0% of total assets
Westpac is Australia's second largest bank after National Australia Bank in
terms of profits. The bank holds some 15% of all Australian banking assets and
19% of housing loans in Australia. Westpac reorganized its operating structures
over the last three years and has concentrated its activities on Australian
retail banking. It has just completed the acquisition of a regional bank,
Challenge Bank, which has extensive operations in Western Australia.
Fletcher Challenge Limited 3.1% of total assets
Fletcher Challenge is New Zealand's second largest corporation, with
activities also in Australia, Canada, Brazil and Chile, providing exposure to
pulp, paper, wood products, oil and gas and building materials. Fletcher
Challenge has become the world's largest producer of newsprint.
Savage Resources Limited 3.0% 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
base metal producer. In addition, Savage has an expanding coal operation in the
Hunter Valley region of Australia's east coast. The purchase of the Tennessee
(USA) 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.
Pioneer International Limited 2.6% of total assets
Pioneer is one of four major building materials companies in Australia.
Pioneer also has a good geographical spread of building material assets
throughout the world. Considerable growth is coming from Asia and East European
4
<PAGE>
opportunities. By 1996, 48% of group earnings before interest and tax is
expected to come from outside Australia. Pioneer's other business is downstream
petroleum, which is now being 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.
Challenge Bank Limited 2.1% of total assets
Challenge Bank is a moderate sized regional bank in Australia which has
recently been acquired by Westpac Banking Corporation. The Manager has since
October 31, 1995, accepted Westpac's offer to purchase this holding in
Challenge, locking in a substantial profit for the Fund.
North Limited 2.1% of total assets
North Limited is one of Australia's major minerals and forest resource
companies. Its mining activities include iron ore, gold, copper, zinc and
uranium. In forestry it manages extensive areas of forests and supplies wood
resources to Australian and international customers. The Company has a number
of
new projects due for commissioning over the next three to four years.
REVIEW AND OUTLOOK FOR THE AUSTRALIAN
FINANCIAL MARKETS
Economy
Economic growth has moderated after peaking in the second half of 1994.
Australia's September quarter National Accounts showed annual growth of 3.3%.
While forward indicators suggest further moderation over the next three months
or so, there are some tentative signs amongst leading activity indicators of a
stronger growth outlook for 1996. The underlying inflation rate breached the
Reserve Bank's 2 to 3% target range in the September quarter, posting an annual
gain of 3.1%. Headline inflation is running at over 5%, reflecting, in part,
higher mortgage interest charges as a result of previous monetary policy moves.
Taxation changes have also boosted both the headline and underlying inflation
rates. The Reserve Bank has indicated that monetary policy will remain firm.
Stock Market
The Australian stock market has had a mixed year. After a sharp correction
in
late 1994 and early 1995, Australian resource stocks staged a brief resurgence
in mid-year, before consolidating over recent months. The industrial side of the
market has generally fared a little better, with banking stocks amongst the
leaders. Over the next twelve months, stronger global economic growth and rising
demand for industrial raw materials is likely to generate rapidly rising prices
for most commodities, particularly base metals. Australian resource companies
are expected to be amongst the major beneficiaries of these developments.
Earnings growth of the order of 35% is forecast as an average for Australian
resource stocks over the next twelve months. Strong performance by resource
stocks is likely to have a positive impact on the broader market, with
Australian industrial stocks currently attractively valued on an international
comparison basis. At the end of October, the All Ordinaries Index stood at
2,073.70 and on the date of this report it was 2,215.10.
Currency
Over the twelve months to the end of October, the Australian dollar
appreciated by 2.5% against the US dollar. In the quarter ended October 31, the
Australian dollar rose by 3.1% against the US dollar. The stronger currency
trend
5
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<PAGE>
reflects the sharp improvement in Australia's monthly current account deficit,
a
firmer outlook for commodity prices and supportive short term interest rates.
At
the end of October, the currency was trading at US$0.7608 and on the date of
this report it was at US0.7396.
Fixed Income
The Australian bond market rallied strongly over the past quarter, with
government ten year bond yields falling from 9.4% to a low of 8.3%. The strength
reflected the positive global bond market environment and favorable domestic
economic fundamentals. Higher inflation data released in October pushed up
yields, with ten year government bonds finishing the quarter trading around
8.8%. Australian bonds continue to provide substantially higher yields than
comparable United States fixed income securities.
EquitiLink International Management Limited
6
<PAGE>
<PAGE>
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THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
October 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--92.8%
Common Stocks and Equivalents--92.3%
Diversified Industries--15.6%
1,877,062 AAPC Limited................ $ 1,085,329
433,900 Ausmelt Limited*............ 947,416
257,662 Australian National
Industries Limited........ 201,910
299,300 Brambles Industries
Limited................... 3,178,786
150,000 CSR Limited................. 478,161
1,972,300 Fletcher Challenge
Limited................... 5,251,824
475,000 Keycorp Limited............. 1,264,826
2,000,000 Mallina Holdings Limited*... 296,711
1,249,484 Multistack International
Limited................... 846,038
1,563,000 Norvet Limited*............. 1,082,105
781,500# Norvet Limited*
Call options expiring Dec.
'98
@ A$0.50.................. 416,194
1,781,300 Pioneer International
Limited................... 4,363,772
32,000 Qantas Airways Limited*..... 564,800
1,031,000 QNI Limited................. 1,976,644
2,003,300 Shomega Limited............. 2,438,570
369,212 Simsmetal Limited........... 1,910,090
------------
26,303,176
------------
Natural Resources--44.7%
716,600 Acacia Resources Limited*... 1,172,153
2,923,000 Amalgamated Resources*...... 1,601,144
1,542,740 Broken Hill Proprietary
Company Limited........... 20,868,616
812,295 Burmine Limited............. 1,606,779
513,000 Comalco Limited............. 2,587,617
2,124,500 Coplex Resources NL*........ 307,100
771,000 Cumnock Coal Limited........ 1,173,150
6,056,000 Dome Resources NL*.......... 852,367
1,257,000 Eagle Mining Corporation
NL*....................... 2,142,163
1,034,295 Energy Developments
Limited................... 1,463,614
12,017,027 Equatorial Mining NL*....... 1,737,080
485,410 Forrestania Gold Limited.... 806,918
562,633 Goldfields Limited*......... 1,391,162
936,000 Lihir Gold Limited*......... 1,053,918
573,300 Nord Pacific Limited........ 457,974
62,700 North Flinders Mines
Limited................... 337,730
1,259,519 North Limited............... 3,545,485
3,463,200 Oil Search Limited.......... 2,924,622
2,852,000 Pasminco Limited............ 3,146,202
2,243,980 QCT Resources Limited....... 2,902,265
592,700 Ross Mining NL.............. 491,508
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
438,000 Samantha Gold NL............ $ 843,070
1,060,800 Santos Limited.............. 2,865,042
7,082,768 Savage Resources Limited*... 5,119,125
3,410,000 Striker Resources NL*....... 441,034
4,475,000# Striker Resources NL*
Call options expiring Jun.
'97
@ A$0.20.................. 255,343
1,275,530 Union Gold Mining
Limited*.................. 591,956
1,456,250 Western Mining Corporation
Holdings Limited*......... 9,328,615
644,250 Woodside Petroleum
Limited................... 3,083,005
------------
75,096,757
------------
Property Related--0.9%
4,000,000 Citistate Corporation
Limited*.................. 1,521,595
------------
Services--31.1%
760,000 Australia & New Zealand
Banking Group Limited..... 3,180,134
3,144,000 Australian Topmaking
Services
Limited*.................. 693,665
2,250,000 Bellara Medical Products
Limited*.................. 239,651
930,000 Challenge Bank Limited...... 3,608,463
1,002,455 Environmental Recovery
Service Limited........... 366,079
969,800 Gio Australia Holdings
Limited................... 2,051,144
5,797,170 Guinness Peat Group
Limited................... 2,866,807
2,599,379 Hydromet Corporation
Limited................... 1,384,321
191,979 Lend Lease Corporation
Limited................... 2,667,004
48,000# Lend Lease Corporation
Limited*
Call options expiring Feb.
'96 @ A$20.00............. 6,573
1,065,114 National Australia Bank
Limited................... 9,108,179
1,819,500 National Foods Limited...... 2,034,879
1,597,418 News Corporation Limited.... 8,045,364
708,035 News Corporation Limited
Limited Voting Preferred
Stock..................... 3,232,028
200,000# News Corporation Limited*
Put options expiring Nov.
'95
@ A$6,00.................. 3,043
9,437,800 Pact Resources NL*.......... 861,631
1,122,580 Polartechnics Limited*...... 708,867
68,080# Polartechnics Limited*
Call options expiring June
'96 @A$1.25............... 9,323
248,495 QBE Insurance Group
Limited................... 1,096,516
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
Services--(cont'd)
879,100 Seven Network Limited....... $ 2,280,667
2,305,000 Spectrum Network Systems
Limited*.................. 1,139,865
1,640,000 Westpac Banking Corp........ 6,725,147
------------
52,309,350
------------
Total common stocks and
equivalents
(cost US$145,586,024)..... 155,230,878
------------
Corporate Bond--0.5%
A$ 1,000 Australian Topmaking
Services
Limited, Unsecured
convertible
note(D), 8.50%, 12/13/99
(cost US$752,700)......... 760,798
------------
Total long-term investments
(cost US$146,338,724)..... 155,991,676
Principal
Amount
(000) SHORT-TERM INVESTMENT--0.2%
- -----------
Repurchase Agreement
US$ 299 Repurchase Agreement, State
Street Bank & Trust
Company, 2.50% dated
10/31/95, due 11/1/95 in
the amount of $299,021
(cost $299,000;
collateralized by $300,000
U.S. Treasury Note, 6.00%
due 12/31/97; value
including accrued interest
- US$305,066)............. 299,000
------------
Total Investments--93.0%
(cost US$146,637,724; Note
3)........................ 156,290,676
Other assets in excess of
liabilities--7.0%......... 11,820,036
------------
Net Assets--100%............ $168,110,712
------------
------------
</TABLE>
- ------------------
# Expressed in number of shares into which position
can be
exercised or converted.
* Non-income producing security.
(D) Fair valued security.
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
October 31, 1995
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$146,637,724)........................ $156,290,676
Foreign currency, at value (cost
$10,622,795)......................... 10,673,295
Receivable for investments sold........ 1,531,923
Dividends and interest receivable...... 691,482
Other assets........................... 22,231
------------
Total assets....................... 169,209,607
------------
Liabilities
Payable for investments purchased...... 680,542
Accrued expenses and other
liabilities.......................... 298,335
Investment management fee payable...... 113,555
Administration fee payable............. 6,463
------------
Total liabilities.................. 1,098,895
------------
Net Assets $168,110,712
------------
------------
Net assets were comprised of:
Common stock, $.01 par value......... $ 167,432
Paid-in capital in excess of par..... 149,203,959
------------
149,371,391
Undistributed net investment
income............................... 1,683,067
Accumulated net realized gains on
investments.......................... 3,440,197
Net unrealized appreciation on
investments.......................... 2,098,383
Accumulated net realized and
unrealized foreign exchange
gains.............................. 11,517,674
------------
Net assets........................... $168,110,712
------------
------------
Net asset value per share:
($168,110,712 / 16,743,156 shares of
common stock issued and
outstanding)......................... $10.04
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
8
<PAGE>
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THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Year ended October 31, 1995
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Dividends (net of foreign withholding
taxes of $170,957).................. $ 5,329,320
Interest (net of foreign withholding
taxes of $6,284).................... 743,109
------------
Total income........................ 6,072,429
------------
Expenses
Investment management fee............. 1,441,884
Custodian's fees and expenses......... 310,000
Shareholder communications............ 220,000
Independent accountant's fees and
expenses.............................. 113,000
Directors' fees and expenses.......... 107,000
Administration fee.................... 81,462
Legal fees and expenses............... 70,000
Transfer agent's fees and expenses.... 38,000
Insurance expense..................... 15,000
Miscellaneous......................... 31,731
------------
Total operating expenses.............. 2,428,077
------------
Net investment income before excise
tax................................... 3,644,352
Excise tax............................ (9,672)
------------
Net investment income................... 3,634,680
------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain on investment
transactions.......................... 2,535,199
Net realized gains on written option
transactions.......................... 176,277
Net change in unrealized appreciation on
investments........................... (18,739,899)
Net change in unrealized appreciation on
written options....................... 3,353
------------
Net loss on investments................. (16,025,070)
------------
Net decrease in net assets resulting
from operations before net foreign
exchange gains........................ (12,390,390)
Net realized and unrealized foreign
exchange gains........................ 4,859,840
------------
Net Decrease In Net Assets
Resulting From Operations............... $ (7,530,550)
------------
------------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Year ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 3,634,680 $ 2,130,888
Net realized gain on
investments and
written options
transactions.......... 2,711,476 15,710,004
Net change in unrealized
appreciation on
investments and
written options....... (18,736,546) (7,008,431)
------------ ------------
Net increase (decrease)
in net
assets resulting from
operations before net
foreign exchange
gains................. (12,390,390) 10,832,461
Net realized and
unrealized foreign
exchange gains........ 4,859,840 10,405,302
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ (7,530,550) 21,237,763
Dividends to shareholders
from net investment
income.................. (3,646,284) (1,282,560)
Distributions to
shareholders from net
realized capital gains.. (14,893,100) (1,505,043)
Net proceeds from rights
offering of Fund
shares.................. 220,812 57,172,242
Net asset value of shares
issued to shareholders
in connection with
distribution paid in
stock................... 7,107,913 --
------------ ------------
Total increase
(decrease).............. (18,741,209) 75,622,402
Net Assets
Beginning of year......... 186,851,921 111,229,519
------------ ------------
End of year............... $168,110,712 $186,851,921
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
9
<PAGE>
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THE FIRST AUSTRALIA FUND, INC.
Notes to Financial Statements
- ----------------------------------------------------------
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
significant accounting policies 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 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 year;
(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 year 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 year.
Net realized and unrealized foreign exchange gains of $4,859,840 includes
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid and changes in unrealized foreign exchange gains and
losses in the value of portfolio securities and other assets and liabilities
arising as a result of changes in the exchange rate. Accumulated net realized
and unrealized foreign exchange gains shown in the composition of net assets at
October 31, 1995 represent foreign exchange gains for book purposes that have
not yet been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rate for the Australian dollar at October 31, 1995 was US$.7608
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
10
<PAGE>
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.
Dividends and Distributions: It is the Fund's current policy to pay dividends
semi-annually from accumulated net investment income. The Fund will also declare
and pay distributions annually from net realized gains on investment
transactions and net realized foreign exchange gains, if any. 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.
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 year ended October 31, 1995, the Fund increased undistributed net
investment income by $633,964, increased accumulated net realized gains on
investments by $536,607, decreased accumulated realized and unrealized foreign
exchange gains by $1,160,899 and decreased paid-in capital in excess of par by
$9,672. 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 $376,342 to the Investment Adviser and $113,559 to the Consultant during
the fiscal year ended October 31, 1995.
Note 3. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for
11
<PAGE>
the year ended October 31, 1995 aggregated $70,349,077 and $73,850,936,
respectively.
Transactions in options written during the year ended October 31, 1995 were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options outstanding at October 31,
1994............................. 200 $ 11,492
Options written.................... 7,448 279,921
Options terminated in closing
purchase transactions............ (7,398) (259,512)
Options expired.................... (250) (31,901)
--------- --------
Options outstanding at October 31,
1995............................. 0 0
--------- --------
--------- --------
</TABLE>
The United States federal income tax basis of the Fund's investments at
October 31, 1995 was $154,192,294 and accordingly, net unrealized appreciation
for United States federal income tax purposes was $2,098,383 (gross unrealized
appreciation--$15,658,559; gross unrealized depreciation--$13,560,176).
Note 4. Capital There are 20 million shares of
$.01 par value common stock authorized. Of the
16,743,156 shares issued and outstanding at October 31, 1995, the Investment
Manager owned 37,390 shares. During the fiscal year ended October 31, 1995 the
Fund issued 848,706 shares in connection with a cash dividend paid in stock.
During the fiscal year ended October 31, 1994 the Fund issued 6,113,250 shares
of common stock (net proceeds $57,172,242) in connection with a rights offering
of the Fund's shares.
Note 5. Transactions During the fiscal year ended
with Affiliates October 31, 1995, Prudential
Securities Incorporated, an affiliate of the
Administrator, earned approximately $3,450 in brokerage commissions as a result
of executing transactions in portfolio securities on behalf of the Fund.
Note 6. Dividend On December 12, 1995 the
and Distribution Board of Directors of the Fund
declared a dividend of $0.153 per share from net
investment income and a distribution of $0.191 per share from capital gains
payable on January 12, 1996 and January 31, 1996, respectively, to shareholders
of record on December 29, 1995.
Note 7.
Quarterly Data
(Unaudited)
<TABLE>
<CAPTION>
Net
realized and Net increase
unrealized (decrease) in net
gains
(losses) on assets
Net investment
investments resulting from
Quarterly Total income and
foreign currency operations
period income Amount Per share Amount
Per share Amount Per share
<S> <C> <C> <C> <C>
<C> <C> <C>
- ------------------ ---------- --------------------------
- ---------------------------- ----------------------------
November 1, 1993
to
January 31, 1994 $ 778,997 $ 346,855 $ .02 $ 24,763,134
$ 1.99 $ 25,109,989 $ 2.01
February 1, 1994
to
April 30, 1994 998,199 524,438 .04 (15,731,983)
(1.26) (15,207,545) (1.22)
May 1, 1994 to
July 31, 1994 1,053,151 458,480 .03 6,832,032
.55 7,290,512 .58
August 1, 1994 to
October 31, 1994 1,468,642 801,115 .05 3,243,692
.28 4,044,807 .33
November 1, 1994
to
January 31, 1995 1,685,643 1,095,111 .07 (22,899,566)
(1.41) (21,804,455) (1.34)
February 1, 1995
to
April 30, 1995 1,357,275 802,766 .05 2,949,937
.18 3,752,703 .23
May 1, 1995 to
July 31, 1995 1,380,715 781,979 .05 7,202,486
.43 7,984,465 .48
August 1, 1995 to
October 31, 1995 1,648,796 954,824 .05 1,581,913
.09 2,536,737 .14
<CAPTION>
Share price on
Dividends the American
Quarterly and distributions Stock Exchange
period Amount Per share High Low
<S> <C<C> <C> <C> <C>
- ------------------ -------------------------- ----------------
November 1, 1993
to
January 31, 1994 $ 880,310 $ .09 $ 14 $10
February 1, 1994
to
April 30, 1994 -- -- 14 3/8 10 1/2
May 1, 1994 to
July 31, 1994 1,907,293 .12 10 7/8 10 1/8
August 1, 1994 to
October 31, 1994 -- -- 11 3/8 10
November 1, 1994
to
January 31, 1995 16,530,205 1.04 10 1/8 8 1/4
February 1, 1995
to
April 30, 1995 -- -- 8 15/16 7 3/8
May 1, 1995 to
July 31, 1995 2,009,179 .12 8 7/8 7 11/16
August 1, 1995 to
October 31, 1995 -- -- 8 7/8 7 13/16
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended October 31,
- ----------------------------------------------------------
1995 1994
1993 1992 1991
--------
- -------- -------- ------- -------
<S> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................... $ 11.76 $
11.37 $ 8.46 $ 11.03 $ 9.14
--------
- -------- -------- ------- -------
Net investment income.................................... .22
0.14 0.15 0.19 0.30
Net realized and unrealized gain (loss) on investments
and foreign currencies................................. (.71)
1.84) 4.09 (2.50) 2.02
--------
- -------- -------- ------- -------
Total from investment operations....................... (.49)
1.98 4.24 (2.31) 2.32
--------
- -------- -------- ------- -------
Dividends from net investment income..................... (.22)
(0.10) (0.16) (0.26) (0.42)
Distributions from net capital and currency gains........ (.94)
(0.11) -- -- (0.01)
--------
- -------- -------- ------- -------
Total dividends and distributions...................... (1.16)
(0.21) (0.16) (0.26) (0.43)
--------
- -------- -------- ------- -------
Capital reduction with respect to issuance of Fund
shares................................................. (.07)
(1.38) (1.17) -- --
--------
- -------- -------- ------- -------
Net asset value, end of year............................. $ 10.04 $
11.76 $ 11.37 $ 8.46 $ 11.03
--------
- -------- -------- ------- -------
--------
- -------- -------- ------- -------
Market price per share, end of year...................... $ 8.19 $
10.13 $ 10.38 $ 7.75 $ 9.75
--------
- -------- -------- ------- -------
--------
- -------- -------- ------- -------
TOTAL INVESTMENT RETURN BASED ON#:
Market value............................................. (7.84)%
(0.56)% 36.39% (18.24)% 39.66%
Net asset value.......................................... (2.70)%
5.39% 36.93% (21.11)% 27.48%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets.................. 1.50%
1.45% 1.87% 1.90% 2.25%
Ratio of net investment income to average net assets..... 2.24%
1.42% 1.50% 1.86% 3.11%
Portfolio turnover rate.................................. 45%
46% 108% 39% 82%
Net assets, end of year (000 omitted).................... $168,111
$186,852 $111,230 $50,946 $66,374
Average net assets (000 omitted)......................... $162,228
$149,801 $ 67,341 $61,645 $57,762
</TABLE>
<TABLE>
<C> <S>
- ---------------
# Total investment return is calculated assuming a purchase of common stock
on the first day and a sale
on the last day of each year 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.
(D) Due to the timing and magnitude of the rights offering, the amount
reported herein is not proportional
to the aggregate value reported in the Statement of Changes in Net Assets
and Note 7 to the financial
statements.
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 years indicated. This
information has been determined based upon financial information provided
in the financial statements
and market value data for the Fund's shares.
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The First Australia Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The First Australia Fund, Inc. (the
``Fund'') at October 31, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
``financial statements'') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1995 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 11, 1995
14
<PAGE>
FEDERAL TAX INFORMATION:
DIVIDENDS AND DISTRIBUTIONS
As required by Internal Revenue Code regulations, we are to advise you within
60 days of the Fund's fiscal year end (October 31, 1995) as to the tax status
of
dividends, distributions and foreign tax credits paid by the Fund during the
fiscal year. During fiscal year 1995, the Fund paid dividends from net
investment income which are taxable as ordinary income. However, these dividends
do not qualify for the 70% dividends received deduction for corporations.
The Fund has elected to give the benefit of foreign tax credits to its
shareholders in the amount designated below on a per share basis. Accordingly,
shareholders who must report their gross income dividends and distributions in
a
federal income tax return will be entitled to a foreign tax credit, or an
itemized deduction, in computing their U.S. income tax liability. It is
generally more advantageous to claim a credit rather than to take a deduction.
The following table allocates the dividends and distributions paid by their
sources:
<TABLE>
<CAPTION>
Foreign
Gross Taxes
Dividends
Amount Paid
Paid
------ -------
- ---------
<S> <C> <C> <C>
<C>
Australia --dividends $0.193 $ 0.005
$ 0.188
--interest 0.027 0.001
0.026
New Zealand --dividends 0.005 --
0.005
United States --interest 0.004 --
0.004
--long-term capital gains 0.538 --
0.538
--short-term capital gains 0.399 --
0.399
------ -------
- ---------
$1.166 $ 0.006
$ 1.160
------ -------
- ---------
------ -------
- ---------
</TABLE>
Although the Fund has made the election required to make this credit or
deduction available to you, the amount of allowable tax credit is subject to
Section 904 of the Internal Revenue Code. Shareholders are advised to consult
their own tax advisers with respect to the tax consequences of their investment
in the Fund.
In January 1996 shareholders will receive Form 1099-DIV, or substitute
1099-DIV, which will reflect the amount of dividends and distributions and
foreign taxes to be used by calendar year taxpayers on their 1995 federal income
tax returns.
15
<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 also allows participants to make optional cash investments in Fund
shares through the Plan Agent on the open market.
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 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.
16
<PAGE>
Directors
Anthony E. Aaronson
John A. Calvert-Jones
Sir Roden Cutler
David Lindsay Elsum
Rt. Hon. Malcolm Fraser
Laurence S. Freedman
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
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
for information call toll-free (800) 451-6788
collect (212) 214-5572
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
<PAGE>
