The First Australia
Fund, Inc.
- ------------------------------------------------------------
- -------
Annual Report
October 31, 1996
Highlights
-------------------------------------------
- The Fund's total investment return based on share price
was 17.8% over
the twelve months ended October 31, 1996 (assuming
reinvestment of
dividends and distributions).
- The Fund's total investment return based on NAV was
15.6% over the twelve
months ended October 31, 1996 (assuming reinvestment of
dividends and
distributions).
- Australian corporations expect to see earnings
turnaround from a cyclical
low in December 1996.
<PAGE>
LETTER TO SHAREHOLDERS
December 13, 1996
Dear Shareholder,
We are pleased to present the report for The First
Australia Fund, Inc. for
the year ended October 31, 1996, prepared by the Investment
Manager, EquitiLink
International Management Limited. An overview of the
Australian economy and
financial markets is also included.
The Australian stock market performed strongly over the
past year, with
Australian share prices rising to record levels in October.
The strongest gains
during the October quarter were achieved by the industrial
sector. Despite
continued earnings disappointment, the sharp decline in bond
yields provided
positive valuation effects for industrial shares. Resources
stocks lagged the
overall index, reflecting weaker commodity price sentiment.
The environment in
Australia is conducive to equities. Moderate growth and low
inflation should
coincide with an expected turnaround in the corporate
profits cycle from a
cyclical low in December 1996.
Over the twelve months to the end of October, the
Australian dollar
appreciated by 4.2% against the U.S. dollar. The Australian
dollar recovered
strongly early in the October quarter, following the
weakness associated with
the July interest rate cut. For the remainder of the
quarter, the dollar traded
above US$0.79, remaining firm despite less positive
commodity price sentiment
and growing expectations of a further rate cut. However,
continued relatively
low current account deficits and low inflation data were
supporting factors.
Looking ahead, any improvement in international growth and
commodity price
sentiment should further support the dollar.
In the three months to October 31, 1996, the Net Asset
Value (NAV) of the
Fund increased by 9.2%, assuming reinvestment of dividends
and distributions.
Over the twelve months to October 31, 1996, it has increased
by 15.6% again
assuming reinvestment of dividends and distributions. The
Fund's share price
return was 5.8% over the past three months and 17.8% over
the past twelve
months, assuming reinvestment of dividends and
distributions.
On December 10, 1996, the Board of Directors declared a
final dividend of
US11.9 cents per share and a capital gains distribution of
US14.6 cents per
share, bringing the total for the calendar year to US41.5
cents per share.
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.
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.
1
<PAGE>
- 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.
The Plan now 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
US$100, on a monthly basis. For each additional investment,
participants pay
only a service fee of US75 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
commission payments
for each individual.
To Request Your Information Brochure About the Plan
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 nominee to participate on your
behalf. If your nominee
is unable to participate on your behalf, you should request
it to re-register
your shares in your own name which will enable you to
participate in the Plan.
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
and is toll-free
for calls made from within the United States.
Yours sincerely,
Laurence S. Freedman Brian M.
Sherman
Chairman President
2
<PAGE>
REPORT BY THE INVESTMENT MANAGER
NAV Performance
The Fund's Net Asset Value (NAV) increased by 9.2% over
the three months
ended October 31, 1996, assuming reinvestment of dividends
and distributions.
The net change in the Fund's NAV over the past twelve months
was an increase of
15.6%, again assuming reinvestment of dividends and
distributions.
Share Price Performance
In share price terms, the Fund returned 5.8% over the
three month period and
produced a net gain of 17.8% over the past twelve months,
assuming reinvestment
of dividends and distributions.
Quality of the Portfolio
The quality of the portfolio has been strengthened, with
67% of the Fund by
value included in the Australian Stock Exchange's Top 100.
The remaining stocks
represent a selection of smaller growth and value companies.
Increasingly these
companies are attracting the attention of both corporate and
institutional
investors. The Fund's strategy focuses on identifying value
in individual stocks
rather than on market sectors.
Dividends and Distributions
The Board of Directors on December 10, 1996, declared a
final dividend and
distribution of US26.5 cents per share, consisting of US3.5
cents per share paid
out of short-term capital gains, US11.1 cents paid out of
long-term capital
gains and US11.9 cents per share paid out of net investment
income. This follows
a semi-annual distribution of US15.0 cents per share,
composed of US7.7 cents
per share in net investment income and US7.3 cents per share
of short-term
capital gains paid in July 1996. This brings total dividends
and distributions
to US41.5 cents per share for the calendar year.
Portfolio Composition
The following chart and table summarize the composition
of the Fund's
portfolio, expressed as a percentage of net assets. The
Fund's overweighting to
resources was reduced in the October quarter to 33.6% of net
assets relative to
the 30% weighting of resource stocks in the Australian Stock
Exchange's All
Ordinaries Index.
[CHART TO COME]
3
<PAGE>
Selected Equity Holdings
The following notes highlight the Fund's top ten holdings
at October 31,
1996.
Broken Hill Proprietary Company Limited (BHP) 7.2%
of total net 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
increased 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.
Westpac Banking Corp. 5.4%
of total net assets
Westpac is Australia's second largest bank after National
Australia Bank in
terms of market capitalization. The bank holds some 17% of
all Australian
banking assets and 18% of housing loans in Australia.
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%. In
April 1996 Westpac
acquired the Trust Bank of New Zealand for A$1.1 billion.
News Corporation Limited 4.4%
of total net 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 is working towards a worldwide joint venture
to develop seamless
network infrastructures covering telephony, information and
entertainment
services. Globalization of the News network continues with
the negotiations for
AskyB.
National Australia Bank Limited (NAB) 4.4%
of total net 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
should provide solid future profit growth. The Bank's
acquisition of Michigan
National Bank has provided further strategic diversification
through entry into
the US market.
Western Mining Corporation Holdings Limited 3.6%
of total net 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 is currently in its most significant expansion phase
since the late
1960s. Capital expenditure on planned and potential
developments through to 2000
totals A$5 billion.
Southcorp Holdings Limited 3.3%
of total net assets
Southcorp is a diversified industrial company with
businesses in packaging,
appliances and wine. The packaging group covers metal, paper
and plastic
containers for the food, drink and industrial markets. The
appliance group is
the Australian market leader in water heaters and holds
substantial market
shares in dishwashers, stoves and ranges. The wine group is
benefiting from
rapidly growing exports of bottled wines to Europe and North
America. Southcorp
is Australia's largest wine producer and exporter with 30%
market share of the
domestic market.
4
<PAGE>
Advance Bank Limited 2.9%
of total net assets
Advance Bank provides regional retail and commercial
banking and funds
management services. Branches are predominantly located in
New South Wales and
South Australia following the 1995 takeover of the State
Bank of South
Australia. Retail banking represents approximately 70% of
the loan book with
commercial representing 30%. Advance Bank is currently under
merger negotiations
with St George Bank.
Lend Lease Corporation Limited 2.7%
of total net assets
Lend Lease Corporation is an integrated property and
financial services
business with sales of a A$1.3 billion. It's major business
investments include
MLC, a shareholding in the Westpac Banking Corporation, and
control of listed
property trust, General Property Trust. Major property
investments/projects
currently undertaken include the Bluewater Shopping Centre
(UK) and the Darling
Park Stage 2 Project in Sydney. The Westpac dividend stream
(locked in until the
year 2000) is currently underpinning Lend Lease's reported
profits and dividend
yield.
Norvet Limited 2.5%
of total net assets
Norvet is an Australian biotechnology company which has
developed a range of
natural therapeutic medicines targeting the prevention of
dietary-related
``Western Diseases''. The commercialization of the Company's
product range is
supported by marketing and distribution alliances with a
number of leading
international pharmaceutical companies. Its first major
product, to treat
menopausal syndrome, will be launched worldwide in December
1996. Norvet has the
capacity to launch five products in 1997 and a further eight
products are
targeted for market release in 1998.
Australia and New Zealand Banking Group Limited (ANZ) 2.5%
of total net assets
ANZ Banking Group is Australia's fourth largest bank by
market
capitalization, with principal activities in general
banking, mortgage and
installment lending and related financial services. Since
acquiring Grindlay's
Bank in 1984, ANZ has developed a presence in over 45
countries, with
international operations contributing some 40% of group
assets. The bank is
likely to participate in any major bank consolidation that
may emerge from the
Wallis inquiry into the Australian banking sector.
REVIEW AND OUTLOOK FOR THE AUSTRALIAN
FINANCIAL MARKETS
Economy
Recent Australian economic indicators have been weak,
despite GDP growth of
4.5% in the year to the June quarter. While economic growth
could remain subdued
in the near term, a number of factors should help to lift
the economy on a 12
month horizon, including a firmer international economy, the
recovering housing
sector and stronger business investment. Australia's
underlying inflation has
fallen to a 2.4% annual rate and the headline inflation
rate, currently 2.1%,
will fall further because of lower mortgage interest rates.
The Reserve Bank of
Australia has cut official interest rates by 1.5% in recent
months, reflecting
more positive inflation prospects and continued high
unemployment.
Stock Market
Australian share prices rose to record highs in October,
with supportive
valuation effects from the sharp decline in bond yields. The
All Ordinaries
Accumulation Index rose 18.2% over the twelve months to
October 31 and by 9.34%
5
<PAGE>
over the past quarter. Despite continued earnings
disappointment, reflecting the
slower pace of demand, the industrial sector performed
strongly, with the All
Industrials Accumulation Index up 23.5% over the year to
October 31. Resource
stocks lagged the overall index, reflecting weaker commodity
price sentiment.
The All Resources Accumulation Index rose a more modest 7.7%
over the year to
October 31.
Over the next twelve months the Australian equity market
is expected to
perform well. Industrial stocks will be helped by an
expected recovery in
domestic earnings and from firmer Australian economic
growth. Lower long term
bond yields will continue to support market valuations.
Resource companies will
benefit from any pick-up in the global economy and the
associated improvement in
the commodity price outlook.
Currency
Over the twelve months to the end of October, the
Australian dollar
appreciated by 4.2% against the U.S. dollar. In the quarter
ended October 31,
the Australian dollar appreciated by 2.6% against the U.S.
dollar, despite less
positive commodity price sentiment and growing expectations
of a further
official interest rate cut. However, continued relatively
low current account
deficits, attractive interest rate differentials and low
inflation data were
supporting factors. Looking ahead, any improvement in
international growth and
commodity price sentiment should further support the dollar.
On the date of this
letter, the Australian dollar was trading at US$.7917.
EquitiLink
International Management Limited
6
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
October 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--90.9%
Common And Preferred Stocks
And Equivalents--90.9%
Diversified Industries--15.1%
2,982,600 Circadian Technologies
Limited*(D)............... $ 3,405,713
4,000,000 Citistate Corporation
Limited*.................. 999,128
550,000 CSR Limited................. 1,849,179
8,610,292 Hydromet Corporation
Limited(D)................ 2,048,281
301,129 Lend Lease Corporation
Limited(D)(D)............. 5,107,564
1,432,330 Polartechnics Limited*(D)... 3,225,610
1,995,964 Southcorp Holdings
Limited................... 6,077,632
3,048,900 Southern Group Limited(D)... 1,281,355
2,948,900# Southern Group Limited *
Call options expiring June
'99 @ A$0.50.............. 455,980
760,000 Tabcorp Holdings Limited.... 3,585,759
------------
28,036,201
------------
Resources And Mining--33.6%
5,677,674 Amalg Resources NL*(D)...... 2,161,037
1,012,873 Broken Hill Proprietary
Company Limited(D)(D)..... 13,453,035
343,000 Comalco Limited............. 1,784,220
266,066 Delta Gold NL*.............. 506,350
2,754,652 Discovery Petroleum NL*..... 1,747,460
9,631,000 Dome Resources NL*(D)....... 2,405,650
6,617,027 Equatorial Mining NL*....... 839,524
450,000 Leighton Holdings
Limited(D)(D)............. 2,051,780
1,356,926 Niugini Mining Limited...... 3,604,553
1,206,235 North Limited............... 3,433,815
1,348,984 Oil Search Limited.......... 2,032,408
4,020,000 Pacific Island Gold NL...... 956,308
9,937,800 Pact Resources NL*.......... 1,103,237
2,452,000 Pasminco Limited............ 3,810,895
500,000# Resolute Samantha Limited*
Call options expiring Nov.
'96 @ A$3.25.............. 3,964
1,456,994 Ross Mining NL(D)(D)........ 1,444,170
1,065,762 Samantha Gold NL............ 2,163,469
760,800 Santos Limited(D)(D)........ 3,040,546
2,907,395 Savage Resources Limited.... 2,881,805
1,008,131# Savage Resources Limited*
Call options expiring Nov.
'98 @ A$1.25.............. 255,810
4,650,000 Striker Resources NL(D)..... $ 553,089
4,475,000# Striker Resources NL*
Call options expiring June
'97 @ A$0.20.............. 110,003
1,011,000 Ticor Limited*.............. 865,816
1,054,127 Western Mining Corporation
Holdings Limited*......... 6,628,520
2,021,185 Wiluna Mines Limited*....... 1,330,254
462,750 Woodside Petroleum
Limited................... 3,265,780
100,000# Woodside Petroleum Limited*
Put options expiring Dec.
'96 @ A$8.00.............. 1,586
------------
62,435,084
------------
Services--42.2%
1,000,000 Advance Bank Limited........ 5,376,259
546,720 Ausmelt Limited*(D)......... 1,235,550
781,818 Australia & New Zealand
Banking Group
Limited(D)(D)............. 4,569,026
500,000# Australia & New Zealand
Banking Group Limited*
Call options expiring Nov
'96 @ A$7.25.............. 114,979
290,226 Bank of Melbourne
Limited(D)(D)............. 2,002,193
2,497,224 Bank of Western
Australia(D)(D)........... 4,633,656
211,188 Brambles Industries
Limited................... 3,499,984
2,602,810 Corporation Express
Australia................. 2,373,508
1,311,100 Crown Limited*(D)(D)........ 2,848,635
480,303 Howard Smith Limited........ 3,770,518
670,000 Mayne Nickless Ltd.......... 4,452,145
750,775 National Australia Bank
Limited(D)(D)............. 8,245,368
2,365,000 National Mutual Holdings.... 3,375,624
900,656 News Corporation Limited.... 5,127,833
713,324 News Corporation Limited
Voting Preferred Stock.... 3,139,282
1,763,000 Norvet Limited*(D).......... 3,313,227
881,500# Norvet Limited*(D)
Call options expiring Dec.
'98 @ A$0.50.............. 1,384,006
719,910 QBE Insurance Group
Limited................... 3,813,337
6,818,084 Spectrum Network Systems
Limited(D)................ 3,297,939
830,000# Spectrum Network Systems
Limited*
Call options expiring June
'98 @ A$0.20.............. 230,354
1,697,924 Tourism Asset Holdings
Limited*.................. 1,467,558
1,760,000 Westpac Bank Corp.(D)(D).... 10,048,370
------------
78,319,351
------------
</TABLE>
See Notes to
Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
Total common and preferred stocks
and equivalents
(cost $149,415,121)......... $168,790,636
------------
Principal
Amount
(000) SHORT-TERM INVESTMENTS--7.4%
- -----------
Demand Deposit--7.1%
A$ 16,718 BNP Bank Demand Deposit
(cost $13,238,201)........ 13,256,880
Repurchase Agreement--0.3%
US$ 549 Repurchase Agreement, State
Street Bank & Trust
Company 5.50% dated
10/31/96, due 11/1/96 in
the amount of $549,084
(cost $549,000;
collateralized by $480,000
U.S. Treasury bill, due
8/15/19; value including
accrued
interest--US$565,185)..... 549,000
------------
Total short-term investments
(cost $13,787,201)........ 13,805,880
------------
Total Investments Before
Outstanding Options
Written--98.3%
(cost $163,202,322; Note
3)........................ 182,596,516
OUTSTANDING CALL OPTIONS
Contracts WRITTEN*--(0.1%)
- -----------
250 Westpac Bank Corp
Expiring November '96
@ A$6.75
(premiums received
US$42,729)................ (88,217)
------------
Total Investments, Net of
Outstanding Options
Written--98.2%............ 182,508,299
Other assets in excess of
liabilities--1.8%......... 3,247,804
------------
Net Assets--100%............ $185,756,103
------------
------------
</TABLE>
- ------------------
# Expressed in number of shares into which position
can be exercised or converted.
* Non-income producing security.
(D) Investment in affiliated company. Fund owns 5% or
more of the outstanding stock of issuer. In the
year ended October 31, 1996, the Fund earned
$136,955 of income and $499,038 of net realized
gains on investments in affiliated companies.
(D)(D) Portion of securities on loan; see Note 3.
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
October 31, 1996
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$163,202,322)........................ $182,596,516
Foreign currency, at value (cost
$79,579)............................. 79,837
Cash................................... 511
Collateral for securities loaned, at
value................................ 57,129,048
Receivable for investments sold........ 6,562,659
Dividends and interest receivable...... 874,568
Other assets........................... 28,516
------------
Total assets....................... 247,271,655
------------
Liabilities
Payable upon return of securities
loaned............................... 57,129,048
Payable for investments purchased...... 3,869,868
Accrued expenses and other
liabilities.......................... 298,977
Investment management fee payable...... 122,351
Outstanding call options written, at
value (premiums received $42,729).... 88,217
Administration fee payable............. 7,091
------------
Total liabilities.................. 61,515,552
------------
Net Assets $185,756,103
------------
------------
Net assets were comprised of:
Common stock, $.01 par value......... $ 169,143
Paid-in capital in excess of par..... 150,798,529
------------
150,967,672
Undistributed net investment
income............................... 1,540,677
Accumulated net realized gains on
investments.......................... 2,336,915
Net unrealized appreciation on
investments.......................... 12,802,281
Accumulated net realized and
unrealized foreign exchange
gains.............................. 18,108,558
------------
Net assets........................... $185,756,103
------------
------------
Net asset value per share:
($185,756,103 / 16,914,278 shares of
common stock issued and
outstanding)......................... $10.98
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to
Financial Statements.
8
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Year ended October 31, 1996
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Dividends (net of foreign withholding
taxes of $143,435).................. $ 5,074,748
Interest.............................. 721,413
Income from securities loaned......... 52,814
-----------
Total income........................ 5,848,975
-----------
Expenses
Investment management fee............. 1,558,325
Custodian's fees and expenses......... 290,000
Shareholder relations and
communications........................ 220,000
Independent accountant's fees and
expenses.............................. 113,000
Directors' fees and expenses.......... 113,000
Administration fee.................... 89,763
Legal fees and expenses............... 70,000
Transfer agent's fees and expenses.... 38,000
Insurance expense..................... 9,000
Miscellaneous......................... 26,963
-----------
Total operating expenses.............. 2,528,051
-----------
Net investment income................... 3,320,924
-----------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain on investment
transactions.......................... 3,410,710
Net realized loss on written option
transactions.......................... (64,671)
Net change in unrealized appreciation on
investments........................... 10,749,386
Net change in unrealized depreciation on
written options....................... (45,488)
-----------
Net gain on investments................. 14,049,937
-----------
Net increase in net assets resulting
from operations before net foreign
exchange gains........................ 17,370,861
Net realized and unrealized foreign
exchange gains........................ 6,975,063
-----------
Net Increase In Net Assets
Resulting From Operations............... $24,345,924
-----------
-----------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Year ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1996 1995
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 3,320,924 $ 3,634,680
Net realized gain on
investments and
written options
transactions.......... 3,346,039 2,711,476
Net change in unrealized
appreciation on
investments and
written options....... 10,703,898 (18,736,546)
------------ ------------
Net increase (decrease)
in net assets resulting
from operations before
net foreign exchange
gains................. 17,370,861 (12,390,390)
Net realized and
unrealized foreign
exchange gains........ 6,975,063 4,859,840
------------ ------------
Net increase (decrease)
in net assets resulting
from operations....... 24,345,924 (7,530,550)
Dividends to shareholders
from net investment
income.................. (3,864,129) (3,646,284)
Distributions to
shareholders from net
realized capital gains.. (4,432,685) (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................... 1,596,281 7,107,913
------------ ------------
Total increase
(decrease).............. 17,645,391 (18,741,209)
Net Assets
Beginning of year......... 168,110,712 186,851,921
------------ ------------
End of year............... $185,756,103 $168,110,712
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to
Financial Statements.
9
<PAGE>
- ----------------------------------------------------------
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
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 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
$6,975,063 includes
realized foreign exchange gains and losses from sales and
maturities of
portfolio securities, sales of foreign currencies, currency
gains or losses
realized between the trade and settlement dates on
securities transactions, the
difference between the amounts of dividends, interest and
foreign withholding
taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts
actually received or paid and changes in unrealized foreign
exchange gains and
losses in the value of portfolio securities and other assets
and liabilities
arising as a result of changes in the exchange rate.
Accumulated net realized
and unrealized foreign exchange gains shown in the
composition of net assets at
October 31, 1996 represent foreign exchange gains for book
purposes that have
not yet been recognized for tax purposes.
Foreign security and currency transactions may involve
certain considerations
and risks not typically associated with those of domestic
origin, including
unanticipated movements in the value of the foreign currency
relative to the
U.S. dollar.
The exchange rate for the Australian dollar at October
31, 1996 was US$.7930
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. 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 pay dividends
semi-annually from accumulated net investment income. The
Fund will also declare
and pay distributions at least 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.
Securities Lending: The Fund may lend its securities to
approved borrowers. The
loans are secured by collateral at least equal at all times
to the market value
of the securities loaned. The Fund may bear the risk of
delay in recovery of, or
even loss of rights in, the securities loaned should the
borrower of the
securities fail financially. The Fund receives compensation
for lending its
securities in the form of fees or it retains a portion of
interest on the
investment of any cash received as collateral. The Fund also
continues to
receive interest and dividends on the securities loaned and
any gain or loss in
the market price of the securities loaned that may occur
during the term of the
loan will be for the account of the Fund.
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, 1996, the Fund increased
undistributed net
investment income by $400,815, decreased accumulated net
realized gains on
investments by $16,636 and decreased accumulated realized
and unrealized foreign
exchange gains by $384,179. 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.
11
<PAGE>
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 $393,134 to the Investment Adviser and $35,184 to the
Consultant during the
fiscal year ended October 31, 1996.
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.
Note 3. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for
the year ended October
31, 1996 aggregated $226,534,043 and $223,247,779,
respectively.
Transactions in options written during the year ended
October 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- ---------
<S> <C> <C>
Options written..................... 4,297 $ 699,729
Options terminated in closing
purchase transactions............. (3,556) (536,688)
Options exercised................... (288) (82,300)
Options expired..................... (203) (38,012)
--------- ---------
Options outstanding at October 31,
1996.............................. 250 $ 42,729
--------- ---------
--------- ---------
</TABLE>
As of October 31, 1996, the Fund had securities on loan
with an aggregate
market value of $53,270,542. As of this date, the collateral
held for securities
on loan was comprised of U.S. government securities with an
aggregate market
value of $57,129,048.
The United States federal income tax basis of the Fund's
investments at
October 31, 1996 was $169,750,606 and accordingly, net
unrealized appreciation
for United States federal income tax purposes was
$12,845,910 (gross unrealized
appreciation--$22,679,544; gross unrealized depreciation--
$9,833,634).
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 October 31,
1996, the Investment
Manager owned 39,104 shares. During the fiscal years ended
October 31, 1996 and
1995 the Fund issued 171,122 and 848,706 shares in
connection with cash
dividends paid in stock, respectively.
Note 5. Transactions During the fiscal year ended
with Affiliates October 31, 1996, Prudential
Securities Incorporated, an
affiliate of the
Administrator, earned approximately $20,000 in brokerage
commissions as a result
of executing transactions in portfolio securities on behalf
of the Fund.
Note 6. Dividend On December 10, 1996 the
and Distribution Board of Directors of the Fund
declared a dividend of $.119
per share from net
investment income and a distribution of $.146 per share from
capital gains
payable on January 17, 1997 and January 31, 1997,
respectively, to shareholders
of record on December 31, 1996.
12
<PAGE>
- ------------------------------------------------------------
- --------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Years ended October 31,
- -----------------------------------------------------------
1996 1995 1994 1993 1992
- -------- -------- -------- -------- -------
<S>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......................
$ 10.04 $ 11.76 $ 11.37 $ 8.46 $ 11.03
- -------- -------- -------- -------- -------
Net investment income...................................
0.20 0.22 0.14 0.15 0.19
Net realized and unrealized gain (loss) on investments
and foreign currencies................................
1.25 (0.71) 1.84 4.09 (2.50)
- -------- -------- -------- -------- -------
Total from investment operations......................
1.45 (0.49) 1.98 4.24 (2.31)
- -------- -------- -------- -------- -------
Dividends from net investment income....................
(0.23) (.22) (0.10) (0.16) (0.26)
Distributions from net capital and currency gains.......
(0.26) (0.94) (0.11) -- --
- -------- -------- -------- -------- -------
Total dividends and distributions.....................
(0.49) (1.16) (0.21) (0.16) (0.26)
- -------- -------- -------- -------- -------
Capital reduction with respect to issuance of Fund
shares................................................
(0.02) (.07) (1.38) (1.17) --
- -------- -------- -------- -------- -------
Net asset value, end of year............................
$ 10.98 $ 10.04 $ 11.76 $ 11.37 $ 8.46
- -------- -------- -------- -------- -------
- -------- -------- -------- -------- -------
Market price per share, end of year.....................
$ 9.125 $ 8.19 $ 10.13 $ 10.38 $ 7.75
- -------- -------- -------- -------- -------
- -------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN BASED ON#:
Market value............................................
17.76% (7.84)% (0.56)% 36.39% (18.24)%
Net asset value.........................................
15.55% (2.70)% 5.39% 36.93% (21.11)%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets.................
1.41% 1.50% 1.45% 1.87% 1.90%
Ratio of net investment income to average net assets....
1.86% 2.24% 1.42% 1.50% 1.86%
Portfolio turnover rate.................................
133% 45% 46% 108% 39%
Net assets, end of year (000 omitted)...................
$185,756 $168,111 $186,852 $111,230 $50,946
Average net assets (000 omitted)........................
$178,756 $162,228 $149,801 $ 67,341 $61,645
Average commission rate per share.......................
$ 0.0074 N/A N/A N/A N/A
</TABLE>
- ---------------
# 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.
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.
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, 1996, 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, 1996 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 10, 1996
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, 1996) as
to the tax status of
dividends, distributions and foreign tax credits paid by the
Fund during the
fiscal year. During fiscal year 1996, 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>
Net
Foreign Dividends and
Gross
Taxes Distributions
Amount
Paid Paid
------
- ------- ---------------
<S> <C> <C>
<C> <C>
Australia --dividends $.206
$ .005 $ .201
--interest .028
.001 .027
New Zealand --dividends .001
- -- .001
United States --interest .001
- -- .001
--long-term capital gains .191
- -- .191
--short-term capital gains .073
- -- .073
------
- ------- -------
$.500
$ .006 $ .494
------
- ------- -------
------
- ------- -------
</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 1997 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
1996 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). Generally, shareholders who do not participate
in the Plan will
receive 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 of at
least $100 in Fund shares as frequently as monthly through
the Plan Agent on the
open market. Participants must pay a service fee of $0.75
for each investment
and a pro rata share of the brokerage commissions.
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 some or all of
their shares 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
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
Neville J. Miles
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, LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
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
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
for information call toll-free (800) 362-
3277
collect (201) 367-7403
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
