<PAGE>
(R)
The First Australia
Fund, Inc.
- -------------------------------------------------------------------
Semi-Annual Report
April 30, 1997
Highlights
-------------------------------------------
- Total dividends and distributions for
past twelve months of US41.5 cents per
share, equating to a cash distribution
rate of 4.9% (based on share price of
US$8.50 at April 30, 1997).
- Corporate earnings are expected to improve
over the remainder of 1997 as the Australian
economy strengthens.
<PAGE>
LETTER TO SHAREHOLDERS
June 12, 1997
Dear Shareholder,
We are pleased to present the Semi-Annual Report for The First Australia
Fund, Inc. for the six months ended April 30, 1997, prepared by the Investment
Manager, EquitiLink International Management Limited. An overview of the
Australian economy and financial markets is also included.
Although the industrial sector improved over the past six months because of
expectations of higher earnings, the resource sector continued to lag behind the
market. Gold shares were the worst performers as gold fell by 10%. Metal shares
performed only modestly, with base metal prices not showing signs of improvement
until the end of April.
The Fund's performance during the period under review was adversely affected
by weakness in the resources sector and by the holding of smaller capital stocks
which have underperformed the market indices. The Fund's manager has implemented
a series of steps which are designed to redirect the portfolio into major
stocks.
Currency trends were not favorable for the Fund over the six months to April
30, 1997. During this period the Australian dollar depreciated by 1.4% against
the US dollar to US$0.7816. The Australian dollar was volatile over the period
because of changing perceptions about the strength of commodity prices and the
future direction of interest rates.
The outlook for Australian shares is improving. A further cut to official
interest rates in May by the Reserve Bank of Australia should boost the economy,
and with it corporate earnings should grow more strongly. In addition, with
world economic growth rising, the outlook for commodity prices and resource
shares is improving. Since late April and into May, metal prices have begun to
rise with the best gains having been made in nickel, aluminium and zinc.
Dividends and Distributions
On December 10, 1996, the Board of Directors declared a year-end dividend and
distribution of US26.5 cents per share, consisting of US11.1 cents per share
paid out of long-term capital gains, US3.5 cents per share paid out of
short-term capital gains and US11.9 cents per share paid out of net investment
income, bringing the total for the twelve months to April 30, 1997 to US41.5
cents per share. This equates to a cash distribution rate of 4.9%, based on a
share price of US$8.50 at April 30, 1997.
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.
1
<PAGE>
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.
The Plan also provides shareholders, who own shares in their own name, with
the option of making additional cash investments in the Fund, in any amount over
$100, on a monthly basis. For each additional investment, participants pay 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.
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, P.O. 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 reregister
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 total return based on NAV was 0.02% and -0.04% over the six month
and twelve month periods ended April 30, 1997, assuming reinvestment of
dividends and distributions.
Share Price Performance
In share price terms, the Fund returned -4.0% over the six months ended April
30, 1997 and -6.2% over the year to this date, assuming reinvestment of
dividends and distributions. The Fund's shares were trading at US$8.50 per share
at April 30, 1997.
Quality of the Portfolio
The quality of the portfolio has been strengthened, with 73% of the Fund by
market value representing companies in the Australian Stock Exchange's Top 100.
The remaining stocks represent a selection of smaller growth and value
companies. The Fund's strategy focuses on identifying value in individual stocks
rather than on market sectors.
Dividends and Distributions
On December 10, 1996, the Board of Directors declared a year-end dividend and
distribution of US26.5 cents per share, consisting of US11.1 cents per share
paid out of long-term capital gains, US3.5 cents per share paid out of
short-term capital gains and US11.9 cents per share paid out of net investment
income. This follows a semi-annual dividend and distribution of US15.0 cents per
share, composed of US7.7 cents per share in net investment income and US7.3
cents per share in short-term capital gains paid in July 1996, bringing the
total for the twelve months to April 30, 1997 to US41.5 cents per share. This
equates to a cash distribution rate of 4.9%, based on a share price of US$8.50
at April 30, 1997.
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 maintained over the six months to April 30, 1997 at 34% of net
assets.
CHART
3
<PAGE>
Selected Equity Holdings
The following notes highlight the Fund's top ten holdings at April 30, 1997.
National Australia Bank Limited (NAB) 7.3% of total investments
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. The Bank's acquisition of Michigan National Bank has provided
further strategic diversification through entry into the US market, while other
offshore operations in New Zealand and the United Kingdom are expected to
provide solid future profit growth.
Broken Hill Proprietary Company Limited (BHP) 6.4% of total investments
BHP is Australia's largest corporation and one of the world's largest
resource companies. It has superior mining assets, financial strength and growth
potential from both existing and new projects. Group sales amount to over A$20
billion from four main operating divisions: steel, petroleum, minerals and
copper. BHP has a number of new projects which are likely to contribute to
strong growth over the next five years. The recent acquisition of Magma copper,
headquartered in the USA, has increased its copper market shares to 10% of
world-wide supply. The Company provides leverage to Asia-Pacific economic
activity through its extensive exports to, and operations within, the region.
Recent focus on increasing returns on assets within the underperforming steel
division should boost earnings in the medium term.
News Corporation Limited 4.8% of total investments
News Corporation is a global, vertically integrated entertainment and media
company. News produces film and television entertainment media through the Fox
brand name. It is building a global distribution platform in highly populated
regions in order to leverage off the relatively high fixed cost production
businesses. It has also entered into joint venture arrangements with other
media/telecommunications companies in order to reduce its financial risk and
expand its market presence.
Westpac Banking Corporation 4.2% of total investments
Westpac is Australia's second largest bank in terms of market capitalization.
It holds some 17% of all Australian banking assets and 18% of housing loans.
Westpac has reorganized its operating structures over the last three years and
has concentrated its activities within Australian retail banking.
Australia and New Zealand Banking Group Limited (ANZ) 4.0% of total investments
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, headquartered in the UK in 1984, ANZ has developed a presence in over 45
countries, with international operations contributing some 40% of group assets.
Commonwealth Bank of Australia (CBA) 3.6% of total investments
CBA is one of the four largest banking groups in Australia, capitalized at
$12.5 billion and with assets of $109 billion. CBA provides a full range of
retail and wholesale banking services as well as insurance and funds management
operations. It holds 17.3% market share by assets and 20.4% by deposits, and
generates over 90% of its profit from within Australia. The bank has a lending
mix of 41% residential mortgage, 46% commercial and 12% consumer finance.
4
<PAGE>
Western Mining Corporation Holdings Limited (WMC) 3.5% of total investments
WMC is a world class diversified mining company with interests in nickel,
alumina, aluminum, copper, uranium, gold and industrial minerals. 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. Sale of the oil and gas division will help fund these commitments.
Woodside Petroleum Limited 3.4% of total investments
Woodside is Australia's largest oil and gas company and is the operator of
the Northwest Shelf liquid natural gas project in Western Australia. The strong
growth projected from the Northwest Shelf project is set to continue, with
further expansion and new projects coming on stream in both oil and gas over the
next decade. The company is continuing to add to shareholder value from
exploration success in offshore Western Australia.
Rio Tinto Limited 2.9% of total investments
Rio Tinto is a large diversified mining company formed by the merger and dual
listing of RTZ and CRA in 1996. It has interests in iron ore, copper, coal,
gold, aluminum and industrial minerals located all around the world in over 50
mining locations. Management's strategy is to focus on large-scale, long-life,
low-cost open pit operations. It has shown its preparedness to divest
underperforming assets and not to develop those that do not meet its development
criteria.
North Limited 2.4% of total investments
North Limited is a mid-sized diversified mining company with interests in
iron ore, uranium, copper, zinc, gold, mining equipment and forestry. Its
diversification provides relatively smooth earnings growth from highly cyclical
businesses. North has one of the best organic growth profiles in the resources
sector and has an aggressive history of acquisitions.
REVIEW AND OUTLOOK FOR THE AUSTRALIAN
FINANCIAL MARKETS
Economy
The Australian economy continues to strengthen, with the housing sector
showing signs of improvement and business confidence increasing. Investment is
also strong, particularly in non-residential construction. However, some areas
of weakness remain; manufacturing and retail still face difficult trading
conditions and the unemployment rate is 8.7%. The Australian official interest
rate is 5.5%, the Reserve Bank of Australia lowered rates by a further 0.5% on
May 23.
Australia's inflation remains low, with underlying inflation at 2.1% over the
year to March 31, 1997 and headline inflation at 1.3% for the period. In coming
months, economic growth is expected to strengthen further, helped by lower
official interest rates, continued solid business investment and some
improvement in international economic activity.
5
<PAGE>
Stock Market
The All Ordinaries Accumulation Index rose 7.8% over the six months to April.
Resource stocks, however, continued to lag, reflecting continued subdued
commodity prices, and the fall in the price of gold.
The outlook for Australian equities remains positive. As the economy
strengthens, earnings should improve because of higher volumes and productivity
benefits from recent restructurings. Resource companies should benefit from the
firming of commodity prices as the international economy strengthens.
Currency
Over the six months to the end of April, the Australian dollar depreciated by
1.4% against the US dollar to US$0.7816. The Australian dollar was volatile over
the period because of changing perceptions about the strength of commodity
prices and the future direction of interest rates. On the date of this report,
the Australian dollar was trading at US$0.7525.
EquitiLink International Management Limited
6
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--90.9%
Common and Preferred Stocks and
Equivalents--90.9%
Diversified Industries--15.9%
314,700 Boral Limited................ $ 929,712
2,940,196 Circadian Technologies
Limited*D.................. 2,343,884
1,729,500 Citistate Corporation
Limited*................... 270,340
416,000 CSR Limited.................. 1,541,102
1,400,000 Fosters Brewing Group
Limited.................... 2,888,628
2,000,000 Goodman Fielder Limited...... 2,626,026
82,500 ICI Australia Limited........ 776,319
200,000 Lend Lease Corporation
LimitedDD.................. 3,835,873
815,500 Pacific Dunlop Limited....... 2,205,260
1,000,000 Pioneer International
Limited.................... 3,298,163
900,000 Polartechnics Limited*....... 1,449,003
625,560 Southcorp Holdings........... 2,189,338
2,034,900 Southern Group LimitedD...... 906,521
750,000Pound Southern Group Limited*D
Call options expiring June
'99
@ A$0.50................... 158,265
500,000 Spicers Paper Limited........ 859,711
400,000 Tabcorp Holdings Limited..... 1,980,461
79,105 Wesfarmers Limited........... 652,871
------------
28,911,477
------------
Resources And Mining--35.6%
5,677,674 Amalg Resources NL*D......... 1,952,463
800,000 Broken Hill Proprietary
Company LimitedDD.......... 11,304,416
2,230,000 Centaur Mining &
Expedition................. 2,962,876
9,411,000 Dome Resources NL*D.......... 1,434,267
1,461,000 Great Central Mines
Limited.................... 2,808,957
993,780 Iron Carbide Limited......... 699,025
400,000 Leighton Holdings Limited.... 1,800,703
2,000,000 Macmahon Holdings Limited.... 1,547,479
422,808 Niugini Mining Limited....... 1,024,388
1,218,297 North Limited................ 4,306,649
1,048,984 Oil Search Limited........... 2,500,509
3,798,500 Pacific Island Gold NLD...... 712,497
2,179,600 Pasminco Limited............. 4,156,486
820,000 Resolute Limited............. 1,506,057
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
350,000 Rio Tinto Limited............ $ 5,230,168
2,053,766 Ross Mining NL............... 1,556,978
3,242,867 Savage Resources Limited..... 3,168,100
1,301,941Pound Savage Resources Limited*
Call options expiring Nov.
'98
@ A$1.25................... 284,910
4,650,000 Striker Resources NLD........ 508,792
4,145,000Pound Striker Resources NL*D
Call options expiring June
'97
@ A$0.20................... 16,198
1,950,150 Tap Oil...................... 2,240,501
1,054,127 Western Mining Corporation
Holdings Limited........... 6,261,325
1,252,595 Wiluna Mines Limited*........ 616,753
767,750 Woodside Petroleum Limited... 6,120,399
------------
64,720,896
------------
Services--39.4%
500,000 Amcor Limited................ 3,296,600
541,320 Ausmelt Limited*D............ 973,064
1,115,980 Australia & New Zealand
Banking Group Limited...... 7,143,319
512,453 Australia Province News...... 881,123
140,000 Bank of Melbourne Limited.... 1,017,585
200,000 Brambles Industries
Limited.................... 3,626,416
585,100 Commonwealth Bank of
Australia.................. 6,370,022
700,000 Crown Limited*............... 1,220,008
370,000 Foodland Associates
Limited.................... 2,258,460
250,000 Howard Smith Limited......... 2,188,355
220,000 Hudson Conway Limited........ 2,269,636
3,500,000 Infrastructure Trust of
Australia.................. 3,583,432
700,000 Jupiters Limited............. 1,575,615
185,200 Macquarie Bank Limited....... 1,338,882
84,000 Mayne Nickless Limited....... 521,923
945,775 National Australia Bank
LimitedDD.................. 12,972,529
1,102,879 News Corporation Limited..... 5,094,189
907,482 News Corporation Limited *
Voting Preferred Stock..... 3,468,220
675,058 Novogen Limited.............. 675,058
454,525Pound Novogen Limited*
Call options expiring Dec.
'98
@ A$0.50................... 230,904
1,000,000 Qantas Airways Limited*...... 2,082,845
4,633,277 Spectrum Network Systems
Limited.................... 1,267,407
</TABLE>
7
<PAGE>
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
Services (cont'd.)
23,000 St. George Bank Limited...... $ 141,649
1,385,000 Westpac Banking Corp.DD...... 7,479,758
------------
71,676,999
------------
Total common and preferred
stocks and equivalents
(cost $150,192,590)........ 165,309,372
------------
Short-Term Investments--7.0%
Principal
Amount
(000) Corporate Bond--0.2%
- ----------
A$ 600 Southern Group Limited
12.00%, 3/8/98
(cost $306,748)............ 304,807
------------
Demand Deposits--6.4%
7,007 State Street Bank & Trust
Company, Demand Deposit,
5.65%...................... 6,678,116
6,346 Banque National de Paris,
Demand Deposit, 5.60%...... 4,960,438
------------
Total demand deposits
(cost US$11,470,134)....... 11,638,554
------------
Repurchase Agreement--0.4%
US$ 710 Repurchase Agreement, State
Street Bank & Trust
Company,
5.20%, dated 4/30/97, due
5/1/97 in the amount of
$710,103 (cost $710,000;
collateralized by $720,000
U.S. Treasury Bill, due
8/15/97; value including
accrued
interest-US$725,947)....... 710,000
------------
Total short-term investments
(cost US$12,486,882)....... 12,653,361
------------
Total Investments--97.9%
(cost $162,679,472; Note
3)......................... 177,962,733
Other assets in excess of
liabilities--2.1%.......... 3,833,545
------------
Net Assets--100%............. $181,796,278
------------
------------
</TABLE>
- ------------------
Pound 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 six months ended April 30, 1997, the Fund incurred
$72,689 of net realized losses on investments in affiliated companies.
DD Portion of securities on loan; see Note 3.
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
April 30, 1997
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$162,679,472)........................ $177,962,733
Foreign currency, at value (cost
$127,275)............................ 127,464
Cash................................... 661
Collateral for securities loaned, at
value................................ 19,479,905
Receivable for investments sold........ 3,957,965
Dividends and interest receivable...... 224,316
Other assets........................... 24,871
------------
Total assets....................... 201,777,915
------------
Liabilities
Payable upon return of securities
loaned............................... 19,479,905
Accrued expenses and other
liabilities.......................... 363,720
Investment management fee payable...... 118,253
Withholding tax payable................ 12,961
Administration fee payable............. 6,798
------------
Total liabilities.................. 19,981,637
------------
Net Assets $181,796,278
------------
------------
Net assets were comprised of:
Common stock, $.01 par value......... $ 170,593
Paid-in capital in excess of par..... 152,074,928
------------
152,245,521
Undistributed net investment
income............................... 622,441
Accumulated net realized gains on
investments.......................... 1,166,944
Net unrealized appreciation on
investments.......................... 13,347,864
Accumulated net realized and
unrealized foreign exchange
gains.............................. 14,413,508
------------
Net assets........................... $181,796,278
------------
------------
Net asset value per share:
($181,796,278 / 17,059,266 shares of
common stock issued and
outstanding)......................... $10.66
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
8
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Six months ended April 30, 1997
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Dividends (net of foreign withholding
taxes of $53,039)................... $ 1,960,121
Interest.............................. 215,888
Income from securities loaned - net... 107,203
-----------
Total income........................ 2,283,212
-----------
Expenses
Investment management fee............. 782,702
Custodian's fees and expenses......... 144,000
Shareholder relations and
communications........................ 109,000
Independent accountant's fees and
expenses.............................. 57,000
Directors' fees and expenses.......... 55,000
Administration fee.................... 45,252
Legal fees and expenses............... 35,000
Transfer agent's fees and expenses.... 19,000
Insurance expense..................... 5,000
Miscellaneous......................... 11,798
-----------
Total operating expenses.............. 1,263,752
-----------
Net investment income................... 1,019,460
-----------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain on investment
transactions.......................... 1,278,428
Net realized loss on written option
transactions.......................... (25,511)
Net change in unrealized appreciation on
investments........................... 500,095
Net change in unrealized appreciation on
written options....................... 45,488
-----------
Net gain on investments................. 1,798,500
-----------
Net increase in net assets resulting
from operations before net foreign
exchange losses....................... 2,817,960
Net realized and unrealized foreign
exchange losses....................... (3,573,351)
-----------
Net Decrease In Net Assets
Resulting From Operations............... $ (755,391)
-----------
-----------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
(Unaudited)
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Six months
ended Year ended
Increase (Decrease) April 30, October 31,
in Net Assets 1997 1996
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 1,019,460 $ 3,320,924
Net realized gain on
investments........... 1,252,917 3,346,039
Net change in unrealized
appreciation on
investments and
written options....... 545,583 10,703,898
------------ ------------
Net increase in net
assets resulting from
operations before net
foreign exchange gains
(losses).............. 2,817,960 17,370,861
Net realized and
unrealized foreign
exchange gains
(losses).............. (3,573,351) 6,975,063
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ (755,391) 24,345,924
Dividends to shareholders
from net investment
income.................. (2,012,798) (3,864,129)
Distributions to
shareholders from net
realized capital gains.. (2,469,485) (4,432,685)
Net asset value of shares
issued to shareholders
in connection with
distribution paid in
stock................... 1,277,849 1,596,281
------------ ------------
Total increase
(decrease).............. (3,959,825) 17,645,391
Net Assets
Beginning of period....... 185,756,103 168,110,712
------------ ------------
End of period............. $181,796,278 $185,756,103
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
9
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Notes to Financial Statements
(Unaudited)
- ----------------------------------------------------------
The First Australia Fund, Inc. (the 'Fund') was incorporated in Maryland on
September 30, 1985 as a closed-end, diversified investment company. The Fund's
principal investment objective is long-term capital appreciation through
investment primarily in equity securities of Australian companies listed on
Australian stock exchanges. The Fund's secondary investment objective is current
income. It is expected that normally at least 65% of the Fund's total assets
will be invested in equity securities listed on Australian stock exchanges and
that current income will be derived primarily from dividends and interest on
Australian corporate and governmental securities. The ability of issuers of debt
securities, including foreign currency balances on deposit with the Fund's
Australian subcustodian bank, held by the Fund to meet their obligations may be
affected by economic or political developments in a specific industry or region.
Note 1. Accounting The following is a summary of
Policies significant accounting policies
followed by the Fund in the preparation of its
financial statements.
Basis of Presentation: The financial statements of the Fund are prepared in
accordance with United States generally accepted accounting principles using the
United States dollar as both the functional and reporting currency.
Security Valuation: Investments are stated at value. Investments for which
market quotations are readily available are valued at the last reported sales
prices. If there is no sales price on the date of valuation, then investments
are valued at the most recently available sales price or at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian take possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest. To the extent
that any repurchase transaction exceeds one business day, the collateral is
valued on a daily basis to determine its adequacy. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
Foreign Currency Translation: Australian dollar ('A$') amounts are translated
into United States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities at
the exchange rates at the end of the fiscal period;
(ii) purchases and sales of investment securities, income and expenses at
the rate of exchange prevailing on the respective dates of such
transactions.
The Fund isolates that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the fluctuations arising
from changes in the market prices of securities held at fiscal period end.
Similarly, the Fund isolates the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of portfolio
securities sold during the fiscal period.
Net realized and unrealized foreign exchange losses of $3,573,351 includes
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid and changes in unrealized foreign exchange gains and
losses in the value of portfolio securities and other assets and liabilities
arising as a result of changes in the exchange rate. Accumulated net realized
and unrealized foreign exchange gains shown in the composition of net assets at
April 30, 1997 represent foreign exchange gains for book purposes that have not
yet been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rate for the Australian dollar at April 30, 1997 was US$.7816 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
10
<PAGE>
premium and an amount equal to that premium is recorded as a liability. The
investment or liability is adjusted daily to reflect the current market value of
the option. If an option expires unexercised, the Fund realizes a gain or loss
to the extent of the premium received or paid. If an option is exercised, the
premium received or paid is an adjustment to the proceeds from the sale or the
cost of the purchase in determining whether the Fund has realized a gain or
loss. The difference between the premium and the amount received or paid on
effecting a closing purchase or sale transaction is also treated as a realized
gain or loss. Gain or loss on purchased options is included in net realized gain
(loss) on investment transactions. Gain or loss on written options is presented
separately as net realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
or currency underlying the written option. The Fund, as purchaser of an option,
bears the risk of the potential inability of the counterparties to meet the
terms of their contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Dividends and Distributions: It is the Fund's current policy to 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 six months ended April 30, 1997, the Fund increased undistributed net
investment income by $75,102, increased accumulated net realized gains on
investments by $46,597 and decreased accumulated realized and unrealized foreign
exchange gains by $121,699. 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') and Prudential Investments Fund Management, Inc. (the
'Administrator'). The Investment Manager and the Investment Adviser are
affiliated companies.
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 including the selection of and the placement of orders with brokers and
dealers to execute portfolio transactions on behalf of the Fund.
The Investment Manager pays fees to the Investment Adviser for its services
rendered. The Investment Manager
11
<PAGE>
informed the Fund that it paid $5,057 to the Investment Adviser during the six
months ended April 30, 1997.
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 six months ended
April 30, 1997 aggregated $144,864,834 and $147,516,707, respectively.
Transactions in options written during the six months ended April 30, 1997
were as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options outstanding at October 31,
1996............................... 250 $ 42,729
Options terminated in closing
purchase
transactions....................... (125) (21,365)
Options exercised.................... (125) (21,364)
--------- --------
Options outstanding at April 30,
1997............................... 0 0
--------- --------
--------- --------
</TABLE>
As of April 30, 1997, the Fund had securities on loan with an aggregate
market value of $18,639,575. As of this date, the collateral held for securities
on loan was comprised of U.S. government securities with an aggregate market
value of $19,479,905.
The United States federal income tax basis of the Fund's investments at April
30, 1997 was $166,201,443 and accordingly, net unrealized appreciation for
United States federal income tax purposes was $11,761,290 (gross unrealized
appreciation--$21,941,068; gross unrealized depreciation--$10,179,778).
Note 4. Capital There are 20 million shares of
$.01 par value common stock authorized. Of the
17,059,266 shares issued and outstanding at April 30, 1997, the Investment
Manager owned 39,104 shares. During the six months ended April 30, 1997 and the
fiscal year ended October 31, 1996 the Fund issued 144,988 shares and 171,122
shares, respectively, in connection with cash dividends paid in stock.
Note 5. Transactions During the six months ended
with Affiliates April 30, 1997, Prudential
Securities Incorporated, an affiliate of the
Administrator, earned approximately $5,100 in brokerage commissions as a result
of executing transactions in portfolio securities on behalf of the Fund.
Note 6. Dividend On June 12, 1997 the Board
and Distribution of Directors of the Fund
declared a dividend of $.052 per share from net
investment income and a distribution of $.038 per share from short-term capital
gains payable on July 11, 1997 to shareholders of record on June 30, 1997.
12
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months
ended Years ended October 31,
April 30, -----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 10.98 $ 10.04 $ 11.76 $ 11.37 $ 8.46 $ 11.03
---------- -------- -------- -------- -------- -------
Net investment income.......................... 0.06 0.20 0.22 0.14 0.15 0.19
Net realized and unrealized gain (loss) on
investments
and foreign currencies....................... (0.10) 1.25 (0.71) 1.84 4.09 (2.50)
---------- -------- -------- -------- -------- -------
Total from investment operations............. (0.04) 1.45 (0.49) 1.98 4.24 (2.31)
---------- -------- -------- -------- -------- -------
Dividends from net investment income........... (0.12) (0.23) (0.22) (0.10) (0.16) (0.26)
Distributions from net capital and currency
gains........................................ (0.15) (0.26) (0.94) (0.11) -- --
---------- -------- -------- -------- -------- -------
Total dividends and distributions............ (0.27) (0.49) (1.16) (0.21) (0.16) (0.26)
---------- -------- -------- -------- -------- -------
Capital reduction with respect to issuance of
Fund shares.................................. (0.01) (0.02) (0.07) (1.38) (1.17) --
---------- -------- -------- -------- -------- -------
Net asset value, end of period................. $ 10.66 $ 10.98 $ 10.04 $ 11.76 $ 11.37 $ 8.46
---------- -------- -------- -------- -------- -------
---------- -------- -------- -------- -------- -------
Market price per share, end of period.......... $ 8.50 $ 9.125 $ 8.19 $ 10.13 $ 10.38 $ 7.75
---------- -------- -------- -------- -------- -------
---------- -------- -------- -------- -------- -------
TOTAL INVESTMENT RETURN BASED ONPound:
Market value................................... (4.03)% 17.76% (7.84)% (0.56)% 36.39% (18.24)%
Net asset value................................ 0.02% 15.55% (2.70)% 5.39% 36.93% (21.11)%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets........ 1.40%* 1.41% 1.50% 1.45% 1.87% 1.90%
Ratio of net investment income to average net
assets....................................... 1.13%* 1.86% 2.24% 1.42% 1.50% 1.86%
Portfolio turnover rate........................ 80% 133% 45% 46% 108% 39%
Net assets, end of period (000 omitted)........ $ 181,796 $185,756 $168,111 $186,852 $111,230 $50,946
Average net assets (000 omitted)............... $ 181,923 $178,756 $162,228 $149,801 $ 67,341 $61,645
Average commission rate per share.............. $ 0.0087 $ 0.0074 N/A N/A N/A N/A
</TABLE>
- ---------------
* Annualized.
Pound Total investment return is calculated assuming a purchase of
common stock on the first day and a sale on the last day of
each period reported. Dividends and distributions are assumed,
for purposes of this calculation, to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Total
investment return does not reflect brokerage commissions.
NOTE: Contained above is operating performance for a share of common
stock outstanding, total investment return, ratios to average
net assets and other supplemental data for each of the periods
indicated.
This information has been determined based upon financial
information provided in the financial
statements and market value data for the Fund's shares.
See Notes to Financial Statements.
13
<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 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 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.
14
<PAGE>
Supplemental Proxy Information
The Annual Meeting of Shareholders of The First Australia Fund, Inc. (the
'Fund') was held on Thursday, March 13, 1997 at the offices of Prudential
Securities Incorporated, One Seaport Plaza, New York, New York. The meeting was
held for the following purposes:
(1) To elect the following five Directors to serve as Class III
Directors for a three-year term expiring in 1999:
- Sir Roden Cutler
- David L. Elsum
- Laurence S. Freedman
- Michael R. Horsburgh
- William J. Potter
Directors whose term of office continued beyond this meeting are
as follows: Anthony E. Aaronson, Rt. Hon. Malcolm Fraser, Harry
A. Jacobs, Jr., Howard A. Knight, Roger C. Maddock, Richard H. McCoy,
Neville J. Miles, John T. Sheehy and Brian M. Sherman;
(2) To ratify the selection of Price Waterhouse LLP as independent
public accountants of the Fund for the fiscal year ending
October 31, 1997;
(3) To transact such other business as may properly come before
the meeting or any adjournment thereof.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Auditor Votes for Votes against Votes withheld Abstentions
------------------------ ------------ --------------- ---------------- ------------
<S> <C> <C> <C> <C>
(1) Sir Roden Cutler 12,539,511 -- 1,478,694 --
David L. Elsum 12,564,574 -- 1,453,631 --
Laurence S. Freedman 12,564,064 -- 1,454,141 --
Michael R. Horsburgh 12,563,010 -- 1,455,195 --
William J. Potter 12,658,999 -- 1,352,206 --
(2) Price Waterhouse LLP 13,748,063 140,990 -- 129,152
(3) There was no other business voted upon at the Annual Meeting of Shareholders.
15
<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
The accompanying financial statements as of April 30, 1997 were not audited and
accordingly, no opinion is expressed on them.
This report, including the financial statements herein, is transmitted to the
shareholders of The First Australia Fund, Inc. for their information. This is
not a prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase, from time to time, shares of its
common stock in the open market.
<PAGE>
Investment Manager
EquitiLink International Management Limited
Union House, Union Street
St. Helier, Jersey, Channel Islands
Investment Adviser
EquitiLink Australia Limited
190 George Street
Sydney, NSW 2000, Australia
Administrator
Prudential Investments 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
Stikeman, Elliott
Level 32, Chifley Tower
2 Chifley Square
Sydney, NSW 2000, Australia
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
for information call toll-free (800) 362-3277
collect (973) 367-7409
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
</TABLE>
