<PAGE>
(R)
The First Australia
Fund, Inc.
- -------------------------------------------------------------------
Semi-Annual Report
April 30, 1998
Highlights
-------------------------------------------
- Third quarterly distribution of US22.0
cents per share under new managed
distribution policy equates to annualized
cash distribution yield of 14.1%.
- High quality portfolio with 81% invested in
the top 100 of the Australian Stock Exchange.
- Shareholders attending the AGM approved amendments
including: removal of diversification restrictions.
- Australian dollar decline causes drop in NAV despite
pickup in portfolio performance.
<PAGE>
LETTER TO SHAREHOLDERS
June 12, 1998
Dear Shareholder,
We are pleased to present the semi-annual report for The First Australia
Fund, Inc. for the six months ended April 30, 1998, prepared by the Investment
Manager, EquitiLink International Management Limited.
Annual General Meeting
At the Annual General Meeting held on May 14, 1998, shareholders voted to
change the Fund's sub-classification under the Investment Company Act of 1940
and to eliminate investment restrictions regarding diversification. The Fund's
policy on concentration was also amended. The Fund will now be able to pursue a
more flexible investment strategy, reflecting the changes that have occurred in
the Australian stock market over the last few years. The proposal to amend The
Fund's articles of incorporation to add supermajority 75% voting requirements
was withdrawn by the Board prior to the meeting.
Investment Markets
The Australian All Ordinaries Accumulation Index returned 14.1% over the six
months and 15.3% over the year to April 30, 1998 in Australian dollar terms.
Industrial shares outperformed resource shares over both the six-month and
one-year periods. Over the last quarter, resource shares outperformed industrial
shares as a result of a strong gold sector. Since the end of April, the
Australian stock market has fallen 6.5%.
The Australian dollar fell by 7.1% against the U.S. dollar over the six
months to April 30, 1998 and by 16.5% over the year. This weakness resulted from
the flow-on effect of financial instability in Asia, together with weakness in
international commodity prices. Since the end of April, the Australia dollar has
fallen another 9.5% against the U.S. dollar to be US$0.59 at the date of this
report.
In U.S. dollar terms, the Australian All Ordinaries Accumulation Index
returned 6.25% over the six months and 11.00% over the year to April 30, 1998.
Performance
In Australian dollar terms, the Fund performed in line with the Australian
market. However, the depreciation of the Australian dollar has detracted from
returns when translated into U.S. dollars.
The Fund's Net Asset Value (NAV) return in U.S. dollar terms was 5.8% for the
six months, assuming reinvestment of distributions. The Fund's share price
return was 10.5% for the six months, assuming reinvestment of distributions.
Distribution Policy
As from December 1997, the Fund commenced making quarterly distributions. The
Fund's Board of Directors set the distribution rate at the commencement of each
year, which will be a percentage of the rolling average of the Fund's prior four
end-of-quarter NAVs. The rate for 1998 has been set at 9%. The distributions
will be made initially from net investment income, then from net realized gains
and, to any extent necessary, paid-in capital.
Pursuant to this managed distribution policy, the Board of Directors declared
a further quarterly distribution of US22.0 cents per share payable in July 1998.
This distribution, together with the earlier quarterly distributions of
1
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US23.3 cents per share paid in January and US22.8 cents per share paid in April,
equates to an annualized cash distribution yield of 14.1%, based on the share
price of US$6.4375 as of the date of this report.
Dividend Reinvestment and Cash Purchase Plan
We invite you to participate in the Fund's Dividend Reinvestment and Cash
Purchase Plan (the 'Plan'), which allows you to automatically reinvest your
distributions in additional shares of the Fund. Under this arrangement, the Plan
Agent will purchase shares for you on the stock exchange on or about the 15th of
each month.
As a Participant in the Plan, you will also have the convenience of:
Automatic reinvestment--the Plan Agent will automatically reinvest your
distributions, allowing you to gradually grow your holdings in the Fund;
Lower costs--shares purchased on your behalf under the Plan will be at
reduced brokerage rates;
Convenience--the Plan Agent will hold your shares in noncertificated form and
will provide a detailed record of your holdings at the end of each distribution
period.
For information on the Fund or the Dividend Reinvestment and Cash Purchase
Plan, please telephone investor relations at Dewe Rogerson, toll free on
1-800-323-9995.
Yours sincerely,
Laurence S. Freedman Brian M. Sherman
Chairman President
REPORT BY THE INVESTMENT MANAGER
NAV Performance
The Fund's NAV return in U.S. dollar terms was 5.8% for the six months and
- -6.3% for the year to April 30, 1998, assuming reinvestment of distributions.
The depreciation of the Australian dollar detracted from returns when translated
into U.S. dollars.
Currency
The Australian dollar fell by 7.1% versus the U.S. dollar over the six
months, and by 16.5% for the 12-month period to April 30, 1998.
Share Price Performance
The Fund's share price return was 10.5% for the six-month and -2.3% for the
12-month periods to April 30, 1998, assuming reinvestment of distributions. The
Fund's stock closed at US$7.75 per share on April 30, 1998.
2
<PAGE>
Investment Strategy
The Fund has moved to an approximately neutral weighting in both the
industrial and resource sectors. The Fund Manager has taken this neutral
weighting because there continues to be concern about the effect a slowdown in
the Asian region will have on Australian economic growth.
Quality of the Portfolio
The Fund has over 80% of its holdings by value in the top 100 companies of
the Australian Stock Exchange. During the year the Manager restructured the
Fund's portfolio to reduce exposure to smaller companies and resources and to
increase exposure to medium and large-sized industrial companies.
Distribution Policy
Commencing from January 1998, the Fund changed its distribution policy to
quarterly distributions at an annual rate being a percentage of the rolling
average of the prior four quarter-end NAVs. The rate for 1998 was set at 9% by
the Board of Directors. The distributions will be made initially from net
investment income, then from net realized gains and, to any extent necessary,
paid-in capital.
On June 12, 1998, the Board declared a further quarterly distribution of
US22.0 cents per share payable in July 1998. This distribution, together with
the earlier quarterly distributions of US23.3 cents per share paid in January
and US22.8 cents per share paid in April, equates to an annualized cash
distribution yield of 14.1%, based on the share price of US$6.4375 as of the
date of this report.
Investors may choose to reinvest their distribution under a favorable
Dividend Reinvestment Plan (see page 2).
Portfolio Composition
The following chart summarizes the composition of the Fund's portfolio,
expressed as a percentage of net assets. At April 30, 1998, the Fund held 76% of
its net assets in industrial stocks, 19% in resource stocks, and the balance in
cash.
(CHART)
Selected Equity Holdings
The following notes highlight the Fund's top ten holdings at April 30, 1998.
National Australia Bank Limited (NAB) 9.0% of total investments
Australia's largest full service banking group, with significant operations
in Australia, New Zealand, the UK and US. NAB has grown its international retail
banking presence through acquisitions while maintaining market leadership in
3
<PAGE>
Australia. The recent interim result showed strong growth in banking fees and
commissions, as well as continuing emphasis on expense reduction.
Telstra Corporation Limited 6.2% of total investments
Australia's dominant telecommunications carrier continues to maintain an
excellent position in a rapidly growing market. The deregulation of the
Australian telecommunications market on July 1, 1997 has increased competition
and may lead to some erosion of Telstra's market share in the future. However,
the benefits to shareholders include the opportunity to eliminate inefficient
work practices and high costs created under government ownership.
Australia & New Zealand Banking Group Limited (ANZ) 4.1% of total investments
Australia's fourth largest banking group, offering retail and wholesale
banking services to Australia, New Zealand and Asia. Recent management changes
have focused on cost control. Domestic asset quality and interest margins are
trending favorably.
WMC Limited (WMC) 4.1% of total investments
WMC is the third largest nickel concentrate producer in the world, has a 40%
interest in the largest Australian alumina producer and is the second largest
Australian gold producer. Expansion of its Olympic Dam copper/uranium mine
should place its production costs in the bottom quartile of world copper
producers. Its new phosphate mine is also expected to be a world-class
operation, supplying fertilizer across Asia.
Westpac Banking Corporation Limited (WBC) 4.0% of total investments
The second largest banking group in Australia, offering retail and wholesale
banking services to Australia, New Zealand and Asia. Management remains focused
on optimizing the returns from its domestic banking franchises. The share
buyback of an additional 60 million shares after the interim result should help
drive earnings per share growth.
Orica Limited 3.8% of total investments
Orica is a major domestic chemical company with markets in chemicals, paints
and explosives. Recent changes to the plastics division should improve returns
from this segment of the business. The company will continue to benefit from
capable management and the deregulation of gas and electricity markets, although
expected falls in commodity prices may impact near-term profitability.
Rio Tinto Limited 3.5% 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 around the world in over 50
mining operations. Management's strategy is to focus on large scale, long life,
low cost, and highly efficient open-pit operations.
Pioneer International Limited 3.2% of total investments
A specialty concrete, aggregate and cement producer with operations in
Europe, the U.S. and Australia. The group has some noncore building material
assets in Australia, which it is looking to divest in order to improve its
focus. Pioneer has excellent management and is currently undertaking a share
buyback in order to maintain an optimum level of gearing.
4
<PAGE>
News Corporation Limited 3.2% 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 has also entered into joint venture arrangements with other
media/telecommunications companies in order to reduce its financial risk and
expand its global market presence.
CSR Limited (CSR) 3.0% of total investments
A large diversified building materials supplier, CSR has building material
operations in Australia, Asia and the U.S., as well as high-quality aluminum and
sugar operations in Australia. The group has substantial growth potential, and
stronger management should enable the group to deliver some of this value to
shareholders.
REVIEW AND OUTLOOK FOR THE AUSTRALIAN
FINANCIAL MARKETS
Economy
Australian economic growth has slowed since mid-1997, reflecting the impact
of the Asian crisis on export growth. Domestic demand remained firm, supported
by private consumption and a housing sector recovery. Inflation remained low, at
a 1.5% annual rate in the March quarter. The Manager expects the Asian crisis to
continue to dampen growth through 1998. Higher import prices are expected to
lead to inflation drifting back over 2%. The Manager also expects Australia's
current account deficit to continue to be a negative influence throughout 1998.
On the positive side, the Australian government recently announced a budget
surplus which should reduce pressure on interest rates.
Sharemarket
The Australian stock market performed well over the six-months to April 30,
1998. Industrial stocks continued to outperform resources with the latter
adversely affected by the impact of weaker commodity prices and concerns about
lower demand resulting from the Asian crisis. The All Ordinaries Accumulation
Index rose by 14.1% over the six months while the All Industrials Accumulation
Index rose by 16.4% and the All Resources Accumulation Index edged up by only
6.7%. Since the end of April, the Australian stock market has fallen 6.5%.
The Telecommunications sector was boosted by the privatization and listing of
Telstra Corporation Limited, the government telecommunications company, in
November 1997.
During the period, earnings expectations were generally revised down. This
not only reflected concern about commodity prices but also an indication of some
slowing in domestic demand.
Currency
The Australian dollar depreciated by 5 cents against the U.S. dollar over the
six month period to US65 cents at April 30, 1998. The currency weakness
reflected continuing concerns about weaker commodity prices and a higher current
account deficit. Since the end of April, the Australian dollar has fallen by
9.5% to US59 cents against the U.S. dollar. Looking ahead, the dollar will
remain vulnerable to adverse events in the Asian region. However, once the
region stabilizes, an improvement in commodity prices is likely. This should
result in renewed strength for the currency.
EquitiLink International Management Limited
5
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- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
April 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--92.2%
Common Stocks And Preferred Stocks and
Equivalents--89.5%
Diversified Industries--26.1%
2,500,000 Adelaide Brighton Limited... $ 1,909,294
400,000 Australian Gas and Light
Company................... 2,979,673
1,500,000 CSR Limited................. 4,797,713
609,000 Faulding (F.H.) & Company
Limited................... 2,938,503
2,200,000 Fosters Brewing Group
Limited................... 4,796,407
1,000,000 Goodman Fielder Limited..... 1,553,545
830,000 Orica Limited............... 6,116,725
1,880,000 Lang Corporation Limited.... 2,086,189
900,000 Leighton Holdings Limited... 3,436,729
150,000 Lend Lease Corporation
Limited................... 3,446,520
4,500,000 MacMahon Holdings Limited... 1,498,061
1,810,000 Pioneer International
Limited................... 5,174,872
403,000 Polartechnics Limited*...... 854,939
1,596,854 Voicenet Australia
Limited................... 333,551
------------
41,922,721
------------
Resources And Mining--18.3%
393,000 Acacia Resources Limited.... 618,239
240,000 Capital Aluminum Limited.... 510,712
400,000 Broken Hill Proprietary
Company Limited........... 3,916,500
727,323 Comalco Limited............. 3,171,872
100,000 Fletcher Challenge
Limited*.................. 345,957
2,000,000 Lihir Gold Limited.......... 3,485,685
1,400,000Pound Macquarie Bank Limited
BHP call warrants expiring
Sept. '98 @ A$1.25*....... 91,385
1,015,000 Newcrest Mining Limited..... 1,855,116
579,000 North Limited............... 1,696,961
932,143 Pasminco Limited............ 985,699
400,000 Rio Tinto Limited........... 5,551,509
1,838,400 WMC Limited................. 6,552,086
95,200 Woodside Petroleum
Limited................... 623,282
------------
29,405,003
------------
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
Services--45.1%
388,995 Adelaide Bank Limited....... $ 1,371,149
950,000 Australia & New Zealand
Banking Group Limited..... 6,637,065
3,500,000 Australian Growth
Properties................ 1,941,931
202,000 Brambles Industries
Limited................... 4,167,953
380,000 Commonwealth Bank of
Australia................. 4,566,509
37,279 Foodland Associates
Limited................... 270,106
329,500 Formida Holdings Limited.... 1,000,127
4,000,000 FXF Trust................... 522,200
732,250 HIH Winterthur International
Holdings.................. 1,519,964
900,000 Jupiters Limited............ 1,574,433
1,007,678 National Australia Bank
Limited................... 14,339,208
912,595 News Corporation Limited
Voting Preferred Stock.... 5,146,817
1,500,000 Pacific Magazines & Printing
Limited................... 2,673,011
594,504 QBE Insurance Group
Limited................... 2,731,960
1,300,000 Reinsurance Australia
Corporation............... 3,631,901
4,200,000 Telstra Corporation
Limited................... 9,869,581
2,258,332 Village Roadshow Limited
Voting Preferred Stock.... 3,950,659
950,000 Westpac Banking Corporation
Limited................... 6,387,159
------------
72,301,733
------------
Total common stocks and
preferred stock and
equivalents
(cost US$146,951,523)..... 143,629,457
------------
Bonds--2.7%
1,513,761 State of Queensland
Exchanging NoteD
8.00%, 11/1/99
(cost US$3,943,265)....... 4,268,625
------------
Total long-term investments
(cost US$150,894,788)..... 147,898,082
------------
Principal
Amount
(000) SHORT-TERM INVESTMENTS--7.6%
- -----------
Demand Deposits--5.0%
A$ 1,148 State Street Bank & Trust
Company, Demand Deposit,
4.55%..................... 749,061
11,162 Banque National de Paris,
Demand Deposit, 4.60%..... 7,285,715
------------
Total demand deposits
(cost US$8,044,524)....... 8,034,776
------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Principal
Amount Value
(000) Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
Repurchase Agreement--2.6%
US$ 4,206 Repurchase Agreement, State
Street Bank & Trust
Company 5.35%, dated
4/30/98, due 5/1/98 in the
amount of $4,206,625 (cost
$4,206,000);
collateralized by
$3,090,000 U.S. Treasury
bill, due 5/15/18; value
including
accrued
interest--US$4,294,037)... $ 4,206,000
------------
Total short-term investments
(cost US$12,250,524)...... 12,240,776
------------
Total Investments--99.8%
(cost US$163,145,312; Note
3)........................ 160,138,858
Other assets in excess of
liabilities--0.2%......... 318,649
------------
Net Assets--100%............ $160,457,507
------------
------------
</TABLE>
- ------------------
Pound Expressed in number of shares into which position
can be exercised or converted.
* Non-income producing security.
D Notes are exchangeable into 100 million shares in
Suncorp-Metway Limited on November 1, 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
April 30, 1998
(Unaudited)
- ----------------------------------------------------------
<S> <C>
Assets
Investments, at value (cost
$163,145,312)........................ $160,138,858
Foreign currency, at value (cost
$1,235).............................. 1,234
Receivable for investments sold........ 1,007,740
Dividends and interest receivable...... 28,823
Other assets........................... 23,029
------------
Total assets....................... 161,199,684
------------
Liabilities
Bank overdraft......................... 111,500
Accrued expenses and other
liabilities.......................... 511,408
Investment management fee payable...... 111,443
Administration fee payable............. 6,312
Withholding taxes payable.............. 1,514
------------
Total liabilities.................. 742,177
------------
Net Assets $160,457,507
------------
------------
Net assets were comprised of:
Common stock, $.01 par value......... $ 171,900
Paid-in capital in excess of par..... 152,925,340
------------
153,097,240
Undistributed net investment
income............................... 1,700,007
Accumulated net realized gains on
investments.......................... 10,200,278
Net unrealized appreciation on
investments.......................... 8,375,541
Accumulated net realized and
unrealized foreign exchange
losses............................. (12,915,559)
------------
Net assets........................... $160,457,507
------------
------------
Net asset value per share:
($160,457,507 / 17,189,998 shares of
common stock issued and
outstanding)......................... $9.33
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Six months ended April 30, 1998
(Unaudited)
- ----------------------------------------------------------
<S> <C>
Net Investment Income
Income
Dividends (net of foreign withholding
taxes of $81,434)................... $ 2,828,046
Interest.............................. 554,467
Income from securities loaned, net.... 980
------------
Total income........................ 3,383,493
------------
Expenses
Investment management fee............. 706,372
Shareholder relations and
communications........................ 122,000
Custodian's fees and expenses......... 115,000
Directors' fees and expenses.......... 71,000
Independent accountant's fees and
expenses.............................. 56,000
Administration fee.................... 39,800
Legal fees and expenses............... 35,000
Transfer agent's fees and expenses.... 19,000
Insurance expense..................... 7,000
Miscellaneous......................... 12,640
------------
Total operating expenses.............. 1,183,812
------------
Net investment income before excise
tax................................... 2,199,681
Excise taxes............................ (136,935)
------------
Net investment income................... 2,062,746
------------
Realized and Unrealized Gains
(Losses) on Investments and Foreign
Currencies
Net realized gains on investment
transactions.......................... 11,614,835
Net change in unrealized appreciation on
investments........................... 5,765,040
------------
Net gain on investments................. 17,379,875
------------
Net increase in net assets resulting
from operations before net foreign
exchange gains........................ 19,442,621
Net realized and unrealized foreign
exchange losses....................... (11,502,227)
------------
Net Increase In Net Assets
Resulting From Operations............... $ 7,940,394
------------
------------
</TABLE>
<TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
(Unaudited)
- ----------------------------------------------------------
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) April 30, October 31,
in Net Assets 1998 1997
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 2,062,746 $ 3,072,308
Net realized gain on
investments and
written options
transactions.......... 11,614,835 5,661,884
Net change in unrealized
appreciation
(depreciation) on
investments and
written options....... 5,765,040 (10,191,780)
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations before net
foreign exchange
losses................ 19,442,621 (1,457,588)
Net realized and
unrealized foreign
exchange losses....... (11,502,227) (20,136,258)
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ 7,940,394 (21,593,846)
Dividends to shareholders
from net investment
income.................. (1,757,106) (2,899,881)
Distributions to
shareholders from net
realized capital gains.. (6,136,923) (3,117,737)
Net asset value of shares
issued to shareholders
in connection with
distribution paid in
stock................... 988,654 1,277,849
------------ ------------
Total increase
(decrease).............. 1,035,019 (26,333,615)
Net Assets
Beginning of period....... 159,422,488 185,756,103
------------ ------------
End of period............. $160,457,507 $159,422,488
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
8
<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, nondiversified management 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 reporting 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 April 30, 1998.
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 reporting period.
Net realized and unrealized foreign exchange losses of $11,502,227 includes
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid and changes in unrealized foreign exchange gains and
losses in the value of portfolio securities and other assets and liabilities
arising as a result of changes in the exchange rate. Accumulated net realized
and unrealized foreign exchange losses shown in the composition of net assets at
April 30, 1998 represent foreign exchange losses for book purposes that have not
yet been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rate at April 30, 1998 was US$.6528 to A$1.00 for the Australian
dollar and US$.5561 to NZ$1.00 for the New Zealand dollar.
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
9
<PAGE>
<PAGE>
an investment. When the Fund writes an option, it receives a premium and an
amount equal to that premium is recorded as a liability. The investment or
liability is adjusted daily to reflect the current market value of the option.
If an option expires unexercised, the Fund realizes a gain or loss to the extent
of the premium received or paid. If an option is exercised, the premium received
or paid is an adjustment to the proceeds from the sale or the cost of the
purchase in determining whether the Fund has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
or currency underlying the written option. The Fund, as purchaser of an option,
bears the risk of the potential inability of the counterparties to meet the
terms of their contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Dividends and Distributions: It is the Fund's current policy to pay regular
quarterly distributions at an annual rate, which is a percentage of the rolling
average of the Fund's prior four quarter-end net asset values. The distributions
will be made from net investment income, net realized capital gains and, to any
extent necessary, paid-in capital. 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, 1998, the Fund increased undistributed net
investment income by $307,650, decreased accumulated net realized gains on
investments by $574,122, increased accumulated realized and unrealized foreign
exchange gains by $403,407 and decreased paid-in capital in excess of par by
$136,935. 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, LLC (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 their services
rendered. The Investment Manager
10
<PAGE>
<PAGE>
informed the Fund that it paid $175,552 to the Investment Adviser during the six
months ended April 30, 1998.
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, 1998 aggregated $171,607,547 and $157,318,000, respectively.
The United States federal income tax basis of the Fund's investments at April
30, 1998 was $151,774,620 and accordingly, net unrealized depreciation for
United States federal income tax purposes was $8,073,326 (gross unrealized
appreciation--$13,231,459; gross unrealized depreciation--$5,158,133).
Note 4. Capital There are 20 million shares of
$.01 par value common stock authorized. Of the
17,189,998 shares issued and outstanding at April 30, 1998, the Investment
Manager owned 42,666 shares. During the six months ended April 30, 1998 and year
ended October 31, 1997 the Fund issued 130,732 and 144,988 shares, respectively,
in connection with cash dividends paid in stock and as a result of the
reinvestment of dividends paid to shareholders enrolled in the dividend
reinvestment plan.
Note 5. Dividend On June 12, 1998 the Board
and Distribution of Directors of the Fund
declared a dividend of US$.13 per share from net
investment income and a distribution of US$.09 per share from realized
short-term capital gains payable on July 10, 1998 to shareholders of record on
June 30, 1998.
11
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Years Ended October 31,
April 30, ------------------------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
----------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 9.35 $ 10.98 $ 10.04 $ 11.76 $ 11.37 $ 8.46
----------- -------- -------- -------- -------- --------
Net investment income....................... .12 .18 .20 .22 .14 .15
Net realized and unrealized gain (loss) on
investments
and foreign currencies.................... .34 (1.45) 1.25 (.71) 1.84 4.09
----------- -------- -------- -------- -------- --------
Total from investment operations.......... .46 (1.27) 1.45 (.49) 1.98 4.24
----------- -------- -------- -------- -------- --------
Dividends from net investment income........ (.10) (.17) (.23) (.22) (.10) (.16)
Distributions from net capital and currency
gains..................................... (.36) (.18) (.26) (.94) (.11) --
----------- -------- -------- -------- -------- --------
Total dividends and distributions......... (.46) (.35) (.49) (1.16) (.21) (.16)
----------- -------- -------- -------- -------- --------
Capital reduction with respect to issuance
of Fund shares............................ (.02) (.01) (.02) (.07) (1.38) (1.17)
----------- -------- -------- -------- -------- --------
Net asset value, end of period.............. $ 9.33 $ 9.35 $ 10.98 $ 10.04 $ 11.76 $ 11.37
----------- -------- -------- -------- -------- --------
----------- -------- -------- -------- -------- --------
Market price per share, end of period....... $ 7.75 $ 7.44 $ 9.125 $ 8.19 $ 10.13 $ 10.38
----------- -------- -------- -------- -------- --------
----------- -------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN BASED ONPound:
Market value................................ 10.45% (15.17)% 17.76% (7.84)% (0.56)% 36.39%
Net asset value............................. 5.82% (11.37)% 15.55% (2.70)% 5.39% 36.93%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets..... 1.64%* 1.39% 1.41% 1.50% 1.45% 1.87%
Ratio of net investment income to average
net assets................................ 2.60%* 1.68% 1.86% 2.24% 1.42% 1.50%
Portfolio turnover rate..................... 109% 270% 133% 45% 46% 108%
Net assets, end of period (000 omitted)..... $ 160,458 $159,422 $185,756 $168,111 $186,852 $111,230
Average net assets (000 omitted)............ $ 160,098 $182,588 $178,756 $162,228 $149,801 $ 67,341
Average commission rate per share........... $ 0.0082 $ 0.0086 $ 0.0074 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.
12
<PAGE>
Supplemental Proxy Information
The Annual Meeting of Shareholders of The First Australia Fund, Inc. (the
'Fund') was held on Thursday, May 14, 1998 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 four Directors to serve as Class I Directors
for a three-year term expiring in 2001:
- Anthony E. Aaronson
- Roger C. Maddock
- Neville J. Miles
- John T. Sheehy
Directors whose term of office continued beyond this
meeting are as follows: Sir Roden Cutler, David
Lindsay Elsum, Rt. Hon. Malcolm Fraser, Laurence
S. Freedman, Michael R. Horsburgh, Harry A. Jacobs,
Jr., Howard A. Knight, Richard H. McCoy, William J.
Potter 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, 1998;
(3) To approve a change to the Fund's sub-classification
and elimination of the Fund's investment
restriction regarding diversification.
(4) To amend the Fund's policy on concentration.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Auditor Votes for Votes against Votes withheld Abstentions
----------------------------- ------------ --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
(1) Anthony E. Aaronson 10,538,814 -- 2,753,752 --
Roger C. Maddock 10,553,971 -- 2,738,594 --
Neville J. Miles 10,550,746 -- 2,741,819 --
John T. Sheehy 10,540,557 -- 2,752,008 --
(2) Price Waterhouse LLP 11,511,748 1,525,713 -- 255,105
(3) Eliminating investment
restriction 6,278,603 2,686,864 -- 297,804
(4) Concentration 6,713,783 2,204,818 -- 344,670
</TABLE>
Shareholder proxies were also solicited on a proposal to amend the
Fund's charter to add a 75% supermajority vote requirement for
certain shareholder proposals. Because shareholder response was closely
divided, the Chairman determined that the proposal should be withdrawn.
13
<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
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, 1998 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) 367-7403
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
