(LOGO) (R)
The First Australia
Fund, Inc.
- ---------------------------------------------
- ----------------------
Annual Report
October 31, 1997
Highlights
---------------------------------------
- ----
- New quarterly distribution policy.
- 4.57% dividend yield.
- Total distribution for the year
US32.3
cents per share.
<PAGE>
LETTER TO
SHAREHOLDERS
December 12, 1997
Dear Shareholder,
We are pleased to present the report for
The First Australia Fund, Inc. ('the
Fund') for the year ended October 31, 1997,
prepared by the Investment Manager,
EquitiLink International Management Limited.
Investment Markets
In Australian dollars terms, the
Australian stock market returned -8.7% over
the quarter and 9.1% over the year to October
31, 1997. In U.S. dollar terms,
the Australian stock market returned -13.9%
over the quarter and 3.4% over the
year.
The stock market performed strongly for
most of the year, reaching a record
high in early October, but then came under
substantial selling pressure, in line
with volatility which affected global equity
markets.
The Australian dollar fell by 11.4%
against the U.S. dollar over the year,
due to concerns about weaker commodity
prices, expectations of interest rate
cuts and the effect of financial instability
in some Asian economies.
Performance
The Fund's Net Asset Value (NAV) fell by
15.6% for the quarter and 11.4% for
the year and the Fund's share price return
fell by 16.8% for the quarter and
15.2% for the year, assuming reinvestment of
distributions.
The negative performance resulted from the
depreciation of the Australian
dollar and the underperformance of small
capitalization and resource stocks, to
which the Fund had a high exposure during the
first half of the year. In the
second half of the year, the Manager
restructured the portfolio to reduce the
exposure to small capitalization and resource
stocks and to increase the Fund's
exposure to large industrial companies.
New Distribution Policy
On December 12, 1997, the Board of
Directors declared a final distribution of
US23.3 cents per share, bringing the total
for the 1997 calendar year to US32.3
cents per share. This represents a yield of
4.57% based on the closing share
price on the date of this report of US$7.0625
per share.
The Board of Directors also announced a
change in the Fund's distribution
policy. In the past, the Fund has paid semi-
annual distributions comprising net
investment income and realized capital gains.
Under the new policy, the Fund
intends to make regular quarterly
distributions at an annual rate being a
percentage of the rolling average of the
prior four quarter-end NAV's. The
distributions will be made from net
investment income, net realized gains and,
to the extent necessary, paid-in capital. The
Board of Directors will determine
the distribution rate at the commencement of
each year based on the Manager's
forecast of earnings and its outlook for the
Australian equity and currency
markets.
The Fund will commence distributions
quarterly at an annual rate of 9% in
respect of the 1998 fiscal year.
Distributions will be payable in January,
April, July and October.
1
<PAGE>
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. The Plan also enables you to
make optional cash investments in the Fund's
shares at favorable commission
rates, by investing at least US$100 each
month. Under this arrangement, the Plan
Agent will purchase shares for you on the
stock exchange or otherwise on the
open market 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 Company;
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 non-certificated 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 fell by 15.6% for the
quarter and 11.4% for the year, assuming
reinvestment of distributions.
Share Price Performance
The Fund's share price return fell by
16.8% for the quarter and 15.2% for the
year, assuming reinvestment of distributions.
The Fund's shares closed at
US$7.44 per share on October 31, 1997.
Investment Strategy
The Fund's investment strategy focuses on
identifying stocks that reflect
'Growth At a Reasonable Price', that is,
stocks that are undervalued relative to
their earnings growth potential. This process
combines financial analysis with
judgemental research on the management and
positioning of companies.
Quality of the Portfolio
The Fund has a high quality portfolio with
64% of its holdings by value
comprising companies in the top 100 of the
Australian Stock Exchange. During the
year, the Manager restructured the Fund's
portfolio to reduce the exposure to
small capitalization and resource stocks and
to increase exposure to large
industrial companies.
2
<PAGE>
New Distribution Policy
The Board of Directors on December 12,
1997, declared a final distribution of
US23.3 cents per share consisting of US10.3
cents per share paid out of net
investment income and US13.0 cents paid out
of net long-term capital gains. This
follows a semi-annual distribution of US9.0
cents per share composed of US5.2
cents per share of net investment income and
US3.8 cents per share of short-term
capital gains paid in July 1997. This brings
total dividends and distributions
to US32.3 cents per share for the calendar
year and represents a yield of 4.57%
based on the Fund's closing share price on
December 12, 1997 of US$7.06 per
share.
The Board of Directors also announced a
change in the Fund's distribution
policy. Under the new policy, the Fund
intends to make regular quarterly
distributions at an annual rate being a
percentage of the rolling average of the
prior four quarter-end NAV's. The
distributions will be made from net
investment
income, net realized gains and, to any extent
necessary, paid-in capital. The
Board of Directors will determine the
distribution rate at the commencement of
each year based on the Manager's forecast of
earnings and its outlook for the
Australian equity and currency markets.
The Fund will commence distributions
quarterly at an annual rate of 9% in
respect of the 1998 fiscal year.
Distributions will be payable in January,
April, July and October.
Portfolio Composition
The following chart and table summarize
the composition of the Fund's
portfolio, expressed as a percentage of net
assets. As of October 31, 1997, The
Fund held 76% of its net assets in industrial
stocks, 7.2% in resource stocks,
and the balance in cash. The Fund currently
has 64% of its holdings by value in
the top 100 companies of the Australian Stock
Exchange.
[CHART TO
COME]
Selected Equity Holdings
The following notes highlight the Fund's
top ten holdings at October 31,
1997.
Australia and New Zealand
Banking Group Limited (ANZ) 10.0%
of total investments
One of four largest banking groups in
Australia, capitalized at A$15 billion
and with assets of A$135 billion. ANZ offers
retail and wholesale banking
services in Australia and globally and has
insurance and investment management
operations.
3
<PAGE>
Westpac Banking Corporation (WBC)
5.4% of total investments
One of the four largest banking groups in
Australia, capitalized at A$16.5
billion and with assets of A$119 billion. WBC
provides retail and wholesale
banking services in Australia and New Zealand
and has insurance and investment
management operations.
National Australia Bank (NAB)
4.9% of total investments
Australia's largest full service banking
group, capitalized at A$29 billion
and with assets of A$202 billion. NAB has
domestic banking operations and has
expanded its global presence through
acquisitions in New Zealand, UK, and USA.
NAB has consistently demonstrated a focus on
cost control while pursuing its
market share objectives in selected markets.
Prime Television Limited
3.7% of total investments
An operator of regional television
services in New South Wales, Victoria,
Western Australia and Queensland's Gold Cost.
The services have a potential
audience of 4.4 million people or 27% of
national audience share. The network
has an affiliation with Seven Network Limited
which provides a live feed and
access to its program inventory.
CSR Limited (CSR)
3.7% of total investments
A large diversified building materials
supplier. CSR has building material
operations in Australia, Asia and the USA as
well as world class aluminum and
sugar operations in Australia. The group has
enormous unlocked potential and the
recent appointment of a new managing director
should enable the group to deliver
some of this value to shareholders.
Commonwealth Bank of Australia (CBA)
3.7% of total investments
One of the four largest banking groups in
Australia, capitalized at A$16
billion and with assets of A$120 billion. CBA
provides a full range of banking
services and has insurance and funds
management operations. CBA became fully
privatized in July 1996 following its listing
in 1991 and progressive sell-downs
of the Government's shareholding.
ICI Australia Limited (ICI)
3.2% of total investments
A producer and supplier of chemicals to
general industry including housing
and construction, paper and packaging,
agriculture, mining, household products
and health care. ICI has lowered its cost
base and maintained profitability in
an increasingly competitive marketplace.
Going forward, ICI will continue to
benefit from capable management and the
deregulation of the gas and electricity
markets.
Fosters Brewing Group Limited
3.0% of total investments
Australia's largest brewer with a market
share of around 55% and a presence
in international markets. Its brewing
business has three operations: CUB, Molson
and China. In February 1996, Fosters acquired
Mildara Blass, a significant
producer of premium wines with exposure to
the growing export market for
Australian varietal wines. Since then,
Fosters has repurchased around 13% of
shares on issue and announced the sale of
underperforming investments.
4
<PAGE>
Brambles Industries Limited
2.8% of total investments
One of Australia's most successful and
well run publicly listed companies.
This large diversified company has operations
in equipment hire, records
management, security services, mining
services and cleaning services. Its most
attractive business is the CHEP pallet rental
pool, which operates throughout
the world. This business is Brambles main
source of growth and has only two
small competitors in the world.
Western Mining Corporation Holdings Limited
(WMC) 2.8% of total investments
One of Australia's largest, diversified,
base and precious metals producers.
WMC is the third largest nickel concentrate
producer in the world, has a 40%
interest in the largest alumina producer and
is the second largest gold producer
in Australia. Expansion of its Olympic Dam
copper/uranium mine should place its
production costs in the bottom quartile of
copper producers in the world. Its
new phosphate mine is also expected to be a
world class operation, supplying
fertilizer to Australia and Asia.
REVIEW AND OUTLOOK FOR
THE AUSTRALIAN
FINANCIAL
MARKETS
Economy
Recent economic data for Australia
indicates some pick-up in activity with
low inflation, although unemployment remains
high. Forward indicators point to
further strength in 1998. In the Manager's
opinion, growth should be supported
by continued low interest rates. However,
fall-out from the financial problems
in South East Asia is likely to lower the
growth outlook over the next year or
so. The Manager expects that Australia's
inflation will remain below 2% for most
of 1998.
Stock Market
The past quarter was marked by
considerable turbulence in global financial
markets. Triggered by currency and financial
instability in South East Asia,
global equity markets fell sharply in late
October. Many developed country
equity markets had earlier set new records in
the quarter. As equity prices
fell, there was a flight to quality, which
saw a sharp fall in global bond
yields.
The Australian stock market rose to a
record high in early October, before
falling sharply later in the month.
Industrial stocks continued to outperform
resources, with resources still feeling the
impact of weaker commodity prices,
especially gold.
The All Ordinaries Accumulation Index fell
by 8.7% over the three months to
October with the All Industrials Accumulation
Index falling by 4.9% over the
period and the All Industrials Accumulation
Index falling by 19.2%. Small
capitalization stocks fell
disproportionately, with the Accumulation
Index
falling 11.2% during the period.
Currency
The Australian dollar depreciated against
the U.S. dollar over the quarter
falling 5.4% to US70 cents. In the trade-
weighted terms, the Australian dollar
fell by 2.1%. The depreciation reflected
concerns about weaker commodity prices,
expectations of further interest rate cuts
and, more recently, the impact of
economic and financial instability in South
East Asia. On the date of this
report, the Australian dollar was trading at
US.6635 cents.
EquitiLink International Management Limited
5
<PAGE>
- ---------------------------------------------
- -------------
THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
October 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------
- ------------
Value
Shares Description
(US$)
- ---------------------------------------------
- ------------
<C> <S>
<C>
LONG-TERM INVESTMENTS--82.8%
Common and Preferred Stocks
and
Equivalents--82.8%
Diversified Industries--19.2%
200,000 Australian Pharmaceutical
Industries Limited*.......
$ 335,867
1,500,000 CSR Limited.................
5,207,689
284,000 Faulding (F.H.) & Co.
Limited...................
1,386,890
25,000Pound Faulding (F.H) & Co. Limited
Rights expiring Nov.
'97*......................
2,635
100,000 Fletcher Challenge
Limited*..................
449,696
2,200,000 Fosters Brewing Group
Limited...................
4,173,740
2,000,000 Goodman Fielder Limited.....
3,063,553
600,000 ICI Australia Limited.......
4,511,012
1,880,000 Lang Corporation Limited....
1,981,473
175,000 Lend Lease Corporation
Limited...................
3,580,704
1,360,000 Pioneer International
Limited...................
3,593,070
813,000 Polartechnics Limited*......
1,828,014
420,000 Spicers Paper Limited.......
531,203
- ------------
30,645,546
- ------------
Resources And Mining--14.3%
1,100,000 Aberfoyle Limited...........
2,202,807
3,000,000 Australian National
Industries Limited........
3,014,368
620,000 Comalco Limited.............
2,535,441
5,000,000 Envestra Limited............
3,232,189
900,000 Leighton Holdings Limited...
3,320,020
4,500,000 Macmahon Holdings Limited...
2,055,251
789,584 Normandy Mining Limited.....
859,942
457,143Pound Pasminco Limited
Rights expiring Nov.
'97*......................
321
685,000 Portman Mining Limited......
1,082,959
700,000 QNI Limited.................
614,819
1,103,000 Western Mining Corporation
Holdings Limited..........
3,913,865
- ------------
22,831,982
- ------------
Services--49.3%
2,000,000 Australia & New Zealand
Banking Group Limited.....
13,940,573
3,500,000 Australian Growth
Properties*...............
2,262,532
202,000 Brambles Industries
Limited...................
3,880,510
1,350,000 Colonial Limited*...........
3,756,366
450,000 Commonwealth Bank of
Australia.................
5,169,746
500,000 Foodland Associates
Limited...................
3,724,044
- ---------------------------------------------
- ------------
Value
Shares Description
(US$)
- ---------------------------------------------
- ------------
55,298 Formida Holdings............
$ 244,348
117,367 Hoyts Cinemas Group.........
164,936
3,431,150 Infrastructure Trust of
Australia.................
2,651,987
1,127,050Pound Infrastructure Trust of
Australia
Rights expiring Dec.
'97*......................
7,919
350,000 Macquarie Bank Limited......
2,705,202
1,400,000Pound Marquarie Bank Limited
Warrants expiring Sept.
'98 @ A$1.25*.............
127,882
700,000 Mayne Nickless Limited......
3,197,057
700,000 Mirvac Limited..............
1,131,266
140,000Pound Mirvac Limited
Warrants expiring Nov.
'97*......................
33,446
500,000 National Australia Bank
LimitedDD.................
6,833,270
400,000 News Corporation Limited....
1,914,018
1,500,000 Pacific Magazines & Printing
Limited...................
3,109,226
2,750,000 Prime Television Limited....
5,217,175
300,000 QBE Insurance Group
Limited...................
1,401,786
75,000Pound QBE Insurance Group Limited
Bonus Issue*..............
341,488
1,300,000 Reinsurance Australia
Corp......................
3,361,477
150,000 St. George Bank Limited.....
907,894
654,761 Suncorp Metway Limited
Non Voting Preferred
Stock.....................
1,722,033
675 Transurban City Link
Limited...................
431,603
1,458,332 Village Roadshow Limited
Voting Preferred Stock....
2,715,446
1,300,000 Westpac Banking Corp........
7,563,323
- ------------
78,516,553
- ------------
Total common and preferred
stocks and equivalents
(cost US$137,565,462).....
131,994,081
- ------------
Principal
Amount
(000) SHORT-TERM INVESTMENTS--4.8%
- -----------
Corporate Bond--0.1%
A$ 600 Southern Group Limited
12.00%, 3/8/98
(cost US$306,748).........
274,033
- ------------
Demand Deposits--4.3%
9,666 Banque National de Paris,
5.60%
(cost US$6,768,081).......
6,791,535
- ------------
</TABLE>
See
Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------
- ------------
<C> <S>
<C>
Principal
Amount
Value
(000) Description
(US$)
- ---------------------------------------------
- ------------
Repurchase Agreement--0.4%
US$ 586 Repurchase Agreement, State
Street Bank & Trust
Company 5.40% dated
10/31/97, due 11/3/97 in
the amount of $586,264
(cost $586,000);
collateralized by $590,000
U.S. Treasury bill, due
7/31/99; value including
accrued
interest--US$600,048).....
$ 586,000
- ------------
Total short-term investments
(cost US$7,660,829).......
7,651,568
- ------------
Total Investments--87.6%
(cost US$145,226,291; Note
3)........................
139,645,649
Other assets in excess of
liabilities--12.4%........
19,776,839
- ------------
Net Assets--100%............
$159,422,488
- ------------
- ------------
</TABLE>
- ------------------
* Non-income producing security.
DD Portion of securities on loan; see Note
3.
Pound Expressed in number of shares into
which position
can be exercised or converted.
- ---------------------------------------------
- -------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
October 31, 1997
- ---------------------------------------------
- -------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$145,226,291)........................
$139,645,649
Foreign currency, at value (cost
$137,880)............................
137,856
Cash...................................
979
Collateral for securities loaned, at
value................................
664,290
Receivable for investments sold........
25,968,291
Dividends and interest receivable......
513,848
Other assets...........................
29,071
---
- ---------
Total assets.......................
166,959,984
---
- ---------
Liabilities
Payable for investments purchased......
6,303,786
Payable upon return of securities
loaned...............................
664,290
Accrued expenses and other
liabilities..........................
369,691
Investment management fee payable......
148,190
Withholding taxes payable..............
43,014
Administration fee payable.............
8,525
---
- ---------
Total liabilities..................
7,537,496
---
- ---------
Net Assets
$159,422,488
---
- ---------
---
- ---------
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...............................
1,086,717
Accumulated net realized gains on
investments..........................
5,296,488
Net unrealized appreciation on
investments..........................
2,610,501
Accumulated net realized and
unrealized foreign exchange
losses.............................
(1,816,739)
---
- ---------
Net assets...........................
$159,422,488
---
- ---------
---
- ---------
Net asset value per share:
($159,422,488 / 17,059,266 shares of
common stock issued and
outstanding).........................
$9.35
---
- ---------
---
- ---------
</TABLE>
See Notes to Financial Statements. See
Notes to Financial Statements.
7
<PAGE>
- ---------------------------------------------
- -------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Year ended October 31, 1997
- ---------------------------------------------
- -------------
<TABLE>
<S>
<C>
Net Investment Income
Income
Dividends (net of foreign withholding
taxes of $141,345).................. $
5,029,185
Interest..............................
435,123
Income from securities loaned, net....
146,152
--
- ----------
Total income........................
5,610,460
--
- ----------
Expenses
Investment management fee.............
1,586,212
Custodian's fees and expenses.........
255,000
Shareholder relations and
communications........................
230,000
Directors' fees and expenses..........
119,000
Independent accountant's fees and
expenses..............................
113,000
Administration fee....................
91,813
Legal fees and expenses...............
70,000
Transfer agent's fees and expenses....
38,000
Insurance expense.....................
13,000
Miscellaneous.........................
22,127
--
- ----------
Total operating expenses..............
2,538,152
--
- ----------
Net investment income...................
3,072,308
--
- ----------
Realized and Unrealized Gains
(Losses) on Investments and Foreign
Currencies
Net realized gains on investment
transactions..........................
5,687,395
Net realized losses on written option
transactions..........................
(25,511)
Net change in unrealized appreciation on
investments...........................
(10,237,268)
Net change in unrealized depreciation on
written options.......................
45,488
--
- ----------
Net losses on investments...............
(4,529,896)
--
- ----------
Net decrease in net assets resulting
from operations before net foreign
exchange losses.......................
(1,457,588)
Net realized and unrealized foreign
exchange losses.......................
(20,136,258)
--
- ----------
Net Decrease In Net Assets
Resulting From Operations...............
$(21,593,846)
--
- ----------
--
- ----------
</TABLE>
- ---------------------------------------------
- -------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
- ---------------------------------------------
- -------------
<TABLE>
<CAPTION>
Year ended
October 31,
Increase (Decrease) ----------------
- ------------
in Net Assets 1997
1996
------------
- ------------
<S> <C>
<C>
Operations
Net investment income... $ 3,072,308
$ 3,320,924
Net realized gain on
investments and
written options
transactions.......... 5,661,884
3,346,039
Net change in unrealized
appreciation
(depreciation) on
investments and
written options....... (10,191,780)
10,703,898
------------
- ------------
Net increase (decrease)
in net assets
resulting from
operations before net
foreign exchange gains
(losses).............. (1,457,588)
17,370,861
Net realized and
unrealized foreign
exchange gains
(losses).............. (20,136,258)
6,975,063
------------
- ------------
Net increase (decrease)
in net assets
resulting from
operations............ (21,593,846)
24,345,924
Dividends to shareholders
from net investment
income.................. (2,899,881)
(3,864,129)
Distributions to
shareholders from net
realized capital gains.. (3,117,737)
(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).............. (26,333,615)
17,645,391
Net Assets
Beginning of year......... 185,756,103
168,110,712
------------
- ------------
End of year............... $159,422,488
$185,756,103
------------
- ------------
------------
- ------------
</TABLE>
See Notes to Financial Statements. See
Notes to Financial Statements.
8
<PAGE>
- ---------------------------------------------
- -------------
THE FIRST AUSTRALIA FUND, INC.
Notes to Financial Statements
- ---------------------------------------------
- -------------
The First Australia Fund, Inc. (the
'Fund') was incorporated in Maryland on
September 30, 1985 as a closed-end,
diversified investment company. The Fund's
principal investment objective is long-term
capital appreciation through
investment primarily in equity securities of
Australian companies listed on
Australian stock exchanges. The Fund's
secondary investment objective is current
income. It is expected that normally at least
65% of the Fund's total assets
will be invested in equity securities listed
on Australian stock exchanges and
that current income will be derived primarily
from dividends and interest on
Australian corporate and governmental
securities. The ability of issuers of debt
securities, including foreign currency
balances on deposit with the Fund's
Australian subcustodian bank, held by the
Fund to meet their obligations may be
affected by economic or political
developments in a specific industry or
region.
Note 1. Accounting The following
is a summary of
Policies significant
accounting policies
followed by the
Fund in the preparation of its
financial statements.
Basis of Presentation: The financial
statements of the Fund are prepared in
accordance with United States generally
accepted accounting principles using the
United States dollar as both the functional
and reporting currency.
Security Valuation: Investments are stated at
value. Investments for which
market quotations are readily available are
valued at the last reported sales
prices. If there is no sales price on the
date of valuation, then investments
are valued at the most recently available
sales price or at fair value as
determined in good faith by or under the
direction of the Fund's Board of
Directors.
Short-term securities which mature in more
than 60 days are valued at current
market quotations. Short-term securities
which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in
repurchase agreements with U.S. financial
institutions, it is the Fund's policy that
its custodian take possession of the
underlying collateral securities, the value
of which exceeds the principal
amount of the repurchase transaction,
including accrued interest. To the extent
that any repurchase transaction exceeds one
business day, the collateral is
valued on a daily basis to determine its
adequacy. If the seller defaults and
the value of the collateral declines or if
bankruptcy proceedings are commenced
with respect to the seller of the security,
realization of the collateral by the
Fund may be delayed or limited.
Foreign Currency Translation: Australian
dollar ('A$') amounts are translated
into United States dollars on the following
basis:
(i) market value of investment
securities, other assets and liabilities at
the exchange rates at the end of the
fiscal year;
(ii) purchases and sales of investment
securities, income and expenses at
the rate of exchange prevailing on the
respective dates of such
transactions.
The Fund isolates that portion of the
results of operations arising as a
result of changes in the foreign exchange
rates from the fluctuations arising
from changes in the market prices of
securities held at fiscal year end.
Similarly, the Fund isolates the effect of
changes in foreign exchange rates
from the fluctuations arising from changes in
the market prices of portfolio
securities sold during the fiscal year.
Net realized and unrealized foreign
exchange losses of $20,136,258 includes
realized foreign exchange gains and losses
from sales and maturities of
portfolio securities, sales of foreign
currencies, currency gains or losses
realized between the trade and settlement
dates on securities transactions, the
difference between the amounts of dividends,
interest and foreign withholding
taxes recorded on the Fund's books and the
U.S. dollar equivalent amounts
actually received or paid and changes in
unrealized foreign exchange gains and
losses in the value of portfolio securities
and other assets and liabilities
arising as a result of changes in the
exchange rate. Accumulated net realized
and unrealized foreign exchange losses shown
in the composition of net assets at
October 31, 1997 represent foreign exchange
losses for book purposes that have
not yet been recognized for tax purposes.
Foreign security and currency transactions
may involve certain considerations
and risks not typically associated with those
of domestic origin, including
unanticipated movements in the value of the
foreign currency relative to the
U.S. dollar.
The exchange rate for the Australian
dollar at October 31, 1997 was US$.7026
to A$1.00.
Options: The Fund may either purchase or
write options in order to hedge against
adverse market movements with respect to
securities which the Fund currently
owns or intends to purchase. When the Fund
purchases an option, it pays a
premium and an amount equal to that premium
is recorded as an investment. When
the Fund writes an option, it receives a
premium and an amount equal to that
premium is recorded as
9
<PAGE>
a liability. The investment or liability is
adjusted daily to reflect the
current market value of the option. If an
option expires unexercised, the Fund
realizes a gain or loss to the extent of the
premium received or paid. If an
option is exercised, the premium received or
paid is an adjustment to the
proceeds from the sale or the cost of the
purchase in determining whether the
Fund has realized a gain or loss. The
difference between the premium and the
amount received or paid on effecting a
closing purchase or sale transaction is
also treated as a realized gain or loss. Gain
or loss on purchased options is
included in net realized gain (loss) on
investment transactions. Gain or loss on
written options is presented separately as
net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, may have
no control over whether the
underlying securities may be sold (called) or
purchased (put). As a result, the
Fund bears the market risk of an unfavorable
change in the price of the security
or currency underlying the written option.
The Fund, as purchaser of an option,
bears the risk of the potential inability of
the counterparties to meet the
terms of their contracts.
Securities Transactions and Investment
Income: Securities transactions are
recorded on the trade date. Realized and
unrealized gains and losses from
security and currency transactions are
calculated on the identified cost basis.
Dividend income is recorded on the ex-
dividend date and interest income is
recorded on an accrual basis. Expenses are
recorded on the accrual basis which
may require the use of certain estimates by
management.
Dividends and Distributions: It is the Fund's
current policy to pay dividends
semi-annually from accumulated net investment
income. The Fund will also declare
and pay distributions at least annually from
net realized gains on investment
transactions and net realized foreign
exchange gains, if any. Dividends and
distributions are recorded on the ex-dividend
date. Income distributions and
capital and currency gains distributions are
determined in accordance with
income tax regulations which may differ from
generally accepted accounting
principles. These differences are primarily
due to differing treatments for
foreign currencies.
Taxes: For federal income and excise tax
purposes, substantially all of the
Fund's transactions are accounted for using
the Australian dollar as the
functional currency. Accordingly, only
realized currency gains and losses
resulting from the repatriation of Australian
dollars into United States dollars
are recognized for tax purposes.
No provision has been made for United States
income taxes because it is the
Fund's policy to continue to meet the
requirements of the United States Internal
Revenue Code applicable to regulated
investment companies and to distribute all
of its taxable income to shareholders.
Australia imposes a withholding tax of
15% on certain dividends and 10% on certain
interest.
Securities Lending: The Fund may lend its
securities to approved borrowers. The
loans are secured by collateral at least
equal at all times to the market value
of the securities loaned. The Fund may bear
the risk of delay in recovery of, or
even loss of rights in, the securities loaned
should the borrower of the
securities fail financially. The Fund
receives compensation for lending its
securities in the form of fees or it retains
a portion of interest on the
investment of any cash received as
collateral. The Fund also continues to
receive interest and dividends on the
securities loaned and any gain or loss in
the market price of the securities loaned
that may occur during the term of the
loan will be for the account of the Fund.
Reclassification of Capital Accounts: The
Fund accounts and reports for
distributions to shareholders in accordance
with AICPA Statement of Position
93-2: Determination, Disclosure, and
Financial Statement Presentation of Income,
Capital Gain, and Return of Capital
Distributions by Investment Companies.
During the year ended October 31, 1997, the
Fund decreased undistributed net
investment income by $626,387, increased
accumulated net realized gains on
investments by $415,426 and increased
accumulated realized and unrealized
foreign exchange gains by $210,961. 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. On March 13, 1997, the
Fund terminated its consultant
agreement with The Prudential Insurance
Company of America (the 'Consultant').
The Investment Manager makes investment
decisions on behalf of the Fund on
the basis of recommendations and information
furnished to it by the Investment
Adviser, including the selection of and the
placement of orders with brokers and
dealers to execute portfolio transactions on
behalf of the Fund.
10
<PAGE>
The Investment Manager pays fees to the
Investment Adviser and Consultant for
their services rendered. The Investment
Manager informed the Fund that it paid
$406,552 to the Investment Adviser and $6,329
to the Consultant during the year
ended October 31, 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 year ended October
31, 1997 aggregated $452,833,003 and
$469,969,054, respectively.
Transactions in options written during the
year ended October 31, 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 October 31,
1997..............................
0 0
-------
- -- ---------
-------
- -- ---------
</TABLE>
As of October 31, 1997, the Fund had
securities on loan with an aggregate
market value of $632,651. As of this date,
the collateral held for securities on
loan was comprised of U.S. cash with an
aggregate market value of $664,290.
The United States federal income tax basis
of the Fund's investments at
October 31, 1997 was $137,035,148 and
accordingly, net unrealized depreciation
for United States federal income tax purposes
was $2,610,501 (gross unrealized
appreciation--$12,990,112; gross unrealized
depreciation--$10,379,611).
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
October 31, 1997, the Investment
Manager owned 40,411 shares. During the
fiscal years ended October 31, 1997 and
1996 the Fund issued 144,988 and 171,122
shares in connection with cash
dividends paid in stock, respectively.
Note 5. Transactions During the
fiscal year ended
with Affiliates October 31,
1997, Prudential
Securities
Incorporated, an affiliate of the
Administrator, earned approximately $7,000 in
brokerage commissions as a result
of executing transactions in portfolio
securities on behalf of the Fund.
For the year ended October 31, 1997 the
Fund incurred $4,168,572 of net
realized losses on investments in affiliated
companies.
Note 6. Dividend On December 12,
1997 the
and Distribution Board of
Directors of the Fund
declared a
dividend of $.103 per share from net
investment income and a distribution of $.13
per share from long-term capital
gains payable on January 16, 1998 and January
30, 1998, respectively, to
shareholders of record on December 31, 1997.
11
<PAGE>
- ---------------------------------------------
- -----------------------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
- ---------------------------------------------
- -----------------------------------
<TABLE>
<CAPTION>
Years ended October 31,
- ---------------------------------------------
- ---------------
1997 1996 1995 1994
1993
<S>
<C> <C> <C> <C>
<C>
- -------- -------- -------- ------
- -- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year..................... $ 10.98 $
10.04 $ 11.76 $ 11.37 $ 8.46
- -------- -------- -------- ------
- -- --------
Net investment
income..................................
.18 .20 .22 .14
.15
Net realized and unrealized gain (loss) on
investments
and foreign
currencies...............................
(1.45) 1.25 (.71) 1.84
4.09
- -------- -------- -------- ------
- -- --------
Total from investment
operations..................... (1.27)
1.45 (.49) 1.98 4.24
- -------- -------- -------- ------
- -- --------
Dividends from net investment
income................... (.17)
(.23) (.22) (.10) (.16)
Distributions from net capital and currency
gains...... (.18) (.26)
(.94) (.11) --
- -------- -------- -------- ------
- -- --------
Total dividends and
distributions....................
(.35) (.49) (1.16) (.21)
(.16)
- -------- -------- -------- ------
- -- --------
Capital reduction with respect to issuance of
Fund
shares.......................................
........ (.01) (.02)
(.07) (1.38) (1.17)
- -------- -------- -------- ------
- -- --------
Net asset value, end of
year........................... $ 9.35
$ 10.98 $ 10.04 $ 11.76 $
11.37
- -------- -------- -------- ------
- -- --------
- -------- -------- -------- ------
- -- --------
Market price per share, end of
year.................... $ 7.44 $
9.125 $ 8.19 $ 10.13 $ 10.38
- -------- -------- -------- ------
- -- --------
- -------- -------- -------- ------
- -- --------
TOTAL INVESTMENT RETURN BASED ONPound:
Market
value........................................
... (15.17)% 17.76% (7.84)%
(0.56)% 36.39%
Net asset
value........................................
(11.37)% 15.55% (2.70)%
5.39% 36.93%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net
assets................ 1.39%
1.41% 1.50% 1.45% 1.87%
Ratio of net investment income to average net
assets... 1.68% 1.86%
2.24% 1.42% 1.50%
Portfolio turnover
rate................................
270% 133% 45% 46%
108%
Net assets, end of year (000
omitted).................. $159,422
$185,756 $168,111 $186,852
$111,230
Average net assets (000
omitted)....................... $182,588
$178,756 $162,228 $149,801 $
67,341
Average commission rate per
share...................... $ 0.0086 $
0.0074 N/A N/A N/A
</TABLE>
<TABLE>
<C> <S>
- ---------------
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 year reported.
Dividends and distributions are assumed, for
purposes of this
calculation, to be reinvested at
prices obtained under the Fund's dividend
reinvestment plan. Total
investment return does not reflect
brokerage commissions.
NOTE: Contained above is operating
performance for a share of common stock
outstanding, total investment
return, ratios to average net assets
and other supplemental data for each of the
years indicated. This
information has been determined based
upon financial information provided in the
financial statements
and market value data for the Fund's
shares.
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Shareholders and Board of Directors of
The First Australia Fund, Inc.
In our opinion, the accompanying statement of
assets and liabilities, including
the portfolio of investments, and the related
statements of operations and of
changes in net assets and the financial
highlights present fairly, in all
material respects, the financial position of
The First Australia Fund, Inc. (the
'Fund') at October 31, 1997, the results of
its operations for the year then
ended, the changes in its net assets for each
of the two years in the period
then ended and the financial highlights for
each of the five years in the period
then ended, in conformity with generally
accepted accounting principles. These
financial statements and financial highlights
(hereafter referred to as
'financial statements') are the
responsibility of the Fund's management; our
responsibility is to express an opinion on
these financial statements based on
our audits. We conducted our audits of these
financial statements in accordance
with generally accepted auditing standards
which require that we plan and
perform the audit to obtain reasonable
assurance about whether the financial
statements are free of material misstatement.
An audit includes examining, on a
test basis, evidence supporting the amounts
and disclosures in the financial
statements, assessing the accounting
principles used and significant estimates
made by management, and evaluating the
overall financial statement presentation.
We believe that our audits, which included
confirmation of securities at October
31, 1997 by correspondence with the custodian
and brokers and the application of
alternative auditing procedures where
confirmations from brokers were not
received, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 12, 1997
13
<PAGE>
FEDERAL TAX
INFORMATION:
DIVIDENDS AND
DISTRIBUTIONS
As required by Internal Revenue Code
regulations, we are to advise you within
60 days of the Fund's fiscal year end
(October 31, 1997) as to the tax status of
dividends, distributions and foreign tax
credits paid by the Fund during the
fiscal year. During fiscal year 1997, the
Fund paid dividends from net
investment income which are taxable as
ordinary income. However, these dividends
do not qualify for the 70% dividends received
deduction for corporations.
The Fund has elected to give the benefit
of foreign tax credits to its
shareholders in the amount designated below
on a per share basis. Accordingly,
shareholders who must report their gross
income dividends and distributions in a
federal income tax return will be entitled to
a foreign tax credit, or an
itemized deduction, in computing their U.S.
income tax liability. It is
generally more advantageous to claim a credit
rather than to take a deduction.
The following table allocates the dividends
and distributions paid by their
sources:
<TABLE>
<CAPTION>
Net
Foreign Dividends and
Gross Taxes Distributions
Amount Paid Paid
- ------ ------- ---------------
<S> <C>
<C> <C> <C>
Australia --dividends
$.159 $.005 $.154
--interest
.013 .001 .012
United States --interest
.005 -- .005
--long-term capital gains
.111 -- .111
--short-term capital gains
.073 -- .073
- ------ ------- ------
$.361 $.006 $.355
- ------ ------- ------
- ------ ------- ------
</TABLE>
Although the Fund has made the election
required to make this credit or
deduction available to you, the amount of
allowable tax credit is subject to
Section 904 of the Internal Revenue Code.
Shareholders are advised to consult
their own tax advisers with respect to the
tax consequences of their investment
in the Fund.
In January 1998 shareholders will receive
Form 1099-DIV, or substitute
1099-DIV, which will reflect the amount of
dividends and distributions and
foreign taxes to be used by calendar year
taxpayers on their 1997 federal income
tax returns.
14
<PAGE>
OTHER
INFORMATION
Dividend Reinvestment and Cash Purchase
Plan. Shareholders may elect to have
all distributions of dividends and capital
gains automatically reinvested in
Fund shares pursuant to the Fund's Dividend
Reinvestment and Cash Purchase Plan
(the Plan). Generally, shareholders who do
not participate in the Plan will
receive distributions in cash paid by check
in United States dollars mailed
directly to the shareholders of record (or if
the shares are held in street or
other nominee name, then to the nominee) by
the custodian, as dividend
disbursing agent. Shareholders who wish to
participate in the Plan should
contact the Fund at (800) 451-6788.
State Street Bank & Trust Co. (the Plan
Agent) serves as agent for the
shareholders in administering the Plan. If
the Fund declares a dividend or
capital gains distribution and the net asset
value per share of the Fund's
common stock exceeds the market price per
share on the distribution payable
date, Plan participants will receive shares
purchased on the open market with
the proceeds of the distribution. In all
other cases, Plan participants will
receive a number of newly-issued shares
determined by dividing the dollar amount
of the distributions by the net asset value
per share of the Fund's common stock
on the distribution payable date, provided
that the discount from current market
price will not exceed 5%.
There is no charge to participants for
reinvesting dividends or capital gain
distributions, except for certain brokerage
commissions, as described below. The
Plan Agent's fees for the handling of the
reinvestment of dividends and
distributions will be paid by the Fund. There
will be no brokerage commissions
charged with respect to shares issued
directly by the Fund. However, each
participant will pay a pro rata share of
brokerage commissions incurred with
respect to the Plan Agent's open market
purchases in connection with the
reinvestment of dividends and distributions.
The automatic reinvestment of
dividends and distributions will not relieve
participants of any federal income
tax that may be payable on such dividends and
distributions.
The Plan also allows participants to make
optional cash investments of at
least $100 in Fund shares as frequently as
monthly through the Plan Agent on the
open market. Participants must pay a service
fee of $0.75 for each investment
and a pro rata share of the brokerage
commissions.
The Fund reserves the right to amend or
terminate the Plan either in full or
partially upon 90 days' written or telephone
notice to shareholders of the Fund.
Participants in the Plan may withdraw some
or all of their shares from the
Plan upon written notice to the Plan Agent
and will receive certificates for
whole shares and cash for fractional shares.
In the alternative, by giving
proper notice to the Plan Agent, participants
may receive cash in lieu of shares
in an amount which is reduced by brokerage
commissions in connection with the
sale of shares and a $2.50 service fee.
All correspondence concerning the Plan
should be directed to the Plan Agent,
State Street Bank & Trust Company, P.O. Box
8200, Boston, MA 02266-8200.
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
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
