(R)
The First Australia
Fund, Inc.
- ------------------------------------------------------------
- -------
Annual Report
October 31, 1998
Highlights
-------------------------------------------
- Fourth quarterly distribution of 20.5
cents per share under new managed
<PAGE>
LETTER TO SHAREHOLDERS
December 17, 1998
Dear Shareholder,
We are pleased to present the annual report for The First
Australia Fund,
Inc. for the year ended October 31, 1998. Included in this
report is a review of
the Australian economy and stock market, together with an
overview of the Fund's
investments prepared by the Investment Manager, EquitiLink
International
Management Limited.
Investment Markets
The Australian All Ordinaries Accumulation Index fell
0.9% over the three
months, but increased by 11.4% over the year to October 31,
1998 in Australian
dollar terms after adjusting for withholding tax. Industrial
shares outperformed
resource shares over the year, although the last quarter saw
resource shares
substantially outperform industrials.
In U.S. Dollar terms, the Australia All Ordinaries
Accumulation Index
increased by 1.6% over the three months, but fell by 1.3%
over the year to
October 31, 1998.
Speculative trading by hedge funds increased the
volatility of the Australian
dollar during the latest quarter. After reaching an all-time
low of 55 cents in
late August, it rebounded strongly to end the period 13.6%
higher, closing at 62
cents. The currency rallied 2.5% against the U.S. dollar
over the quarter,
although it fell 11.4% over the year.
Although the currency, in trade weighted terms, remains
13% below its highs
reached at the start of the year, it has most likely passed
its low point.
Looking further out, improving global growth will lead
commodity prices higher.
This has traditionally been a significant influence on the
Australian dollar.
Performance
The Fund's total investment return based on Net Asset
Value (NAV) increased
by 2.9% over the quarter assuming reinvestment of
distributions and eased 0.3%
over the year, outperforming its benchmark returns. The
Fund's total investment
return based on share price value fell 1.5% over the three
months and 0.4% over
the year, assuming reinvestment of distributions.
Distribution Policy
Pursuant to the Fund's managed distribution policy, a
quarterly distribution
of 20.5 cents per share was paid in October 1998. Over the
past 12 months, the
Fund has paid a total of 88.6 cents in distributions, or an
annualized cash
distribution yield of 13.5%, based on the share price of
$6.56 as of the date of
this report. At the meeting of the Board of Directors held
on December 15, 1998,
a quarterly distribution of 20.0 cents per share was
declared.
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;
1
<PAGE>
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 Net Asset Value (NAV) increased by 2.9% over
the quarter assuming
reinvestment of distributions, but eased by 0.3% over the
year. The Fund
outperformed its benchmark returns.
Currency
The Australian dollar rose by 2.5% against the U.S.
dollar over the three
months, but fell by 11.4% over the year.
Share Price Performance
The Fund's share price value fell 1.5% over the quarter
and 0.4% over the
year, assuming reinvestment of distributions. The Fund's
stock closed at $6.56
per share on October 31, 1998.
Investment Strategy
The Fund substantially lowered its exposure to the
Resource sector from a
year ago. This has proven to be a correct strategy, as the
Resource sector has
dramatically underperformed the Industrial sector over the
period. The Fund will
remain relatively fully invested.
Quality of the Portfolio
The Fund maintains a high quality portfolio, with 84% by
value invested in
the top 100 companies of the Australian Stock Exchange.
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 are made initially
from net investment
income, then from net realized gains and, to any extent
necessary, paid-in
capital.
2
<PAGE>
A further quarterly distribution of 20.5 cents per share
was paid in October
1998. This distribution, together with the earlier quarterly
distributions of
23.3 cents per share paid in January, 22.8 cents per share
paid in April, and
22.0 cents per share paid in July, equates to an annualized
cash distribution
yield of 13.5%, based on the share price of $6.56 as of the
date of this report.
At the meeting of the Board of Directors held on December
15, 1998, a
quarterly distribution of 20.0 cents per share was declared.
Portfolio Composition
The following chart summarizes the composition of the
Fund's portfolio,
expressed as a percentage of net assets.
(CHART)
Selected Equity Holdings
The following notes highlight the Fund's top ten holdings
at October 31,
1998.
National Australia Bank Limited (NAB)
6.8% of total assets
Australia's largest full-service banking group, with
significant operations
in Australia, New Zealand, the U.K. and U.S. NAB has grown
its international
retail banking presence through acquisitions while
maintaining market leadership
in Australia. The recent interim result showed strong growth
in banking fees and
commissions, as well as continuing emphasis on expense
reduction.
Telstra Corporation Limited
6.7% of total assets
Australia's dominant telecommunications carrier continues
to maintain an
excellent position in a rapidly growing market. The recent
deregulation of the
Australian telecommunications market 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 before the company was privatized.
News Corporation Limited
6.0% of total assets
News Corporation is a global, vertically integrated
entertainment and media
company. The company produces film and television
entertainment media through
the Fox brand name and also has significant interests in
several major
3
<PAGE>
broadcast platforms such as B-Sky-B in the U.K. and the Fox
TV network in the
U.S. News 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.
Westpac Banking Corporation Limited (WBC)
5.7% of total assets
The second largest banking group in Australia, offering
retail and wholesale
banking services to Australia and New Zealand. Management
remains focused on
optimizing its domestic banking business and integrating
recent acquisitions.
Sound capital management should help drive earnings per
share growth.
Fosters Brewing Group Limited
4.6% of total assets
An international beverage group focusing on beer, wine
and other alcoholic
beverages. Following the recent disposal of its holding in
Molson Canada,
Fosters derives the majority of its earnings from its
Australian beer and wine
operations.
Australia & New Zealand Banking Group Limited (ANZ)
3.6% of total assets
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 and growing non-interest
income. Domestic asset
quality and interest margins are trending favorably.
Broken Hill Proprietary Company Limited (BHP)
3.5% of total assets
BHP is a diversified global resources company. The
primary businesses are oil
and gas production, steel production and the mining and
processing of a range of
minerals including copper, iron ore and coal. BHP is the
largest stock in the
Resources sector, but the Fund holds only 60% of the All
Ordinaries Index weight
because of the company's poor earnings outlook.
Commonwealth Bank of Australia (CBA)
3.5% of total assets
Commonwealth Bank is Australia's largest retail bank with
over 7.5 million
customers and over 1,100 branches. It has the strongest
brand name of all the
major banks. CBA has high asset quality, the highest level
of capital adequacy
and the highest level of low-risk housing loans.
Management's ability to cut
costs, grow non-interest income and utilize surplus capital
should enable it to
generate significant earnings growth.
Brambles Industries Limited
3.4% of total assets
Brambles Industries is a geographically diversified group
operating in
Australia, Europe and North America. Major activities
include equipment rental,
waste management, palette management (CHEP), security,
industrial service,
records management, and other transport-related services.
The trend towards
outsourcing industrial services is underwriting strong
growth for Brambles in
its core operations.
Lend Lease Corporation Limited
3.4% of total assets
Australia's largest integrated property and financial
services group, Lend
Lease Corporation has achieved 23 consecutive years of
profit growth. It
continues to leverage off its strong market presence in
Australia with
increasing involvement in international markets: Australia,
Europe and the U.S.
The property group is involved in a wide range of
activities, including project
management, design and construction, property development,
property investment
services and facilities management. Lend Lease is a major
provider of financial
services (funds management and life insurance products)
through MLC group. The
company is well positioned to maintain growth in
profitability.
4
<PAGE>
REVIEW AND OUTLOOK FOR THE AUSTRALIAN
FINANCIAL MARKETS
Economy
The Australian economy has weathered the Asian downturn
well, with the latest
upwardly revised data showing growth of 4.4% over the year
to June 1998
(previously 3.9%). This has been due mainly to the strength
of services and
other domestically focused parts of the economy, helped by
low interest rates,
subdued real wages growth, modest employment growth and
relatively healthy
consumer sentiment.
Exports have shown particular resilience, with product
redirected away from
Asia towards the U.S. and Europe. The lower Australian
dollar had made exporters
more price competitive on world markets.
Inflation remains at 35-year lows, with data released in
the past three
months showing an annual price growth of 1.6%. The impact of
a weaker currency
continues to be offset by competitive pressures and
discounting from Asian
importers.
We expect modest domestic growth of around 3% for the
current calendar year,
with further slight moderation into 1999.
Stock Market
The Australian stock market weakened 0.8% in the October
quarter (not
adjusting for withholding tax), but was relatively
unaffected by the sharp
sentiment swings in the major U.S. and European markets.
Industrial stocks lost
ground, falling 2.1% amid concerns about longer-term
economic growth. This
sentiment has since reversed, helped by a strong upward
revision of 1997-98
growth, from 3.9% to 4.4%. Resource stocks were particularly
strong, up by 5.4%
over the quarter, helped by some firming in commodity prices
and a rally in the
gold price above USD 300/oz at one point. This has been a
major turnaround for
resource stocks, which have fallen over the year on concerns
about soft
international growth prospects and weak commodity prices.
During the October quarter, stock market sentiment became
more positive. The
change to more expansionary policies in the United States
will help to promote
renewed Asian growth and improve demand for commodities. We
expect an improving
Asian outlook to further help sentiment.
Currency
Speculative trading by hedge funds increased the
volatility of the Australian
dollar during the October quarter. After reaching an all-
time low of 55 cents in
late August, it rebounded strongly to end the period 13.6%
higher, closing at 62
cents. The currency rallied 2.5% against the U.S. dollar
over the quarter,
although it fell 11.4% over the year.
Although in trade weighted terms the currency remains 13%
below its highs
reached at the start of the year, it has most likely passed
its low point. The
resilience of domestic growth is a key positive in the near
term. Looking
further out, improving global growth will lead commodity
prices higher. These
have traditionally been a significant influence on the
Australian dollar. On the
date of this report, the Australian dollar was trading at 62
cents.
EquitiLink
International Management Limited
5
<PAGE>
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THE FIRST AUSTRALIA FUND, INC.
Portfolio of Investments
October 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--93.7%
Common and Preferred Stocks--93.7%
Diversified Industries--24.7%
1,000,000 Australian Infrastructure
Group..................... $ 1,263,776
950,000 CSR Limited................. 2,164,606
609,000 Faulding (F.H.) & Company
Limited................... 2,629,666
2,800,000 Fosters Brewing Group
Limited................... 6,850,539
2,183,661 Futuris Corporation
Limited................... 2,229,478
1,200,000 Goodman Fielder Limited..... 1,578,537
1,980,000 Lang Corporation Limited.... 2,896,725
800,000 Leighton Holdings Limited... 2,958,357
230,000 Lend Lease Corporation
Limited................... 5,054,053
4,500,000 MacMahon Holdings Limited... 1,232,649
1,827,336 MTM Entertainment Trust*.... 1,023,847
150,000 Orbital Engine Corporation
Limited................... 62,566
400,000 Orica Limited............... 2,196,854
900,000 Pioneer International
Limited................... 1,860,179
1,000,000 Ramsay Health Care
Limited................... 971,178
------------
34,973,010
------------
Resources And Mining--15.6%
339,064 Acacia Resources Limited.... 538,265
608,000 Broken Hill Proprietary
Company Limited........... 5,147,740
527,000 Comalco Limited............. 2,017,715
1,000,600 Lihir Gold Limited*......... 1,382,890
5,379,215 M.I.M. Holdings Limited..... 2,612,087
652,600 Newcrest Mining Limited*.... 1,067,694
988,907 North Limited............... 1,906,034
358,000 Resolute Limited............ 307,565
170,000 Rio Tinto Limited........... 2,118,469
1,225,400 WMC Limited................. 4,141,635
175,000 Woodside Petroleum
Limited................... 921,140
------------
22,161,234
------------
Services--53.4%
388,995 Adelaide Bank Limited....... 1,390,049
927,324 Australia & New Zealand
Banking Group Limited..... 5,282,345
40,000 Australian Stock Exchange
Limited*.................. 119,903
232,000 Brambles Industries
Limited................... 5,068,104
413,806 Commonwealth Bank of
Australia................. 5,123,960
429,500Pound Formida Holdings Limited*... 802,155
450,000D HIH Winterthur Interest
Installment Receipts...... 378,199
732,250D HIH Winterthur International
Holdings Limited.......... 1,030,248
1,180,982 Jupiters Limited............ 1,996,123
765,000 National Australia Bank
Limited................... 10,096,514
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
1,751,727D National Mutual Holdings
Limited................... $ 3,457,004
300,000 News Corporation Limited.... 2,041,341
1,140,360 News Corporation Limited
Voting Preferred Stock.... 6,829,536
1,500,000 Pacific Magazines & Printing
Limited................... 2,680,077
945,800 Qantas Airways Limited...... 1,601,557
625,220 QBE Insurance Group
Limited................... 2,459,937
845,232 Reinsurance Australia
Corporation Limited....... 1,852,221
206,294D St. George Bank Limited..... 1,370,587
3,200,000Pound Telstra Corporation Limited
Installment Receipts*..... 9,861,190
2,600,000D Village Roadshow Limited
Voting Preferred Stock.... 3,884,711
1,390,985 Westpac Banking Corporation
Limited................... 8,425,767
------------
75,751,528
------------
Total common and preferred
stocks
(cost US$139,277,551)..... 132,885,772
------------
<CAPTION>
Principal
Amount
(000) SHORT-TERM INVESTMENTS--7.0%
- -----------
<C> <S> <C>
Demand Deposits--6.6%
A$ 14,589 Banque Nationale de Paris,
Demand Deposit, 4.60%..... 9,082,491
524 State Street Bank & Trust
Company,
Demand Deposit, 4.30%..... 326,485
------------
Total demand deposits
(cost US$9,388,200)....... 9,408,976
------------
Repurchase Agreement--0.4%
US$ 576 Repurchase Agreement, State
Street Bank & Trust
Company, 5.10% dated
10/30/98, due 11/2/98 in
the amount of $576,245
(cost $576,000);
collateralized by $375,000
U.S. Treasury bill, due
8/15/13; value including
accrued
interest--US$590,837)..... 576,000
------------
Total short-term investments
(cost US$9,964,200)....... 9,984,976
------------
Total Investments--100.7%
(cost US$149,241,751; Note
3)........................ 142,870,748
Liabilities in excess of
other
assets--(0.7%)............ (1,076,472)
------------
Net Assets--100%............ $141,794,276
------------
------------
</TABLE>
- ------------------
* Non-income producing security.
D Portion of securities on loan; see Note 3.
Pound Fair valued security.
See Notes to
Financial Statements.
6
<PAGE>
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THE FIRST AUSTRALIA FUND, INC.
Statement of Assets and Liabilities
October 31, 1998
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments, at value (cost
$149,241,751)........................ $142,870,748
Foreign currency, at value (cost
$724,915)............................ 724,145
Cash................................... 971
Receivable for investments sold........ 3,394,340
Dividends and interest receivable...... 398,605
Other assets........................... 26,812
------------
Total assets....................... 147,415,621
------------
Liabilities
Payable for investments purchased...... 5,034,267
Accrued expenses and other
liabilities.......................... 428,334
Investment management fee payable...... 120,001
Withholding taxes payable.............. 32,232
Administration fee payable............. 6,511
------------
Total liabilities.................. 5,621,345
------------
Net Assets $141,794,276
------------
------------
Net assets were comprised of:
Common stock, $.01 par value......... $ 171,900
Paid-in capital in excess of par..... 152,925,339
------------
153,097,239
Distributions in excess of net
investment income.................. (33,796)
Accumulated net realized gains on
investments.......................... 3,587,811
Net unrealized appreciation on
investments.......................... 4,047,551
Accumulated net realized and
unrealized foreign exchange
losses............................. (18,904,529)
------------
Net assets........................... $141,794,276
------------
------------
Net asset value per share:
($141,794,276 / 17,189,998 shares of
common stock issued and
outstanding)......................... $8.25
------------
------------
</TABLE>
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THE FIRST AUSTRALIA FUND, INC.
Statement of Operations
Year ended October 31, 1998
- ----------------------------------------------------------
<TABLE>
Net Investment Income
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $169,549).................. $ 5,284,641
Interest.............................. 693,602
Income from securities loaned, net.... 9,188
------------
Total income........................ 5,987,431
------------
Expenses
Investment management fee............. 1,355,832
Shareholder relations and
communications........................ 225,000
Custodian's fees and expenses......... 205,000
Directors' fees and expenses.......... 165,000
Independent accountant's fees and
expenses.............................. 113,000
Administration fee.................... 75,358
Legal fees and expenses............... 70,000
Transfer agent's fees and expenses.... 38,000
Insurance expense..................... 13,000
Miscellaneous......................... 20,587
------------
Total operating expenses.............. 2,280,777
------------
Net investment income before excise
tax................................... 3,706,654
Excise taxes............................ (136,935)
------------
Net investment income................... 3,569,719
------------
Realized and Unrealized Gains
(Losses) on Investments and Foreign
Currencies
Net realized gains on investment
transactions.......................... 10,321,183
Net change in unrealized appreciation on
investments........................... 1,437,050
------------
Net gain on investments................. 11,758,233
------------
Net increase in net assets resulting
from operations before net foreign
exchange losses....................... 15,327,952
Net realized and unrealized foreign
exchange losses....................... (18,745,223)
------------
Net Decrease In Net Assets
Resulting From Operations............... $ (3,417,271)
------------
------------
</TABLE>
See Notes to Financial Statements. See Notes to
Financial Statements.
7
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA FUND, INC.
Statement of Changes
in Net Assets
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1998 1997
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 3,569,719 $ 3,072,308
Net realized gain on
investments and
written options
transactions.......... 10,321,183 5,661,884
Net change in unrealized
appreciation
(depreciation) on
investments and
written options....... 1,437,050 (10,191,780)
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations before net
foreign exchange
losses................ 15,327,952 (1,457,588)
Net realized and
unrealized foreign
exchange losses....... (18,745,223) (20,136,258)
------------ ------------
Net decrease in net
assets resulting from
operations............ (3,417,271) (21,593,846)
Dividends to shareholders
from net investment
income.................. (3,991,702) (2,899,881)
Distributions to
shareholders from net
realized capital gains.. (11,207,892) (3,117,737)
Net asset value of shares
issued to shareholders
in connection with
distribution paid in
stock................... 988,653 1,277,849
------------ ------------
Total decrease............ (17,628,212) (26,333,615)
Net Assets
Beginning of year......... 159,422,488 185,756,103
------------ ------------
End of year(a)............ $141,794,276 $159,422,488
------------ ------------
------------ ------------
- ---------------
(a) Includes undistributed
net investment income
of...................... $ (33,796) $ 1,086,717
------------ ------------
</TABLE>
- ----------------------------------------------------------
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, 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
See Notes to Financial Statements.
8
<PAGE>
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$')
amounts are translated
into United States dollars ('US$') 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
October 31, 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
$18,745,223 includes
realized foreign exchange gains and losses from sales and
maturities of
portfolio securities, sales of foreign currencies, currency
gains or losses
realized between the trade and settlement dates on
securities transactions, the
difference between the amounts of dividends, interest and
foreign withholding
taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts
actually received or paid and changes in unrealized foreign
exchange gains and
losses in the value of portfolio securities and other assets
and liabilities
arising as a result of changes in the exchange rate.
Accumulated net realized
and unrealized foreign exchange losses shown in the
composition of net assets at
October 31, 1998 represent foreign exchange losses for book
purposes that have
not yet been recognized for tax purposes.
Foreign security and currency transactions may involve
certain considerations
and risks not typically associated with those of domestic
origin, including
unanticipated movements in the value of the foreign currency
relative to the
U.S. dollar.
The exchange rate at October 31, 1998 was US$.6249 to
A$1.00 for the
Australian dollar and US$.5295 to NZ$1.00 for the New
Zealand dollar (NZ$).
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 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.
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. The
preparation of
financial statements requires management to make estimates
and assumptions that
affect the reported amounts and disclosures. Actual results
could differ from
those estimates.
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.
9
<PAGE>
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. Provision has been
made for United States
excise taxes incurred during the prior fiscal year.
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, 1998, the Fund decreased
undistributed net
investment income by $698,530, decreased accumulated net
realized gains on
investments by $821,968, increased accumulated realized and
unrealized foreign
exchange gains by $1,657,433 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 informed the Fund that it
paid $349,741 to the
Investment Adviser during the year ended October 31, 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 year ended October
31, 1998 aggregated $262,012,028 and $251,612,879,
respectively.
As of October 31, 1998, the Fund has securities on loan
with an aggregate
market value of $5,425,347. As of this date, the collateral
held for securities
on loan was comprised of securities with an aggregate market
value of
$5,669,302.
The United States federal income tax basis of the Fund's
investments at
October 31, 1998 was $139,385,961 and accordingly, net
unrealized appreciation
for United States federal income tax purposes was $3,484,787
(gross unrealized
appreciation--$12,027,840; gross unrealized depreciation--
$8,543,053).
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 October 31,
1998, the Investment
Manager owned 45,004 shares. During the fiscal years ended
October 31, 1998 and
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. Transactions During the fiscal year ended
With Affiliates October 31, 1998, Prudential
Securities Incorporated, an
affiliate of the
Administrator, earned approximately $12,000 in brokerage
commissions as a result
of executing transactions in portfolio securities on behalf
of the Fund.
Note 6. Dividend On December 15, 1998 the
and Distribution Board of Directors of the Fund
declared a dividend of US$.10
per share from
ordinary income and a distribution of US$.10 per share from
realized long-term
capital gains payable on January 15, 1999 to shareholders of
record on December
31, 1998.
10
<PAGE>
- ------------------------------------------------------------
- --------------------
THE FIRST AUSTRALIA FUND, INC.
Financial Highlights
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Years Ended October 31,
-
- -----------------------------------------------------------
1998 1997 1996 1995 1994
<S>
<C> <C> <C> <C> <C>
-
- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $
9.35 $ 10.98 $ 10.04 $ 11.76 $ 11.37
-
- ------- -------- -------- -------- --------
Net investment income..................................
.21 .18 .20 .22 .14
Net realized and unrealized gain (loss) on investments
and foreign currencies...............................
(.41) (1.45) 1.25 (.71) 1.84
-
- ------- -------- -------- -------- --------
Total from investment operations.....................
(.20) (1.27) 1.45 (.49) 1.98
-
- ------- -------- -------- -------- --------
Dividends from net investment income...................
(.23) (.17) (.23) (.22) (.10)
Distributions from net capital and currency gains......
(.66) (.18) (.26) (.94) (.11)
-
- ------- -------- -------- -------- --------
Total dividends and distributions....................
(.89) (.35) (.49) (1.16) (.21)
-
- ------- -------- -------- -------- --------
Capital reduction with respect to issuance of Fund
shares...............................................
(.01) (.01) (.02) (.07) (1.38)
-
- ------- -------- -------- -------- --------
Net asset value, end of year........................... $
8.25 $ 9.35 $ 10.98 $ 10.04 $ 11.76
-
- ------- -------- -------- -------- --------
-
- ------- -------- -------- -------- --------
Market price per share, end of year.................... $
6.5625 $ 7.44 $ 9.125 $ 8.19 $ 10.13
-
- ------- -------- -------- -------- --------
-
- ------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN BASED ONPound:
Market value...........................................
(0.38)% (15.17)% 17.76% (7.84)% (0.56)%
Net asset value........................................
(0.34)% (11.37)% 15.55% (2.70)% 5.39%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets................
1.61% 1.39% 1.41% 1.50% 1.45%
Ratio of net investment income to average net assets...
2.38% 1.68% 1.86% 2.24% 1.42%
Portfolio turnover rate................................
180% 270% 133% 45% 46%
Net assets, end of year (000 omitted)..................
$141,794 $159,422 $185,756 $168,111 $186,852
Average net assets (000 omitted).......................
$149,827 $182,588 $178,756 $162,228 $149,801
</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.
11
<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, 1998, 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, 1998 by correspondence with the custodian and brokers,
provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 15, 1998
12
<PAGE>
FEDERAL TAX INFORMATION:
DIVIDENDS AND DISTRIBUTIONS
(Unaudited)
As required by Internal Revenue Code regulations, we are
to advise you within
60 days of the Fund's fiscal year end (October 31, 1998) as
to the tax status of
dividends, distributions and foreign tax credits paid by the
Fund during the
fiscal year. During fiscal year 1998, 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 $.213
$.006 $.207
--interest .020
.001 .019
United States --interest .007
.000 .007
--short-term capital gains .090
.000 .090
--long-term capital gains .563
.000 .563
------
- ------- ------
$.893
$.007 $.886
------
- ------- ------
------
- ------- ------
</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 1999 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
1998 federal income
tax returns.
13
<PAGE>
OTHER INFORMATION (Unaudited)
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.
Year 2000 Compliance Disclosure
Many computer systems and other electronically controlled
equipment used by
companies and other business organizations throughout the
world express dates
using only the last two digits of the year, and thus will
require modification
or replacement to accommodate the Year 2000 and beyond in
order to avoid
malfunctions and consequential widespread commercial
disruption.
The Fund could be adversely affected if the computer
systems and equipment
used by its service providers or the companies in which it
invests, or other
organizations with which any of them deal, do not properly
address this problem
before January 1, 2000. The Investment Manager and the
Investment Adviser have
taken steps that they believe are reasonably designed to
address that the
computer systems and equipment it uses are adequate to deal
with Year 2000
issues and to seek the same of its suppliers and the Fund's
other service
providers. As of the date of this report, however, there can
be no assurance
that these steps will be sufficient to avoid any adverse
impact to the Fund.
14
<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
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
This report, including the financial statements herein, is
transmitted to the
shareholders of The First Australia Fund, Inc. for their
general information
only. It does not have regard to the specific investment
objectives, financial
situation and the particular needs of any specific person.
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
PricewaterhouseCoopers 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) 522-
5465
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
