<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1998
SECURITIES ACT REGISTRATION NO. 333-61841
INVESTMENT COMPANY ACT FILE NO. 811-4611
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-effective Amendment No. 1
[ ] Post-effective Amendment No.
and/or
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 31
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Exact Name of Registrant Specified in Charter
Gateway Center 3, 100 Mulberry Street, Newark, New Jersey 07102
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 451-6788
Registrant's Telephone Number, Including Area Code
RICHARD P. STRICKLER 45 Broadway, New York, New York 10006
Name and Address (Number, Street, City, State, Zip Code of Agent for Service)
Copies to:
Margaret A. Bancroft, Dechert Price & Rhoads, 30 Rockefeller Plaza, New York,
New York 10112
John A. MacKinnon, Brown & Wood LLP, One World Trade Center, New York, New York
10048
Allan S. Mostoff, Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, DC
20006
As soon as practicable after the effective date of this Registration Statement
Approximate Date of Proposed Public Offering
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
====================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Offering Price Aggregate Amount of
Being Registered Being Registered Per Unit Offering Price Registration Fee(1)(2)
- ---------------------------- ------------------- ------------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
Common Stock 81,143,470 shares $6.375 $517,289,621.25 $152,600.44
($.01 par value)
====================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c) on the basis of market value per
share on August 14, 1998.
(2) Previously paid.
This Registration Statement shall hereafter become effective in accordance with
the provisions of Section 8(a) of the Securities Act of 1933.
<PAGE> 2
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS OF REGISTRATION STATEMENT (FORM N-2) AND PROSPECTUS
<TABLE>
<CAPTION>
PARTS A AND B
Item No. Caption Location in Prospectus
<S> <C>
1. Outside Front Cover Outside Front Cover Page
2. Inside Front and Outside Back Cover Page Inside Front and Outside Back Cover Page
3. Fee Table and Synopsis Prospectus Summary; Fund Expenses
4. Financial Highlights Financial Highlights; Senior Securities
5. Plan of Distribution Prospectus Summary; The Offer; Distribution Arrangements; Fund
Expenses
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant Cover Page; Prospectus Summary; The Fund; Risk Factors and Special
Considerations; Investment Objectives and Policies; Investment
Restrictions; Description of Common Stock; Capital Stock
9. Management Management of the Fund; Management Agreement and Advisory Agreement;
Administration Agreement; Custodian, Dividend Paying Agents,
Transfer Agents, Registrar, and Auction Agent
10. Capital Stock, Long-Term Debt, and Other Prospectus Summary; Description of Common Stock; Capital Stock;
Securities Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan; Taxation
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of Not Applicable
Additional Information
14. Cover Page Not Applicable
15. Table of Contents Not Applicable
16. General Information and History Cover Page; The Fund
17. Investment Objective and Policies Investment Objective and Policies; Investment Restrictions;
Portfolio Transactions and Brokerage
18. Management Management of the Fund
19. Control Persons and Principal Holders of Management of the Fund--Share Ownership
Securities
20. Investment Advisory and Other Services Fund Expenses; Management Agreement and Advisory Agreement;
Administration Agreement; Custodian; Dividend Paying Agents,
Transfer Agents and Registrars; Experts
21. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
22. Tax Status Taxation
23. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 3
PROSPECTUS
- --------------------------------------------------------------------------------
64,914,776 Shares of Common Stock
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Issuable Upon Exercise of Non-Transferable Rights
to Subscribe for Such Shares of Common Stock
American Stock Exchange Symbol: FAX
Pacific Stock Exchange Symbol: FAX
- --------------------------------------------------------------------------------
The First Australia Prime Income Fund, Inc. (the "Fund") will issue to its
stockholders of record as of the close of business on September 25, 1998 (the
"Record Date"), non-transferable rights (the "Rights") entitling the holders
thereof to subscribe for up to an aggregate of 64,914,776 shares (the "Shares")
of the Fund's common stock, par value $.01 (the "Common Stock"), at the rate of
ONE SHARE OF COMMON STOCK FOR EACH WHOLE RIGHT HELD (the "Offer"). STOCKHOLDERS
OF RECORD WILL RECEIVE ONE-THIRD OF A NON-TRANSFERABLE RIGHT FOR EACH SHARE OF
COMMON STOCK HELD and stockholders who fully exercise their Rights will have,
subject to certain limitations and subject to allotment, an over-subscription
privilege (the "Over-Subscription Privilege"). Fractional shares will not be
issued upon the exercise of Rights; accordingly, only whole Rights may be
exercised. The Rights are NON-TRANSFERABLE and will not be admitted for trading
on the American Stock Exchange (the "AMEX") or any other exchange. The Fund's
Common Stock is listed on the AMEX and the Pacific Stock Exchange (the "PSE")
under the symbol "FAX." See "The Offer." THE SUBSCRIPTION PRICE PER SHARE WILL
BE 95% OF THE LOWER OF (a) THE AVERAGE OF THE LAST REPORTED SALES PRICE OF A
SHARE OF THE FUND'S COMMON STOCK ON THE AMEX ON OCTOBER 22, 1998 (THE "PRICING
DATE") AND THE FOUR PRECEDING BUSINESS DAYS OR (b) THE NET ASSET VALUE ("NAV")
PER SHARE AS OF THE PRICING DATE (THE "SUBSCRIPTION PRICE").
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 22, 1998,
UNLESS EXTENDED (THE "EXPIRATION DATE"). FOR ADDITIONAL INFORMATION REGARDING
THE OFFER, PLEASE CALL SHAREHOLDER COMMUNICATIONS CORPORATION (THE "INFORMATION
AGENT") AT (800) 733-8481, EXT. 422.
The Fund is a non-diversified, closed-end management investment company. The
Fund's principal investment objective is current income through investment
primarily in Australian debt securities. In May 1998, the Fund's Common and
Preferred stockholders approved a series of proposals allowing the Fund to
invest up to 35% of its assets in Asian debt securities. The Fund may also
achieve incidental capital appreciation. See "Investment Objective and Policies;
Investment Restrictions." Investment in the Fund involves certain risks and
special considerations, including risks associated with currency fluctuations
and the Fund's leveraged capital structure. See "RISK FACTORS AND SPECIAL
CONSIDERATIONS." The Fund's Investment Manager is EquitiLink International
Management Limited (the "Investment Manager"), an affiliate of EquitiLink
Australia Limited, the Fund's Investment Adviser (the "Investment Adviser").
Prudential Investments Fund Management LLC acts as the Fund's Administrator. The
address of the Fund is Gateway Center 3, 100 Mulberry Street, Newark, New Jersey
07102, and its telephone number is (800) 451-6788.
The Fund announced the Offer prior to the commencement of trading on the AMEX on
August 21, 1998. The NAV per share of Common Stock at the close of business on
August 14, 1998 and September 25, 1998 was $6.82 and $6.83, respectively, and
the last reported sales prices per share of the Fund's Common Stock on the AMEX
on those dates were $6.31 and $6.06, respectively.
As a result of the terms of the Offer, stockholders who do not fully exercise
their Rights will, upon the completion of the Offer, own a smaller proportional
interest in the Fund than they owned prior to the Offer. In addition, because
the Subscription Price will be less than the current NAV per share, the Offer
will result in an immediate dilution of the NAV per share for all existing
stockholders. The dilution, which might be substantial, is not currently
determinable because it is not known how many Shares will be subscribed for,
what the NAV or market price of the Common Stock will be on the Pricing Date or
what the Subscription Price will be. Stockholders will experience a decrease in
the NAV per share held by them, irrespective of whether they exercise all or any
portion of the their Rights. See "The Offer" and "Risk Factors and Special
Considerations." INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND TO RETAIN IT
FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED ESTIMATED PROCEEDS
SUBSCRIPTION PRICE(1) SALES LOAD(2) TO FUND(3)
- ------------------------------------------------------------------------------------------------------------------------
Per Share................................. $5.84 $0.219 $5.621
- ------------------------------------------------------------------------------------------------------------------------
Total Maximum............................. $379,102,292 $14,216,336 $364,885,956
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes set forth on next page
DEALER MANAGERS
PRUDENTIAL SECURITIES INCORPORATED
A.G. EDWARDS & SONS, INC.
SALOMON SMITH BARNEY
September 28, 1998
<PAGE> 4
(continued from previous page)
- ---------------
(1) Estimated on the basis of the average of the last reported sales prices of a
share of the Fund's Common Stock on the AMEX on September 25, 1998 and the
four preceding business days. Pursuant to the Over-Subscription Privilege,
the Fund may increase the number of Shares subject to subscription by up to
25% of the Shares offered hereby. If the Fund increases the number of Shares
subject to subscription by 25%, the total maximum Estimated Subscription
Price will be approximately $473,877,865, the total maximum Estimated Sales
Load will be approximately $17,770,420 and the total maximum Estimated
Proceeds to Fund will be approximately $456,107,445.
(2) In connection with the Offer, the Fund has agreed to pay Prudential
Securities Incorporated, A.G. Edwards & Sons, Inc. and Salomon Smith Barney
Inc. (the "Dealer Managers") a fee for their financial advisory, marketing
and soliciting services equal to 3.75% of the aggregate Subscription Price
for the Shares issued pursuant to the Offer and to reimburse Prudential
Securities Incorporated for out-of-pocket expenses up to $300,000. The
Dealer Managers will reallow to certain broker-dealers a concession of 2.50%
of the Subscription Price for Shares issued pursuant to the Offer. See
"Distribution Arrangements." These fees and expense reimbursement will be
borne by the Fund and indirectly by all of the Fund's stockholders,
including those who do not exercise their Rights. The Fund and the
Investment Manager have agreed to indemnify the Dealer Managers against
certain liabilities including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"), and the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(3) Before deduction of expenses incurred by the Fund, estimated to be
$1,828,500, including $300,000 to be paid to Prudential Securities
Incorporated for reimbursement of their expenses.
Unless otherwise specified, all references in this Prospectus to "U.S.
dollars," "dollars," "US$" or "$" are to the United States dollar, all
references to "A$" are to the Australian dollar and all references to "NZ$" are
to the New Zealand dollar. On September 25, 1998, the noon buying rates in New
York City for cable transfers payable in A$ and NZ$, as certified for customs
purposes by the Federal Reserve Bank of New York, were A$1.6918 per U.S. dollar
and NZ$2.0129 per U.S. dollar. See "Risks and Special Considerations -- Currency
and Interest Rate Fluctuations."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere or incorporated by reference in this
Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes that stockholders fully exercise their Rights and that the allowable
increase of 25% of the Shares offered hereby pursuant to the Over-Subscription
Privilege will not occur. Also, unless otherwise indicated, references in the
Prospectus to "stockholders" refer only to holders of the Fund's Common Stock.
THE OFFER AT A GLANCE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
The Offer The Fund is issuing to stockholders of record on September
25, 1998 ("Record Date Stockholders") one-third of a
non-transferable Right for each share of Common Stock held.
A stockholder's right to acquire, during the Subscription
Period at the Subscription Price, one Share for each whole
Right held is hereinafter referred to as the "Primary
Subscription." The Shares issued in the Offer will not be
entitled to the distribution to be declared to stockholders
of record on October 30, 1998 which is payable in November
1998.
----------------------------------------------------------------------------------------------------
Subscription Price The Subscription Price will be 95% of the lower of (a) the
average of the last reported sales price of a share of the
Fund's Common Stock on the AMEX on the Pricing Date and the
four preceding business days or (b) the NAV per share as of
the Pricing Date.
----------------------------------------------------------------------------------------------------
Over-Subscription Privilege Stockholders who fully exercise all Rights issued to them
(other than those Rights which cannot be exercised because
they represent the right to acquire less than one Share)
are entitled to subscribe for additional Shares. The Fund
may, at its discretion, issue up to an additional 25% of
the shares available in the Offer to honor over-
subscriptions.
----------------------------------------------------------------------------------------------------
Purpose of the Offer In May 1998, the Fund's Common and Preferred stockholders
approved a series of proposals allowing the Fund, among
other things, to:
- invest up to 35% of its assets in Asian debt securities;
- invest in Asian debt securities for which there is no
established
relevant market;
- invest up to 15% of its total assets in Asian debt
securities rated, or considered by the Investment Manager
to be, below investment grade at the time of investment,
and to reduce the percentage of its investments in debt
securities which are, or are considered by the Investment
Manager to be, rated AA or A quality; and
- utilize derivatives in furtherance of its investment
objective and policies.
The net proceeds of this Offer will be used to implement
this new investment flexibility and are intended to enable
the Fund to increase the Fund's net investment income above
the current level by taking advantage of the relatively
high level of interest rates available in Asian markets
compared with interest rates prevailing in Australia and
New Zealand. This will, however, expose the Fund to greater
interest rate risk, foreign exchange risk, credit risk,
political and economic risk
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Purpose of the Offer and liquidity risk than the Fund has been exposed to in the
(continued) past, particularly in light of recent volatility in Asian
currency and bond markets. Also, as a consequence of the
Fund's investment in Asian debt securities, the overall
credit quality of the securities in the Fund's portfolio
will be reduced.
----------------------------------------------------------------------------------------------------
Use of Proceeds The Investment Manager and Investment Adviser anticipate
that investment of the net proceeds in Asian debt
securities, in accordance with the Fund's investment
objective and policies, will take approximately three
months from their receipt by the Fund, depending on market
conditions and the availability of appropriate securities.
See "Use of Proceeds."
----------------------------------------------------------------------------------------------------
How to Obtain Subscription - Contact your broker or nominee, or
Information - Contact the Information Agent toll-free at (800)
733-8481, Ext. 422 or call collect (212) 805-7000.
----------------------------------------------------------------------------------------------------
How to Subscribe - Deliver a completed Exercise Form and payment to the
Subscription Agent by the Expiration Date, or
- If your shares are held in a brokerage or bank account,
have your broker or bank deliver a Notice of Guaranteed
Delivery to the Subscription Agent by the Expiration
Date.
----------------------------------------------------------------------------------------------------
Subscription Agent State Street Bank and Trust Company
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Record Date................................................. September 25, 1998
Subscription Period......................................... October 1, 1998 --
October 22, 1998
Deadline for delivery of Exercise Form together with payment
of Estimated Subscription Price or for delivery of
Notice of Guaranteed Delivery.......................... October 22, 1998
Expiration Date and Pricing Date............................ October 22, 1998
Deadline for payment pursuant to Notice of Guaranteed
Delivery............................................... October 27, 1998
Confirmation Date to Registered Stockholders................ November 5, 1998
For Registered Stockholder Purchases -- Deadline for payment
of unpaid balance if Final Subscription Price is higher
than Estimated Subscription Price...................... November 19, 1998
----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
THE FUND AT A GLANCE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
The Fund The Fund is a non-diversified, closed-end management
investment company organized as a Maryland corporation. As
of the Record Date, the Fund's NAV per share was $6.83.
----------------------------------------------------------------------------------------------------
AMEX and PSE Listed As of the Record Date, the Fund had 194,744,328 shares of
Common Stock, par value $.01, outstanding, which are traded
on the AMEX and PSE under the symbol "FAX." As of the
Record Date, the last reported sales price of a share of
the Fund was $6.06. The Rights are non-transferable and
therefore will not be admitted for trading on the AMEX and
the PSE.
----------------------------------------------------------------------------------------------------
Preferred Stock As of the Record Date, the Fund had 24,000 shares of
Auction Market Preferred Stock (the "Preferred Stock"), par
value $.01, outstanding. The Preferred Stock has an
aggregate liquidation value (excluding accumulated but
unpaid dividends, if any) of $600 million.
Holders of Common Stock have generally benefited from the
Fund's issuance of the Preferred Stock which commenced in
1989. Since the fiscal quarter beginning August 1, 1997,
however, the shrinking yield differential between Australia
and U.S. rates and a depreciating Australian dollar have
resulted in the Preferred Stock having a negative impact on
returns to holders of Common Stock. The proposed investment
of a significant percentage of the Fund's total assets in
higher yielding Asian debt securities, as recommended by
the Fund's Investment Manager and Investment Adviser, and
approved by Common and Preferred stockholders in May 1998,
is expected to increase the Fund's net investment income
above the current level. See "The Offer -- Purpose of the
Offer."
----------------------------------------------------------------------------------------------------
Investment Objective To obtain current income through investment primarily in
Australian debt securities. The Fund may also achieve
incidental capital appreciation.
----------------------------------------------------------------------------------------------------
Portfolio Structure It is expected that normally at least 65% of the Fund's
total assets will be invested in Australian dollar
denominated debt securities of Australian banks, federal
and state governmental entities and companies, and in
Australian dollar denominated global or Eurobonds, whether
or not the issuer is domiciled in Australia, which expose
the Fund to the Australian interest rate structure and
which are traded by reference to similar debt securities of
Australian domiciled issuers. In May 1998, the Fund's
Common and Preferred stockholders approved a proposal which
allows the Fund to invest the balance of its total assets
in Asian and New Zealand debt securities.
"Asian debt securities" includes (1) debt securities issued
by entities located in the following countries: China, Hong
Kong, India,
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Portfolio Structure Indonesia, Japan, Malaysia, the Philippines, Singapore,
(continued) South Korea, Taiwan and Thailand (each an "Asian Country"
or together "Asian Countries"), as well as (2) debt
securities of other issuers which are denominated in, or
linked to, the currency of an Asian Country. In addition,
"Asian debt securities" may include debt securities issued
by entities located in other countries on the Asian
continent, or which are denominated in, or linked to, the
currency of any other country on the Asian continent
provided the country is approved for investment by the
Board of Directors upon the recommendation of the
Investment Manager and Investment Adviser.
----------------------------------------------------------------------------------------------------
Investment Guidelines General. It is the Fund's policy to limit its investments
as to at least 50% of its total assets, to issuers or debt
securities which are, at the time of investment, rated AA
or better by Standard & Poor's Corporation ("S&P"), or Aa
or better by Moody's Investors Service, Inc. ("Moody's"),
or which, in the opinion of the Investment Manager, are of
equivalent quality. In addition, at least 65% of the Fund's
investments must be rated, at the time of investment, A- or
better by S&P or A3 or better by Moody's or be, in the
Investment Manager's judgment, of equivalent quality.
Asian Debt. In order to accommodate investment in Asian
markets, Asian debt securities may be purchased which, at
the time of investment are rated by S&P or Moody's, or are
judged by the Investment Manager, to be the equivalent of
at least B- by S&P or B3 by Moody's; provided, however,
that in no event may more than 15% of its total assets be
invested in Asian debt securities which, at the time of
investment, are rated below investment grade of BBB, but
not less than B-, by S&P, or Baa, but not less than B3, by
Moody's, or which, in the opinion of the Investment
Manager, are of equivalent quality, and provided further,
that with the approval of the Fund's Board of Directors,
the ratings of other recognized rating services may be
used. As a consequence of the Fund's investment in Asian
debt securities, the overall credit quality of the
securities in the Fund's portfolio will be reduced.
The maximum country exposure to any one Asian Country is
limited to 15% of the Fund's total assets and the maximum
currency exposure to any one Asian County currency is
limited to 10% of the Fund's total assets.
The Fund will generally invest in debt securities for which
there is an active secondary market, except that the Fund
may invest up to 35% of its total assets in Asian debt
securities for which there is no established relevant
market.
The Fund may, with respect to its Asian investments, use
derivatives to manage currency and interest rate risk and
as a substitute for physical securities. The Fund may also
use derivatives with respect to its Australian and New
Zealand investments to manage interest rate risk through
investing in exchange traded interest rate derivatives.
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Distributions The Fund pays distributions monthly out of current income
supplemented by realized capital gains, if required. The
current monthly cash distribution is U.S. 6 cents per
common share. For the current fiscal year, the
distributions to date have exceeded net investment income.
Income dividends may be distributed in cash or reinvested
in additional full and fractional shares through the Fund's
Dividend Reinvestment and Cash Purchase Plan. The Shares
issued in the Offer will not be entitled to the
distribution to be declared to stockholders of record on
October 30, 1998 which is payable in November 1998.
----------------------------------------------------------------------------------------------------
Investment Manager and EquitiLink International Management Limited (the
Investment Adviser "Investment Manager") acts as the Fund's investment manager
and EquitiLink Australia Limited (the "Investment Adviser")
acts as the Fund's investment adviser. The Investment
Manager and the Investment Adviser also serve in these
capacities for the First Asia Income Fund, a closed-end
investment trust, the units of which are listed on the
Toronto Stock Exchange (under the symbol "FAI.UN"),
organized to invest primarily in debt securities of issuers
in Australia, New Zealand and other Asian countries; The
First Australia Fund, Inc., a non-diversified closed-end
management investment company, the shares of which are
listed on the AMEX (under the symbol "IAF"), organized to
invest primarily in Australian listed equity securities;
The First Australia Prime Income Investment Company
Limited, a closed-end management investment company, the
shares of which are listed on the Toronto Stock Exchange
(under the symbol "FAP"), also organized to invest
primarily in Australian debt securities; and The First
Commonwealth Fund, Inc., a non-diversified closed-end
management investment company, the shares of which are
listed on the New York Stock Exchange (under the symbol
"FCO"), organized to invest in high-grade, fixed income
securities denominated in the currencies of Australia,
Canada, New Zealand and the United Kingdom. In addition,
the Investment Adviser currently manages eleven Australian
wholesale public unit trusts and two other closed-end
management investment companies, the shares of which are
listed on the Australian Stock Exchange Limited, as well as
an open-end fund marketed in Taiwan and institutional and
private advisory accounts.
Investment Experience. The Investment Manager and
Investment Adviser also manage the First Asia Income Fund,
which commenced operations in May 1997. The Investment
Adviser's professional staff has experience managing
investments in Asian markets on behalf of the First Asia
Income Fund and through prior employment with other
investment management firms based in Hong Kong and
Malaysia. The Investment Adviser's fixed income team of
eight persons has many years of in-depth experience
investing in international fixed income markets.
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Compensation of the Investment The Fund pays the Investment Manager a fee at the annual
Manager and Investment Adviser rate of 0.65% of the Fund's average weekly net assets
applicable to Common and Preferred Stock up to $200
million, 0.60% of the assets between $200 million and $500
million, 0.55% of the assets between $500 million and $900
million, 0.50% of the assets between $900 million and
$1,750 million and 0.45% of the assets in excess of $1,750
million, computed based upon net assets applicable to
Common and Preferred Stock at the end of each week and
payable at the end of each calendar month. Under the
Advisory Agreement, the Investment Manager pays the
Investment Adviser an advisory fee at the annual rate of
0.25% of the Fund's average weekly net assets applicable to
Common and Preferred Stock up to $1,200 million and 0.20%
of the assets in excess of $1,200 million at the end of
each week and payable at the end of each calendar month.
THE FUND'S INVESTMENT MANAGER AND INVESTMENT ADVISER WILL
BENEFIT FROM THE OFFER BECAUSE THEIR FEES ARE BASED ON THE
AVERAGE NET ASSETS APPLICABLE TO COMMON AND PREFERRED STOCK
OF THE FUND.
----------------------------------------------------------------------------------------------------
Administrator The Fund's Administrator is Prudential Investments Fund
Management LLC. The Fund pays the Administrator a fee
computed at the annual rate of 0.15% of the Fund's average
weekly net assets applicable to the Common Stock and
Preferred Stock up to $900 million, 0.10% of such assets
between $900 million and $1,750 million and 0.07% of such
assets in excess of $1,750 million, based upon the net
asset value applicable to Common and Preferred Stock at the
end of each week and payable at the end of each calendar
month. THE FUND'S ADMINISTRATOR WILL BENEFIT FROM THE OFFER
BECAUSE ITS FEE IS BASED ON THE AVERAGE NET ASSETS
APPLICABLE TO COMMON AND PREFERRED STOCK OF THE FUND.
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
The following summarizes certain matters that should be considered, among
others, in connection with the Offer. For a more complete discussion of the risk
factors and special considerations involved in investing in the Fund's shares,
see "Risk Factors and Special Considerations."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Dilution -- Net Asset Value and As a result of the terms of the Offer, stockholders who do
Non-Participation in the Offer not fully exercise their Rights will, upon the completion
of the Offer, own a smaller proportional interest in the
Fund than they owned prior to the Offer. In addition, an
immediate dilution of the NAV per share will be experienced
by all stockholders as a result of the Offer, whether or
not they exercise all or any of their Rights, because the
Subscription Price will be less than the then current NAV
per share, and the number of shares outstanding after the
Offer will increase in greater percentage than the increase
in the size of the Fund's assets. This dilution could be
minimal or it could be substantial. See "Risk
Factors -- Dilution -- Net Asset Value and
Non-Participation in the Offer." The Offer may also have a
dilutive impact on investment income per share available
for distribution.
----------------------------------------------------------------------------------------------------
Current Distribution Rate In February 1989, the Fund began to pay regular monthly
distributions from net investment income which, commencing
in September 1993, have been supplemented by realized
capital gains. The amount of monthly distributions has been
reduced from time to time when the previous distribution
level could no longer be sustained. For the current fiscal
year, the distributions to date have exceeded net
investment income. To the extent total distributions for
the year exceed the Fund's net investment income, the
difference will be deemed for income tax purposes to have
been distributed from realized capital gains or will be
treated as return of capital. Although the Fund anticipates
that investment of the proceeds in higher yielding Asian
debt securities will enable the Fund to increase the Fund's
net investment income above the current level, stockholders
are cautioned that there can be no guarantee of future
performance.
The Fund's investment in Asian debt securities involves
risks and uncertainties so that actual results may differ
materially from those anticipated as a result of various
factors. If the anticipated results are not achieved, the
Fund may not be able to maintain the current level of
monthly distributions. The Fund undertakes no obligation to
update or revise the disclosure in this Prospectus with
regard to the effect of investment in Asia on the Fund's
monthly distributions to reflect current events or
circumstances after the date of this Prospectus or to
reflect the occurrence of unanticipated events.
The Board of Directors reviews the level of monthly
distributions on a continuing basis at its quarterly Board
meetings, with the next review scheduled to take place at
its meeting to be held in December 1998. The Shares issued
in the Offer will not be entitled to the distribution to be
declared to stockholders of record on October 30, 1998
which is payable in November 1998.
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Interest Rate Fluctuations Fluctuations in interest rates in the relevant bond markets
can affect the Fund's NAV and distribution rate.
The Fund's NAV is adversely affected during periods of
rising interest rates in those bond markets and is
favorably affected during periods when interest rates fall.
In addition, the Fund may recognize capital loss, impacting
its ability to supplement distributable income, when bonds
in the Fund's portfolio are sold or mature at a price which
is less than the Fund's cost.
Any overall downward trend in interest rates can also be
expected ultimately to reduce available yields to Fund
stockholders, which could in turn result in a reduction in
the amount of the Fund's monthly distributions. While
interest rates in Australia and New Zealand were
substantially higher than interest rates in the U.S. at the
inception of the Fund in 1986, yields on Australian and New
Zealand debt securities have generally declined in recent
years and are currently more comparable to yields available
in the U.S. Although relatively high levels of interest
rates are available in Asian debt markets, there can be no
assurance that these rates will continue to be obtainable.
----------------------------------------------------------------------------------------------------
Currency Exchange Rate Currency exchange rates can fluctuate significantly over
Fluctuations short periods and can be subject to unpredictable changes
based on a variety of factors including political
developments and the imposition of currency controls by
foreign governments. See "Risk Factors and Special
Considerations -- Currency Exchange Rate Fluctuations." A
decline in the value of the currency in which a portfolio
security is denominated against the U.S. dollar will
generally result in a decline in the U.S. dollar value of
the Fund's assets. If the decline occurs after the Fund has
accrued income but before it has been received, the Fund
could be required to liquidate portfolio securities to make
distributions.
Currency exchange rate fluctuations can decrease or
eliminate income available for distribution or conversely
increase income available for distribution. For example, if
currency exchange losses exceed other net investment income
for a taxable year, the Fund would not be able to make
ordinary income distributions. In that event, if
distributions had been made before the losses had been
realized, they would be recharacterized either as a return
of capital, thus reducing each stockholder's cost basis, or
as a dividend from capital gains rather than ordinary
income.
The Fund will not seek to hedge against adverse currency
fluctuations in the Australian dollar. With respect to
Asian currencies, currency fluctuations against the U.S.
dollar in many Asian Countries have been profound and
negative in recent months, and there can be no assurance
that these exchange rates will stabilize against the U.S.
dollar. Although the Fund may hedge against currency
fluctuations with respect to Asian currencies, there can be
no assurance that it can employ this strategy successfully.
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Risks Involved in Asian Proposals approved by Common and Preferred stockholders in
Investment -- Credit Risk May 1998 permit the Fund to invest up to 35% of its assets
in Asian debt securities, including, with respect to 15% of
its total assets, Asian debt securities which, at the time
of investment, are rated below investment grade or, if
unrated, are in the opinion of the Investment Manager, of
equivalent quality. Among other things, investment in
securities which are rated below investment grade
introduces an element of speculation, requires skilled
credit analysis and reduces the overall credit quality of
the Fund's portfolio. See "Risk Factors and Special
Considerations -- Risks Involved in Asian Investment --
Credit Risk."
----------------------------------------------------------------------------------------------------
Risks Involved in Asian The Fund's investments could in the future be adversely
Investment -- Political and affected by any increase in taxes or by political, economic
Economic Risk or diplomatic developments in Asian Countries as well as
Australia and New Zealand. Moreover, accounting, auditing
and financial reporting standards and other regulatory
practices and requirements vary from those applicable to
entities subject to regulation in the United States. See
"Risk Factors and Special Considerations -- Risks Involved
in Asian Investments -- Political and Economic Risk."
----------------------------------------------------------------------------------------------------
Risks Involved in Asian In some Asian countries, there is no established secondary
Investment -- Liquidity Risks market for securities. Therefore, liquidity in these
countries is generally low and transaction costs high.
Reduced liquidity often creates higher volatility, as well
as difficulties in obtaining accurate market quotations for
financial reporting purposes and for calculating net asset
values, and sometimes also an inability to buy and sell
securities. See "Risk Factors and Special
Considerations -- Risks Involved in Asian
Investments -- Liquidity Risk."
----------------------------------------------------------------------------------------------------
Risks Involved in Asian When an investment is made into a volatile new asset class
Investment -- Timing such as Asian debt securities, its timing can be
significant in terms of performance. It is not possible to
predict major market events and, therefore, investment into
volatile markets, such as Asia, presents the added risk of
timing. If an investment is made in a new asset class just
prior to a significant downturn in that market, performance
will be worse than it would have been had the investment
been made later. See "Risk Factors and Special
Considerations -- Risks Involved in Asian
Investments -- Timing."
----------------------------------------------------------------------------------------------------
Use of Derivatives In addition to using derivatives to manage currency and
interest rate risk with respect to the Asian portion of the
Fund's portfolio, in seeking to invest in Asian debt, the
Fund will also use derivatives to replicate or substitute
for physical securities. The use of derivatives will expose
the Fund to a variety of risks which include:
- imperfect correlation between the prices of derivatives
and the movements of the securities prices, interest rates
or currency exchange rates being hedged;
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Use of Derivatives (continued) - the possible absence of a liquid secondary market for any
particular derivative at any time;
- the potential loss if the counterparty to the transaction
does not perform as promised;
- the possible need to defer closing out certain positions
to avoid adverse tax consequences;
- the risk that the financial intermediary "manufacturing"
the derivative, being the most active market maker and
offering the best price for repurchase, will not continue
to create a credible market in the derivative;
- because derivatives are "manufactured" by financial
institutions for the most part, the risk that the Fund may
develop a substantial exposure to financial institution
counterparties; and
- the risk that a full and complete appreciation of the
complexity of derivatives and how future value is affected
by various factors including changing interest rates,
exchange rates and credit quality is not attained.
See "Risk Factors and Special Considerations -- Use of
Derivatives." Derivatives will not be used to increase the
leverage of the Fund.
----------------------------------------------------------------------------------------------------
Preferred Stock -- Leverage Investors should note that leverage resulting from the
issuance of Preferred Stock creates risks for holders of
Common Stock, including higher volatility of both the NAV
and market value of the Common Stock, and that fluctuations
in the dividend rates on Preferred Stock will affect the
yield to holders of Common Stock. If the Fund is able to
realize a net return on its investment portfolio in excess
of the then current dividend rate of the Preferred Stock,
the effect of leverage permits holders of Common Stock to
realize a higher current rate of return than if the Fund
were not leveraged. On the other hand, if the current
dividend rate on the Preferred Stock exceeds the net return
on the Fund's investment portfolio, as is currently the
case, the Fund's leveraged capital structure results in a
lower rate of return to holders of Common Stock than if the
Fund were not leveraged. Similarly, because any decline in
the NAV of the Fund's investments will be borne entirely by
holders of Common Stock, the effect of leverage in a
declining market results in a greater decrease in NAV to
holders of Common Stock than if the Fund were not
leveraged, which would likely be reflected in a greater
decline in the market price for shares of Common Stock.
Moreover, because dividends and other distributions on
Preferred Stock are payable in U.S. dollars, a decline in
value against the U.S. dollar of currencies in which
portfolio securities are denominated also impacts
negatively on the rate of return to holders of Common
Stock. If the Fund's current investment income were not
sufficient to meet dividend requirements on Preferred
Stock, it could be necessary for the Fund to liquidate
certain of its investments, thereby reducing the NAV
attributable to the Fund's Common Stock. See "Risk Factors
and Special Considerations -- Preferred Stock" and "Capital
Stock -- Leverage."
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Preferred Stock -- Leverage Holders of Common Stock have generally benefited from the
(continued) Fund's issuance of the Preferred Stock which commenced in
1989. Since the fiscal quarter beginning August 1, 1997,
however, the shrinking yield differential between
Australian and U.S. interest rates and a depreciating
Australian dollar have resulted in the Preferred Stock
having a negative impact on the total return to holders of
Common Stock. Because the Investment Manager's and the
Investment Adviser's fees are based on the average net
assets of the Fund, which include the Preferred Stock, the
Investment Manager and Investment Adviser have benefited
from the Fund's determination not to redeem the Preferred
Stock.
The proposed investment of a significant percentage of the
Fund's total assets in higher yielding Asian debt
securities, as recommended by the Fund's Investment Manager
and Investment Adviser, and approved by Common and
Preferred stockholders in May 1998, is expected to increase
the Fund's net investment income above the current level.
See "The Offer -- Purpose of the Offer." The implementation
of this strategy is proposed to occur within approximately
six months of the completion of the Offer by a combination
of investing the net proceeds of the Offer together with
the proceeds from the sale of existing portfolio securities
and proceeds received from maturing Australian debt
securities held in the Fund's portfolio. Stockholders are
cautioned that there can be no guarantee of future
performance and the Fund's investment in Asian debt
securities involves risks and uncertainties, so that actual
results may differ materially from those anticipated as a
result of various factors. The Fund undertakes no
obligation to update or revise the disclosure in this
Prospectus with regard to the effect of investment in Asia
on the Fund's leverage to reflect current events or
circumstances after the date of this Prospectus or to
reflect the occurrence of unanticipated events.
----------------------------------------------------------------------------------------------------
Year 2000 Risk Many existing computer programs may not properly process
and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year
2000 Problem." The Fund could be adversely affected if the
service providers to the Fund do not take adequate steps to
address the Year 2000 Problem prior to January 1, 2000. The
problem may also particularly impact the Fund as it seeks
to implement its new Asian debt securities investment
policy. This impact will depend upon the degree of
technological sophistication of the issuers of securities
and the degree of due diligence they are applying to the
Year 2000 Problem. The Fund is unable to predict what
impact, if any, the Year 2000 Problem will have on the
issuers of securities in which it invests.
----------------------------------------------------------------------------------------------------
Discount from Net Asset Value The Fund's shares have traded in the market below, at and
above NAV since the commencement of the Fund's operations.
This characteristic of shares of closed-end investment
companies is a risk separate and distinct from the risk
that the Fund's NAV will decrease. In the twelve months
ended July 31, 1998, the Fund's shares have traded in the
market at an average discount to NAV of 5.05%. See
"Description of Common Stock."
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Non-Diversified Status The Fund is classified as a "non-diversified" investment
company under the Investment Company Act, which means that
the Fund is not limited by the Investment Company Act as to
the proportion of its assets that may be invested in the
securities of a single issuer. As a non-diversified
investment company, the Fund may invest a greater
proportion of its assets in the obligations of a smaller
number of issuers and, as a result, will be subject to
greater risk with respect to its portfolio securities.
Although the Fund must diversify its holdings in order to
be treated as a regulated investment company under the
provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the Fund may be more susceptible to any
single economic, political or regulatory occurrence than
would be the case if it had elected to diversify its
holdings sufficiently to be classified as a "diversified"
investment company under the Investment Company Act. See
"Investment Objective and Policies; Investment
Restrictions" and "Taxation -- United States."
----------------------------------------------------------------------------------------------------
Tax Considerations Withholding and/or other taxes may apply in the countries
in which the Fund invests, which will reduce the Fund's
cash return in those countries. The Fund intends to elect,
when eligible, to "pass-through" to the Fund's
stockholders, as a deduction or credit, the amount of
foreign income and similar taxes paid by the Fund. See
"Taxation."
----------------------------------------------------------------------------------------------------
Anti-Takeover Provision The Fund presently has a provision in its By-Laws that
could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund. The
By-Laws provide for a staggered election of those Directors
who are elected by the holders of Common Stock, with the
Directors divided into three classes, each having a term of
three years. Accordingly, only those Directors in one class
may be changed in any one year and it would require two
years to change a majority of the Board of Directors. This
system of electing Directors may be regarded as having an
anti-takeover effect, and may have the effect of
maintaining the continuity of management and thus may make
it more difficult for the Fund's stockholders to change the
majority of Directors. See "Capital Stock" and "Certain
Provisions of the Articles of Amendment and Restatement and
By-Laws."
----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
FUND EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of the Subscription
Price)(1).............................................. 3.75%
Dividend Reinvestment and Cash Purchase Plan Fees......... None
ANNUAL EXPENSES ATTRIBUTABLE TO COMMON STOCK (AS A PERCENTAGE OF
AVERAGE NET ASSETS)(2)
Management Fee............................................ 0.71%
Administrative Fee........................................ 0.15%
Other Expenses(2)......................................... 0.49%
----
Total Annual Expenses(3).................................. 1.35%
====
</TABLE>
- ---------------
(1) The Fund has agreed to pay the Dealer Managers a fee for their financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for the Shares issued pursuant to the Offer and to
reimburse Prudential Securities Incorporated for out-of-pocket expenses up
to $300,000. In addition, the Fund has agreed to pay a fee to each of the
Subscription Agent and the Information Agent estimated to be $255,000 and
$320,000, respectively, which includes reimbursement for their out-of-
pocket expenses related to the Offer. Total offering expenses are estimated
to be $16,044,836, which assumes that the Offer is fully subscribed (not
including the Over-Subscription Privilege). These fees will be borne by the
Fund and indirectly by all of the Fund's stockholders, including those who
do not exercise their Rights. See "Distribution Arrangements."
(2) Fees payable under the Management Agreement and Administration Agreement are
calculated on the basis of the Fund's average weekly net assets applicable
to the Fund's Common and Preferred Stock. See "Management Agreement and
Advisory Agreement" and "Administration Agreement." "Other Expenses" have
been estimated for the current fiscal year.
(3) The indicated 1.35% expense ratio assumes that the Offer is fully subscribed
(not including the Over-Subscription Privilege), yielding estimated net
proceeds of approximately $363,057,456 (assuming an Estimated Subscription
Price of $5.84) and that, as a result, based on the Fund's net assets of
$1,330.8 million attributable to holders of Common Stock on September 25,
1998, the net assets attributable to stockholders would be $1,693.9 million.
It also assumes that net assets attributable to stockholders will not
increase or decrease due to currency fluctuations. The indicated ratio
reflects all expenses of the Offer.
The above table is intended to assist the Fund's investors in understanding
the various costs and expenses associated with investing in the Fund through the
exercise of Rights.
HYPOTHETICAL EXAMPLE
An investor would directly or indirectly pay the following expense on a
$1,000 investment in the Fund, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$14 $43 $74 $162
</TABLE>
This Hypothetical Example assumes that all dividends and other
distributions are reinvested at NAV and that the percentage amounts listed under
Annual Expenses above remain the same in the years shown. (See also Note (3)
above for assumptions made in calculating the expenses in this Hypothetical
Example.) The above tables and the assumption in the Hypothetical Example of a
5% annual return are required by regulation of the Securities and Exchange
Commission (the "Commission") applicable to all investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Fund's shares. For more complete
descriptions of certain of the Fund's costs and expenses, see "Management of the
Fund."
This Hypothetical Example should not be considered a representation of past
or future expenses, and the Fund's actual expenses may be greater or less than
those shown.
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
The following information, insofar as it relates to each year of the ten
year period ended October 31, 1997, has been audited by PricewaterhouseCoopers
LLP, independent accountants, whose reports thereon were unqualified. This
information should be read in conjunction with the Financial Statements and
Notes thereto and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED OCTOBER 31,
APRIL 30, ------------------------------------------------------------------------------------
1998(A) 1997 1996 1995 1994 1993 1992 1991
----------- ---------- ---------- ---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE:
Net asset value per common
share, beginning of
period.................... $ 8.85 $ 9.93 $ 9.36 $ 8.82 $ 10.09 $ 9.61 $ 11.31 $ 10.02
---------- ---------- ---------- ---------- ---------- ---------- -------- --------
Net investment income....... .42 .87 .87 .93 1.01 1.19 1.29 1.40
Net realized and unrealized
gain (loss) on investments
and foreign currencies.... (1.03) (.96) 1.13 1.16 (1.03) .58 (1.42) 1.37
---------- ---------- ---------- ---------- ---------- ---------- -------- --------
Total from
investment
operations....... (.61) (.09) 2.00 2.09 (.02) 1.77 (.13) 2.77
---------- ---------- ---------- ---------- ---------- ---------- -------- --------
Dividends from net
investment income to
preferred stockholders.... (.09) (.17) (.14) (.17) (.12) (.11) (.14) (.24)
Dividends from net
investment income to
common stockholders....... (.33) (.82) (.83) (.83) (.84) (1.08) (1.10) (1.24)
Dividends in excess of net
investment income to
common stockholders....... (.03) -- -- -- -- -- -- --
Distributions from net
capital and currency gains
to preferred
stockholders.............. -- -- (.02) (.01) (.01) (.01) (.01) --
Distributions from net
capital and currency gains
to common stockholders.... -- -- (.03) (.15) (.17) (.08) (.29) --
---------- ---------- ---------- ---------- ---------- ---------- -------- --------
Total dividends and
distributions.... (.45) (.99) (1.02) (1.16) (1.14) (1.28) (1.54) (1.48)
---------- ---------- ---------- ---------- ---------- ---------- -------- --------
Capital charge in respect to
issuance of shares........ -- (.41) (.39) (.11) (.01) (.03) --
---------- ---------- ---------- ---------- ---------- ---------- -------- --------
Net asset value per common
share, end of period...... $ 7.79 $ 8.85 $ 9.93 $ 9.36 $ 8.82 $ 10.09 $ 9.61 $ 11.31
========== ========== ========== ========== ========== ========== ======== ========
Market price per common
share, end of period...... $ 7.125 $ 8.125 $ 8.94 $ 9.31 $ 9.56 $ 10.25 $ 10.00 $ 10.94
TOTAL INVESTMENT RETURN
BASED ON+:
Market value................ (8.12)% (0.42)% 5.59% 8.78% 3.32% 15.00% 4.11% 38.36%
Net asset value............. (7.77)% (2.37)% 16.73% 18.54% (3.19)% 17.80% (3.22)% 27.62%
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1990 1989 1988
-------- -------- --------
<S> <C> <C> <C>
PERFORMANCE:
Net asset value per common
share, beginning of
period.................... $ 9.31 $ 10.81 $ 8.74
-------- -------- --------
Net investment income....... 1.49 1.32 .97
Net realized and unrealized
gain (loss) on investments
and foreign currencies.... .73 (1.22) 2.50
-------- -------- --------
Total from
investment
operations....... 2.22 .10 3.47
-------- -------- --------
Dividends from net
investment income to
preferred stockholders.... (.30) (.20) --
Dividends from net
investment income to
common stockholders....... (1.13) (1.08) (1.40)
Dividends in excess of net
investment income to
common stockholders....... -- -- --
Distributions from net
capital and currency gains
to preferred
stockholders.............. -- -- --
Distributions from net
capital and currency gains
to common stockholders.... (.08) (.23) --
-------- -------- --------
Total dividends and
distributions.... (1.51) (1.51) (1.40)
-------- -------- --------
Capital charge in respect to
issuance of shares........ -- (.09) --
-------- -------- --------
Net asset value per common
share, end of period...... $ 10.02 $ 9.31 $ 10.81
======== ======== ========
Market price per common
share, end of period...... $ 8.94 $ 8.88 $ 9.56
TOTAL INVESTMENT RETURN
BASED ON+:
Market value................ 14.95% 7.38% 54.42%
Net asset value............. 22.88% (.44)% 44.84%
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
SIX MONTHS
ENDED YEARS ENDED OCTOBER 31,
APRIL 30, -------------------------------------------------------------------------
1998(A) 1997 1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
OF COMMON STOCKHOLDERS/
SUPPLEMENTAL DATA#:
Expenses++.................. 1.44%* 1.25% 1.29% 1.47% 1.41% 1.44% 1.43%
Net investment income before
preferred stock
dividends................. 10.35%* 9.17% 9.16% 10.83% 10.68% 12.13% 12.14%
Preferred stock dividends... 2.10%* 1.78% 1.45% 1.87% 1.20% 1.13% 1.25%
Net investment income
available to common
stockholders.............. 8.25%* 7.39% 7.71% 8.96% 9.48% 11.00% 10.89%
Portfolio turnover rate..... 21% 85% 63% 50% 34% 23% 17%
Net assets of common
stockholders, end of
period (000).............. $1,517,721 $1,723,025 $1,931,894 $1,452,205 $1,088,631 $1,050,084 $977,933
Average net assets of common
stockholders (000)........ $1,590,108 $1,848,378 $1,627,916 $1,201,383 $1,174,394 $1,011,324 $938,072
Senior securities (preferred
stock) outstanding
(000)..................... $ 600,000 $ 600,000 $ 600,000 $ 475,000 $ 400,000 $ 350,000 $300,000
Asset coverage of preferred
stock, end of period...... 353% 387% 422% 406% 372% 400% 426%
<CAPTION>
FINANCIAL HIGHLIGHTS -- (CONTINUED)
YEARS ENDED OCTOBER 31,
-----------------------------------------
1991 1990 1989 1988
-------- -------- -------- --------
<S> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
OF COMMON STOCKHOLDERS/
SUPPLEMENTAL DATA#:
Expenses++.................. 1.59% 1.54% 1.35% 1.04%
Net investment income before
preferred stock
dividends................. 13.42% 15.47% 13.46% 9.51%
Preferred stock dividends... 2.31% 3.11% 2.07% --
Net investment income
available to common
stockholders.............. 11.11% 12.36% 11.39% 9.51%
Portfolio turnover rate..... 83% 80% 46% 60%
Net assets of common
stockholders, end of
period (000).............. $972,569 $861,379 $800,166 $928,689
Average net assets of common
stockholders (000)........ $899,175 $826,862 $832,779 $875,609
Senior securities (preferred
stock) outstanding
(000)..................... $300,000 $300,000 $300,000 --
Asset coverage of preferred
stock, end of period...... 424% 387% 367% --
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the
year.
* Annualized.
+ Total investment return based on market value is calculated based on
the Fund's market value on the first and last day of each period and
total investment return based on NAV is calculated based on the Fund's
NAV on such days. Dividends and distributions are assumed, for purposes
of the calculations, to be reinvested at prices obtained under the
Fund's dividend reinvestment and cash purchase plan. Total investment
returns do not reflect brokerage commissions. Total investment returns
for periods of less than one full year are not annualized. Generally,
total investment returns based on NAV will be higher than total
investment returns based on market value in periods where there is an
increase in the discount or a decrease in the premium of the market
value to the NAV from the beginning to the end of such periods.
Conversely, total investment returns based on NAV will be lower than
total investment returns based on market value in years where there is
a decrease in the discount or an increase in the premium of the market
value to the NAV from the beginning to the end of such periods.
++ Includes expenses of both Preferred and Common Stock.
# Ratios calculated on the basis of income, expenses and preferred share
dividends applicable to both the Common and Preferred Stock relative to
the average net assets of Stockholders.
NOTE: Contained above is operating performance for a share of Common Stock
outstanding, total investment return, ratios to average net assets of
Stockholders and other supplemental data for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements and market value data
for the Fund's Common Stock.
17
<PAGE> 20
SENIOR SECURITIES
The Fund currently has outstanding an aggregate of 24,000 shares of
Preferred Stock. The Preferred Stock has been issued in nine series, Series A
through I. The first three series were issued on January 19, 1989, the fourth
series on August 1, 1989, the fifth series on December 16, 1992, the sixth
series on December 20, 1993, the seventh series on July 27, 1995 and the eighth
and ninth series on September 9, 1996. The shares of Preferred Stock are senior
securities having priority over the shares of Common Stock as to distribution of
assets and payment of dividends. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of Preferred
Stock are entitled to receive a preferential liquidating distribution of $25,000
per share (the "Liquidation Preference"), plus accrued and unpaid dividends
(whether or not declared), before any payment is made to holders of Common
Stock. The average market value of a share of Preferred Stock has been equal to
the Liquidation Preference. The following tables set forth certain information
relating to the Preferred Stock.
PREFERRED STOCK, SERIES A-I
<TABLE>
<CAPTION>
TOTAL AMOUNT OF ASSET COVERAGE PER LIQUIDATION
PREFERRED STOCK $25,000 SHARE OF PREFERENCE PER
PERIOD ENDED OUTSTANDING(1) PREFERRED STOCK(2) $25,000 SHARE(3)(4)
- ------------ --------------- ------------------ -------------------
<S> <C> <C> <C>
October 31, 1988.......................... -- -- --
October 31, 1989.......................... $300,000,000 $ 91,747.25 $25,000
October 31, 1990.......................... $300,000,000 $ 96,883.75 $25,000
October 31, 1991.......................... $300,000,000 $106,141.00 $25,000
October 31, 1992.......................... $300,000,000 $106,520.50 $25,000
October 31, 1993.......................... $350,000,000 $100,006.00 $25,000
October 31, 1994.......................... $400,000,000 $ 93,039.50 $25,000
October 31, 1995.......................... $475,000,000 $101,431.75 $25,000
October 31, 1996.......................... $600,000,000 $ 80,495.59 $25,000
October 31, 1997.......................... $600,000,000 $ 71,792.73 $25,000
April 30, 1998............................ $600,000,000 $ 63,238.38 $25,000
</TABLE>
- ---------------
(1) Based on the number of shares of Preferred Stock outstanding multiplied by
the Liquidation Preference per share.
(2) Asset coverage per share of Preferred Stock is derived by subtracting the
aggregate Liquidation Preference of all of the series of Preferred Stock
outstanding ($300,000,000 through 1992, $350,000,000 in 1993, $400,000,000
in 1994, $475,000,000 in 1995 and $600,000,000 in 1996, 1997 and 1998) from
the total assets of the Fund less (i) all liabilities and indebtedness not
represented by the Preferred Stock and (ii) any accrued but unpaid dividends
on the Preferred Stock as at the end of the fiscal periods indicated. This
sum is then divided by the number of shares of Preferred Stock outstanding.
(3) Plus accrued and unpaid dividends, if any.
(4) The liquidation preference as of October 31, 1995 was $100,000 per share of
Preferred Stock, Series A-F, and $25,000 per share of Preferred Stock,
Series G. Effective April 25, 1996, by means of stock splits, the
liquidation preference of Preferred Stock, Series A-F was reduced to $25,000
per share and an additional aggregate 12,000 shares of Preferred Stock,
Series A-F were issued.
The dividend rates on the outstanding Preferred Stock are established
through an auction process. The dividend rates on the series A-D shares are set
every 28 days and the dividend rates on the Series E, F, G, H and I shares are
set every 7 days. Generally, the dividend rate has represented a discount from
the 30-day commercial paper rate. At July 31, 1998, the annual dividend rates on
Series A through I were, respectively, 5.20%, 5.21%, 5.245%, 5.245%, 5.19%,
5.15%, 5.24%, 5.20% and 5.50%. At these rates, the annual return the Fund's
portfolio must experience (net of expenses) in order to cover dividend payments
on all series is 1.60%.
18
<PAGE> 21
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of the leverage obtained by the issuance of
the Preferred Stock, assuming hypothetical annual returns on the Fund's
portfolio of minus 10 to plus 10 percent. As can be seen, leverage generally
increases the returns to stockholders when portfolio returns are positive and
decreases returns when the portfolio returns are negative. Actual returns may be
greater or less than those appearing in the table and may be enhanced or
diminished by fluctuations in foreign currency. See "Risk Factors and Special
Considerations -- Preferred Stock."
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of expenses)...... -10% -5% 0% 5% 10%
Corresponding Common Stock Return(1)............ -15.39% -8.65% -1.91% 4.83% 11.57%
</TABLE>
- ---------------
(1) In order to compute "Corresponding Common Stock Return," the "Assumed
Portfolio Return" is multiplied by the total value of Fund assets as of the
beginning of the fiscal year (November 1, 1997) to obtain an assumed return
to the Fund. This rate is then reduced by the value of Preferred Stock
dividends that would be paid during the year ($32,901,875) based on the
dividend rates in effect at the beginning of the fiscal year (for Series A
through I, respectively, 5.50%, 5.40%, 5.50%, 5.40%, 5.21%, 5.35%, 5.625%,
5.625%, and 5.70%) in order to determine the return available to holders of
the Fund's Common Stock. Return available to holders of the Fund's Common
Stock is then divided by the value of the Fund's net assets attributable to
holders of Common Stock as of the beginning of the fiscal year
($1,723,025,462) to determine "Corresponding Common Stock Return."
19
<PAGE> 22
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to Record Date Stockholders non-transferable rights to
subscribe for an aggregate of 64,914,776 Shares. Each Record Date Stockholder is
being issued one-third of a non-transferable Right for each share of Common
Stock owned on the Record Date. The Rights entitle the stockholder to acquire at
the Subscription Price one Share for each whole Right held. Rights may be
exercised at any time during the Subscription Period, which commences on October
1, 1998 and ends at 5:00 p.m., New York City time, on October 22, 1998, unless
extended. A stockholder's right to acquire, during the Subscription Period at
the Subscription Price, one Share for each whole Right held is hereinafter
referred to as the "Primary Subscription." A stockholder who exercises Rights
pursuant to the Primary Subscription is hereinafter referred to as an
"Exercising Stockholder." Only the underlying Shares will be listed for trading
on the AMEX and the PSE. Stockholders who receive, and who are left with,
fractional Rights will be unable to exercise the Rights and will not be entitled
to receive any cash in lieu thereof. Fractional shares will not be issued upon
the exercise of Rights; accordingly, only whole Rights may be exercised. The
Rights will be evidenced by subscription certificates which will be mailed to
Record Date Stockholders.
In addition, stockholders who fully exercise all Rights issued to them
(other than those Rights which cannot be exercised because they represent the
right to acquire less than one Share) are entitled to subscribe for additional
Shares pursuant to the Over-Subscription Privilege. For purposes of determining
the number of Shares a stockholder may acquire pursuant to the Offer,
broker-dealers, trust companies, banks or others whose Shares are held of record
by Cede or by any other depository or nominee will be deemed to be the holders
of the Rights that are issued to Cede or the other depository or nominee on
their behalf. Shares acquired pursuant to the Over-Subscription Privilege are
subject to allotment or increase, which is more fully discussed below under
"Over-Subscription Privilege."
PURPOSE OF THE OFFER
The Fund seeks to maintain a stable monthly cash distribution consistent
with its principal investment objective of providing current income. To this
end, in February 1989, the Fund began paying a regular monthly distribution in
place of the previous quarterly payments and, in September 1993, the Fund
adopted a policy of supplementing monthly distributions paid out of available
net investment income with realized capital gains. As interest rates have fallen
in Australia, on the basis of the advice of the Investment Manager and
Investment Adviser, the Fund's Board of Directors from time to time has reduced
the level of monthly distribution payments when the previous distribution level
could no longer be sustained. The last reduction occurred in September 1997,
when the regular monthly distribution was reduced from 7 cents per share to 6
cents per common share.
In order to address the prospect of declining distributions, the Fund's
Investment Manager and Investment Adviser, in August 1997, proposed to the Board
of Directors that the Fund's investment policies be expanded to enable the Fund
to invest up to 35% of its assets in Asian debt securities. The Investment
Manager and Investment Adviser indicated that in their view the relatively high
level of interest rates available in Asian markets compared with interest rates
prevailing in Australia and New Zealand offered an attractive opportunity to
increase the Fund's net investment income above the current level, although they
also emphasized that this would introduce an extra element of risk in
implementing the Fund's investment objective.
After in-depth consideration, the Fund's Board determined to recommend to
the Fund's Common and Preferred stockholders that the Fund's investment policies
and investment structure be amended in order to enable the Fund to invest up to
35% of its assets in Asian debt securities. That proposal was approved by the
Common and Preferred stockholders on May 14, 1998. The proxy statement
soliciting Common and Preferred stockholder approval indicated that if
investment in Asian debt securities received Common and Preferred stockholder
approval, a combination of the proceeds of the sale of some of the Australian
debt securities held in the Fund's portfolio, the reinvestment of maturing
Australian debt securities in the portfolio and the
20
<PAGE> 23
proceeds of a likely rights offering would be utilized to fund investment into
Asia. The proxy statement also disclosed that because rights offerings are
frequently dilutive to stockholders, the Fund's Directors would first seek the
advice of an independent consultant with respect to the ultimate funding of a
large portion of the Fund's investment in Asian securities through a rights
offering.
Following the vote of the Common and Preferred stockholders, the Investment
Manager and Investment Adviser began a thorough analysis of how best to
implement the investment in Asian debt securities in terms of both the timing of
investment and its appropriate funding. The Investment Manager and Investment
Adviser jointly prepared a written report addressing these issues dated July 24,
1998 (the "EquitiLink Report"), which concluded that, in terms of investment
timing, the period through the end of 1998 and into early 1999 appeared to
present a favorable opportunity for Asian investment. The EquitiLink Report
indicated that although the Asian markets have experienced significant
volatility and continue to involve risk, the current level of yields on Asian
debt investments could make it timely for the Fund to raise the capital
necessary to support investment into Asian debt by approving a one-for-three
rights offering to existing stockholders.
The proposal was first reviewed by a Sub-Committee composed of five
Directors, Malcolm Fraser, Neville Miles, William Potter, Peter Sacks and John
Sheehy, who are not interested Directors of the Fund and were selected by the
Board to evaluate the proposal. In early October of 1997, the Sub-Committee
engaged Chase Securities Inc. ("Chase") on behalf of the Board, to act as the
Fund's exclusive financial adviser. The proposal was reviewed by Chase which had
earlier advised the Sub-Committee and the Board with respect to the Investment
Manager's proposal to enter the Asian debt markets. In its written report to the
Sub-Committee dated July 30, 1998 (the "Chase Report"), Chase said that it had
reviewed the EquitiLink Report and discussed the EquitiLink Report with the
representatives of the Investment Manager and Investment Adviser. On the basis
of its review and analysis, Chase advised the Board that, having reviewed the
factual information presented by the Investment Manager and the Investment
Adviser in the EquitiLink Report, ". . . the assumptions contained therein are
appropriate and the factual information contained therein is accurate, in each
case in all material respects."
At a meeting held on July 22, 1998, the Sub-Committee met to consider the
EquitiLink Report. After hearing from representatives of Chase and extensive
discussion, the Sub-Committee agreed to recommend to the full Board that the
Fund engage in a rights offering on the terms set forth in this Prospectus,
subject to a final discussion with Chase. At a subsequent meeting of the
Sub-Committee on July 30, 1998, after discussing the proposal with the
Investment Manager and Investment Adviser and hearing further from
representatives of Chase, the Sub-Committee voted to recommend to the Board that
the Fund proceed with the recommended rights offering. Immediately thereafter,
the Board met to consider the matter. After reviewing the EquitiLink Report as
well as the Chase Report, and discussing the proposal with the Sub-Committee as
well as representatives of Chase, the Investment Manager and the Investment
Adviser, the Board determined, by the unanimous vote of the independent
Directors, as well as the unanimous vote of the full Board, to recommend a
rights offering upon the terms set forth in this Prospectus.
The Investment Adviser believes that an increase in the size of the Fund
should result in an incidental modest reduction in the Fund's expense ratio,
which would be of long-term benefit to stockholders.
The Offer also seeks to reward stockholders by giving them the right to
purchase additional Shares at a discount, although stockholders who do not fully
exercise their Rights will own, upon completion of the Offer, a smaller
proportional interest in the Fund than they owned prior to the Offer. The Board
of Directors took this into account in adopting the Subscription Price formula
applicable to the Offer and selecting the ratio of Rights offered relative to
the number of shares held. See "The Offer" and "Risk Factors and Special
Considerations."
THERE CAN BE NO ASSURANCE THAT THE FUND OR ITS STOCKHOLDERS WILL ACHIEVE
ANY OF THE FOREGOING OBJECTIVES OR BENEFITS THROUGH THE OFFER.
The Fund has made four prior rights offerings which the Investment Manager
and Investment Adviser believe had a generally favorable effect on returns to
Common Stock holders. In each case tactical investment
21
<PAGE> 24
of the proceeds enabled the Fund to maintain a stable distribution policy
despite declining interest rates. In the case of the 1992 rights offering, the
1995 rights offering and the 1996 rights offering, the Fund used the net
proceeds to capture higher yields then available for long-term securities, and
in 1993 it sought to reduce the Fund's exposure to long-term securities in order
to reduce volatility in the Fund's NAV in a period of changing market
conditions.
In the case of all four rights offerings, the Fund sought to emphasize
investment in the Australian Eurobond market and to provide modest reductions in
the Fund's expense ratio. In this respect, overall, the Fund's investment in
Australian dollar Eurobonds rose from 15.8% of its total assets at October 31,
1992, immediately prior to the investment of the proceeds of the 1992 offering,
to 24% of the Fund's total assets at January 31, 1994, the last day of the
quarter in which the proceeds of the 1993 offer were invested. Prior to the 1995
rights offering, 33.8% of the Fund's total assets were invested in Eurobonds.
Following the investment of the proceeds of that offering, the Fund's holding in
Eurobonds represented 36.9% of its assets. Immediately prior to the 1996 rights
offering, 26.24% of the Fund's total assets were invested in Eurobonds.
Following the investment of the proceeds of the 1996 rights offering, the Fund's
holding in Eurobonds represented 28.2% of its assets at October 31, 1996 and
30.8% of its assets at April 30, 1997. The Fund intends to continue its
investment approach of emphasizing the Eurobond markets, where securities are
exempt from the 10% withholding tax imposed on domestic Australian issues. See
"Taxation -- Foreign Taxes -- Australia."
The Fund's expense ratio was also favorably affected by the rights
offerings. For the six months ended April 30, 1998 and the six fiscal years
ended October 31, 1997, 1996, 1995, 1994, 1993 and 1992, the Fund's annualized
expense ratios were, respectively, 1.44%, 1.25%, 1.29%, 1.47%, 1.41%, 1.44% and
1.43%, compared with expense ratios of 1.59% and 1.54% for the 1991 and 1990
fiscal years. In the opinion of the Investment Adviser, the expense ratios for
the 1997, 1996, 1995, 1994 and 1992 fiscal years (which are the fiscal years in
which the proceeds of the 1996, 1995, 1993 and 1992 rights offerings were
invested) were favorably affected by the rights offerings, since the proceeds
served to offset a decrease in the total net assets of the Fund in those years
occasioned by unfavorable currency and market value movements.
Although the Fund has sought to restrict potential dilution, the extent of
dilution depends on the amount, if any, by which the Subscription Price less
fees paid to the Dealer Managers and other expenses of the Offer represents a
discount to NAV on the date new Shares are issued. The dilution was $0.03 per
share in the 1992 offering, $0.11 per share in the case of the 1993 offering,
$0.38 per share in the case of the 1995 offering and $0.40 per share in the case
of the 1996 offering.
Because their fees are based on the magnitude of the Fund's assets, the
Fund's Investment Manager and Investment Adviser, as well as the Administrator,
will benefit from the Offer. See "Management Agreement and Advisory Agreement."
It is not possible to state precisely the amount of additional compensation
these entities will receive as a result of the Offer because it is not known how
many Shares will be subscribed for and because the net proceeds of the Offer
will be invested in additional portfolio securities which will fluctuate in
value.
Although the Board of Directors has no present intention of proposing
further rights offerings, the Board may consider, from time to time, making
additional offerings when, in its view, investment opportunities are presented
that lend themselves to the investment of new funds and further rights offerings
would be in the best interests of the Fund and its Stockholders. Any rights
offerings will be made in accordance with the Investment Company Act, but may or
may not be made on terms similar to the Offer.
OVER-SUBSCRIPTION PRIVILEGE
If some stockholders do not exercise all of the Rights initially issued to
them, any Shares for which subscriptions have not been received from
stockholders will be offered by means of the Over-Subscription Privilege to the
stockholders who have exercised all the Rights initially issued to them and who
wish to acquire more than the number of Shares for which the Rights issued to
them are exercisable. Exercising Stockholders who exercise on Primary
Subscription all of the Rights initially issued to them will be asked to
indicate, on the Exercise Form which they submit with respect to the exercise of
the Rights initially issued to them, how many Shares they would like to purchase
pursuant to the Over-Subscription Privilege. If sufficient Shares remain, as
22
<PAGE> 25
a result of unexercised Rights, all over-subscriptions will be honored in full.
If sufficient Shares are not available to honor all over-subscriptions, the Fund
may, at its discretion, issue up to an additional 25% of the Shares to honor the
over-subscriptions. To the extent the Fund determines not to issue additional
Shares to honor all over-subscriptions, the available Shares will be allocated
among those who over-subscribe based on the number of Rights originally issued
to them, so that the number of Shares issued to Exercising Stockholders who
subscribe pursuant to the Over-Subscription Privilege will generally be in
proportion to the number of Shares owned by them on the Record Date. The
percentage of remaining Shares each over-subscribing Exercising Stockholder may
acquire will be rounded down to result in delivery of whole Shares. The
allocation process may involve a series of allocations to assure that the total
number of Shares available for over-subscriptions is distributed on a pro-rata
basis.
The Investment Manager, the owner of 59,124 shares, intends to exercise all
of the Rights initially issued to it so that, if additional Shares remain after
all over-subscriptions other than the over-subscriptions submitted by the
Investment Manager are honored in full, the Investment Manager may purchase all
or any of the remaining Shares. If additional Shares do not remain after all
over-subscriptions by stockholders other than the Investment Manager are
honored, then the Investment Manager will not receive Shares pursuant to its
Over-Subscription Privilege. Any Shares purchased by the Investment Manager will
be "restricted shares" which can be publicly sold by the Investment Manager only
if registered under the Securities Act of 1933, as amended (the "Securities
Act"), or pursuant to an exemption from registration, including pursuant to the
exemption for limited resales provided by Rule 144 promulgated thereunder. In
general, under Rule 144, as currently in effect, an "affiliate" of the Fund is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock or
the average weekly reported trading volume of the Common Stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain restrictions on the manner of sale, to notice requirements and to the
availability of current public information about the Fund. In addition, any
profit resulting from the Investment Manager's sale of shares within a period of
less than six months from the purchases will be returned to the Fund.
The Fund will not offer or sell any Shares which are not subscribed for
pursuant to the Offer.
THE SUBSCRIPTION PRICE
The Subscription Price will be 95% of the lower of (a) the average of the
last reported sales price of a share of the Fund's Common Stock on the AMEX on
October 22, 1998 and the four preceding business days or (b) the NAV per share
as of the Pricing Date. For example, if the average of the last reported sales
price on the AMEX on the Pricing Date and the four preceding business days of a
share of the Fund's Common Stock is $6.15, and the NAV per share is $6.83, the
Subscription Price will be $5.84 (95% of $6.15). If, however, the average of the
last reported sales price of a share on the AMEX on the Pricing Date and the
four preceding business days is $6.84 and the NAV per share is $6.83, the
Subscription Price will be $6.49 (95% of $6.83). See "Description of Common
Stock."
Because the Expiration Date and the Pricing Date are each October 22, 1998,
Exercising Stockholders will not know at the time of exercise the Subscription
Price for Shares acquired pursuant to the exercise.
The Fund announced the Offer prior to the commencement of trading on the
AMEX on August 21, 1998. The NAV per share of the Common Stock at the close of
business on August 14, 1998 and September 25, 1998 was $6.82 and $6.83,
respectively, and the last reported sales price of a share of the Fund's Common
Stock on the AMEX on those dates was $6.31 and $6.06, respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on October 22,
1998, unless extended. Rights will expire on the Expiration Date and thereafter
may not be exercised.
Any extension, termination, or amendment will be followed as promptly as
practical by announcement thereof. In the case of an extension, the announcement
will be issued no later than 9:00 a.m., New York City
23
<PAGE> 26
time, on the next business day following the previously scheduled Expiration
Date. The Fund will not, unless otherwise obligated by law, have any obligation
to publish, advertise, or otherwise communicate any announcement other than by
making a release to the Dow Jones News Service or any other means of
announcement as the Fund deems appropriate.
SUBSCRIPTION AGENT
State Street Bank and Trust Company, P.O. Box 9061, Boston, Massachusetts
02205 will perform administrative, processing, invoice, and other services as
Subscription Agent in connection with the Offer. Signed Exercise Forms should be
sent to the Subscription Agent by one of the methods described below.
Stockholders may also subscribe for the Offer by contacting their brokers and
nominees. The Fund reserves the right to accept Exercise Forms actually received
on a timely basis at any of the addresses listed.
The Subscription Agent will receive a fee for its services, estimated to be
$255,000 including reimbursement for all out-of-pocket expenses related to the
Offer. The Subscription Agent is also the Fund's Custodian, Dividend Paying
Agent, Transfer Agent and Registrar with respect to the Common Stock.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
EXERCISE FORM
DELIVERY METHOD ADDRESS/NUMBER
------------------------------------------------------------------------------------------------
By First Class Mail Only The First Australia Prime Income Fund,
(No Overnight/Express Mail) Inc.
c/o State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
------------------------------------------------------------------------------------------------
By Hand to New York Delivery Window The First Australia Prime Income Fund,
Inc.
Securities Transfer & Reporting Services,
Inc.
c/o Boston EquiServe LP
55 Broadway, 3rd Floor
New York, NY 10006
------------------------------------------------------------------------------------------------
By Express Mail or Overnight Courier The First Australia Prime Income Fund,
Inc.
State Street Bank and Trust Company
Corporate Reorganization
40 Campanelli Drive
Braintree, MA 02184
------------------------------------------------------------------------------------------------
By Notice of Guaranteed Delivery Contact your broker-dealer, trust company,
bank, or other nominee to notify the Fund
of your intent to exercise the Rights.
------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE GOOD DELIVERY.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
SHAREHOLDER
COMMUNICATIONS CORPORATION
New York, New York
Toll Free: (800) 733-8481, Ext. 422
or
Call Collect: (212) 805-7000
24
<PAGE> 27
Stockholders may also contact their brokers or nominees for information
with respect to the Offer.
The Information Agent will receive a fee estimated to be $30,000 and
reimbursement for all out-of-pocket expenses related to the Offer.
EXERCISE OF RIGHTS
Rights may be exercised by completing and signing the Exercise Form and
mailing it in the envelope provided, or otherwise delivering the completed and
signed Exercise Form to the Subscription Agent, together with payment for the
Shares as described below under "Payment for Shares." Stockholders may also
exercise Rights by contacting their broker, banker or trust company who can
arrange, on their behalf, to guarantee delivery of payment and of a properly
completed and executed Exercise Form. A fee may be charged for this service.
Completed Exercise Forms and related payments must be received by the
Subscription Agent prior to 5:00 p.m., New York City time, on or before the
Expiration Date (unless payment is effected by means of a Notice of Guaranteed
Delivery as described below under "Payment for Shares") at the offices of the
Subscription Agent at the address set forth above. Fractional Shares will not be
issued, and stockholders who receive, or who are left with, less than a whole
Right will not be able to exercise those Rights.
Exercising Stockholders Who Are Record Owners. Exercising Stockholders who
are owners of record may choose either option set forth under "Payment for
Shares" below. If time is of the essence, alternative (2) will permit delivery
of the Exercise Form and payment after the Expiration Date.
Investors Whose Shares Are Held By A Nominee. Stockholders whose shares
are held by a nominee such as a broker or trustee must contact the nominee to
exercise their Rights. In that case, the nominee will complete the Exercise Form
on behalf of the Exercising Stockholder and arrange for proper payment by one of
the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should notify
the respective beneficial owners of the shares as soon as possible to ascertain
the beneficial owners' intentions and to obtain instructions with respect to
exercising the Rights. If a beneficial owner so instructs, the nominee should
complete the Exercise Form and submit it to the Subscription Agent with the
proper payment described under "Payment for Shares" below.
All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
subscription forms and the Subscription Price will be determined by the Fund,
which determinations will be final and binding. No alternative, conditional or
contingent subscriptions will be accepted. The Fund reserves the right to reject
any or all subscriptions not properly submitted or the acceptance of which
would, in the opinion of Fund's counsel, be unlawful.
PAYMENT FOR SHARES
Exercising Stockholders may exercise their Rights and pay for Shares
subscribed for pursuant to the Primary Subscription and Over-Subscription
Privilege in one of the following ways:
(1) Exercising Stockholders can send the Exercise Form together with
payment for the Shares subscribed for pursuant to the Primary Subscription and
for additional Shares they would like to subscribe for pursuant to the
Over-Subscription Privilege to the Subscription Agent based on the Estimated
Subscription Price of $5.84. To be accepted, the payment, together with the
executed Exercise Form, must be received by the Subscription Agent at one of the
Subscription Agent's offices set forth above, prior to 5:00 p.m., New York City
time, by the Expiration Date. The Subscription Agent will deposit all the Share
purchase checks received by it prior to the final due date into a segregated
interest bearing account (which interest will accrue to the benefit of the Fund)
pending proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD
MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE
UNITED STATES, MUST BE PAYABLE TO THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
AND MUST ACCOMPANY AN EXECUTED EXERCISE FORM FOR THE EXERCISE FORM TO BE
ACCEPTED.
25
<PAGE> 28
(2) Alternatively, a subscription will be accepted by the Subscription
Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date, the
Subscription Agent has received a notice of guaranteed delivery by facsimile
(telecopy) or otherwise from a bank, a trust company, or a New York Stock
Exchange member guaranteeing delivery of (i) payment of the full Subscription
Price for the Shares subscribed for pursuant to the Primary Subscription and any
additional Shares subscribed for pursuant to the Over-Subscription Privilege,
and (ii) a properly completed and executed Exercise Form. The Subscription Agent
will not honor a notice of guaranteed delivery if a properly completed and
executed Exercise Form and full payment for the Shares is not received by the
Subscription Agent by the close of business on the third business day after the
Expiration Date.
Within fourteen calendar days following the Expiration Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent to
each registered stockholder (or, if the Fund's Shares are held by Cede or any
other depository or nominee, to Cede or the depository or nominee), showing (i)
the number of Shares acquired pursuant to the Primary Subscription, (ii) the
number of Shares, if any, acquired pursuant to the Over-Subscription Privilege,
(iii) the per Share and total purchase price for the Shares, and (iv) any
additional amount payable by the stockholder to the Fund or any excess to be
refunded by the Fund to the stockholder, in each case based on the Subscription
Price as determined on the Pricing Date. If any stockholder exercises the right
to acquire Shares pursuant to the Over-Subscription Privilege, any excess
payment which would otherwise be refunded to the stockholder will be applied by
the Fund toward payment for Shares acquired pursuant to exercise of the
Over-Subscription Privilege. Any additional payment required from a stockholder
must be received by the Subscription Agent within ten business days after the
Confirmation Date. Any excess payment to be refunded by the Fund to a
stockholder will be mailed by the Subscription Agent to the stockholder as
promptly as possible. All payments by a stockholder must be in U.S. dollars by
money order or check drawn on a bank located in the United States and payable to
The First Australia Prime Income Fund, Inc.
Whichever of the two methods described above is used, issuance and delivery
of certificates for the Shares purchased are subject to collection of checks and
actual payment pursuant to any notice of guaranteed delivery.
STOCKHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER RECEIPT
OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.
If a stockholder who acquires Shares pursuant to the Primary Subscription
or Over-Subscription Privilege does not make payment of any additional amounts
due, the Fund reserves the right to take remedial action, including without
limitation, (i) applying any payment actually received by it toward the purchase
of the greatest number of Shares which could be acquired by the holder upon
exercise of the Primary Subscription and/or Over-Subscription Privilege; (ii)
allocating the Shares subject to subscription rights to one or more other
stockholders; and (iii) selling all or a portion of the Shares deliverable upon
exercise of subscription rights on the open market and applying the proceeds to
the amount owed.
NOTICE OF NAV DECLINE
The Fund, as required by the Commission's registration form, will suspend
the Offer until it amends this Prospectus if, subsequent to the date of this
Prospectus, the Fund's NAV declines more than 10% from its NAV as of that date.
Accordingly, the Fund will notify stockholders of the decline and thereby permit
them to cancel their exercise of Rights.
DELIVERY OF STOCK CERTIFICATES
Participants in the Fund's Dividend Reinvestment and Cash Purchase Plan
(the "Plan") will have any Shares that they acquire pursuant to the Offer
credited to their stockholder dividend reinvestment accounts in the Plan.
Stockholders whose Shares are held of record by Cede or by any other depository
or nominee on their behalf or their broker-dealers' behalf will have any Shares
that they acquire credited to the account of Cede or the other depository or
nominee. With respect to all other stockholders, stock certificates for all
Shares acquired will be mailed after payment for all the Shares subscribed for
has cleared, which may take up
26
<PAGE> 29
to fifteen days from the date of receipt of the payment. Shares purchased
pursuant to the Offer will be issued after the record date for the monthly
distribution payable in November 1998 and, accordingly, the Fund will not pay
the monthly distribution with respect to the Shares.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
For federal income tax purposes, neither the receipt nor the exercise of
the Rights by stockholders will result in taxable income to holders of Common
Stock, and no loss will be realized if the Rights expire without exercise.
A stockholder's holding period for a Share acquired upon exercise of a
Right begins with the date of exercise. A stockholder's basis for determining
gain or loss upon the sale of a Share acquired upon the exercise of a Right will
be equal to the sum of the stockholder's basis in the Right, if any, and the
Subscription Price. The stockholder's basis in the Right will be zero unless
either (i) the fair market value of the Right on the date of distribution is 15%
or more of the fair market value of the Shares with respect to which the Right
was distributed, or (ii) the stockholder elects, in the stockholder's federal
income tax return for the taxable year in which the Right is received, to
allocate part of the basis of the Shares to the Right. If either of clauses (i)
and (ii) is applicable, then if the Right is exercised, the stockholder will
allocate the stockholder's basis in the Shares with respect to which the Right
was distributed between the Shares and the Right in proportion to the fair
market values of each on the date of distribution. A stockholder's gain or loss
recognized upon a sale of a Share acquired upon the exercise of a Right will be
capital gain or loss (assuming the Share was held as a capital asset at the time
of sale) and will be long-term capital gain or loss if the Share was held at the
time of sale for more than one year.
The foregoing is a general summary of the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and Treasury regulations
presently in effect, and does not cover state or local taxes. The Code and
regulations are subject to change by legislative or administrative action.
Stockholders should consult their tax advisers regarding specific questions as
to federal, state or local taxes.
INVESTMENT CONSIDERATIONS
As a result of the terms of the Offer, stockholders who do not exercise
their Rights will, at the completion of the Offer, own a smaller proportional
interest in the Fund than they owned prior to the Offer. In addition, an
immediate dilution of the NAV per share will be experienced by all stockholders
as a result of the Offer irrespective of whether they exercise all or any
portion of their Rights, because the Subscription Price will be less than the
current NAV per share of the Fund's Common Stock and the number of shares
outstanding after the Offer will increase by a greater percentage than the
increase in the size of the Fund's assets. Although it is not possible to state
precisely the amount of dilution of the NAV per share, because it is not known
at this time how many Shares will be subscribed for or what the Subscription
Price will be, the dilution could be minimal or it could be substantial. In
addition, the Offer may have a dilutive impact on investment income available
for distribution.
USE OF PROCEEDS
If 64,914,776 Shares are sold at the Estimated Subscription Price of $5.84,
the net proceeds of the Offer are estimated to be approximately $363,057,456,
after deducting commissions and expenses payable by the Fund estimated at
approximately $16,044,836. If the Fund, in its sole discretion, increases the
number of Shares subject to the Offer by 25% in order to satisfy
over-subscriptions, the additional net proceeds will be approximately
$91,221,489. The Investment Manager and Investment Adviser anticipate that
investment of the net proceeds in Asian debt securities, in accordance with the
Fund's investment objective and policies, will take approximately three months
from their receipt by the Fund, depending on market conditions and the
availability of appropriate securities. See "The Offer -- Purpose of the Offer"
and "Investment Objective and Policies; Investment Restrictions."
27
<PAGE> 30
DESCRIPTION OF COMMON STOCK
The Fund, which was incorporated under the laws of the State of Maryland on
March 14, 1986, is authorized to issue 400,000,000 shares of Common Stock. Each
share has equal voting, dividend, distribution and liquidation rights. The
shares outstanding and the Shares offered hereby, when issued and paid for
pursuant to the terms of the Offer, will be fully paid and non-assessable.
Shares of Common Stock are not redeemable and have no preemptive, conversion or
cumulative voting rights.
The number of shares of Common Stock outstanding as of July 31, 1998 was
194,744,328. The number of shares outstanding as of July 31, 1998 adjusted to
give effect to the Offer, assuming that all Rights and the Over-Subscription
Privilege are exercised and the applicable Shares issued, would be 275,887,798.
The Fund's shares are publicly held and listed and traded on the AMEX and
the PSE. The NAV of the Fund is determined on the last business day of each
week. The following table sets forth for the quarters indicated the highest and
lowest Friday (or other last business day of a week) closing prices on the AMEX
per share of Common Stock and the NAV per share and the premium or discount from
NAV on the date of each of the high and low market prices. The table also sets
forth the number of shares traded on the AMEX during the respective quarter.
<TABLE>
<CAPTION>
NAV
PER SHARE ON AMEX
DATE OF MARKET PRICE PER SHARE
MARKET PRICE AND RELATED PREMIUM(+)/
HIGH AND LOW(1) DISCOUNT(-)(2)(3) REPORTED
---------------- -------------------------------- AMEX
QUARTER ENDED HIGH LOW HIGH LOW VOLUME
------------- ------ ----- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
January 31, 1996........... 9.35 9.10 9.56 (+3.71%) 9.13 (+0.27%) 8,086,200
April 30, 1996............. 9.00 9.29 9.50 (+5.53%) 8.58 (-7.66%) 12,366,600
July 31, 1996.............. 9.41 9.47 8.75 (-7.01%) 8.38 (-11.58%) 17,832,400
October 31, 1996........... 9.88 9.45 8.88 (-10.17%) 8.63 (-8.73%) 11,149,200
January 31, 1997........... 10.32 9.38 9.13 (-11.58%) 8.81 (-6.05%) 15,343,800
April 30, 1997............. 9.50 9.56 9.19 (-3.29%) 8.88 (-7.17%) 9,408,400
July 31, 1997.............. 9.42 9.35 9.38 (-0.48%) 9.13 (-2.41%) 9,781,600
October 31, 1997........... 9.44 8.85 9.38 (-0.69%) 8.13 (-8.19%) 15,609,300
January 31, 1998........... 8.80 7.86 8.13 (-7.67%) 7.25 (-7.76%) 16,513,700
April 30, 1998............. 8.28 7.89 8.00 (-3.38%) 7.38 (-6.53%) 13,303,500
July 31, 1998.............. 7.81 7.02 7.06 (-9.57%) 6.75 (-3.85%) 14,740,800
</TABLE>
- ---------------
(1) Based on the Fund's computations.
(2) Highest and lowest Friday (or other last business day of the week) closing
market price per share as reported on the AMEX.
(3) "Related Premium(+)/Discount(-)" represents the premium or discount from NAV
of the shares on the date of the respective high and low Friday (or other
last business day of the week) market price for the respective quarter.
On September 25, 1998, the per share NAV was $6.83 and the share market
price was $6.06, representing a 11.24% discount from such NAV.
The Fund's shares have traded in the market above, at and below NAV since
the commencement of the Fund's operations. The Fund cannot determine the reasons
for the Fund's shares trading at a premium or discount to NAV, nor can the Fund
predict whether its shares will trade in the future at a premium or discount to
NAV, and if so, the level of any premium or discount. Shares of closed-end
investment companies frequently trade at a discount from NAV.
28
<PAGE> 31
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the Investment Company Act. It commenced operations in April
1986 and was the first publicly offered United States registered investment
company organized to invest primarily in Australian debt securities. The Fund's
investment objective is current income through investment primarily in
Australian debt securities. The Fund may also achieve incidental capital
appreciation. In May 1998, the Fund's Common and Preferred stockholders approved
a series of proposals allowing the Fund, among other things, to (1) invest up to
35% of its assets in Asian debt securities; (2) invest in Asian debt securities
for which there is no established relevant market; (3) invest up to 15% of its
total assets in Asian debt securities rated, or considered by the Investment
Manager to be, below investment grade at the time of investment, and to reduce
the percentage of its investments in debt securities which are, or are
considered by the Investment Manager to be, rated AA or A quality; and (4)
utilize derivatives in furtherance of its investment objective and policies.
EXPERIENCE OF THE INVESTMENT MANAGER AND INVESTMENT ADVISER
General. The Fund's Investment Manager is EquitiLink International
Management Limited, an investment management company organized in Jersey,
Channel Islands. The Investment Manager manages, in accordance with the Fund's
stated investment objective, policies and limitations and subject to the
supervision of the Fund's Board of Directors, the Fund's investments and makes
investment decisions on behalf of the Fund, including the selection of, and
placing of orders with, broker-dealers to execute portfolio transactions on
behalf of the Fund and the making of investments in U.S. dollar-denominated
securities. The Investment Manager's affiliate, EquitiLink Australia Limited, an
Australian corporation, acts as the Fund's Investment Adviser, providing
portfolio recommendations to the Investment Manager with respect to Australian,
New Zealand and Asian debt securities. The Investment Manager and the Investment
Adviser also serve in these capacities for the First Asia Income Fund, a
closed-end unit trust the units of which are listed on the Toronto Stock
Exchange, organized to invest primarily in debt securities of issuers in
Australia, New Zealand and other Asian countries; The First Australia Fund,
Inc., a non-diversified closed-end management investment company, the shares of
which are listed on the AMEX and the PSE, organized to invest primarily in
Australian listed equity securities, which commenced operations in 1985; and The
First Australia Prime Income Investment Company Limited, a closed-end management
investment company, the shares of which are listed on the Toronto Stock
Exchange, also organized to invest primarily in Australian debt securities,
which commenced operations in 1986. In addition, the Investment Manager and
Adviser provide management and advisory services to The First Commonwealth Fund,
Inc., a non-diversified, closed-end management investment company whose shares
are traded on the New York Stock Exchange, organized to invest in high-grade,
fixed income securities denominated in the currencies of Australia, Canada, New
Zealand and the United Kingdom. The Investment Adviser also manages eleven
Australian wholesale public unit trusts and two other closed-end management
investment companies, the shares of which are listed on the Australian Stock
Exchange Limited, as well as an open-end fund marketed in Taiwan and
institutional and private advisory accounts. The Investment Manager and the
Investment Adviser are registered with the Commission under the Investment
Advisers Act of 1940. See "Management of the Fund."
Investment Experience. The Investment Manager and Investment Adviser also
manage the First Asia Income Fund, which commenced operations in May 1997. The
Investment Adviser's professional staff has experience managing investments in
Asian markets on behalf of the First Asia Income Fund and through prior
employment with other investment management firms based in Hong Kong and
Malaysia. The Investment Adviser's fixed income team of eight persons has many
years of in-depth experience investing in international fixed income markets.
29
<PAGE> 32
INVESTMENT OBJECTIVE AND POLICIES; INVESTMENT RESTRICTIONS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is current income through investment
primarily in Australian debt securities. The Fund may also achieve incidental
capital appreciation. The objective and the investment policies set forth in the
following four paragraphs and under the caption "Investment Restrictions" may
not be changed without the approval of the holders of a majority of the
outstanding shares of the Common Stock and the Preferred Stock, voting together
as a single class, as well as by the holders of a majority of the outstanding
shares of the Fund's Preferred Stock voting as a separate class without regard
to series. A majority vote, as defined by the Investment Company Act, means the
affirmative vote of the lesser of (i) 67% of the relevant shares represented at
a meeting at which more than 50% of the shares are represented, or (ii) more
than 50% of the relevant shares.
PORTFOLIO STRUCTURE
It is expected that normally at least 65% of the Fund's total assets will
be invested in Australian dollar denominated debt securities of Australian
banks, federal and state governmental entities and companies, and in Australian
dollar denominated global or Eurobonds, whether or not the issuer is domiciled
in Australia, which expose the Fund to the Australian interest rate structure
and which are traded by reference to similar debt securities of Australian
domiciled issuers. To achieve its investment objective, the Fund may invest the
balance of its total assets (1) in debt securities of Asian Country issuers,
including securities issued by Asian Country governmental entities, as well as
by banks, companies and other entities which are located in Asian Countries,
whether or not denominated in an Asian Country currency, (2) in debt securities
of other issuers, denominated in, or linked to, the currency of an Asian
Country, including securities issued by supranational issuers, such as The World
Bank and derivative debt securities that replicate, or substitute for, the
currency of an Asian Country, (3) in debt securities which are denominated in
New Zealand dollars of issuers, whether or not domiciled in New Zealand, and (4)
in U.S. debt securities. The maximum country exposure to any one Asian Country
is limited to 15% of the Fund's total assets and the maximum currency exposure
to any one Asian Country currency is limited to 10% of the Fund's total assets.
The Fund will invest only in debt securities for which there is an active
secondary market except that the Fund may invest up to 35% of its assets in
Asian debt securities for which there is no established relevant market.
During periods when, in the Investment Manager's judgment, economic
conditions warrant a temporary defensive investment policy, the Fund may
temporarily invest up to 100% of its assets in U.S. debt securities. The Fund
will not invest in convertible debt securities.
It is the Fund's policy to limit its investments, as to at least 50% of its
total assets, to issuers or debt securities which are, at the time of
investment, rated AA or better by S&P, or Aa or better by Moody's, or which, in
the opinion of the Investment Manager, are of equivalent quality. In addition,
at least 65% of the Fund's investments must be rated, at the time of investment,
A- or better by S&P or A3 or better by Moody's or be, in the Investment
Manager's judgment, of equivalent quality. In order to accommodate investment in
Asian markets, Asian debt securities may be purchased which, at the time of
investment are rated by S&P or Moody's, or are judged by the Investment Manager,
to be the equivalent of at least B- by S&P or B3 by Moody's; provided, however,
that in no event may more than 15% of its total assets be invested in Asian debt
securities which, at the time of investment, are rated below investment grade of
BBB, but not less than B-, by S&P, or Baa, but not less than B3, by Moody's, or
which, in the opinion of the Investment Manager, are of equivalent quality, and
provided further; that with the approval of the Fund's Board of Directors, the
ratings of other recognized rating services may be used.
The Fund may enter into repurchase agreements with banks and broker-dealers
pursuant to which the Fund may acquire a security for a relatively short period
(usually no more than a week) subject to the obligations of the seller to
repurchase and the Fund to resell the security at a fixed time and price. The
Fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the Fund's Board of Directors, i.e.,
banks or broker-dealers which have been determined by the Fund's Investment
30
<PAGE> 33
Manager to present no serious risk of becoming involved in bankruptcy
proceedings within the period contemplated by the repurchase transaction.
The Fund may, with respect to the Asian portion of its portfolio, use
derivatives to manage currency and interest rate risk and as a substitute for
physical securities. The Fund may also use derivatives with respect to its
Australian investments to manage interest rate risk through investing in
exchange traded interest rate derivatives. However, it will not use derivatives
to hedge Australian currency risk, except in connection with currency forward
contracts used in connection with the transfer of cash to the United States.
As a non-diversified company, there is no investment restriction on the
percentage of the Fund's assets that may be invested at any time in the
securities of any issuer. However, the Fund intends to limit its investments in
the securities of any issuer, except for securities issued or guaranteed as to
payment of principal and interest by Australian or New Zealand commonwealth or
state governments or their instrumentalities, to 5% of its assets at the time of
purchase. The Fund may invest without limitation in securities of Australian
governments or governmental entities and may invest up to 25% of its assets at
the time of purchase in New Zealand government securities. The Fund intends to
invest in a variety of debt securities, with differing issuers, maturities and
interest rates, and to comply with the diversification and other requirements of
the Code applicable to regulated investment companies so that the Fund will not
be subject to U.S. federal income taxes on its net investment income. See
"Taxation -- United States." The average U.S. dollar weighted maturity of the
Fund's portfolio is not expected to exceed 10 years.
INVESTMENT RESTRICTIONS
The Fund may not:
1. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions.
2. Make short sales of securities or maintain a short position (other than
with respect to the use of derivatives).
3. (a) Issue senior securities, except (i) insofar as the Fund may be
deemed to have issued a senior security in connection with any
repurchase or securities lending agreement or any borrowing agreement
permitted by those investment restrictions and (ii) that the Fund may
issue one or more series of its preferred stock, if permitted by the
Articles; or (b) borrow money or pledge its assets, except that the
Fund may borrow on an unsecured basis from banks for temporary or
emergency purposes or for the clearance of transactions in amounts not
exceeding 10% of its total assets (not including the amount borrowed)
and will not make additional investments while any such borrowings are
outstanding.
4. Buy or sell commodities, commodity contracts, real estate or interests
in real estate (other than mortgage-backed securities or with respect
to the use of derivatives).
5. Make loans (except that the Fund may purchase debt securities whether
or not publicly traded or privately placed or may enter into repurchase
and securities lending agreements consistent with the Fund's investment
policies).
6. Make investments for the purpose of exercising control or management.
7. Act as an underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in the
Fund's investment portfolio).
8. Invest more than 25% of its total assets at the time of purchase in any
one industry (including banking) except that the Fund will invest over
25% of its total assets in securities issued or guaranteed, as to
payment of principal and interest, by Australian governments or
governmental entities. U.S. government securities are excluded from
this restriction.
31
<PAGE> 34
RISK FACTORS AND SPECIAL CONSIDERATIONS
This Prospectus contains certain forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of uncertainties set forth below and elsewhere in the Prospectus.
Investing in the Shares involves certain risks and considerations not typically
associated with investing in the United States. The following discusses risks
and special considerations with respect to the Offer and with respect to an
investment in the Fund.
DILUTION -- NET ASSET VALUE AND NON-PARTICIPATION IN THE OFFER. As a
result of the terms of the Offer, stockholders who do not fully exercise their
Rights will, at the completion of the Offer, own a smaller proportional interest
in the Fund than they owned prior to the Offer. In addition, an immediate
dilution of the NAV per share will be experienced by all stockholders as a
result of the Offer irrespective of whether they exercise all or any portion of
their Rights, because the Subscription Price will be less than the then current
NAV per share, and the number of shares outstanding after the Offer will
increase by a greater percentage than the increase in the size of the Fund's
assets. Although it is not possible to state precisely the amount of the
dilution of the NAV per share, because it is not known at this time how many
Shares will be subscribed for or what the Subscription Price will be, any
dilution could be minimal or it could be substantial. For example, if the
Subscription Price is $5.84, representing a price which is 85.5% of an assumed
NAV per Share of $6.83, assuming that all Rights are exercised and the Fund
increases the number of Shares subject to subscription by 25% in order to
satisfy over-subscriptions, the Fund's NAV per share would be reduced by
approximately $0.36 per share. If, on the other hand, the Subscription Price
represents a further discount to the Fund's NAV per share, the dilution would be
greater. For example, if the Subscription Price is $5.66, representing a price
which is only 82.9% of the NAV per share, assuming that all Rights are exercised
and the Fund increases the number of shares subject to subscription by 25% in
order to satisfy over-subscriptions, the Fund's NAV per share would be reduced
by approximately $0.41 per share. The foregoing examples assumed Subscription
Prices of $5.84 and $5.66, respectively. However, the actual Subscription Price
may be greater or less than the assumed Subscription Prices. The Offer may also
have a dilutive impact on investment income available for distribution.
CURRENT DISTRIBUTION RATE. In February 1989, the Fund began to pay regular
monthly distributions from net investment income which, commencing in September
1993, have been supplemented by realized capital gains. The amount of monthly
distributions has been reduced from time to time when the previous distribution
level could no longer be sustained. For the current fiscal year, the
distributions to date have exceeded net investment income. To the extent total
distributions for the year exceed the Fund's net investment income, the
difference will be deemed for income tax purposes to have been distributed from
realized capital gains or will be treated as return of capital. Although the
Fund anticipates that investment of the proceeds in higher yielding Asian debt
securities will enable the Fund to increase the Fund's net investment income
above the current level, stockholders are cautioned that there can be no
guarantee of future performance. The Fund's investment in Asian debt securities
involves risks and uncertainties so that actual results may differ materially
from those anticipated as a result of various factors. The Fund undertakes no
obligation to update or revise the disclosure in this Prospectus with regard to
the effect of investment in Asia on the Fund's distribution rate to reflect
current events or circumstances after the date of this Prospectus or to reflect
the occurrence of unanticipated events. The Board of Directors reviews the level
of distributions on a continuing basis at its quarterly Board meetings, with the
next review scheduled to take place at its meeting to be held in December 1998.
The Shares issued in the Offer will not be entitled to the distribution to be
declared to stockholders of record on October 30, 1998 which is payable in
November 1998.
INTEREST RATE FLUCTUATIONS. Fluctuations in interest rates in the relevant
bond markets can affect the Fund's NAV and distribution rate. The Fund's NAV is
adversely affected during periods of rising interest rates in those bond markets
and is favorably affected during periods when interest rates fall. Moreover, the
Fund may recognize capital loss, impacting its ability to supplement
distributable income, when bonds in the Fund's portfolio are sold or mature at a
price which is less than the Fund's cost.
In addition to fluctuation in interest rates, any overall downward trend in
interest rates can be expected to ultimately reduce available yields to Fund
stockholders, which could in turn result in a reduction in the
32
<PAGE> 35
amount of the Fund's monthly distributions. Although interest rates in Australia
and New Zealand were substantially higher than interest rates in the U.S. at the
inception of the Fund in 1986, yields on Australian and New Zealand debt
securities have generally declined in recent years and are currently more
comparable to yields available in the U.S. Relatively high levels of interest
rates are currently available in Asian debt markets, but there can be no
assurance that these rates will continue to be obtainable.
Changes in the level of interest rates, in the relevant markets in which
the Fund invests will affect the market price of its portfolio securities and
the net asset value of the Fund at any given time. These changes are usually
more substantial in Asian countries. The level of interest rate risk will vary
from country to country depending on political and economic factors and monetary
policy. See "Appendix B -- Asian Economic Data."
CURRENCY EXCHANGE RATE FLUCTUATIONS. It is expected that normally at least
65% of the Fund's total assets will be invested in Australian dollar-denominated
debt securities. The Fund may also invest up to 35% of its assets in Asian debt
securities, including, but not limited to, debt securities which are denominated
in, or linked to, the currency of an Asian Country (see "Portfolio
Securities -- Asian Debt Securities"). Currency Exchange rates can fluctuate
significantly over short periods and can be subject to unpredictable changes
based on a variety of factors including political developments and currency
controls by foreign governments. A change in the value of the currency in which
a portfolio security is denominated against the U.S. dollar will generally
result in a change in the U.S. dollar value of the Fund's assets. If the
exchange rate for a foreign currency declines, the Fund's NAV would decline. In
addition, although most of the Fund's income will be received or realized
primarily in foreign currencies, the Fund will be required to compute and
distribute its income in U.S. dollars. Therefore, for example, if the exchange
rate for a foreign currency declines after the Fund's income has been accrued
and translated into U.S. dollars, but before the income has been received or
converted into U.S. dollars, the Fund could be required to liquidate portfolio
securities to make distributions. Similarly, if the exchange rate declines
between the time the Fund incurs expenses in U.S. dollars and the time the
expenses are paid, the amount of foreign currency required to be converted into
U.S. dollars in order to pay the expenses in U.S. dollars will be greater than
the foreign currency equivalent of the expenses at the time they were incurred.
Currency exchange rate fluctuations can decrease or eliminate income
available for distribution or conversely increase income available for
distribution. For example, in some situations, if certain currency exchange
losses exceed other net investment income for a taxable year, the Fund would not
be able to make ordinary income distributions and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to stockholders for U.S. federal
income tax purposes thus reducing stockholders' cost basis in their Fund shares,
or as capital gain, rather than as an ordinary income dividend.
The Investment Manager expects to hedge Asian foreign currency risks in
accordance with its views by engaging in foreign currency exchange transactions.
These may include buying and selling foreign currency options, foreign currency
futures, options on foreign currency futures and swap arrangements. Many of
these activities constitute "derivatives" transactions. See "Use of Derivatives"
below. There can be no assurance that the Fund will be able to do this hedging
successfully. Moreover, currency fluctuations against the U.S. dollar in many
Asian countries have been profound and negative in recent months and there can
be no assurance that these exchange rates will stabilize against the U.S.
dollar. The Fund will not seek to hedge against currency fluctuations in the
Australian dollar.
Securities issued in Asian markets and denominated in an Asian country
currency are subject to fluctuation in value due to changes in the value of the
currency against the U.S. dollar. A decline in the value of an Asian currency
compared to the U.S. dollar will reduce the Fund's NAV. Income received from
securities denominated in Asian currencies is also translated into and
distributed in U.S. dollars, so that a decline in the value of an Asian currency
will result in a decline in income to the Fund.
Investments made in the local currencies of an Asian country may not be
freely convertible into other currencies. Exchange rate fluctuations and local
currency devaluation could have a material effect on the value of these
securities. See "Appendix B -- Asian Economic Data."
33
<PAGE> 36
RISKS INVOLVED IN ASIAN INVESTMENT. In May 1998, the Fund's Common and
Preferred stockholders approved a series of proposals allowing the Fund, among
other things, to (1) invest up to 35% of its assets in Asian debt securities;
(2) invest in Asian debt securities for which there is no established relevant
market; (3) invest up to 15% of its total assets in Asian debt securities rated,
or considered by the Investment Manager to be, below investment grade at the
time of investment, and to reduce the percentage of its investments in debt
securities which are, or are considered by the Investment Manager to be, rated
AA or A quality; and (4) utilize derivatives in furtherance of its investment
objective and policies. Investment in Asian debt markets will expose the Fund to
greater foreign exchange risk, interest rate risk, credit risk, political and
economic risk ("event risk") and liquidity risk than would be the case if the
Fund invested only in Australian and New Zealand securities.
The following summarizes the main risks involved in investing in Asian bond
and short term money market securities relative to similar types of securities
in Australia and the U.S. In managing the Fund, the Investment Manager and
Investment Adviser will manage all risks in accordance with their stated
investment guidelines.
CREDIT RISK. The proposals approved by Common and Preferred stockholders
in May 1998 permit the Fund to invest up to 15% of its total assets in Asian
debt securities which, at the time of investment, are rated below investment
grade or, if unrated, are in the opinion of the Investment Manager, of
equivalent quality. Among other things, investment in securities which are rated
below investment grade introduces an element of speculation, requires skilled
credit analysis and reduces the overall credit quality of the Fund's portfolio.
Investments in securities rated below investment grade are subject to
greater market fluctuations and risk of loss of income and principal than
investments in securities with investment grade credit ratings. The former will
generally provide higher yields due to the higher premia now required by
investors for taking the associated credit risk.
Investment in debt securities expose the Fund to credit risk (that is, the
risk of default on interest and principal payments). Credit risk is influenced
by changes in general economic and political conditions and changes in the
financial condition of the issuers. During periods of economic downturn or
rising interest rates, issuers of securities with a low credit rating may
experience financial weakness that could affect their ability to make payments
of interest and principal.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the value and liquidity of securities
with low credit ratings, especially in markets characterized by a low volume of
trading.
UNRATED SECURITIES. Under the proposal, the Fund will be permitted to
invest in unrated debt securities. Unrated securities, while not necessarily of
lower quality than rated securities, generally do not have a broad market.
Before purchasing an unrated security, the Investment Manager and Investment
Adviser intend to analyze the creditworthiness of the issuer of the security and
of any financial institution or other party responsible for payments on the
security in order to assign a rating to the security.
BELOW-INVESTMENT GRADE SECURITIES. Ratings of debt securities represent
the rating agency's opinion regarding their quality and are not a guarantee of
quality. Rating agencies attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Because rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, the Investment Manager and Investment Adviser
will continuously monitor the issuers of securities held to determine whether
the issuers have sufficient cash flows and profits to meet principal and
interest payments.
The achievement of the Fund's investment objective will be more dependent
on the Investment Manager or the Investment Adviser's own credit analysis than
might be the case for a fund which invests in higher quality bonds. The Fund may
retain a security the rating of which has been changed. The market values of
lower quality debt securities tend to reflect individual developments of the
issuer to a greater extent than do higher quality securities, which react
primarily to fluctuations in the general level of interest rates.
34
<PAGE> 37
Lower quality debt securities tend to be highly leveraged. Their issuers
may also not have available to them traditional methods of financing. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower quality securities may experience
financial stress. During these periods, issuers may not have sufficient revenue
to meet their interest payment obligations. An issuer's ability to service debt
obligations may also be adversely affected by specific developments affecting
the issuer, such as the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. Similarly, certain
emerging market governments that issue lower quality debt securities are among
the largest debtors to commercial banks, foreign governments and supernational
organizations such as the World Bank, and may not be able or willing to make
principal and/or interest repayments as they come due. The risk of loss due to
default by the issuer is significantly greater for the holders of lower quality
securities because these securities are generally unsecured and are often
subordinated to higher ranking creditors of the issuer.
Lower quality debt securities occasionally have call or buy-back features
that would permit an issuer to call or repurchase the security from the holder.
The Investment Manager and Investment Adviser anticipate that these securities
could be sold only to a limited number of dealers or institutional investors as
there may not be an established retail secondary market for many of these
securities, or where there is a market, the securities may not be easily
tradable.
The Fund may also incur additional expense to the extent that it is
required to seek recovery on a default in the payment of principal or interest
on its portfolio holdings, and the Fund may have limited legal recourse in the
event of a default. Debt securities issued by governments in emerging Asian
markets can differ from debt obligations issued by private entities in that
remedies for defaults generally must be pursued in the courts of the defaulting
government, and legal recourse may be diminished. Political conditions, in terms
of a government's willingness to meet the terms of its debt obligations, are
also of considerable significance. There can be no assurance that the holders of
commercial bank debt may not contest payments to the holders of debt securities
issued by governments in the event of default by the governments under
commercial bank loan agreements.
The Investment Manager and Investment Adviser will attempt to minimize the
speculative risks associated with investments in lower quality securities
through credit analysis and by carefully monitoring such current trends as
interest rates and political developments.
MANAGEMENT OF CREDIT RISK. At the upper end of the credit rating spectrum,
recognized international ratings agencies such as S&P and Moody's provide
extensive risk credit analysis for investors. However, in emerging markets such
as Asia, where issues are often unrated or are at the lower end of the credit
risk spectrum, the Investment Manager and Investment Adviser believe that
opportunities exist for skilled analysts to add value through extensive company
research and detailed credit assessment. They have advised the Fund that the
process of credit assessment in much of Asia's developing debt markets is
similar to that undertaken when considering an equity investment, rather than a
debt purchase. In debt investing, the Investment Manager and Investment Adviser
determine the likelihood of default (by assessing debt to equity levels,
interest coverage, etc.), and then compare that to the market price offered for
that issuer. As with stock investing, qualitative factors must be evaluated,
including management capability, in order to assess the likelihood that the
issuer will remain in business for the life of the security (i.e., to make
interest payments plus return of principal).
The Investment Manager and Investment Adviser also consider external credit
assessments available from rating agencies such as S&P and Moody's, as well as
any reports on the issuer which may be available from brokers or other sources.
A chart showing the current S&P and Moody's credit ratings on long-term foreign
sovereign debt for the Asian countries in which the Fund may invest is included
in Appendix B.
Once a company has been fully assessed, the Investment Manager and
Investment Adviser determine whether the return on that company's security
appears adequate to compensate for the risks of investment.
POLITICAL AND ECONOMIC RISK. The Fund's investments could in the future be
adversely affected by any increase in taxes or by political, economic or
diplomatic developments in the Asian Countries as well as
35
<PAGE> 38
Australia and New Zealand. Moreover, accounting, auditing and financial
reporting standards and other regulatory practices and requirements vary from
those applicable to entities subject to regulation in the United States.
Securities of foreign issuers involve different, and sometimes greater,
risks than securities of U.S. and Australian issuers. Asian economies are
considered to be more politically volatile than the traditional Western style
democracies. Investments in securities of issuers in Asian countries involve
political risk, including in some countries, the possibility of expropriation,
confiscatory taxation or nationalization of assets, and the establishment of
foreign exchange controls. Central authorities also tend to exercise a high
degree of control over the economies and in many cases have ownership over core
productive assets.
With their strong reliance on international trade, the Asian economies tend
to be sensitive both to economic changes in their own region and to changes
affecting their major trading partners. These include changes in growth,
inflation, foreign exchange rates, current account positions, government
policies, taxation and tariffs. See "Appendix B -- Asian Economic Data."
TAX RISK. Income earned on investments in Asian countries may be subject
to applicable withholding taxes and other taxes imposed by the governments of
these countries. There can be no assurance that foreign tax laws will not be
changed in a manner which adversely affects foreign investors.
The tax code, assessment, collection and crediting systems of some Asian
countries are currently under review. Local officials are given considerable
leverage and discretion in fixing the level and amount of tax to which an
investment may be subject.
LEGAL AND ACCOUNTING RISK. The legal systems in many Asian countries are
less developed than those in more developed countries, with the administration
of laws and regulations often subject to considerable discretion. While the
development of the legal systems is a positive step, there is a risk that
foreign investors will be adversely affected by new laws or changes to existing
laws.
Accounting and auditing standards applied in certain Asian countries
frequently do not conform with the accepted international standards used in
Australia and the U.S. In some cases accounting policies, for example the use of
the constant purchasing power method, can have a distortive effect. Also,
substantially less financial information is generally publicly available about
issuers in Asian countries and, where available, may not be independently
verifiable.
LIQUIDITY RISK. While the Fund may ordinarily invest only in debt
securities for which there is an active secondary market, in order to give it
the flexibility to invest in Asian debt securities, the Fund may invest up to
35% of its assets in Asian debt securities for which there is no established
relevant market.
The securities markets that exist in emerging Asian countries are
substantially smaller, less developed, less liquid and more volatile than the
securities markets of the United States and other more developed countries.
In some Asian countries, there is no established secondary market for
securities. Therefore, liquidity in these countries is generally low and
transaction costs high. Reduced liquidity often creates higher volatility, as
well as difficulties in obtaining accurate market quotations for financial
reporting purposes and for calculating net asset values, and sometimes also an
inability to buy and sell securities. Market quotations on many securities may
only by available from a limited number of dealers and may not necessarily
represent firm bids from those dealers or prices for actual sales.
TIMING. When an investment is made into a new asset class, such as Asian
debt securities, its timing can be significant in terms of performance. For
example, if an investment is made in a new asset class just prior to the advent
of very favorable market conditions, the investment performance will be better
than it would have been if the investment had been made two years earlier in a
static market. Conversely, if an investment is made in a new asset class just
prior to a significant downturn in that market, performance will be worse than
it would have been had the investment been made later. It is not possible to
predict major market events and, therefore, investment into volatile markets,
such as Asia, presents the added risk of timing.
36
<PAGE> 39
The experience of the First Asia Income Fund is illustrative. The First
Asia Income Fund ("FAI.UN") is a closed-end investment trust managed by the
Investment Manager and advised by the Investment Adviser. FAI.UN was listed on
the Toronto Stock Exchange in May 1997. Its investment objective is to maximize
current income through investment in debt securities of issuers in Australia,
New Zealand and selected Asian countries. Over a period of months following its
inception, FAI.UN took increasingly defensive positions in Australian dollar,
U.S. dollar and Canadian dollar denominated securities as the deteriorating
Asian economic conditions were becoming clear. Nonetheless, as a result of its
investments that were made in the Asian markets just prior to a downturn, the
performance of FAI.UN was worse than it might have been had the investments been
made at a different time. In the opinion of the Investment Manager and the
Investment Adviser, since early 1998, the economic conditions in Asia have
presented investment opportunities. Accordingly, FAI.UN has increased its
exposure to Asian currencies.
USE OF DERIVATIVES. Consistent with its investment objective, the Fund may
invest in a broad array of financial instruments and securities in which the
value of the instrument or security is "derived" from the performance of an
underlying asset or a "benchmark" such as a security index, an interest rate or
a foreign currency ("derivatives"). Derivatives are most often used to manage
investment risk, to increase or decrease exposure to an asset class or benchmark
(as a hedge or to enhance return), or to create an investment position directly
(often because it is more efficient or less costly than direct investment).
There is no guarantee that these results can be achieved through the use of
derivatives and any success in their use depends on a variety of factors
including the Investment Manager's and Investment Adviser's ability to predict
correctly the direction of interest rates, securities prices, currency exchange
rates and other factors.
The primary risk of derivatives is the same as the risk of the underlying
asset, namely that the value of the underlying asset may increase or decrease.
Adverse movements in the value of the underlying asset can expose the Fund to
losses. In addition, risks in the use of derivatives include:
- an imperfect correlation between the price of derivatives and the
movement of the securities prices, interest rates or currency exchange
rates being hedged;
- the possible absence of a liquid secondary market for any particular
derivative at any time;
- the potential loss if the counterparty to the transaction does not
perform as promised;
- the possible need to defer closing out certain positions to avoid adverse
tax consequences;
- the risk that the financial intermediary "manufacturing" the derivative,
being the most active market maker and offering the best price for
repurchase, will not continue to create a credible market in the
derivative;
- because derivatives are "manufactured" by financial institutions for the
most part, the risk that the Fund may develop a substantial exposure to
financial institution counterparties; and
- the risk that a full and complete appreciation of the complexity of
derivatives and how future value is affected by various factors including
changing interest rates, exchange rates and credit quality is not
attained.
The types of derivatives used by the Fund and the techniques employed may
change over time as new derivatives and strategies are developed or regulatory
changes occur.
PREFERRED STOCK. The leverage obtained through the outstanding Preferred
Stock, since its issuance in January 1989, has generally provided holders of
Common Stock with a higher yield than they would otherwise have received. Under
such conditions, the benefit of leverage to holders of Common Stock will be
reduced and the Fund's leveraged capital structure could result in a lower rate
of return to holders of Common Stock than if the Fund were not leveraged. The
Fund has the authority to redeem the Preferred Stock for any reason and may
redeem all or part of the Preferred Stock if it anticipates that the Fund's
leveraged capital structure will result in a lower rate of return to holders of
the Common Stock than that obtainable if the Common Stock were unleveraged for
any significant amount of time. The Fund may also need to redeem all or a
portion of the Preferred Stock to the extent required by the Investment Company
Act, the terms of the Preferred Stock or by
37
<PAGE> 40
rating agencies rating the Preferred Stock. The leveraging of the Common Stock
would be eliminated during any period that Preferred Stock is not outstanding.
See "Financial Highlights -- Senior Securities." Because the Investment
Manager's and the Investment Adviser's fees are based on the average net assets
of the Fund which include the Preferred Stock, the Investment Manager and
Investment Adviser have benefited from the Fund's determination not to redeem
the Preferred Stock.
YEAR 2000 RISK. Many existing computer programs may not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem." Like other investment
companies, financial and business organizations and individuals around the
world, the Fund could be adversely affected if the service providers to the Fund
do not take adequate steps to address the Year 2000 Problem prior to January 1,
2000. The problem may also particularly impact the Fund as it seeks to implement
its new Asian debt securities investment policy. This impact will depend upon
the degree of technological sophistication of the issuers of securities and the
degree of due diligence they are applying to the Year 2000 Problem. The Fund is
unable to predict what impact, if any, the Year 2000 Problem will have on the
issuers of securities in which it invests.
NET ASSET VALUE DISCOUNT. Shares of closed-end investment companies
frequently trade at a discount from NAV. This characteristic is a risk separate
and distinct from the risk that NAV will decrease. The Fund's shares have
frequently traded at prices below NAV since the commencement of the Fund's
operations. In the twelve months ended July 31, 1998, the Fund's shares have
traded in the market at an average discount to NAV of 5.05%. The Fund cannot
predict whether its shares in the future will trade at, below or above NAV. The
risk that shares of a closed-end fund might trade at a discount is more
significant for investors who wish to sell their shares in a relatively short
period of time. For those investors, realization of gain or loss on their
investment is likely to be more dependent upon the existence of a premium or
discount than upon portfolio performance.
NON-DIVERSIFIED STATUS. The Fund is classified as a "non-diversified"
investment company under the Investment Company Act, which means that the Fund
is not limited by the Investment Company Act as to the proportion of its assets
that may be invested in the securities of a single issuer. As a non-diversified
investment company, the Fund may invest a greater proportion of its assets in
the obligations of a smaller number of issuers and, as a result, will be subject
to greater risk with respect to its portfolio securities. Although, with respect
to 50% of its assets, the Fund must diversify its holdings in order to be
treated as a regulated investment company under the provisions of the Code, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence than would be the case if it had elected to diversify its holdings
sufficiently to be classified as a "diversified" investment company under the
Investment Company Act. See "Investment Objective and Policies; Investment
Restrictions" and "Taxation -- United States."
TAX CONSIDERATIONS. Subject to certain limitations imposed by the Code,
foreign taxes withheld from distributions or otherwise paid by the Fund may be
creditable or deductible by U.S. stockholders for U.S. income tax purposes, if
the Fund is eligible to and makes an election to treat the stockholders as
having paid those taxes for U.S. federal income tax purposes. No assurance can
be given that the Fund will be eligible to make this election each year but it
intends to do so if it is eligible. If the election is made, the foreign
withholding taxes paid by the Fund will be includable in the U.S. federal
taxable income of stockholders. Non-U.S. investors may not be able to credit or
deduct the foreign taxes, but they may be deemed to have additional income from
the Fund, equal to their share of the foreign taxes, that is subject to the U.S.
withholding tax. Investors should review carefully the information discussed
under the heading "Taxation" and should discuss with their tax advisers the
specific tax consequences of investing in the Fund.
ARTICLES OF AMENDMENT AND RESTATEMENT AND BY-LAW PROVISIONS. The Fund
presently has provisions in its Articles that could have the effect of limiting
(i) the ability of other entities or persons to acquire control of the Fund,
(ii) the Fund's freedom to engage in certain transactions or (iii) the ability
of the Fund's Directors or stockholders to amend the Articles or effect changes
in the Fund's management. The By-Laws provide for a staggered election of those
Directors who are elected by the holders of Common Stock, with such Directors
divided into three classes, each having a term of three years. Accordingly, only
those Directors in one class may be changed in any one year and it would require
two years to change a majority of the Board of Directors.
38
<PAGE> 41
This system of electing Directors may have the effect of maintaining the
continuity of management and, thus, make it more difficult for the Fund's
stockholders to change the majority of Directors. Other provisions require the
approval of holders of 75% of the outstanding shares of the Common and Preferred
Stock voting both together as a single class and separately as to each class to
approve certain transactions including certain mergers, asset dispositions and
conversion of the Fund to open-end status. The foregoing provisions may be
regarded as "anti-takeover" provisions and may have the effect of depriving
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices. See "Capital Stock -- Common Stock" and "Certain Provisions of
the Articles of Amendment and Restatement and By-Laws." The Fund's Articles
authorize the Fund, by action of its Board of Directors, to issue up to
100,000,000 shares of Preferred Stock in one or more series and from time to
time. See "Risk Factors and Special Considerations -- Preferred Stock."
PORTFOLIO COMPOSITION
The following sets forth certain information with respect to the
composition of the Fund's investment portfolio in terms of percentages of total
market value (excluding $182,954,418 held in U.S. and Australian
dollar-denominated short-term investments) as of April 30, 1998.
THE PORTFOLIO
[PORTFOLIO CHART]
Eurobonds 36%
Australia and New Zealand corporate bonds 6%
Australia and New Zealand government securities 30%
Australian state and semi-government securities 28%
RATINGS OF SECURITIES HELD IN THE PORTFOLIO*
[RATINGS CHART]
Aa/AA by Moody's or S&P 25%
A/A by Moody's or S&P 2%
Aaa/AAA Moody's or S&P 73%
- ---------------
* Reflects the lower of the Moody's or S&P rating
39
<PAGE> 42
COMPARISON OF FUND TOTAL RETURNS TO THE CBBI
IN AUSTRALIAN DOLLARS
The following chart sets forth a comparison of the total return based on
NAV of the Fund to that of the Commonwealth Bank All Series, All Maturities,
Accumulation Bond Index (the "CBBI") in Australian Dollars. As discussed below,
the CBBI is presented on both an adjusted and unadjusted basis to reflect the
impact of a 10% withholding tax levied by Australia on interest income derived
from Australian sources by non-resident investors, such as the Fund. The CBBI
reflects the total return on all outstanding Australian government bonds,
calculated to reflect capital gains and losses and reinvestment of income. The
Fund's performance reflects the reinvestment of dividends at the first net asset
value calculated after distribution. While there are several differences between
both the composition and the performance of the CBBI and the Fund's portfolio of
investments, the Investment Adviser believes that this comparison is the most
representative available method of demonstrating the correlation of the Fund's
performance with that of Australian government bonds.
Among the factors distinguishing the CBBI from the Fund are the following:
(i) the CBBI is an unmanaged index that bears none of the costs associated with
the portfolio management activities of an investment company such as the Fund
and, therefore, the performance of the CBBI, as measured against the
after-expenses performance of the Fund, is favorably affected; (ii) the CBBI is
made up entirely of Australian government bonds, while the Fund also invests in
Australian semi-government bonds, Australian corporate bonds, and Eurobonds;
(iii) Australian semi-government bonds, Australian corporate bonds, and
Eurobonds, which, over the life of the Fund, have represented between 28% and
77% of the total assets of the Fund (on a quarterly basis), generally yield
slightly higher returns than those of Australian government bonds and therefore
the performance of the Fund, as measured against the CBBI, is favorably
affected; and (iv) while the adjusted CBBI reflects the imposition of the 10%
withholding tax levied on the Fund's Australian source income, the portion of
the Fund's portfolio held in Eurobonds, which, since April, 1993, has averaged
approximately 24% on a quarterly basis, is not subject to such tax and therefore
the performance of the Fund, as measured against the adjusted CBBI, is favorably
affected.
<TABLE>
<CAPTION>
Fund
Performance Fund CBBI After
Before Performance Withholding CBBI Before
Expenses & After Expenses Tax Withholding
Fees & Fees Adjustment Tax
<S> <C> <C> <C> <C>
4/24/86 0.00 0.00 0.00 0.00
-0.13 -0.13 -0.6 0.01
0.96 0.96 -0.9 0.62
1.38 1.29 -3.23 -2.42
1.15 0.97 -2.92 -2.03
0.40 -0.69 -2.51 -1.52
10/31/86 4.44 3.21 0.13 1.24
2.70 1.39 1.45 2.69
3.60 2.19 2.60 3.95
7.15 5.60 2.71 4.22
6.41 4.77 1.70 3.27
8.19 6.43 5.74 7.49
4/30/87 10.42 8.53 8.31 10.20
11.65 9.64 10.66 12.71
14.29 12.13 11.40 13.56
15.70 13.41 12.82 15.18
18.53 16.09 14.12 16.59
23.81 21.15 18.22 20.91
10/31/87 17.90 15.27 14.90 17.63
21.47 18.66 16.26 19.14
27.09 24.04 20.22 23.29
30.66 27.43 22.97 26.30
32.23 28.85 23.64 27.07
34.25 30.73 26.37 30.04
4/30/88 36.77 33.09 28.81 32.66
32.54 28.88 25.85 29.75
39.92 35.95 28.98 33.05
36.23 32.14 30.01 34.33
37.60 33.22 30.52 34.95
38.21 33.58 30.93 35.53
10/31/88 39.38 34.54 30.82 35.53
38.63 33.64 30.44 35.26
37.99 32.85 29.98 34.87
36.79 31.53 28.91 34.02
33.65 28.33 28.44 33.62
36.48 30.86 30.25 35.67
4/30/89 38.46 32.57 32.44 38.06
36.45 30.26 31.06 36.76
39.80 33.07 34.19 40.13
42.76 35.49 35.95 42.25
46.62 38.93 39.79 46.36
45.30 37.44 38.33 45.02
10/31/89 47.39 39.19 39.47 46.33
52.61 43.88 43.17 50.37
56.54 47.34 46.57 54.04
58.17 48.63 49.12 57.03
57.28 47.55 47.35 55.25
58.82 48.74 48.78 56.96
4/30/90 61.18 50.70 48.84 57.14
64.16 53.25 51.60 60.22
68.18 56.76 53.76 62.59
72.35 60.40 56.65 66.00
77.05 64.48 58.08 67.60
80.88 67.73 60.06 69.91
10/31/90 83.08 69.47 63.77 73.97
88.98 74.61 68.86 79.54
91.81 76.91 71.53 82.45
98.44 82.69 75.93 87.56
101.30 85.06 78.17 90.04
102.34 85.75 79.80 92.11
4/30/91 108.51 91.14 84.00 96.63
113.39 95.30 87.31 100.36
112.33 94.01 85.86 98.88
116.72 97.69 88.66 102.28
122.10 102.23 91.44 105.34
130.94 109.91 96.30 110.86
10/31/91 139.05 116.90 103.38 118.57
141.70 119.04 105.05 120.58
147.96 124.43 110.99 127.03
138.93 115.98 105.51 121.49
141.66 118.18 106.98 123.14
146.07 121.90 108.88 125.72
4/30/92 153.91 128.70 115.16 132.55
157.45 131.59 119.01 136.93
164.99 138.07 124.31 142.70
176.03 147.69 131.32 150.63
160.75 133.64 123.54 142.31
163.43 135.69 125.37 144.66
10/31/92 163.01 135.03 127.25 146.87
161.68 133.55 126.64 146.40
170.39 141.03 129.86 150.09
173.53 143.53 133.65 154.51
188.45 156.53 141.33 163.05
195.96 162.92 144.45 166.84
4/30/93 200.74 166.87 148.51 171.46
203.76 169.21 147.76 170.80
203.67 168.79 152.35 175.81
217.08 180.32 157.64 181.91
222.80 185.00 161.29 186.10
219.33 181.57 160.07 185.18
10/31/93 230.33 190.89 164.85 190.63
221.03 182.40 162.46 188.11
228.90 189.02 165.59 191.56
240.58 198.98 169.76 196.51
229.24 188.72 162.21 188.21
213.42 174.55 154.44 180.09
4/30/94 212.09 173.07 151.45 177.00
209.76 170.75 150.52 176.12
194.94 157.52 143.60 168.50
199.76 161.43 145.76 171.24
207.04 167.44 149.04 175.03
194.95 156.57 142.21 167.84
10/31/94 193.31 154.80 141.42 167.24
196.98 157.68 140.96 166.73
206.13 165.30 145.76 171.86
204.38 163.45 144.59 171.17
210.99 168.83 152.48 180.10
210.33 167.92 154.74 182.94
4/30/95 220.20 176.10 158.23 187.07
232.76 186.63 169.44 199.67
235.59 188.77 168.42 198.55
231.47 184.92 167.28 197.76
241.36 193.11 171.98 203.00
250.05 200.26 178.15 210.25
10/31/95 252.24 201.84 177.46 209.68
262.25 210.07 186.23 219.62
264.06 211.28 187.99 221.59
269.81 215.85 191.12 225.58
262.14 208.98 185.66 219.74
262.63 209.07 183.83 218.02
4/30/96 270.01 215.03 187.98 222.89
269.97 214.69 188.10 223.16
272.47 216.49 190.00 225.29
285.72 227.42 199.64 236.63
295.27 235.22 204.16 242.00
302.57 241.10 209.06 247.89
10/31/96 313.95 250.42 215.38 255.23
323.14 257.85 218.82 259.25
319.74 254.62 219.21 259.69
316.76 251.74 220.78 261.92
317.01 251.60 218.59 259.75
314.33 249.00 216.29 257.53
4/30/97 320.79 254.10 221.30 263.43
328.91 260.52 228.70 271.97
337.69 267.48 235.56 279.72
353.00 279.91 243.90 289.59
349.90 276.90 244.07 290.11
361.06 285.69 250.62 297.90
10/31/97 360.03 284.34 253.50 301.44
350.64 276.04 251.28 299.07
347.55 273.00 254.88 303.17
358.02 281.27 257.64 306.83
359.63 282.15 258.14 307.77
361.56 283.29 262.60 313.16
4/30/98 358.96 280.67 262.52 313.34
365.27 285.33 270.48 322.61
356.40 277.42 268.07 319.86
357.62 277.85 270.29 322.82
322.34 248.87 265.13 317.28
</TABLE>
(footnotes on following page)
40
<PAGE> 43
- ---------------
(1) Fund total return measured in Australian dollars for the period from the
Fund's inception on April 24, 1986 through April 30, 1998 after expenses and
fees is 280.7% or 11.8% per annum and before expenses and fees is 346.6% or
13.5% per annum. Past performance is no guarantee of future results. The
Fund's total return as reflected in the chart is based on the Fund's NAV
rather than on market value. The Fund's shares have traded in the market
above, at and below NAV since the commencement of the Fund's operations. See
"Financial Highlights -- Total Investment Return."
(2) The "Before Expenses and Fees" calculation is derived by adding back the
operating expenses of the Fund, including those relating to the Preferred
Stock, which are subtracted in the "After Expenses and Fees" calculation.
The one-time offering and underwriting expenses associated with each of the
Preferred Stock issues and the prior rights offerings, which are subtracted
in the "After Expenses and Fees" calculation, have also been added back.
(3) CBBI total return, which is shown in the chart after adjustment to reflect
the imposition of the 10% withholding tax levied by Australia in order to
account for the 10% tax levied on that portion of the Fund's income that is
Australian source income, for the period from April 24, 1986 through April
30, 1998 is 262.5% or 11.3% per annum.
(4) CBBI total return before adjustment to reflect the imposition of the 10%
withholding tax levied by Australia. Before such adjustment, CBBI total
return for the period from April 24, 1986 through April 30, 1998 is 311.3%
or 12.5% per annum.
For further information, reference should be made to "Financial Statements"
and "Appendix A -- Australian Economy."
PORTFOLIO SECURITIES
DESCRIPTION OF DEBT SECURITIES
The types of debt securities in which the Fund is permitted to invest
include those described below. The list is not exclusive, but is indicative of
the kinds of securities which the Fund's investment objectives, policies and
restrictions permit it to buy.
AUSTRALIAN SECURITIES
Commercial Banks. The Fund is permitted to invest in bills of exchange,
certificates of deposit and promissory notes issued or guaranteed, as to payment
of principal and interest, by Australian commercial banks. Australian commercial
banks are generally comparable to U.S. banks and are subject to regulation by
Australian government authorities. The Investment Adviser does not believe that
there are any special risks associated with these securities arising out of the
fact that they are issued by banks. Bills of exchange are negotiable
instruments, issued to finance current transactions, which generally mature
within six months and which are accepted or endorsed by a commercial bank and
thus carry the bank's credit. Certificates of deposit are negotiable instruments
issued by commercial banks with maturities ranging from a few days to several
years. Promissory notes are negotiable instruments endorsed and therefore
guaranteed by a commercial bank or backed by a bank letter of credit as to
payment of principal and interest. Maturities generally range up to 180 days.
Bank bills, certificates of deposit and promissory notes are usually issued at a
discount from face value and are traded by dealers in an active public secondary
market.
Governmental Entities. The Fund is permitted to invest in Federal
Commonwealth of Australia (the "Commonwealth") government bonds and treasury
notes and state government and semi-government bonds and notes. Commonwealth
government bonds and treasury notes represent the obligations of the
Commonwealth and are sold by the Reserve Bank of Australia (the central bank)
through public tenders. Bonds have maturities up to 15 years while notes are
issued in maturities of 13 and 26 weeks. The Commonwealth also guarantees as to
payment of principal and interest similar debt obligations issued by its
instrumentalities. State government and semi-government bonds and notes are
issued by various states and state instrumentalities and, in the case of state
instrumentalities, are guaranteed by the applicable state government. Maturities
range from less than one year to 15 years. Australian federal and state
government debt securities are frequently listed on the Australian Stock
Exchange Limited but most trading is by dealers in an active public secondary
market.
41
<PAGE> 44
Companies. The Fund is permitted to invest in publicly-traded notes and
debentures or bills of exchange issued or guaranteed as to the payment of
principal and interest by Australian companies, whether or not guaranteed or
backed by a commercial bank. These securities have maturities generally ranging
from less than one year to five years and are traded by dealers in an active
public secondary market.
Mortgage-Backed Securities. The Fund is permitted to invest in Australian
mortgage-backed securities, which represent part ownership by the Fund in a pool
of mortgage loans. These loans are made by private lenders and may have
guarantees from Australian federal and state governmental entities, companies
and agencies. The securities would have to satisfy the Fund's general credit
criteria to qualify for purchase. Characteristics of several of the major
mortgage-backed securities are summarized below:
FANMACs: FANMAC securities are securities issued by a trustee against
housing loans made through the New South Wales Department of Housing and
consist of a series of closed trusts or pools. The mortgage manager is the
First Australian National Mortgage Acceptance Corporation Ltd. ("FANMAC").
FANMAC is owned 26% by the Government of the State of New South Wales with
the remainder owned by other institutions. The Government of the State of
New South Wales has provided the FANMAC Trust with a guarantee as to
availability of funds to meet payment. The securities have been rated by
Australian Ratings Pty. Ltd. ("Australia Ratings") and S&P. FANMAC
securities are subject to a call provision under which borrowers
(mortgagors) can repay early and the investors in a particular pool can be
repaid on a pro rata basis.
NMMC AUSSIE MACs and National Mortgage Market Bonds: National
Mortgage Market Corporation Ltd. ("NMMC") has issued both AUSSIE MACs,
which are medium-term bearer securities, and National Mortgage Market
Bonds. NMMC is a private company which is 26% owned by the Government of
the State of Victoria and 74% by private institutions. Both AUSSIE MACs and
National Mortgage Market Bonds are rated by Australian Ratings.
MTCs: Mortgage Trust Certificates ("MTCs") are securities issued
against specific mortgages by a trustee and are similar to "pass through"
certificates. MTCs are issued on a continuous basis, insured by Australian
insurance companies against both mortgage default and an early call, and
rated by Australian Ratings.
MMSs and ANNIE MAEs: MMSs are mortgage-backed securities issued by
MGICA Securities Ltd., a wholly-owned subsidiary of AMP Society Ltd., an
Australian insurance company. ANNIE MAEs are securities issued by
Australian National Mortgage Pool Agency Ltd., an affiliate of Bank of
America. Both MMSs and ANNIE MAEs are issued against pools of mortgages and
are rated by Australian Ratings.
Other Debt Securities including Australian Dollar Denominated Global or
Eurobonds. Subject to its investment policy of investing at least 65% of its
assets in Australian dollar-denominated debt securities of Australian issuers,
the Fund is permitted to invest in Australian dollar-denominated debt
securities, similar in nature to those described above, regardless of the
domicile of the issuers. Thus, the Fund is permitted to invest in Australian
dollar denominated global or Eurobonds that expose the Fund to the Australian
interest rate structure and which are traded by reference to similar debt
securities of Australian domiciled issuers. The latter securities are usually
issued in the Eurodollar market by multi-national banks and companies which may
have operations in Australia or New Zealand.
ASIAN DEBT SECURITIES
"Asian debt securities" includes (1) debt securities issued by entities
located in the following countries: China, Hong Kong, India, Indonesia, Japan,
Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand (each an
"Asian Country" or together "Asian Countries"); as well as (2) debt securities
of other issuers which are denominated in, or linked to, the currency of an
Asian Country. In addition, "Asian debt securities" may include debt securities
issued by entities located in other countries on the Asian continent, or which
are denominated in, or linked to, the currency of any other country on the Asian
continent provided the country is approved for investment by the Board of
Directors upon the recommendation of the Investment Manager and the Investment
Adviser.
42
<PAGE> 45
The Fund is permitted to invest in physical securities denominated in Asian
local currency including government bonds, bills and convertible notes. Subject
to its investment policies, the Fund may invest no more than 15% of its total
assets in Asian debt securities, including local currency physical securities,
which, at the time of investment, are rated below investment grade of BBB, but
not less than B-, by S&P, or Baa, but not less than B3, by Moody's, or which, in
the opinion of the Investment Manager, are of equivalent quality. Debt
securities rated below investment grade are sometimes referred to as "junk
bonds." For information regarding the risks of investing in securities rated
below investment grade, see "Risk Factors and Special Considerations -- Risks
Involved in Asian Investment -- Credit Risk."
Asian Yankee Bonds. The Fund is also permitted to invest in Asian Yankee
bonds in order to gain exposure to certain Asian debt markets without exposing
the fund to Asian currency risk. Asian Yankee bonds are U.S. dollar-denominated
debt securities issued by obligors located in Asian countries. The bonds may be
issued in the United States and may be registered under U.S. securities law.
Asian Yankee bonds, which are only available in the United States, may be
purchased from brokers operating in the United States, or may be purchased
outside the United States through offices located outside the United States of
brokers doing business in the United States. Asian Yankee bonds are subject to
credit risk relating primarily to the issuer of the bond and liquidity risk
relating to the issuer's ability to maintain a sufficiently liquid market for
the specific issue. The bonds are also affected by movements in U.S. interest
rates.
Derivative Securities. The Fund can use derivatives with respect to its
Australian fixed income securities to modify interest rate risk and adjust the
Fund's duration or its positioning along the yield curve. With respect to its
Asian debt securities, the Fund will invest in derivatives for two main
purposes: (1) to modify interest rate risk and adjust currency risk within the
portfolio, and (2) to enable the Fund to replicate or substitute for a
particular security in order to gain access to a particular Asian market or
security, where either the physical security is too expensive, or there is an
insufficient supply of the particular security. Derivatives will not be utilized
to leverage the Fund.
By directly investing into Asia, the Fund will take on exposure to the
currencies of the countries in which it holds securities. The Fund will seek to
manage currency risk when the perceived outlook for a particular currency is for
depreciation against other currencies. The most effective way of doing this is
through the use of currency forwards (and occasionally options), which provide
an efficient means of implementing currency strategies. Also, investment in
Asian Yankee bonds involves exposure to both fluctuations in U.S. interest rates
and the credit standing of a particular Asian issuer. There may be times when
the Fund wishes to reduce the U.S. interest rate exposure embedded in Asian
Yankee bonds. This can be done by selling U.S. Treasury Bond futures.
Investment in Asian fixed income securities may at certain times be more
efficiently achieved using derivative securities to replicate physical
securities. These types of derivatives carry identical market price risks to the
equivalent physical securities but provide a number of transactional benefits.
For example, by using derivatives, the Fund may be able to implement investment
decisions at lower costs, increase the after-tax yield, obtain prices that are
not available in the underlying cash market, or settle in U.S. dollars. In less
developed markets, liquidity and credit quality can be enhanced and transaction
costs reduced by using derivatives rather than the underlying securities. This
is due to the fact that the investor assumes the lower counterparty risk of the
issuer of the derivatives (for example, an international bank rated A- or
better), rather than that of a (local currency) domestic issuer. In certain
circumstances, due to lack of available direct investment opportunity or
government regulations, the only means of gaining exposure to particular Asian
countries is through derivatives.
The derivatives used for adjusting currency exposures or replicating
underlying securities are usually over-the-counter ("OTC") securities. OTC
securities carry credit risk associated with the counterparty institution. See
"Risk Factors and Special Considerations -- Use of Derivatives." To manage this
risk, the Fund will only use counterparty institutions rated A- or better by
recognized international ratings agencies. Only up to 5% of total assets may be
put at risk in derivatives transactions with any single counterparty (aggregate
interest rate and currency derivatives exposure). A maximum of 10% of total
assets may be at risk in currency-linked notes
43
<PAGE> 46
and a maximum of 2.5% of total assets may be at risk to any single counterparty
in currency forwards. All currency forwards must be settled only in U.S.
dollars.
The Fund will only engage in exchange-traded derivatives transactions on
regulated derivative exchanges. A maximum of 35% of total assets may be at risk
in exchange-traded derivatives. For derivatives traded on the Sydney Futures
Exchange, the maximum gross exposure (long positions plus short positions) will
be 20% of total assets and the maximum net exposure (long positions minus short
positions) will be 15% of total assets. A maximum of 20% of total assets may be
at risk in derivatives traded on the Chicago Board of Trade. A maximum of 5% of
total assets, excluding Japanese Government Bond ("JGB") futures, may be at risk
in derivatives traded on any one Asian futures exchange. A maximum of 7% of
total assets may be at risk in JGB futures contracts (traded on Singapore
International Monetary Exchange and the Tokyo Stock Exchange). The Fund will
only use the exchange-traded (as opposed to over-the-counter) interest rate
derivatives in the Australian component of its portfolio. It will not use
derivatives where it would contravene the guidelines set by the rating agencies
for AMPS issues. Currency derivatives are not used to hedge Australian dollar
currency risk associated with the Fund's investments in Australia.
U.S. SECURITIES
Government. The Fund is permitted to invest in U.S. government securities,
including obligations issued or guaranteed by U.S. government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. treasury (such as direct pass-through certificates of the Government
National Mortgage Association), some of which are supported by the right of the
issuer to borrow from the U.S. government (such as obligations of Federal Home
Loan Banks), and some of which are backed only by the credit of the issuer
itself. Government obligations do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. government obligations are generally
lower than the yields available from corporate interest bearing securities. Like
other interest bearing securities, however, the value of Government obligations
changes as interest rates fluctuate.
Corporations and Banks. The Fund is permitted to invest for defensive and
other temporary purposes in U.S. corporate debt instruments rated at the time of
investment Aa or better by Moody's or AA or better by S&P, finance company and
corporate commercial paper, and other short-term obligations, in each case rated
at the time of investment Prime-1 or Prime-2 by Moody's or A-2 or better by S&P.
The Fund is also permitted to invest in obligations of U.S. federal or state
chartered banks and bank holding companies rated at the time of investment Aa or
better by Moody's or AA or better by S&P (including certificates of deposit,
bankers' acceptances and other short-term debt obligations).
REPURCHASE AGREEMENTS
The Fund is permitted to invest in repurchase agreements with banks and
broker-dealers. A repurchase agreement is a contract under which the Fund
acquires a security for a relatively short period (usually no more than one
week) subject to the obligations of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). The Investment Manager monitors the value of such securities
daily to determine that the value equals or exceeds the repurchase price. Under
the Investment Company Act, repurchase agreements are considered to be loans
made by the Fund which are collateralized by the securities subject to
repurchase. Repurchase agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities. The Fund will enter into
repurchase agreements only with parties who meet creditworthiness standards
approved by the Fund's Board of Directors, i.e., banks or broker-dealers which
have been determined by the Investment Manager to present no serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the repurchase transaction.
44
<PAGE> 47
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The names and addresses of the Directors and officers of the Fund are set
forth below, together with their positions and their principal occupations
during the past five years and, in the case of the Directors, their positions
with certain other organizations and companies. Directors who are "interested
persons" of the Fund, as defined by the Investment Company Act, are indicated by
an asterisk.
Although the Fund is a Maryland corporation, certain of its Directors and
officers (Messrs. Maddock, Miles, Sacks, Fraser, Sherman, Cutler, Horsburgh,
Knight, Elsum, Freedman, Manor, Yontef and Randall) are non-residents of the
United States and have all, or a substantial part, of their assets located
outside the United States. None of the Directors or officers has authorized an
agent for service of process in the United States. As a result, it may be
difficult for U.S. investors to effect service of process upon the Directors and
officers within the United States or to effectively enforce judgments of courts
of the United States predicated upon civil liabilities of the Directors or
officers under the federal securities laws of the United States. The Fund has
been advised by Jersey counsel that it is unlikely that the courts of Jersey
would adjudge civil liability against Directors and officers resident in Jersey
in an original action predicated solely on a violation of the federal securities
laws of the United States. Although there is no arrangement in place between
Jersey and the United States for the reciprocal enforcement of judgments, a
judgment against the Directors and officers in an original action predicated on
such provisions rendered by a court in the United States would be enforceable by
action or counterclaim or be recognized by the Jersey courts as a defense to an
action or as conclusive of an issue in that action unless obtained by fraud or
otherwise than in accordance with the principles of natural justice or unless
contrary to public policy or unless the proceedings in the United States court
were not duly served on the defendant in the original action. There is doubt as
to the enforceability in Australia and Canada, the countries in which other
Directors and officers are resident, of these civil liability provisions,
whether or not the liabilities are based upon judgments of courts in the United
States or are pursuant to original actions.
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS THE FUND** PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
---------------- ------------- -------------------------------------------
<S> <C> <C>
ANTHONY E. AARONSON++ Class I Director, The First Australia Fund, Inc. (since
116 South Anita Avenue Director 1985); Tony Aaronson (textile agent) (since 1993);
Los Angeles, CA 90049 Vice President, Fortune Fashions (1992-1993);
President Fashion Fabric Division, Forrest Fabrics
(textiles) (August 1991-1992); Director, PKE
Incorporated (consulting company) (1988-1990);
Director, Textile Association of Los Angeles
(1990-1993); Vice President, Textile Association of
Los Angeles (1996-1997); Director O.T.C. Sales,
Emday Fabric Co. (textiles) (1986-1991); Executive
Vice-President and Secretary-Treasurer, J&J
Textiles Inc. (1982-1986).
</TABLE>
45
<PAGE> 48
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS THE FUND** PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
---------------- ------------- -------------------------------------------
<S> <C> <C>
ROGER C. MADDOCK* Class I Director, The First Australia Fund, Inc. and The
Union House, Union Director First Commonwealth Fund, Inc. (since 1992);
Street Chairman and Managing Director, EquitiLink
St. Helier, Jersey International Management Limited (since 1985);
Channel Islands JE4 8TQ Partner, Jackson Fox, Chartered Accountants (since
United Kingdom 1981); Director, Worthy Trust Company Limited
(since 1993); Director, Professional Consultancy
Services Limited (since 1983); Director, Honeywell
Spring Limited (since 1987); Director, The
EquitiLink Private Gold Investment Fund Limited
(since 1992); Director, CentraLink-EquitiLink
Investment Company Limited (since 1994).
NEVILLE MILES Class I Director, The First Australia Fund, Inc. (since
23 Regent Street Director 1996); Director, MaxiLink Limited (investment
Paddington, N.S.W. 2021 company); Director, Walker Corp. Limited (property
Australia development); Director, First Resources Development
Fund Limited (investment company); Executive
Director, EL&C Ballieu Limited (stock broker)
(1994-1996); Executive Director, Old Minnett
Securities Limited (stock broker) (1998-1994).
JOHN T. SHEEHY++ Class I Director, The First Australia Fund, Inc. (since
2700 Garden Road Director 1985), First Australia Prime Income Investment
Suite G Company Limited (since 1986) and The First
Monterey, CA 93940 Commonwealth Fund, Inc. (since 1992); Managing
Director, The Value Group LLC (merchant banking)
(since 1997); Managing Director, Black & Company
(broker-dealer and investment bankers); Director,
Greater Pacific Food Holdings, Inc. (food industry
investment company) (since 1993); Director, Video
City, Inc. (video retail merchandising); Partner,
Sphere Capital Partners (corporate consulting)
(since 1987); Director, Sphere Capital Advisors
(investment adviser); Director, Sandy Corporation
(corporate consulting, communication and training)
(1986-1996); Associate Director, Bear Stearns & Co.
Inc. (1985-1987); previously, Limited Partner, Bear
Stearns & Co. Inc.
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS THE FUND** PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
---------------- ------------- -------------------------------------------
<S> <C> <C>
RT. HON. MALCOLM FRASER Class II Director, The First Australia Fund, Inc. (since
A.C., C.H.+ Director 1985), First Australia Prime Income Investment
44/55 Collins Street Company Limited (since 1986) and The First
Melbourne, Victoria 3000 Commonwealth Fund, Inc. (since 1992); Partner,
Australia Nareen Pastoral Company (agriculture) (until 1998);
Fellow, Center for International Affairs, Harvard
University; International Council of Associates,
Claremont University; Chairman, CARE Australia
(since 1987); President, CARE International
(1990-1995); Member, ANZ International Board of
Advice (1987-1990); InterAction Council for Former
Heads of Government (since 1987, Chairman since
1997); Co-Chairman, Commonwealth Eminent Persons
Group on Southern Africa (1985-1986); Chairman,
United Nations Committee on African Commodity
Problems (1989-1990); Consultant, The Prudential
Insurance Company of America; International
Consultant on Political, and Strategic Affairs
(since 1983); Parliamentarian-Prime Minister of
Australia (1975-1983).
HARRY A. JACOBS, JR.* Class II Director, The First Australia Fund, Inc. (since
One New York Plaza Director 1985); Chairman and Chief Executive Officer,
New York, NY 10292 Prudential Mutual Fund Management, Inc.
(June-September 1993); Senior Director, Prudential
Securities Incorporated (since 1986); previously,
Chairman of the Board, Prudential Securities
Incorporated (1982-1985); Chairman of the Board and
Chief Executive Officer, Bache Group, Inc.
(1977-1982); Trustee, The Trudeau Institute
(eleemosynary); Director of 11 investment companies
affiliated with Prudential Securities Incorporated.
HOWARD A. KNIGHT Class II Director, The First Australia Fund, Inc. (since
36 Ive Street Director 1993); Director, Vice Chairman and Chief Operating
London SW3 2ND Officer, Scandinavian Broadcasting System S.A.
United Kingdom (television and radio broadcasting) (since 1996);
Private Investor and Consultant (1994-1996);
President of Investment Banking, Equity
Transactions and Corporate Strategy, Prudential
Securities Incorporated (1991-1994); former
Chairman and Chief Executive Officer, Avalon
Corporation (1984-1990); Managing Director,
President and Chief Executive Officer, Weeks
Petroleum Limited (1982-1984); General Counsel,
member of the Executive Committee and Director,
Farrell Lines Incorporated (1976-1982); Partner,
Cummings & Lockwood (1963-1976).
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS THE FUND** PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
---------------- ------------- -------------------------------------------
<S> <C> <C>
PETER D. SACKS++ Class II Director, The First Commonwealth Fund, Inc. (since
33 Yonge Street Director 1992); President and Director, Toron Capital
Suite 706 Markets, Inc. (currency, interest rate and
Toronto, Ontario M5E 1G4 commodity risk management) (since 1988); Director,
Canada Toron Capital Management Ltd. (commodity trading
adviser) (since 1994); Vice President and
Treasurer, Midland Bank Canada (1987-1988); Vice
President and Treasurer, Chase Manhattan Bank of
Canada (1985-1987).
BRIAN M. SHERMAN* Class II President and Director, The First Australia Fund,
Level 3 Director; Inc. (since 1985); Joint Managing Director (since
190 George Street President 1986) and Chairman (since 1995), First Australia
Sydney, N.S.W. 2000 (since 1986) Prime Income Investment Company Limited; Director
Australia and Vice President (since 1992) and Chairman (since
1995), The First Commonwealth Fund, Inc.; Chairman
and Joint Managing Director, EquitiLink Limited
(since 1986); Chairman and Joint Managing Director,
EquitiLink Australia Limited (since 1981);
Director, EquitiLink International Management
Limited (since 1985); Joint Managing Director,
MaxiLink Limited (since 1987); Executive Director,
MaxiLink Securities Limited (since 1987); Director,
First Resources Development Fund Limited (since
1994); Director, Ten Group Limited (since 1994);
Director, Telecasters North Queensland Limited
(since 1993); Director, Sydney Organizing Committee
for The Olympic Games.
SIR RODEN CUTLER, V.C., Class III Director, The First Australia Fund, Inc. (since
A.K., K.C.M.G., Director; 1985); Chairman (1986-1995) and Director (since
K.C.V.O., C.B.E., Chairman of 1986), First Australia Prime Income Investment
K.St.J.+ the Board Company Limited; Chairman (1992- 1995) and Director
22 Ginahgulla Road (1986-1995) (since 1992), The First Commonwealth Fund, Inc.;
Bellevue Hill, N.S.W. Australia Director, Rothmans Holding Ltd. (formerly
2023 Rothmans Pall Mall) (tobacco) (1981-1994);
Australia Chairman, State Bank of New South Wales
(1981-1986); Governor of New South Wales, Australia
(1966-1981).
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS THE FUND** PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
---------------- ------------- -------------------------------------------
<S> <C> <C>
DAVID LINDSAY ELSUM+ Class III Director, The First Australia Fund, Inc. (since
9 May Grove Director 1985), First Australia Prime Income Investment
South Yarra, Victoria Company Limited (since 1986) and The First
3141 Commonwealth Fund, Inc. (since 1992); Director,
Australia IlTec Limited (1993-1996); President, State
Superannuation Fund of Victoria (1986-1993);
Director, MaxiLink Limited; Managing Director, The
MLC Limited (insurance) (1984-1985); Managing
Director, Renison Goldfields Consolidated Limited
(mining) (1983-1984); Member, Federal
Administrative Appeals Tribunal; Member,
Corporations and Securities Panel of the Australian
Securities and Investments Commission of Australian
States and Territories; Chairman, Queen Victoria
Market; Director, First Resources Development Fund
Limited and Statewide Friendly Society; Chairman,
Stodart Investment Pty. Ltd.; Chairman, Melbourne
Wholesale Fish Market Ltd.; Adviser, TASA
International Executive Search; Chairman, Health
Computing Services Limited.
LAURENCE S. FREEDMAN* Class III Chairman (since 1995) and Vice President and
Level 3 Director; Director (since 1985), The First Australia Fund,
190 George Street Chairman Inc.; Joint Managing Director, First Australia
Sydney, N.S.W. 2000 (since 1995); Prime Income Investment Company Limited (since
Australia Vice 1986); President and Director, The First
President Commonwealth Fund, Inc. (since 1992); Founder and
(since 1986) Director, EquitiLink Limited (since 1986); Joint
Managing Director, EquitiLink Australia Limited
(since 1982); Director, EquitiLink International
Management Limited (since 1985); Chairman and Joint
Managing Director, MaxiLink Limited (since 1987);
Executive Director MaxiLink Securities Limited
(since 1987); Chairman and Director, First
Resources Development Fund Limited (since 1994);
Joint Managing Director, Ten Group Limited (since
1994); Director, Telecasters North Queensland
Limited (since 1993); Managing Director, Link
Enterprises (International) Pty. Limited
(investment management company) (since 1980);
Manager of Investments, Bankers Trust Australia
Limited (1978-1980); Investment Manager,
Consolidated Goldfields (Australia) Limited
(natural resources investments), (1975-1978).
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS THE FUND** PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
---------------- ------------- -------------------------------------------
<S> <C> <C>
MICHAEL R. HORSBURGH Class III Director, The First Australia Fund, Inc. (since
21, 22/FI Ssang Yong Director 1985); Director, The First Commonwealth Fund, Inc.
Tower (since 1994); Executive Vice President, Hannuri
23-2 Yuido-dong Securities Investment, Ltd. (since October 1997);
Youngdungpo-gu, Managing Director, Carlson Investment Management,
Seoul 150-010, Korea Inc. (1996-October 1997); Director and Chief
Executive Officer, Horsburgh Carlson Investment
Management, Inc. (1991-1996); Director, The First
Hungary Fund; Managing Director, Barclays de Zoete
Wedd Investment Management (U.S.A.) (1990-1991);
Special Associate Director, Bear Stearns & Co. Inc.
(1989-1990); Senior Managing Director, Bear Stearns
& Co. Inc. (1985-1989); General Partner, Bear,
Stearns & Co. Inc. (1981-1985); previously Limited
Partner, Bear, Stearns & Co. Inc.
WILLIAM J. POTTER+ Class III Director, The First Australia Fund, Inc. (since
380 Lexington Avenue Director 1985), The First Australia Prime Income Investment
Suite 1511 Company Limited (since 1986) and The First
New York, NY 10168 Commonwealth Fund, Inc. (since 1992); Partner,
Sphere Capital Partners (corporate consulting)
(1989-1997); President, Ridgewood Partners, Ltd.
(investment banking) (since 1989); Managing
Director, Prudential-Bache Securities Inc.
(1984-1989); Director and Chairman of Finance,
National Foreign Trade Association (USA); Director,
Ridgewood Capital Funding, Inc. (NASD); Director,
Alexandria Bancorp Limited (banking group in Cayman
Islands); Director, Battery Technologies, Inc.;
Consultant, Trieste Futures Exchange, Inc.;
Director, Impulsora del Fondo Mexico; Director,
International Panorama Resources Ltd.; Director,
Voicenet, Inc.; Director, Canadian Health
Foundation; First Vice President, Barclays Bank,
plc (1982-1984); previously various positions with
Toronto Dominion Bank.
DAVID MANOR* Preferred Treasurer, The First Australia Fund, Inc. (since
Level 3 Director; 1987); Director and Treasurer, The First
190 George Street Treasurer Commonwealth Fund, Inc. (since 1992) and Treasurer,
Sydney, N.S.W. 2000 (since 1987) First Australia Prime Income Investment Company
Australia Limited (since 1987); Executive Director,
EquitiLink Australia Limited and EquitiLink Limited
(1986-1998); Director, EquitiLink International
Management Limited (since 1987) and EquitiLink
U.S.A., Inc.; Director, Telecasters Australia
Limited (1995-1997).
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
POSITION WITH
NAME AND ADDRESS THE FUND** PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
---------------- ------------- -------------------------------------------
<S> <C> <C>
MARVIN YONTEF* Preferred Partner, Stikeman, Elliott (Canadian law firm);
P.O. Box 85 Director Director of and counsel to First Australia Prime
5300 Commerce Court West Income Investment Company Limited; Director and
Toronto, Ontario Executive Committee Member, Gordon Capital
Canada M5L 1B9 Corporation (Canadian investment dealer) (since
1996); Director, Pendaries Petroleum Ltd. (since
1996).
KENNETH T. KOZLOWSKI Assistant Director, Prudential Investments (since 1996); Vice
Gateway Center 3 Treasurer President, Prudential Mutual Fund Management, Inc.
100 Mulberry Street (1992-1996) and Fund Accounting Manager, Pruco Life
Newark, NJ 07102 Insurance Company (life insurance division of The
Prudential Insurance Company) (1990-1992);
Assistant Treasurer, The Prudential Series Fund,
Inc. (1990-1992).
OUMA SANANIKONE-FLETCHER Assistant Director (since 1995) and Investment Director
Level 3 Vice (since 1994), EquitiLink Australia Limited;
190 George Street President and Executive Director, Banque Nationale de Paris Group
Sydney, N.S.W. 2000 Chief (1986-1994).
Australia Investment
Officer
BARRY G. SECHOS Assistant Director (since 1994) and General Counsel (since
Level 3 Treasurer 1993), EquitiLink Australia Limited; Solicitor,
190 George Street Allen Allen & Hemsley (1986-1993).
Sydney, N.S.W. 2000
Australia
ROY M. RANDALL Secretary Partner (since 1996), Stikeman, Elliott, Australian
Level 32, Chifley Tower counsel to the Fund; Partner, Freehill, Hollingdale
2 Chifley Square & Page (until 1996).
Sydney, N.S.W. 2000
Australia
MARGARET A. BANCROFT Assistant Partner, Dechert Price & Rhoads, U.S. counsel to
30 Rockefeller Plaza Secretary the Fund.
New York, NY 10112
ALLAN S. MOSTOFF Assistant Partner, Dechert Price & Rhoads, U.S. counsel to
1775 Eye Street, N.W. Secretary the Fund.
Washington, DC 20006
</TABLE>
- ---------------
* Directors considered by the Fund and its counsel to be persons who are
"interested persons" (as defined in the Investment Company Act) of the Fund
or of the Fund's Investment Manager or Investment Adviser. Mr. Jacobs is
deemed to be an interested person because of his affiliation with
Prudential Securities Incorporated, a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, which is acting as a Dealer
Manager in connection with the Offer. Messrs. Freedman, Maddock, Manor and
Sherman are deemed to be interested persons because of their affiliation
with the Fund's Investment Manager and Investment Adviser, or because they
are officers of the Fund or both. Mr. Yontef is deemed to be an interested
person because the law firm of which he is a partner acts as legal counsel
for the Investment Adviser and its parent.
(footnotes continued on following page)
51
<PAGE> 54
** The Board of Directors is currently divided into three classes (not
including the Preferred Directors). The terms of the Class I, II and III
Directors expire in 2001, 1999 and 2000 respectively. Section 18 of the
Investment Company Act requires that the holders of any preferred shares,
voting separately as a class without regard to series, have the right to
elect at least two Directors at all times. The Preferred Directors were
elected by the holders of the Preferred Stock in accordance with Section
18.
+ Member, Contract Review Committee.
++ Member, Audit Committee.
BOARD COMMITTEES
The Board of Directors has a standing Audit Committee, which consists
entirely of Directors who are not interested persons of the Fund as defined in
the Investment Company Act. The principal purpose of the Audit Committee is to
review the scope and results of the annual audit conducted by the Fund's
independent accountants and the evaluation by the accountants of the accounting
procedures followed by the Fund. The Board of Directors also has a standing
Contract Review Committee which also consists of Directors who are not
interested persons of the Fund. The Contract Review Committee reviews and makes
recommendations to the Board with respect to entering into, renewing or amending
the Management Agreement, the Advisory Agreement and the Administration
Agreement. The Board of Directors does not have a standing nominating committee.
RELATIONSHIP OF DIRECTORS OR NOMINEES WITH THE INVESTMENT ADVISER AND THE
INVESTMENT MANAGER
EquitiLink Australia Limited, the Investment Adviser, is an indirect
wholly-owned subsidiary of EquitiLink Holdings Limited, a non-listed public
company whose principal shareholders are Messrs. Freedman and Sherman, Directors
of the Fund.
Messrs. Freedman and Sherman also serve as directors of EquitiLink
International Management Limited, the Investment Manager. Mr. Maddock, a
Director of the Fund, is also chairman and managing director of the Investment
Manager. In addition, Messrs. Freedman and Sherman are the principal
shareholders of the Investment Manager, of which Mr. Manor is also a
shareholder. Messrs. Freedman, Sherman and Manor also serve as, respectively,
joint managing director, joint managing director and chairman, and executive
director of the Investment Adviser. Mr. Manor is also a shareholder of
EquitiLink Holdings Limited.
During the fiscal year ended October 31, 1997, Professional Consultancy
Services Limited, a limited company organized under the laws of Jersey, Channel
Islands, provided administrative services to the Investment Manager in
connection with its activities on behalf of the Fund and other U.S. and foreign
investment companies and entities in return for a fee in the amount of $930,000
paid by the Investment Manager. Mr. Maddock is a director and a principal
shareholder of Professional Consulting Services Limited.
COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS
The following table sets forth certain information regarding compensation
of Directors of the Fund and by the Fund and by the fund complex of which the
Fund is a part (the "Fund Complex") for the fiscal year ended October 31, 1997.
(The Fund Complex consists of all investment companies having EquitiLink
Australia Limited as investment adviser.) Officers of the Fund and Directors who
are interested persons of the
52
<PAGE> 55
Fund do not receive any compensation from the Fund or any other investment
company in the Fund Complex that is a U.S. registered investment company.
COMPENSATION TABLE
FISCAL YEAR ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM
AGGREGATE ACCRUED ANNUAL REGISTRANT
COMPENSATION AS PART OF BENEFITS AND FUND
FROM FUND UPON COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT TO DIRECTORS+
------------------------ ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Directors:
Anthony E. Aaronson........................ $13,750 N/A N/A $21,250(2)
Sir Roden Cutler........................... 13,750 N/A N/A 29,250(3)
David Lindsay Elsum........................ 13,750 N/A N/A 29,250(3)
Rt. Hon. Malcolm Fraser.................... 13,750 N/A N/A 29,250(3)
Laurence S. Freedman....................... 0 N/A N/A 0(3)
Michael R. Horsburgh....................... 13,750 N/A N/A 29,250(3)
Harry A. Jacobs, Jr........................ 0 N/A N/A 0(2)
Howard A. Knight........................... 13,750 N/A N/A 21,250(2)
Roger C. Maddock........................... 0 N/A N/A 0(3)
Neville Miles.............................. 13,750 N/A N/A 21,250(2)
William J. Potter.......................... 13,750 N/A N/A 29,250(3)
Peter D. Sacks............................. 13,750 N/A N/A 21,750(2)
John T. Sheehy............................. 13,750 N/A N/A 29,250(3)
Brian M. Sherman........................... 0 N/A N/A 0(3)
Preferred Directors:
David Manor................................ 0 N/A N/A 0(2)
Marvin Yontef.............................. 13,750 N/A N/A 13,750(1)
</TABLE>
- ---------------
+ The number in parentheses indicates the total number of boards of investment
companies in the Fund Complex on which the Director serves.
SHARE OWNERSHIP
As of July 31, 1998, the Directors and officers of the Fund as a group
owned an aggregate of less than 1/4 of 1% of the outstanding Common Stock. No
Director or officer of the Fund owns any outstanding Preferred Stock. To the
best knowledge of the management of the Fund, as of the record date, no persons
or groups beneficially own more than 5% of the outstanding shares of common
stock or preferred stock of the Fund.
53
<PAGE> 56
MANAGEMENT AGREEMENT AND ADVISORY AGREEMENT
EquitiLink International Management Limited (the "Investment Manager")
serves as investment manager to the Fund and EquitiLink Australia Limited (the
"Investment Adviser") serves as investment adviser to the Fund pursuant to a
management agreement dated February 1, 1990 (the "Management Agreement") and an
advisory agreement dated December 15, 1992 (the "Advisory Agreement"). The
current Management Agreement was initially approved on December 12, 1989 by a
majority of the Fund's Board of Directors and by a majority of the Fund's
Directors who were not interested persons (as defined in the Investment Company
Act) of the Fund, the Investment Manager or the Investment Adviser (the
"Disinterested Directors") and the current Advisory Agreement was similarly
approved by the Fund's Board of Directors on December 15, 1992. The current
Management Agreement and Advisory Agreement were respectively approved by the
stockholders of the Fund at annual meetings held on March 15, 1990 and March 15,
1993. Since those dates, the continuance of each of the Management Agreement and
the Advisory Agreement has been approved annually in accordance with their
respective terms by the Fund's Board of Directors. Pursuant to the existing and
previous management agreements and advisory agreements with the Fund, the
Investment Manager and Investment Adviser have served in these capacities since
the Fund was organized in 1986.
The Investment Manager is a Jersey, Channel Islands corporation organized
in October 1985. The registered office of the Investment Manager is located at
Union House, Union Street, St. Helier, Jersey, Channel Islands. EquitiLink
U.S.A., located at 45 Broadway, New York, NY 10006, acts as the Investment
Manager's agent for service of process in the United States. The Investment
Manager's shares are principally owned by Laurence S. Freedman and Brian M.
Sherman.
The Investment Adviser is a wholly-owned subsidiary of EquitiLink Limited,
an Australian corporation, which is a wholly-owned subsidiary of EquitiLink
Holdings Limited, also an Australian corporation. The registered offices of the
Investment Adviser, EquitiLink Limited and EquitiLink Holdings Limited are
located at Level 3, 190 George Street, Sydney, N.S.W., Australia. EquitiLink
U.S.A. is also the Investment Adviser's agent for service of process in the
United States. The shares of EquitiLink Holdings Limited are principally owned
by Laurence S. Freedman and Brian M. Sherman. Mr. Manor is also a shareholder of
EquitiLink Holdings Limited.
Each of the Investment Manager and the Investment Adviser has all, or a
substantial part of, its assets located outside the United States. As a result,
it may be difficult for U.S. investors to enforce judgments of the courts of the
United States against the Investment Manager and the Investment Adviser
predicated on the civil liability provisions of the federal securities laws of
the United States. The Fund has been advised that there is substantial doubt as
to the enforceability in the courts of Australia of judgments against the
Investment Adviser predicated upon the civil liability provisions of the federal
securities laws of the United States. The Fund also has been advised that it is
unlikely that the courts of Jersey would adjudge civil liability against the
Investment Manager in an original action predicated solely on the federal
securities laws of the United States. However, although there is no arrangement
in place between Jersey and the United States for the reciprocal enforcement of
judgments, the Fund has been advised by Jersey counsel that a judgment rendered
by a court in the United States against the Investment Manager predicated upon a
violation of the federal securities laws of the U.S. would be enforceable by
action or counterclaim or be recognized by the Jersey courts as a defense to an
action, or as conclusive of an issue in an action, unless obtained by fraud or
otherwise than in accordance with the principles of natural justice or unless
contrary to public policy or unless the proceedings in the United States court
were not duly served on the defendant in the original action. The Investment
Manager and the Investment Adviser are advised by U.S. counsel with respect to
the federal securities laws of the United States.
TERMS OF THE MANAGEMENT AGREEMENT
The Management Agreement provides that the Investment Manager will manage,
in accordance with the Fund's stated investment objective, policies and
limitations and subject to the supervision of the Fund's Board of Directors, the
Fund's investments and make investment decisions on behalf of the Fund including
the
54
<PAGE> 57
selection of, and placing of orders with, brokers and dealers to execute
portfolio transactions on behalf of the Fund. The Management Agreement further
provides that the Investment Manager will not be liable for any error of
judgment or for any loss suffered by the Fund in connection with matters to
which the Management Agreement relates, except a loss resulting from a breach of
fiduciary duty with respect to receipt of compensation for services (in which
case any award of damages shall be limited as provided in the Investment Company
Act) or a loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of, or from reckless disregard by the Investment
Manager of, its duties and obligations under the Management Agreement.
The Management Agreement provides that the Investment Manager may, at its
expense, employ, consult or associate with itself, such person or persons as it
believes necessary to assist it in carrying out its obligations thereunder,
provided however, that if any such person would be an "investment adviser" as
defined under the Investment Company Act, that (a) the Fund is a party to any
contract with such a person and (b) the contract is approved by the Fund's
Directors, Disinterested Directors, and stockholders, as required by the
Investment Company Act.
Management Fee. The Management Agreement provides that, as compensation
for its services to the Fund, the Fund will pay the Investment Manager a fee
computed at the annual rate of 0.65% of the Fund's average weekly net assets
applicable to Common and Preferred Stock up to $200 million, 0.60% of such
assets between $200 million and $500 million, 0.55% of such assets between $500
million and $900 million, 0.50% of such assets between $900 million and $1,750
million, and 0.45% of such assets in excess of $1,750 million, computed upon net
assets applicable to Common and Preferred Stock at the end of each week and
payable at the end of each calendar month. Because of the Fund's objective, its
expense ratio, of which this fee is a component, may be higher than that of
closed-end investment companies of comparable size investing in U.S. securities.
For the fiscal years ended October 31, 1997, 1996 and 1995, the Fund paid
or accrued on behalf of the Investment Manager aggregate management fees of
$12,637,375, $11,251,987, and $9,165,046, respectively. During the same periods,
the Investment Manager informed the Fund that it paid aggregate advisory fees of
$5,602,463, $4,841,352, and $3,952,767, respectively, to the Investment Adviser.
Payment of Expenses. The Management Agreement obligates the Investment
Manager to bear all expenses of its employees and overhead incurred in
connection with its duties under the Management Agreement and to pay all
salaries and fees of the Fund's Directors and officers who are interested
persons (as defined in the Investment Company Act) of the Investment Manager.
Pursuant to the Management Agreement, the Fund will bear all of its own expenses
including: expenses of organizing the Fund; fees of the Fund's Disinterested
Directors; out-of-pocket travel expenses for all Directors; interest expense;
taxes and governmental fees, brokerage commissions and other expenses incurred
in acquiring or disposing of the Fund's portfolio securities; expenses of
preparing stock certificates; expenses in connection with the issuance,
offering, distribution, sale or underwriting of securities issued by the Fund;
expenses of registering and qualifying the Fund's shares for sale with the
Commission and in various states and foreign jurisdictions; auditing,
accounting, insurance and legal costs; custodian, dividend disbursing and
transfer agent expenses of obtaining and maintaining stock exchange listings of
the Fund's shares; and the expenses of stockholders' meetings and of the
preparation and distribution of proxies and reports to stockholders.
Duration and Termination. The Management Agreement provides that it will
continue in effect for 12-month periods, provided that each continuance is
specifically approved annually by (1) the vote of the majority of the Fund's
Disinterested Directors cast in person at a meeting called for the purpose of
voting on such approval and (2) either (a) the vote of a majority of the
outstanding voting securities of the Fund, or (b) the vote of a majority of the
Fund's Board of Directors. The Management Agreement may be terminated at any
time by the Fund without the payment of any penalty, upon vote of a majority of
the Fund's Directors or a majority of the outstanding voting securities of the
Fund on 60 days' written notice to the Investment Manager. The Management
Agreement will terminate automatically in the event of its assignment (as
defined in the Investment Company Act). In addition, the Investment Manager may
terminate the Management Agreement on 90 days' written notice to the Fund.
55
<PAGE> 58
TERMS OF THE ADVISORY AGREEMENT
The Advisory Agreement provides that the Investment Adviser will make
recommendations to the Investment Manager as to specific portfolio securities
which are denominated in Australian or New Zealand dollars, to be purchased,
retained or sold by the Fund and will provide or obtain such research and
statistical data as may be necessary in connection therewith. The Advisory
Agreement further provides that the Investment Adviser will give the Investment
Manager and the Fund the benefit of the Investment Adviser's best judgment and
efforts in rendering services under the Advisory Agreement.
The Advisory Agreement provides that neither the Investment Manager nor the
Investment Adviser will be liable for any error of judgment or for any loss
suffered by the Fund in connection with matters to which the Advisory Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
receipt of compensation for services (in which case any award of damages shall
be limited as provided in the Investment Company Act) or a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Investment
Manager or the Investment Adviser, as appropriate, in the performance of, or
from reckless disregard by such party of such party's obligations and duties
under, the Advisory Agreement.
Advisory Fee. Under the Management Agreement, the Investment Manager pays
the Investment Adviser an advisory fee at the annual rate of 0.25% of the Fund's
average weekly net assets applicable to Common and Preferred Stock up to $1,200
million and 0.20% of such assets in excess of $1,200 million at the end of each
week and payable at the end of each calendar month.
Payment of Expenses. The Advisory Agreement obligates the Investment
Adviser to bear all expenses of its employees and overhead incurred in
connection with its duties under the Advisory Agreement and to pay all salaries
and fees of the Fund's Directors and officers who are interested persons (as
defined in the Investment Company Act) of the Investment Adviser but who are not
interested persons of the Investment Manager.
Duration and Termination. The Advisory Agreement provides that it will
continue in effect for 12-month periods, provided that each continuance is
specifically approved annually by (1) the vote of the majority of the Fund's
Disinterested Directors cast in person at a meeting called for the purpose of
voting on such approval and (2) either (a) the vote of a majority of the
outstanding voting securities of the Fund, or (b) the vote of a majority of the
Fund's Board of Directors. The Advisory Agreement may be terminated with respect
to the Fund at any time by the Fund without the payment of any penalty, upon
vote of a majority of the Fund's Directors or a majority of the outstanding
voting securities of the Fund on 60 days' written notice to the Investment
Manager and the Investment Adviser. The Advisory Agreement will terminate
automatically as to any party in the event of its assignment (as defined in the
Investment Company Act) by that party. In addition, the Investment Manager or
the Investment Adviser may terminate the Advisory Agreement as to such party on
90 days' written notice to the Fund and the other party.
PORTFOLIO MANAGEMENT
The Fund's investment decisions are made by a Securities Selection
Committee consisting of representatives of the Australian and Asian Fixed
Interest team and the Investment Director of the Investment Adviser. Two
Investment Adviser Committees, the Asset Allocations Committee and the
Investment Strategy Committee, make broad decisions as to the allocation of
assets and investments, leaving decisions with respect to the selection of
particular securities to the Securities Selection Committee, which then
recommends to the Investment Manager that certain securities be bought or sold.
YEAR 2000 COMPLIANCE BY THE FUND
The Investment Manager and Investment Adviser are coordinating, managing
and monitoring Year 2000 readiness for the Fund. The Investment Manager is
working with vendors who provide services, software and systems to the Fund to
help ensure that date-related information and data can be properly processed and
calculated on and after January 1, 2000. Many Fund service providers and
vendors, including the Investment Manager and Investment Adviser, are in the
process of making Year 2000 modifications to their services,
56
<PAGE> 59
software and systems and believe that such modifications will be completed on a
timely basis prior to January 1, 2000. The cost of these modifications will not
affect the Fund. However, no assurances can be given that all modifications
required to ensure proper data processing and calculation on and after January
1, 2000 will be timely made or that services to the Fund will not be adversely
affected.
ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement effective as of December 13, 1988
(the "Administration Agreement"), Prudential Investments Fund Management LLC
(the "Administrator") provides office facilities and personnel adequate to
perform the following services for the Fund: oversee the determination and
publication of the Fund's NAV in accordance with its policy as adopted from time
to time by the Board of Directors; oversee the maintenance of the books and
records of the Fund required under Rule 31a-1(b)(4) under the Investment Company
Act; prepare the Fund's U.S. federal, state and local income tax returns;
prepare financial information for the Fund's proxy statements and quarterly and
annual reports to stockholders; prepare the fund's periodic financial reports to
the Commission; and respond to or refer to the Fund's officers or transfer agent
stockholder inquiries relating to the Fund.
The Fund pays the Administrator a fee computed at the annual rate of 0.15%
of the Fund's average weekly net assets applicable to Common and Preferred Stock
up to $900 million, and 0.10% of such assets between $900 million and $1,750
million and 0.07% of such assets in excess of $1,750 million, based upon NAV
applicable to Common and Preferred Stock at the end of each week and payable at
the end of each calendar month. For the fiscal years ended October 31, 1997,
1996 and 1995, the Fund paid the Administrator a fee of $2,676,338, $2,465,669,
and $2,120,097, respectively. The Administrator's offices are located at Gateway
Center 3, 100 Mulberry Street, Newark, New Jersey 07102.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Portfolio transactions of the Fund are primarily effected with dealers
acting as a principal for their own account. During the fiscal years ended
October 31, 1997, 1996 and 1995, the Fund paid no brokerage commissions. In the
event the Fund were to place an order with a broker, the primary objective would
be to obtain best execution taking into account a variety of factors including
price, commission, size order, difficulty of execution and skill required of the
broker.
Subject to best execution, orders will be placed with brokers who supply
research, market and statistical information ("research") to the Fund, the
Investment Manager and the Investment Adviser. The research may be used by the
Investment Manager and the Investment Adviser in advising other clients, and the
Fund's commissions to brokers supplying research may not represent the lowest
obtainable commission rates. Although research from brokers supplying research
may be useful to the Investment Manager and the Investment Adviser, it will be
only supplementary to their own efforts.
NET ASSET VALUE OF COMMON STOCK
The NAV per share of Common Stock is determined no less frequently than
weekly at the close of business (generally 5:00 p.m. New York City time) on a
specified business day ("Valuation Date") by dividing the value of net assets of
the Fund (the value of its assets less its liabilities, its accumulated and
unpaid dividends (whether or not earned or declared) on outstanding shares of
Preferred Stock and the aggregate liquidation value of such outstanding shares
of Preferred Stock) by the total number of shares of Common Stock outstanding.
The Board of Directors has established procedures to value the Fund's securities
in order to determine the NAV. A security for which market quotations are
readily available is valued at the security's last quoted sale price on the
exchange if the trade price reflects a trade on, or within one local business
day prior to, the Valuation Date. All other securities for which OTC market
quotations are readily available are valued at the average of the last bid price
and the last asked price as of the Valuation Date, provided that the spread
between the bid price and the asked price is determined to be reasonable.
Securities
57
<PAGE> 60
and other assets for which market prices are not readily available are valued at
fair value, as determined by, or pursuant to, procedures approved by the
Directors.
The values of the Fund's assets and liabilities are translated into U.S.
dollars at the closing selling rate of the U.S. dollar against the currencies in
which the Fund's assets and liabilities are denominated at the end of each
calendar week according to the procedures normally employed by the Fund's
Custodian or as otherwise established by the Fund's Board of Directors.
The Common Stock is listed on the AMEX and the PSE. Shares of closed-end
investment companies frequently trade at a discount from NAV, but in certain
instances have traded above NAV. The Fund's shares have traded in the market
below, at or above NAV since the commencement of the Fund's operations. The Fund
cannot predict whether its shares will trade above or below NAV in the future.
DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund distributes to stockholders, at least annually, substantially all
of its net investment income and net realized capital gains. To the extent
practicable, the Fund attempts to maintain a constant level of monthly
distributions to stockholders, although there can be no assurance that it will
continue to be able to do so. See "Risk Factors and Special
Considerations -- Current Distribution Rate." The Offer may have a dilutive
impact on investment income available for distribution. Shares purchased
pursuant to the Offer will be issued after the record date for the monthly
distribution payable in November 1998, and accordingly, the Fund will not pay
such monthly distribution with respect to such Shares.
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
stockholders may elect to have all distributions automatically reinvested by
State Street Bank and Trust Company, the Plan Agent, in Fund Shares on a monthly
basis. Stockholders who do not participate in the Plan will receive all
distributions in cash paid by check in U.S. dollars mailed directly to the
stockholder.
Any stockholder may enroll in the Plan by contacting the Plan Agent.
If shares are held of record by a stockholder, the stockholder can
participate directly in the Plan. If shares are held in the name of a brokerage
firm, bank, or other nominee, a stockholder must instruct its nominee to
participate on the stockholder's behalf. If the stockholder's brokerage firm,
bank or other nominee is unable to participate on its behalf, the stockholder
must request it to re-register such shares in the stockholder's own name which
will enable the stockholder's participation in the Plan.
The Plan Agent will administer the Plan on the basis of the number of
shares certified from time to time as representing the total amount registered
in a stockholder's name or held by a nominee. Nominees should provide to the
Plan Agent a listing of participating beneficial owners.
If the Fund declares an income dividend or capital gains distribution
payable in stock to stockholders who are not Plan participants, the participants
will receive that dividend or distribution in newly-issued shares on identical
terms and conditions.
In every other case Plan participants will receive shares on the following
basis: If the market price of the Fund's Common Stock plus any brokerage
commission is equal to or exceeds NAV, stockholders will receive newly-issued
shares valued at the greater of NAV or 95% of current market price. If, on the
other hand, the NAV plus any brokerage commission exceeds the market price, the
Plan Agent will buy shares in the open market. If the market price plus any
applicable brokerage commission exceeds NAV before the Plan Agent has completed
its purchases, the Fund will issue new shares to complete the program. All
reinvestments are in full and fractional shares carried to three decimal places.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, in any amount of at least US$100 monthly. The Plan Agent will
use all funds received from participants (as well as any dividends and capital
gains distributions received in cash) to purchase Fund shares in the open market
on or about the fifteenth of each month. Interest will not be paid on any
uninvested cash payments. To avoid
58
<PAGE> 61
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, participants should send in voluntary cash
payments to be received by the Plan Agent not earlier than ten or later than
five business days before the fifteenth of the month. Cash payments received
within five business days of the investment date will be held by the Plan Agent
until the following month's investment date. A participant may withdraw a
voluntary cash payment by written notice, if the notice is received by the Plan
Agent not less than 48 hours before such payment is to be invested.
The Plan Agent maintains all stockholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by stockholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy will include those
shares purchased pursuant to the Plan.
In the case of stockholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholders as representing the total amount registered in the stockholder's
name or held for the account of beneficial owners who are to participate in the
Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable either in stock or in cash.
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 or capital gains distributions. A participant
also will pay brokerage commissions incurred in purchases from voluntary cash
payments made by the participant.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge US$0.75 for each such purchase from a participant, plus a pro rata share
of the brokerage commissions. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the lower
commission thus attainable.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax that may be payable on such dividends or
distributions.
The Fund reserves the right to amend or terminate the Plan as applied to
any voluntary cash payments made and any dividend or distribution paid
subsequent to notice of the change sent to the members of the Plan at least 90
days before the record date for such dividend or distribution. The Plan also may
be amended or terminated by the Plan Agent by at least 90 days' written notice
to members of the Plan. All correspondence concerning the Plan should be
directed to the Plan Agent at State Street Bank and Trust Company, P.O. Box
8200, Boston, Massachusetts 02266-8200 Attention: Dividend Reinvestment
Department.
59
<PAGE> 62
TAXATION
The following is intended to be a general summary of certain tax
consequences that may result to the Fund and its stockholders. It is not
intended as a complete discussion of all such tax consequences, nor does it
purport to deal with all categories of investors. Investors are therefore
advised to consult with their tax advisers before making an investment in the
Fund. The summary is based on the laws in effect on the date of this Prospectus,
which are subject to change.
UNITED STATES TAXES
TAX TREATMENT OF THE FUND -- GENERAL
The Fund intends to continue to qualify annually to be treated as a
regulated investment company under the Code.
To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies ("Qualifying Income Requirement"); (b) diversify its
holdings so that, at the end of each quarter of the taxable year (i) at least
50% of the market value of the Fund's assets is represented by cash and cash
items, U.S. government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for purposes of this calculation to an amount not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. government
securities or the securities of other regulated investment companies); and (c)
distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, and net short-term capital
gains in excess of net long-term capital losses) each taxable year. The U.S.
Treasury Department has authority to promulgate regulations pursuant to which
gains from foreign currency (and options, futures and forward contracts on
foreign currency) not directly related to a regulated investment company's
business of investing in stocks and securities would not be treated as
qualifying income for purposes of the Qualifying Income Requirement. To date,
such regulations have not been promulgated.
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years), if any,
that it distributes to stockholders. However, the Fund would be subject to
corporate income tax (currently at a 35% rate) on any undistributed income. The
Fund intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the tax, the Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the 12-month period ending on October 31 of the calendar year, and
(3) all such ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as having been
paid on December 31 if it is declared by the Fund in October, November or
December with a record date in such month and is paid by the Fund in January of
the following year. Accordingly, such distributions will be taxable to
stockholders in the calendar year in which the distributions are declared. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement. The
Fund may distribute net capital gains at least annually and designate them as
capital gain dividends where appropriate, or, alternatively, the Fund may choose
to retain net capital gains and pay corporate income tax (and, possibly, an
excise tax) thereon. In the event that the Fund retains net capital gains, the
Fund would most likely make an election which would require each stockholder of
record on the last day of the Fund's taxable year to include in gross income for
U.S. federal tax purposes his or her proportionate
60
<PAGE> 63
share of the Fund's undistributed net capital gain. If such an election were
made, each stockholder would be entitled to credit his or her proportionate
share of the tax paid by the Fund against his or her federal income tax
liabilities and to claim a refund to the extent that the credit exceeds such
liabilities. Tax-qualified pension plans and individual retirement accounts
("IRAs") (through their custodian or trustee), as well as nonresident aliens and
foreign corporations, can obtain a refund of their proportionate shares of the
tax paid by the Fund by filing a U.S. federal income tax return. In addition,
the stockholder would be entitled to increase the basis of the shares for U.S.
federal tax purposes by an amount equal to 65% of his or her proportionate share
of the undistributed net capital gain.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund would be taxed in the same manner as an
ordinary corporation and distributions to its stockholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to stockholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the stockholders' hands
as long-term capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it must pay out its earnings and profits
accumulated in that year and may be required to recognize any net unrealized
gains on its entire portfolio in order to requalify as a regulated investment
company.
DISTRIBUTIONS
For federal income tax purposes, dividends paid by the Fund out of its
investment company taxable income will be taxable to a U.S. stockholder as
ordinary income. Because none of the Fund's income is expected to consist of
dividends paid by U.S. corporations, none of the dividends paid by the Fund is
expected to be eligible for the corporate dividends-received deduction. To the
extent that the Fund designates distributions of net capital gains as capital
gain dividends, such distributions will be taxable to a stockholder as long-term
gain, regardless of how long the stockholder has held the Fund's shares, and are
not eligible for the dividends-received deduction. Distributions in excess of
the Fund's investment company taxable income and net capital gains will first
reduce a stockholder's basis in his shares and, after the stockholder's basis is
reduced to zero, will constitute capital gains to a stockholder who holds his
shares as capital assets.
Stockholders participating in the Plan receiving a distribution in the form
of newly-issued shares will be treated for U.S. federal income tax purposes as
receiving a distribution in an amount equal to the fair market value, determined
as of the distribution date, of the shares received and will have a cost basis
in each share received equal to the fair market value of a share of the Fund on
the distribution date. Stockholders participating in the Plan receiving a
distribution in the form of shares purchased by the Plan Agent in the open
market will be treated for U.S. federal income tax purposes as receiving a
distribution of the cash that such stockholder would have received had it not
elected to have such distribution reinvested and will have a cost basis in such
shares equal to the amount of such distribution. Stockholders will be notified
annually as to the U.S. federal tax status of distributions, and stockholders
receiving distributions in the form of newly-issued shares will receive a report
as to the fair market value of the shares received.
The Fund presently intends that it will designate as capital gain dividends
a proportionate part of the dividends paid to holders of Preferred and Common
Stock.
SALE OF SHARES
Upon the sale or other disposition of shares of the Fund, or upon receipt
of a distribution in complete liquidation of the Fund, a stockholder may realize
a taxable gain or loss depending upon his basis in the shares. The gain or loss
generally will be treated as capital gain or loss if the shares are capital
assets in the stockholder's hands and generally will be long-term or short-term
gain, depending upon the stockholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of. In that case, the basis of the
shares acquired will be adjusted to reflect the
61
<PAGE> 64
disallowed loss. Any loss realized by a stockholder on a disposition of Fund
shares held by the stockholder for six months or less will be treated as
long-term capital loss to the extent of any distributions of capital gain
dividends received by the stockholder with respect to the shares.
ISSUANCE OF PREFERRED STOCK
The Internal Revenue Service has in a revenue ruling taken the position
that a regulated investment company which has two or more classes of shares
cannot effectively designate distributions made to each class in any year as
consisting of more than that class's proportionate share of particular types of
income including capital gain and foreign source income. When both Common Stock
and Preferred Stock are outstanding, the Fund intends to designate distributions
made to each class as consisting of particular types of income in accordance
with the class's proportionate shares of such income. Thus, the Fund intends to
designate as capital gain dividends a proportionate part of the dividends paid
to holders of Preferred and Common Stock. Also, if the Fund is eligible to and
does elect to pass foreign taxes through to its stockholders, the Fund intends
to designate dividends paid to each class of stockholders as consisting of a
proportionate share of the foreign taxes paid by the Fund.
If the Fund does not meet its asset maintenance requirements (See "Capital
Stock -- Asset Coverage"), it may be required to suspend distributions to the
holders of its Common and/or Preferred Stock until such coverage is restored.
Suspension of distributions might prevent the Fund from qualifying as a
regulated investment company for federal income tax purposes, or, if the Fund
retains such qualification, would cause the Fund to incur income and excise
taxes on its undistributed income. Further, the Fund may be required to redeem
Preferred Stock in order to restore asset coverage to an acceptable level. In
order to effect these redemptions, the Fund may be required to dispose of assets
for cash, and this may result in recognition of gain or loss to the Fund for tax
purposes. This gain or loss (or gain or loss from the remittance to the United
States of proceeds from the disposition of assets) may be treated, in whole or
in part for federal income tax purposes, as gain or loss due to fluctuations in
foreign currency values, which under current law is ordinary rather than capital
in character. Ordinary gain or loss will increase, decrease, or possibly
eliminate the Fund's investment company taxable income distributable to holders
of Common Stock. For example, if losses attributable to foreign currency
fluctuations exceed other investment company taxable income during a taxable
year, the Fund would not be able to make ordinary income dividend distributions,
and all or a portion of distributions made would be treated as a return of
capital to stockholders for federal income tax purposes, rather than as an
ordinary income dividend, reducing each stockholder's tax basis in his Fund
shares. Conversely, gain (including gain attributable to foreign currency
fluctuations) arising from the sale of Fund assets to redeem Preferred Stock
would increase the amounts required to be distributed to holders of Common Stock
in order for the Fund to retain its qualification as a regulated investment
company and/or to avoid imposition of income or excise taxes on the Fund.
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES
Under the Code, the gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues receivables or
liabilities denominated in a currency which is not a functional currency for the
Fund and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a currency which is
not a functional currency of the Fund, gains or losses attributable to
fluctuations in the value of the currency between the date of acquisition of the
security and the date of disposition are also treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "Section 988" gains or
losses, may increase or decrease the amount of the Fund's investment company
taxable income to be distributed to its stockholders as ordinary income.
The Fund uses the Australian dollar as its functional currency in
accounting for its investments in Australia, New Zealand and the Asian
Countries. Gains and losses on non-Australian investments will first be
translated into the Australian dollar equivalent, which may result in Section
988 gains or losses as described above, and then into their U.S. dollar
equivalent for purposes of computing U.S. tax liabilities. Because the
Australian dollar is the functional currency of the Fund, the Fund is not
required to take into account gains or
62
<PAGE> 65
losses attributable to fluctuations in the value of this functional currency,
which otherwise would be treated as Section 988 gains or losses, described
above. However, remittances from Australia, New Zealand or any one of the Asian
Countries to the United States will result in recognition of ordinary gains or
losses attributable to fluctuations in the value of the Australian dollar.
CERTAIN SECURITIES TRANSACTIONS
Options, Futures and Forward Contracts. Any regulated futures contracts
and certain options (namely, nonequity options and dealer equity options) in
which the Fund may invest may be "section 1256 contracts." Gains (or losses) on
these contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
Fund may result in "straddles" under the Code. The straddle rules may affect the
character of gains (or losses) realized by the Fund, and losses realized by the
Fund on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which the losses are realized. In addition, certain
carrying charges (including interest expense) associated with positions in a
straddle may be required to be capitalized rather than deducted currently.
Certain elections that the Fund may make with respect to its straddle positions
may also affect the amount, character and timing of the recognition of gains or
losses from the affected positions.
The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize
gain from a constructive sale of an "appreciated financial position" it holds if
it enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
FOREIGN WITHHOLDING TAXES
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. For example,
the Fund's interest income derived from Australian sources generally is subject
to a 10% Australian withholding tax. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible and intends to elect to "pass-through"
to the Fund's stockholders the amount of foreign taxes paid by the Fund.
Pursuant to this election, a stockholder will be required to include in gross
income (in addition to taxable dividends actually received) his proportionate
share of the foreign taxes paid by the Fund, and will be entitled either to
deduct (as an itemized deduction) his pro rata share of foreign taxes in
computing his taxable income or to use it as a foreign tax credit against his
U.S. federal income tax liability, subject to limitations. No deduction for
foreign taxes may be claimed by an individual stockholder who does not itemize
deductions. The deduction for foreign taxes is not allowable in computing
alternative minimum taxable income of non-corporate stockholders. A foreign
stockholder may be subject to U.S. withholding tax on such
63
<PAGE> 66
foreign taxes included in income, and may be unable to claim a deduction or
credit for such taxes. Each stockholder will be notified within 60 days after
the close of the Fund's taxable year whether the foreign taxes paid by the Fund
will "pass-through" for the year and of the amount of such taxes deemed paid by
the stockholder.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the stockholder's U.S. tax attributable to his foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its stockholders. With respect to
the Fund, certain gain from the sale of securities will be treated as derived
from U.S. sources and currency fluctuation gains, including fluctuation gains
from certain foreign currency denominated debt securities, receivables and
payables, may be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax credit), including
the foreign source passive income passed through by the Fund. Stockholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit limitation rules do
not apply to certain electing individual taxpayers who have limited creditable
foreign taxes and no foreign source income other than passive investment-type
income. The foreign tax credit is eliminated with respect to foreign taxes
withheld on dividends if the dividend paying shares or the shares of the Fund
are held by the Fund or the stockholder, as the case may be, for less than 16
days (46 days in the case of Preferred Stock) during the 30-day period (90-day
period for Preferred Stock) beginning 15 days (45 days for Preferred Stock)
before the shares become ex-dividend. In addition, if the Fund fails to satisfy
these holding period requirements, it cannot elect to "pass through" to
stockholders the ability to claim a deduction for the related foreign taxes. The
foreign tax credit can be used to offset only 90% of the alternative minimum tax
(as computed under the Code for purposes of this limitation) imposed on
corporations and individuals. If the Fund is not eligible to make the election
to "pass through" to its stockholders its foreign taxes, the foreign taxes it
pays will reduce its income and distributions by the Fund will be treated as
U.S. source income.
The foregoing is only a general description of the foreign tax credit and,
because application of the credit depends on the particular circumstances of
each stockholder, stockholders are advised to consult their own tax advisers.
Assuming that the Fund is eligible and does elect to pass foreign taxes
through to its stockholders, the Fund currently intends to designate Common and
Preferred stockholders' proportionate shares of foreign taxes in the same
proportion as the income subject to such taxes is distributed to each such
stockholder.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to stockholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or when the Internal Revenue Service has notified the Fund or a
stockholder that the stockholder is subject to backup withholding. Corporate
stockholders and certain other stockholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the stockholder's U.S. federal
income tax liability.
FOREIGN STOCKHOLDERS
The tax consequences to a foreign stockholder of an investment in the Fund
may be different from and more adverse than the tax consequences to U.S.
investors described herein. Foreign stockholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
AUSTRALIAN TAXES
The following discussion is based upon the advice of Stikeman, Elliott,
Australian counsel for the Fund and is a general and non-exhaustive summary of
Australian tax considerations which may be applicable to the Fund under current
law.
64
<PAGE> 67
Under current Australian law, the Fund will be regarded as a non-resident
of Australia. Pursuant to the United States Australia Double Tax Agreement (the
"Agreement") and assuming the Fund to be a resident of the United States for the
purposes of the Agreement, the Fund will not be regarded as having a permanent
establishment in Australia if it has no fixed place of business or place of
management in Australia and if there is no person (other than a broker or other
agent of independent status) in Australia who has authority to conclude
contracts on behalf of the Fund and habitually exercises that authority. The
Fund does not intend to have a fixed place of business or place of management in
Australia or to give any person (other than a broker or other agent of
independent status) in Australia the authority to conclude contracts on behalf
of the Fund, and accordingly none of the Fund's profits arising from the
disposal of its assets should be subject to Australian taxes. The Fund will be
subject to an interest withholding tax at the rate of 10% on all interest
payments (including discounts on money market securities) under corporate debt
instruments, money market securities and Australian Commonwealth Government and
State Government securities (unless the particular issue qualifies for exemption
from interest withholding tax). Australian interest withholding tax does not
apply to interest on Eurodollar obligations issued by non-residents of Australia
where the interest is not an expense incurred by that person in carrying on
business in Australia at or through a permanent establishment in Australia of
that non-resident. See "Taxation -- United States Taxes -- Foreign Withholding
Taxes." Generally, the Fund will not be subject to a stamp duty on its
investments in government and semi-government securities, promissory notes and
bills of exchange.
CAPITAL STOCK
GENERAL
Set forth below is information with respect to the Fund's outstanding
securities as of July 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
NUMBER OF BY THE FUND SHARES
SHARES OR FOR ITS ISSUED AND
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
- -------------- ---------- ----------- -----------
<S> <C> <C> <C>
Common Stock........................... 400,000,000 shares -0- 194,744,328
Auction Market Preferred Stock......... 100,000,000 shares -0- 24,000
</TABLE>
COMMON STOCK
The Fund's Articles of Amendment and Restatement, as amended to date (the
"Articles") authorize the issuance of up to 400,000,000 shares of Common Stock.
At July 31, 1998, there were 194,744,328 outstanding shares of Common Stock of
the Fund, all of which are fully paid and nonassessable. All shares of Common
Stock are equal as to dividends, assets and voting privileges and have no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of Common Stock is entitled to its proportion of the
Fund's assets after the payment of debts and expenses and after payment of the
aggregate liquidation preferences to holders of Preferred Stock, including the
liquidation preference of $25,000 per share, plus accumulated but unpaid
dividends (whether or not earned or declared), on the outstanding shares of
Preferred Stock. Holders of shares of Common Stock are entitled to one vote per
share and do not have cumulative voting rights.
PREFERRED STOCK
The Fund's Articles authorize the issuance of up to 100,000,000 shares of
Preferred Stock, in one or more series, with rights as determined by the Board
of Directors, by action by the Board of Directors without the approval of the
holders of Common Stock. As of July 31, 1998, an aggregate of 24,000 shares of
Preferred Stock in nine series, designated as Series A, Series B, Series C,
Series D, Series E, Series F, Series G, Series H and Series I, with an aggregate
liquidation preference of $600 million, was outstanding. Under the Investment
Company Act, the Fund is permitted to have outstanding more than one series of
Preferred Stock so long as no single series has a priority over another series
as to the distribution of assets of the Fund or the
65
<PAGE> 68
payment of dividends. Although the Fund has no current intention to issue
additional shares of Preferred Stock, it may issue additional shares of
Preferred Stock at a time the Board deems appropriate after completion of this
Offer.
NO PREEMPTIVE RIGHTS
No holder of shares of the Fund has any preemptive right to acquire from
the Fund any capital stock of the Fund whether now or hereafter authorized.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the holders of shares of any series of Preferred Stock
would be entitled to receive a preferential liquidating distribution (to equal
the liquidation value of $25,000 per share plus accrued and unpaid dividends,
whether or not declared) before any distribution of assets is made to holders of
Common Stock. After payment of the full amount of the liquidating distribution
to which they are entitled, the Preferred Stockholders would not be entitled to
any further participation in any distribution of assets by the Fund.
VOTING RIGHTS
Except as otherwise required by applicable law, or by terms of the Fund's
Articles or as may be established at the time of the issuance of any series of
Preferred Stock, holders of shares of Preferred Stock, voting as a separate
class, are entitled to elect two of the Fund's Directors, and the remaining
Directors will be elected by holders of Common Stock. If at any time dividends
on shares of the Fund's Preferred Stock are unpaid in an amount equal to two
full years' dividends, the holders of outstanding shares of Preferred Stock,
voting as a separate class, will be entitled to elect a majority of the Fund's
Directors until all dividends in default have been paid or declared and set
apart for payment.
The terms of the Preferred Stock require a separate class vote of the
Preferred Stock with respect to matters which would affect adversely any
preferences, rights, or powers applicable to the Preferred Stock. Moreover, the
affirmative vote of the holders of a majority of the outstanding shares of
Preferred Stock, voting as a separate class, would be required to approve any
plan of reorganization adversely affecting these shares or any action requiring
a vote of security holders under Section 13(a) of the Investment Company Act.
REDEMPTION, PURCHASE AND SALE OF PREFERRED STOCK BY THE FUND
The terms of the Preferred Stock provide that the shares are redeemable by
the Fund in whole or in part, at the liquidation value of $25,000 per share plus
accrued dividends per share, that the Fund may tender for or purchase shares of
Preferred Stock and that the Fund may subsequently resell any shares so tendered
for or purchased. Any redemption or purchase of shares of Preferred Stock by the
Fund will reduce the leverage applicable to shares of Common Stock, while any
resale of shares by the Fund will increase such leverage. The Fund may also need
to redeem all or a portion of the Preferred Stock pursuant to the requirements
of either the Investment Company Act or the rating agencies rating the Preferred
Stock. The leveraging of the Common Stock would be eliminated during any period
that Preferred Stock is not outstanding.
LEVERAGE
The Preferred Stock results in leveraging, which is usually considered
speculative and involves certain risks to the holders of Common Stock. These
risks include a higher volatility of the NAV of the Common Stock, potentially
more volatility in the market value of the Common Stock and the relatively
greater effect on the NAV of the Common Stock caused by favorable or adverse
changes in currency exchange rates. In addition, fluctuations in the dividend
rates on the Preferred Stock will affect the return to holders of Common Stock,
with increases in the Preferred Stock dividend rates, decreasing the return to
holders of Common Stock. So long as the Fund is able to realize a higher net
return on its investment portfolio than the then current dividend rate of the
Preferred Stock, the effect of leverage will be to cause holders of Common Stock
to realize a higher current rate of return than if the Fund were not leveraged.
On the other hand, to the extent
66
<PAGE> 69
that the current dividend rate on the Preferred Stock approaches the net return
on the Fund's investment portfolio, as is currently the case, the Fund's
leveraged capital structure results in a lower rate of return to holders of
Common Stock than if the Fund were not leveraged. Further, because any decline
in the NAV of the Fund's investments will be borne entirely by holders of Common
Stock, in a declining market the Fund's leverage would result in a greater
decrease in NAV to holders of Common Stock than if the Fund were not leveraged.
This would likely be reflected in a greater decline in the market price for
shares of Common Stock and, if the Fund's current investment income were not
sufficient to meet dividend requirements on Preferred Stock, it could be
necessary for the Fund to liquidate certain of its investments, thereby further
reducing the NAV attributable to the Fund's Common Stock.
Because under historical market conditions, Australian and New Zealand
long-term debt obligations have produced higher yields than U.S. short-term
obligations, the difference between the U.S. short-term rates paid by the Fund
on the Preferred Stock and the net Australian and New Zealand long-term debt
rates received by the Fund has, over the life of the Fund, provided holders of
Common Stock with a higher yield. Holders of Common Stock have generally
benefited from the Fund's issuance of the Preferred Stock which commenced in
1989. Since the fiscal quarter beginning August 1, 1997, however, the shrinking
yield differential between Australian and U.S. interest rates and a depreciating
Australian dollar have resulted in the Preferred Stock having a negative impact
on the total return to holders of Common Stock. Because the Investment Manager's
and the Investment Adviser's fees are based on the average net assets of the
Fund, which include the Preferred Stock, the Investment Manager and Investment
Adviser have benefited from the Fund's determination not to redeem the Preferred
Stock.
The proposed investment of a significant percentage of the Fund's total
assets in higher yielding Asian debt securities, as recommended by the Fund's
Investment Manager and Investment Adviser, and approved by Common and Preferred
stockholders in May 1998, is expected to increase the Fund's net investment
income above the current level. See "The Offer -- Purpose of the Offer." The
implementation of this strategy is proposed to occur within approximately six
months after the completion of the Offer by a combination of investing the net
proceeds of the Offer together with the proceeds from the sale of existing
portfolio securities and proceeds received from maturing Australian debt
securities held in the Fund's portfolio. Stockholders are cautioned that there
can be no guarantee of future performance and the Fund's investment in Asian
debt securities involves risks and uncertainties so that actual results may
differ materially from those anticipated as a result of various factors. The
Fund undertakes no obligation to update or revise the disclosure in this
Prospectus with regard to the effect of investment in Asia on the Fund's
leverage to reflect current events or circumstances after the date of this
Prospectus or to reflect the occurrence of unanticipated events.
ASSET COVERAGE
Under the Investment Company Act, the Fund is not permitted to issue shares
of Preferred Stock unless immediately after the issuance the asset coverage of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding Preferred Stock ($25,000 plus any accrued and unpaid dividends). In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Stock unless, at the time of the declaration, the NAV
of the Fund's portfolio (determined after deducting the amount of any dividend
or other distribution) is at least 200% of the liquidation value of the
Preferred Stock.
Under the terms of the Preferred Stock, the Fund could be required to
suspend distributions to holders of Common Stock in order to maintain the asset
coverage required by the Investment Company Act. The suspension of distributions
might prevent the Fund from qualifying as a regulated investment company for
federal income tax purposes, or, if the Fund retains the qualification, could
cause the Fund to incur income and excise taxes on its undistributed income.
Further, the Fund could be required to redeem Preferred Stock in order to
restore asset coverage to an acceptable level. In order to effect redemptions,
the Fund could be required to dispose of assets for cash, which could result in
recognition of gain or loss to the Fund for tax purposes. This gain or loss
could be treated, in whole or in part for federal income tax purposes, as gain
or loss due to fluctuations in foreign currency values, which under current law
is ordinary rather than capital in character. Ordinary gain or loss would
increase, decrease, or possibly eliminate the Fund's investment
67
<PAGE> 70
company taxable income distributable to holders of Common Stock. For example, if
losses attributable to foreign currency fluctuations exceed other investment
company taxable income during a taxable year, the Fund would not be able to make
ordinary dividend distributions, or distributions made would be treated as a
return of capital to stockholders for federal income tax purposes, rather than
as an ordinary dividend, reducing each stockholder's tax basis in his Fund
shares. Conversely, gain (including gain attributable to foreign currency
fluctuations) arising from the sale of Fund assets to redeem Preferred Stock
would increase the amounts required to be distributed to holders of Common Stock
in order for the Fund to retain its qualification as a regulated investment
company and/or avoid imposition of income or excise taxes on the Fund. See
"Taxation."
The Fund's outstanding Preferred Stock is currently rated "aa2" and AA by
Moody's and S&P, respectively. In order to obtain these ratings, the Fund is
required to maintain portfolio holdings meeting specified guidelines of these
rating agencies. The guidelines impose asset coverage requirements that are more
stringent than those imposed by the Investment Company Act.
RATING AGENCY GUIDELINES
The Fund intends that, so long as shares of Preferred Stock are
outstanding, the composition of its portfolio will reflect guidelines
established by the rating agencies in connection with the Fund's receipt of a
rating for the Preferred Stock of at least "aa2" from Moody's and at least AA
from S&P. Moody's and S&P issue ratings for various securities reflecting the
perceived creditworthiness of those securities. The guidelines are designed to
ensure that assets underlying outstanding debt or preferred stock will be
sufficiently varied and will be of sufficient quality and amount to justify
investment grade ratings. The guidelines do not have the force of law but have
been adopted by the Fund in order to receive the above-described ratings for
shares of Preferred Stock, which ratings are generally relied upon by
institutional investors in purchasing such securities. The guidelines provide a
set of tests for portfolio composition and asset coverage that supplement (and
in some cases are more restrictive than) the applicable requirements under the
Investment Company Act.
The Fund intends to maintain a portfolio value at least equal to the
discounted value of the assets in its portfolio which satisfies minimum values
set by each of the rating agencies. Upon any failure to do this, the Fund will
seek to alter the composition of its portfolio to satisfy the rating agency. To
the extent it is not able to do so in a timely basis, the Fund may redeem shares
of Preferred Stock in accordance with their terms.
CERTAIN PROVISIONS OF THE ARTICLES OF AMENDMENT
AND RESTATEMENT AND BY-LAWS
The Fund presently has provisions in its Articles that could have the
effect of limiting (i) the ability of other entities or persons to acquire
control of the Fund, (ii) the Fund's freedom to engage in certain transactions
or (iii) the ability of the Fund's Directors or stockholders to amend the
Articles or effect changes in the Fund's management. The provisions of the
Articles may be regarded as "anti-takeover" provisions. The By-Laws provide for
a staggered election of those Directors who are elected by the holders of Common
Stock, with the Directors divided into three classes, each having a term of
three years. Accordingly, only those Directors in one class may be changed in
any one year and it would require two years to change a majority of the Board of
Directors. This system of electing Directors may have the effect of maintaining
the continuity of management and, thus, make it more difficult for the Fund's
stockholders to change the majority of Directors.
Article Ninth of the Fund's Articles stipulates that a "fair price" be paid
for the Fund's shares in the event of a proposed merger or other business
combination which is not approved by either 75% of the Continuing Directors of
the Board of Directors (as defined therein) or the holders of 75% of the
outstanding shares of the Fund voting both as a single class and separately as
to each class (the "Fair Price Provision"). The stipulated "fair price" is the
higher of:
(i) the highest per share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by an Interested Party
(as hereinafter defined) for any shares acquired by it (a) within
68
<PAGE> 71
the two-year period immediately prior to the first public announcement of
the proposal of a business combination (the "Announcement Date"), or (b) in
the transaction in which an Interested Party first becomes the beneficial
owner of voting shares of the Fund (a "Threshold Transaction"), whichever
is higher; and
(ii) in the case of Common Stock, the NAV per share of Common Stock on
the Announcement Date or on the date of the Threshold Transaction,
whichever is higher, and in the case of any Preferred Stock, the highest
preferential amount per share to which the holders of shares of a class of
Preferred Stock would be entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Fund, regardless of whether the business combination to be consummated
constitutes such an event.
Article Ninth requires the same super-majority vote to amend the Articles
to "open-end" the Fund by making the Fund's Common Stock redeemable or to adopt
any stockholder proposal as to specific investment decisions with respect to the
Fund's assets. Stockholders of an open-end investment company may require the
company to redeem their shares in kind or in cash at any time (except in certain
circumstances authorized by the Investment Company Act) at their NAV less any
redemption charge. If shares are redeemed in kind, stockholders may incur
brokerage commissions. Conversion to open-end status would require the
redemption of all outstanding shares of Preferred Stock.
An "Interested Party" includes any person, other than an investment company
advised by the Investment Manager or any of its affiliates, which proposes to
enter into a business combination with the Fund.
CUSTODIAN, DIVIDEND PAYING AGENTS, TRANSFER AGENTS,
REGISTRARS AND AUCTION AGENT
Pursuant to a Custodian Contract dated April 11, 1986, as amended from time
to time, State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, acts as the Fund's custodian for assets of the Fund held in
the United States and the Fund's dividend paying agent, transfer agent and
registrar for the Fund's Common Stock. The Chase Manhattan Bank acts as Auction
Agent for the Preferred Stock and also acts as transfer agent, registrar,
dividend disbursing agent and redemption agent for the Preferred Stock.
Rules adopted under the Investment Company Act permit the Fund to maintain
its foreign securities and cash in the custody of certain eligible foreign banks
and securities depositories. Pursuant to those rules, the Fund's portfolio of
securities and cash, when invested in foreign securities, are held by its
subcustodians designated by State Street Bank and Trust Company.
EXPERTS
The financial statements, insofar as they relate to the periods through
October 31, 1997, included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, the Fund's independent accountants,
given on the authority of said firm as experts in accounting and auditing. The
principal place of business of PricewaterhouseCoopers LLP is located at 1177
Avenue of the Americas, New York, New York, 10036. The audit services they
provide include examination of the financial statements of the Fund, services
relating to filings by the Fund with the Commission and consultation on matters
related to the preparation and filing of tax returns.
DISTRIBUTION ARRANGEMENTS
Prudential Securities Incorporated, A.G. Edwards & Sons, Inc. and Salomon
Smith Barney Inc. will act as Dealer Managers for the Offer (the "Dealer
Managers"). Under the terms and subject to the conditions contained in a Dealer
Manager Agreement, the Dealer Managers will provide financial advisory,
marketing and soliciting services. The Fund has agreed to pay the Dealer
Managers a fee for their financial advisory, marketing and soliciting services
equal to 3.75% of the aggregate Subscription Price for the Shares issued
69
<PAGE> 72
pursuant to the Offer (the "Dealer Manager Fee") and to reimburse Prudential
Securities Incorporated for out-of-pocket expenses up to $300,000. The Dealer
Managers will reallow to the broker-dealer designated on the related Exercise
Form a concession of 2.50% of the Subscription Price for each Share issued
pursuant to the Offer, provided that the designated broker-dealer has executed a
confirmation accepting the terms of the Soliciting Dealer Agreement relating to
the Offer. The Dealer Manager Fee will be borne by the Fund and indirectly by
all of the Fund's stockholders, including those who do not exercise their
Rights.
The Fund will bear the expenses of the Offer, which will be paid from the
proceeds of the Offer. These expenses include, but are not limited to: the
expense of preparation and printing of the Prospectus for the Offer, the expense
of counsel and auditors in connection with the Offer, the out-of-pocket expenses
incurred by the Officers of the Fund in connection with the Offer and others.
The Fund and the Investment Manager will indemnify the Dealer Managers against
certain liabilities, including liabilities under the Securities Act and the
Investment Company Act.
Prudential Investments Fund Management LLC, an affiliate of Prudential
Securities Incorporated, acts as the Fund's Administrator and receives
compensation from the Fund in connection with its services. See "Administration
Agreement."
In the ordinary course of their businesses, the Dealer Managers and their
respective affiliates may engage in investment banking or financial transactions
with the Fund, the Investment Manager, the Investment Adviser and their
affiliates.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Fund by
Dechert Price & Rhoads, New York, New York, who will rely as to matters of
Maryland law on the opinion of Venable, Baetjer and Howard, LLP, Baltimore,
Maryland. Matters of Australian law will be passed on for the Fund by Stikeman,
Elliott, Sydney, Australia. Roy M. Randall, a partner of Stikeman, Elliott,
serves as Secretary of the Fund. Margaret A. Bancroft and Allan S. Mostoff,
members of Dechert Price & Rhoads, each serve as Assistant Secretaries of the
Fund. Certain legal matters will be passed on for the Dealer Managers by Brown &
Wood LLP, One World Trade Center, New York, New York.
ADDITIONAL INFORMATION
The Fund has filed with the Commission, Washington, DC 20549, a
Registration Statement under the Securities Act with respect to the Shares
offered hereby. Further information concerning these securities and the Fund may
be found in the Registration Statement, of which this Prospectus constitutes a
part, on file with the Commission. The Registration Statement may be inspected
without charge at the Commission's office in Washington, DC, and copies of all
or any part thereof may be obtained from that office after payment of the fees
prescribed by the Commission.
The Fund is subject to the informational requirements of the 1934 Act and
the Investment Company Act, and in accordance therewith files reports and other
information with the Commission. These reports, proxy and information statements
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, Washington, DC
20549 and the Commission's regional offices, including offices at Seven World
Trade Center, New York, New York 10048. Copies of this material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549 at prescribed rates. Reports and other information
concerning the Fund may also be inspected at the offices of the Exchange. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference into this
Prospectus and the Statement of Additional Information, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, reports, proxy and information
statements and other information concerning the Fund can be inspected at the
offices of the AMEX, 86 Trinity Place, New York, New York 10005.
70
<PAGE> 73
The tabular and other statistical information set forth in this Prospectus
is, unless otherwise indicated, based upon or derived from public official
documents or information of the Australian or New Zealand governments, its
ministries, the Reserve Bank of Australia, the Reserve Bank of New Zealand, SBC
Australia Limited, the Australian Bureau of Statistics, the New Zealand
Institute of Economic Research, the Organization for Economic Cooperation and
Development, Bloomberg, Warburg Australia Bond Indicies, Warburg Dillon Read and
the publications Datastream and Main Economic Indicators.
71
<PAGE> 74
- ------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Portfolio of Investments
April 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--127.8%
AUSTRALIA--123.8%
Government and Semi-Government--72.7%
Commonwealth of Australia--36.7%
Australian Capital
Territory,
A$ 10,000 12.00%, 11/15/01............ $ 7,872,883
Commonwealth Bank of
Australia,
45,000 12.00%, 7/15/99............. 31,698,449
Commonwealth of Australia,
15,000 12.00%, 7/15/99............. 10,587,328
89,900 13.00%, 7/15/00............. 68,151,193
5,000 13.00%, 12/15/00............ 3,880,635
40,000 8.75%, 1/15/01.............. 28,428,700
48,000 12.00%, 11/15/01............ 38,005,718
80,000 9.00%, 9/15/04.............. 61,436,050
60,000 10.00%, 2/15/06............. 49,373,556
116,000 10.00%, 10/15/07............ 98,169,310
87,000 8.75%, 8/15/08.............. 69,136,940
80,000 7.50%, 9/15/09.............. 58,876,226
Northern Territory
Authority,
40,000 12.50%, 7/15/01............. 31,407,721
--------------
557,024,709
--------------
New South Wales--13.9%
New South Wales Treasury
Corporation,
50,000 11.50%, 7/1/99.............. 34,973,955
35,000 7.00%, 2/1/00............... 23,515,784
57,000 12.00%, 12/1/01............. 45,001,195
65,000 7.00%, 4/1/04............... 44,749,817
20,000 12.60%, 5/1/06.............. 18,428,687
60,000 8.00%, 3/1/08............... 44,309,325
--------------
210,978,763
--------------
Queensland--1.9%
Queensland Treasury
Corporation,
10,000 8.00%, 7/14/99.............. 6,751,883
10,000 8.00%, 8/14/01.............. 7,029,628
20,000 8.00%, 5/14/03.............. 14,354,952
--------------
28,136,463
--------------
South Australia--4.3%
Electricity Trust of South
Australia,
5,000 13.00%, 10/1/05............. $ 4,567,292
South Australian Financing
Authority,
30,000 12.50%, 10/15/00............ 22,784,142
50,000 10.00%, 1/15/03............. 38,319,201
--------------
65,670,635
--------------
Tasmania--5.1%
Tasmanian Public Finance
Corporation,
15,000 8.25%, 11/15/99............. 10,244,155
13,000 12.50%, 1/15/01............. 9,979,455
75,000 9.00%, 11/15/04............. 56,708,231
--------------
76,931,841
--------------
Victoria--6.1%
Treasury Corporation of
Victoria,
5,000 10.25%, 9/15/99............. 3,484,690
36,000 12.50%, 10/15/03............ 30,840,794
70,500 10.25%, 11/15/06............ 58,720,318
--------------
93,045,802
--------------
Western Australia--4.7%
Western Australia Treasury
Corporation,
70,000 10.00%, 7/15/05............. 56,299,560
20,000 8.00%, 10/15/07............. 14,775,258
--------------
71,074,818
--------------
Total Australian government
and semi-government
(cost US$1,190,182,494)..... 1,102,863,031
--------------
Eurobonds--43.6%
Banking and Finance--12.4%
Australia Industrial
Development Corporation,
5,000 8.75%, 7/20/04.............. 3,704,973
5,000 9.50%, 9/22/04.............. 3,832,475
</TABLE>
See Notes to Financial Statements.
F-1
<PAGE> 75
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ------------------------------------------------------------------------
<S> <C> <C>
Banking and Finance (cont'd.)
Bank Austria AG,
A$ 10,000 10.875%, 11/17/04........... $ 8,072,742
Banque National de Paris,
14,000 9.00%, 8/13/02.............. 10,164,635
Commerzbank Overseas
Finance,
5,000 10.50%, 1/19/00............. 3,529,824
10,000 10.25%, 4/28/00............. 7,101,392
Commonwealth Bank of
Australia,
10,000 9.00%, 8/15/05.............. 7,567,188
Credit Locale de France,
20,000 8.75%, 7/23/01.............. 14,173,096
5,000 10.25%, 4/12/05............. 3,996,110
Federal National Mortgage
Association Global,
20,000 6.50%, 7/10/02.............. 13,458,048
Finnish Eksport Credit,
2,925 9.25%, 12/30/99............. 2,024,149
GMAC Australia Finance
Limited,
6,500 9.00%, 5/22/01.............. 4,606,876
Morgan Guaranty Trust,
10,000 8.00%, 4/18/01.............. 6,927,068
National Australia Bank,
25,000 8.00%, 4/10/01.............. 17,310,605
Rural & Industries Bank of
Western Australia,
5,000 8.75%, 9/9/99............... 3,408,899
Societe Generale Australia,
5,000 7.75%, 2/19/01.............. 3,429,186
State Bank of New South
Wales,
5,000 12.25%, 2/26/01............. 3,810,699
20,000 11.75%, 8/16/01............. 15,332,968
14,000 8.625%, 8/20/01............. 9,911,810
28,000 10.75%, 3/12/02............. 21,333,299
10,000 9.25%, 2/18/03.............. 7,380,840
State Bank of South
Australia,
5,000 7.25%, 6/15/00.............. 3,377,055
10,000 11.00%, 4/10/02............. 7,690,270
10,000 9.50%, 10/15/02............. 7,417,107
--------------
189,561,314
--------------
Diversified Industrial--0.7%
Federal Airports
Corporation,
15,000 7.00%, 2/16/04.............. 10,286,306
--------------
Semi-Government and Local
Government--20.6%
New South Wales Treasury
Corporation,
44,000 11.50%, 7/1/99.............. $ 30,777,081
25,000 8.00%, 12/1/01.............. 17,656,236
50,000 12.00%, 12/1/01............. 39,369,346
10,000 7.00%, 4/1/04............... 6,901,376
7,000 10.50%, 12/7/04............. 5,643,513
10,000 10.00%, 6/6/05.............. 7,943,694
7,000 9.25%, 6/20/05.............. 5,374,763
50,000 6.50%, 5/1/06............... 32,717,986
34,000 12.60%, 5/1/06.............. 31,328,768
60,000 8.00%, 3/1/08............... 44,309,325
Province Aples Cotes D'Azur,
22,000 8.25%, 9/15/99.............. 14,912,504
Province of Quebec,
10,000 9.50%, 10/2/02.............. 7,367,022
Queensland Treasury
Corporation,
25,000 8.00%, 5/14/03.............. 17,933,752
10,000 6.50%, 6/14/05.............. 6,722,836
20,000 12.00%, 6/15/05............. 17,618,115
30,000 8.00%, 9/14/07.............. 22,208,769
South Australia Financing
Authority,
5,000 11.25%, 10/23/01............ 3,813,036
--------------
312,598,122
--------------
Supranational Global--9.9%
Eksportfinans,
4,000 7.00%, 6/28/00.............. 2,689,330
19,000 11.00%, 12/29/04............ 15,617,547
Eurofima,
88,170 9.875%, 1/17/07............. 71,833,589
European Bank of
Reconstruction &
Development,
69,000 9.00%, 10/15/02............. 50,708,005
European Investment Bank,
3,000 10.25%, 10/1/01............. 2,118,731
10,000 7.25%, 4/22/02.............. 6,885,364
--------------
149,852,566
--------------
Total Australian eurobonds
(cost US$701,643,165)....... 662,298,308
--------------
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 76
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ------------------------------------------------------------------------
<S> <C> <C>
Corporate Bonds--7.5%
Asset Backed--0.1%
FANMAC 22,
A$ 1,855 11.40%, 12/15/01............ $ 1,371,253
FANMAC 25,
438 10.33%, 6/15/02............. 320,122
--------------
1,691,375
--------------
Floating Rate Notes*--0.8%
Crusade Trust,
4,156 5.74%, 7/10/29.............. 2,718,200
Initial Corporate
Obligation,
3,000 5.2333%, 9/19/03............ 1,958,720
Puma Management Limited,
10,000 7.50%, 2/5/00............... 6,759,096
--------------
11,436,016
--------------
Services--6.6%
AMP Shopping Centre Trust,
5,000 6.20%, 3/31/01.............. 3,295,539
Bank Of Western Australia
Limited,
10,000 7.75%, 6/9/03............... 7,022,187
8,000 7.25%, 9/29/03.............. 5,514,855
Federal Airports
Corporation,
15,000 10.50%, 7/15/99............. 10,407,316
Macquarie Bank Limited,
1,000 9.75%, 8/1/00............... 707,300
Merrill Lynch & Co.
Australia
10,000 7.625%, 3/15/02............. 6,895,619
National Power PLC,
20,000 8.00%, 2/21/07.............. 14,061,019
Telstra Corporation,
30,000 12.50%, 11/15/00............ 22,815,768
10,000 11.50%, 10/15/02............ 7,935,352
2,000 7.80%, 7/17/03.............. 1,417,133
21,000 12.00%, 5/15/06............. 18,442,134
2,000 8.75%, 1/15/20.............. 1,618,964
--------------
100,133,186
--------------
Total Australian corporate
bonds
(cost US$117,989,177)....... 113,260,577
--------------
Total Australian long-term
investments
(cost US$2,009,814,836)..... 1,878,421,916
--------------
NEW ZEALAND--4.0%
Government Bonds--2.2%
New Zealand Government
Bonds,
NZ$ 7,000 10.00%, 3/15/02............. $ 4,226,529
20,000 8.00%, 4/15/04.............. 11,582,091
30,000 8.00%, 11/15/06............. 17,824,803
--------------
Total New Zealand government
bonds
(cost US$39,038,053) 33,633,423
--------------
Eurobonds--1.8%
Federal National Mortgage
Association Global,
8,000 7.00%, 9/26/00.............. 4,323,866
10,000 7.25%, 6/20/02.............. 5,471,404
European Investment Bank,
6,000 9.00%, 7/16/99.............. 3,351,068
International Bank of
Reconstruction &
Development,
26,000 7.00%, 9/18/00.............. 14,191,814
--------------
Total New Zealand Eurobonds
(cost US$30,834,696)........ 27,338,152
--------------
Total New Zealand long-term
investments
(cost US$69,872,749)........ 60,971,575
--------------
Total long-term investments
(cost US$2,079,687,585)..... 1,939,393,491
--------------
SHORT-TERM INVESTMENTS--12.1%
AUSTRALIA--10.9%
Demand Deposits--8.5%
A$ 107,419 Banque National de Paris,
4.60%..................... 70,118,658
90,000 State Street Call Deposit,
4.55%..................... 58,747,503
--------------
Total Australian demand
deposits
(cost US$131,847,781)....... 128,866,161
--------------
Eurobonds--1.1%
Banking and Finance--0.9%
Merrill Lynch & Co.
Australia,
15,000 7.10%, 3/8/99............... 9,950,867
Primary Industry Bank of
Australia,
5,000 6.75%, 2/25/99.............. 3,304,482
--------------
13,255,349
--------------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 77
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ------------------------------------------------------------------------
<S> <C> <C>
Diversified Industrials--0.2%
Australian National Railway,
A$ 4,000 9.50%, 2/25/99.............. $ 2,700,265
--------------
Total Australian eurobonds
(cost US$17,721,515)........ 15,955,614
--------------
Government and Semi-Govern-
ment--1.3%
Commonwealth of Australia,
15,000 14.00%, 4/15/99............. 10,608,379
Primary Industry Bank of
Australia,
5,000 8.00%, 5/15/98.............. 3,267,953
Telstra,
10,000 12.00%, 9/1/98.............. 6,677,698
--------------
Total Australian government
and semi-government
(cost US$23,466,473)........ 20,554,030
--------------
Total Australian short-term
investments
(cost US$173,035,769)....... 165,375,805
--------------
NEW ZEALAND--0.2%
NZ$ 4,396 State Street Bank Call
Account, 2.0%
(cost US$2,515,560)....... 2,444,613
--------------
UNITED STATES--1.0%
US$ 15,134 Repurchase Agreement,
State Street Bank & Trust Co.,
5.35%, dated 4/30/98, due 5/1/98
in the amount of $15,136,249
(cost US$15,134,000; collatera-
lized by US$10,235,000 United
States Treasury Note, due
8/15/15; value including
accrued interest-US$15,437,266)... $ 15,134,000
--------------
Total short-term investments
(cost US$190,685,329)............... 182,954,418
--------------
Total Investments--139.9%
(cost US$2,270,372,914) .......... 2,122,347,909
Liabilities in excess of
other assets--(0.3%).............. (4,626,902)
Liquidation value of
preferred
stock--(39.6%) ................... (600,000,000)
--------------
Net Assets Applicable to
Common
Shareholders--100% ............... $1,517,721,007
==============
</TABLE>
- ---------------
* The interest rate reflected for floating rate notes is the rate in effect at
April 30, 1998.
See Notes to Financial Statements.
F-4
<PAGE> 78
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Statement of Assets and Liabilities
April 30, 1998
(Unaudited)
- ------------------------------------------------------------------------
<S> <C>
Assets
Investments, at value (cost
$2,270,372,914)..................... $2,122,347,909
Interest receivable................... 48,687,343
Other assets.......................... 80,654
--------------
Total assets...................... 2,171,115,906
--------------
Liabilities
Bank overdraft........................ 258,104
Payable for investments purchased..... 34,467,472
Dividends payable-common stock........ 11,684,660
Withholding taxes payable............. 3,089,705
Accrued expenses and other
liabilities......................... 1,645,130
Dividends payable-preferred stock..... 1,185,284
Investment management fee payable..... 893,681
Administration fee payable............ 170,863
--------------
Total liabilities................. 53,394,899
--------------
Total Net Assets...................... $2,117,721,007
==============
Total net assets were composed of:
Common stock:
Par value ($.01 per share,
applicable to
194,744,328 shares)............. $ 1,947,443
Paid-in capital in excess of
par............................... 1,672,384,757
Preferred stock ($.01 par value per
share and $25,000 liquidation value
per share applicable to 24,000
shares; Note 4)................... 600,000,000
--------------
2,274,332,200
Distributions in excess of net
investment income................. (11,749,838)
Accumulated net realized gains on
investments....................... 15,750,371
Net unrealized appreciation on
investments......................... 118,467,560
Accumulated net realized and
unrealized foreign exchange
losses............................ (279,079,286)
--------------
Total net assets.................... $2,117,721,007
==============
Net assets applicable to common
shareholders...................... $1,517,721,007
==============
Net asset value per common share:
($1,517,721,007 / 194,744,328 shares
of common stock issued and
outstanding)........................ $7.79
=====
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Operations
Six Months Ended April 30, 1998
(Unaudited)
- ------------------------------------------------------------------------
<S> <C>
Net Investment Income
Income
Interest and discount earned (net of
foreign
withholding taxes of $5,314,359)... $ 93,036,191
-------------
Expenses
Investment management fee............ 5,849,801
Custodian's fees and expenses........ 1,375,000
Administration fee................... 1,258,014
Auction agent's fees and broker
commissions.......................... 835,000
Consulting fee....................... 500,000
Shareholder relations and
communications....................... 460,000
Transfer agent's fees and expenses... 340,000
Directors' fees and expenses......... 275,000
Independent accountant's fees and
expenses............................. 106,000
Legal fees and expenses.............. 100,000
Insurance expense.................... 73,000
Miscellaneous........................ 37,562
-------------
Total operating expenses............. 11,209,377
-------------
Net investment income before excise
tax.................................. 81,826,814
Excise tax........................... (190,668)
-------------
Net investment income.................. 81,636,146
-------------
Realized and Unrealized
Gains (Losses) on Investments
and Foreign Currencies
Net realized gains on investment
transactions......................... 7,973,012
Net change in unrealized depreciation
on investments....................... (41,381,712)
-------------
Net loss on investments................ (33,408,700)
-------------
Net increase in total net assets from
operations before net foreign
exchange losses...................... 48,227,446
Net realized and unrealized foreign
exchange losses...................... (166,842,135)
-------------
Net Decrease In Total Net Assets
Resulting From Operations.............. $(118,614,689)
=============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 79
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Statement of Cash Flows
Six Months Ended April 30, 1998
(Unaudited)
- ------------------------------------------------------------------------
<S> <C>
Increase (Decrease) in Cash
(Including Foreign Currency)
Cash flows used for operating
activities
Interest received (net of foreign
withholding taxes)................. $ 98,100,377
Expenses paid........................ (10,710,550)
Proceeds from sales of short-term
portfolio investments, net......... 19,086,461
Purchases of long-term portfolio
investments.......................... (429,157,679)
Proceeds from sales of long-term
portfolio
investments........................ 452,658,902
Other................................ 78,927
-------------
Net cash provided from operating
activities......................... 130,056,438
-------------
Cash flows provided from financing
activities
Dividends and distributions paid to
preferred shareholders............. (16,562,683)
Dividends and distributions paid to
common
shareholders....................... (65,052,704)
Distributions to common shareholders
in excess of net investment
income............................. (5,053,620)
-------------
Net cash used for financing
activities......................... (86,669,007)
-------------
Effect of changes in exchange rate..... (44,285,878)
-------------
Net decrease in cash................... (898,447)
Cash at beginning of period.......... 640,343
-------------
Cash at end of period................ $ (258,104)
=============
Reconciliation of Net Decrease in Total
Net Assets from Operations to Net Cash
(Including Foreign Currency) Provided
From Operating Activities
Net decrease in total net assets
resulting from
operations........................... $(118,614,689)
-------------
Decrease in investments.............. 35,543,293
Net realized gain on investment
transactions......................... (7,973,012)
Net change in unrealized depreciation
on investments..................... 41,381,712
Net realized and unrealized foreign
exchange losses.................... 166,842,135
Decrease in interest receivable...... 5,016,007
Net decrease in other assets......... 78,927
Increase in payable for investments
purchased.......................... 7,044,391
Increase in accrued expenses and
other liabilities.................. 737,674
-------------
Total adjustments.................. 248,671,127
-------------
Net cash provided from operating
activities............................. $ 130,056,438
=============
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Statement of Changes
in Net Assets
(Unaudited)
- ------------------------------------------------------------------------------
Six Months
Ended Year Ended
Increase (Decrease) April 30, October 31,
in Total Net Assets 1998 1997
-------------- --------------
<S> <C> <C>
Operations
Net investment income... $ 81,636,146 $ 169,586,462
Net realized gains on
investment
transactions.......... 7,973,012 9,798,919
Net change in unrealized
appreciation
(depreciation) on
investments........... (41,381,712) 76,842,257
-------------- --------------
Net increase in total
net assets resulting
from operations before
net foreign exchange
losses................ 48,227,446 256,227,638
Net realized and
unrealized foreign
exchange losses....... (166,842,135) (274,306,145)
-------------- --------------
Net decrease in total net
assets resulting from
operations.............. (118,614,689) (18,078,507)
-------------- --------------
Dividends to shareholders
from net investment
income
Common shares........... (65,052,704) (159,569,671)
Preferred shares........ (16,583,442) (32,946,291)
-------------- --------------
(81,636,146) (192,515,962)
Distributions to common
shareholders in excess
of net investment
income................ (5,053,620) --
-------------- --------------
Net asset value of shares
issued to shareholders
in reinvestment of divi-
dends and distributions
and in connection with
dividends paid in
stock................. -- 1,725,751
-------------- --------------
Total decrease............ (205,304,455) (208,868,718)
Total Net Assets
Beginning of period....... 2,323,025,462 2,531,894,180
-------------- --------------
End of period............. $2,117,721,007 $2,323,025,462
============== ==============
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 80
- -------------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Notes to Financial Statements
(Unaudited)
- -------------------------------------------------------------------------------
The First Australia Prime Income Fund, Inc. (the 'Fund') was incorporated in
Maryland on March 14, 1986 as a closed-end, nondiversified management investment
company. The Fund's investment objective is current income through investment
primarily in Australian debt securities. The Fund may also achieve incidental
capital appreciation. It is expected that normally at least 65% of the Fund's
total assets will be invested in Australian dollar denominated debt securities
of Australian banks and federal and state governmental and corporate entities.
To achieve its investment objective, the Fund may invest the remainder of its
assets in debt securities of comparable quality which are denominated in
Australian or New Zealand dollars of other issuers, whether or not domiciled in
Australia or New Zealand, and in U.S. Government securities and corporate and
bank debt securities of U.S. issuers rated Aa or Prime-2 or better by Moody's
Investors Service, Inc. ('Moody's') or AA or A-2 or better by Standard & Poor's
Corporation ('S&P'). It is the Fund's policy to limit its investments, as to 65%
of its total assets, to issuers of debt securities rated AA or better by
S&P-Australian Ratings Pty. Ltd. or S&P or Aa or better by Moody's or which, in
the judgement of the Investment Manager, are of equivalent quality. The
remainder of the Fund's investments will be rated A by those rating agencies or,
if unrated, will in the Investment Manager's judgement be of equivalent quality.
The ability of issuers of debt securities, including foreign currency balances
on deposit with the Fund's Australian and New Zealand subcustodian banks, held
by the Fund to meet their obligations may be affected by economic or political
developments in a specific industry or region. At the annual meeting of
shareholders on May 14, 1998, shareholders voted and approved a series of
related proposals to amend the Fund's investment policies and restrictions to
allow the Fund to invest a portion of its assets in Asian debt securities (see
Note 6).
Note 1. Accounting Policies
The following is a summary of 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 based on prices provided by a
pricing service or the lower of the quotations from two leading Australian or
New Zealand brokers in the debt securities market, in the event that a price
cannot be obtained by the pricing service. Securities for which market
quotations are not readily available are valued at fair value using methods
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$') and New Zealand dollar
('NZ$') amounts are translated into United States dollars on the following
basis:
(i) market value of investment securities, other assets and liabilities at
the exchange rates at the end of the reporting periods;
(ii) purchases and sales of investment securities, income and expenses at
the rates 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 the securities held at April 30, 1998.
Similarly, the Fund isolates the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of portfolio
securities sold during the reporting periods.
Net realized and unrealized foreign exchange losses of $166,842,135 include
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of interest, discount and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid and changes in unrealized foreign exchange gains and
losses in the value of portfolio securities and other assets and liabilities
F-7
<PAGE> 81
arising as a result of changes in the exchange rate. Accumulated net realized
and unrealized foreign exchange losses shown in the composition of net assets at
April 30, 1998 represent foreign exchange losses for book purposes that have not
yet been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rate at April 30, 1998 was US$.6528 to A$1.00 for the Australian
dollar and US$.5561 to NZ$1.00 for the New Zealand dollar.
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.
Interest income is recorded on an accrual basis. Discounts on short-term
securities are accreted over the life of the security. 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
from net investment income supplemented by net realized foreign exchange gains
and net realized short-term capital gains if necessary, on a monthly basis. 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 to common shareholders are recorded on the
ex-dividend date. Dividends and distributions to preferred shareholders are
accrued on a weekly basis and are determined as described in Note 4.
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, loss deferrals and recognition of
market discount.
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 or transactions in New Zealand 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. Provision has been made for United States
excise taxes incurred during the prior fiscal year. Australia and New Zealand
impose a withholding tax of 10% on most interest and discount earned.
Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and net realized gains from investment and currency
transactions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statement of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash includes domestic and foreign
currency.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
During the six months ended April 30, 1998, the Fund decreased undistributed net
investment income by $7,492,857, decreased accumulated net realized gains on
investments by $1,431,774, increased accumulated net realized foreign exchange
gains by $9,115,299 and decreased paid in capital in excess of par by $190,668.
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 management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 0.65% of the Fund's
average weekly total net assets of common and preferred shareholders up to $200
million, 0.60% of such assets between $200 million and $500 million, 0.55% of
such assets between $500 million and $900 million, 0.50% of such assets between
$900 million and $1,750 million and 0.45% of such assets in excess of $1,750
million.
The Investment Manager pays fees to the Investment Adviser for services
rendered. The Investment Manager informed the Fund that it paid $2,394,335 to
the Investment Adviser during the six months ended April 30, 1998.
The administration agreement provides the Administrator with a fee at the
annual rate of 0.15% of the Fund's average weekly total net assets of common and
preferred shareholders up to $900 million, 0.10% of such assets between $900
F-8
<PAGE> 82
million and $1,750 million and 0.07% of such assets in excess of $1,750 million.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the six months ended April 30, 1998 aggregated $436,202,070
and $422,004,646, respectively.
The United States federal income tax basis of the Fund's investments at April
30, 1998 was $2,005,044,315 and accordingly, net unrealized appreciation for
United States federal income tax purposes was $117,303,594 (gross unrealized
appreciation--$127,718,420; gross unrealized depreciation--$10,414,826).
Note 4. Capital
There are 400 million shares of common stock authorized. Of the 194,744,328
common shares outstanding at April 30, 1998, the Investment Manager owned 58,052
shares.
During the fiscal year ended October 31, 1997 the Fund issued 184,572 shares
in connection with the reinvestment of dividends and distributions paid to
shareholders enrolled in the dividend reinvestment plan.
The Preferred Stock have rights as determined by the Board of Directors. The
24,000 shares of Auction Market Preferred Stock ('Preferred Stock') outstanding
consist of nine series as follows: Series A--3,000 shares, Series B--3,000
shares, Series C--2,000 shares, Series D--4,000 shares, Series E--2,000 shares,
Series F--2,000 shares, Series G--3,000 shares, Series H--2,500 shares and
Series I--2,500 shares.
Dividends on each series of Preferred Stock are cumulative at a rate
established at the initial public offering and are typically reset every 28 days
for Series A through D and every seven days for Series E through I based on the
results of an auction. Dividend rates ranged from 5.06% to 6.00% during the six
months ended April 30, 1998. Under the Investment Company Act of 1940, the Fund
may not declare dividends or make other distributions on shares of common stock
or purchase any such shares if, at the time of the declaration, distribution or
purchase, asset coverage with respect to the outstanding Preferred Stock would
be less than 200%.
The Preferred Stock is redeemable at the option of the Fund, in whole or in
part, on any dividend payment date at liquidation value plus any accumulated but
unpaid dividends. The Preferred Stock is also subject to mandatory redemption at
liquidation value plus any accumulated but unpaid dividends if certain
requirements relating to the composition of the assets and liabilities of the
Fund as set forth in the Articles of Incorporation are not satisfied.
The holders of Preferred Stock have voting rights equal to the holders of
common stock (one vote per share) and will vote together with holders of shares
of common stock as a single class. However, holders of Preferred Stock are also
entitled to elect two of the Fund's directors.
Note 5. Dividends And Distributions
On May 18, 1998 and June 12, 1998 the Board of Directors of the Fund declared
distributions from income of $.06 per common share payable on June 12, 1998 and
July 10, 1998 to shareholders of record on May 29, 1998 and June 30, 1998.
Subsequent to April 30, 1998, dividends and distributions declared and paid
on Preferred Stock totalled approximately $3,943,860 for the nine outstanding
preferred share series in the aggregate through June 12, 1998.
Note 6. Amendments to Investment Policies
At the annual meeting of shareholders held on May 14, 1998, shareholders
approved amendments that allow the Fund to invest up to 35% of its total assets
in (1) debt securities of Asian country issuers, including securities issued by
Asian country governmental entities, as well as by banks, companies and other
entities which are located in Asian countries, whether or not denominated in an
Asian country currency, (2) in debt securities of other issuers, denominated in,
or linked to, the currency of an Asian country, including securities issued by
supranational issuers, such as The World Bank and derivative debt securities
that replicate or substitute for, the currency of an Asian country, (3) in debt
securities which are denominated in New Zealand dollars of issuers, whether or
not domiciled in New Zealand, and (4) in U.S. debt securities. The maximum
country exposure to any one Asian country currency is limited to 15% of the
Fund's total assets and the maximum currency exposure to any one Asian country
currency is limited to 10% of the Fund's total assets. Shareholders approved
amendments that would allow the Fund to invest up to 35% of its assets in Asian
debt securities for which there is no established relevant market. Shareholders
also approved amendments to allow the Fund to invest up to 15% of its total
assets in Asian debt securities rated below investment grade. In addition,
shareholders approved amendments to the Fund's investment restrictions to allow
the Fund to use derivatives and be able to purchase mortgage backed securities.
F-9
<PAGE> 83
- --------------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Financial Highlights
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Years ended October 31,
April 30, -------------------------
1998* 1997* 1996*
---------- ---------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value per common share, beginning of period................... $ 8.85 $ 9.93 $ 9.36
---------- ---------- ----------
Net investment income................................................... .42 .87 .87
Net realized and unrealized gain (loss) on investments
and foreign currencies................................................ (1.03) (.96) 1.13
---------- ---------- ----------
Total from investment operations...................................... (.61) (.09) 2.00
---------- ---------- ----------
Dividends from net investment income to preferred shareholders.......... (.09) (.17) (.14)
Dividends from net investment income to common shareholders............. (.33) (.82) (.83)
Dividends in excess of net investment income to common shareholders..... (.03) -- --
Distributions from net capital and currency gains to preferred
shareholders.......................................................... -- -- (.02)
Distributions from net capital and currency gains to common
shareholders.......................................................... -- -- (.03)
---------- ---------- ----------
Total dividends and distributions..................................... (.45) (.99) (1.02)
---------- ---------- ----------
Capital charge in respect to issuance of shares......................... -- -- (.41)
---------- ---------- ----------
Net asset value per common share, end of period......................... $ 7.79 $ 8.85 $ 9.93
========== ========== ==========
Market price per common share, end of period............................ $ 7.125 $ 8.125 $ 8.94
========== ========== ==========
TOTAL INVESTMENT RETURN BASED OND:
Market value............................................................ (8.12)% (0.42)% 5.59%
Net asset value......................................................... (7.77)% (2.37)% 16.73%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS/SUPPLEMENTAL DATAPound:
ExpensesDD.............................................................. 1.44%** 1.25% 1.29%
Net investment income before preferred stock dividends.................. 10.35%** 9.17% 9.16%
Preferred stock dividends............................................... 2.10%** 1.78% 1.45%
Net investment income available to common shareholders.................. 8.25%** 7.39% 7.71%
Portfolio turnover rate................................................. 21% 85% 63%
Net assets of common shareholders, end of period (000 omitted).......... $1,517,721 $1,723,025 $1,931,894
Average net assets of common shareholders (000 omitted)................. $1,590,108 $1,848,378 $1,627,916
Senior securities (preferred stock) outstanding (000 omitted)........... $ 600,000 $ 600,000 $ 600,000
Asset coverage of preferred stock at period end......................... 353% 387% 422%
</TABLE>
<TABLE>
<CAPTION>
Years ended October 31,
----------------------------------------
1995* 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value per common share, beginning of period................... $ 8.82 $ 10.09 $ 9.61
---------- ---------- ----------
Net investment income................................................... .93 1.01 1.19
Net realized and unrealized gain (loss) on investments
and foreign currencies................................................ 1.16 (1.03) .58
---------- ---------- ----------
Total from investment operations...................................... 2.09 (.02) 1.77
---------- ---------- ----------
Dividends from net investment income to preferred shareholders.......... (.17) (.12) (.11)
Dividends from net investment income to common shareholders............. (.83) (.84) (1.08)
Dividends in excess of net investment income to common shareholders..... -- -- --
Distributions from net capital and currency gains to preferred
shareholders.......................................................... (.01) (.01) (.01)
Distributions from net capital and currency gains to common
shareholders.......................................................... (.15) (.17) (.08)
---------- ---------- ----------
Total dividends and distributions..................................... (1.16) (1.14) (1.28)
---------- ---------- ----------
Capital charge in respect to issuance of shares......................... (.39) (.11) (.01)
---------- ---------- ----------
Net asset value per common share, end of period......................... $ 9.36 $ 8.82 $ 10.09
========== ========== ==========
Market price per common share, end of period............................ $ 9.31 $ 9.56 $ 10.25
========== ========== ==========
TOTAL INVESTMENT RETURN BASED OND:
Market value............................................................ 8.78% 3.32% 15.00%
Net asset value......................................................... 18.54% (3.19)% 17.80%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS/SUPPLEMENTAL DATAPound:
ExpensesDD.............................................................. 1.47% 1.41% 1.44%
Net investment income before preferred stock dividends.................. 10.83% 10.68% 12.13%
Preferred stock dividends............................................... 1.87% 1.20% 1.13%
Net investment income available to common shareholders.................. 8.96% 9.48% 11.00%
Portfolio turnover rate................................................. 50% 34% 23%
Net assets of common shareholders, end of period (000 omitted).......... $1,452,205 $1,088,631 $1,050,084
Average net assets of common shareholders (000 omitted)................. $1,201,383 $1,174,394 $1,011,324
Senior securities (preferred stock) outstanding (000 omitted)........... $ 475,000 $ 400,000 $ 350,000
Asset coverage of preferred stock at period end......................... 406% 372% 400%
</TABLE>
- ---------------
* Calculated based upon weighted average shares outstanding during the
period.
** Annualized.
D Total investment return is calculated assuming a purchase of common
stock on the first day and a sale on the last day of each period
reported. Dividends and distributions are assumed, for purposes of this
calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total investment return does not reflect
brokerage commissions.
DD Includes expenses of both preferred and common stock.
Pound Ratios calculated on the basis of income, expenses and preferred
share dividends applicable to both the common and preferred shares
relative to the average net assets of common shareholders. Expense
ratios relative to the average net assets of common and preferred
shareholders are 1.05% .95%, .94%, 1.05%, 1.05% and 1.07%,
respectively.
NOTE: Contained above is operating performance for a share of common stock
outstanding, total investment return, ratios to average net assets of
common shareholders and other supplemental data for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements and market value data
for the Fund's common shares.
See Notes to Financial Statements.
F-10
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The First Australia Prime Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of The First Australia Prime
Income Fund, Inc. (the 'Fund') at October 31, 1997, the results of its
operations and its cash flows 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
F-11
<PAGE> 85
<TABLE>
<CAPTION>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Portfolio of Investments
October 31, 1997
- --------------------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- -------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--124.2%
AUSTRALIA--120.2%
Government and Semi-Government--67.5%
Commonwealth of Australia--36.9%
Australian Capital
Territory,
A$ 10,000 12.00%, 11/15/01............ $ 8,608,936
Commonwealth Bank of
Australia,
45,000 12.00%, 7/15/99............. 35,134,132
Commonwealth of Australia,
15,000 14.00%, 4/15/99............. 11,865,015
15,000 12.00%, 7/15/99............. 11,731,898
10,000 7.00%, 4/15/00.............. 7,326,811
89,900 13.00%, 7/15/00............. 75,390,323
5,000 13.00%, 12/15/00............ 4,283,684
40,000 8.75%, 1/15/01.............. 30,937,953
48,000 12.00%, 11/15/01............ 41,634,870
25,000 9.75%, 3/15/02.............. 20,423,571
20,000 10.00%, 10/15/02............ 16,701,003
100,000 9.00%, 9/15/04.............. 82,897,222
75,000 10.00%, 2/15/06............. 66,633,338
96,000 10.00%, 10/15/07............ 87,737,243
62,000 8.75%, 8/15/08.............. 53,033,424
60,000 7.50%, 9/15/09.............. 47,439,404
Northern Territory
Authority,
40,000 12.50%, 7/15/01............. 34,446,706
--------------
636,225,533
--------------
New South Wales--10.3%
New South Wales Treasury
Corporation,
50,000 11.50%, 7/1/99.............. 38,697,245
30,000 7.00%, 2/1/00............... 21,887,683
57,000 12.00%, 12/1/01............. 49,213,757
65,000 7.00%, 4/1/04............... 48,361,740
20,000 12.60%, 5/1/06.............. 20,036,861
--------------
178,197,286
--------------
Queensland--1.8%
Queensland Treasury
Corporation,
10,000 8.00%, 7/14/99.............. $ 7,362,857
10,000 8.00%, 8/14/01.............. 7,603,163
20,000 8.00%, 5/14/03.............. 15,449,162
--------------
30,415,182
--------------
South Australia--4.2%
Electricity Trust of South
Australia,
5,000 13.00%, 10/1/05............. 4,961,867
South Australian Financing
Authority,
30,000 12.50%, 10/15/00............ 25,115,164
50,000 10.00%, 1/15/03............. 41,689,971
--------------
71,767,002
--------------
Tasmania--4.9%
Tasmanian Public Finance
Corporation,
15,000 8.25%, 11/15/99............. 11,165,703
13,000 12.50%, 1/15/01............. 11,001,255
75,000 9.00%, 11/15/04............. 61,572,415
--------------
83,739,373
--------------
Victoria--5.9%
Treasury Corporation of
Victoria,
5,000 10.25%, 9/15/99............. 3,833,341
36,000 12.50%, 10/15/03............ 33,648,186
70,500 10.25%, 11/15/06............ 63,565,143
--------------
101,046,670
--------------
Western Australia--3.5%
Western Australia Treasury
Corporation,
70,000 10.00%, 7/15/05............. 60,940,574
--------------
Total Australian government
and semi-government
(cost US$1,159,357,779)..... 1,162,331,620
--------------
Eurobonds--42.5%
Banking and Finance--14.2%
Australia Industrial
Development Corporation,
5,000 8.75%, 7/20/04.............. 4,001,022
5,000 9.50%, 9/22/04.............. 4,157,119
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE> 86
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- -------------------------------------------------------------------
<S> <C> <C>
Banking and Finance (cont'd.)
Bank Austria AG,
A$ 10,000 10.875%, 11/17/04........... $ 8,794,351
Banque National de Paris,
14,000 9.00%, 8/13/02.............. 11,017,638
Commerzbank Overseas
Finance,
5,000 10.50%, 1/19/00............. 3,875,602
10,000 10.25%, 4/28/00............. 7,779,423
Commonwealth Bank of
Australia,
10,000 9.00%, 8/15/05.............. 8,215,248
Credit Locale de France,
20,000 8.75%, 7/23/01.............. 15,408,942
5,000 10.25%, 4/12/05............. 4,339,457
Eksport Finance & Insurance,
4,000 7.00%, 6/28/00.............. 2,899,133
19,000 11.00%, 12/29/04............ 16,995,966
Federal National Mortgage
Association Global,
20,000 6.50%, 7/10/02.............. 14,538,668
Finnish Eksport Credit,
2,925 9.25%, 12/30/99............. 2,209,962
GG Securities,
5,000 9.25%, 3/24/03.............. 4,007,026
GMAC Australia Finance Ltd.
6,500 9.00%, 5/22/01.............. 5,007,185
Merrill Lynch & Co.
Australia
15,000 7.10%, 3/8/99............... 10,810,124
Morgan Guaranty Trust,
10,000 8.00%, 4/18/01.............. 7,506,626
National Australia Bank,
25,000 8.00%, 4/10/01.............. 18,763,667
Primary Industry Bank of
Australia,
5,000 6.75%, 2/25/99.............. 3,586,089
Rural & Industries Bank of
Western Australia,
5,000 8.75%, 9/9/99............... 3,717,885
Societe Generale Australia,
5,000 7.75%, 2/19/01.............. 3,719,052
South Australia Financing
Authority,
5,000 11.25%, 10/23/01............ 4,163,885
State Bank of New South
Wales,
5,000 12.25%, 2/26/01............. 4,189,595
20,000 11.75%, 8/16/01............. 16,809,183
14,000 8.625%, 8/20/01............. 10,754,250
28,000 10.75%, 3/12/02............. 23,245,022
10,000 9.25%, 2/18/03.............. 8,022,743
State Bank of South
Australia,
10,000 11.00%, 4/10/02............. $ 8,380,259
10,000 9.50%, 10/15/02............. 8,053,477
--------------
244,968,599
--------------
Diversified Industrials--0.6%
Australian National Railway,
4,000 9.50%, 2/25/99.............. 2,962,375
Federal Airports
Corporation,
10,000 7.00%, 2/16/04.............. 7,380,627
--------------
10,343,002
--------------
Semi-Government and Local
Government--19.6%
New South Wales Treasury
Corporation,
44,000 11.50%, 7/1/99.............. 34,053,576
50,000 12.00%, 12/1/01............. 43,230,285
10,000 7.00%, 4/1/04............... 7,400,132
7,000 10.50%, 12/7/04............. 6,123,175
10,000 10.00%, 6/6/05.............. 8,625,989
7,000 9.25%, 6/20/05.............. 5,820,625
50,000 6.50%, 5/1/06............... 34,929,215
34,000 12.60%, 5/1/06.............. 33,906,494
65,000 8.00%, 3/1/08............... 51,609,630
Province Aples Cotes D'Azur,
22,000 8.25%, 9/15/99.............. 16,238,770
Province of Quebec,
16,000 9.50%, 10/2/02.............. 12,773,612
Queensland Treasury
Corporation,
25,000 8.00%, 5/14/03.............. 19,358,495
10,000 6.50%, 6/14/05.............. 7,206,412
20,000 12.00%, 6/15/05............. 19,133,296
30,000 8.00%, 9/14/07.............. 23,961,273
State Electricity Commission
of Victoria,
7,000 9.25%, 9/18/03.............. 5,711,153
Treasury Corporation of
Victoria,
10,000 8.25%, 10/15/03............. 7,847,123
--------------
337,929,255
--------------
Supranational Global--8.1%
Eurofima,
88,170 9.875%, 1/17/07............. 77,712,147
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE> 87
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- -------------------------------------------------------------------
<S> <C> <C>
Supranational Global (cont'd.)
European Bank of
Reconstruction &
Development,
A$ 65,000 9.00%, 10/15/02............. $ 52,154,500
European Investment Bank,
3,000 10.25%, 10/1/01............. 2,302,423
10,000 7.25%, 4/22/02.............. 7,420,165
--------------
139,589,235
--------------
Total Australian eurobonds
(cost US$716,693,006)....... 732,830,091
--------------
Corporate Bonds--10.2%
Asset Backed--0.1%
FANMAC 22,
2,060 11.40%, 12/15/01............ 1,652,491
FANMAC 25,
480 10.33%, 6/15/02............. 379,940
--------------
2,032,431
--------------
Floating Rate Notes*--3.1%
Arms Fund II,
10,000 5.10%, 5/10/24.............. 7,035,211
Crusade Trust,
4,755 5.17%, 7/10/29.............. 3,349,854
GIO Australia Holdings
Limited,
4,500 5.34%, 11/16/98............. 3,171,284
Korean Long Term Credit
Bank,
15,000 5.0983%, 12/17/99........... 10,328,004
Puma Management Limited,
15,000 7.50%, 12/5/28.............. 10,990,954
20,000 6.90%, 2/15/30.............. 14,489,483
Residential Mortgage Backed
Trust,
4,916 5.1033%, 10/7/22............ 3,477,058
--------------
52,841,848
--------------
Services--7.0%
AMP Shopping Centre Trust,
5,000 6.20%, 3/31/01.............. 3,550,735
Federal Airports
Corporation,
15,000 10.50%, 7/15/99............. 11,580,758
Korea Development Bank,
8,000 7.50%, 8/9/99............... 5,796,040
Macquarie Bank Limited,
1,000 9.75%, 8/1/00............... 768,158
National Power PLC
20,000 8.00%, 2/21/07.............. 15,255,512
Telstra Corporation,
40,000 12.50%, 11/15/00............ $ 33,512,181
20,000 11.50%, 10/15/02............ 17,320,740
2,000 7.80%, 7/17/03.............. 1,524,933
31,000 12.00%, 5/15/06............. 29,793,618
2,000 8.75%, 1/15/20.............. 1,750,174
--------------
120,852,849
--------------
Total Australian corporate
bonds
(cost US$172,764,726)....... 175,727,128
--------------
Total Australian long-term
investments
(cost US$2,048,815,511)..... 2,070,888,839
--------------
NEW ZEALAND--4.0%
Government Bonds--2.8%
New Zealand Government
Bonds,
NZ$ 20,000 10.00%, 3/15/02............. 13,979,319
20,000 8.00%, 4/15/04.............. 13,344,839
30,000 8.00%, 11/15/06............. 20,543,125
--------------
Total New Zealand government bonds
(cost US$48,247,564)........ 47,867,283
--------------
Eurobonds--1.2%
European Investment Bank,
6,000 9.00%, 7/16/99.............. 3,825,238
Federal National Mortgage
Association Global,
8,000 7.00%, 9/26/00.............. 4,980,015
International Bank of
Reconstruction &
Development,
20,000 7.00%, 9/18/00.............. 12,402,672
--------------
Total New Zealand eurobonds
(cost US$21,568,545) 21,207,925
--------------
Total New Zealand long-term
investments
(cost US$69,816,109)........ 69,075,208
--------------
Total long-term investments
(cost US$2,118,631,620)..... 2,139,964,047
--------------
SHORT-TERM INVESTMENTS--10.1%
AUSTRALIA--8.0%
Demand Deposit--5.6%
Banque National de Paris,
4.60%,
A$ 136,533 (cost US$96,763,661)........ 95,935,148
--------------
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 88
<TABLE>
<CAPTION>
- ------------------------------------------- --------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ------------------------------------------- --------------
<S> <C> <C>
Government and Semi-Government--1.3%
Commonwealth of Australia--0.7%
Commonwealth of Australia,
A$ 5,000 13.00%, 4/15/98............. $ 3,639,898
Telstra Corporation,
10,000 12.00%, 9/1/98.............. 7,437,408
--------------
11,077,306
--------------
South Australia--0.6%
South Australian Financing
Authority,
15,000 12.50%, 3/15/98............. 10,825,290
--------------
Total Australian government
and semi-government
(cost US$24,382,968)........ 21,902,596
--------------
Eurobonds--0.9%
Banking and Finance--0.4%
Commonwealth Bank of
Australia,
11,000 12.75%, 1/7/98.............. 7,828,607
--------------
Diversified Industrials--0.1%
Shell Australia,
1,786 10.00%, 12/19/97............ 1,263,861
--------------
Semi-Government and Local
Government--0.4%
New South Wales Treasury
Corporation,
10,000 7.50%, 2/1/98............... 7,075,404
--------------
Total Australian eurobonds
(cost US$17,902,498) 16,167,872
--------------
Corporate Bond--0.2%
Primary Industry Bank of
Australia,
5,000 8.00%, 5/15/98
(cost US$3,526,196)....... 3,573,150
--------------
Total Australian short-term
investments
(cost US$142,575,323)....... 137,578,766
--------------
NEW ZEALAND--0.1%
NZ$ 2,027 State Street Bank Call
Account,
6.35%,
(cost US$1,286,252)....... 1,263,346
--------------
UNITED STATES--2.0%
$ 35,450 Repurchase Agreement,
State Street Bank & Trust
Co., 5.40%, dated
10/31/97, due 11/03/97 in
the amount of $35,465,953
(cost US$35,450,000;
collateralized by
US$28,220,000 United
States Treasury Bond, due
2/15/20; value including
accrued
interest-US$36,164,918)... $ 35,450,000
--------------
Total short-term investments
(cost US$179,311,575)....... 174,292,112
--------------
Total Investments--134.3%
(cost US$2,297,943,195;
Note 3)................... 2,314,256,159
Other assets in excess of
liabilities--0.5%......... 8,769,303
Liquidation value of
preferred
stock--(34.8%)............ (600,000,000)
--------------
Net Assets Applicable to
Common
Shareholders--100%........ $1,723,025,462
==============
</TABLE>
- ---------------
* The interest rate reflected for floating rate notes is the rate in effect at
October 31, 1997.
See Notes to Financial Statements.
F-15
<PAGE> 89
<TABLE>
<CAPTION>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Statement of Assets and Liabilities
October 31, 1997
- ----------------------------------------------------------
<S> <C>
Assets
Investments, at value (cost
$2,297,943,195)..................... $2,314,256,159
Cash.................................. 640,343
Interest receivable................... 53,703,350
Other assets.......................... 159,581
--------------
Total assets...................... 2,368,759,433
--------------
Liabilities
Payable for investments purchased..... 27,423,081
Dividends payable-common stock........ 11,684,660
Withholding taxes payable............. 3,041,526
Investment management fee payable..... 1,206,591
Dividends payable-preferred stock..... 1,164,525
Accrued expenses and other
liabilities......................... 980,311
Administration fee payable............ 233,277
--------------
Total liabilities................. 45,733,971
--------------
Total Net Assets...................... $2,323,025,462
==============
Total net assets were composed of:
Common stock:
Par value ($.01 per share,
applicable to
194,744,328 shares)............. $ 1,947,443
Paid-in capital in excess of
par............................... 1,672,575,425
Preferred stock ($.01 par value per
share and
$25,000 liquidation value per
share
applicable to 24,000 shares; Note
4)................................ 600,000,000
--------------
2,274,522,868
Undistributed net investment
income............................ 796,639
Accumulated net realized gains on
investments....................... 9,209,133
Net unrealized appreciation on
investments......................... 159,849,272
Accumulated net realized and
unrealized foreign exchange
losses............................ (121,352,450)
--------------
Total net assets.................... $2,323,025,462
==============
Net assets applicable to common
shareholders...................... $1,723,025,462
--------------
Net asset value per common share:
($1,723,025,462 / 194,744,328 shares
of common stock issued and
outstanding)........................ $8.85
==============
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Statement of Operations
Year Ended October 31, 1997
- ----------------------------------------------------------
<S> <C>
Net Investment Income
Income
Interest and discount earned (net of
foreign withholding taxes of
$13,154,985)....................... $ 192,743,394
-------------
Expenses
Investment management fee............ 12,637,375
Custodian's fees and expenses........ 2,700,000
Administration fee................... 2,676,338
Auction agent's fees and broker
commissions.......................... 1,670,000
Shareholder relations and
communications....................... 939,000
Transfer agent's fees and expenses... 650,000
Directors' fees and expenses......... 495,000
Independent accountant's fees and
expenses............................. 212,000
Legal fees and expenses.............. 200,000
Insurance expense.................... 126,000
Miscellaneous........................ 76,000
-------------
Total operating expenses............. 22,381,713
-------------
Net investment income before excise
tax.................................. 170,361,681
Excise tax........................... (775,219)
-------------
Net investment income.................. 169,586,462
-------------
Realized and Unrealized
Gains (Losses) on Investments
and Foreign Currencies
Net realized gains on investment
transactions......................... 9,798,919
Net change in unrealized appreciation
on investments....................... 76,842,257
-------------
Net gains on investments............... 86,641,176
-------------
Net increase in total net assets from
operations before net foreign
exchange losses...................... 256,227,638
Net realized and unrealized foreign
exchange losses...................... (274,306,145)
-------------
Net Decrease In Total Net Assets
Resulting From Operations.............. $ (18,078,507)
=============
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE> 90
<TABLE>
<CAPTION>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Statement of Cash Flows
Year Ended October 31, 1997
- ----------------------------------------------------------
Increase (Decrease) in Cash
(Including Foreign Currency)
<S> <C>
Cash flows used for operating
activities
Interest received (net of foreign
withholding taxes)............... $ 201,548,852
Expenses paid...................... (23,462,720)
Purchases of short-term portfolio
investments, net................. (13,898,728)
Purchases of long-term portfolio
investments........................ (1,924,595,090)
Proceeds from sales of long-term
portfolio
investments...................... 1,961,228,646
Other.............................. (10,141)
---------------
Net cash provided from operating
activities....................... 200,810,819
---------------
Cash flows provided from financing
activities
Dividends and distributions paid to
preferred shareholders........... (32,354,148)
Dividends and distributions paid to
common shareholders.............. (159,778,443)
---------------
Net cash used for financing
activities....................... (192,132,591)
---------------
Effect of changes in exchange rate... (9,069,831)
---------------
Net decrease in cash................. (391,603)
Cash at beginning of year.......... 1,031,946
---------------
Cash at end of year................ $ 640,343
===============
Reconciliation of Net Decrease in Total
Net Assets from Operations to Net Cash
(Including Foreign Currency) Provided
From Operating Activities
Net decrease in total net assets
resulting from
operations......................... $ (18,078,507)
---------------
Increase in investments............ (4,688,253)
Net realized gain on investment
transactions....................... (9,798,919)
Net change in unrealized
appreciation on
investments...................... (76,842,257)
Net realized and unrealized foreign
exchange losses.................. 274,306,145
Decrease in interest receivable.... 9,392,189
Net increase in other assets....... (10,141)
Increase in payable for investments
purchased........................ 27,423,081
Decrease in accrued expenses and
other liabilities................ (892,519)
---------------
Total adjustments................ 218,889,326
---------------
Net cash provided from operating
activities........................... $ 200,810,819
===============
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Statement of Changes in Net Assets
- ----------------------------------------------------------
Year Ended October 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Increase (Decrease)
in Total Net Assets
Operations
Net investment income... $ 169,586,462 $ 149,191,364
Net realized gains on
investment
transactions.......... 9,798,919 3,752,308
Net change in unrealized
appreciation on
investments........... 76,842,257 104,837,565
-------------- --------------
Net increase in total
net assets resulting
from operations before
net foreign exchange
gains (losses)........ 256,227,638 257,781,237
Net realized and
unrealized foreign
exchange gains
(losses).............. (274,306,145) 93,023,604
-------------- --------------
Net increase (decrease) in
total net assets
resulting from
operations.............. (18,078,507) 350,804,841
-------------- --------------
Dividends to shareholders
from net investment
income
Common shares........... (159,569,671) (142,448,343)
Preferred shares........ (32,946,291) (23,607,820)
-------------- --------------
(192,515,962) (166,056,163)
-------------- --------------
Distributions to
shareholders
from net realized
capital gains
Common shares........... -- (4,985,403)
Preferred shares........ -- (3,046,221)
-------------- --------------
-- (8,031,624)
-------------- --------------
Fund share transactions
Net proceeds from
issuance of preferred
shares................ -- 122,958,530
Net proceeds from rights
offering of Fund
shares................ -- 299,771,852
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions and in
connection with
dividends paid in
stock................. 1,725,751 5,241,634
-------------- --------------
1,725,751 427,972,016
-------------- --------------
Total increase
(decrease).............. (208,868,718) 604,689,070
Total Net Assets
Beginning of year......... 2,531,894,180 1,927,205,110
-------------- --------------
End of year............... $2,323,025,462 $2,531,894,180
============== ==============
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE> 91
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Notes to Financial Statements
- ----------------------------------------------------------
The First Australia Prime Income Fund, Inc. (the 'Fund') was incorporated in
Maryland on March 14, 1986 as a closed-end, non-diversified investment company.
The Fund's investment objective is current income through investment primarily
in Australian debt securities. The Fund may also achieve incidental capital
appreciation. It is expected that normally at least 65% of the Fund's total
assets will be invested in Australian dollar denominated debt securities of
Australian banks and federal and state governmental and corporate entities. To
achieve its investment objective, the Fund may invest the remainder of its
assets in debt securities of comparable quality which are denominated in
Australian or New Zealand dollars of other issuers, whether or not domiciled in
Australia or New Zealand, and in U.S. Government securities and corporate and
bank debt securities of U.S. issuers rated Aa or Prime-2 or better by Moody's
Investors Service, Inc. ('Moody's') or AA or A-2 or better by Standard & Poor's
Corporation ('S&P'). It is the Fund's policy to limit its investments, as to 65%
of its total assets, to issuers of debt securities rated AA or better by
S&P-Australian Ratings Pty. Ltd. or S&P or Aa or better by Moody's or which, in
the judgement of the Investment Manager, are of equivalent quality. The
remainder of the Fund's investments will be rated A by those rating agencies or,
if unrated, will in the Investment Manager's judgement be of equivalent quality.
The ability of issuers of debt securities, including foreign currency balances
on deposit with the Fund's Australian and New Zealand subcustodian banks, 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 Policies
The following is a summary of 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 based on prices provided by a
pricing service or the lower of the quotations from two leading Australian or
New Zealand brokers in the debt securities market, in the event that a price
cannot be obtained by the pricing service. Securities for which market
quotations are not readily available are valued at fair value using methods
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$') and New Zealand dollar
('NZ$') 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 rates 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 the 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 $274,306,145 include
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of interest, discount and foreign withholding
taxes recorded on the Fund's books and the US dollar equivalent amounts actually
received or paid and changes in unrealized foreign exchange gains and losses in
the value of portfolio securities and other assets and liabilities
F-18
<PAGE> 92
arising as a result of changes in the exchange rate. Accumulated net realized
and unrealized foreign exchange losses shown in the composition of net assets at
October 31, 1997 represent foreign exchange losses for book purposes that have
not yet been recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.
The exchange rate at October 31, 1997 was US$.7026 to A$1.00 for the
Australian dollar and US$.6232 to NZ$1.00 for the New Zealand dollar.
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.
Interest income is recorded on an accrual basis. Discounts on short-term
securities are accreted over the life of the security. 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
from net investment income supplemented by net realized foreign exchange gains
and net realized short-term capital gains if necessary, on a monthly basis. 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 to common shareholders are recorded on the
ex-dividend date. Dividends and distributions to preferred shareholders are
accrued on a weekly basis and are determined as described in Note 4.
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, loss deferrals and recognition of
market discount.
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
or transactions in New Zealand 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. Provision has been made for United States
excise taxes incurred during the fiscal year. Australia and New Zealand impose a
withholding tax of 10% on most interest and discount earned.
Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and net realized gains from investment and currency
transactions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statement of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash includes domestic and foreign
currency.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with 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 fiscal year ended October 31, 1997, the Fund increased undistributed
net investment income by $1,975,989, decreased accumulated net realized gains on
investments by $1,524,475, increased accumulated net realized foreign exchange
gains by $1,014,354 and decreased paid in capital in excess of par by
$1,465,868. 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.
The management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 0.65% of the Fund's
average weekly
F-19
<PAGE> 93
total net assets of common and preferred shareholders up to $200 million, 0.60%
of such assets between $200 million and $500 million, 0.55% of such assets
between $500 million and $900 million, 0.50% of such assets between $900 million
and $1,750 million and 0.45% of such assets in excess of $1,750 million.
The Investment Manager pays fees to the Investment Adviser and Consultant for
their services rendered. The Investment Manager informed the Fund that it paid
$5,602,463 to the Investment Adviser and $84,081 to the Consultant during the
fiscal year ended October 31, 1997.
The administration agreement provides the Administrator with a fee at the
annual rate of 0.15% of the Fund's average weekly total net assets of common and
preferred shareholders up to $900 million, 0.10% of such assets between $900
million and $1,750 million and 0.07% of such assets in excess of $1,750 million.
During the year, the Administrator remitted $240,000 to Professional Consulting
Services Limited for administrative services provided.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the fiscal year ended October 31, 1997 aggregated
$1,952,018,171 and $1,955,554,450, respectively.
The United States federal income tax basis of the Fund's investments at
October 31, 1997 was $2,155,570,844 and accordingly, net unrealized appreciation
for United States federal income tax purposes was $158,685,315 (gross unrealized
appreciation--$164,113,964; gross unrealized depreciation--$5,428,649).
Note 4. Capital
There are 400 million shares of common stock authorized. Of the 194,744,328
common shares outstanding at October 31, 1997, the Investment Manager owned
56,240 shares.
During the fiscal year ended October 31, 1996 the Fund issued 38,911,951
shares of common stock (net proceeds $299,771,852) in connection with a rights
offering of the Fund's shares and issued 568,703 shares in connection with the
reinvestment of dividends and distributions paid to shareholders enrolled in the
dividend reinvestment plan.
During the fiscal year ended October 31, 1997 the Fund issued 184,572 shares
in connection with the reinvestment of dividends and distributions paid to
shareholders enrolled in the dividend reinvestment plan.
The Preferred Stock have rights as determined by the Board of Directors. The
24,000 shares of Auction Market Preferred Stock ('Preferred Stock') outstanding
consist of nine series as follows: Series A--3,000 shares, Series B--3,000
shares, Series C--2,000 shares, Series D--4,000 shares, Series E--2,000 shares,
Series F--2,000 shares, Series G--3,000 shares, Series H--2,500 shares and
Series I--2,500 shares.
During the fiscal year ended October 31, 1996 the Fund issued $62,500,000
(net proceeds $61,479,265) in liquidation value per series for Series H and I
preferred shares.
Dividends on each series of Preferred Stock are cumulative at a rate
established at the initial public offering and are typically reset every 28 days
for Series A through D and every seven days for Series E through I based on the
results of an auction. Dividend rates ranged from 4.86% to 6.25% during the
fiscal year ended October 31, 1997. Under the Investment Company Act of 1940,
the Fund may not declare dividends or make other distributions on shares of
common stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, asset coverage with respect to the outstanding
Preferred Stock would be less than 200%.
The Preferred Stock is redeemable at the option of the Fund, in whole or in
part, on any dividend payment date at liquidation value plus any accumulated but
unpaid dividends. The Preferred Stock is also subject to mandatory redemption at
liquidation value plus any accumulated but unpaid dividends if certain
requirements relating to the composition of the assets and liabilities of the
Fund as set forth in the Articles of Incorporation are not satisfied.
The holders of Preferred Stock have voting rights equal to the holders of
common stock (one vote per share) and will vote together with holders of shares
of common stock as a single class. However, holders of Preferred Stock are also
entitled to elect two of the Fund's directors.
Note 5. Dividends And Distributions
On November 17, 1997 and December 12, 1997 the Board of Directors of the Fund
declared distributions from undistributed net investment income of $.06 per
common share payable on December 12, 1997 and January 16, 1998 to common
shareholders of record on November 28, 1997 and December 31, 1997.
Subsequent to October 31, 1997, dividends and distributions declared and paid
on Preferred Stock totalled approximately $4,122,785 for the nine outstanding
preferred share series in the aggregate through December 12, 1997.
F-20
<PAGE> 94
- --------------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended October 31,
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1997* 1996* 1995* 1994 1993
<S> <C> <C> <C> <C> <C>
---------- ---------- ---------- ---------- ----------
Net asset value per common share, beginning of
year............................................ $ 9.93 $ 9.36 $ 8.82 $ 10.09 $ 9.61
---------- ---------- ---------- ---------- ----------
Net investment income............................. .87 .87 .93 1.01 1.19
Net realized and unrealized gain (loss) on
investments and foreign currencies.............. (.96) 1.13 1.16 (1.03) .58
---------- ---------- ---------- ---------- ----------
Total from investment operations................ (.09) 2.00 2.09 (.02) 1.77
---------- ---------- ---------- ---------- ----------
Dividends from net investment income to preferred
shareholders.................................... (.17) (.14) (.17) (.12) (.11)
Dividends from net investment income to common
shareholders.................................... (.82) (.83) (.83) (.84) (1.08)
Distributions from net capital and currency gains
to preferred shareholders....................... -- (.02) (.01) (.01) (.01)
Distributions from net capital and currency gains
to common shareholders.......................... -- (.03) (.15) (.17) (.08)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions............... (.99) (1.02) (1.16) (1.14) (1.28)
---------- ---------- ---------- ---------- ----------
Capital charge in respect to issuance of shares... -- (.41) (.39) (.11) (.01)
---------- ---------- ---------- ---------- ----------
Net asset value per common share, end of year..... $ 8.85 $ 9.93 $ 9.36 $ 8.82 $ 10.09
========== ========== ========== ========== ==========
Market price per common share, end of year........ $ 8.125 $ 8.94 $ 9.31 $ 9.56 $ 10.25
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN BASED OND:
Market value...................................... (0.42)% 5.59% 8.78% 3.32% 15.00%
Net asset value................................... (2.37)% 16.73% 18.54% (3.19)% 17.80%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS/SUPPLEMENTAL DATAPound:
ExpensesDD........................................ 1.25% 1.29% 1.47% 1.41% 1.44%
Net investment income before preferred stock
dividends....................................... 9.17% 9.16% 10.83% 10.68% 12.13%
Preferred stock dividends......................... 1.78% 1.45% 1.87% 1.20% 1.13%
Net investment income available to common
shareholders.................................... 7.39% 7.71% 8.96% 9.48% 11.00%
Portfolio turnover rate........................... 85% 63% 50% 34% 23%
Net assets of common shareholders, end of year
(000 omitted)................................... $1,723,025 $1,931,894 $1,452,205 $1,088,631 $1,050,084
Average net assets of common shareholders (000
omitted)........................................ $1,848,378 $1,627,916 $1,201,383 $1,174,394 $1,011,324
Senior securities (preferred stock) outstanding
(000 omitted)................................... $ 600,000 $ 600,000 $ 475,000 $ 400,000 $ 350,000
Asset coverage of preferred stock at year end..... 387% 422% 406% 372% 400%
</TABLE>
---------------
* Calculated based upon weighted average shares outstanding during the
year.
D 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.
DD Includes expenses of both preferred and common stock.
Pound Ratios calculated on the basis of income, expenses and preferred
share dividends applicable to both the common and preferred shares
relative to the average net assets of common shareholders. Expense
ratios relative to the average net assets of common and preferred
shareholders are .95%, .94%, 1.05%, 1.05% and 1.07%, respectively.
NOTE: Contained above is operating performance for a share of common stock
outstanding, total investment return, ratios to average net assets of
common shareholders 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 common shares.
See Notes to Financial Statements.
F-21
<PAGE> 95
APPENDIX A
AUSTRALIAN ECONOMY
Certain information relating to Australia has been extracted from various
governmental and private publications as indicated herein. For a listing of
these publications, see "Additional Information" in the Prospectus.
OVERVIEW
The Commonwealth of Australia comprises an area of about 2,773,000 square
miles -- almost the same as that of the United States, excluding Alaska. In
December 1997, Australia's population was estimated to be approximately 18.6
million people.
The Commonwealth of Australia was formed as a federal union in 1901, when
six British colonies of New South Wales, Victoria, Queensland, South Australia,
Western Australia and Tasmania were united as states in a "Federal Commonwealth"
under the authority of the Commonwealth of Australia Constitution Act enacted by
the British Parliament.
Federal legislative powers in Australia are vested in the Federal
Parliament which consists of the Queen, the Senate and the House of
Representatives. The Queen is represented throughout Australia by the
Governor-General. The Senate and the House of Representatives are both elected
by the compulsory vote of all eligible persons. Under the Constitution, the
Parliament is empowered to make laws on certain specified matters such as
defense, external affairs, interstate and overseas trade and commerce, taxation,
currency and banking. Powers not conferred on the parliament remain with the
States subject to certain Constitutional limitations.
The executive power of the Commonwealth under the Constitution is formally
vested in the Governor-General. There is a Federal Executive Council to advise
the Governor-General in the government of Australia. This council is comprised
of the Prime Minister and other Federal Ministers of State, all of whom belong
to the party or coalition of parties which has a majority in the House of
Representatives. Such Ministers form the Government with the practical result
that executive power is exercised by the Prime Minister and other Ministers.
Prior to World War II, the Australian economy was highly dependent on the
rural sector. The 1950's and 1960's saw strong growth in the economy and
diversification through developments in the mining sector. There have been some
significant structural changes in the past 20 years, with the tertiary sector
(i.e., all areas of the economy excluding agriculture, mining and manufacturing)
and the mining sector growing strongly. In 1996-97, the rural sector accounted
for approximately 4% of Gross Domestic Product ("GDP"), 5% of employment and 20%
of total exports of goods and services by value. During the same period, the
mining sector accounted for approximately 4% of GDP and 1% of employment, and
exports of mining commodities accounted for approximately 35% of exports by
value. The tertiary sector accounted for approximately 75% of GDP, approximately
76% of employment and around 24% of exports by value during the period.
SELECTED ECONOMIC DATA
Domestic Economy. Since 1980-81, the Australian economy has recorded
average GDP growth of 3.2%. However, there were severe recessions in 1982-83 and
1990-91, with strong growth in the intervening years. Following the 1990-91
recession, economic activity accelerated with strong growth in private
consumption and housing investment. Concern about the possible inflation
consequences of strong growth prompted the Reserve Bank of Australia to raise
interest rates in the second half of 1994. The tightening in monetary policy saw
growth return to more sustainable levels. Annual GDP growth on a year to year
basis peaked at 5.8% in the September quarter of 1994 and slowed to an annual
rate of 2.0% in the March quarter of 1997. Weaker economic growth during 1996
and early 1997, combined with low inflation, encouraged the Reserve Bank of
Australia to lower cash rates, almost to the level before rates were increased
in 1994. Easier credit conditions promoted a reacceleration of economic growth
driven mostly by business investment spending and residential real estate
activity. Growth improved to 4.9% in the March quarter 1998, but with some signs
of renewed
A-1
<PAGE> 96
weakness in net exports. Growth eased subsequently to 3.9% on a year to year
basis in the June quarter 1998 with robust private consumption spending and
residential real estate activity offset partially by weaker business investment
spending and exports. The table below shows GDP over the past five years.
GROSS DOMESTIC PRODUCT
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR JUNE TO JUNE PERIODS
---------------------------------------------------------------------
1992/3 1993/4 1994/5 1995/6 1996/7 1997/8
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GDP, income-based measure
(current prices)............. A$408,299 A$433,002 A$460,276 A$492,371 A$516,382 A$544,680
GDP, average measure
(constant 1989-90 prices).... A$384,676 A$402,531 A$419,994 A$437,663 A$449,849 A$467,927
% change over previous period
(constant 1989-90 prices).... 3.5% 4.6% 4.3% 4.2% 2.8% 4.0%
</TABLE>
- ---------------
Source: Australian Bureau of Statistics, Australian National Accounts (Cat. No.
5206-0).
Prices. Since 1980-81 Australian CPI inflation has averaged 5.6% with a
peak rate of 12.5% in September 1982. Inflation has been trending down since
this peak. Following the 1990-91 recession, CPI inflation fell to a low of 0.3%
in December 1992. As the economic recovery initially gathered pace, higher wages
and import prices began to filter through into the underlying inflation rate.
(The underlying inflation rate excludes seasonal and administered prices as well
as mortgage interest charges.) The "headline" CPI inflation rate (which includes
all relevant prices and represents the average inflation rate for the eight
Australian capital states) was also boosted by the increase in mortgage interest
charges. These inflation pressures reversed in 1996 and 1997 as tighter monetary
conditions impacted. CPI inflation fell to a new low of -0.3% in the September
quarter 1997.
For the year ended June 30, 1998, CPI inflation was 0.7% (year to year
basis) with the underlying rate at 1.6%. In recent years, the Reserve Bank of
Australia has adopted a target for the underlying rate of 2-3% (averaged over a
number of years). Underlying annual inflation has been below target for five
consecutive quarters including the quarter ended June 30, 1998.
PRICES
(YEAR AVERAGE BASIS)
<TABLE>
<CAPTION>
% CHANGE
CONSUMER PRICE OVER
INDEX PRIOR PERIOD
-------------- ------------
<S> <C> <C>
1993-94........................................... 110.4 1.8
1994-95........................................... 113.9 3.2
1995-96........................................... 118.7 4.2
1996-97........................................... 120.3 1.3
1997-98........................................... 120.3 0.0
</TABLE>
- ---------------
Source: Australian Bureau of Statistics, Consumer Price Index (Cat. No. 6401.0).
Note: Indices used year-end June 30 figures; Consumer Price Index 1989-90 = 100,
weighted average of eight capital cities.
Foreign Trade and Balance of Payments. External trade plays an important
part in the Australian economy. In the five years ended June 30, 1997,
merchandise exports and imports in current prices, calculated on a balance of
payments basis, both averaged approximately 15% of GDP.
A-2
<PAGE> 97
Australia has traditionally been a net importer of capital, facilitating
the development of a rich endowment of natural resources at a faster pace than
would have been possible if domestic savings were the only source of investment
funds. Australia has, therefore, traditionally run a current account deficit.
Since 1980-81 the current account deficit has averaged 4.4% of GDP, with
significant cyclical variations -- reflecting the state of the economy and
fluctuation in Australia's terms of trade. In 1994-95, the current account
deficit represented 6.3% of GDP, boosted by strong import demand (in part
reflecting the business investment recovery) and higher debt servicing costs. As
the economy slowed through 1996 and 1997, import growth slowed sharply, while
export performance stayed robust. The current account deficit represented a
below long-term average 3.4% of GDP in 1996-97. More recently, the current
account deficit has widened quite sharply again reflecting imports supported by
strong domestic demand and the effect of the Asian crisis on Australian exports.
The quarterly current account deficit has widened from a low of A$2.8 billion in
the June quarter 1997 to A$7.3 billion in the quarter ended March 31, 1998
before narrowing to A$6.5 billion in the quarter ended June 30, 1998. The
following table shows the current account balance for the six years ended June
30, 1998.
CURRENT ACCOUNT BALANCE
(AUSTRALIAN $ IN MILLIONS)
<TABLE>
<CAPTION>
EXPORTS OF
GOODS &
SERVICES AS
EXPORTS OF IMPORTS OF GOODS & A % OF CURRENT
GOODS & SERVICES GOODS & SERVICES SERVICES IMPORTS OF INVISIBLES ACCOUNT
--------------------- --------------------- BALANCE GOODS & BALANCE(2) BALANCE
A$M % CHANGE(1) A$M % CHANGE(1) A$M SERVICES(1) A$M A$M
------- ----------- ------- ----------- -------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992-93.............. 76,827 9.7 78,885 14.3 (2,058) 97.4 (13,152) (15,210)
1993-94.............. 82,928 7.9 85,162 8.0 (2,234) 97.4 (14,182) (16,416)
1994-95.............. 87,540 5.6 97,438 14.4 (9,898) 89.8 (18,951) (28,849)
1995-96.............. 99,039 13.1 100,908 3.6 (1,869) 98.1 (19,933) (21,802)
1996-97.............. 105,360 6.4 103,555 2.6 1,805 101.7 (18,857) (17,502)
1997-98.............. 114,024 8.2 118,442 14.4 (4,418) 96.3 (19,523) (23,941)
</TABLE>
- ---------------
Source: Australian Bureau of Statistics, Balance of Payments and International
Investment Position (Cat. No. 5302.0).
(1) Data may not be calculable due to rounding.
(2) Net total of invisible transactions, consisting primarily of interest,
profit and dividends on external assets and liabilities, and government and
other transfer payments.
Australia's net foreign debt as of June 30, 1998 was A$222.0 billion, which
is equivalent to approximately 41.2% of its GDP. In comparison, Australia's net
foreign debt as of June 30, 1997 was A$213.5 billion, which was approximately
41.3% of its GDP.
A-3
<PAGE> 98
Interest Rates. The following table sets forth certain historical
short-term Australian bank interest rates and interest rates for medium and
long-term Australian Government securities.
INTEREST RATES
<TABLE>
<CAPTION>
UNOFFICIAL 90-DAY BANK BILL BUSINESS LOAN 3-YEAR TREASURY 10-YEAR TREASURY
YEAR(1) CASH RATE(2) YIELD(3) INDICATOR RATE(4) BONDS(5) BONDS(5)
- ------- ------------ ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1994................. 4.75 5.45 9.00 8.60 9.65
1995................. 7.51 7.55 10.70 8.27 9.21
1996................. 7.51 7.57 10.80 8.33 8.88
1997................. 5.57 5.35 9.00 5.93 7.05
1998................. 5.07 5.32 8.05 5.25 5.58
</TABLE>
- ---------------
Source: Reserve Bank of Australia Bulletin, July 1998; Bloomberg.
(1) June 30, unless otherwise indicated; all quoted rates are in percent per
annum terms.
(2) Average of daily 11:00 a.m. calls for the month.
(3) Average of daily figures for the week ended last Wednesday of the month.
(4) Indicator rate on overdraft loans of A$100,000 or more by large businesses.
(5) Assessed secondary market yield on the last business day of the month.
The following table compares interest rates of Australian and U.S. ten-year
government bonds over the past five years on a quarter-end basis.
COMPARISON OF INTEREST RATES
OF U.S. AND AUSTRALIAN BONDS
(% PER ANNUM)
<TABLE>
<CAPTION>
10-YEAR U.S. 10-YEAR AUSTRALIAN
FIVE YEAR TREASURY BONDS GOVERNMENT BONDS
- --------- -------------- ------------------
<C> <C> <S> <C> <C>
1993 Qtr. 1 ...................................... 6.02 7.78
2 ...................................... 5.78 7.39
3 ...................................... 5.38 6.84
4 ...................................... 5.79 6.68
1994 Qtr. 1 ...................................... 6.74 7.95
2 ...................................... 7.32 9.64
3 ...................................... 7.60 10.32
4 ...................................... 7.82 10.04
1995 Qtr. 1 ...................................... 7.20 9.83
2 ...................................... 6.20 9.21
3 ...................................... 6.18 8.58
4 ...................................... 5.57 8.22
1996 Qtr. 1 ...................................... 6.33 8.90
2 ...................................... 6.71 8.79
3 ...................................... 6.70 7.80
4 ...................................... 6.42 7.37
1997 Qtr. 1 ...................................... 6.90 8.01
2 ...................................... 6.50 7.06
3 ...................................... 6.10 6.13
4 ...................................... 5.74 6.04
1998 Qtr. 1 ...................................... 5.65 5.75
2 ...................................... 5.45 5.55
</TABLE>
- ---------------
Source: Bloomberg GTIO Government and GACGIO Index.
A-4
<PAGE> 99
The following table compares the value of an Australian dollar per U.S.
dollar for the periods indicated.
EXCHANGE RATES (PER US$)
<TABLE>
<CAPTION>
AT MONTH ENDING A$
--------------- ------
<S> <C> <C>
1991........................................ March 1.2900
June 1.3019
September 1.2508
December 1.3161
1992........................................ March 1.3014
June 1.3355
September 1.4006
December 1.4535
1993........................................ March 1.4168
June 1.4877
September 1.5497
December 1.4769
1994........................................ March 1.4269
June 1.3716
September 1.3526
December 1.2873
1995........................................ March 1.3736
June 1.4112
September 1.3236
December 1.3441
1996........................................ March 1.2832
June 1.2674
September 1.2620
December 1.2555
1997........................................ March 1.2715
June 1.3414
September 1.3893
December 1.5321
1998........................................ March 1.5074
April 1.5387
May 1.6036
June 1.6300
July 1.6359
</TABLE>
- ---------------
Source: Reserve Bank of Australia Bulletin, July Bulletins.
Public Finance. The following table summarizes the outstanding Australian
Commonwealth Government debt.
GOVERNMENT SECURITIES ON ISSUE AT JUNE 30, 1994 TO 1998
(AUSTRALIAN $ IN MILLIONS)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
- ------ ------- ------- ------- ------
<S> <C> <C> <C> <C>
91,710 102,713 108,440 109,104 94,697
</TABLE>
- ---------------
Source: Reserve Bank of Australia Bulletin, June 1998.
A-5
<PAGE> 100
The following table summarizes Australian Commonwealth Government budget
transactions for the five fiscal years ended June 30, 1998. The Government
currently expects an underlying surplus (net of asset sales and abnormal one-off
accounting transactions) of A$2.7 billion for the 1998-99 financial year, the
first underlying surplus in 8 years. The Coalition Government has focused
budgetary policy strongly on returning the Budget to underlying surplus. The
headline budget (including asset sales and abnormal one-off accounting
transactions) returned to surplus in 1997-98, helped by substantial asset sales.
SUMMARY OF AUSTRALIAN GOVERNMENT UNDERLYING BUDGET TRANSACTIONS
(AUSTRALIAN $ IN MILLIONS)
<TABLE>
<CAPTION>
TOTAL TOTAL SURPLUS/
REVENUE OUTLAYS DEFICIT
------- ------- --------
<S> <C> <C> <C>
1993-94....................................... 100,747 117,814 (17,067)
1994-95....................................... 110,430 123,563 (13,133)
1995/96....................................... 121,688 131,966 (10,278)
1996/97....................................... 131,031 135,933 (4,902)
1997/98 (Estimate)............................ 135,448 136,603 (1,155)
1998/99 (Forecast)............................ 145,243 142,698 2,545
</TABLE>
- ---------------
Source: Budget Related paper No. 1, 1998-99; Reserve Bank of Australia Bulletin,
July 1998, pre-election government budget press release.
AUSTRALIAN DEBT SECURITIES
Primary Market. Australian semi-government bonds and corporate notes and
debentures are issued through tender panels, private placements or by direct
solicitation to the public through prospectuses registered with the Australian
Securities and Investments Commission of Australian States and Territories (the
regulatory authority which administers comprehensive laws relating to, among
other things, prospectus disclosure requirements) and are not generally listed
on the Australian Stock Exchange ("ASX"). The Commonwealth and State Governments
of Australia and their agencies and instrumentalities issue bonds and notes
which are generally listed on the ASX. Australian corporations and Government
entities also issue Australian dollar-denominated bonds and notes in the
Euromarket.
Secondary Market. As with the U.S. secondary market, most trading in
Australian debt securities takes place off the ASX. Trading in Eurobonds also
takes place off the European stock exchanges. Certain major commercial banks,
stockbrokers and other financial institutions have been designated by the
Reserve Bank as reporting bond dealers through which the Reserve Bank usually
conducts transactions in Commonwealth Government securities with maturities of
more than one year. In addition, commercial banks and investment banking
institutions operate an unofficial secondary market in the debt securities of
corporations and Government entities.
Short-Term Debt Instruments. Short-term marketable debt instruments are
usually issued with a maturity period of 90 to 180 days. These instruments
include notes and bills from Government entities, bank and commercial bills,
promissory notes, and certificates of deposit. Short-term non-marketable debt
instruments include deposits with banks or merchant banks on a fixed-term basis,
varying from 24 hours to 365 days. These securities are traded by commercial
banks and investment banking institutions on an unofficial secondary market.
A-6
<PAGE> 101
Recent data on the Australian debt securities market is summarized in the
table below.
AUSTRALIAN DEBT SECURITIES
(AUSTRALIAN $ IN BILLIONS AS OF APRIL 30, 1998)
<TABLE>
<CAPTION>
NOMINAL VALUE MARKET VALUE
------------- ------------
<S> <C> <C>
Commonwealth Government................................... 72,662 83,718
Semi-government........................................... 46,396 51,944
Corporate................................................. 8,268 9,441
--------- ---------
Total........................................... A$127,326 A$145,103
</TABLE>
- ---------------
Source: Warburg Australia Bond Indices, April 1998
A-7
<PAGE> 102
APPENDIX B
ASIAN ECONOMIC DATA
Certain information relating to the Asian countries has been extracted from
various private publications as indicated herein. For a listing of these
publications, see "Additional Information" in the Prospectus.
The economies of Asian Countries are in different stages of development.
Hong Kong and Singapore have well developed industrial, financial and service
sectors, but limited natural resources. Korea has a large manufacturing sector,
but relies heavily on imports of raw materials. The economies of Indonesia,
Malaysia, the Philippines and Thailand are generally less developed than Hong
Kong, Korea and Singapore, but these countries have higher levels of natural
resources. Of the Asian Countries, the economies of China and India are
generally the least developed, with large agricultural sectors, but there are
geographic regions in each of these countries which have much higher levels of
development.
SOVEREIGN DEBT CREDIT RATINGS
The following table sets forth the credit ratings given by S&P and Moody's
to the long-term sovereign debt of certain countries in which the Fund may
invest.
S&P AND MOODY'S CREDIT RATINGS
<TABLE>
<CAPTION>
S&P MOODY'S (*)
------- --------------
<S> <C> <C>
Japan.......................................... AAA Aaa (AAA) /
Singapore...................................... AAA Aa1 (AA+)
New Zealand.................................... AA+ Aa1 (AA+) /
Taiwan......................................... AA+ Aa3 (AA-)
Australia...................................... AA ) Aa2 (AA)
Hong Kong...................................... A / A3 (A-) /
China.......................................... BBB+ / A3 (A-) /
Malaysia....................................... BBB- / Baa3 (BBB-)/
Thailand....................................... BBB- / Ba1 (BB+)
South Korea.................................... BB+ Ba1 (BB+)
Philippines.................................... BB+ / Ba1 (BB+)
India.......................................... BB+ / Ba2 (BB)
Indonesia...................................... CCC+ / B3 (B-)
</TABLE>
- ---------------
* S&P equivalent
) -- rating agency has a positive outlook on country
/ -- rating agency has a negative outlook on country
-- below investment grade
(1) Long-term foreign sovereign rating
B-1
<PAGE> 103
ASIAN ECONOMIES
In general, the economies of Asian Countries have grown at a relatively
high rate during 1988 to 1997. As the following table shows, most of the Asian
Countries in which the Fund may invest grew faster than did Australia and New
Zealand between 1988 and 1997. On average, for this time period, annual real GDP
growth for Asian Countries was 6.8% as compared to the average annual real GDP
growth for Australia and New Zealand of 2.5%. Of the Asian Countries, China was
the fastest growing economy followed by Malaysia and Singapore. The table does
not reflect slowdowns and negative real GDP growth being experienced in the
current year that have resulted from the financial troubles occurring in the
region since July 1997.
AVERAGE ANNUAL REAL GDP GROWTH
(% CHANGE OVER PREVIOUS YEAR)
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 AVERAGE
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA.................. 3.9 3.3 1.5 -0.1 3.5 3.6 5.6 3.3 3.7 3.3 3.2
NEW ZEALAND................ -0.3 0.9 -0.3 -1.7 0.9 5.1 6.0 3.9 3.1 2.3 2.0
CHINA...................... 11.3 4.1 3.8 9.2 14.2 13.5 12.7 10.5 9.7 8.8 9.8
HONG KONG.................. 8.0 2.6 3.4 5.1 6.3 6.1 5.3 4.8 4.9 5.3 5.2
INDIA...................... 9.9 6.6 5.7 0.4 5.3 3.9 7.2 7.2 7.5 5.1 5.9
INDONESIA.................. 5.8 7.5 7.1 7.0 6.5 6.5 7.8 8.2 8.0 4.8 6.9
JAPAN...................... 6.2 4.8 5.2 3.8 1.0 0.3 0.6 1.5 3.9 0.8 2.8
MALAYSIA................... 8.8 9.2 9.7 8.6 7.8 8.3 9.2 9.6 8.6 7.9 8.8
PHILIPPINES................ 6.8 6.2 3.0 -0.6 0.3 2.1 4.3 4.8 5.5 5.1 3.8
SINGAPORE.................. 11.6 9.6 9.0 7.0 6.2 10.4 10.2 8.9 7.0 7.8 8.8
SOUTH KOREA................ 11.3 6.4 9.5 9.1 5.1 5.8 8.6 9.0 7.2 5.5 7.8
TAIWAN..................... 7.8 8.2 5.4 7.6 6.8 6.3 6.5 6.0 5.7 6.8 6.7
THAILAND................... 13.3 12.2 11.2 8.5 8.1 8.3 8.7 8.7 6.7 1.0 8.7
</TABLE>
- ---------------
Source: Warburg Dillon Read; Reserve Bank of New Zealand
B-2
<PAGE> 104
EXCHANGE RATES
The following table sets forth the U.S. dollar exchange rates for the last
ten years for the currencies of certain countries in which the Fund may invest.
As the following table shows, Asian Currencies were relatively stable during the
period 1989 to 1996. During the last six months of 1997, however, many of the
Asian currencies experienced significant depreciation with the most extreme
movements occurring in Indonesia, South Korea, Thailand and Malaysia. In the
current year through August 1998, the exchange rates of some currencies,
including those of the Philippines, South Korea and Thailand appear to be
stabilizing.
US$ EXCHANGE RATE (PERIOD END)
<TABLE>
<CAPTION>
CURRENCIES
(MEASURED AGAINST
ONE U.S. DOLLAR) 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ----------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA (A$)............... 0.79 0.77 0.76 0.69 0.68 0.78 0.74 0.80 0.65
NEW ZEALAND (NZ$)............ 0.60 0.59 0.54 0.52 0.56 0.64 0.65 0.71 0.59
CHINA........................ 3.77 4.78 5.32 5.51 5.76 8.62 8.32 8.30 8.27
HONG KONG.................... 7.78 7.82 7.81 7.79 7.75 7.81 7.81 7.73 7.75
INDIA........................ 16.94 18.12 25.88 30.80 31.37 31.37 34.33 35.85 39.20
INDONESIA.................... 1,784.00 1,889.00 1,984.01 2,063.50 2,102.62 2,196.75 2,283.00 2,363.00 5,402.50
JAPAN........................ 143.75 135.80 124.80 124.80 111.61 99.70 103.40 115.70 130.58
MALAYSIA..................... 2.70 2.70 2.72 2.61 2.70 2.56 2.54 2.53 3.88
PHILIPPINES.................. 21.77 27.20 26.15 23.60 28.18 24.42 26.20 26.30 39.50
SINGAPORE.................... 1.90 1.74 1.62 1.64 1.60 1.46 1.41 1.40 1.68
SOUTH KOREA.................. 679.60 716.40 760.80 788.40 808.10 788.70 775.75 840.90 1,600.00
TAIWAN....................... 26.17 27.11 25.75 25.40 26.63 26.24 27.29 27.49 32.55
THAILAND..................... 25.61 25.30 25.05 25.49 25.48 25.13 25.20 25.66 47.00
<CAPTION>
CURRENCIES
(MEASURED AGAINST AUGUST 31,
ONE U.S. DOLLAR) 1998
- ----------------- ----------
<S> <C>
AUSTRALIA (A$)............... 0.57
NEW ZEALAND (NZ$)............ 0.65
CHINA........................ 8.28
HONG KONG.................... 7.75
INDIA........................ 42.49
INDONESIA.................... 11,000.00
JAPAN........................ 141.79
MALAYSIA..................... 4.20
PHILIPPINES.................. 43.70
SINGAPORE.................... 1.78
SOUTH KOREA.................. 1,350.00
TAIWAN....................... 34.79
THAILAND..................... 41.75
</TABLE>
- ---------------
* China: Official Rate before 1989, Swap Rate 1989-93, Unified Rate from January
1994
Source: Warburg Dillon Read; Reserve Bank of New Zealand
B-3
<PAGE> 105
INTEREST RATES
The following table sets forth certain historical three-month money market
interest rates for certain countries in which the Fund may invest. As the
following table shows, domestic interest rates in most Asian Countries rose
sharply in 1997. Central banks have maintained tight monetary conditions in an
attempt to mitigate pressure on their currencies and to slow credit growth and
to contain inflation. On average, at the end of 1997, Asian three-month money
market rates were approximately 10.7% compared to Australia and New Zealand
which averaged 6.7%. There can be no assurance, however, that Asian Countries
will maintain such high rates.
THREE-MONTH MONEY MARKET INTEREST RATES (END PERIOD)
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----- ------ ----- ----- ----- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA......................... 15.00 17.00 11.80 7.50 5.80 4.80 8.30 7.50 6.00 5.00
NEW ZEALAND....................... 14.18 14.10 13.90 10.00 6.70 6.30 9.56 8.59 8.08 8.30
CHINA............................. -- -- -- -- -- -- -- -- 11.80 9.00
HONG KONG......................... 9.20 8.60 8.00 3.90 4.20 3.40 6.40 5.90 5.60 9.30
INDIA............................. 9.80 10.60 13.60 13.20 11.20 7.80 9.40 13.00 8.30 7.20
INDONESIA......................... 18.00 14.50 19.90 19.60 13.80 8.20 14.40 18.00 12.80 18.80
JAPAN............................. 4.40 6.30 8.40 6.00 3.70 2.50 2.50 0.40 0.40 0.80
MALAYSIA.......................... 4.30 5.20 7.60 8.10 8.00 6.40 5.50 6.30 7.40 9.20
PHILIPPINES....................... 16.70 20.50 26.50 21.10 14.50 15.90 10.70 12.30 11.70 18.10
SINGAPORE......................... 5.30 5.60 5.30 3.50 2.20 3.30 4.40 2.40 3.40 7.00
SOUTH KOREA....................... 15.00 15.30 15.70 17.70 15.80 12.40 15.50 11.70 12.80 14.80
TAIWAN............................ 5.70 9.00 7.70 7.60 8.00 6.90 8.00 5.70 5.60 7.30
THAILAND.......................... 10.90 11.80 14.90 10.20 8.00 4.90 8.40 10.20 9.60 15.90
</TABLE>
- ---------------
Source: Warburg Dillon Read; Bloomberg
B-4
<PAGE> 106
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER OR ANY OF THE DEALER MANAGERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY SUCH PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THE PROSPECTUS WILL BE AMENDED OR
SUPPLEMENTED ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Fund Expenses............................. 15
Financial Highlights...................... 16
The Offer................................. 20
Use of Proceeds........................... 27
Description of Common Stock............... 28
The Fund.................................. 29
Investment Objective and Policies;
Investment Restrictions................. 30
Risk Factors and Special Considerations... 32
Portfolio Composition..................... 39
Portfolio Securities...................... 41
Management of the Fund.................... 45
Management Agreement and Advisory
Agreement............................... 54
Administration Agreement.................. 57
Portfolio Transactions and Brokerage...... 57
Net Asset Value of Common Stock........... 57
Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan..... 58
Taxation.................................. 60
Capital Stock............................. 65
Certain Provisions of the Articles of
Amendment and Restatement and By-Laws... 68
Custodian, Dividend Paying Agents,
Transfer Agents, Registrars and Auction
Agent................................... 69
Experts................................... 69
Distribution Arrangements................. 69
Legal Matters............................. 70
Additional Information.................... 70
Financial Statements...................... F-1
Report of Independent Accountants.........
Appendix A................................ A-1
Appendix B................................ B-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
64,914,776
Shares of Common Stock
THE FIRST AUSTRALIA PRIME
INCOME FUND, INC.
MANAGED BY
EQUITILINK INTERNATIONAL MANAGEMENT LIMITED
Issuable Upon Exercise of
Non-Transferable Rights to
Subscribe for Such
Shares of Common Stock
------------------------
P R O S P E C T U S
------------------------
DEALER MANAGERS
PRUDENTIAL SECURITIES INCORPORATED
A.G. EDWARDS & SONS, INC.
SALOMON SMITH BARNEY
September 28, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 107
PART B
NOT APPLICABLE
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS:
(i) Portfolio of Investments as of October 31,
1997
(ii) Statement of Assets and Liabilities as of
October 31, 1997
(iii) Statement of Operations for the fiscal year
ended October 31, 1997
(iv) Statement of Changes in Net Assets for the
fiscal years ended October 31, 1997 and
October 31, 1996
(v) Notes to the Financial Statements
(vi) Financial Highlights
(vii) Report of Independent Accountants
(i) Portfolio of Investments as of April 30, 1998
(ii) Statement of Assets and Liabilities as of
April 30, 1998
(iii) Statement of Operations for the six months
ended April 30, 1998
(iv) Statement of Cash Flows for the six months
ended April 30, 1998
(v) Statement of Changes in Net Assets for the
six months ended April 30, 1998 (unaudited)
and fiscal year ended October 31, 1997
(audited)
(vi) Notes to the Financial Statements
(vii) Financial Highlights for the six months ended
April 30, 1998 (unaudited) and for each of
the five fiscal years in the period ended
October 31, 1997 (audited)
2. EXHIBITS:
(a) (1) Articles of Amendment and Restatement dated December
14, 1988. (Previously filed as Exhibit (1)(a)(3) to
Amendment No. 6 to Registrant's Registration
Statement on Form N-2, File No. 811-4611 (the
"Original Registration Statement"))*
(a) (2) Article of Amendment dated May 29, 1991 (Previously
filed as Exhibit (1)(a)(6) to Amendment No. 12 to
the Original Registration Statement)*
(a) (3) Article of Amendment dated April 25, 1996.
(Previously filed as Exhibit (1)(a)(3) to Amendment
No. 27 to Original Registration Statement.)*
(a) (4) Article of Amendment dated July 28, 1997.
(Previously filed as Exhibit 2(a)(4) to Amendment
No. 30 to Original Registration Statement)*
C-1
<PAGE> 108
(b) (1) By-Laws as amended through December 21, 1988.
(Previously filed as Exhibit 2 to Amendment No. 6 to
Original Registration Statement.)*
(2) Amendment dated January 20, 1991 to the By-Laws of
Registrant. (Previously filed as Exhibit 2(a)(8) to
Amendment No. 6 to Original Registration
Statement.)*
(3) By-Laws as amended through May 8, 1998. (Previously
filed as Exhibit 2(b)(3) to Amendment No. 30 to
Original Registration Statement)*
(c) Inapplicable.
(d) (1) Specimen certificate representing shares of Common
Stock (U.S. $.01 par value). (Previously filed as
Exhibit 4 to Pre-Effective Amendment No. 2 to
Original Registration Statement.)*
(2) Form of Exercise Form.
(3) Form of Notice of Guaranteed Delivery.
(4) Form of Nominee Holder Over-Subscription Form.
(5) Form of Beneficial Owner Certification.
(6) Form of Subscription Rights Agency Agreement.
(e) Dividend Reinvestment and Cash Purchase Plan. (Previously
filed as Exhibit (e) to Amendment No. 21 to Original
Registration Statement.)*
(f) Inapplicable.
(g) (1) Management Agreement with EquitiLink International
Management Limited ("EIML") and EquitiLink Australia
Limited ("EAL") dated February 1, 1990. (Previously
filed as Exhibit 6(a)(4) to Amendment No. 10 to
Original Registration Statement.)*
(2) Advisory Agreement with EIML and EAL dated December
15, 1992. (Previously filed as Exhibit (g)(2) to
Amendment No. 18 to Original Registration
Statement.)*
(3) Amendment to Management Agreement with EIML and EAL
effective June 1, 1996.
(h) Form of Dealer Manager Agreement among the Registrant, EIML,
EAL, EquitiLink Holdings Limited, and Prudential Securities
Incorporated, A.G. Edwards & Sons, Inc. and Salomon Smith
Barney Inc.
(i) Inapplicable.
C-2
<PAGE> 109
(j) (1) Custodian Contract between the Registrant and State
Street Bank and Trust Company ("State Street") dated
April 11, 1986. (Previously filed as Exhibit (9)(A)
to Pre- Effective Amendment No. 2 to Original
Registration Statement.)*
(2) Amendment No. 1 to Custody Agreement between
Registrant and State Street. (Previously filed as
Exhibit 9(a)(2) to Amendment No. 1 to Original
Registration Statement.)*
(3) Amendment No. 2 to Custody Agreement between the
Registrant and State Street dated November 26, 1986.
(Previously filed as Exhibit 9(a)(3) to Amendment
No. 1 to Original Registration Statement.)*
(4) Sub-custodian Agreement between State Street London
Limited and State Street Bank and Trust Company
dated as of November 13, 1985. (Previously filed as
Exhibit (9)(D) to Pre-Effective Amendment No. 2 to
Original Registration Statement.)*
(5) Sub-custodian Agreement between State Street Bank
and Trust Company and Westpac Banking Corporation
dated as of January 1, 1993. (Previously filed as
Exhibit (j)(5) to Amendment No. 23 to the Original
Registration Statement.)*
(6) Sub-custodian Agreement between State Street Bank
and Trust Company and ANZ Banking Group (New
Zealand) Limited dated as of May 11, 1993.
(Previously filed as Exhibit (j)(6) to Amendment No.
23 to the Original Registration Statement.)*
(k) (1) Transfer Agency Agreement between the Registrant and
State Street dated April 11, 1986. (Previously filed
as Exhibit 10(A) to Pre-Effective Amendment No. 2 to
Original Registration Statement.)*
(2) Administration Agreement between the Registrant and
Prudential Mutual Fund Management, Inc. dated
December 9, 1988. (Previously filed as Exhibit
10(c)(2) to Amendment No. 6 to Original Registration
Statement.)*
(3) Amendment to Administration Agreement between the
Registrant and Prudential Investments Fund
Management, LLC effective June 1, 1996.
(l) (1) Opinion and Consent of Dechert Price & Rhoads.
(2) Opinion of Venable, Baetjer and Howard, LLP.
(m) Inapplicable.
(n) Consent of Independent Accountants.
(o) Inapplicable.
C-3
<PAGE> 110
(p) Subscription Agreement between the Registrant and EIML dated
April 14, 1986. (Previously filed as Exhibit 14 to Original
Registration Statement.)*
(q) Inapplicable.
(r) (1) Financial Data Schedule for year ended October 31,
1997.
(2) Financial Data Schedule for six months ended April
30, 1998.
(s) (1) Powers of attorney. (Previously filed as Exhibit
2(s)(1) to Amendment No. 30 to Original Registration
Statement.)*
(2) Certified copy of Board resolutions. (Previously
filed as Exhibit 2(s)(2) to Amendment No. 30 to
Original Registration Statement.)*
- ----------
* Incorporated by reference herein.
ITEM 25. MARKETING ARRANGEMENTS
See Dealer Manager Agreement to be filed as Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses to be incurred in
connection with the offering described in the Registration Statement:
<TABLE>
<S> <C>
Registration fees.................................... $ 153,000
Printing............................................. $ 200,000
Fees and expenses of qualification under state
securities laws (including fees of counsel)........ $ 2,500
Legal fees and expenses.............................. $ 275,000
Reimbursement of Dealer Manager expenses............. $ 300,000
Auditing fees and expenses........................... $ 30,000
American Stock Exchange listing fees................. $ 50,000
Pacific Stock Exchange listing fees.................. $ 7,500
Subscription Agent fees and expenses................. $ 255,000
Information Agent fees and expenses.................. $ 320,000
Engraving and printing stock certificates............ $ 5,000
NASD Fee............................................. $ 30,500
Marketing Costs...................................... $ 150,000
Miscellaneous........................................ $ 50,000
Total $1,828,500
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
C-4
<PAGE> 111
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF AUGUST 31, 1998)
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Common Stock ($.01 par value
per share).......................................... 18,065
Auction Market Preferred Stock, Series A
($.01 par value per share).......................... 1
Auction Market Preferred Stock, Series B
($.01 par value per share).......................... 1
Auction Market Preferred Stock, Series C
($.01 par value per share)......................... 1
Auction Market Preferred Stock, Series D
($.01 par value per share).......................... 1
Auction Market Preferred Stock, Series E
($.01 par value per share).......................... 1
Auction Market Preferred Stock, Series F
($.01 par value per share).......................... 1
Auction Market Preferred Stock, Series G
($.01 par value per share).......................... 1
Auction Market Preferred Stock, Series H
($.01 par value per share).......................... 1
Auction Market Preferred Stock, Series I
($.01 par value per share).......................... 1
</TABLE>
ITEM 29. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
the state in which the Registrant was organized, empowers a corporation, subject
to certain limitations, to indemnify its Directors against expenses (including
attorneys' fees, judgments, fines and certain settlements) actually and
reasonably incurred by them in connection with any suit or proceeding to which
they are a party unless it is established that (i) the director's act or
omission was material to the matter giving rise to the proceeding and (1) was
committed in bad faith, or (2) was the result of active and liberate dishonesty,
or (ii) the director actually received improper personal benefit in money,
property or services, or (iii) with respect to a criminal action or proceeding,
the director had reasonable cause to believe that the action or omission was
unlawful. Article IX, of the Registrant's By-Laws (as amended through January
20, 1991 and currently in effect) provides:
Article IX. Indemnification. The Corporation shall indemnify (a) its
Directors and officers, whether serving the Corporation or at its request any
other entity, to the full extent required or permitted by (i) the General Laws
of the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law, and (ii)
the Investment Company Act of 1940, as amended, and (b) other employees and
agents to such extent as shall be authorized by the Board of Directors and be
permitted by law. The foregoing rights of indemnification shall not be exclusive
of any other rights to which those
C-5
<PAGE> 112
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law.
Reference is made to Section 7 of the Dealer Manager Agreement filed as
Exhibit (h) to this Registration Statement for provisions relating to
indemnification of the Dealer Managers.
Reference is made to Section 7 of the Dealer Manager Agreement filed as
Exhibit (h) to this Registration Statement and to Section 3 of the Advisory
Agreement filed as Exhibit (g)(2) herewith for provisions relating to limitation
of liability of the Investment Manager and Investment Adviser. Reference is made
to Section 3 of the same Advisory Agreement for provisions relating to
limitation of liability of the Investment Adviser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Information as to the Directors and officers of the Investment Manager
and the Investment Adviser is included in their respective Forms ADV filed with
the Commission and is incorporated herein by reference thereto.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
<TABLE>
<S> <C> <C>
Prudential Investments EquitiLink International State Street Bank and
Fund Management LLC Management Limited Trust Company
100 Mulberry Street Union House One Heritage Drive
Gateway Center 3 Union Street North Quincy, MA 02171
New York, New York 10292 St. Helier, Jersey For all other records
For records pursuant to For records pursuant to
Rule 31a-1(b)(4) Rule 31a-1(b)(5),(6),(9),(10)
and (11) and Rule 31a-1(f)
</TABLE>
C-6
<PAGE> 113
ITEM 32. MANAGEMENT SERVICES.
Not applicable.
ITEM 33. UNDERTAKINGS.
(1) The Registrant undertakes to suspend offering of its shares until it
amends its prospectus if (a) subsequent to the effective date of its
Registration Statement, the NAV of its shares declines more than 10
percent from its NAV as of the effective date of the Registration
Statement or (b) the NAV increases to an amount greater than its net
proceeds as stated in the prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) (a) The Registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) The Registrant hereby undertakes that for the purposes of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) Not applicable.
C-7
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of New York on
this 28th day of September, 1998.
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
*
------------------------
Brian M. Sherman
President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the date
indicated:
<TABLE>
<S> <C> <C>
* President and Director 9/28/98
-------------------------- (Principal Executive Officer)
Brian M. Sherman
Treasurer and Director 9/28/98
* (Principal Financial and
-------------------------- Accounting Officer)
David Manor
*
-------------------------- Director 9/28/98
Anthony E. Aaronson
* Director 9/28/98
--------------------------
Neville Miles
* Director 9/28/98
--------------------------
Sir Arthur Roden Cutler
* Director 9/28/98
--------------------------
David Elsum
* Director 9/28/98
--------------------------
Rt. Hon. Malcolm Fraser
* Director 9/28/98
--------------------------
Laurence S. Freedman
</TABLE>
<PAGE> 115
<TABLE>
<S> <C> <C>
* Director 9/28/98
--------------------------
Michael R. Horsburgh
* Director 9/28/98
--------------------------
Harry A. Jacobs, Jr.
* Director 9/28/98
--------------------------
Howard A. Knight
* Director 9/28/98
--------------------------
Roger C. Maddock
* Director 9/28/98
--------------------------
William J. Potter
* Director 9/28/98
--------------------------
Peter D. Sacks
* Director 9/28/98
--------------------------
John T. Sheehy
* Director 9/28/98
--------------------------
Marvin Yontef
</TABLE>
*By /s/ Margaret A. Bancroft
------------------------
Margaret A. Bancroft
as Attorney-in-Fact
-2-
<PAGE> 116
Exhibits: Index
(d) (2) Form of Exercise Form.
(3) Form of Notice of Guaranteed Delivery.
(4) Form of Nominee Holder Over-Subscription Form.
(5) Form of Beneficial Owner Certification.
(6) Form of Subscription Rights Agency Agreement.
(g) (3) Amendment to Management Agreement with EIML and EAL effective
June 1, 1996.
(h) Form of Dealer Manager Agreement among the Registrant, EIML, EAL,
EquitiLink Holdings Limited, and Prudential Securities Incorporated,
A.G. Edwards & Sons, Inc. and Salomon Smith Barney Inc.
(k) (3) Amendment to Administration Agreement between the Registrant and
Prudential Investments Fund Management LLC effective June 1,
1996.
(j) (1) Opinion and Consent of Dechert Price & Rhoads.
(2) Opinion of Venable, Baetjer and Howard, LLP.
(n) Consent of Independent Accountants.
27 (a) Financial Data Schedule for year ended October 31, 1997.
(b) Financial Data Schedule for six months ended April 30, 1998.
<PAGE> 1
EXHIBIT (d)(2)
Control No. ________ Maximum Primary Subscription Shares Available __________
THE OFFER EXPIRES AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 22, 1998*
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
NON-TRANSFERABLE RIGHTS FOR COMMON STOCK
EXERCISE FORM
Dear Stockholder:
You are entitled to exercise the Rights issued to you as of September 25, 1998,
the Record Date for the Fund's rights offering, to subscribe for the number of
shares of Common Stock of The First Australia Prime Income Fund, Inc. shown on
this Exercise Form pursuant to the Primary Subscription upon the terms and
conditions specified in the Fund's Prospectus dated September 28, 1998 (the
"Prospectus"). The terms and conditions of the rights offering (the "Offer") set
forth in the Prospectus are incorporated herein by reference. Capitalized terms
not defined herein have the meanings attributed to them in the Prospectus. As
holder of these rights you are entitled to purchase one Share of the Fund for
each three Rights you exercise. In accordance with the Over-Subscription
Privilege, as a Record Date stockholder, you are also entitled to subscribe for
additional Shares if Shares remaining after exercise of Rights pursuant to the
Primary Subscription are available and you have fully exercised all Rights
issued to you. If sufficient Shares remain after completion of the Primary
Subscription, all over-subscriptions will be honored in full. If sufficient
Shares are not available after completion of the Primary Subscription to honor
all over-subscriptions, the Fund may, at the discretion of the Board of
Directors, issue shares of Common Stock up to an additional 16,228,694 Shares in
order to cover such over-subscription requests. To the extent the Fund
determines not to issue additional Shares to honor all over-subscriptions, the
available Shares will be allocated among those who over-subscribe based on the
number of Rights originally issued to them by the Fund, so that the number of
Shares issued to stockholders who subscribe pursuant to the Over-Subscription
Privilege will generally be in proportion to the number of Shares owned by them
on the Record Date. The Fund will not offer or sell any Shares which are not
subscribed for pursuant to the Primary Subscription or the Over-Subscription
Privilege.
SAMPLE CALCULATION
PRIMARY SUBSCRIPTION ENTITLEMENT (1-FOR-3)
NUMBER OF SHARES OWNED 100 / 3 = 33 NEW SHARES
ON THE RECORD DATE -------------------- ----------------
(EQUALS NO. OF (IGNORE FRACTIONS)
RIGHTS ISSUED)
SUBSCRIPTION PRICE
The Subscription Price will be 95% of the lower of (i) the average of the last
reported sales prices of a share of the Fund's Common Stock on the American
Stock Exchange on October 22, 1998 (the "Pricing Date") and the four preceding
business days, or (ii) the net asset value on the Pricing Date.
METHOD OF EXERCISE OF RIGHTS
IN ORDER TO EXERCISE YOUR RIGHTS, YOU MUST EITHER (i) COMPLETE AND SIGN THIS
EXERCISE FORM ON THE BACK AND RETURN IT TOGETHER WITH PAYMENT AT THE ESTIMATED
SUBSCRIPTION PRICE FOR THE SHARES, OR (ii) PRESENT A PROPERLY COMPLETED NOTICE
OF GUARANTEED DELIVERY, IN EITHER CASE TO THE SUBSCRIPTION AGENT, STATE STREET
BANK AND TRUST COMPANY, BEFORE 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 22,
1998 (THE "EXPIRATION DATE").*
Full payment of the Estimated Subscription Price per share for all Shares
subscribed for pursuant to both the Primary Subscription and Over-Subscription
Privilege must accompany this Exercise Form and must be made payable in United
States dollars by money order or check drawn on a bank located in the United
States payable to The First Australia Prime Income Fund, Inc. Alternatively, if
a Notice of Guaranteed Delivery is used, a properly completed and executed
Exercise Form, and full payment, as described in such notice, must be received
by the Subscription Agent no later than the close of business on the third
business day after the Expiration Date. For additional information, see the
Prospectus.
Stock certificates for the shares acquired pursuant to the Primary Subscription
will be mailed promptly after the expiration of the Offer and after full payment
for the shares subscribed for has been received and cleared. Certificates
representing shares acquired pursuant to the Over-Subscription Privilege will be
mailed as soon as practicable after full payment has been received and cleared
and all allocations have been effected. Any excess payment to be refunded by the
Fund to a stockholder will be mailed by the Subscription Agent to such
stockholder as promptly as possible.
THESE SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE
Account #:
Control #:
Number of Rights Issued:
(continued on back)
<PAGE> 2
<TABLE>
BY FIRST CLASS MAIL: BY EXPRESS MAIL OR BY HAND:
OVERNIGHT COURIER:
<S> <C> <C>
State Street Bank and Trust Company State Street Bank and Trust Company Securities Transfer & Reporting Services
Corporate Reorganization Corporate Reorganization c/o Boston EquiServe LP
P.O. Box 9061 40 Campanelli Drive 55 Broadway, 3rd Floor
Boston, Massachusetts 02205 Braintree, Massachusetts 02184 New York, New York 10006
</TABLE>
Delivery to an address other than one of the addresses listed above will not
constitute valid delivery.
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
SECTION 1: OFFERING INSTRUCTIONS (CHECK THE APPROPRIATE BOXES) IF YOU WISH TO
SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
[ ] I apply for ALL of my entitlement of new shares pursuant to the Primary
Subscription __________________ x $5.84+ = $ ___________
(no. of new shares)
[ ] I apply for new shares pursuant to the Over-Subscription Privilege**
________________________ ___________ x $5.84+ = $ ________
(no. of additional shares)
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
[ ] I apply for ____________________ x $5.84+ = $ ___________
(no. of new shares)
AMOUNT ENCLOSED $ ___________
SECTION 2: SUBSCRIPTION AUTHORIZATION
I acknowledge that I have received the Prospectus for this Offer and I hereby
irrevocably subscribe for the number of new shares indicated above on the terms
and conditions set in the Prospectus. I understand and agree that I will be
obligated to pay any additional amount to the Fund if the Subscription Price as
determined on the Pricing Date is in excess of the $5.84 Estimated Subscription
Price per share.
I hereby agree that if I fail to pay in full for the shares for which I have
subscribed, the Fund may exercise any of the remedies provided for in the
Prospectus.
Signature of subscriber(s) __________________________________________
__________________________________________
__________________________________________
Telephone number (including area code) ( )___________________________
If you wish to have your shares and refund check (if any) delivered to an
address other than that listed on this Exercise Form you must have your
signature guaranteed by a member of the New York Stock Exchange or a bank or
trust company. Please provide the delivery address above and note if it is a
permanent change.
SECTION 3: DESIGNATION OF BROKER-DEALER
The following broker-dealer is hereby designated as having been instrumental in
the exercise of the Rights hereby exercised:
FIRM:__________________________________________________________________
REPRESENTATIVE NAME:___________________________________________________
REPRESENTATIVE NUMBER:_________________________________________________
_________________________
* Unless the Offer is extended.
** You can only over-subscribe if you have fully exercised your Primary
Subscription Rights.
+ NOTE: $5.84 per share is an estimated price only. The Subscription
Price will be determined on October 22, 1998, the Pricing Date (which
is the same as the Expiration Date, unless extended), and could be
higher or lower depending on the changes in the net asset value and
share price of the Common Stock.
ANY QUESTIONS REGARDING THIS EXERCISE FORM AND THE OFFER MAY BE
DIRECTED TO THE INFORMATION AGENT, SHAREHOLDER COMMUNICATIONS
CORPORATION, TOLL-FREE AT (800) 733-8481, EXT. 422.
<PAGE> 1
Any questions regarding this form or EXHIBIT (d)(3)
Offer may be directed to [FAX Logo]
Shareholder Communications Corporation,
the Information Agent at (800) 733-8481,
Ext. 422.
NON-TRANSFERABLE RIGHTS OFFERING
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
NOTICE OF GUARANTEED DELIVERY
TO BE DELIVERED PRIOR TO 5:00 P.M., NEW YORK CITY TIME, OCTOBER 22, 1998
As set forth in the Prospectus under "Payment for Shares," this form or one
substantially equivalent hereto may be used by a New York Stock Exchange member
firm or bank or trust company as a means of exercising Rights and effecting
subscription and payment for all shares of the Fund's common stock subscribed
for under the Primary Subscription and the Over-Subscription Privilege. Such
form may be delivered by hand or sent by facsimile transmission, overnight
courier or first-class mail to the Subscription Agent prior to 5:00 p.m.,
New York City time, on October 22, 1998 (the "Expiration Date"). If sent by
facsimile, the original executed form must also be sent promptly thereafter by
hand or mail delivery.
THE SUBSCRIPTION AGENT IS: STATE STREET BANK AND TRUST COMPANY
<TABLE>
By First Class Mail: By Hand: By Overnight Courier:
-------------------- -------- ---------------------
<S> <C> <C>
State Street Bank and Trust Securities Transfer & Reporting Services State Street Bank and Trust Company
Corporate Reorganization c/o Boston EquiServe LP Corporate Reorganization
P.O. Box 9061 55 Broadway, 3rd Floor 40 Campanelli Drive
Boston, MA 02205 New York, NY 10006 Braintree, MA 02184
By Facsimile: Confirm by Telephone to:
------------- ------------------------
(781) 794-6333 (781) 794-6388
(No Inquirees Please)
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A
TELECOPY FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A
VALID DELIVERY.
This notice specifies the number of shares subscribed for under both the Primary
Subscription and the Over-Subscription Privilege and guarantees (a) payment in
full for all subscribed shares (which full payment then must be delivered no
later than the close of business on October 27, 1998 (the third business day
after the Expiration Date)) and (b) a properly completed and signed copy of the
Exercise Form (which Form then must be delivered no later than the close of
business on October 27, 1998 (the third business day after the Expiration
Date)). Failure to do so will result in a forfeiture of the Rights. In the event
that the Subscription Price exceeds the Estimated Subscription Price, an invoice
will be sent for any additional amounts due. Payment for such additional
amounts, if any must be made by November 19, 1998. In the event the Subscription
Price is less than the Estimated Subscription Price, the Subscription Agent will
mail a refund to exercising stockholders.
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or trust
company having an office or correspondent in the United States, guarantees
delivery to the Subscription Agent, of (a) payment of the full subscription
price for shares subscribed for under the Primary Subscription and any
additional shares subscribed for pursuant to the Over-Subscription Privilege, as
subscription for such shares is indicated herein or in the Exercise Form, by the
close of business on October 27, 1998 and (b) a properly completed and executed
Exercise Form by the close of business on October 27, 1998.
FOR COMPLETION BY: BROKER, BANK OR TRUST COMPANY
MUST BE RECEIVED BY: 5:00 P.M., OCTOBER 22, 1998 (NEW YORK TIME)
<PAGE> 2
BROKER ASSIGNED CONTROL #____________
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
<TABLE>
<S> <C> <C> <C>
1. Primary Number of Rights to be exercised Number of Primary Subscription shares Payment to be made
Subscription requested for which you are in connection with
guaranteeing delivery of Rights and Primary
payment Subscription shares
____________ Rights _______________ Shares $____________
2. Over-Subscription Privilege Number of Over-Subscription Privilege Payment to be made
shares requested for which you are in connection
guaranteeing payment with Over-
_______________ Shares Subscription
Privilege shares
$____________
3. Totals Total number of Rights to be Total Payment
delivered
____________ Rights $____________
</TABLE>
Method of delivery (circle one)
A. Through DTC
B. Direct to State Street Bank and Trust Company, as Subscription Agent.
Please reference below the registration of the Rights to be delivered:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
PLEASE ASSIGN A UNIQUE CONTROL NUMBER FOR EACH GUARANTEE SUBMITTED. This number
needs to be referenced on any direct delivery of Rights or any delivery through
DTC. In addition, please note that if you are submitting a guarantee for
Over-Subscription Privilege shares and are a DTC participant, you must also
execute and forward to State Street Bank and Trust Company a DTC Participant
Over-Subscription Privilege Exercise Form.
_________________________ ___________________________
Name of Firm Authorized Signature
_________________________ ___________________________
DTC Participant Number Title
_________________________ ___________________________
Address Name (Please Type or Print)
_________________________ ___________________________
City State Zip Code Phone Number
_________________________ ___________________________
Contact Name Date
<PAGE> 1
EXHIBIT (d)(4)
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
RIGHTS OFFERING
NOMINEE HOLDER OVER-SUBSCRIPTION FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION
THIS FORM IS TO BE USED ONLY BY NOMINEES TO EXERCISE THE OVER-SUBSCRIPTION
PRIVILEGE FOR THE ACCOUNT OF PERSONS WHOSE RIGHTS HAVE BEEN EXERCISED AND
DELIVERED IN THE PRIMARY SUBSCRIPTION THROUGH THE FACILITIES OF A COMMON
DEPOSITORY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED
BY THE DELIVERY OF THE SUBSCRIPTION CERTIFICATE.
THE TERMS AND CONDITIONS OF THE OFFER ARE SET FORTH IN THE FUND'S PROSPECTUS
DATED SEPTEMBER 28, 1998 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY
REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE
INFORMATION AGENT, SHAREHOLDER COMMUNICATIONS CORPORATION AT (800) 733-8481,
EXT. 422.
THIS FORM IS VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT BY 5:00 P.M., NEW
YORK CITY TIME, ON OCTOBER 22, 1998* (THE "EXPIRATION DATE") UNLESS PRECEDED BY
A NOTICE OF GUARANTEED DELIVERY.
1. The undersigned hereby certifies to the Fund and the Subscription Agent
that it is a participant in The Depository Trust Company (the "Depository") and
that it has either (i) exercised Rights in the Primary Subscription by means of
transfer to the Depository Account of the Subscription Agent or (ii) delivered
to the Subscription Agent a Notice of Guaranteed Delivery in respect of the
exercise of Rights in the Primary Subscription and will exercise the Rights
called for in such Notice of Guaranteed Delivery by means of transfer to such
Depository Account of the Subscription Agent.
2. The undersigned hereby subscribes for __________ Common Shares pursuant
to the Over-Subscription Privilege, to the extent available, and certifies to
the Fund and the Subscription Agent that such exercise pursuant to the
Over-Subscription Privilege is for the account or accounts of persons (which may
include the undersigned) on whose behalf all Rights in the Primary Subscription
have been exercised, as set forth in the list attached to this form**.
3. The undersigned hereby agrees to make payment of the estimated payment
price of $5.84 for each Common Share subscribed for pursuant to the
Over-Subscription Privilege to the Subscription Agent at or before 5:00 p.m.,
New York City time, on the Expiration Date*, unless a Notice of Guaranteed
Delivery is delivered to the Subscription Agent at or before 5:00 p.m., New York
City time, on the Expiration Date, and hereby represents that (check appropriate
box):
[ ] payment of the actual Subscription Price will be delivered to the
Subscription Agent pursuant to the Notice of Guaranteed Delivery
referred to above;
or
[ ] payment of the estimated payment price in the aggregate amount of
$__________ is being delivered to the Subscription Agent herewith;
or
[ ] payment of the estimated payment price in the aggregate amount of
$__________ has been delivered separately to the Subscription Agent;
and, in the case of funds not delivered pursuant to a Notice of Guaranteed
Delivery, is or was delivered in the manner set forth below (check appropriate
box and complete information relating thereto):
[ ] certified check
[ ] certified bank
[ ] bank draft
*Unless extended by the Fund
<PAGE> 2
__________________________________________________________________________
Primary Subscription Confirmation Number
__________________________________________________________________________
Depository Participant Number
__________________________________________________________________________
Name of Depository Participant
__________________________________________________________________________
Registration into which Common Shares, and/or refund checks should be issued:
Name:_____________________________________________________________________
Address:__________________________________________________________________
__________________________________________________________________________
Certified TIN:____________________________________________________________
By:_______________________________________________________________________
Name:_____________________________________________________________________
Title:____________________________________________________________________
Contact Name:_____________________________________________________________
Phone Number:_____________________________________________________________
Dated:_______________, 1998
** PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE NUMBER OF RIGHTS
OWNED BY EACH BENEFICIAL OWNER, THE NUMBER OF RIGHTS EXERCISED IN THE PRIMARY
SUBSCRIPTION ON BEHALF OF EACH SUCH OWNER AND THE NUMBER OF ADDITIONAL COMMON
SHARES REQUESTED ON BEHALF OF EACH SUCH OWNER PURSUANT TO THE OVER-SUBSCRIPTION
PRIVILEGE.
<PAGE> 1
EXHIBIT (d)(5)
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
RIGHTS OFFERING
BENEFICIAL OWNER CERTIFICATION
The undersigned, a bank, broker or other nominee of Rights to purchase shares of
common stock of The First Australia Prime Income Fund, Inc. pursuant to the
rights offering (the "Offer") described and provided for in the Fund's
Prospectus, dated September 28, 1998 (the "Prospectus"), hereby certifies to The
First Australia Prime Income Fund, Inc. and to State Street Bank and Trust
Company, as Subscription Agent for the Offer, that for each numbered line filled
in below the undersigned has purchased, on behalf of the beneficial owner
thereof (which may be the undersigned), the number of shares specified on such
line pursuant to the Primary Subscription (as defined in the Prospectus) and
such beneficial owner wishes to subscribe for the purchase of additional shares
of common stock pursuant to the Over-Subscription Privilege (as defined in the
Prospectus), in the amount set forth in the third column of such line:
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
I II III
____________________________________________________________________________________________________________
NUMBER OF SHARES NUMBER OF SHARES REQUESTED
PURCHASED PURSUANT TO PURSUANT TO
RECORD DATE SHARES PRIMARY SUBSCRIPTION OVER_SUBSCRIPTION PRIVILEGE
____________________________________________________________________________________________________________
<S> <C> <C>
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
____________________________________________________________________________________________________________
Total = Total = Total =
____________________________________________________________________________________________________________
</TABLE>
________________________________
Number of Nominee Holder
By:
___________________________________
Name:
Title:
Dated:_______________________, 1998
Provide the following information if applicable.
___________________________________________
DTC Participant Number
___________________________________________
DTC Basic Subscription Confirmation Number
___________________________________________
Contact Name: ___________________________________________
Phone Number: ___________________________________________
<PAGE> 1
EXHIBIT (d)(6)
SUBSCRIPTION RIGHTS AGENCY AGREEMENT
This Subscription Rights Agency Agreement (the "Agreement") is made as of
October 1, 1998 between The First Australia Prime Income Fund, Inc., a Maryland
corporation ("the Fund"), and State Street Bank and Trust Company, a
Massachusetts trust company, as subscription and distribution agent ("Agent").
WHEREAS, the Fund proposes to make a subscription offer by issuing certificates
or other evidences of subscription rights, in the form designated by the Fund
("Subscription Rights"), to shareholders of record ("Shareholders") of its
Common Stock as of a record date specified by the Fund (the "Record Date"),
pursuant to which each Shareholder will have certain rights (the "Rights") to
subscribe to shares of the Fund's Common Stock, par value $0.01 ("Common
Stock"), as described in and upon such terms as are set forth in the final
prospectus (the "Prospectus") for the Form N-2 Registration Statement that was
filed by the Fund with the Securities and Exchange Commission on September 28,
1998 as amended from time to time, (the "Registration Statement");
WHEREAS, the Fund wishes the Agent to perform certain acts on its behalf and the
Agent is willing to so act, in connection with the distribution of the
Subscription Rights and the issuance and exercise of the Rights to subscribe
therein set forth, all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein, the parties agree as follows:
1. Pursuant to resolution of its Board of Directors, The First Australia
Prime Income Fund, Inc. hereby appoints and authorizes the Agent to act
on its behalf in accordance with the provisions hereof, and the Agent
hereby accepts such appointment and agrees to so act.
2. (a) Each Subscription Right shall evidence the Rights of the Rights
Holder to purchase Common Stock upon the terms and conditions therein
and herein set forth.
(b) Upon the written advice of the Fund signed by its Chairman,
President, Secretary or Assistant Secretary, as to the Record Date, the
Agent shall, from a list of Shareholders as of the Record Date to be
prepared by the Agent in its capacity as Transfer Agent prepare and
record Subscription Rights in the names of the Shareholders, setting
forth the number of Rights to subscribe to the Fund's Common Stock
calculated on the basis of one-third of one Right for each share of
Common Stock recorded on the Fund's books in the name of each such
Shareholder as of the Record Date. Fractional Rights shall not be
issued and entitlement to Rights shall be rounded down. In the case of
shares held of record by Cede & Co. or any other depository or nominee
(a "Nominee Holder"), we will issue a subscription certificate to the
Depository on behalf of the underlying shareholders (a "Subscription
Certificate"). Each Subscription Certificate shall be dated as of the
Record Date and shall be executed manually or by facsimiles signature
of a duly authorized Officer
1
<PAGE> 2
of the Fund. Upon the written advice, signed as provided above, as to
the effective date of the Registration Statement, the Agent shall as
promptly as practicable deliver the Subscription Certificates, together
with a copy of the Prospectus, to all Record Date Shareholders.
3. (a) Each Subscription Right shall, its having been exercised by the
holder thereof in the manner set forth in the Prospectus, become
irrevocable upon a completed Subscription Certificate having been
delivered to the Agent. The Agent shall, in its capacity as Transfer
Agent for the Fund maintain a register of Subscription Rights and the
holders of record thereof (each of whom shall be deemed a "Shareholder"
hereunder for purposes of determining the rights of holders of
Subscription Rights). Each Subscription Right shall, subject to the
provisions thereof, entitle the Shareholder in whose name it is
recorded to the following:
(1) The right (the "Basic Subscription Right") to purchase one share of
Common Stock for each whole Subscription Right (each Shareholder to
receive one-third of a Subscription Right for each share held on the
record date); and
(2) The right (the "Over-Subscription Right") to purchase from the Fund
additional shares of Common Stock, subject to the availability of such
shares and to allotment of such shares as may be available among
Rightsholders who exercise Over-Subscription Rights on the basis
specified in the Prospectus; provided, however, that a Rightsholder who
has not exercised his Basic Subscription Rights with respect to the
full number of Rights that such Rightsholder owns as of the Expiration
Date, if any, shall not be entitled to any Over-Subscription Rights.
(b) A Rightsholder may exercise his Basic Subscription Rights and
Over-Subscription Rights by delivery to the Agent at its corporate
office specified in the Prospectus of (i) the Subscription Right with
respect thereto, duly executed by such Rightsholder in accordance with
and as provided by the terms and conditions of the Subscription Right,
together with (ii) the Estimated Subscription Price for each share of
Common Stock subscribed for by exercise of such Rights, in United
States dollars by money order or check drawn on a bank located in the
United States and in each case payable to the order of the Fund.
(c) Rights may be exercised at any time after the date of issuance of
the Subscription Certificates with respect thereto but no later than 5
p.m., New York City time, on such date as the Fund shall designate to
the Agent in writing (the "Expiration Date"). For the purpose of
determining the time of the exercise of any Rights, delivery of any
material to the Agent shall be deemed to occur when such materials are
received at the corporate office of the Agent specified in the
Prospectus.
(d) Notwithstanding the provisions of Section 3(b) and 3(c) regarding
delivery of an executed Subscription Right to the Agent prior to 5
p.m., New York City time, on the Expiration Date, if prior to such time
the Agent receives notice of guaranteed delivery of mail or otherwise
from a bank, trust company or a New York Stock Exchange member of
2
<PAGE> 3
guaranteeing delivery of (i) full payment for shares purchased and
subscribed for by virtue of a Rightsholder's Rights, and (ii) a
properly completed and executed Subscription Certificate, then such
exercise of Basic Subscription Rights and Over-Subscription Rights
shall be regarded as timely, subject, however, to receipt of the duly
executed Exercise Form by the Agent by the close of business on the
seventh calendar day after the Expiration Date.
(e) Within fourteen calendar days following the Pricing Date (the
"Confirmation Date"), the Agent shall send a confirmation to each
exercising Rightsholder (or, for shares of Common Stock on the Record
Date held by Cede & Co. or any other depository or nominee, directly to
the depository or nominee), showing (i) the number of shares acquired
pursuant to the Basic Subscription Rights, (ii) the number of shares,
if any, acquired pursuant to the Over-Subscription Rights, (iii) the
per share and total purchase price for the shares, and (iv) any
additional amount payable by such Rightsholder to the Fund or any
excess to be refunded by the Fund to such Rightsholder, in each case
based on the Subscription Price as determined on the Pricing Date. Any
additional payment required from a Rightsholder must be received by the
Agent within ten business days after the Confirmation Date. Any excess
payment to be refunded by the Fund to a Rightsholder, shall be mailed
by the Agent to the Rightsholder within ten business days after the
Confirmation Date, as provided in Section 6 below.
4. If, after allocation of shares of Common Stock to persons exercising
Basic Subscription Rights, there remain unexercised Rights, then the
Agent shall allot the shares issuable upon exercise of such unexercised
Rights (the "Remaining Shares") to persons exercising Over-Subscription
Rights, in the amounts of such over-subscriptions. If the number of
shares for which Over-Subscription Rights have been exercised is
greater than the Remaining Shares, the Agent shall allot the Remaining
Shares to the persons exercising Over-Subscription Rights pro rata
based solely on the number of Rights held on the Expiration Date.
5. All proceeds from the exercise of Rights shall be held by the Agent in
a segregated, interest-bearing account in the name of the Fund. The
Agent shall advise the Fund immediately upon the completion of the
allocation set forth above as to the total number of shares subscribed
and distributable.
6. (a) The Agent shall mail to the Rightsholders within fifteen business
days after the Confirmation Date and after full payment for the Shares
subscribed for has cleared: (i) certificates representing those shares
purchased pursuant to exercise of Basic Subscription Rights and those
shares purchased pursuant to the exercise of Over-Subscription Rights
or a confirmation of an account credit to Dividend Reinvestment
participants; and (ii) in the case of each Rightsholder who subscribed
and paid for shares at an assumed purchase price greater than the
actual per share purchase price, a refund in the amount of the
difference between the assumed purchase price and the actual purchase
price.
(b) The Agent shall deliver the proceeds of the exercise of Primary
Rights to the Fund one business day after the expiration of the
guarantee period and deliver the proceeds of
3
<PAGE> 4
the exercise of rights pursuant to the Over Subscription Privilege two
business days after the expiration of the guarantee period.
7. (a) The Agent shall account promptly to the Fund with respect to Rights
exercised and concurrently account for all monies received and returned
by the Agent with respect to the purchase of shares of Common Stock
upon the exercise of Rights.
(b) The Agent will advise the Fund and Prudential Securities
Incorporated, A.G. Edwards & Sons, Inc. and Salomon Smith Barney, Inc.
(the "Dealer Managers") from day to day during the period of, and
promptly after the termination of, the Offer the total number of Rights
exercised by each Rightsholders during the immediately preceding day
(indicating the total number of Rights verified to be in proper form
for exercise, rejected for exercise and being processed) and the number
of Rights exercised on Subscription Certificates indicating the Dealer
Managers or such soliciting broker as the broker-dealer with respect to
such exercise and such other information as the Fund or the Dealer
Managers may reasonably request.
(c) The Agent shall notify the Fund and the Dealer Managers no later
than 5 p.m., New York City time, on the first business day following
the Expiration Date, of the number of Rights exercised, the total
number of Rights verified to be in proper form for exercise, rejected
for exercise and being processed, and such other information as the
Fund or the Dealer Managers may reasonably request.
(d) Upon request of the Fund after the Confirmation Date, the Agent
shall notify the Fund, and at the Fund's request the Dealer Managers of
any Right with respect of which the full amount due upon the exercise
thereof has not been received and the soliciting broker, if any,
specified as the broker-dealer with respect to such Right.
8. In the event the Agent does not receive, within ten business days after
the Confirmation Date, any amount due from a Shareholder as specified
in Section 3(e), then it shall take such action with respect to such
Shareholder's Subscription Rights as may be instructed in writing by
the Fund, including, without limitation, (i) applying any payment
actually received by it toward the purchase of the greatest whole
number of shares of Common Stock which could be acquired with such
payment, (ii) allocating the shares subject to such Subscription Rights
to one or more other Shareholders, and (iii) selling all or a portion
of the shares of Common Stock deliverable upon exercise of such
Subscription Rights on the open market, and applying the proceeds
thereof to the amount owed.
9. No Subscription Right shall entitle a Shareholder to vote or receive
dividends or be deemed the holder of shares of Common Stock for any
purpose, nor shall anything contained in any Subscription Right be
construed to confer upon any Rightsholder any of the rights of a
shareholder of the Fund or any right to vote, give or withhold consent
to any action by the Fund (whether upon any recapitalization, issue of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meeting or other action affecting
shareholders or receive dividends or otherwise, until the Rights
evidenced thereby shall have been exercised and the shares of Common
Stock purchasable
4
<PAGE> 5
upon the exercise thereof shall have become deliverable as provided in
this Agreement and in the Prospectus.
10. (a) The Fund covenants that all shares of Common Stock issued on
exercise of Rights will be validly issued, fully paid, non-assessable
and free of preemptive rights.
(b) The Fund shall furnish to the Agent, upon request, evidence
satisfactory to the Agent to the effect that a registration statement
under the Securities Act of 1933, as amended (the "Act"), is then in
effect with respect to its shares of Common Stock issuable upon
exercise of the Rights set forth in the Subscription Rights. Upon
written advice to the Agent that the Securities and Exchange Commission
shall have issued or threatened to have issued any order preventing or
suspending the use of the Prospectus, or if for any reason it shall be
necessary to amend or supplement the Prospectus in order to comply with
the Act, the Agent shall cease acting hereunder until receipt of
written instructions from the Fund and such assurances as it may
reasonably request that it may comply with such instruction without
violations of the Act.
11. (a) Any corporation into which the Agent may be merged or converted or
with which it may be consolidated, or any corporation resulting from
any merger, conversion or consolidation to which the Agent shall be a
party, or any corporation succeeding to the corporate trust business of
the Agent, shall be the successor to the Agent hereunder without the
execution or filing of any document by any of the parties hereto,
provided that such corporation would be eligible for appointment as a
successor Agent. In case at the time such successor to the Agent shall
succeed to the agency created by this Agreement, any of the
Subscription Rights shall have been countersigned but not delivered,
any such successor to the Agent may adopt the countersignature of the
original Agent and deliver such Subscription Rights so countersigned,
and in case at that time any of the Subscription Rights shall not have
been countersigned, any successor to the Agent may countersign such
Subscription Rights either in the name of the predecessor Agent or in
the name of the successor Agent, and in all such cases such
Subscription Rights shall have the full force provided in the
Subscription Rights and in this Agreement.
(b) In case at any time the name of the Agent shall be changed and at
such time any of the Subscription Rights have been countersigned but
not delivered, the Agent may adopt the countersignature under its prior
name and deliver Subscription Rights so countersigned, and in case at
that time any of the Subscription Rights shall not have been
countersigned, the Agent may countersign such Subscription Rights
either in its prior name or in its changed name, and in all such cases
such Subscription Rights shall have the full force provided in the
Subscription Rights and in this Agreement.
12. The Fund agrees to pay to the Agent at the completion of the offering,
on demand of the Agent, reasonable compensation for all services
rendered by it hereunder and also its reasonable out-of-pocket expenses
and other disbursements incurred in the administration and execution of
this Agreement and the exercise and performance of its duties hereunder
as set forth in Schedule A (attached).
5
<PAGE> 6
13. The Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement the
Agent shall deem it necessary or desirable that any fact or matter be
proved or established, prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect
thereof is herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
Chairman of the Board or President or a Vice President or the Secretary
or Assistant Secretary or the Treasurer of the Fund delivered to the
Agent, and such certificate shall be full authorization to the Agent
for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(b) The Agent shall not be responsible for and the Fund shall indemnify
and hold the Agent harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributable to all actions of the Agent
or its agents or subcontractors required to be taken pursuant to this
Agreement, provided that such actions are taken in good faith and
without gross negligence or willful misconduct.
(c) The Agent shall be liable hereunder only for its own gross
negligence or willful misconduct and for the negligence or misconduct
of its agents or subcontractors.
(d) The Agent may consult with legal counsel of its selection (who
maybe legal counsel to the Fund), and the opinions of such counsel
shall be full and complete authorization and protection to the Agent as
to any action taken or omitted by it in good faith and in accordance
with such opinion.
(e) Nothing herein shall preclude the Agent from acting in any other
capacity for the Fund or for any other legal entity.
(f) The Agent is hereby authorized and directed to accept instructions
with respect to the performance of its duties hereunder from any
officer or assistant officer of the Fund and to apply to any such
officer of the Fund for advice or instructions in connection with its
duties, and shall be indemnified and not be liable for any action taken
or suffered by it in good faith in accordance with instructions of any
officer or assistant officer of the Fund.
(g) The Agent shall be indemnified and shall incur no liability for or
in respect of any action taken, suffered, or omitted by it in reliance
upon any Subscription Right or certificate for Common Stock, instrument
of assignment or transfer, power of attorney, endorsement, affidavit,
letter, notice, direction, consent, certificate, statement, or other
paper or document that it reasonably believes to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the
proper person or persons.
6
<PAGE> 7
14. The Agent may, without the consent or concurrence of the Shareholders
in whose names Subscription Rights are registered, by supplemental
agreement or otherwise, concur with the Fund in making any changes or
corrections in a Subscription Right that it shall have been advised by
counsel (who may be counsel for the Fund) is appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or
clerical omission or mistake or manifest error therein or herein
contained, and which shall not be inconsistent with the provisions of
the Subscription Right or the Prospectus except insofar as any such
change may confer additional rights upon the Shareholders.
15. All the covenants and provisions of the Agreement by or for the benefit
of the Fund or the Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
16. All capitalized terms used herein and not defined herein shall have the
meaning specified in the Prospectus.
17. The validity, interpretation and performance of this Agreement shall be
governed by the law of the Commonwealth of Massachusetts.
STATE STREET BANK AND TRUST COMPANY THE FIRST AUSTRALIA PRIME
INCOME FUND, INC.
By:__________________________ By:________________________
Name:
Title:
Dated:_______________________ Dated:_____________________
7
<PAGE> 1
EXHIBIT (g)(3)
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
MANAGEMENT AGREEMENT
AGREEMENT dated as of this 1st day of June, 1996,
between The First Australia Prime Income Fund, Inc. (the "Fund"), a Maryland
corporation registered under the Investment Company Act of 1940 (the "1940
Act"), and EquitiLink International Management Limited, a Jersey, Channel
Islands corporation (the "Investment Manager").
WHEREAS, the Fund is a closed-end management
investment company; and
WHEREAS, the Fund engages in the business of
investing its assets in the manner and in accordance with its stated current
investment objective and restrictions;
NOW THEREFORE, in consideration of the premises and
mutual covenants herein contained, the parties agree as follows:
1. Obligations.
1.1 The Investment Manager will manage, in accordance with the Fund's
stated investment objective, policies and limitations and subject to the
supervision of the Fund's Board of Directors, the Fund's investments and will
make investment decisions on behalf of the Fund including the selection of and
placing of orders with brokers and dealers to execute portfolio transactions on
behalf of the Fund. The Investment Manager shall give the Fund the benefit of
the Investment Manager's best judgment and efforts in rendering services under
this Agreement.
1.2 The Fund will pay the Investment Manager a fee at the annual rate
of 0.65% of the Fund's average weekly net assets applicable to shares of common
stock and shares of preferred stock up to $200 million, 0.60% of such assets
between $200 million and $500 million, 0.55% of such assets between $500 million
and $900 million, 0.50% of such assets between $900 million and $1,750 million
and 0.45% of such assets in excess of $1,750 million, computed based upon net
asset value applicable to shares of common stock and shares of preferred stock
at the end of each week and payable at the end of each calendar month.
1.3 In rendering the services required under this Agreement, the
Investment Manager may, at its expense, employ, consult or associate with itself
such person or persons as it believes necessary to assist it in carrying out its
obligations under this Agreement. However, the Investment Manager may not retain
any person or company that would be an "investment adviser," as that term is
defined in the 1940 Act, to the Fund unless (i) the Fund is a party to the
contract with such person or company and (ii) such contract is approved by a
majority of the Fund's Board of Directors and a majority of Directors who are
not parties to any agreement or contract with such company and who are not
"interested persons," as defined in the 1940 Act, of the Fund, the Investment
Manager, or any such person or company retained by the Investment Manager, and
is approved by the vote of a majority of the outstanding voting securities of
the Fund to the extent required by the 1940 Act.
<PAGE> 2
2. Expenses. The Investment Manager shall bear all expenses of its
employees and overhead incurred in connection with its duties under this
Agreement and shall pay all salaries and fees of the Fund's Directors and
officers who are interested persons (as defined in the 1940 Act) of the
Investment Manager. The Fund will bear all of its own expenses, including:
expenses of organizing the Fund; fees of the Fund's Directors who are not
interested persons (as defined in the 1940 Act) of any other party;
out-of-pocket travel expenses for all Directors and other expenses incurred by
the Fund in connection with meetings of directors; interest expense; taxes and
governmental fees including any original issue taxes or transfer taxes
applicable to the sale or delivery of shares or certificates therefor; brokerage
commissions and other expenses incurred in acquiring or disposing of the Fund's
portfolio securities; expenses in connection with the issuance, offering,
distribution, sale or underwriting of securities issued by the Fund; expenses of
registering and qualifying the Fund's shares for sale with the Securities and
Exchange Commission and in various states and foreign jurisdictions; auditing,
accounting, insurance and legal costs; custodian, dividend disbursing and
transfer agent expenses; and the expenses of shareholders' meetings and of the
preparation and distribution of proxies and reports to shareholders.
3. Liability. The Investment Manager shall not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from a breach of
fiduciary duty with respect to receipt of compensation for services (in which
case any award of damages shall be limited to the period and the amount set
forth in Section 36(b)(3) of the 1940 Act) or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of, or
from reckless disregard by it of its obligations and duties under, this
Agreement.
4. Services Not Exclusive. It is understood that the services of the
Investment Manager are not deemed to be exclusive, and nothing in this Agreement
shall prevent the Investment Manager or any affiliate, from providing similar
services to other investment companies and other clients (whether or not their
investment objectives and policies are similar to those of the Fund) or from
engaging in other activities. When other clients of the Investment Manager
desire to purchase or sell a security at the same time such security is
purchased or sold for the Fund, such purchases and sales will be allocated among
the Investment Manager's clients, including the Fund, in a manner that is fair
and equitable in the judgment of the Investment Manager in the exercise of its
fiduciary obligations to the Fund and to such other clients.
5. Duration and Termination. This Agreement shall become effective upon
shareholder approval thereof as required under the 1940 Act and shall continue
in effect for two (2) years from the date of its execution. If not sooner
terminated, this Agreement shall continue in effect with respect to the Fund for
successive periods of twelve months thereafter, provided that each such
continuance shall be specifically approved annually by the vote of a majority of
the Fund's Board of Directors who are not parties to this Agreement or
interested persons (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval and either
(a) the vote of a majority of the outstanding voting securities of the Fund, or
(b) the vote of a majority of the Fund's entire Board of Directors.
Notwithstanding the foregoing, this Agreement may be terminated with respect to
the Fund at any time, without the payment of any penalty, by a vote of a
majority of the Fund's Board of Directors or a majority of
2
<PAGE> 3
the outstanding voting securities of the Fund upon at least sixty (60) days'
written notice to the Investment Manager or by the Investment Manager upon at
least ninety (90) days' written notice to the Fund. This Agreement shall
automatically terminate in the event of its assignment (as defined in the 1940
Act).
6. Miscellaneous.
6.1 This Agreement shall be construed in accordance with the laws of
the State of New York, provided that nothing herein shall be construed as being
inconsistent with the 1940 Act and any rules, regulations and orders thereunder.
6.2 The captions in this Agreement are included for convenience only
and in no way define or delimit any of the provisions hereof or otherwise affect
their construction or effect.
6.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to that extent, the provisions of this
Agreement shall be deemed to be severable.
6.4 Nothing herein shall be construed as constituting the Investment
Manager an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective as of the day and year first above written.
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
By: /s/ David Manor
---------------------------------------
Title: Treasurer
EQUITILINK INTERNATIONAL MANAGEMENT LIMITED
By: /s/ Richard Strickler
---------------------------------------
Title: Director
3
<PAGE> 1
EXHIBIT (h)
The First Australia Prime Income Fund, Inc.
(a Maryland corporation)
64,914,776* Shares of Common Stock Issuable Upon
Exercise of Non-Transferable Rights to Subscribe for
Such Shares of Common Stock
(Common Stock Par Value $0.01 Per Share)
DEALER MANAGER AGREEMENT
September 28, 1998
PRUDENTIAL SECURITIES INCORPORATED
A.G. EDWARDS & SONS, INC.
SALOMON SMITH BARNEY INC.
c/o Prudential Securities Incorporated
One New York Plaza
New York, NY 10292
Ladies and Gentlemen:
The First Australia Prime Income Fund, Inc., a Maryland corporation (the
"Fund"), EquitiLink International Management Limited, a Jersey, Channel Islands
corporation (the "Manager") and EquitiLink Australia Limited, a New South Wales,
Australia corporation (the "Adviser") each confirms its agreement with and
appointment of Prudential Securities Incorporated, A.G. Edwards & Sons, Inc. and
Salomon Smith Barney Inc. (together the "Dealer Managers") to act as dealer
managers in connection with the issuance by the Fund to the holders of record
(the "Holders") of the Fund's common stock, par value $0.01 per share (the
"Common Stock"), of non-transferable rights entitling such Holders to subscribe
for shares of Common Stock and, subject to certain conditions, additional shares
of Common Stock pursuant to an over-subscription privilege (the "Offer"). The
shares of Common Stock for which Holders may subscribe pursuant to the Offer are
herein referred to as the "Shares." Pursuant to the terms of the Offer, the Fund
is issuing each Holder one-third of a non-transferable right (each a "Right" and
collectively, the "Rights") for each share of Common Stock held on the record
date set forth in the Prospectus (as defined herein) (the "Record Date"). Such
Rights entitle Holders to acquire during the subscription period set forth in
the Prospectus (as defined herein) (the "Subscription Period"), at the price set
forth in such Prospectus (the "Subscription Price"), one Share for each full
Right exercised on the terms and conditions set forth in such Prospectus.
Pursuant to the
- ----------------------------
*Pursuant to the over-subscription privilege in connection with the Offer, the
Fund may, at its discretion, increase the number of Shares subject to
subscription by up to 25%.
<PAGE> 2
terms of the Offer, such Rights also entitle Holders to acquire during the
Subscription Period at the Subscription Price certain additional Shares on the
terms and conditions of the over-subscription privilege as set forth in such
Prospectus. EquitiLink Holdings Limited, a New South Wales, Australia
corporation, wholly owns the Adviser through its wholly-owned subsidiary,
EquitiLink Limited, a New South Wales, Australia corporation, which in turn,
wholly owns the Adviser and joins in this Agreement with respect to the
provisions of Section 7 and 8 hereof.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form N-2 (No. 333-61841) and a related
preliminary prospectus for the registration of the Shares under the Securities
Act of 1933, as amended (the "1933 Act"), and has filed such amendments to such
registration statement on Form N-2, if any, and such amended preliminary
prospectuses as may have been required to the date hereof. The Fund will prepare
and file such additional amendments thereto and such amended prospectuses as may
hereafter be required. The Fund previously filed a notification on Form N-8A of
registration of the Fund as an investment company under the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations of the
Commission under the 1940 Act (together with the rules and regulations under the
1933 Act, the "Rules and Regulations"). The registration statement (as amended,
if applicable) and the prospectus constituting a part thereof, as from time to
time amended or supplemented pursuant to the 1933 Act, are herein referred to as
the "Registration Statement" and the "Prospectus", respectively, except that if
any revised prospectus shall be provided to the Dealer Managers by the Fund for
use in connection with the Offer which differs from the Prospectus on file at
the Commission at the time the Registration Statement becomes effective (whether
such revised prospectus is required to be filed by the Fund pursuant to Rule
497(c) or Rule 497(h) of the Rules and Regulations), the term "Prospectus" shall
refer to each such revised prospectus from and after the time it is first
provided to the Dealer Managers for such use. The Prospectus and letters to
beneficial owners of Common Stock, forms used to exercise rights, any letters
from the Fund to securities dealers, commercial banks, trust companies and other
nominees and any newspaper announcements, press releases and other offering
materials and information that the Fund may use, approve, prepare or authorize
for use in connection with the Offer, are collectively referred to hereinafter
as the "Offering Materials."
SECTION 1. Representations and Warranties.
(a) The Fund, the Manager and the Adviser each severally represents
and warrants to each Dealer Manager as of the date hereof and as of the date of
the commencement of the Offer (such later date being hereinafter referred to as
the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective
and at the Representation Date, the Registration Statement will comply
in all material respects with the requirements of the 1933 Act, the 1940
Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective
through the expiration date of the Offer set forth in the Prospectus
(the "Expiration Date"), the Prospectus (unless the term "Prospectus"
refers to a prospectus which has been provided to the Dealer Managers by
2
<PAGE> 3
the Fund for use in connection with the Offer which differs from the
Prospectus on file with the Commission at the time the Registration
Statement becomes effective, in which case at the time such prospectus
is first provided to the Dealer Managers for such use) and the Offering
Materials will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in reliance
upon and in conformity with information furnished to the Fund in writing
by the Dealer Managers expressly for use in the Registration Statement
or Prospectus.
(ii) The accountants who certified the financial statements
included in the Registration Statement are independent public
accountants as required by the 1933 Act and the Rules and Regulations.
(iii) The financial statements included in the Registration
Statement present fairly the financial position of the Fund as at the
date indicated and the results of its operations for the period
specified; such financial statements have been prepared in conformity
with generally accepted accounting principles; and the information in
the Prospectus under the heading "Portfolio Composition" sets forth the
composition of the investment portfolio of the Fund on the date
indicated.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse change,
or any development involving a prospective material adverse change, in
the condition, (financial or otherwise) or management of the Fund, or in
the earnings, business affairs or business prospects of the Fund,
whether or not arising in the ordinary course of business, (B) there
have been no transactions entered into by the Fund which are material to
the Fund other than those in the ordinary course of business, and (C)
except for regular monthly dividends on the outstanding shares of Common
Stock and on the outstanding shares of preferred stock, par value $0.01
per share and liquidation preference of $25,000 per share (the
"Preferred Stock") of the Fund, there has been no dividend or
distribution of any kind declared, paid or made by the Fund on any class
of its capital stock.
(v) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Maryland with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the Registration
Statement; the Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
the failure to so qualify, either individually or in the aggregate,
would have a material adverse effect upon the operations or financial
condition of the Fund; and the Fund has no subsidiaries.
(vi) The Fund is registered with the Commission under the
1940 Act as a closed-end non-diversified management investment company,
and no order of suspension
3
<PAGE> 4
or revocation of such registration has been issued or proceedings
therefor initiated or threatened by the Commission.
(vii) The authorized, issued and outstanding capital stock
of the Fund at July 31, 1998 is as set forth in the Prospectus
under the caption "Capital Stock"; the outstanding Common Stock and
Preferred Stock have been duly authorized by all requisite corporate
action on the part of the Fund and are validly issued and fully paid and
non-assessable; the Rights and the Shares have been duly authorized by
all requisite corporate action on the part of the Fund for issuance
pursuant to the Offer; the Shares have been duly authorized by all
requisite corporate action on the part of the Fund for sale pursuant to
the terms of the Offer and, when issued and delivered by the Fund
pursuant to the terms of the Offer against payment of the consideration
set forth in the Prospectus, will be validly issued and fully paid and
nonassessable; the Common Stock, the Preferred Stock, the Rights and the
Shares conform in all material respects to the descriptions thereof set
forth in the Prospectus under the captions "Capital Stock" and "The
Offer"; and the issuance of each of the Rights and the Shares is not
subject to preemptive rights.
(viii) The Fund is not in violation of its Articles of
Amendment and Restatement, as amended (the "Charter"), or its by-laws,
as amended (the "By-Laws") or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which it is a party or by which it or
its properties may be bound; and the execution and delivery of this
Agreement, and the Subscription Agency Agreement referred to in the
Registration Statement (as used herein, the "Subscription Agency
Agreement") and the consummation of the transactions contemplated herein
and therein have been duly authorized by all necessary corporate action
and will not conflict with or constitute a breach of, or default under,
or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Fund pursuant to any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Fund is a party or by which it may be
bound or to which any of the property or assets of the Fund is subject,
nor will such action result in any violation of the provisions of the
Charter or By-laws or, to the best knowledge of the Fund, the Manager or
the Adviser, any law, administrative regulation or administrative or
court decree applicable to the Fund; and no consent, approval,
authorization or order of any court or governmental authority or agency
is required for the consummation by the Fund of the transactions
contemplated by this Agreement and the Subscription Agency Agreement
except such as has been obtained under the 1940 Act or as may be
required under the 1933 Act, state securities or Blue Sky laws or
foreign securities laws in connection with the Offer.
(ix) The Fund owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated in
the Prospectus and the Fund has not received any notice of proceedings
relating to the revocation or modification of any such licenses,
permits, consents, orders, approvals or authorizations.
4
<PAGE> 5
(x) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Fund, the Manager or the Adviser threatened
against or affecting, the Fund, which might result in any material
adverse change in the condition, financial or otherwise, business
affairs or business prospects of the Fund, or might materially and
adversely affect the properties or assets of the Fund; and there are no
material contracts or documents of the Fund which are required to be
filed as exhibits to the Registration Statement by the 1933 Act, the
1940 Act or by the Rules and Regulations which have not been so filed.
(xi) The Fund owns or possesses, or can acquire on reasonable
terms, adequate trademarks, service marks and trade names necessary to
conduct its business as described in the Registration Statement, and the
Fund has not received any notice of infringement of or conflict with
asserted rights of others with respect to any trademarks, service marks
or trade names which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially adversely
affect the conduct of the business, operations, financial condition or
income of the Fund.
(xii) The Fund intends to direct the investment of the
proceeds of the offering described in the Registration Statement in such
a manner as to comply with the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended ("Subchapter M of the Code"),
and intends to continue to qualify as a regulated investment company
under Subchapter M of the Code.
(xiii) This Agreement, the Management Agreement referred to in
the Registration Statement (the "Management Agreement"), the Advisory
Agreement referred to in the Registration Statement (the "Advisory
Agreement"), the Administration Agreement referred to in the
Registration Statement (the "Administration Agreement") and the
Custodian Agreement referred to in the Registration Statement (the
"Custodian Agreement") have each been duly authorized by all requisite
corporate action on the part of the Fund, executed and delivered by the
Fund and each complies with all applicable provisions of the 1940 Act,
except that with respect to this Agreement no representation is made as
to compliance with Section 17(i) of the 1940 Act.
(xiv) The Shares have been approved for listing, subject to
official notice of issuance, on the American Stock Exchange and the
Pacific Stock Exchange.
(xv) The Fund has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Fund to facilitate the
sale or resale of the Shares or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Common Stock or (B) paid
or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Fund (except for the
solicitation of exercises of Rights pursuant to this Agreement).
5
<PAGE> 6
(xvi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
or if the Prospectus is not in existence, the most recent Preliminary
Prospectus, there has not been any downgrading in the ratings of the
Preferred Stock or any action threatening such a downgrading or placing
the Fund under special surveillance by a "nationally recognized rating
agency" (as defined in Rule 436(g) under the 1933 Act); nor does the
Fund have any knowledge of any facts or circumstances that are likely to
cause such downgrading, threatened downgrading or the placing of the
Fund under such surveillance.
(b) The Manager represents and warrants to each Dealer Manager as of
the date hereof and as of the Representation Date as follows:
(i) The Manager has been duly organized as a corporation
under the laws of Jersey, Channel Islands with corporate power and
authority to conduct its business as described in the Prospectus.
(ii) The Manager is duly registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), and is not prohibited by the Advisers Act or the 1940 Act, or the
rules and regulations under such acts, from acting under the Management
Agreement for the Fund as contemplated by the Prospectus.
(iii) The description of the Manager in the Prospectus is true
and correct and does not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and
there are no pending legal proceedings that would be required to be
described under Item 12 of Form N-2.
(iv) Each of this Agreement and the Management Agreement has
been duly authorized, executed and delivered by the Manager; each of
this Agreement and the Management Agreement is in full force and effect
and constitutes a valid and binding obligation of the Manager,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization or other similar laws relating to
or affecting creditors' rights generally and to general equity
principles; and neither the execution and delivery of this Agreement nor
the performance by the Manager of its obligations hereunder or under the
Management Agreement will conflict with, or result in a breach of, any
of the terms and provisions of, or constitute, with or without the
giving of notice or the lapse of time or both, a default under any
agreement or instrument to which the Manager is a party or by which the
Manager is bound, or any law, order, rule or regulation applicable to it
of any jurisdiction, court, federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Manager or its
respective properties or operations.
(v) The Manager has the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus.
6
<PAGE> 7
(vi) The Fund will not be subject to taxation under the laws
of Jersey, Channel Islands by virtue of its relationship with the
Manager.
(vii) The Manager has not, directly or indirectly, (i) taken
any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Fund to facilitate the
sale or resale of the Shares or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Common Stock or (B) paid
or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Fund (except for the
solicitation of exercises of Rights pursuant to this Agreement).
(viii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, there has been no material adverse change, or
any development involving a prospective material adverse change, in the
condition (financial or otherwise) or management of the Manager, or in
the earnings, business affairs or business prospects of the Manager,
whether or not arising in the ordinary course of business.
(ix) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Fund, the Manager or the Adviser, threatened
against or affecting, the Manager, which might result in any material
adverse change in the condition, financial or otherwise, business
affairs or business prospects of the Manager, or might materially and
adversely affect the properties or assets of the Manager; and there are
no material contracts or documents of the Manager which are required to
be disclosed in the Registration Statement by the 1933 Act, the 1940 Act
or by the Rules and Regulations which have not been so disclosed
therein.
(c) The Adviser represents and warrants to each Dealer Manager as of
the date hereof and as of the Representation Date as follows:
(i) The Adviser has been duly organized as a corporation
under the laws of New South Wales, Australia with corporate power and
authority to conduct its business as described in the Prospectus.
(ii) The Adviser is duly registered as an investment adviser
under the Advisers Act, and is not prohibited by the Advisers Act or the
1940 Act, or the rules and regulations under such acts, from acting
under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(iii) The description of the Adviser in the Prospectus is true
and correct and does not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and
there are no pending legal proceedings that would be required to be
described under Item 12 of Form N-2.
7
<PAGE> 8
(iv) Each of this Agreement and the Advisory Agreement has
been duly authorized, executed and delivered by the Adviser; each of
this Agreement and the Advisory Agreement is in full force and effect
and constitutes a valid and binding obligation of the Adviser,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization or other similar laws relating to
or affecting creditors' rights generally and to general equity
principles; and neither the execution and delivery of this Agreement nor
the performance by the Adviser of its obligations hereunder or under the
Advisory Agreement will conflict with, or result in a breach of, any of
the terms and provisions of, or constitute, with or without giving
notice or lapse of time or both, a default under any agreement or
instrument to which the Adviser is a party or by which the Adviser is
bound, or any law, order, rule or regulation applicable to it of any
jurisdiction, court, federal or state regulatory body, administrative
agency or other governmental body, stock exchange or securities
association having jurisdiction over the Adviser or its properties or
operations.
(v) The Adviser has the financial resources available to it
necessary for the performance of its services and obligations as
contemplated in the Prospectus.
(vi) The Fund will be regarded as a non-resident of Australia
for purposes of Australian tax laws. Pursuant to the United States
Australia Double Tax Agreement, (i) the Fund will not be regarded as
having a permanent establishment in Australia, (ii) the Fund will not
acquire assets which would be regarded as "taxable Australian assets,"
and (iii) none of the Fund's profits arising from the disposal of its
assets will be subject to Australian taxes.
(vii) The Adviser has not, directly or indirectly, (i) taken
any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Fund to facilitate the
sale or resale of the Shares or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Common Stock or (B) paid
or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Fund (except for the
solicitation of exercises of Rights pursuant to this Agreement).
(viii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, there has been no material adverse change, or
any development involving a prospective material adverse change, in the
condition (financial or otherwise) or management of the Adviser, or in
the earnings, business affairs or business prospects of the Adviser,
whether or not arising in the ordinary course of business.
(ix) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Fund, the Manager or the Adviser, threatened
against or affecting, the Adviser, which might result in any material
adverse change in the condition, financial or otherwise, business
affairs or business prospects of the Adviser, or might materially and
adversely affect the properties or assets of the Adviser; and there are
no material contracts or
8
<PAGE> 9
documents of the Adviser which are required to be disclosed in the
Registration Statement by the 1933 Act, the 1940 Act or by the Rules and
Regulations which have not been so disclosed therein.
(d) Any certificate signed by any officer of the Fund, the Manager
or the Adviser and delivered to the Dealer Managers or counsel for the Dealer
Managers shall be deemed a representation and warranty by the Fund, the Manager
or the Adviser, as the case may be, to the Dealer Managers, as to the matters
covered thereby.
SECTION 2. Agreement to Act as Dealer Managers.
(a) On the basis of the representations and warranties contained
herein, and subject to the terms and conditions of the Offer:
(i) The Fund hereby appoints the Dealer Managers and other
soliciting dealers entering into a Soliciting Dealer Agreement in the
form attached hereto as Exhibit A (the "Soliciting Dealer Agreement")
with the Dealer Managers (the "Soliciting Dealers"), to solicit, in
accordance with the 1933 Act, the 1940 Act and the Securities Exchange
Act of 1934 (the "Exchange Act") and their customary practice, the
exercise of the Rights, subject to the terms and conditions of this
Agreement and the procedures described in the Registration Statement;
and
(ii) the Fund agrees to furnish, or cause to be furnished, to
the Dealer Managers, lists, or copies of those lists, showing the names
and addresses of, and number of shares of Common Stock held by, Holders
as of the Record Date, and each of the Dealer Managers agrees to use
such information only in connection with the Offer, and not to furnish
the information to any other person except for securities brokers and
dealers that the Dealer Managers have requested to solicit exercises of
Rights.
(b) Each of the Dealer Managers agrees to provide to the Fund, in
addition to the services described in paragraph (a) of this Section 2, financial
advisory and marketing services in connection with the Offer.
(c) The Fund and the Dealer Managers agree that the Dealer Managers
are independent contractors with respect to the solicitation of the exercise of
Rights and the performance of financial advisory and marketing services to the
Fund contemplated by this Agreement.
(d) In rendering the services contemplated by this Agreement, each
Dealer Manager will not be subject to any liability to the Fund, the Manager or
the Investment Adviser, or any of their affiliates, for any act or omission on
the part of any securities broker or dealer (except with respect to such Dealer
Manager acting in such capacity) or any other person, and neither of the Dealer
Managers will be liable for its acts or omissions in performing its respective
obligations under this Agreement, except for any losses, claims, damages,
liabilities and expenses determined in a final judgment by a court of competent
jurisdiction to have resulted directly from such Dealer Manager's gross
negligence or willful misconduct in such acts or omissions.
9
<PAGE> 10
SECTION 3. Dealer Manager Fees and Reallowance. In full payment for
services rendered and to be rendered hereunder by the Dealer Managers, the Fund
agrees to pay the Dealer Managers a fee for their financial advisory, marketing
and soliciting services equal to 3.75% of the aggregate Subscription Price for
the Shares issued pursuant to the Offer (the "Dealer Manager Fee"). The Dealer
Managers agree with the Fund that the Dealer Managers will reallow a concession
of 2.50% of the Subscription Price per Share for each Share issued pursuant to
the Offer (a "Reallowance") to the broker-dealer designated on the applicable
portion of the form used by the Holder of such Share to exercise Rights;
provided, however, that the designated broker-dealer has executed a confirmation
accepting the terms of the Soliciting Dealer Agreement. As compensation for
their initial financial advisory services, Prudential Securities Incorporated
shall receive the first $300,000 of the Dealer Manager Fee remaining after the
payment of the Reallowance; the remainder of the Dealer Manager Fee after
payment of the Reallowance and of such $300,000 shall be divided proportionally
among the Dealer Managers according to the number of shares of Common Stock sold
by the respective Dealer Managers in the Offer. Payment to each Dealer Manager
by the Fund will be in the form of a wire transfer of same day funds to an
account or accounts identified by such Dealer Manager. Such payments will be
made on the day after the final payment for Shares is due as set forth in the
Prospectus. Payment of the Reallowance to Soliciting Dealers that executed a
confirmation will be made by the Dealer Managers or their agent directly to such
Soliciting Dealers by U.S. dollar checks drawn upon an account at a bank in New
York City. Such payments to such Soliciting Dealers shall be made as soon as
practicable after payment of the Dealer Manager Fee is made to the Dealer
Managers.
SECTION 4. Covenants of the Fund. The Fund covenants with each Dealer
Manager as follows:
(a) The Fund will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and will advise the Dealer
Managers promptly as to the time at which the Registration Statement and any
amendments thereto (including any post-effective amendment) becomes so effective
and (ii) if required, to cause the issuance of any orders exempting the Fund
from any provisions of the 1940 Act and will advise the Dealer Managers promptly
as to the time at which any such orders are granted.
(b) The Fund will notify the Dealer Managers immediately, and
confirm the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendment thereto (including any post-effective amendment),
(ii) of the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose,
(v) of the issuance by the Commission of an order of suspension or revocation of
the notification on Form N-8A of registration of the Fund as an investment
company under the 1940 Act or the initiation of any proceeding for that purpose
and (vi) of the suspension of the qualification of the Shares or the Rights for
offering or sale in any jurisdiction. The Fund will make every reasonable effort
to prevent the issuance of any stop order described in subsection (iv) hereunder
or any order of suspension or revocation described in subsection (v) or
subsection (vi) hereunder and, if any
10
<PAGE> 11
such stop order or order of suspension or revocation is issued, to obtain the
lifting thereof at the earliest possible moment.
(c) The Fund will give the Dealer Managers notice of its intention
to file any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Fund proposes for use by the Dealer
Managers in connection with the Offer, which differs from the prospectus on file
at the Commission at the time the Registration Statement becomes effective,
whether such revised prospectus is required to be filed pursuant to Rule 497(c)
or Rule 497(h) of the Rules and Regulations), whether pursuant to the 1940 Act,
the 1933 Act, or otherwise, and will furnish the Dealer Managers with copies of
any such amendment or supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such amendment
or supplement to which the Dealer Managers or counsel for the Dealer Managers
shall reasonably object.
(d) The Fund will deliver to the Dealer Managers, as soon as
practicable, two signed copies of the Registration Statement as originally filed
and of each amendment thereto, in each case with two sets of the exhibits filed
therewith.
(e) The Fund will furnish to each of the Dealer Managers, from time
to time during the period when the Prospectus is required to be delivered under
the 1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as each of the Dealer Managers may reasonably request for the
purposes contemplated by the 1933 Act or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary,
in the opinion of counsel for the Dealer Managers, to amend or supplement the
Registration Statement or the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, the Fund will forthwith amend or supplement the
Prospectus by preparing, filing with the Commission (and furnishing to the
Dealer Managers a reasonable number of copies of) an amendment or amendments of
the Registration Statement or an amendment or amendments of or a supplement or
supplements to, the Prospectus (in form and substance satisfactory to counsel
for the Dealer Managers) which will amend or supplement the Registration
Statement or the Prospectus so that the Prospectus will not contain an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances existing at
the time the Prospectus is delivered to a Holder, not misleading.
(g) The Fund will endeavor, in cooperation with the Dealer Managers,
to qualify the Shares for offering and sale under the applicable securities laws
of such states and other jurisdictions of the United States as the Dealer
Managers may designate, and will maintain such qualifications in effect for a
period of not less than one year after the date hereof. The Fund will file such
statements and reports as may be required by the laws of each jurisdiction in
which the Shares have been qualified as above provided.
(h) The Fund will make generally available to its security holders
as soon as practicable, but no later than 60 days after the close of the period
covered thereby, an earning statement (in form complying with the provisions of
Rule 158 of the Rules and Regulations)
11
<PAGE> 12
covering a twelve-month period beginning not later than the first day of the
Fund's fiscal quarter next following the "effective" date (as defined in said
Rule 158) of the Registration Statement.
(i) For a period of 180 days from the date of this Agreement, the
Fund will not, without your prior consent, offer or sell, or enter into any
agreement to sell, any equity or equity related securities of the Fund other
than the Shares and the Common Stock issued in reinvestment of dividends or
distributions.
(j) The Fund will use its best efforts to maintain its qualification
as a regulated investment company under Subchapter M of the Code.
(k) The Fund will advise or cause the subscription agent for the
Offer (the "Subscription Agent") to advise the Dealer Managers and each
Soliciting Dealer from day to day during the period of, and promptly after the
termination of, the Offer, as to all names and addresses of Holders exercising
Rights, the total number of Rights exercised by each Holder during the
immediately preceding day, indicating the total number of Rights verified to be
in proper form for exercise, rejected for exercise and being processed and, for
each Dealer Manager and each Soliciting Dealer, the number of Rights exercised
for Shares on exercise forms indicating such Dealer Manager or Soliciting Dealer
as the broker-dealer with respect to such exercise, and as to such other
information as the Dealer Managers may reasonably request; and will notify the
Dealer Managers and each Soliciting Dealer, not later than 5:00 P.M., New York
City time, on the first business day following the Expiration Date, of the total
number of Rights exercised and Shares related thereto, the total number of
Rights verified to be in proper form for exercise, rejected for exercise and
being processed and, for each Dealer Manager and Soliciting Dealer, the number
of Rights exercised for Shares on exercise forms indicating such Dealer Manager
or Soliciting Dealer as the broker-dealer with respect to such exercise, and as
to such other information as the Dealer Managers may reasonably request.
(l) The Fund, the Manager and the Adviser will not, directly or
indirectly, (i) take any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Fund to
facilitate the sale or resale of the Shares or (ii) sell, bid for, purchase, or
pay anyone any compensation for soliciting purchases of the Shares or pay or
agree to pay any person any compensation for soliciting another to purchase any
other securities of the Fund (except for the sale of Shares under this Agreement
or transactions in non-convertible preferred stock of the Fund).
SECTION 5. Payment of Expenses.
(a) The Fund will pay all expenses incident to the performance of
its obligations under this Agreement, including, but not limited to, expenses
relating to (i) the printing and filing of the registration statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Shares, (iii) the fees and
disbursements of the Fund's counsel and accountants, (iv) the qualification of
the Shares under securities laws in accordance with the provisions of Section
4(g) of this Agreement, including filing fees and any reasonable fees or
disbursements of counsel for the Dealer Managers in connection therewith and in
connection with the preparation of the Blue Sky Survey, (v) the
12
<PAGE> 13
printing and delivery to the Dealer Managers of copies of the registration
statement as originally filed and of each amendment thereto, of the preliminary
prospectus, of the Prospectus and any amendments or supplements thereto, of this
Agreement and of the Soliciting Dealer Agreement, (vi) the printing and delivery
of copies of the Blue Sky Survey, (vii) the fees and expenses incurred in
connection with the listing of the Shares on the American Stock Exchange and the
Pacific Stock Exchange, (viii) the filing fees of the Commission and (ix) the
printing, mailing and delivery expenses incurred in connection with Offering
Materials.
(b) In addition to any fees that may be payable to the Dealer
Managers under this Agreement, the Fund agrees to reimburse Prudential
Securities Incorporated upon request made from time to time for its reasonable
expenses incurred in connection with its activities under this Agreement not to
exceed an aggregate of $300,000, including the reasonable fees and disbursements
of legal counsel for the Dealer Managers.
(c) If this Agreement is terminated by the Dealer Managers in
accordance with the provisions of Section 6 or Section 9(a)(i) or 9(a)(ii), the
Fund shall reimburse the Dealer Managers for all of their reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Dealer Managers. In the event the transactions contemplated
hereunder are not consummated, the Fund agrees to pay all of the costs and
expenses set forth in paragraphs (a) and (b) of this Section 5 which the Fund
would have paid if such transactions had been consummated.
(d) The Manager agrees that, to the extent the Fund fails to fulfill
its obligations in paragraphs (b) and (c) of this Section 5, the Manager will
pay all the costs and expenses set forth in this Section 5. The Manager hereby
abandons and waives any rights that the Manager may have at any time under any
applicable laws, existing or future, to require that recourse be made to the
assets of the Fund before any claim is enforced against the Manager in respect
of the Manager's obligations under this paragraph (d) of this Section 5. The
Manager agrees that if at any time the Manager is sued in respect of its
obligations under this paragraph (d) of this Section 5 and the Fund is not also
sued in respect to its obligations under this Section 5, the Manager shall not
claim that the Fund be made a party to such proceedings against the Manager.
SECTION 6. Conditions of Dealer Managers' Obligations. The obligations
of the Dealer Managers hereunder are subject to the accuracy of the
representations and warranties of the Fund, the Manager and the Adviser herein
contained, to the performance by the Fund, the Manager and the Adviser of their
respective obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., New York City time, on the date of this Agreement, or at a later
time and date not later, however, than 5:30 P.M. on the first business day
following the date hereof, or at such later time and date as may be approved by
the Dealer Managers, and at the commencement of the Offer no stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by the
Commission.
(b) On the date of this Agreement, the Dealer Managers shall have
received:
13
<PAGE> 14
(1) The favorable opinion, dated as of the date of this Agreement,
of Dechert Price & Rhoads, counsel for the Fund and special United States
counsel for the Manager and the Adviser, in form and substance satisfactory to
counsel for the Dealer Managers, to the effect that:
(i) The Fund has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Maryland.
(ii) The Fund has corporate power and authority to own, lease
and operate its properties and conduct its business as described in the
Registration Statement and the Prospectus.
(iii) The Fund is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
the failure to so qualify, either individually or in the aggregate,
would have a material adverse effect on the operations or financial
condition of the Fund.
(iv) The outstanding Common Stock and Preferred Stock have
been duly authorized by requisite corporate action on the part of the
Fund and have been validly issued and are fully paid and non-assessable.
(v) The Rights and the Shares have been duly authorized for
issuance pursuant to the Offer; the Shares have been duly authorized for
sale pursuant to the Offer and, when the Shares are issued and delivered
by the Fund pursuant to the Offer against payment of the consideration
set forth in the Prospectus, the Shares will be validly issued and fully
paid and nonassessable; the issuance of the Rights and the Shares is not
subject to any preemptive or other rights to subscribe for any of the
Shares under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which the Fund is a party or by which the
Fund or any of its properties are bound that has been filed as an
exhibit to the Registration Statement (which are the only such
instruments which have been specifically identified to such counsel by
the Fund as material to the business or financial condition of the
Fund), or under the Charter or By-Laws of the Fund, or under the
Maryland Corporation Law; the statements set forth in the Prospectus
under the headings "Description of Common Stock" and "Capital Stock",
insofar as such statements constitute a summary of legal matters or
documents referred to therein, provide a fair summary of such legal
matters or documents.
(vi) This Agreement and the Subscription Agency Agreement
have been duly authorized, executed and delivered by the Fund and comply
with all applicable provisions of the 1940 Act (except that such counsel
need express no opinion as to compliance with Section 17(i) of the 1940
Act).
(vii) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop order
suspending the effectiveness of the Registration Statement has been
issued under the 1933 Act or proceedings therefor have been initiated or
threatened by the Commission.
14
<PAGE> 15
(viii) The Registration Statement and the Prospectus (other
than the financial statements included therein, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the 1933 Act and the 1940 Act and the Rules and
Regulations.
(ix) To the best of their knowledge and information, there
are no legal or governmental proceedings pending or threatened against
the Fund, the Manager or the Adviser that are required to be disclosed
in the Registration Statement, other than those disclosed therein.
(x) To the best of their knowledge and information, there
are no contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments of the Fund required to be described or referred to
in the Registration Statement or to be filed as exhibits thereto other
than those respectively described or referred to therein or filed as
exhibits thereto, the descriptions thereof are correct in all material
respects, references thereto are correct, and no default exists in the
due performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, loan
agreement, note or lease so described, referred to or filed.
(xi) No consent, approval, authorization or order of any
court or governmental authority or agency is required in connection with
the sale of the Shares pursuant to the Offer, except such as has been
obtained under the 1933 Act, the 1940 Act or the Rules and Regulations
or such as may be required under state securities laws; and to the best
of their knowledge and information, the execution and delivery of this
Agreement and the Subscription Agency Agreement and the consummation of
the transactions contemplated herein and therein will not conflict with
or constitute a breach of, or default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or
assets of the Fund pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument known to such counsel to
which the Fund is a party or by which it may be bound or to which any of
the property or assets of the Fund is subject, nor will such action
result in any violation of the provisions of the Charter or By-Laws of
the Fund, or any law or administrative regulation, or, to the best of
their knowledge and information, administrative or court decree.
(xii) The Management Agreement, the Advisory Agreement, the
Custody Agreement and the Administration Agreement have each been duly
authorized and approved by the Fund and comply as to form in all
material respects with all applicable provisions of the 1940 Act, and
each is in full force and effect.
(xiii) The Fund is registered with the Commission under the
1940 Act as a closed-end non-diversified management investment company,
and all required action has been taken by the Fund under the 1933 Act,
the 1940 Act and the Rules and Regulations to make and consummate the
Offer; the provisions of the Charter
15
<PAGE> 16
and By-Laws of the Fund comply as to form in all material respects with
the requirements of the 1940 Act and the rules and regulations
thereunder; and, to the best of their knowledge and information, no
order of suspension or revocation of such registration under the 1940
Act, pursuant to Section 8(e) of the 1940 Act, has been issued or
proceedings therefor initiated or threatened by the Commission.
(xiv) The information in the Prospectus under the caption
"Taxation -- United States Taxes", to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by them and is
correct in all material respects.
(xv) The Manager is duly registered as an investment adviser
under the Advisers Act and is not prohibited by the Advisers Act or the
1940 Act, or the rules and regulations under such acts, from acting
under the Management Agreement for the Fund as contemplated by the
Prospectus.
(xvi) The Adviser is duly registered as an investment adviser
under the Advisers Act and is not prohibited by the Advisers Act or the
1940 Act, or the rules and regulations under such acts, from acting
under the Advisory Agreement for the Fund as contemplated by the
Prospectus.
(2) The favorable opinion, dated as of the date of this Agreement,
of Mourant du Feu & Jeune, counsel to the Manager, in form and substance
satisfactory to counsel for the Dealer Managers, to the effect that:
(i) The Manager has been duly organized as a company
incorporated under the laws of Jersey, Channel Islands, with corporate
power and authority to conduct its business as described in the
Registration Statement and the Prospectus.
(ii) Each of this Agreement and the Management Agreement has
been duly authorized, executed and delivered by the Manager; each of
this Agreement and the Management Agreement constitutes a valid and
binding obligation of the Manager; no consent, approval, authorization
or order of any Jersey, Channel Islands court or governmental authority
or agency is required which has not been obtained for the performance of
this Agreement or the Management Agreement by the Manager; and neither
the execution and delivery of this Agreement or the Management Agreement
nor the performance by the Manager of its obligations hereunder or
thereunder will conflict with, or result in a breach of any of the terms
and provisions of, or constitute, with or without the giving of notice
or the lapse of time or both, a default under the Manager's Memorandum
and Articles of Association or, to the best of such counsel's knowledge
and information, any agreement or instrument to which the Manager is a
party or by which the Manager is bound, or any law, order, rule or
regulation applicable to the Manager of any jurisdiction, court, federal
or state regulatory body, administrative agency or other governmental
body having jurisdiction over the Manager or its properties or
operations; there is no stock exchange or securities association in
Jersey having jurisdiction over the Manager or its properties or
operations.
16
<PAGE> 17
(iii) To the best of such counsel's knowledge and information,
the description of the Manager in the Registration Statement and the
Prospectus does not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(iv) The Fund will not be subject to taxation under the laws
of Jersey, Channel Islands by virtue of its relationship with the
Manager pursuant to the Management Agreement and this Agreement.
(v) To the best of such counsel's knowledge and information,
there are no legal or governmental proceedings pending or threatened
against the Fund, the Manager or the Adviser that are required to be
disclosed in the Registration Statement, other than those disclosed
therein.
(3) The favorable opinion, dated as of the date of this Agreement,
of Stikeman, Elliott, Australian counsel to the Fund and the Adviser, in form
and substance satisfactory to counsel for the Dealer Managers, to the effect
that:
(i) The Adviser has been duly organized as a corporation
under the laws of New South Wales, Australia with corporate power and
authority to conduct its business as described in the Prospectus.
(ii) Each of this Agreement and the Advisory Agreement has
been duly authorized, executed and delivered by the Adviser; each of
this Agreement and the Advisory Agreement constitutes a valid and
binding obligation of the Adviser; no consent, approval, authorization
or order of any court or governmental authority or agency is required
that has not been obtained for the performance of this Agreement or the
Advisory Agreement by the Adviser; and neither the execution and
delivery of this Agreement or the Advisory Agreement nor the performance
by the Adviser of its obligations hereunder or thereunder will conflict
with, or result in a breach of, any of the terms and provisions of, or
constitute, with or without the giving of notice or the lapse of time or
both, a default under, the Adviser's Memorandum and Articles of
Association or, to the best of such counsel's knowledge and information,
any agreement or instrument to which the Adviser is a party or by which
the Adviser is bound, or any law, order, rule or regulation applicable
to the Adviser of any jurisdiction, court, federal or state regulatory
body, administrative agency or other governmental body, stock exchange
or securities association having jurisdiction over the Adviser or its
properties or operations; and if this Agreement were to be governed by
the laws of New South Wales (the domestic law of the Adviser) it would
(subject to it being duly stamped in accordance with the Stamp Duties
Act of New South Wales) be enforceable according to its terms.
(iii) Pursuant to the United States Australia Double Tax
Agreement, (A) the Fund will not be regarded as having a permanent
establishment in Australia and (B) assuming the Fund does not acquire
assets which would be
17
<PAGE> 18
regarded as "taxable Australian assets," none of the Fund's profits
arising from the disposal of its assets will be subject to Australian
taxes.
(iv) The information in the Prospectus under the caption
"Taxation -- Australian Taxes," to the extent that it covers matters of
Australian law or legal conclusions thereunder, has been reviewed by
them and is confirmed.
(v) To the best of such counsel's knowledge and information,
the description of the Adviser in the Registration Statement and the
Prospectus does not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(vi) This Agreement has been duly authorized, executed and
delivered by EquitiLink Holdings Limited and constitutes a valid and
binding obligation of EquitiLink Holdings Limited.
(vii) To the best of such counsel's knowledge and information,
there are no legal or governmental proceedings pending or threatened
against the Fund, the Manager or the Adviser that are required to be
disclosed in the Registration Statement, other than those disclosed
therein.
(4) The favorable opinion, dated as of the date of this Agreement,
of Brown & Wood LLP, counsel for the Dealer Managers, with respect to the
issuance and sale of the Shares, and such other related matters as the Dealer
Managers may reasonably require.
(5) In giving their opinions required by subsection (b)(1) of this
Section, Dechert Price & Rhoads shall additionally state that nothing has come
to their attention that would lead them to believe that the Registration
Statement (other than the financial statements included therein, as to which no
belief need be stated), at the date of this Agreement, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus (other than the financial statement included therein, as to
which no belief need be stated), at the date of this Agreement, included an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. In rendering their
opinion, Dechert Price & Rhoads may rely, as to matters of Maryland law, on the
opinion of Venable, Baetjer and Howard, LLP, dated as of the date of this
Agreement, provided that Dechert Price & Rhoads shall state that such opinion is
satisfactory in form and substance to such counsel and that the Dealer Managers
are justified in relying on it.
(6) In giving their opinion required by subsection (b)(3) of this
Section, Stikeman, Elliott shall additionally state that nothing has come to
their attention that would lead them to believe that Appendix A - "Australian
Economy" in the Registration Statement and the Prospectus, at the date of this
Agreement, contained an untrue
18
<PAGE> 19
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(c) At the date of this Agreement, (i) the Registration Statement
and the Prospectus shall contain all statements which are required to be stated
therein in accordance with the 1933 Act, the 1940 Act and the Rules and
Regulations and in all material respects shall conform to the requirements of
the 1933 Act, the 1940 Act and the Rules and Regulations and the Prospectus
shall not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and no action, suit or
proceeding at law or in equity shall be pending or, to the knowledge of the
Fund, the Manager or the Adviser, threatened against the Fund, the Manager or
the Adviser that would be required to be set forth in the Prospectus other than
as set forth therein, (ii) there shall not have been, since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, any material adverse change in the condition, financial or
otherwise, of the Fund, the Manager or the Adviser, as applicable, or in its
earnings, business affairs or business prospects, whether or not arising in the
ordinary course of business, from that set forth in the Registration Statement
and Prospectus, (iii) the Manager and the Adviser shall each have the financial
resources available to it necessary for the performance of its services and
obligations as contemplated in the Registration Statement and the Prospectus and
(iv) no proceedings shall be pending or, to the knowledge of the Fund, the
Manager or the Adviser, threatened against the Fund, the Manager or the Adviser
before or by any Federal, state or other commission, board or administrative
agency wherein an unfavorable decision, ruling or finding would materially and
adversely affect the business, property, financial condition or income of either
the Fund, the Manager or the Adviser other than as set forth in the Registration
Statement and the Prospectus; and the Dealer Managers shall have received, at
the commencement date of the Offer, a certificate of the President or Treasurer
of the Fund and of the Managing Director of each of the Manager and the Adviser
dated as of such date, confirming the respective representations and warranties
contained in Section 1 of this Agreement and evidencing, to the best of their
knowledge and belief, after reasonable investigation, compliance with the
appropriate provisions of this subsection (c).
(d) At the time of execution of this Agreement, the Dealer Managers
shall have received from PricewaterhouseCoopers LLP a letter, dated such date in
form and substance satisfactory to the Dealer Managers, to the effect that:
(i) they are independent accountants with respect to the
Fund within the meaning of the 1933 Act and the Rules and Regulations;
(ii) in their opinion, the audited financial statements
examined by them and included in the Registration Statement comply as to
form in all material respects with the applicable accounting
requirements of the 1933 Act and the 1940 Act and the Rules and
Regulations;
(iii) they have performed specified procedures, not
constituting an audit, including a reading of the latest available
interim financial statements of the Fund, a reading of the minute books
of the Fund, inquiries of officials of the Fund responsible for
financial accounting matters and such other inquiries and procedures as
may be specified
19
<PAGE> 20
in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that (A) the
unaudited financial statements as of April 30, 1998 included in the
Registration Statement do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the 1940
Act and the Rules and Regulations applicable to unaudited interim
financial statements included in registration statements or are not in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements included in the Registration Statement, and (B) during the
period from April 30, 1998 to a specified date not more than three days
prior to the date of this Agreement, there was any change in the capital
stock or net assets of the Fund, or any increase in the long-term debt
of the Fund, as compared with amounts shown on the unaudited financial
statements included in the Registration Statement, except for changes
which the Registration Statement discloses have occurred or may occur;
and
(iv) in addition to the procedures referred to in clause
(iii) above, they have performed other specified procedures, not
constituting an audit, with respect to certain amounts, percentages,
numerical data, financial information and financial statements appearing
in the Registration Statement, which have previously been specified by
you and which shall be specified in such letter, and have compared
certain of such items with, and have found such items to be in agreement
with, the accounting and financial records of the Fund.
(e) At the date of this Agreement, counsel for the Dealer Managers
shall have been furnished with such documents and opinions as they may
reasonably require for the purpose of enabling them to pass upon the issuance of
the Rights and the Shares and the sale of the Shares as contemplated herein and
in the Registration Statement and to pass upon related proceedings, or in order
to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Fund, the Manager and the Adviser in connection with the issuance
of the Rights and the Shares and sale of the Shares as contemplated herein and
in the Registration Statement shall be satisfactory in form and substance to the
Dealer Managers and counsel for the Dealer Managers.
(f) On (i) the date of this Agreement and (ii) the day immediately
prior to the commencement date of the Offer, the Fund, the Manager, the Adviser
and Dechert Price & Rhoads shall have furnished to the Dealer Managers such
further information, certificates and documents, dated as of, respectively, (i)
the date of this Agreement and (ii) the commencement date of the Offer, as the
Dealer Managers may reasonably request to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions
herein contained.
If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be terminated
by the Dealer Managers by notice to the Fund at any time at or prior to the
termination of the Offer, and such termination shall be without liability of any
party to any other party except as provided in Section 5.
20
<PAGE> 21
SECTION 7. Indemnification and Contribution.
(a) The Fund and the Manager, jointly and severally, agree to
indemnify and hold harmless each of the Dealer Managers and their affiliates and
their respective directors, officers, employees, agents and controlling persons
(each of the Dealer Managers and each such person being an "Indemnified Party")
as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, joint or several, to which
such Indemnified Party may become subject under any applicable federal
or state law, or otherwise, and related to or arising out of (A) an
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto) or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary in order to make the statements
therein not misleading, (B) an untrue statement or alleged untrue
statement of a material fact contained in the Offering Materials (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, (C) any breach by the Fund, the
Adviser or the Manager of any of their respective representations,
warranties and agreements contained in this Agreement or in any
certificate or document furnished pursuant to Section 6(c), 6(e) or 6(f)
hereof, (D) the Fund's failure to make the Offer, or its withdrawal,
termination or extension of the Offer or any other failure on its part
to comply with the terms and conditions specified in the Registration
Statement or the Offering Materials, (E) the Offer, the engagement of
the Dealer Managers pursuant to, and the performance by the Dealer
Managers of the services contemplated by, this Agreement;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon the occurrence of any matter described in
clause (i) above, if such settlement is effected with the written
consent of the Fund or the Manager; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the Dealer
Managers), reasonably incurred in investigating, preparing or defending
against any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon the occurrence of any matter described in clause
(i) above, whether or not such Indemnified Party is a party and whether
or not such claim, action or proceeding is initiated or brought by or on
behalf of the Fund or the Manager, to the extent that any such expense
is not paid under clause (i) or (ii) above.
This indemnity agreement will be in addition to any liability which the Fund or
the Manager may otherwise have.
21
<PAGE> 22
The Fund and the Manager shall not, however, be liable to an Indemnified
Party for any loss, liability, claim, settlement, damage or expense under (A)
clauses (i)(A) and (B) of this subsection 7(a) to the extent arising out of an
untrue statement or omission or alleged untrue statement or omission made in the
Registration Statement or the Offering Materials in reliance upon and in
conformity with written information furnished to the Fund by or on behalf of the
Dealer Managers expressly for use in the Registration Statement (or any
amendment thereto) or any Offering Materials (or any amendment or supplement
thereto) and (B) clause (i)(E) of this subsection 7(a) that is found in a final
judgment by a court of competent jurisdiction to have resulted from the
respective Dealer Manager's bad faith or gross negligence.
Each of the Fund and the Manager also agrees that no Indemnified Party
shall have any liability (whether direct or indirect, in contract or tort or
otherwise) to the Fund, the Manager or their respective security holders or
creditors related to or arising out of the Offer or the engagement of the Dealer
Managers pursuant to, or the performance by the Dealer Managers of the services
contemplated by, this Agreement except to the extent that any loss, liability,
claim, damage or expense is found in a final judgment by a court of competent
jurisdiction to have resulted from the bad faith or gross negligence of such
Indemnified Party.
Each of the Fund and the Manager agrees that, without each of the Dealer
Managers' prior written consent, it will not settle, compromise or consent to
the entry of any judgment in any pending or threatened claim, action or
proceeding in respect of which indemnification could be sought under the
indemnification provisions of this Section 7 (whether or not the Dealer Managers
or any other Indemnified Party is an actual or potential party to such claim,
action or proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Indemnified Party from all liability arising out
of such claim, action or proceeding.
(b) In circumstances in which the indemnity agreement provided for
in the preceding paragraphs of this Section 7 is unavailable or insufficient,
for any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the Offer or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Fund and the Manager on the one hand and the Dealer
Managers on the other shall be deemed to be in the same proportion as the total
proceeds from the Offer (before deducting expenses) received by the Fund bear to
the total compensation received by the Dealer Managers. The relative fault of
the parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Fund or
a Dealer Manager, the parties' relative intents, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
and any other equitable considerations appropriate in the circumstances. The
Fund,
22
<PAGE> 23
the Manager and the Dealer Managers agree that it would not be equitable
if the amount of such contribution were determined by pro rata or per capita
allocation (even if the Dealer Managers were treated as one entity for such
purpose) or by any other method of allocation that does not take into account
the equitable considerations referred to above in this paragraph (b).
Notwithstanding any other provision of this paragraph (b), no Dealer Manager
shall be obligated to make contributions hereunder that in the aggregate exceed
the respective amount of the compensation paid to such Dealer Manager under this
Agreement, less the aggregate amount of any damages that such Dealer Manager has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this paragraph (b), each person, if any, who controls the Fund, the Manager or a
Dealer Manager within the meaning of Section 15 of the 1933 Act or Section 20 of
the Exchange Act shall have the same rights to contribution as the Fund, the
Manager or such Dealer Manager, as the case may be.
(c) In the event that an Indemnified Party is requested or required
to appear as a witness in any action brought by or on behalf of or against the
Fund in which such Indemnified Party is not named as a defendant, the Fund and
the Manager, jointly and severally, agree to reimburse the respective Dealer
Manager for all expenses incurred by it in connection with such Indemnified
Party's appearing and preparing to appear as a witness, including, without
limitation, the fees and disbursements of its legal counsel, and to compensate
the respective Dealer Manager in an amount to be mutually agreed upon.
(d) Each of the Fund and the Manager agrees to notify the respective
Dealer Manager promptly of the assertion against it or any other person of any
claim or the commencement of any action or proceeding relating to a transaction
contemplated by this Agreement. Promptly after receipt by an Indemnified Party
of written notice of any claim or commencement of any action or proceeding with
respect to which indemnification is being sought hereunder, such Indemnified
Party will notify the Fund in writing of such claim or of the commencement of
such action or proceeding, but failure so to notify the Fund will not relieve
either the Fund or the Manager from any liability which it may have to such
Indemnified Party under this indemnification agreement except to the extent that
the Fund or the Manager is materially prejudiced by such failure, and will not
relieve the Fund or the Manager from any other liability that it may have to
such Indemnified Party.
(e) The Fund and the Manager, jointly and severally, agree to
indemnify each Soliciting Dealer and its affiliates and their respective
directors, officers, employees, agents and controlling persons to the same
extent and subject to the same conditions and to the same agreements, including
with respect to contribution, provided for in subsections (a), (b) and (c) of
this Section 7. This indemnity agreement will be in addition to any liability
which the Fund or the Manager may otherwise have.
(f) EquitiLink Holdings Limited and the Adviser agree that, to the
extent that the Fund or the Manager fails to indemnify each Indemnified Person
or person referred to in subsection (e) of this Section 7, in accordance with
the provisions of subsection (a), (c) and (e) of this Section 7, EquitiLink
Holdings Limited and the Adviser will indemnify and hold harmless each
Indemnified Person or person referred to in subsection (e) of this Section 7, to
the extent
23
<PAGE> 24
provided in such subsections (a), (c) and (e), respectively. This indemnity
agreement will be in addition to any liability which EquitiLink Holdings Limited
or the Adviser may otherwise have.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Fund, the Manager or
the Adviser submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of the Dealer
Managers or any controlling person, or by or on behalf of the Fund, the Manager
or the Adviser and shall survive delivery of the Shares pursuant to the Offer.
SECTION 9. Termination of Agreement.
(a) This Agreement may be terminated in the sole discretion of the
Dealer Managers by notice to the Fund given at or prior to the termination of
the Offer in the event that the Fund or the Manager shall have failed, refused
or been unable to perform all material obligations and satisfy all material
conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the termination of the Offer,
(i) the Fund, the Manager or the Adviser shall have
sustained any material loss or interference with its business or
properties from fire, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Fund, the
Manager or the Adviser, as the case may be), in the condition (financial
or otherwise), business prospects, net worth or results of operations of
the Fund, the Manager or the Adviser, except in each case as described
in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto) and except for changes in the Fund's net asset value
due to its normal investment operations;
(ii) trading in the Common Stock has been suspended by the
Commission, the American Stock Exchange or the Pacific Stock Exchange;
(iii) there has occurred any material adverse change in the
existing political or economic conditions or in the financial markets in
the United States or elsewhere or any outbreak of hostilities or other
calamity or crisis or any escalation of existing hostilities the effect
of which is such as to make it, in the Dealer Managers' judgment,
impracticable to market the Shares or enforce contracts for the sale of
the Shares; or
(iv) trading generally on the American Stock Exchange, the
Pacific Stock Exchange, the New York Stock Exchange, the National
Association of Securities Dealers Automated Quotations System or the
Sydney Stock Exchange shall have been suspended, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by any of said exchanges or by order of
the Commission or any other governmental authority, or if a banking
moratorium has been declared by United States or New York authorities or
Australian or New Zealand federal authorities.
24
<PAGE> 25
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 5.
SECTION 10. Jurisdiction of Courts of New York. The Manager, the Adviser
and EquitiLink Holdings Limited each hereby appoints EquitiLink U.S.A., Inc., 45
Broadway, New York, New York 10006 as its authorized agent (the "Authorized
Agent") upon which process may be served in any action by any of the Dealer
Managers, arising out of or based upon this Agreement which may be instituted in
any state or federal court in The City of New York, and the Manager, the Adviser
and EquitiLink Holdings Limited each expressly accepts the jurisdiction of any
such court in respect of such action. Such appointments shall be irrevocable
unless and until the appointment of a successor Authorized Agent and such
successor's acceptance of such appointment. The Manager, the Adviser and
EquitiLink Holdings Limited each will take any and all action, including the
filing of any and all documents and instruments, that may be necessary to
continue such appointment or appointments in full force and effect as aforesaid
and will appoint a successor Authorized Agent if the Authorized Agent named
above ceases operations in The City of New York. Service of process upon the
Authorized Agent and written notice of such service mailed or delivered to the
Manager, the Adviser or EquitiLink Holdings Limited at its address set forth in
Section 11 hereof shall be deemed in every respect service of process upon the
Manager, the Adviser or EquitiLink Holdings Limited, as the case may be.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of written telecommunication. Notices to the
Dealer Managers shall be directed to Prudential Securities Incorporated, One New
York Plaza, New York, New York 10292, Attention: Equity Transactions Group;
notices to the Fund shall be directed to the Fund, Attention: Laurence Freedman
c/o Prudential Investments Fund Management LLC, 100 Mulberry Street, Gateway
Center 3, Newark, New Jersey 07102; notices to the Manager shall be sent to the
Manager at Union House, Union Street, St. Helier, Jersey, Channel Islands,
Attention: Roger Maddock; notices to the Adviser shall be sent to the Adviser at
Level 3, 190 George Street, Sydney, New South Wales, Australia, Attention:
Laurence Freedman; and notices to EquitiLink Holdings Limited shall be sent to
EquitiLink Holdings Limited at Level 3, 190 George Street, Sydney, New South
Wales, Australia, Attention: Laurence Freedman.
25
<PAGE> 26
SECTION 12. Parties. This Agreement shall inure to the benefit of and be
binding upon the Dealer Managers, the Fund, the Adviser, the Manager and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the parties hereto and their respective successors and the controlling
persons and officers and directors referred to in Section 7 and their heirs and
legal representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the parties hereto and thereto and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation.
SECTION 13. Governing Law and Time. This Agreement shall be governed by
the laws of the State of New York applicable to agreements made and to be
performed in said State. Specified times of day refer to New York City time.
26
<PAGE> 27
If the foregoing is in accordance with your understanding of our
Agreement, please sign and return to us a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a single binding agreement
among the Dealer Managers, the Fund, the Manager and the Adviser in accordance
with its terms.
Very truly yours,
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
By:
-----------------------------
Name:
Title:
EQUITILINK INTERNATIONAL
MANAGEMENT LIMITED
By:
-----------------------------
Name:
Title:
EQUITILINK AUSTRALIA LIMITED
By:
-----------------------------
Name:
Title:
EQUITILINK HOLDINGS LIMITED
By:
-----------------------------
Name:
Title:
27
<PAGE> 28
Confirmed and Accepted, as of the
date first above written:
PRUDENTIAL SECURITIES INCORPORATED
By:
--------------------------
Jean-Claude Canfin
Managing Director
A.G. EDWARDS & SONS, INC.
By:
--------------------------
Name:
Title:
SALOMON SMITH BARNEY INC.
By:
--------------------------
Name:
Title:
28
<PAGE> 29
EXHIBIT A
September 28, 1998
SOLICITING DEALER AGREEMENT
Ladies and Gentlemen:
The First Australia Prime Income Fund, Inc., a Maryland corporation (the
"Fund"), proposes to issue to holders of record (the "Holders") as of the close
of business on September 25, 1998 (the "Record Date") of its outstanding shares
of common stock, par value $0.01 per share (the "Common Stock"),
non-transferable rights entitling such Holders to subscribe for shares of Common
Stock and, subject to certain conditions, additional shares of Common Stock
pursuant to an over-subscription privilege (the "Offer"). The shares of Common
Stock for which Holders may subscribe pursuant to the Offer are herein referred
to as the "Shares." Pursuant to the terms of the Offer, the Fund is issuing each
Holder one-third of a non-transferable right (each a "Right" and collectively,
the "Rights") for each share of Common Stock held on the record date set forth
in the accompanying prospectus (the "Prospectus"). Such Rights entitle Holders
to acquire during the subscription period set forth in the Prospectus (the
"Subscription Period"), and at the subscription price set forth in the
Prospectus (the "Subscription Price"), one share for each full right held on the
terms and subject to the conditions set forth in the Prospectus. Pursuant to the
terms of the Offer, such Rights also entitle Holders to acquire during the
Subscription Period at the Subscription Price certain additional Shares on the
terms and conditions of the over-subscription privilege as set forth in such
Prospectus.
The undersigned, as the dealer managers (the "Dealer Managers") named in
the Prospectus, have entered into a Dealer Manager Agreement dated September 28,
1998 with the Fund, EquitiLink International Management Limited, a Jersey,
Channel Islands corporation (the "Manager"), EquitiLink Australia Limited, a New
South Wales, Australia corporation (the "Adviser") and EquitiLink Holdings
Limited, a New South Wales, Australia corporation, pursuant to which the
undersigned have agreed to form and manage, for purposes of soliciting exercises
of Rights pursuant to the Offer, a group of soliciting dealers, including the
undersigned, consisting of brokers and dealers who shall be members in good
standing of the National Association of Securities Dealers, Inc. (the "NASD") or
brokers or dealers not registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") with their principal place of business located
outside the United States, its territories or possessions who agree to solicit
exercises of Rights only in accordance with the laws applicable to such
activities and agree to solicit no exercises of Rights within the United States,
its territories or its possessions or from persons who are nationals thereof or
residents therein and who agree, although not members of the NASD, to conform to
the Conduct Rules of the NASD, in soliciting exercises of Rights outside the
Untied States, its territories and possessions, to the same extent as though
they were members thereof (the members of such group being hereinafter called
the "Soliciting Dealers"). You are invited to become one of the Soliciting
Dealers and by your confirmation hereof you agree to act in such capacity, in
accordance with the terms and
A-1
<PAGE> 30
conditions herein and in your confirmation hereof, to obtain exercises of Rights
pursuant to the Offer.
1. Solicitation and Solicitation Material. Solicitation and other
activities by you hereunder shall be undertaken only in accordance with this
Agreement, the Securities Act of 1933, as amended (the "Securities Act"), the
Exchange Act, and the applicable rules and regulations of the Securities and
Exchange Commission. Accompanying this Agreement are copies of the following
documents: the Prospectus describing the terms of the Offer, an Exercise Form
and letters to stockholders. Additional copies of these documents will be
supplied in reasonable quantities upon your request. You agree that during the
period of the Offer you will not use any solicitation material other than that
referred to above and such as may hereafter be furnished to you by the Fund
through us.
2. Compensation of Soliciting Dealers. As compensation for the
services of the Soliciting Dealers hereunder, the Dealer Managers will reallow
to each Soliciting Dealer a concession of 2.50% of the Subscription Price per
Share purchased pursuant to the Offer through such Soliciting Dealer's efforts
(excluding the exercise of Rights by a Soliciting Dealer for its own account or
for the account of any affiliate, other than a natural person, pursuant to the
Offer) (a "Reallowance"); provided that the aggregate reallowance paid to any
Soliciting Dealer hereunder may not exceed the product of (i) 2.50% of the
Subscription Price per Share, times (ii) the aggregate number of shares of
Common Stock held in such Soliciting Dealer's participant accounts with The
Depository Trust Company on the Record Date divided by three. A Soliciting
Dealer, other than the Dealer Managers acting in such capacity, shall be
entitled to a Reallowance only where the insertion of such Soliciting Dealer's
name has been made on the Exercise Form in the place so provided and where the
Dealer Managers shall have received from such Soliciting Dealer an executed copy
of this Agreement in the form hereof. Payment of such Reallowance will be made
by the Dealer Managers or their agent directly to such Soliciting Dealer by U.S.
dollar check drawn upon an account at a bank in New York City. Such payments to
Soliciting Dealers shall be made as soon as practicable after payment of the
Dealer Manager Fee is made to the Dealer Managers.
No Reallowance shall be payable in respect of any particular
exercise of Rights if, in the opinion of counsel for the Dealer Managers, such
Reallowance cannot legally be paid in respect of such exercise of Rights because
of the provisions of applicable state law or for any other reason. In case of
any dispute or disagreement as to the amount of Reallowance payable to any
Soliciting Dealer hereunder or as to the proper recipient of any such
Reallowance, the decision of the Dealer Managers shall be conclusive. The
payment of any Reallowance to Soliciting Dealers shall be solely the
responsibility of the Dealer Managers, but the Dealer Managers shall have no
obligation or liability to any Soliciting Dealer for any obligation of the Fund
hereunder.
For the purpose of this Section 2, the Offer will expire on the
expiration date set forth in the Prospectus. No Reallowance will be payable to
Soliciting Dealers with respect to Rights exercised after expiration of the
Offer.
3. Trading. You represent to the Fund and the Dealer Managers that
you have not engaged, and agree that you will not engage, in any activity in
respect of the Rights or the Shares
A-2
<PAGE> 31
in violation of the Exchange Act, including Regulation M thereunder. Your
acceptance of a Reallowance will constitute a representation that you are
eligible to receive such Reallowance and that you have complied with the
preceding sentence and your other agreements hereunder.
4. Unauthorized Information and Representations. Neither you nor
any other person is authorized by the Fund or the Dealer Managers to give any
information or make any representations in connection with this Agreement or the
Offer other than those contained in the Prospectus and other authorized
solicitation material furnished by the Fund through the Dealer Managers, and you
hereby agree not to use any solicitation material other than material referred
to in this Section 4. Without limiting the generality of the foregoing, you
agree for the benefit of the Fund and the Dealer Managers not to publish,
circulate or otherwise use any other advertisement or solicitation material
without the prior approval of the Fund and the Dealer Managers. You are not
authorized to act as agent of the Fund or the Dealer Managers in any respect,
and you agree not to act as such agent and not to purport to act as such agent.
On becoming a Soliciting Dealer and in soliciting exercises of Rights, you agree
for the benefit of the Fund and the Dealer Managers to comply with any
applicable requirements of the Securities Act, the Exchange Act, the rules and
regulations thereunder, any applicable securities laws of any state or
jurisdiction where such solicitations may lawfully be made, and the applicable
rules and regulations of any self-regulatory organization or registered national
securities exchange, and to perform and comply with the agreements set forth in
your confirmation of your acceptance of this Agreement, a copy of the form of
which is appended hereto.
5. Blue Sky and Securities Laws. The Dealer Managers assume no
obligation or responsibility in respect of the qualification of the Shares
issuable pursuant to the Offer or the right to solicit Rights under the laws of
any jurisdiction. The enclosed Blue Sky Survey indicates the states in which it
is believed that acceptances of the Offer may be solicited under the applicable
Blue Sky or securities laws. Under no circumstances will you as a Soliciting
Dealer engage in any activities hereunder in any state (a) that is not listed in
said enclosed Blue Sky Survey as a state in which acceptances of the Offer may
be solicited under the Blue Sky or securities law of such state or (b) in which
you may not lawfully so engage. The Blue Sky Survey shall not be considered
solicitation material as that term is herein used. You authorize the undersigned
to cause to be filed in the Department of State of the State of New York a
Further State Notice with respect to the Shares complying with the provisions of
Article 23-A of the General Business Law of the State of New York, if required
by such provisions. You agree that you will not engage in any activities
hereunder outside the United States except in jurisdictions where such
solicitations and other activities may lawfully be undertaken and in accordance
with the laws thereof.
6. Termination. This Agreement may be terminated by written or
telegraphic notice to you from the Dealer Managers, or to the Dealer Managers
from you, and in any case it will terminate upon the expiration or termination
of the Offer; provided, however, that such termination shall not relieve the
Dealer Managers of the obligation to pay when due any Reallowance payable to you
hereunder with respect to Shares acquired pursuant to the exercise of Rights
through the close of business on the date of such termination that are
thereafter exercised pursuant to the Offer or relieve the Fund, the Manager, the
Investment Adviser or EquitiLink Limited of its obligations referred to under
Section 8 hereof, and shall not relieve you of any obligation or liability under
Sections 3, 4, 9 and 10 hereof.
A-3
<PAGE> 32
7. Liability of Dealer Managers. Nothing herein contained shall
constitute the Soliciting Dealers as partners with the Dealer Managers or with
one another, or agents of the Dealer Managers or the Fund, or shall render the
Fund liable for the obligations of the Dealer Managers or the obligations of any
Soliciting Dealers, or shall render the Dealer Managers liable for the
obligations of any Soliciting Dealers other than itself nor constitute the Fund
or the Dealer Managers the agent of any Soliciting Dealer. The Fund, the
Manager, the Adviser, EquitiLink Holdings Limited and the Dealer Managers shall
be under no liability to any Soliciting Dealer or any other person for any act
or omission or any matter connected with this Agreement or the Offer, except
that the Fund, the Manager, the Adviser and EquitiLink Holdings Limited shall be
liable on the basis set forth in Section 8 hereof to indemnify certain persons.
You represent that you have not purported, and agree that you will not purport,
to act as agent of the Fund or the Dealer Managers in any connection or
transaction relating to the Offer.
8. Indemnification. Under the Dealer Manager Agreement, each of the
Fund, the Manager, the Adviser and EquitiLink Holdings Limited has agreed, to
indemnify and hold harmless the Dealer Managers, each Soliciting Dealer and each
person, if any, controlling the Dealer Managers or any Soliciting Dealer within
the meaning of Section 15 of the Securities Act against certain liabilities,
including liabilities under the Securities Act and the Exchange Act. By
returning an executed copy of this Agreement, you agree to indemnify the Fund,
the Manager, the Adviser, EquitiLink Holdings Limited and the Dealer Managers
(the "Indemnified Persons") against losses, claims, damages and liabilities to
which the Indemnified Persons may become subject (a) as a result of your breach
of your representations or agreements made herein or (b) if you (as custodian,
trustee or fiduciary or in any other capacity) are acting on behalf of another
entity that is soliciting exercises of Rights pursuant to the Offer (a
"Soliciting Entity"), as a result of any breach by any such Soliciting Entity of
the representations or agreements made herein by the Soliciting Dealers to the
same extent as if such Soliciting Entity had executed the confirmation referred
to in Section 13 hereof and was therefore a Soliciting Dealer that had directly
made such representations and agreements. This indemnity agreement will be in
addition to any liability which you may otherwise have.
9. Delivery of Prospectus. You agree for the benefit of the Fund
and the Dealer Managers to deliver to each person who owns beneficially Common
Stock registered in your name, and who exercises Rights on an Exercise Form on
which your name, to your knowledge, has been inserted, a Prospectus prior to the
exercise of such person's Rights.
10. Status of Soliciting Dealer. Your acceptance of a Reallowance
will constitute a representation to the Fund and the Dealer Managers that you
(i) have not purported to act as agent of the Fund or the Dealer Managers in any
connection or in any transaction relating to the Offer, (ii) are not affiliated
with the Fund, (iii) will not accept a Reallowance from the Dealer Managers
pursuant to the terms hereof with respect to Shares purchased by you pursuant to
an exercise of Rights for your own account or the account of any affiliate,
other than a natural person, (iv) will not remit, directly or indirectly, any
part of any Reallowance to any beneficial owner of Shares purchased pursuant to
the Offer, (v) agree to the amount of the Reallowance and the terms and
conditions set forth herein with respect to receiving such Reallowance, (vi)
have read and reviewed the Prospectus, and (vii) are (a) a member in good
standing of the NASD and will comply with Rules 2420, 2730, 2740 and 2750 of the
Conduct Rules of the NASD or (b) a broker or dealer with your principal place of
business located outside the United States, its
A-4
<PAGE> 33
territories or its possessions and not registered under the Exchange Act, and
you agree for the benefit of the Fund and the Dealer Managers (1) to solicit
exercises of Rights only in accordance with the laws applicable to such
activities and to solicit no exercises of Rights within the United States, its
territories or possessions or from persons who are nationals thereof or
residents therein, and (2) that, although not a member of the NASD, in acting
under this Agreement you will conform to the Conduct Rules of the NASD,
including Rules 2420, 12730, 2740 and 2750 thereof, in soliciting exercises of
Rights outside the United States, its territories and possessions to the same
extent as though you were a member thereof.
11. Notices. Any notice hereunder shall be in writing or by telegram
and if to you as a Soliciting Dealer shall be deemed to have been duly given if
mailed or telegraphed to you at the address to which this letter is addressed,
and if to the Dealer Managers, if delivered or sent to Prudential Securities
Incorporated at One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group.
12. Parties in Interest. The Agreement herein set forth is intended
for the benefit of the Dealer Managers, the Soliciting Dealers, the Fund, the
Manager, the Adviser and EquitiLink Holdings Limited.
13. Confirmation. Please confirm your agreement to become one of the
Soliciting Dealers under the terms and conditions set forth herein and in the
attached confirmation by completing and executing the confirmation and sending
it via facsimile ((212) 778-3621/1564) to Prudential Securities Incorporated,
Attention: Ms. Adrienne Garofalo, Equity Transactions Group.
14. Governing Law and Time. This Agreement shall be governed by the
laws of the State of New York applicable to agreements made and to be performed
in said State.
A-5
<PAGE> 34
NOTICE: IF A COPY OF THE CONFIRMATION REFERRED TO IN SECTION 13 HEREOF
IS NOT SIGNED, DATED AND RETURNED TO THE DEALER MANAGERS PRIOR TO THE EXPIRATION
OF THE OFFER, NO REALLOWANCE WILL BE PAYABLE HEREUNDER.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
A.G. EDWARDS & SONS, INC.
SALOMON SMITH BARNEY INC.
As Dealer Managers
By: PRUDENTIAL SECURITIES INCORPORATED
By
-------------------------------------
Jean-Claude Canfin
Managing Director
A-6
<PAGE> 35
CONFIRMATION
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY INC.
A.G. EDWARDS & SONS, INC.
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Attention: Ms. Adrienne Garofalo
Equity Transactions Group
Facsimile: (212) 778-3621/1564
Dear Sirs:
We hereby confirm our acceptance of the terms and conditions of the
letter captioned "Soliciting Dealer Agreement" which was attached hereto upon
our receipt hereof (this "Agreement") with reference to the Offer of The First
Australia Prime Income Fund, Inc. (the "Fund") described therein. We hereby
acknowledge that we (i) have received, read and reviewed the Prospectus and
other solicitation material referred to in this Agreement, and confirm that in
executing this confirmation we have relied upon such Prospectus and other
solicitation material authorized by the Fund or EquitiLink International
Management Limited (the "Manager") and upon no other representations whatsoever,
written or oral, (ii) have not purported to act as agent of the Fund or the
Dealer Managers in any connection or in any transaction relating to the Offer,
(iii) are not affiliated with the Fund, (iv) are not purchasing Shares for our
own account or the account of any of our affiliates, other than a natural
person, (v) will not remit, directly or indirectly, any part of any Reallowance
to any beneficial owner of Shares purchased pursuant to the Offer, and (vi)
agree to the amount of the Reallowance and the terms and conditions set forth in
this Agreement with respect to receiving such Reallowance. We also confirm that
we are a broker or dealer who is a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") and will comply with Rules
2420, 2730, 2740, 2750 of the Conduct Rules of the NASD or a broker or dealer
not registered under the Securities Exchange Act of 1934 with its principal
place of business located outside the United States, its territories or
possessions who by signing below also (a) agrees to solicit exercises of Rights
only in accordance with the laws applicable to such activities and to solicit no
exercises of Rights within the United States, its territories or its
possessions, or from persons who are nationals thereof or residents therein and
(b) agrees, although not a member of the NASD, to conform to the Conduct Rules
of the NASD, including Rules 2420, 2730, 2740, 2750 of the Conduct Rules
thereof, in acting under this Agreement in soliciting exercises of Rights
outside the United States, its territories and possessions, to the same extent
as though we were a member thereof. In connection with the Offer, we represent
that we have complied, and agree that we will comply, with any applicable
requirements of the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, any applicable securities or Blue Sky laws and the
rules and regulations under the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and any applicable securities or
Blue Sky laws.
<PAGE> 36
---------------------------------
Firm Name
By
-------------------------------
Name:
Title:
Address:
---------------------------------
---------------------------------
Telephone Number:
---------------------------------
Facsimile Number:
---------------------------------
DTC Number:
---------------------------------
Nominee Name:
---------------------------------
Dated: ______________, 1998
NOTICE: IF A COPY OF THIS CONFIRMATION IS NOT SIGNED, DATED AND RETURNED
TO THE DEALER MANAGERS PRIOR TO THE EXPIRATION OF THE OFFER, NO REALLOWANCE WILL
BE PAYABLE HEREUNDER.
2
<PAGE> 1
EXHIBIT (k)(3)
AMENDMENT TO
ADMINISTRATION AGREEMENT
Amendment dated as of June 1, 1996 to the Administration Agreement
between The First Australia Prime Income fund, Inc., a Maryland corporation (the
"Fund"), and Prudential Investments Fund Management LLC, a Delaware limited
liability company (the "Administrator"), dated December 9, 1988 (the
"Agreement").
In consideration of the mutual promises herein contained, the
Corporation and the Investment Manager hereby agree as follows:
1. Section 3 of the Agreement is hereby amended to read in its
entirety as follows:
"The Fund will pay the Administrator a fee at the annual rate
of 0.15% of the Fund's average weekly net assets applicable to Common
and Preferred Stock up to $900 million, 0.10% of such assets between
$900 million and $1,750 million and 0.07% of such assets in excess of
$1,750 million, computed based upon net asset value applicable to
Common and Preferred Stock at the end of each week and payable at the
end of each calendar month."
Except as set forth above, the terms of the Agreement shall
remain unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below effective as of the day and
year first above written.
THE FIRST AUSTRALIA PRIME
INCOME FUND, INC.
By: /s/ David Manor
___________________________
Name: David Manor
Title: Treasurer
PRUDENTIAL INVESTMENTS FUND
MANAGEMENT LLC
By: /s/ Eugene Stark
____________________________
Name: Eugene Stark
Title: Vice President
<PAGE> 1
Exhibit (j)(1)
[Dechert Price & Rhoads Letterhead]
September 28, 1998
The First Australia Prime Income Fund, Inc.
Level 3
190 George Street
Sydney, New South Wales 2000
Australia
Re: The First Australia Prime Income Fund, Inc.
Registration Statement on Form N-2
Securities Act Registration No. 333-61841
Investment Company Act File No. 811-4611
Ladies and Gentlemen:
We have acted as counsel for The First Australia Prime Income Fund,
Inc., a corporation organized under the laws of Maryland (the "Fund"), in
connection with the above-captioned registration statement (the "Registration
Statement"). In our capacity as counsel, we have examined the Fund's articles of
incorporation and its by-laws, each as amended to date, and are familiar with
the Fund's corporate proceedings in connection with the authorization of the
issuance by the Fund to the holders of the Fund's Common Stock, par value $0.01
per share, of non-transferable rights entitling such holders to subscribe for up
to 81,143,470 shares of Common Stock (the "Shares") as contemplated by the
Registration Statement. In rendering this opinion, we have also made such
examination of law and of fact reasonably available to us as we have deemed
necessary in connection with the opinion hereafter set forth, and we have
relied, with respect to matters of Maryland law, on the opinion of Venable,
Baetjer and Howard, LLP, a copy of which is attached hereto.
<PAGE> 2
The First Australia Prime Income Fund, Inc.
September 28, 1998
Page 2
Based upon such examination, we are of the opinion that the Shares
have been duly authorized and, when issued and sold in the manner contemplated
by the Registration Statement, will be legally issued, fully paid, and
non-assessable.
We hereby consent to the inclusion of this opinion as an exhibit to
the Registration Statement and to the reference to our firm under the caption
"Legal Matters." In giving such consent, we do not hereby admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, and the rules and regulations thereunder.
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE> 1
EXHIBIT (j)(2)
[Venable, Baetjer and Howard, LLP
Letterhead]
September 25, 1998
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, NY 10112
Re: The First Australia Prime Income Fund,
Inc. -- 1998 Rights Offering
Ladies and Gentlemen:
We have acted as special Maryland counsel to The First Australia Prime
Income Fund, Inc., a Maryland corporation (the "Company"), in connection with
the proposed public offering of up to 81,143,470 shares of the Company's common
stock, par value $.01 per share (the "Shares"), pursuant to a rights offering to
shareholders of the Company.
We have examined the Company's prospectus included in its Registration
Statement on Form N-2, File No. 333-61841, substantially in the form in which
it is to become effective (the "Prospectus"), copies of the Company's Charter
and Bylaws, and resolutions adopted by the Board of Directors of the Company
and the Pricing Committee appointed by the Board of Directors, and have further
examined and relied upon a certificate of the Maryland State Department of
Assessments and Taxation to the effect that the Company is duly incorporated
and existing under the laws of the State of Maryland and is in good standing
and duly authorized to transact business in the State of Maryland.
We have also examined and relied upon such other corporate records of the
Company and documents and certificates with respect to factual matters as we
have deemed necessary for purposes of this opinion. We have assumed, without
independent verification, the genuineness of signatures, the authenticity of
documents, and the conformity with the originals of all copies furnished to us.
<PAGE> 2
Dechert Price & Rhoads
September 25, 1998
Page 2
Based on the foregoing, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of State of Maryland.
2. The Shares have been duly and validly authorized and, upon the
issuance of the Shares and payment therefor in the manner contemplated by the
Prospectus, will be validly issued, fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the
authorization and issuance of stock. It does not extend to the securities or
"Blue Sky" laws of Maryland, to federal securities laws or to other laws.
You may rely on this opinion in rendering your opinion to the
Securities and Exchange Commission that is to be filed as an exhibit to the
Registration Statement. We consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us in the Prospectus
under the caption "Legal Matters." We do not thereby admit that we are
"experts" within the meaning of the Securities Act of 1933 and the regulations
thereunder. No other person may rely upon this opinion without our prior
written consent.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP
<PAGE> 1
EXHIBIT (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
registration statement on Form N-2 (the Registration Statement) of our report
dated December 12, 1997, relating to the financial statements and financial
highlights of The First Australia Prime Income Fund, Inc., which appears in
such prospectus. We also consent to the references to us under the headings
Financial Highlights and Experts in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000790500
<NAME> THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 2,297,943,195
<INVESTMENTS-AT-VALUE> 2,314,256,159
<RECEIVABLES> 53,703,350
<ASSETS-OTHER> 799,924
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,368,759,433
<PAYABLE-FOR-SECURITIES> 27,423,081
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,310,890
<TOTAL-LIABILITIES> 45,733,971
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,674,522,868
<SHARES-COMMON-STOCK> 194,744,328
<SHARES-COMMON-PRIOR> 194,559,756
<ACCUMULATED-NII-CURRENT> 796,639
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (112,143,317)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 159,849,272
<NET-ASSETS> 1,723,025,462
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 192,743,394
<OTHER-INCOME> 0
<EXPENSES-NET> 23,156,932
<NET-INVESTMENT-INCOME> 169,586,462
<REALIZED-GAINS-CURRENT> (264,507,226)
<APPREC-INCREASE-CURRENT> 76,842,257
<NET-CHANGE-FROM-OPS> (18,078,507)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (192,515,962)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1,725,751
<NET-CHANGE-IN-ASSETS> (208,868,718)
<ACCUMULATED-NII-PRIOR> 21,750,150
<ACCUMULATED-GAINS-PRIOR> 152,874,030
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12,637,375
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23,156,932
<AVERAGE-NET-ASSETS> 1,848,378,000
<PER-SHARE-NAV-BEGIN> 9.93
<PER-SHARE-NII> 0.87
<PER-SHARE-GAIN-APPREC> (0.96)
<PER-SHARE-DIVIDEND> (0.99)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.85
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000790500
<NAME> THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 2,270,372,914
<INVESTMENTS-AT-VALUE> 2,122,347,909
<RECEIVABLES> 48,687,343
<ASSETS-OTHER> 80,654
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,171,115,906
<PAYABLE-FOR-SECURITIES> 34,467,472
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,927,427
<TOTAL-LIABILITIES> 53,394,899
<SENIOR-EQUITY> 600,000,000
<PAID-IN-CAPITAL-COMMON> 1,674,332,200
<SHARES-COMMON-STOCK> 194,744,328
<SHARES-COMMON-PRIOR> 194,559,756
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (11,749,838)
<ACCUMULATED-NET-GAINS> (263,328,915)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 118,467,560
<NET-ASSETS> 1,517,721,007
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 93,036,191
<OTHER-INCOME> 0
<EXPENSES-NET> 11,400,045
<NET-INVESTMENT-INCOME> 81,636,146
<REALIZED-GAINS-CURRENT> (37,015,836)
<APPREC-INCREASE-CURRENT> (163,234,999)
<NET-CHANGE-FROM-OPS> (118,614,689)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (86,689,766)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (205,304,455)
<ACCUMULATED-NII-PRIOR> 796,639
<ACCUMULATED-GAINS-PRIOR> (112,143,317)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,849,801
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,400,045
<AVERAGE-NET-ASSETS> 1,590,108,000
<PER-SHARE-NAV-BEGIN> 8.85
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (1.03)
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.79
<EXPENSE-RATIO> 1.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
