(R)
The First Australia
Prime Income
Fund, Inc.
- ------------------------------------------------------------
- -------
Annual Report
October 31, 1998
Highlights
- 12.8% cash distribution rate for the year.
- NAV return of 10.0% per annum since
inception, assuming reinvestment of
distributions.
- The Fund's 1:3 rights offering 11%
oversubscribed.
- Proceeds of rights issue being invested in
high yielding Asian bonds.
<PAGE>
LETTER TO SHAREHOLDERS
December 16, 1998
Dear Shareholder,
We are pleased to present the Annual Report which covers
the activities of
The First Australia Prime Income Fund, Inc. for the year
ended October 31, 1998.
Included in this report is a review of the Australian, New
Zealand and selected
Asian economies and investment markets, together with an
overview of the Fund's
investments prepared by the Investment Manager, EquitiLink
International
Management Limited.
Expansion into Asia
Shareholders attending the Annual Meeting of Shareholders
on May 14, 1998
voted to amend the Fund's mandate, allowing it to invest up
to 35% of its assets
in Asian debt securities and to permit it to invest in
certain derivative
securities. To implement this new investment flexibility,
the Fund raised
additional capital through a one-for-three rights offering
during the month of
October.
The rights offering was oversubscribed by 11%, raising a
total net amount of
$365 million. The net proceeds have enabled the Fund to
increase its net
investment income by taking advantage of the relatively high
level of interest
rates available in Asian markets compared with those rates
prevailing in
Australian and New Zealand.
At the date of this report, approximately 10.0% of the
Fund's total assets
were invested in Asian bonds.
Investment Markets
During the October quarter, Australian bond yields
initially weakened in line
with a falling Australian dollar but then improved as the
currency bounced
strongly off its lows and signs of slowing growth emerged.
Speculative trading by hedge funds increased the
volatility of the Australian
dollar during the October quarter. After reaching an all-
time low of 55 cents in
late August, it rebounded strongly to end the period 13.6%
higher, closing at 62
cents. Although the currency rallied 2.5% against the U.S.
dollar over the
quarter, it fell 11.4% over the year.
The Fund commenced investment in the Asian bond markets
in October, and by
the end of its October 31 fiscal year, had invested 2.4% of
the portfolio in
U.S. dollar denominated (Yankee) bonds. Russia's debt
problems in August saw all
emerging market yields, including those on Asian Yankees,
increase. However,
later in the quarter, Asian Yankees rallied strongly. The
rally started in early
October and during the month yields fell more than 1% in the
Fund's preferred
markets: South Korea, Thailand and the Philippines. Further
gains are
anticipated, helped by a more expansionary monetary policy
in the United States,
which should have a flow-on effect across Asian debt
markets.
Investment Performance
The Fund's total investment return based on Net Asset
Value (NAV) was 7.6%
over the quarter and -8.1% over the year. The Australian
dollar continues to be
the main influence on the Fund's performance, with its
recent strength
benefiting the Fund. Since inception the Fund's NAV return
has been 10.0% per
annum.
The Fund's share price total investment return was -14.1%
for the three
months and -23.2% for the year. Since inception the share
price return has been
8.1% per annum. The NAV and share price returns both assume
reinvestment of
distributions.
1
<PAGE>
Distributions
Distributions for the year totalled 72 cents per common
share. Based upon the
share price of $5.63 at October 31, 1998, the cash
distribution rate for the
year was 12.8%. Since all distributions are paid after
deducting Australian and
New Zealand withholding taxes, the effective yield is higher
for those U.S.
investors who are able to claim a tax credit. At its meeting
held on December
15, 1998, the Board of Directors resolved to continue paying
a monthly
distribution of 6 cents per share through March 1999 when
the Board will again
review its policy.
Dividend Reinvestment and Cash Purchase Plan
We invite you to participate in the Fund's Dividend
Reinvestment and Cash
Purchase Plan ('the Plan') which allows you to automatically
reinvest your
distributions in shares of the Fund's common stock at
favorable commission
rates. The Plan also enables you to make additional cash
investments in shares
of at least $100 per month. Under this arrangement, the Plan
Agent will purchase
shares for you on the stock exchange or otherwise on the
open market on or about
the 15th of each month.
As a Participant in the Plan, you will have the
convenience of:
Automatic reinvestment -- the Plan Agent will
automatically reinvest your
distributions, allowing you to gradually grow your holdings
in the Fund;
Lower costs -- shares purchased on your behalf under the
Plan will be at
reduced brokerage rates;
Convenience -- the Plan Agent will hold your shares in
noncertificated form
and will provide a detailed record of your holdings at the
end of each
distribution period.
To request a brochure containing information of the Plan,
together with an
authorization form, please telephone the Plan Agent, State
Street Bank & Trust
Company, toll-free on 1-800-451-6788.
For information on the Fund, or the Fund's Dividend
Reinvestment and Cash
Purchase Plan, please telephone Investor Relations at Dewe
Rogerson, toll free
on 1-800-323-9995.
Sincerely,
Laurence S. Freedman
Brian M. Sherman
Chairman
President
2
<PAGE>
REPORT OF THE INVESTMENT MANAGER
Distributions
During the 12 months to October 31, 1998, the Fund paid a
total of 72 cents
per common share in distributions, comprising 12 monthly
payments of 6 cents per
share. The Board's policy is to provide investors with a
stable monthly
distribution out of current income supplemented by realized
capital gains if
required. The Board reviews the Fund's monthly distribution
rate each quarter.
Based upon the October 31, 1998 share price of $5.63 and
total distributions
paid over the past 12 months, the common shares provided a
cash distribution
rate of 12.8%. All distributions are paid after deducting
Australian and New
Zealand withholding taxes.
Net Asset Value Performance
The Net Asset Value (NAV) per share of the Fund at
October 31, 1998 was
$7.33. Assuming reinvestment of distributions, the NAV
increased by 7.6% over
the three months and decreased by 8.1% over the year,
principally as a result of
the depreciation in the Australian dollar. Since inception,
the Fund's NAV has
returned 10.0% per annum, assuming reinvestment of
distributions. At the date of
this report, the NAV was $6.73 per share.
Share Price
At October 31, 1998 the common share price was $5.63,
representing a discount
of 23.2% to the NAV. At the date of this report, the common
share price has
recovered to close at $5.8125, representing a 13.6% discount
to the NAV. The
Fund's total investment return, based on common share price
and assuming
reinvestment of distributions, was -14.1% for the three
months and -23.2% for
the year. Since inception the share price return has been
8.1% per annum.
Quality of Investments
The Fund has maintained a high credit quality. As of
October 31, 1998, 97% of
the Fund's investments were in securities where either the
issue or the issuer
was rated A or better by Standard & Poor's and Moody's
Investors Service, Inc.
or, if unrated, were judged to be of equivalent quality by
the Investment
Manager.
<TABLE>
<CAPTION>
AAA/Aaa
AA/Aa A BBB/Baa BB/Ba
As of October 31, 1998 % %
% % %
<S> <C> <C>
<C> <C> <C>
- ------------------------------------------------------------
- -------------------------------------
Total Portfolio 70.3 24.1
3.2 0.0 2.4
- ------------------------------------------------------------
- -------------------------------------
</TABLE>
Country Composition
The following table shows the composition of the Fund's
portfolio by Country
(Region) of Issuer.
<TABLE>
<CAPTION>
Ex-Australia
United
Australia (i.e., NZ and
Asia) States
Date % %
%
<S> <C> <C>
<C>
- ------------------------------------------------------------
- --------------------------
October 31, 1998 96.7 2.7
0.6
July 31, 1998 96.0 3.0
1.0
October 31, 1997 95.0 3.0
2.0
- ------------------------------------------------------------
- --------------------------
</TABLE>
3
<PAGE>
Currency Composition
The following table shows the currency composition of the
Fund's portfolio.
<TABLE>
<CAPTION>
Ex-
Australia
Australian (i.e., NZ
Dollar and
Dollar Asian
Currencies) U.S. Dollar
Date % %
%
<S> <C> <C>
<C>
- ------------------------------------------------------------
- ----------------------------
October 31, 1998 96.7 0.3
3.0
July 31, 1998 96.0 3.0
1.0
October 31, 1997 95.0 3.0
2.0
- ------------------------------------------------------------
- ----------------------------
</TABLE>
Maturity Composition
On October 31, 1998 the average maturity of the Fund's
assets, including
cash, was 4.8 years, comprising 4.9 years in Australia and
4.3 years in Asia.
This was shortened from 5.7 years a year ago, to protect the
portfolio from
market volatility earlier in the year. The following table
shows the maturity
composition of the Fund's investments.
<TABLE>
<CAPTION>
Under 1 Year 1 to 5 Years 5
to 10 Years 10 Years & Over
Date % %
% %
<S> <C> <C>
<C> <C>
- ------------------------------------------------------------
- --------------------------------
October 31, 1998 19 37
38 6
July 31, 1998 14 37
40 9
October 31, 1997 6 43
44 7
- ------------------------------------------------------------
- --------------------------------
</TABLE>
Sectoral Composition
The following table shows the sectoral composition of the
portfolio.
<TABLE>
<CAPTION>
State &
Eurobonds & Commercial
Government Semi-Govt**
Corporates Banks***
% %
% %
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------
- ------------------------
Australia 24.0 40.4
22.2 10.1
Ex-Australia
(i.e., NZ and
Asia) 0.0 0.0
2.4 0.3
United States 0.0 0.0
0.0 0.6
----- -----
- ----- -----
Total 24.0 40.4
24.6 11.0
- ------------------------------------------------------------
- ------------------------
</TABLE>
* Includes government guaranteed debt.
** Includes State Government Guaranteed Banks.
*** Includes cash held by the Fund's custodian and
repurchase agreements.
4
<PAGE>
- ------------------------------------------------------------
- --------------------
MARKET REVIEW AND OUTLOOK
- ------------------------------------------------------------
- --------------------
AUSTRALIA
Economy
The Australian economy has weathered the Asian downturn
well, with the latest
upwardly revised data showing growth of 4.4% over the year
to June 1998
(previously 3.9%.) This has been due mainly to the strength
of services and
other domestically focused parts of the economy, helped by
low interest rates,
subdued real wage growth, modest employment growth and
relatively healthy
consumer sentiment.
Exports have shown particular resilience, with product
redirected away from
the weakening Asian economies towards the U.S. and Europe.
The lower Australian
dollar has made exporters more price competitive on world
markets.
Inflation remains at 35-year lows, with data released in
the past three
months showing annual price growth of just 1.6%. The impact
of a weaker currency
continues to be offset by competitive pressures and
discounting from Asian
importers.
We expect modest domestic growth of around 3% for the
current calendar year,
with further moderation into 1999. We see growth remaining
positive, despite any
downturn.
Fixed Income
The environment of slowing growth and low inflation has
been positive for
bonds, with 10-year yields ending October at 4.97%, down
more than 1% over the
calendar year to date.
During the October quarter, yields initially weakened in
line with a falling
Australian dollar but then improved as the currency bounced
strongly off its
lows and signs of slowing growth emerged.
Based on our expectations of moderating growth and
Australia's excellent
inflation performance, we support the case for lower cash
rates but see no
urgency for Australia's central bank to make such a move,
given the resilience
of domestic activity.
Currency
Speculative trading by hedge funds increased the
volatility of the Australian
dollar during the October quarter. After reaching an all-
time low of 55 cents in
late August, it rebounded strongly to end the period 13.6%
higher, closing at 62
cents. The currency rallied 2.5% against the U.S. dollar
over the quarter,
although it fell 11.4% over the year.
Although the currency, in trade-weighted terms, remains
13% below its highs
reached at the start of the year, it has most likely passed
its low point. The
resilience of domestic growth is a key positive in the near
term. Looking
further out, improving global growth will lead commodity
prices higher. These
have traditionally been a significant influence on the
Australian dollar due to
the nation's concentration of primary exports.
5
<PAGE>
ASIA
Economies
Most Asian economies are well into the economic
adjustments that will
eventually lead to recovery from the 1997 financial market
crisis. Initially the
adjustments involved adoption of very tight monetary
policies to provide support
for heavily devalued currencies and to encourage the return
of foreign
investors. The cost of this phase was sharp reductions in
economic activity
across the region. More recently, the benefits of these
initial adjustments are
showing through in substantial improvement in international
trade earnings and
well-contained inflation, particularly in the countries
presently of interest to
the Fund: South Korea, Thailand, the Philippines, China and
Hong Kong. Slower
growth and falling inflation have started the next
adjustment phase of easier
monetary policy, making domestic Asian bond markets
particularly attractive as
interest rates fall.
During the October quarter the adjustment benefits
continued to show through
strongly with annual inflation in October well below the
1998 IMF's targets of
8%-9%. South Korea reported inflation of 7.2%, Thailand 5.9%
and China reported
1.4% deflation. Substantial international trade surpluses
were featured in
China, South Korea, Thailand and the Philippines. The IMF
issued very positive
quarterly progress on South Korea, Thailand and the
Philippines, paving the way
for further easing of monetary conditions.
Asian-Domestic Bond and Currency Markets
Earlier in the year, Asian-domestic bond yields were very
high, reflecting
high short-term interest rates needed to reverse currency
weakness. Towards the
end of October, yields started to fall across the region, a
trend we expect to
see continue as monetary conditions ease. For example, South
Korea bond yields
improved particularly with the 3-year yield down 3.5% to
8.5% in the last weeks
of October.
A softer U.S. dollar in the October quarter, combined
with continuing large
trade surpluses in most Asian countries, fostered some
recovery in Asian
currencies from previously very low levels. The Thai baht
and Philippine peso
were particularly strong in the quarter, appreciating by
11.1% and 4.0%,
respectively against the U.S. dollar. The Korean won started
its appreciation
the previous quarter and gave back some of its earlier
gains, but still finished
the quarter up 24% from its February lows. Depreciation
pressure on the Chinese
and Hong Kong currencies earlier in the quarter were
alleviated by improving
Chinese international competitiveness generated indirectly
by a firmer Japanese
yen. Many Asian currencies are likely to appreciate further.
Despite strong
rallies, all remain well below their precrisis levels.
US$ Yankee Bond Market
The U.S. dollar denominated (Yankee) bond market is driven
primarily by credit
considerations. Russia's debt problem in August saw all
emerging market yields,
including those on Asian Yankees, increase. However, later
in the quarter, Asian
Yankees rallied strongly. The rally started in early October
and during the
month yields fell more than 1% in the Fund's preferred
markets: South Korea,
Thailand and the Philippines. Further gains are anticipated,
helped
substantially by a more expansionary monetary policy in the
United States, which
should have a flow-on effect across all Asian debt markets.
6
<PAGE>
Summary of Key Market Rates
The following table summarizes the movements of key
interest rates and
currencies over the last 3- and 12-month periods.
<TABLE>
<CAPTION>
July 31, 1998 October 31, 1998
<S> <C> <C>
- -------------------------------------------------------
Australia
90 day bank bill 5.15% 4.82%
10 year bonds 5.57% 4.97%
Australian Dollar $ 0.61 $ 0.62
New Zealand
90 day bank bill 7.41% 4.62%
10 year bonds 6.14% 5.38%
NZ Dollar $ 0.51 $ 0.53
South Korea
90 day bank bill 2.39% 8.00%
3 year bond 12.00% 8.50%
South Korean
Won* W1230 W1319
Thailand
90 day bank bill 2.75% 6.50%
12 month BIBOR 3.75% 7.75%
Thai Baht* B41 B37
Philippines
90 day bank bill 6.00% 15.31%
5 year bond 19.28% 18.46%
Philippines Peso P42 P40
Hong Kong
90 day bank bill 8.75% 7.25%
5 year bond 9.78% 7.37%
Hong Kong Dollar* HK$7.75 HK$7.75
US$ Yankee Bonds
South Korea 9.82% 10.22%
Thailand 9.73% 9.90%
Philippines 9.47% 10.54%
* These currencies are quoted Asian currency per U.S.
dollar. The Australian and New Zealand dollars are
quoted U.S. dollars per currency.
</TABLE>
EquitiLink
International Management Limited
7
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Portfolio of Investments
October 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--115.4%
AUSTRALIA--112.0%
Government and Semi-Government--66.8%
Commonwealth of Australia--33.6%
Australian Capital
Territory,
A$ 10,000 12.00%, 11/15/01............ $ 7,524,823
Commonwealth Bank of
Australia,
5,000 5.50%, 3/15/01.............. 3,168,250
5,000 5.50%, 3/1/02............... 3,179,954
5,000 6.00%, 8/1/03............... 3,236,061
Commonwealth of Australia,
49,900 13.00%, 7/15/00............. 35,427,264
5,000 13.00%, 12/15/00............ 3,652,951
70,000 8.75%, 1/15/01.............. 47,589,456
48,000 12.00%, 11/15/01............ 36,298,293
10,000 9.75%, 3/15/02.............. 7,253,515
40,000 9.50%, 8/15/03.............. 30,129,048
15,000 9.00%, 9/15/04.............. 11,385,192
20,000 10.00%, 2/15/06............. 16,353,514
45,000 6.75%, 11/15/06............. 31,507,343
76,000 10.00%, 10/15/07............ 64,523,709
72,000 8.75%, 8/15/08.............. 57,917,234
112,000 7.50%, 9/15/09.............. 84,373,189
10,000 5.75%, 6/15/11.............. 6,634,421
Northern Territory
Authority,
40,000 12.50%, 7/15/01............. 29,862,223
--------------
480,016,440
--------------
New South Wales--8.2%
New South Wales Treasury
Corporation,
35,000 7.00%, 2/1/00............... 22,450,549
57,000 12.00%, 12/1/01............. 42,855,649
25,000 7.00%, 4/1/04............... 16,996,701
20,000 12.60%, 5/1/06.............. 18,113,736
23,000 8.00%, 3/1/08............... 17,057,160
--------------
117,473,795
--------------
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
Queensland--4.3%
Queensland Treasury
Corporation,
A$ 10,000 8.00%, 8/14/01.............. $ 6,772,969
20,000 8.00%, 5/14/03.............. 14,020,570
20,000 6.50%, 6/14/05.............. 13,421,777
20,000 6.00%, 7/14/09.............. 13,071,929
20,000 6.00%, 6/14/21.............. 13,272,029
--------------
60,559,274
--------------
South Australia--5.4%
Electricity Trust of South
Australia,
5,000 13.00%, 10/1/05............. 4,467,698
South Australian Financing
Authority,
30,000 12.50%, 10/15/00............ 21,417,272
50,000 10.00%, 1/15/03............. 37,072,690
20,000 7.50%, 10/15/07............. 14,317,776
--------------
77,275,436
--------------
Tasmania--4.7%
Tasmanian Public Finance
Corporation,
15,000 8.25%, 11/15/99............. 9,697,556
13,000 12.50%, 1/15/01............. 9,413,626
65,000 9.00%, 11/15/04............. 48,318,322
--------------
67,429,504
--------------
Victoria--6.3%
Treasury Corporation of
Victoria,
36,000 12.50%, 10/15/03............ 29,774,855
50,500 10.25%, 11/15/06............ 41,657,626
25,000 7.50%, 8/15/08.............. 18,067,798
--------------
89,500,279
--------------
Western Australia--4.3%
Western Australia Treasury
Corporation,
40,000 10.00%, 7/15/05............. 31,681,190
40,000 8.00%, 10/15/07............. 29,593,655
--------------
61,274,845
--------------
Total long-term Australian
government and
semi-government
(cost US$1,007,768,919)..... 953,529,573
--------------
</TABLE>
See Notes to
Financial Statements.
8
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
Eurobonds--39.7%
Banking and Finance--15.5%
Australia Industrial
Development Corporation,
A$ 5,000 8.75%, 7/20/04.............. $ 3,595,892
Bank Austria AG,
10,000 10.875%, 11/17/04........... 7,817,209
Bank of Western Australia
Limited,
10,000 7.75%, 6/9/03............... 6,809,662
8,000 7.25%, 9/29/03.............. 5,371,500
Banque National de Paris,
14,000 9.00%, 8/13/02.............. 9,758,619
Commerzbank Overseas
Finance,
5,000 10.50%, 1/19/00............. 3,312,426
10,000 10.25%, 4/28/00............. 6,681,037
Commonwealth Bank of
Australia,
10,000 9.00%, 8/15/05.............. 7,340,641
Credit Locale de France,
20,000 8.75%, 7/23/01.............. 13,549,624
5,000 10.25%, 4/12/05............. 3,873,702
Export Finance,
19,000 11.00%, 12/29/04............ 15,140,661
Federal National Mortgage
Association Global,
40,000 5.75%, 9/5/00............... 25,385,094
20,000 6.50%, 7/10/02.............. 13,120,861
27,065 6.375%, 8/15/07............. 17,924,973
Finnish Eksport Credit,
2,925 9.25%, 12/30/99............. 1,907,791
GMAC Australia Finance
Limited,
6,500 9.00%, 5/22/01.............. 4,402,284
Merrill Lynch & Co.
Australia,
10,000 7.625%, 3/15/02............. 6,566,718
Morgan Guaranty Trust,
10,000 8.00%, 4/18/01.............. 6,618,782
National Australia Bank,
5,000 8.00%, 4/10/02.............. 3,313,207
Northern Territory
Authority,
5,000 10.03%, 8/9/05.............. 3,889,972
Societe Generale Australia,
5,000 7.75%, 2/19/01.............. 3,283,378
State Bank of New South
Wales,
5,000 12.25%, 2/26/01............. 3,588,231
20,000 11.75%, 8/15/01............. 14,550,622
28,000 10.75%, 3/12/02............. 20,315,386
10,000 9.25%, 2/18/03.............. 7,140,006
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
State Bank of South
Australia,
A$ 10,000 11.00%, 4/10/02............. $ 7,324,928
--------------
222,583,206
--------------
Diversified Industrials--0.7%
Federal Airports
Corporation,
15,000 7.00%, 2/16/04.............. 9,977,703
--------------
Semi-Government and Local
Government--16.6%
New South Wales Treasury
Corporation,
25,000 8.00%, 12/1/01.............. 17,041,525
50,000 12.00%, 12/1/01............. 37,281,991
10,000 7.00%, 4/1/04............... 6,798,413
7,000 10.50%, 12/7/04............. 5,428,830
10,000 10.00%, 6/6/05.............. 7,650,671
50,000 6.50%, 5/1/06............... 32,485,898
34,000 12.60%, 5/1/06.............. 30,682,396
7,000 9.25%, 6/20/06.............. 5,266,905
55,000 8.00%, 3/1/08............... 40,795,196
Queensland Treasury
Corporation,
25,000 8.00%, 5/14/03.............. 17,545,043
20,000 12.00%, 6/15/05............. 17,253,970
20,000 8.00%, 9/14/07.............. 14,849,371
South Australia Financing
Authority,
5,000 11.25%, 10/23/01............ 3,630,748
--------------
236,710,957
--------------
Supranational Global--6.9%
Asian Development Bank
10,000 5.375%, 9/15/03............. 6,271,505
Eksportfinans,
4,000 7.00%, 6/28/00.............. 2,581,047
Eurofima,
58,170 9.875%, 1/17/07............. 46,353,570
European Bank of
Reconstruction &
Development,
49,000 9.00%, 10/15/02............. 34,813,767
European Investment Bank,
3,000 10.25%, 10/1/01............. 2,142,885
Kingdom of Sweden
8,287 7.875%, 4/23/07............. 5,904,835
--------------
98,067,609
--------------
Total long-term Australian
eurobonds
(cost US$603,619,229)....... 567,339,475
--------------
</TABLE>
See Notes to
Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
Corporate Bonds--5.5%
Asset Backed--0.1%
FANMAC 22,
A$ 1,650 11.40%, 12/15/01............ $ 1,170,164
FANMAC 25,
396 10.33%, 6/15/02............. 278,764
--------------
1,448,928
--------------
Floating Rate Notes*--0.7%
Crusade Trust,
3,366 5.3433%, 7/10/29............ 2,094,686
Initial Corporate
Obligation,
3,000 5.1817%, 9/19/03............ 1,905,451
Puma Management Limited,
10,000 7.50%, 12/5/28.............. 6,423,905
--------------
10,424,042
--------------
Services--4.7%
Macquarie Bank Limited,
1,000 9.75%, 8/1/00............... 671,825
National Power PLC,
15,000 8.00%, 2/21/07.............. 10,244,152
Telstra Corporation,
30,000 12.50%, 11/15/00............ 21,474,291
18,000 11.50%, 10/15/02............ 13,733,500
2,000 7.80%, 7/17/03.............. 1,389,120
21,000 12.00%, 5/15/06............. 18,155,105
2,000 8.75%, 1/15/20.............. 1,701,989
--------------
67,369,982
--------------
Total Australian corporate
bonds
(cost US$83,832,444)........ 79,242,952
--------------
Total Australian long-term
investments
(cost US$1,695,220,592)..... 1,600,112,000
--------------
UNITED STATES--3.4%
Yankee Bonds--3.4%
Export-Import Bank Korea
US$ 3,000 7.125%, 9/20/01............. 2,651,802
10,000 7.10%, 3/15/07.............. 8,535,160
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
Kingdom of Thailand
US$ 5,000 7.75%, 4/15/07.............. $ 4,403,705
Korea Development Bank
3,000 6.625%, 11/21/03............ 2,427,858
Korea Electric Power
9,000 10.00%, 4/01/01............. 8,656,875
4,000 7.00%, 10/01/02............. 3,336,764
7,000 6.375%, 12/01/03............ 5,505,535
Korea Electric Power
(Registered)
4,000 10.00%, 4/01/01............. 3,727,200
PTT Exploration & Production
(Thailand)
8,000 7.625%, 10/01/06............ 5,370,000
Republic of Korea
4,000 8.875%, 4/15/08............. 3,598,752
--------------
Total Yankee bonds
(cost US$48,174,270)........ 48,213,651
--------------
Total long-term investments
(cost US$1,743,394,862)..... 1,648,325,651
--------------
SHORT-TERM INVESTMENTS--25.0%
AUSTRALIA--23.7%
Demand Deposits--12.3%
A$ 86,619 Banque National de Paris,
4.60%..................... 53,924,368
196,453 State Street Call Deposit,
4.30%..................... 122,301,660
--------------
Total Australian demand
deposits
(cost US$167,365,919)....... 176,226,028
--------------
Government and Semi-Government--6.4%
Commonwealth of Australia--3.4%
Commonwealth Bank of
Australia,
45,000 12.00%, 7/15/99............. 29,410,663
Commonwealth of Australia,
15,000 14.00%, 4/15/99............. 9,723,096
15,000 12.00%, 7/15/99............. 9,816,507
--------------
48,950,266
--------------
New South Wales--2.3%
New South Wales Treasury
Corporation,
50,000 11.50%, 7/1/99.............. 32,510,177
--------------
</TABLE>
See Notes to
Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
Queensland--0.5%
Queensland Treasury
Corporation,
A$ 10,000 8.00%, 7/14/99.............. $ 6,370,210
--------------
Victoria--0.2%
Treasury Corporation of
Victoria
5,000 10.25%, 9/15/99............. 3,261,041
--------------
Total short-term Australian
government and
semi-government
(cost US$116,644,555)..... 91,091,694
--------------
Eurobonds--5.0%
Banking and Finance--1.1%
Merrill Lynch & Co.
Australia,
15,000 7.10%, 3/8/99............... 9,423,506
Primary Industry Bank of
Australia,
5,000 6.75%, 2/25/99.............. 3,129,518
Rural & Industries Bank of
Western Australia,
5,000 8.75%, 9/9/99............... 3,215,909
--------------
15,768,933
--------------
Diversified Industries--0.9%
Australian National Railway,
4,000 9.50%, 2/25/99.............. 2,524,014
Federal Airports
Corporation,
15,000 10.50%, 7/15/99............. 9,716,634
--------------
12,240,648
--------------
Semi-Government and Local
Government--3.0%
New South Wales Treasury
Corporation,
44,000 11.50%, 7/1/99.............. 28,596,273
Province Aples Cotes D'Azur,
22,000 8.25%, 9/15/99.............. 14,085,655
--------------
42,681,928
--------------
- ---------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ---------------------------------------------------------
Total Australian eurobonds
(cost US$87,458,421)........ $ 70,691,509
--------------
Total Australian short-term
investments
(cost US$371,468,895)..... 338,009,231
--------------
NEW ZEALAND--0.5%
NZ$ 9,917 State Street Call Account,
0.25%..................... 5,245
13,144 Term Deposit, 4.80%......... 6,951,224
--------------
(cost US$7,085,798)......... 6,956,469
--------------
UNITED STATES--0.8%
US$ 11,676 Repurchase Agreement,
State Street Bank & Trust
Co., 5.10%, dated
10/30/98, due 11/02/98 in
the amount of $11,680,962
(cost $11,676,000;
collateralized by
$7,310,000 United States
Treasury Bond, due
8/15/15; value including
accrued
interest-US$11,910,088)... 11,676,000
--------------
Total short-term investments
(cost US$390,230,693)....... 356,641,700
--------------
Total Investments--140.4%
(cost US$2,133,625,555; Note
3)........................ 2,004,967,351
Other assets in excess of
liabilities--1.6%......... 23,174,253
Liquidation value of
preferred
stock--(42.0%)............ (600,000,000)
--------------
Net Assets Applicable to
Common Shareholders--
100%...................... $1,428,141,604
--------------
--------------
</TABLE>
- ---------------
* The interest rate reflected for floating rate notes is the
rate in effect at
October 31, 1998.
See Notes to
Financial Statements.
11
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Assets and Liabilities
October 31, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$2,133,625,555)..................... $2,004,967,351
Cash.................................. 780,715
Deposits received in advance from
rights offering..................... 365,420,287
Interest receivable................... 44,155,895
Other assets.......................... 134,705
--------------
Total assets...................... 2,415,458,953
--------------
Liabilities
Liability for shares subscribed in
rights offering..................... 365,420,287
Dividends payable-common stock........ 11,684,660
Payable for investments purchased..... 4,110,156
Withholding taxes payable............. 2,516,476
Dividends payable-preferred stock..... 1,321,187
Investment management fee payable..... 1,057,821
Accrued expenses and other
liabilities......................... 996,627
Administration fee payable............ 210,135
--------------
Total liabilities................. 387,317,349
--------------
Total Net Assets...................... $2,028,141,604
--------------
--------------
Total net assets were composed of:
Common stock:
Par value ($.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
Undistributed net investment
income.............................. 4,605,692
Accumulated net realized gains on
investments....................... 3,231,097
Net unrealized appreciation on
investments......................... 115,703,458
Accumulated net realized and
unrealized foreign exchange
losses............................ (369,730,843)
--------------
Total net assets.................... $2,028,141,604
--------------
--------------
Net assets applicable to common
shareholders...................... $1,428,141,604
--------------
--------------
Net asset value per common share:
($1,428,141,604 / 194,744,328 shares
of
common stock issued and
outstanding)........................ $7.33
--------------
--------------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Operations
Year Ended October 31, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Interest (net of foreign withholding
taxes of $9,942,192)............... $ 181,217,772
-------------
Expenses
Investment management fee............ 11,120,471
Custodian's fees and expenses........ 2,700,000
Administration fee................... 2,446,264
Auction agent's fees and broker
commissions.......................... 1,670,000
Consulting fee....................... 1,000,000
Shareholder relations and
communications....................... 920,000
Transfer agent's fees and expenses... 650,000
Directors' fees and expenses......... 550,000
Independent accountant's fees and
expenses............................. 230,000
Legal fees and expenses.............. 200,000
Insurance expense.................... 152,000
Miscellaneous........................ 58,149
-------------
Total operating expenses............. 21,696,884
-------------
Net investment income before excise
tax.................................. 159,520,888
Excise tax........................... (190,668)
-------------
Net investment income.................. 159,330,220
-------------
Realized and Unrealized
Gains (Losses) on Investments
and Foreign Currencies
Net realized gains on investment
transactions......................... 38,070,936
Net change in unrealized appreciation
on investments....................... (44,145,814)
-------------
Net loss on investments................ (6,074,878)
-------------
Net increase in total net assets from
operations before net foreign
exchange losses...................... 153,255,342
Net realized and unrealized foreign
exchange losses...................... (275,093,837)
-------------
Net Decrease In Total Net Assets
Resulting From Operations.............. $(121,838,495)
-------------
-------------
</TABLE>
See Notes to
Financial Statements.
12
<PAGE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Cash Flows
Year Ended October 31, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
Increase (Decrease) in Cash
(Including Foreign Currency)
Cash flows used for operating
activities
Interest received (net of foreign
withholding taxes)............... $ 190,240,177
Expenses paid...................... (22,043,148)
Proceeds from sales of short-term
portfolio investments, net....... 17,974,847
Purchases of long-term portfolio
investments........................ (1,232,085,550)
Proceeds from sales of long-term
portfolio
investments...................... 1,393,186,354
Other.............................. 24,876
---------------
Net cash provided from operating
activities....................... 347,297,556
---------------
Cash flows provided from financing
activities
Dividends and distributions paid to
preferred shareholders........... (32,676,183)
Dividends and distributions paid to
common
shareholders..................... (140,212,518)
---------------
Net cash used for financing
activities....................... (172,888,701)
---------------
Effect of changes in exchange rate... (174,268,483)
---------------
Net decrease in cash................. 140,372
Cash at beginning of year.......... 640,343
---------------
Cash at end of year................ $ 780,715
---------------
---------------
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......................... $ (121,838,495)
---------------
Decrease in investments............ 202,388,576
Net realized gain on investment
transactions....................... (38,070,936)
Net change in unrealized
appreciation on
investments...................... 44,145,814
Net realized and unrealized foreign
exchange losses.................. 275,093,837
Decrease in interest receivable.... 9,547,455
Net decrease in other assets....... 24,876
Decrease in payable for investments
purchased........................ (23,312,925)
Increase in accrued expenses and
other liabilities................ (680,646)
---------------
Total adjustments................ 469,136,051
---------------
Net cash provided from operating
activities........................... $ 347,297,556
---------------
---------------
</TABLE>
- ----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Changes
in Net Assets
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended October 31,
in Total Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income... $ 159,330,220 $ 169,586,462
Net realized gains on
investment
transactions.......... 38,070,936 9,798,919
Net change in unrealized
appreciation
(depreciation) on
investments........... (44,145,814) 76,842,257
-------------- --------------
Net increase in total
net assets resulting
from operations before
net foreign exchange
losses................ 153,255,342 256,227,638
Net realized and
unrealized foreign
exchange losses....... (275,093,837) (274,306,145)
-------------- --------------
Net decrease in total net
assets resulting from
operations.............. (121,838,495) (18,078,507)
-------------- --------------
Dividends to shareholders
from net investment
income
Common shares........... (99,121,808) (159,569,671)
Preferred shares........ (32,832,845) (32,946,291)
-------------- --------------
(131,954,653) (192,515,962)
-------------- --------------
Distributions to
shareholders from net
realized capital gains
Common shares........... (41,090,710) --
Preferred shares........ -- --
-------------- --------------
(41,090,710) --
-------------- --------------
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
-------------- --------------
Total decrease............ (294,883,858) (208,868,718)
Total Net Assets
Beginning of year......... 2,323,025,462 2,531,894,180
-------------- --------------
End of year(a)............ $2,028,141,604 $2,323,025,462
-------------- --------------
-------------- --------------
(a) Including
undistributed net
investment income
of.................... $ 4,605,692 $ 796,639
-------------- --------------
</TABLE>
See Notes to
Financial Statements.
13
<PAGE>
- ----------------------------------------------------------
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, 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 The following is a summary of
Policies significant accounting
policies
followed by the Fund in the
preparation of its
financial statements.
Basis of Presentation: The financial statements of the Fund
are prepared in
accordance with United States generally accepted accounting
principles using the
United States dollar as both the functional and reporting
currency.
Security Valuation: Investments are stated at value.
Investments for which
market quotations are readily available are valued 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
October 31, 1998.
Similarly, the Fund isolates the effect of changes in
foreign exchange rates
from the fluctuations arising from changes in the market
prices of portfolio
securities sold during the reporting periods.
Net realized and unrealized foreign exchange losses of
$275,093,837 include
realized foreign exchange gains and losses from sales and
maturities of
portfolio securities, sales of foreign currencies, currency
gains or losses
realized between the trade and settlement dates on
securities transactions, the
14
<PAGE>
difference between the amounts of interest, discount and
foreign withholding
taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts
actually received or paid and changes in unrealized foreign
exchange gains and
losses in the value of portfolio securities and other assets
and liabilities
arising as a result of changes in the exchange rate.
Accumulated net realized
and unrealized foreign exchange losses shown in the
composition of net assets at
October 31, 1998 represent foreign exchange losses for book
purposes that have
not yet been recognized for tax purposes.
Foreign security and currency transactions may involve
certain considerations
and risks not typically associated with those of domestic
origin, including
unanticipated movements in the value of the foreign currency
relative to the
U.S. dollar.
The exchange rate at October 31, 1998 was US$.6249 to
A$1.00 for the
Australian dollar and US$.5295 to NZ$1.00 for the New
Zealand dollar.
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.
Discounts on long-term
securities are recognized upon disposition. Expenses are
recorded on the accrual
basis which may require the use of certain estimates by
management. Actual
results could differ from those estimates.
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 relating to 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 and excludes deposits received in advance from the
rights offering.
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. To
reflect reclassifications arising from permanent book/tax
differences for the
fiscal year ended October 31, 1998, the Fund decreased
undistributed net
investment income by $23,566,514, decreased accumulated net
realized gains on
investments by $2,958,262, increased accumulated net
realized foreign exchange
gains by $26,715,444 and decreased paid in capital in excess
of par by $190,668.
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
15
<PAGE>
$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 $4,771,381 to
the Investment Adviser during the fiscal year ended October
31, 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
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 Purchases and sales of invest-
ment securities, other than
Securities
short-term investments, for
the fiscal year ended
October 31, 1998 aggregated $1,208,772,625 and
$1,244,969,851, respectively.
The United States federal income tax basis of the Fund's
investments at
October 31, 1998 was $1,890,557,417 and accordingly, net
unrealized appreciation
for United States federal income tax purposes was
$114,409,934 (gross unrealized
appreciation--$126,109,940; gross unrealized depreciation--
$11,700,006).
Note 4. Capital There are 400 million shares
of common stock authorized. Of
the 194,744,328
common shares outstanding at October 31, 1998, the
Investment Manager owned
60,345 shares.
In connection with a rights offering, shareholders of
record on September 25,
1998 were issued one-third of a nontransferable right for
each full share of
common stock owned, entitling shareholders the opportunity
to acquire one newly
issued share of common stock for every whole right held at a
subscription price
equal to a 5% discount from the lesser of net asset value on
the expiration date
(October 22, 1998) or the average market value on that date
and the four
business days preceding the expiration date. On November 2,
1998 the Fund issued
71,991,921 shares of common stock at $5.30 per share and
estimated rights
offering costs of $1,828,500 ($.01 per share) and brokerage
and dealer-manager
commissions of $14,308,394 ($.02 per share) were charged to
paid-in capital of
the common shareholders resulting in net proceeds to the
Fund of $365,420,287.
The net asset value per share of the Fund's common
shareholders was reduced by
approximately $.61 per share as a result of this share
issuance. Prudential
Securities Incorporated, an affiliate of the Administrator,
earned approximately
$4,100,000 of the aforementioned commissions with respect to
its participation
in the rights offering. At October 31, 1998, the deposits of
the rights offering
were maintained in a segregated account and were restricted
as to use by the
Fund until the issuance of new shares by the Fund on
November 2, 1998.
During the fiscal years ended October 31, 1998 and 1997
the Fund issued zero
and 184,572 shares, respectively in connection with the
reinvestment of
dividends and distributions paid to shareholders enrolled in
the dividend
reinvestment plan.
The Preferred Stock shareholders 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 4.50% to
6.00% during the
fiscal year ended October 31, 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.
16
<PAGE>
Note 5. Dividends On November 16, 1998 and
And Distributions December 15, 1998 the Board
of Directors of the Fund
declared distributions
from ordinary income of $.06 per common share payable on
December 11, 1998 and
January 15, 1999 to shareholders of record on November 30,
1998 and December 31,
1998, respectively.
Subsequent to October 31, 1998, dividends and
distributions declared and paid
on Preferred Stock totalled approximately $4,187,185 for the
nine outstanding
preferred share series in the aggregate through December 15,
1998.
Note 6. Amendments At the annual meeting of
to Investment shareholders held on May 14,
Policies 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 any mortgage backed securities.
17
<PAGE>
- ------------------------------------------------------------
- --------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Financial Highlights
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Years Ended October 31,
--------
- ------------------------------------------------------------
- --
PER SHARE OPERATING PERFORMANCE: 1998*
1997* 1996* 1995* 1994
--------
- -- ---------- ---------- ---------- --------
- --
<S> <C>
<C> <C> <C> <C>
Net asset value per common share, beginning of
year........................................... $
8.85 $ 9.93 $ 9.36 $ 8.82 $
10.09
--------
- -- ---------- ---------- ---------- --------
- --
Net investment income............................
.82 .87 .87 .93
1.01
Net realized and unrealized gain (loss) on
investments and foreign currencies.............
(1.45) (.96) 1.13 1.16
(1.03)
--------
- -- ---------- ---------- ---------- --------
- --
Total from investment operations...............
(.63) (.09) 2.00 2.09
(.02)
--------
- -- ---------- ---------- ---------- --------
- --
Dividends from net investment income to preferred
shareholders...................................
(.17) (.17) (.14) (.17)
(.12)
Dividends from net investment income to common
shareholders...................................
(.51) (.82) (.83) (.83)
(.84)
Distributions from net capital and currency gains
to preferred shareholders......................
- -- -- (.02) (.01)
(.01)
Distributions from net capital and currency gains
to common shareholders.........................
(.21) -- (.03) (.15)
(.17)
--------
- -- ---------- ---------- ---------- --------
- --
Total dividends and distributions..............
(.89) (.99) (1.02) (1.16)
(1.14)
--------
- -- ---------- ---------- ---------- --------
- --
Capital charge in respect to issuance of
shares.........................................
- -- -- (.41) (.39)
(.11)
--------
- -- ---------- ---------- ---------- --------
- --
Net asset value per common share, end of year.... $
7.33 $ 8.85 $ 9.93 $ 9.36 $
8.82
--------
- -- ---------- ---------- ---------- --------
- --
--------
- -- ---------- ---------- ---------- --------
- --
Market price per common share, end of year....... $
5.625 $ 8.125 $ 8.94 $ 9.31 $
9.56
--------
- -- ---------- ---------- ---------- --------
- --
--------
- -- ---------- ---------- ---------- --------
- --
TOTAL INVESTMENT RETURN BASED OND:
Market value.....................................
(23.19)% (0.42)% 5.59% 8.78%
3.32%
Net asset value..................................
(8.10)% (2.37)% 16.73% 18.54%
(3.19)%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS/SUPPLEMENTAL DATAPound:
ExpensesDD.......................................
1.47% 1.25% 1.29% 1.47%
1.41%
Net investment income before preferred stock
dividends......................................
10.72% 9.17% 9.16% 10.83%
10.68%
Preferred stock dividends........................
2.21% 1.78% 1.45% 1.87%
1.20%
Net investment income available to common
shareholders...................................
8.51% 7.39% 7.71% 8.96%
9.48%
Portfolio turnover rate..........................
61% 85% 63% 50%
34%
Net assets of common shareholders, end of year
(000 omitted)..................................
$1,428,142 $1,723,025 $1,931,894 $1,452,205
$1,088,631
Average net assets of common shareholders (000
omitted).......................................
$1,485,690 $1,848,378 $1,627,916 $1,201,383
$1,174,394
Senior securities (preferred stock) outstanding
(000 omitted).................................. $
600,000 $ 600,000 $ 600,000 $ 475,000 $
400,000
Asset coverage of preferred stock at year-end....
338% 387% 422% 406%
372%
</TABLE>
<TABLE>
<C> <S>
- ---------------
* 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 1.05%, .95%, .94%, 1.05%
and 1.05%, 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.
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
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, 1998, 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, 1998 by
correspondence with the custodian and brokers, provide a
reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 15, 1998
19
<PAGE>
FEDERAL TAX INFORMATION:
DIVIDENDS AND DISTRIBUTIONS (Unaudited)
As required by Internal Revenue Code regulations, we are
to advise you within
60 days of the Fund's fiscal year end (October 31, 1998) as
to the tax status of
dividends, distributions and foreign tax credits paid by the
Fund during the
fiscal year. During fiscal year 1998, the Fund paid
dividends from net
investment income. These dividends do not qualify for the
70% dividends received
deduction for corporations. The Fund also paid distributions
from long-term
capital gains which are taxable as such.
The Fund has elected to give the benefit of foreign tax
credits to its
shareholders in the amount designated below on a per share
basis. Accordingly,
shareholders who must report their gross income dividends
and distributions in a
federal income tax return will be entitled to a foreign tax
credit, or an
itemized deduction, in computing their U.S. income tax
liability. It is
generally more advantageous to claim a credit rather than to
take a deduction.
The following table allocates the dividends and
distributions paid by their
sources:
<TABLE>
<CAPTION>
Net
Dividends
Foreign and
Gross
Taxes Distributions
Common Shares Amount
Paid Paid
<S> <C>
<C> <C>
--------------------------------------------
- ------------------------------------
Ordinary Income:
Australia $
.5335 $ .0470 $ .4865
United States
.0058 -- .0058
New Zealand
.0169 -- .0169
Capital Gains:
ShortTerm
.1158 -- .1158
LongTerm
.0950 -- .0950
-------
- -- ------- -------------
$
.7670 $ .0470 $ .7200
-------
- -- ------- -------------
-------
- -- ------- -------------
</TABLE>
<TABLE>
<CAPTION>
Preferred Shares
--------------------------------------------
- ------------------------------------
<S> <C>
<C> <C>
Series A:
Ordinary Income:
Australia
$1,441.24 $101.50 $1,339.74
United States
11.08 -- 11.08
New Zealand
32.48 -- 32.48
Capital Gains:
- -- -- --
-------
- -- ------- -------------
$1,484.80 $101.50 $1,383.30
-------
- -- ------- -------------
-------
- -- ------- -------------
Series B:
Ordinary Income:
Australia
$1,417.64 $ 99.84 $1,317.80
United States
10.90 -- 10.90
New Zealand
31.95 -- 31.95
Capital Gains:
- -- -- --
-------
- -- ------- -------------
$1,460.49 $ 99.84 $1,360.65
-------
- -- ------- -------------
-------
- -- ------- -------------
Series C:
Ordinary Income:
Australia
$1,423.64 $100.26 $1,323.38
United States
10.95 -- 10.95
New Zealand
32.09 -- 32.09
Capital Gains:
- -- -- --
-------
- -- ------- -------------
$1,466.68 $100.26 $1,366.42
-------
- -- ------- -------------
-------
- -- ------- -------------
Series D:
Ordinary Income:
Australia
$1,446.58 $101.88 $1,344.70
United States
11.12 -- 11.12
New Zealand
32.60 -- 32.60
Capital Gains:
- -- -- --
-------
- -- ------- -------------
$1,490.30 $101.88 $1,388.42
-------
- -- ------- -------------
-------
- -- ------- -------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Net
Dividends
Foreign and
Gross
Taxes Distributions
Common Shares Amount
Paid Paid
<S> <C>
<C> <C>
--------------------------------------------
- ------------------------------
Series E:
Ordinary Income:
Australia $1,397.89
$ 98.45 $1,299.44
United States 10.75
- -- 10.75
New Zealand 31.51
- -- 31.51
Capital Gains: --
- -- --
---------
- ------- -------------
$1,440.15
$ 98.45 $1,341.70
---------
- ------- -------------
---------
- ------- -------------
Series F:
Ordinary Income:
Australia $1,392.31
$ 80.35 $1,311.96
United States 6.11
- -- 6.11
New Zealand 30.81
- -- 30.81
Capital Gains: --
- -- --
---------
- ------- -------------
$1,429.23
$ 80.35 $1,348.88
---------
- ------- -------------
---------
- ------- -------------
Series G:
Ordinary Income:
Australia $1,419.56
$ 99.97 $1,319.59
United States 10.92
- -- 10.92
New Zealand 32.00
- -- 32.00
Capital Gains: --
- -- --
---------
- ------- -------------
$1,462.48
$ 99.97 $1,362.51
---------
- ------- -------------
---------
- ------- -------------
Series H:
Ordinary Income:
Australia $1,416.78
$ 99.78 $1,317.00
United States 10.90
- -- 10.90
New Zealand 31.93
- -- 31.93
Capital Gains: --
- -- --
---------
- ------- -------------
$1,459.61
$ 99.78 $1,359.83
---------
- ------- -------------
---------
- ------- -------------
Series I:
Ordinary Income:
Australia $1,432.24
$100.87 $1,331.37
United States 11.01
- -- 11.01
New Zealand 32.28
- -- 32.28
Capital Gains: --
- -- --
---------
- ------- -------------
$1,475.53
$100.87 $1,374.66
---------
- ------- -------------
---------
- ------- -------------
</TABLE>
Although the Fund has made the election required to make
this foreign tax
credit or deduction available to you, the amount of
allowable tax credit is
subject to Section 904 of the Internal Revenue Code.
Shareholders are advised to
consult their own tax advisers with respect to the tax
consequences of their
investment in the Fund.
In January 1999 shareholders will receive Form 1099-DIV,
or substitute
1099-DIV, which will reflect the amount of dividends and
distributions and
foreign taxes to be used by calendar year taxpayers on their
1998 federal income
tax returns.
21
<PAGE>
OTHER INFORMATION (Unaudited)
Dividend Reinvestment and Cash Purchase Plan.
Shareholders may elect to have
all distributions of dividends and capital gains
automatically reinvested in
Fund shares pursuant to the Fund's Dividend Reinvestment and
Cash Purchase Plan
(the Plan). Generally, shareholders who do not participate
in the Plan will
receive all distributions in cash paid by check in United
States dollars mailed
directly to the shareholders of record (or if the shares are
held in street or
other nominee name, then to the nominee) by the custodian,
as dividend
disbursing agent. Shareholders who wish to participate in
the Plan should
contact the Fund at (800) 451-6788.
State Street Bank & Trust Co. (the Plan Agent) serves as
agent for the
shareholders in administering the Plan. Dividends and
capital gains
distributions payable to Plan participants will be promptly
invested. If the
Fund declares an income dividend or capital gains
distribution payable in stock
to shareholders who are not Plan participants, then Plan
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 net asset value, Plan
participants will
receive newly issued shares valued at the greater of net
asset value or 95% of
current market price. If, on the other hand, the net asset
value 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 net asset value 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.
There is no charge to participants for reinvesting
dividends or capital gain
distributions, except for certain brokerage commissions, as
described below. The
Plan Agent's fees for the handling of the reinvestment of
dividends and
distributions will be paid by the Fund. There will be no
brokerage commissions
charged with respect to shares issued directly by the Fund.
However, each
participant will pay a pro rata share of brokerage
commissions incurred with
respect to the Plan Agent's open market purchases in
connection with the
reinvestment of dividends and distributions. The automatic
reinvestment of
dividends and distributions will not relieve participants of
any federal income
tax that may be payable on such dividends and distributions.
The Plan also allows participants to make optional cash
investments of at
least $100 in Fund shares as frequently as monthly through
the Plan Agent on the
open market. Participants must pay a service fee of $0.75
for each investment
and a pro rata share of the brokerage commissions.
The Fund reserves the right to amend or terminate the
Plan either in full or
partially upon 90 days' written or telephone notice to
shareholders of the Fund.
Participants in the Plan may withdraw some or all of
their shares from the
Plan upon written notice to the Plan Agent and will receive
certificates for
whole Shares and cash for fractional Shares. In the
alternative, by giving
proper notice to the Plan Agent, participants may receive
cash in lieu of shares
in an amount which is reduced by brokerage commissions in
connection with the
sale of shares and a $2.50 service fee.
All correspondence concerning the Plan should be directed
to the Plan Agent,
State Street Bank & Trust Company, P.O. Box 8200, Boston, MA
02266-8200.
Year 2000 Compliance Disclosure
Many computer systems and other electronically controlled
equipment used by
companies and other business organizations throughout the
world express dates
using only the last two digits of the year, and thus will
require modification
or replacement to accommodate the Year 2000 and beyond in
order to avoid
malfunctions and consequential widespread commercial
disruption.
The Fund could be adversely affected if the computer
systems and equipment
used by its service providers or the companies in which it
invests, or other
organizations with which any of them deal, do not properly
address this problem
before January 1, 2000. The Investment Manager and the
Investment Adviser have
taken steps that they believe are reasonably designed to
address that the
computer systems and equipment it uses are adequate to deal
with Year 2000
issues and to seek the same of its suppliers and the Fund's
other service
providers. As of the date of this report, however, there can
be no assurance
that these steps will be sufficient to avoid any adverse
impact to the Fund.
22
<PAGE>
Directors
Anthony E. Aaronson
Sir Roden Cutler
David Lindsay Elsum
Rt. Hon. Malcolm Fraser
Laurence S. Freedman, Chairman
Michael R. Horsburgh
Harry A. Jacobs, Jr.
Howard A. Knight
David Manor
Neville J. Miles
William J. Potter
Peter D. Sacks
John T. Sheehy
Brian M. Sherman
Marvin Yontef
Officers
Brian M. Sherman, President
Laurence S. Freedman, Vice President
Ouma Sananikone-Fletcher, Assistant Vice President
and Chief Investment Officer
David Manor, Treasurer
Roy M. Randall, Secretary
Barry G. Sechos, Assistant Treasurer
Kenneth T. Kozlowski, Assistant Treasurer
Allan S. Mostoff, Assistant Secretary
Margaret A. Bancroft, Assistant Secretary
This report, including the financial statements herein, is
transmitted to the
shareholders of The First Australia Prime Income Fund, Inc.
for their general
information only. It does not have regard to the specific
investment objectives,
financial situation and the particular needs of any specific
person.
Notice is hereby given in accordance with Section 23(c) of
the Investment
Company Act of 1940 that the Fund may purchase, from time to
time, shares of its
common stock in the open market.
<PAGE>
- ------------------------------------------------------------
- -------
Investment Manager
EquitiLink International Management Limited
Union House, Union Street
St. Helier, Jersey, Channel Islands
Investment Adviser
EquitiLink Australia Limited
190 George Street
Sydney, NSW 2000, Australia
Administrator
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian and Transfer Agent
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Auction Agent
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10001
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Dechert Price & Rhoads
1500 K Street N.W.
Washington, D.C. 20005
Stikeman, Elliot
Level 32, Chifley Tower
2 Chifley Square
Sydney, NSW 2000, Australia
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
for information call toll-free (800) 362-
3277
collect (973) 367-7403
or for information regarding net asset
value
(800) 451-6788
The common shares of The First Australia Prime
Income Fund, Inc. are
traded on the American Stock Exchange and on the
Pacific Stock
Exchange under the symbol 'FAX'. Information about the
Fund's net
asset value and market price is published weekly in
Barron's and in
the Monday edition of The Wall Street Journal.
For a weekly update of the Fund's net asset value
and share price,
or to receive more information on the Fund, call toll-
free:
1-800-323-9995
318653102
