Kleinwort
Benson
- --------------------------------------------------------------------------------
Australian
Income Fund, Inc.
Annual Report
October 31, 1995
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Report to Shareholders
- --------------------------------------------------------------------------------
To Our Shareholders,
During the twelve months ended October 31, 1995, the total value of the
Fund appreciated, with especially strong performance in late 1994 and during the
last quarter of the financial year. Optimism returned to the Australian bond
market as interest rate pressures eased globally, pushing prices to their
highest level since May 1994. In addition, the Australian dollar rallied over
the period as a whole, maintaining the upward trend in place for the past two
years. The Fund's position in New Zealand bonds further enhanced income and
capital returns, because while bond prices rose broadly in line with Australia,
the New Zealand dollar appreciated markedly against both the Australian and US
dollars. Over the financial year, the Fund was able to take advantage of these
trends and fulfill its primary objective of producing a high level of income
return, while also succeeding in raising the capital value of the underlying
assets. At October 31, 1995, the Fund's closing market price was $9.25, a
discount of 8.23% to its net asset value of $10.08.
For the year ended October 31, 1995, the Fund achieved a total return on
net asset value of 17.93% (with income reinvested and assuming full primary
subscription in the rights offering). The monthly dividend rate was raised to
$0.065 per share in 1995, giving the Fund a dividend yield of 9.6% (based on the
Fund's stock price at October 31, 1995 and the income distributions over the
past year). This income return was superior to comparable US cash and bond
investments. A rights offering to shareholders was successfully concluded in May
1995 and raised net proceeds to the Fund of $17.5 million.
A further analysis of the Fund's performance since inception is provided
on page three of this report.
MARKET SUMMARY
A more comprehensive discussion of the major economic trends in Australia
and New Zealand is provided in the Economic Review together with an analysis of
developments over the past year in the debt and currency markets. In brief, both
economies experienced strong rates of growth and declining unemployment during
the past twelve months. However, as the year progressed, economic activity
slowed and indicators began to highlight the mature nature of the business
cycle. Inflation has remained low by historic standards, with particular success
at resisting price pressures evident in New Zealand. Nevertheless, consumer
price inflation has accelerated and, in Australia, may not yet have reached the
peak. Accordingly, while the determined action taken on interest rates in 1994
might prove to have been sufficient, central banks have retained a cautious
approach to monetary policy despite a deceleration in growth, as long-term
inflation control remains the primary objective.
In this environment, short-term interest rates have risen over the period
under review but, since March, money markets have become less convinced about
the need for further official rate hikes. Indeed in New Zealand, the yield curve
has become steeply downward sloping for maturities of up to three years, as a
near term reduction is expected. The slowdown in growth and emerging optimism on
short-term interest rates has enabled a more positive outlook to develop in both
the Australian and New Zealand bond markets as the risk of accelerating
inflation has waned considerably. The combination of a potential slowing in
domestic demand and rigorous monetary discipline also gave an overall favorable
slant to the foreign exchange markets, although both currencies experienced
1
<PAGE>
- --------------------------------------------------------------------------------
fluctuating fortunes over the financial year. The rise in the New Zealand dollar
was more impressive than that of the Australian dollar as current account
concerns intensified in the first half of 1995 and restricted the scope for
gains in the Australian currency.
Against this encouraging background for Australasian bonds, the average
life of investments in the Fund was extended gradually from April. This
increased the yield on the portfolio, with the purchases having been effected
mainly when Australian yields moved to over 250 basis points (2.5%) above US
equivalents. The additional capital generated by the rights offering was
employed in accordance with this strategy, allowing the Fund to increase the
proportion of assets in longer dated securities. Moreover, we continued to place
emphasis on purchasing bonds exempt from Australian withholding tax.
The prospects for further capital gains in Australian and New Zealand
bonds during the next financial year are favorable, with yields likely to have
passed the cyclical peak. Nevertheless, accounting for the risks that growth and
inflation may not decline meaningfully, the Fund will maintain a conservative
overall interest rate exposure, consistent with emphasizing a high level of
income.
At this time the Board would like to acknowledge the retirement during the
past year of Henry G. Lang, a Director of the Fund since 1986. Mr. Lang, a
former Secretary of the Treasury of New Zealand, had served the Fund with
distinction since its inception and the Board extends their thanks for his
service and wishes him the best of luck in retirement.
On behalf of the Board of Directors,
Sir Robert Cotton David Felder
Chairman President
November 22, 1995
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
At October 31, 1995, the average maturity of the Fund's portfolio was 6.4
years, with an average duration of 4.3 years, while the average current yield to
maturity was 8.0%.
- --------------------------------------------------------------------------------
2
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Performance from Inception through October 31, 1995
(Unaudited)
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table is represented as a line graph in the printed report]
Market Net Asset Aust. U.S.
Value Value Index Index
----- ----- ----- -----
11/86 10000 10000 10000 10000
10/87 9165 11102 11687 10041
10/88 14679 15899 16812 11077
10/89 15010 15993 17137 12359
10/90 14664 18470 20426 13075
10/91 20969 23178 25846 14965
10/92 21388 22775 26021 16527
10/93 23363 25656 29557 18687
10/94 23776 26482 30145 17864
10/95 27511(1) 31231(2) 36488(4) 20601(3)
Since its inception in 1986, the Fund has achieved an average annualized return
on market value of 12.02%, on the basis noted below. On a net asset value basis,
which measures the performance of the Fund's underlying portfolio, the average
annualized return has been 13.62%. Both the market and net asset value
performance measures have outpaced the Salomon Brothers US Government Bond Index
which has averaged 8.44%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Annualized Since
Performance 1 Year 3 Years 5 Years Inception+
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fund Market Value (1) 15.74% 8.76% 13.42% 12.02%
- -------------------------------------------------------------------------------------------------------------------------
Fund Net Asset Value (2) 17.93% 11.10% 11.08% 13.62%
- -------------------------------------------------------------------------------------------------------------------------
Salomon Brothers US Gov't Bond Index (3) 15.32% 7.62% 9.52% 8.44%
- -------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Australian Gov't Bond Index (4) 21.04% 11.93% 12.30% 15.62%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Fund commenced operations November 28, 1986.
(1) Based on market value per share, adjusted for rights offerings, and
assumes reinvestment of all distributions at reinvestment plan prices.
(2) Based on net asset value per share, adjusted for rights offerings, and
assumes reinvestment of all distributions at the ex-dividend date net
asset value. This measures the performance of the underlying Fund
portfolio and may not be indicative of returns to investors.
(3)(4) The Salomon Brothers US and Australian Government Bond Indices are
US$ based unmanaged indices.
Please remember that past performance may not be indicative of future
results.
3
<PAGE>
- --------------------------------------------------------------------------------
ECONOMIC REVIEW
Over the past year, global economic activity, while strong in certain
areas, has failed to meet expectations formed in 1994 following the sharp
expansion in North America and Europe. The United States economy has continued
to exceed growth rates in continental Europe, where currency pressures and
stubborn wage inflation have restricted scope for cuts in interest rates, but
the cycle is mature. Meanwhile, the Japanese economy remains depressed with the
authorities struggling to tackle the crisis in the financial sector.
Australia
The Australian economy has been one of the most robust amongst
industrialized nations, with growth levels superior to Europe and North America.
Nevertheless, activity has evidently slowed, indicating that the peak in the
annual GDP expansion rate occurred in September 1994. The National Accounts for
the quarter ending September 1995, reported a rise of 1.6% in GDP (A) -- the
average measure of Gross Domestic Product. Inventory accumulation contributed
meaningfully to growth together with private consumption and, to a lesser
extent, net exports. Dwelling and business investment were flat over the three
months to September, while public sector final demand contracted. Notably, farm
GDP rebounded considerably following the easing of drought conditions. During
1995 the annual growth rate has declined, with 3.3% recorded for the twelve
months to September. This compares with 6% over the year to September 1994 and
an average of 5% for 1994 as a whole.
The improvement in retail demand experienced in the three months to June
continued into the third quarter of 1995. Turnover was up 1.4%, which will
contribute 0.3% to GDP quarterly expansion. This surge in household spending
followed months of falling unemployment and real wage rises, coupled with
heightened optimism that mortgage interest rates had reached a plateau. However,
various leading indicators together with signs that both employment gains and
real disposable income growth may have peaked, imply that consumption is likely
to suffer over the next six months.
The Westpac-Melbourne Institute index of consumer sentiment has been
volatile over the past year. The downtrend set in place during 1994 by concerns
about mortgage costs was reversed in early 1995, as improved job prospects
dominated sentiment. However, in the last four months of the Fund's financial
year, employment has disappointed with the index settling at 105.5 from a
cyclical high of 125.5 in June 1994 and a recent low of 91.1 in February 1995.
Strong economic growth, albeit at a decelerating rate over the past year,
has facilitated considerable gains in employment. Over the year to October 1995,
employment rose by 226,400 (2.8%). Concomitantly, the unemployment rate has
fallen to 8.7% from 9.1%, well below the cyclical high of 11.1% in October 1993.
Moreover, job prospects have improved primarily in the full-time sector and the
positive economic outlook has encouraged an increase in the number of people
actively seeking work. Nevertheless, in the last quarter of the Fund's financial
year, this positive labor market outlook did become tarnished slightly.
Employment fell nearly 50,000 in this period and unemployment rose from the low
of 8.2%. This modest increase in the jobless rate had been forecast by the ANZ
job advertisements series -- a leading indicator -and recent data suggests that
employment growth should decline towards 2% over the next six months.
4
<PAGE>
- --------------------------------------------------------------------------------
The acceleration in economic activity in 1994 has caused a rise in
inflationary pressures. Annual headline consumer price inflation has climbed
from 1.9% in September 1994 to 5.1% in September 1995. Although rising mortgage
interest rate charges and increased levies on tobacco and alcohol have
influenced the acceleration, underlying price pressures have intensified.
According to the Treasury's methodology, underlying inflation rose by 1.2% in
the quarter to end September -- in line with the quarterly CPI rise -- driven
primarily by the services component due to higher wage costs. On an annual
basis, underlying inflation has risen from 2.0% to 3.1% over the past year, just
above the Reserve Bank of Australia's (RBA) unofficial desired range of 2%-3%.
Wage inflation is the main concern for the RBA, as unit labor costs are
under upward pressure and productivity growth is slowing. Average Weekly
Ordinary Time Earnings (AWOTE) were up 1.2% in the three months to August,
giving an annual rate of 5.3%, compared with 2.9% a year earlier. However, on
these figures, the rate of real wage growth has begun to slow, as CPI inflation
has begun to accelerate faster than AWOTE. This implies a slowing in real
disposable income gains bringing a slowdown in spending and, ultimately,
restricting further acceleration in service sector price rises -- the more
problematic component of underlying inflation. Moreover, it is important to note
that even if underlying inflation reaches 4%, this will be substantially below
the peak of 6.4% recorded in the previous cycle.
With domestic demand remaining strong relative to global trends, the
current account balance deteriorated for most of the year under review. For the
fiscal year to June 1995, the accumulated current account deficit was A$27.4
billion (6% of GDP), up from A$16.6 billion in the previous twelve month period.
During the Fund's financial year, the monthly shortfall rose from just under A$2
billion to beyond A$3 billion in May, before recovering steadily towards A$1.5
billion by September. This recent improvement has occurred due to the positive
effect on exports of a modest decline in the Australian dollar during the first
half of 1995 and a slowing in the rate of import penetration as domestic
activity eased.
While such developments in the balance of payments situation bode well for
the political fortunes of the incumbent Labour government, the turn in
employment trends and consequent worsening in consumer confidence have damaged
the credibility of Prime Minister Paul Keating. His prospects have also been
dented by his party's poor result in the Queensland election held in July.
Accordingly, although erratic in forecasting magnitude, recent polls conducted
regarding the Federal election, to be held by May 1996, show a clear lead for
the opposition National/Liberal Coalition led by John Howard.
New Zealand
During the Fund's financial year, growth rates in New Zealand continued to
exceed those in Australia, although activity has also slowed from its highs in
1994. In the June quarterly release of national accounts data, the production
based measure of GDProse only 0.3%, compared with an expansion rate of 0.9% in
the three months to March 1995. The mining, trade and manufacturing sectors
dragged growth lower, while agriculture, electricity and construction registered
the most marked increase. Overall, the annual growth rate has slowed from 6.3%
in June 1994 to 5.5% in June 1995.
5
<PAGE>
- --------------------------------------------------------------------------------
The high levels of activity have clearly brought capacity constraints and
hence a rise in inflation. However, the Reserve Bank of New Zealand (RBNZ) has
demonstrated considerable resolve towards tightening monetary policy at the
slightest detection of any intensification in inflationary pressure.
Accordingly, both headline and underlying consumer price inflation have risen by
less than in Australia. For the September quarter, the CPI rose 0.2%, driven
mainly by increases in the housing (rents primarily) and recreation groups with
major declines in food prices and credit service costs. On an annual basis
CPIinflation rose from 1.8% in September 1994 to a high of 4.6% in June 1995,
before easing to 3.5% in September.
Underlying inflation also appears to have passed its peak, recording 2.0%
for the year to September 1995, up from the 1.2% for the same period to
September 1994, but lower than the 2.2% for the twelve months ended June 1995.
Indeed, with the underlying rate returning within the RBNZ's official 0% to 2%
target range and growth decelerating, the central bank signaled a cautious
easing in monetary policy on October 17th.
DEBT MARKETS
Against the background of improving bond sentiment world-wide and
recognition of the responsible approach to monetary and fiscal policy in
Australia, bond yields fell substantially during the Fund's financial year.
Short-term interest rates rose sharply in the early part of the period, as the
money markets expected the considerable tightening in monetary policy in 1994 to
be continued into 1995. However, the RBA has not taken action since the 1.0%
increase in the cash rate target to 7.5% on December 14, 1994. Accordingly, with
growth rates slowing, the 90-day bank bill rate, after having reached 8.5% in
January 1995, declined steadily to 7.5% in June and has since remained stable.
This represents a rise of only 1.0% over the year as a whole and indicates that
the market has attached a low probability to any further tightening. Ten year
bond yields fell from over 10.5% to 8.8% over the twelve months to October 31,
1995, slightly above the low of 8.3% in early October. The yield curve has
therefore flattened considerably, while the yield premium over US equivalents
ended the period close to October 1994 levels at 2.5%, after having widened
beyond 3.0% in early 1995.
While the shift in New Zealand bond yields was broadly parallel, shorter
term interest rates, as the main instrument for currency control, fluctuated
considerably. Bond yields fell from around 9.0% in October last year to just
above 7.0%. The three month bank bill rate ended the period virtually unchanged
at 8.2%, although it traded in a range between this level and a high of 9.7%.
The yield curve remained flat between three and 10 year bond maturities, but the
short end became inverted as market expectations of falls in interest rates
increased with annual inflation rates slowing meaningfully for the first time
this cycle.
AUSTRALIAN AND NEW ZEALAND DOLLARS
Although both the Australian (A$) and New Zealand (NZ$) dollars
appreciated over the period under review as a whole, the NZ$ strengthened more
substantially and exhibited lower volatility. Both currencies rose considerably
in the early part of the Fund's financial year as official interest rates rose
to prevent a rapid acceleration in inflation, given the strong pace of growth in
1994.
However, after reaching a high of nearly US$0.78 in early January, a
marked deterioration in the current account balance sent the A$ down to a low of
just under US$0.71 by mid-July. A similarly sharp recovery in the last few
6
<PAGE>
- --------------------------------------------------------------------------------
months of the financial year was facilitated by improving external deficit data
as the foreign exchange markets assumed that the worst had passed. The A$ ended
the year just over US$0.76, with an overall appreciation of just over 2.5% in
the trade weighted index.
Although the NZ$ ended the year off its highs, the uptrend over the period
was more pronounced as current account difficulties were less acute and the RBNZ
moved quickly to reverse temporary bouts of weakness. Accordingly, the trade
weighted index -- monitored closely by the central bank -- rose from 57.8 to
62.1, with a high of 62.6 in mid-September. Against the US$, the NZ$ ended
October just over $0.66.
7
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Portfolio of Investments and Cash on Deposit
October 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Investments -- 91.3%
Principal Amount Value (US$)
- ---------------- ----------
<C> <S> <C> <C>
Australian Government and Semi-Government Bonds -- 66.5%
Australian Government Bonds -- 21.3%
A$ 6,000,000 Commonwealth Government Bond 12.5% due 9/15/97 ..................... $ 4,943,085
12,000,000 Commonwealth Government Bond 12% due 11/15/01 ...................... 10,698,167
6,000,000 Commonwealth Government Bond 10% due 2/15/06 ....................... 4,941,852
-----------
20,583,104
-----------
Semi-Government Bonds with Eurobond Structure -- 31.3%
A$12,700,000 Queensland Treasury Corp. 8% due 5/14/03 ........................ 9,250,975
6,700,000 South Australian Finance Authority 7.75% due 6/30/03 ..................... 4,752,843
17,400,000 Queensland Treasury Corp. 6.5% due 6/14/05 ...................... 11,150,303
7,900,000 New South Wales Treasury Corp. 6.5% due 5/1/06 ....................... 5,002,316
-----------
30,156,437
-----------
Other Semi-Government Bonds -- 13.9%
A$ 4,000,000 State Electricity Commission
of Queensland 13% due 7/1/96 ........................ 3,156,173
4,000,000 Tasmanian Public Finance Corp. 13% due 11/1/96 ....................... 3,205,321
4,000,000 Western Australia Treasury Corp. 12.5% due 4/1/98 ...................... 3,349,932
4,000,000 Victorian Public Finance Authority 12.5% due 10/15/03 .................... 3,658,867
-----------
13,370,293
-----------
Total Australian Government and Semi-Government Bonds-- (Cost $55,788,883) .......................... 64,109,834
-----------
Eurobonds -- 16.5%
A$ 2,500,000 Deutsche Bank Australia 9.75% due 4/8/97 ...................... 1,944,842
5,800,000 Toyota Motor Credit Corp. 10.75% due 3/6/98 ..................... 4,644,579
2,500,000 Unilever Australia Ltd. 12% due 4/8/98 ........................ 2,051,964
3,300,000 Export Finance & Insurance Corp. 9% due 3/26/03 ........................ 2,510,632
5,890,000 Eurofima 9.875% due 1/17/07 .................... 4,716,650
-----------
Total Eurobonds-- (Cost $14,730,077) ................................................................ 15,868,667
-----------
Australian Corporate Bond -- 3.5%
A$ 4,000,000 National Australia Bank 12% due 7/15/99-- (Cost $3,100,973) ... 3,379,153
-----------
New Zealand Government Bond -- 4.8%
NZ$ 6,700,000 New Zealand Government Bond 8% due 11/15/06-- (Cost $4,315,668) ... 4,668,084
-----------
Total Long-Term Investments-- (Cost $77,935,601) .................................................... 88,025,738
-----------
Cash on Deposit -- 6.4%
A$ 8,013,417 Brown Brothers Harriman & Co., upon demand at 6.25%-- (Cost $5,762,142) ........ 6,104,219
US$ 53,069 Brown Brothers Harriman & Co., upon demand at 4.75%-- (Cost $53,069) ........... 53,069
-----------
Total Cash on Deposit -- (Cost $5,815,211) .......................................................... 6,157,288
-----------
Total Portfolio of Investments and Cash on Deposit -- 97.7% (Cost $83,750,812) ...................... 94,183,026
Other Assets less Liabilities -- 2.3% ............................................................... 2,206,973
-----------
Net Assets -- 100.0% ................................................................................ $96,389,999
===========
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
October 31, 1995 October 31, 1994
---------------- ----------------
<S> <C> <C>
ASSETS:
Investments, at value (cost $77,935,601 and $65,983,290, respectively) .... $ 88,025,738 $ 68,902,389
Cash on deposit:
Foreign currency (cost $5,762,142 and $798,857, respectively) ........ 6,104,219 804,017
US dollars ........................................................... 53,069 87,039
Interest receivable ....................................................... 3,038,152 2,527,289
Prepaid expenses .......................................................... 6,524 6,878
Other assets .............................................................. 7,317 7,317
----------- -----------
Total assets .......................................................... 97,235,019 72,334,929
----------- -----------
LIABILITIES:
Dividends payable ......................................................... 621,637 430,364
Investment advisory fee payable ........................................... 56,525 41,950
Directors' fees and expenses payable ...................................... 14,215 9,684
Other accrued expenses .................................................... 152,643 167,775
----------- -----------
Total liabilities ..................................................... 845,020 649,773
----------- -----------
Net assets ............................................................ $96,389,999 $71,685,156
=========== ===========
NET ASSETS:
Net assets were comprised of:
Common stock, at $0.001 par ............................................. $ 9,564 $ 7,173
Paid-in capital ......................................................... 85,551,096 67,980,486
----------- -----------
85,560,660 67,987,659
Accumulated undistributed net investment income ........................... 1,066,228 751,410
Accumulated undistributed net realized gain (loss) on
investment and foreign currency transactions ............................ (748,847) 4,646
Net unrealized appreciation on investments and foreign currencies ......... 10,511,958 2,941,441
----------- -----------
Net assets ............................................................ $96,389,999 $71,685,156
=========== ===========
Shares of common stock issued and outstanding ............................. 9,563,653 7,172,740
----------- -----------
Net asset value per share ................................................. $10.08 $9.99
====== =====
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Statement of Operations
Throughout each period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended October 31,
1995 1994
---- ----
NET INVESTMENT INCOME:
Investment Income:
<S> <C> <C>
Interest and discount earned (net of foreign withholding taxes of
$392,294 and $383,702, respectively) ..................................... $ 8,211,336 $ 6,943,174
----------- -----------
Expenses:
Investment advisory fees ................................................... 584,994 523,737
Custodian fees ............................................................. 183,491 185,311
Directors' fees and expenses ............................................... 119,830 124,940
Audit and tax services ..................................................... 53,860 53,960
Transfer agent fees ........................................................ 44,180 48,180
Printing ................................................................... 38,040 35,040
Postage .................................................................... 24,455 21,375
Stock exchange listing fee ................................................. 16,292 16,664
Legal ...................................................................... 13,570 14,416
Insurance .................................................................. 4,394 4,991
Miscellaneous .............................................................. 18,760 16,411
----------- -----------
Total operating expenses ................................................... 1,101,866 1,045,025
----------- -----------
Net investment income* ..................................................... 7,109,470 5,898,149
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investment transactions* ................................................... (768,608) 13,763
Foreign currency transactions** ............................................ 666,676 335,567
----------- -----------
Total net realized gain (loss) ............................................. (101,932) 349,330
----------- -----------
Change in unrealized appreciation (depreciation) on:
Investments* ............................................................... 5,498,565 (10,646,881)
Foreign currency denominated assets and liabilities** ...................... 2,071,952 6,864,374
----------- -----------
Total net unrealized appreciation (depreciation) ........................... 7,570,517 (3,782,507)
----------- -----------
Net realized and unrealized gain (loss) on investments and
foreign currencies ....................................................... 7,468,585 (3,433,177)
----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................................................... $14,578,055 $ 2,464,972
=========== ===========
</TABLE>
* Net increase in net assets before foreign currency gain (loss) was
$11,839,427 and ($4,734,969), respectively.
** Net realized and unrealized foreign currency gain was $2,738,628 and
$7,199,941, respectively.
See Notes to Financial Statements.
10
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Statement of Changes in Net Assets
Throughout each period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended October 31,
1995 1994
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ...................................................... $ 7,109,470 $ 5,898,149
Net realized gain (loss) on investment and
foreign currency transactions ............................................ (101,932) 349,330
Change in unrealized appreciation (depreciation) on
investments and foreign currency denominated assets and liabilities ...... 7,570,517 (3,782,507)
----------- -----------
Net increase in net assets resulting from operations ....................... 14,578,055 2,464,972
----------- -----------
Distributions to shareholders:
From net investment income ................................................. (7,337,713) (5,580,392)
From net realized gain on investment and
foreign currency transactions ............................................ (14,346) (157,800)
----------- -----------
Net decrease in net assets resulting from
distributions to shareholders ............................................ (7,352,059) (5,738,192)
----------- -----------
Capital stock transactions:
Net asset value of shares issued
through rights offering .................................................. 17,478,847 --
----------- -----------
Total increase (decrease) in net assets .................................. 24,704,843 (3,273,220)
----------- -----------
NET ASSETS:
Beginning of period ........................................................ 71,685,156 74,958,376
----------- -----------
End of period (including accumulated undistributed
net investment income of $1,066,228 and $751,410, respectively) .......... $96,389,999 $71,685,156
=========== ============
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Financial Highlights
Selected data for a share of common stock outstanding throughout each period
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended October 31,
1995 1994 1993 1992 1991
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value at beginning of period ........ $ 9.99 $10.45 $ 9.97 $11.77 $10.29
------ ------ ------ ------ ------
Net investment income+ ........................ 0.84 0.82 0.77 0.92 1.05
Net realized and unrealized gain (loss) on
investments and foreign currencies+ ......... 0.82 (0.48) 0.47 (1.03) 1.44
------ ------ ------ ------ ------
Total increase (decrease) from operations ..... 1.66 0.34 1.24 (0.11) 2.49
------ ------ ------ ------ ------
Distributions to shareholders:
From net investment income .................... (0.89) (0.78) (0.74) (1.02) (1.01)
From net realized gains on investment and
foreign currency transactions ............... -- (0.02) -- (0.56) --
------ ------ ------ ------ ------
Total distributions to shareholders ........... (0.89) (0.80) (0.74) (1.58) (1.01)
------ ------ ------ ------ ------
Decrease in net assets from capital
stock transactions .......................... (0.65) -- (0.01) (0.08) --
------ ------ ------ ------ ------
Offering expenses charged to capital .......... (0.03) -- (0.01) (0.03) --
------ ------ ------ ------ ------
Net increase (decrease) in net asset value .... 0.09 (0.46) 0.48 (1.80) 1.48
------ ------ ------ ------ ------
Net asset value at end of period .............. $10.08 $ 9.99 $10.45 $ 9.97 $11.77
====== ====== ====== ====== ======
Per share market value at end of period ....... $ 9.25 $ 9.125 $ 9.75 $ 9.625 $11.00
Total investment return (1) ................... 15.74% 1.77% 9.23% 2.00% 43.00%
Net asset value return (2) .................... 17.93% 3.22% 12.65% (1.74)% 25.49%
Net assets at end of period (in 000's) ........ $96,390 $71,685 $74,958 $69,564 $74,651
Number of shares outstanding at
end of period (in 000's) .................... 9,564 7,173 7,173 6,979 6,345
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ............................ 1.32% 1.40% 1.47% 1.48% 1.62%
Net investment income ......................... 8.51% 7.88% 7.45% 8.20% 9.62%
Portfolio turnover ............................ 56.55% 13.71% 9.69% 53.66% 11.39%
</TABLE>
(1) Based on market value per share, adjusted for reinvestment of distributions
at reinvestment plan prices and for rights offerings, assuming full
subscription by shareholder.
(2) Based on net asset value per share, adjusted for reinvestment of
distributions at the ex-dividend date net asset value and for rights
offerings, assuming full subscription by shareholder.
+ 1991 and 1992 figures restated to reflect reclassification of certain
realized and unrealized foreign exchange gain (loss) from a component of
net investment income to a component of net realized and unrealized gain
(loss) on investments and foreign currencies.
See Notes to Financial Statements.
12
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Notes to Financial Statements
October 31, 1995
- --------------------------------------------------------------------------------
The Kleinwort Benson Australian Income Fund, Inc. (the "Fund") was incorporated
in Maryland on August 12, 1986 and is registered as a closed-end,
non-diversified investment company under the Investment Company Act of 1940, as
amended.
1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Basis of Presentation: The financial statements of the Fund are prepared in
accordance with accounting principles generally accepted in the United States
using the United States dollar as both the functional and reporting currency.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Australian dollar ("A$") and New Zealand dollar
("NZ$") amounts are translated into United States dollars on the following
basis:
(i) market value of investment securities and other assets and liabilities --
at the current prevailing rate of exchange.
(ii) purchases and sales of investment securities and income and expenses -- at
the rates of exchange prevailing on the respective dates of such
transactions.
The investment securities of the Fund are presented at the foreign exchange
rates and market values at the close of the period. The Fund isolates that
portion of the results of operations arising as a result of changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of securities held or sold during the period.
The foreign currency transactions element of net realized gains or losses
represents net foreign exchange gains or losses from the disposition of
portfolio securities, foreign currencies and forward currency contracts and net
currency gains or losses realized between the trade and settlement dates on
securities transactions and 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. The foreign currency denominated
assets and liabilities element of the change in unrealized appreciation or
depreciation represents the change in the value of portfolio securities arising
as a result of changes in foreign exchange rates and the change in the value of
foreign currencies and other assets and liabilities arising as a result of
changes in foreign exchange rates.
The Australian and New Zealand dollar exchange rates at October 31, 1994 and
1995 were US$0.7426 to A$1.00 and US$0.6155 to NZ$1.00, and US$0.76175 to A$1.00
and US$0.6601 to NZ$1.00, respectively.
Investment Valuation: Investment securities are stated at value. Investments for
which market quotations are readily available are valued at the last reported
sales prices. If there is no sales price on the date of valuation, then
investments are valued at the most recently available sales price or at fair
value as determined in good faith by or under the direction of the Fund's Board
of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost, if their term to maturity from date of purchase was 60
days or less, or by amortizing their value on the 61st day prior to maturity, if
their original term to maturity exceeded 60 days.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability. The abilities of the issuers of debt securities held by the Fund to
13
<PAGE>
- --------------------------------------------------------------------------------
meet their obligations may be affected by economic or political developments in
a particular country.
Investment Transactions and Investment Income: Investment security transactions
are recorded on the trade date. Realized and unrealized gains and losses on
investments and foreign currencies are calculated on the identified cost basis.
Interest income is recorded on the accrual basis and interest receivable is
reflected in the Statement of Assets and Liabilities net of accrued withholding
taxes. Premiums and discounts on debt securities are amortized over the life of
the security.
Forward Currency Contracts: The Fund may enter into forward currency contracts
in order to hedge its exposure to changes in foreign currency exchange rates on
its foreign portfolio holdings. A forward contract is a commitment to purchase
or sell a foreign currency at a future date at a negotiated forward rate.
Forward currency contracts are valued based on the current forward rate of
exchange. Fluctuations in the value of such contracts are recorded as unrealized
foreign exchange gain or loss; realized gains or losses are included in net
realized gain or loss on foreign currency transactions.
Taxes: For Federal income 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 A$ into US$ or NZ$ into A$ or US$ are recognized for tax
purposes.
No provision has been made for United States income taxes because it is the
Fund's policy to meet the requirements of the United States Internal Revenue
Code applicable to regulated investment companies and to distribute, within
allowable time limits, all of its taxable income to shareholders. As the Fund
uses the Australian dollar as its functional currency for tax purposes, there
are character differences between taxable income and net investment income and
net realized gain(loss) on investments and foreign currencies as computed for
financial statement purposes. Australia imposes a withholding tax of 10% on most
interest and discount earned. Eurobonds and New Zealand government bonds are
generally not subject to withholding taxes.
Dividends and Distributions: The Fund declares and pays dividends of net
investment income on a monthly basis. Distributions of net realized capital
gains, if any, are made annually. Dividends and distributions are recorded on
their ex-dividend date. The amount of dividends and distributions from net
investment income and net realized capital gains are determined in accordance
with federal income tax regulations which may differ with generally accepted
accounting principles. These "book/tax" differences are either temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their
tax-basis treatment; temporary differences do not require a reclassification.
Implementation of Statement of Position 93-2: During fiscal 1994, the Fund
adopted AICPA Statement of Position 93-2 Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies ("SOP 93-2"). Accordingly, permanent book
and tax basis differences relating to net investment income and net realized
gain (loss) on investments and foreign currencies have been reclassified to
paid-in capital. As of November 1, 1993, such cumulative differences totalling
$1,013,828 and $1,659,527 were reclassified from accumulated undistributed net
investment income and accumulated net realized gains, respectively, to paid-in
capital. Net investment income, net realized gains and net assets were not
affected by this change. At October 31, 1994, permanent book and tax basis
differences of $390 and $336,966 were reclassified from accumulated
undistributed net investment income and accumulated undistributed net capital
gains, respectively, to paid-in capital. At October 31, 1995, such
reclassifications were ($543,061) and $637,215, respectively. These differences
relate primarily to redesignation of foreign currency gains (losses) to ordinary
income for tax purposes.
14
<PAGE>
- --------------------------------------------------------------------------------
2. Agreements
The Fund's Advisory Agreement with Kleinwort Benson Investment Management
Americas Inc., the Investment Advisor, provides for a fee, computed weekly and
payable monthly, at an annual rate of 0.70% of the Fund's average annual net
assets. For the years ended October 31, 1994 and 1995, the Investment Advisor
earned $523,737 and $584,994, respectively, under this agreement.
On August 8, 1995, the Fund and the Investment Advisor entered into a new
advisory agreement, identical except as to the commencement date, to the prior
advisory agreement, following the aquisition of the Investment Advisor's
ultimate parent company, Kleinwort Benson Group plc, by Dresdner Bank AG. In
accordance with certain provisions of the Investment Company Act of 1940, the
new agreement was approved by the Board of Directors and submitted for the
approval of shareholders at a special meeting to be held on December 5, 1995.
3. Portfolio Transactions
Purchases of investment securities, other than short-term investments, for the
year ended October 31, 1994 and 1995, aggregated $67,575,112 and $55,102,789,
respectively. Sales of investment securities, other than short-term investments,
totaled $9,891,342 and $43,352,323, respectively, during these periods. The
portfolio of investments at October 31, 1994 was substantially the same in terms
of types of investments to that included herein for October 31, 1995.
The United States Federal income tax basis of the Fund's investments and foreign
currency cash deposits at October 31, 1994 and 1995 was as listed below. In
addition, the Fund has a capital loss carryforward as of October 31, 1995 of
$742,819 which expires in 2003. To the extent future capital gains are offset by
such capital losses, the Fund will not distribute such gains to shareholders.
October 31, October 31,
1994 1995
------------ -----------
Tax basis .................. $ 67,575,112 $83,704,621
============ ===========
Unrealized appreciation .... $ 3,454,604 $10,425,337
Unrealized depreciation .... (1,323,310) 0
------------ -----------
Net unrealized appreciation $ 2,131,294 $10,425,337
============ ===========
4. Capital Stock
There are 100 million shares of $0.001 par value common stock authorized and
9,563,653 such shares outstanding. During April 1995, 2,390,913 shares of common
stock were issued through a rights offering at a subscription price of $7.39 per
share. Gross proceeds to the Fund were $17,668,847. Total offering costs of
$190,000 were charged to capital. There were no transactions in shares of common
stock during the fiscal year ended October 31, 1994. The change in common stock
in the year ended October 31, 1995, represents the additional par value of
$2,391 for the shares issued in the rights offering. The change in paid-in
capital of $17,570,610 resulted from the net proceeds in excess of the par value
of the shares issued in the rights offering of $17,476,456 and the net SOP 93-2
adjustment of $94,154 (Note 1).
15
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
5. Quarterly Results of Operations (Unaudited):
Net Realized and Unrealized Net Increase (Decrease)
Net Investment Gain (Loss) on Investments in Net Assets
Total Investment Income Income and Foreign Currencies Resulting from Operations
For the three ----------------------- ------------------- ---------------------- -------------------------
months ended Total* Per Share Total* Per Share Total* Per Share Total* Per Share
------------ ------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 October 31 ... $2,352 $0.236 $1,954 $0.196 $5,029 $0.543 $6,984 $0.739
July 31 ...... 2,262 0.227 1,883 0.190 2,280 0.255 4,162 0.445
April 30 ..... 1,979 0.276 1,621 0.226 (658) (0.092) 963 0.134
January 31 ... 2,011 0.280 1,651 0.230 818 0.114 2,469 0.344
1994 October 31 ... 1,929 0.269 1,584 0.221 (2,430) (0.339) (846) (0.117)
July 31 ...... 1,880 0.262 1,526 0.213 (392) (0.054) 1,134 0.158
April 30 ..... 1,783 0.248 1,420 0.198 (5,105) (0.712) (3,685) (0.514)
January 31 ... 1,735 0.242 1,368 0.190 4,494 0.627 5,862 0.817
</TABLE>
- ----------
* Thousands.
16
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
the Kleinwort Benson Australian Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the October 31, 1995 portfolio of investments and cash on deposit, and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Kleinwort Benson Australian Income Fund, Inc. (the "Fund") at October 31,
1995 and 1994, the results of its operations and the changes in its net assets
for each of the two years in the period ended October 31, 1995, and the
financial highlights for each of the five years in the period ended October 31,
1995, 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, 1995 and 1994 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
November 22, 1995
17
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Dividend Reinvestment and Cash Purchase Plan
Foreign Tax Credits
Tax Information
(Unaudited)
- --------------------------------------------------------------------------------
Dividend Reinvestment and Cash Purchase Plan
The Fund offers to shareholders a Dividend Reinvestment Plan which
provides participants with a prompt and simple way to reinvest their income
dividends and capital gain distributions in additional Fund shares. If you
choose to participate in the Plan, your income dividends and capital gain
distributions will automatically be reinvested in Fund shares at the lower of
market price or net asset value, at up to a 5% discount from market price, on
valuation date. The Plan also includes a Cash Purchase option which provides
Reinvestment Plan participants with the opportunity to make additional cash
investments in Fund shares directly through the Plan Agent.
The Plan is entirely voluntary and, subject to the terms and conditions of
the Plan, you may join or withdraw at any time. A brochure with more
information, including the full terms and conditions, and an application is
available from the Plan Agent, Boston Equiserve (formerly known as Bank of
Boston), telephone (800) 730-6001.
If you wish to participate and your shares are registered in your name,
simply complete and return the application form at the back of the brochure. If
your shares are held in the name of a brokerage firm, bank or other nominee,
your shares may need to be re-registered in your own name in order for you to
participate. Please consult your broker to determine what needs to be done to
arrange for you to join the Plan.
Foreign Tax Credits
The Fund will generally elect to treat all foreign taxes paid by it as
having been paid proportionately by its shareholders. As a result, the Form
1099-DIV's issued to shareholders by the Fund will likely include an amount of
foreign taxes paid by the Fund on the behalf of its shareholders. Shareholders
can generally use the foreign tax amount to either claim a deduction or a tax
credit on their U.S. Federal tax return.
The Fund issues its 1099-DIV tax forms in January of each year. In
February, the Fund will inform shareholders of the breakdown between foreign
taxes, dividends and distributions paid for the preceding calendar year.
Shareholders whose shares are held in "street name" should contact their broker
for foreign tax credit reporting information.
Tax Information
In accordance with United States Federal income tax regulations, a summary
for the fiscal year ended October 31, 1995, of the dividends and distributions
paid for Federal income tax purposes on a per share basis is listed below.
Please note that if you report for Federal income tax purposes on a
calendar year basis, amounts which should be included in your 1995 return should
be based on the Form 1099 which will be provided to you in January 1996. Those
Form 1099's will be based on calendar year tax information which will vary from
that reported below.
Distributions to Shareholders:
Dividends $0.893
Long-term Capital Gains 0.002
Foreign Taxes (Australia) 0.048
-------
Total Distributions $0.943
=======
Distributions by Source:
Ordinary Income, Foreign Source:
Australia $0.903
New Zealand 0.033
-------
Total Foreign Source 0.936
Ordinary Income, U.S. Source 0.005
-------
Total Ordinary Income 0.941
Long-term Capital Gains 0.002
-------
Total Distributions $0.943
=======
18
<PAGE>
Kleinwort Benson Australian Income Fund, Inc.
Shareholder Meeting Results
(Unaudited)
- --------------------------------------------------------------------------------
During the fiscal year ended October 31, 1995, the Fund's Annual General
Meeting of Shareholders was held on February 9, 1995. Issues presented for the
approval of shareholders were (1) the election of one class of three Directors
(Sir Robert C. Cotton, David M. Felder and James J. Foley); and (2) the
ratification of the selection of Price Waterhouse LLP as Independent Accountants
for the Fund for the fiscal year ended October 31, 1995.
The election of Directors and the selection of accountants were approved
by shareholders by large margins. There were 7,172,710 shares eligible to vote
at the meeting and voting results were as follows:
Number of Shares Voted
----------------------
Issue For Against Abstained
----- --- ------- ---------
Election of Directors:
Sir Robert C. Cotton .................. 6,190,887 122,498 --
David M. Felder ....................... 6,205,262 108,123 --
James J. Foley ........................ 6,207,064 106,321 --
Selection of Independent Accountants .. 6,154,252 52,749 106,385
Directors whose term of office continued after the meeting also included
Leonard T. Hinde, Henry G. Lang, The Earl of Limerick, Nigel S. MacEwan and G.
William Miller.
On December 5, 1995, a Special Meeting of Shareholders was held to approve
a new Investment Advisory Agreement between the Fund and Kleinwort Benson
Investment Management Americas Inc. (See Note 2 on page 15 of the accompanying
financial statements). At the meeting, the resolution was approved by
shareholders, with over 97% of those shares represented at the meeting having
voted in favor of the proposal. There were 9,563,653 shares eligible to vote at
the meeting and voting results were as follows:
Number of Shares Voted
----------------------
Issue For Against Abstained
----- --- ------- ---------
Approval of Advisory Agreement ........ 8,200,064 83,771 125,592
19
<PAGE>
Kleinwort
Benson
---------
Australian
Income Fund, Inc.
- --------------------------------------------------------------------------------
Directors and Officers
Sir Robert C. Cotton
Director and Chairman of the Board
Sydney, Australia
David M. Felder
Director and President
London, England
James J. Foley
Director
Belmont, MA
Leonard T. Hinde
Director
Cremorne, NSW, Australia
The Earl of Limerick
Director
London, England
Nigel S. MacEwan
Director
Darien, CT
G. William Miller
Director and Deputy Chairman of the Board
Washington, DC
Francis M. Harte
Treasurer and Principal Financial and Accounting Officer
New York, NY
Michael Fortier
Secretary and Assistant Treasurer
New York, NY
Investment Advisor
Kleinwort Benson Investment Management Americas Inc.
New York, NY
Kleinwort Benson
Australian Income Fund, Inc.
200 Park Avenue
New York, NY 10166
(800) 237-4218
