- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Annual Report
October 31, 1996
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Report to Shareholders
To Our Shareholders,
In November of 1986, this Fund was launched to provide US investors with a
way to take advantage of the higher yields available from high quality
Australian bonds. We are now celebrating our 10th year of providing high current
income to shareholders while achieving a secondary objective of capital
appreciation. At the Fund's inception, interest rates in Australia were in the
range of 15%, while the currency was trading below US$0.65. As Australian
economic fundamentals have improved, interest rates have declined, providing
capital appreciation for the portfolio. The Australian dollar has also
appreciated versus the US dollar, providing additional returns to investors.
From inception through October 1996 the Fund has achieved annualized total
returns of 13.95% on a net asset value basis and 11.77% on a market value basis
(both returns assume reinvestment of distributions and have been adjusted for
rights offerings). These returns compare favorably to the Salomon US Government
Bond Index which returned just 8.11% annually over the same time frame.
During the twelve months ended October 31, 1996, the total value of the
Fund increased substantially, with bond prices in Australia rising sharply and
the Australian dollar appreciating against the US dollar. The yield premium of
Australian bonds over their US counterparts declined sharply over the period,
driven by improving domestic fundamentals and a general preference among
international investors for higher yielding bond markets. The Australian dollar
appreciated against the US dollar over the first quarter of 1996, and despite
some recent weakness, has held much of this gain. The Fund's position in New
Zealand bonds continues to provide useful diversification and exposure to the
New Zealand dollar, which continued to rise against the Australian and US
dollars over the period. Over the financial year to date, the Fund both
fulfilled its primary objective of achieving a high level of income return and
succeeded in raising the capital value of the underlying assets.
For the year ended October 31, 1996, the Fund achieved a total return on
net asset value (with income reinvested and adjusted for the rights offering) of
16.90%. At October 31, 1996, the Fund's closing market price was $9.125 per
share, a discount of 12.34% to its net asset value of $10.41 per share. The
monthly dividend rate has remained at $0.065 per share since January 1995 and
accordingly the Fund's current dividend yield is 8.5%. On December 9, 1996, the
Board of Directors declared a year-end extra dividend of $0.03 per share. The
Board also announced that the monthly dividend rate would remain at $0.065
through the June 15, 1996 payment. A further analysis of the Fund's performance
since inception is provided later in this report.
The Fund successfully completed a rights offering in October, issuing
2,390,913 shares at an offering price of $8.79 per share, equal to 95% of market
price, and providing net proceeds to the Fund of $20.74 million. The offering
was well over-subscribed and the transferable structure of the offering provided
shareholders with the option of either exercising or selling their rights. As a
result of the increase in net assets from the offering, the ratio of operating
expenses to annual average net assets is expected to decline from 1.22% to 1.15%
for fiscal 1997, (assuming average net assets for the year of $124 million).
1
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Report to Shareholders
- ------------------------
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
recent developments in the debt and currency markets. In summary, Australian
economic growth recovered over 1996 from the weakness that it had suffered in
the previous year. However, the recovery remained narrowly based, with many
sectors continuing to suffer. Inflation trended downwards over the year, leaving
the Treasury underlying measure within the 2-3% target band of the Reserve Bank
of Australia (RBA). In New Zealand the economy continued to slow through 1996,
and while inflation remained stubbornly outside the 0-2% Reserve Bank of New
Zealand (RBNZ) target band, there was some evidence of easing price pressures in
the second half of the year.
Official interest rates in Australia have been reduced twice over the past
five months, to 6.5%, after having been stable at 7.5% since December 1994. The
RBA acted on the lack of obvious inflationary pressures, in particular the
downwards trend in average earnings. The Australian dollar, which performed very
well in the early part of 1996, held on to most of these gains over the
remainder of the period, despite lower commodity prices and falling official
interest rates.
In New Zealand, inflation remained outside the RBNZ target range and a
relatively tight mix of monetary conditions was maintained. Towards the end of
the period under review, signs of an easing in the housing market and a
weakening labor market led to expectations of an easing in monetary conditions.
Continued high short rates kept the New Zealand dollar on an appreciating trend,
despite the failure of the October election to produce a clear result.
The Australian bond market performed poorly over the first eight months of
the year under review, with the yield on ten year bonds rising from 8.5% in
October 1995 to almost 9% in June 1996. Rising Australian yields were largely a
result of higher yields on US Treasuries, which set a negative tone for global
bonds. However, in the period from June to the Fund's year-end in October,
Australian bonds rallied sharply, driven by improving domestic fundamentals and
the return to positive sentiment in the US Treasury market. Ten year Australian
yields fell sharply to finish the year under review at 7.4%, substantially below
the levels of October 1995. New Zealand bonds were also weak over the period to
June 1996, with ten year yields rising to nearly 9% from 7.2% in October 1995.
The effect of a weaker background for global bonds was compounded by domestic
concerns over politics and continuing stubborn inflation. However, as in
Australia, bond prices rose sharply in the last four months of the period, given
signs that inflationary pressures might be easing, bringing the ten year yield
down to 7.3%.
Australia and New Zealand both held general elections in 1996. In
Australia, there was a convincing win for the Liberal coalition, under John
Howard. The new, more conservative government promised, and has since delivered,
a fiscally responsible budget, and has been generally well received by the
market. The picture in New Zealand is less clear. The October election failed to
produce a clear majority for any single party, or indeed any obvious grouping.
The support of the NZ First party would allow either Labour or the National
party to take power, but the outcome of discussions is still unclear.
2
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Performance from Inception through October 31, 1996
(Unaudited)
[The following table was depicted as a line chart in the printed material]
Growth of a Hypothetical $10,000 Investment
Australian Index Net Asset Value Market Value U.S. Index
---------------- --------------- ------------ ----------
Nov '86 10000 10000 10000 10000
Oct '87 11687 11102 9165 10041
Oct '88 16812 15889 14679 11007
Oct '89 17137 15993 15010 12359
Oct '90 20426 18470 14664 13075
Oct '91 25846 23178 20969 14965
Oct '92 26021 22775 21388 16527
Oct '93 29557 25656 23363 18687
Oct '94 30145 26482 23776 17864
Oct '95 36448 31231 27518 20601
Oct '96 43779 36508 30144 21669
Since its inception in 1986, the Fund has achieved an average annualized return
on market value of 11.77%, 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 13.95%. Both the market and net asset value
performance measures have outpaced the Salomon Brothers US Government Bond Index
which has averaged 8.11%. The Salomon Brothers Australian Government Bond Index
has averaged 16.06% since the Fund's inception, with the difference between the
Fund's net asset value performance and that of the index primarily attributable
to the Fund's operating and foreign tax expenses, which neither index is subject
to. After adjusting for these expenses, which have averaged 2.34% since
inception, the Fund has outperformed the Australian index as well.
- --------------------------------------------------------------------------------
Annualized Since
Performance 1 Year 3 Years 5 Years Inception+
- --------------------------------------------------------------------------------
Fund Market Value(1) 9.54% 8.87% 7.53% 11.77%
- --------------------------------------------------------------------------------
Fund Net Asset Value(2) 16.90% 12.48% 9.51% 13.95%
- --------------------------------------------------------------------------------
Salomon Brothers US Gov't
Bond Index(3) 5.18% 5.06% 7.68% 8.11%
- --------------------------------------------------------------------------------
Salomon Brothers Australian Gov't
Bond Index(4) 19.98% 13.99% 11.12% 16.06%
- --------------------------------------------------------------------------------
+ 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>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
- ------------------------
OUTLOOK
- ------------------------
Given recent improvements in Australian fiscal and monetary conditions, we
do not anticipate that Australian returns will continue the level of
outperformance we have seen since 1986. The strength of the Australian bond
market has also resulted on lower current yields on Australian bonds and if this
trend continues it may result in a reduction in the Fund's dividend yield at
some point. However Australian bonds continue to provide superior yields to US
bonds of comparable quality and the Fund expects to continue exploiting this
difference for the benefit of our investors. We appreciate the continued
confidence shown by our shareholders and look forward to the next ten years.
On behalf of the Board of Directors,
/s/ Robert Cotton
Sir Robert Cotton
Chairman
/S/ David M. Felder
David M. Felder
President
December 9, 1996
- ------------------------
ECONOMIC REVIEW
- ------------------------
The last twelve months have been characterized by shifting sentiment as to
the strength of the US economy. In the latter part of 1995 there were worries
that weakness would give way to recession, and the Federal Reserve cut official
rates in early 1996. However, stronger US data released in the first quarter of
1996, most notably the strong series of non-farms payroll figures, led to rising
growth forecasts and inflationary concerns. These fears were not realized, with
inflation figures remaining moderate, and more recent figures have suggested
growth at close to the trend growth rate. European economies have displayed
signs of recovery during 1996, although the extra fiscal discipline imposed by
the Maastricht Treaty should limit the pace of growth. The Japanese economic
recovery continued to stall and officials were resolute in their defense of the
current loose monetary policy.
Australia
Economic growth in Australia slowed in the last quarter of 1995, with
GDP(A) rising 3.1% year on year. However there was a marked increase in the pace
of growth over the early part of 1996 and annual GDP(A) growth was reported at
5.1% in the first quarter and 4.5% in the second. Private consumption held up
well over the first half of the year, despite disappointing growth in
employment, and business investment was particularly strong. The recovery
remains narrowly based, with many
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
At October 31, 1996, the average maturity of the Fund's portfolio was 5.6
years, with an average duration of 4.1 years, while the average current
yield to maturity was 7.3%.
- --------------------------------------------------------------------------------
4
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Economic Review
sectors still relatively depressed, and there has been some more recent evidence
that growth for the third quarter of 1996 will be lower than that reported
earlier in the year.
Retail sales were still strong towards the end of 1995, peaking at a year
on year rise of 8.7% in January 1996. Sales growth has moderated since that
time, but has held up reasonably well in volume terms at the expense of retail
margins. More recent sales data has revealed a sharper decline in growth, with
retail sales rising just 2% over the twelve months ended September 1996. The
weakness in retail sales has been observed in most sectors, with only food and
clothing retailing displaying any strength. Consumer sentiment was relatively
weak at the start of the period under review, but rallied strongly on the
election of the Liberal coalition government in March. In line with retail sales
figures, consumer confidence fell in the second and third quarters of the year.
However, the most recent survey, taken just after the RBA cut official rates to
6.5% on November 6, 1996, rebounded to the levels seen at the time of the March
election.
The labor market has been mixed over the period under review, delivering
growth in total employment, but not at a rate fast enough to reduce the
unemployment rate, given a growing workforce. The unemployment rate rose from
8.6% in October 1995 to 8.9% in April 1996, and has remained broadly stable,
ending the period at 8.8%.
The past twelve months have been characterized by declining inflation in
Australia, as measured by both the headline rate and the Treasury's underlying
measure. Headline CPI peaked in the December quarter of 1995 at 5.1% on year ago
levels, before declining steadily to 2.1% in the twelve months ended in
September 1996. The Treasury underlying measure peaked later, in the March
quarter of 1996 at 3.3%, just outside the RBA's 2-3% target band, before falling
to 2.4% in the September quarter. This easing in inflation is consistent with
the heavy discounting activity in the retail sector and also reflects the
strength of the Australian dollar, particularly against the Yen, which has
dampened inflation in the automobile sector.
The RBA has continued to highlight wage inflation as the main risk to the
achievement of their inflationary targets. However, over the period, wages, as
measured by the Average Weekly Ordinary Time Earnings figures, declined
steadily. AWOTE growth peaked at 5.1% on year ago levels in the September
quarter of 1995 and declined steadily to 3.9% in the June quarter of 1996. The
September rise was originally reported at 3.5%, but has since been revised
upwards to 3.8%. While the AWOTE figures are consistent with the RBA's target
inflation range, there has been some concern about the level of enterprise
bargaining settlements. Many sectors are moving from industry-wide negotiations
to these individual enterprise agreements, and such settlements are running at
around 5% in the private sector.
The external sector of the economy posted a marked improvement over the
year under review. The current account deficit for the year to June 1996 was
A$20.9 billion, having fallen from A$28.1bn in the same period a year before.
The majority of this fall was driven by a drop in the merchandise trade deficit
from A$8.3bn in 1994/5 to A$1.8bn in 1995/6. The only part of the current
account to worsen over the period was the net income balance, which represents
the principal element of the overall deficit and highlights the need for
increased saving in the Australian economy.
5
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Economic Review
The Liberal coalition government, elected in March, has indicated that it
intends to institute reforms to several areas of policy. Indeed, the new
Treasurer Paul Costello delivered his first budget in August, introducing
measures aimed at returning the underlying budget position to a surplus by
1998/9, with a small deficit (1.1% of GDP) predicted for 1997/8. The new
Government has also announced reforms to the labor market, and have set out to
increase the transparency and accountability of the RBA. Late in the period
under review, Ian Macfarlane, the former deputy governor, took over from Bernie
Fraser as the Governor of the Reserve Bank. Mr. Macfarlane is expected to be at
least as firm on meeting inflationary targets as his predecessor.
New Zealand
The economy in New Zealand has continued to slow during 1996. The
production measure of GDP was reported at +2.6% (year on year) in both the
December quarter of 1995 and the March quarter of 1996, before falling to +2.1%
in the June quarter. The economy is expected to receive some support from the
fiscal stimulus of recent tax cuts, announced by the last National Government,
but recent statistics for the September quarter offer little evidence of a
meaningful upturn, and monetary conditions remain tight. Such growth as has been
experienced over the year has been concentrated in the service sector, with the
manufacturing sector weak and continuing to suffer internationally from the
relatively high level of the currency.
Despite continuing economic weakness in the early part of 1996, CPI
inflation remained stubbornly outside the RBNZ 0-2% target band, with the
underlying measure reported at 2.1% (year on year) in the March quarter and 2.3%
in the June quarter. The September quarter outcome was unchanged at 2.3%, below
market expectations. Inflation in the tradable goods sector has been constrained
by the strong New Zealand dollar, but the non-tradable rate remains high, and as
yet there are no clear signs of a downturn in house prices, the main cause for
concern. Labor market conditions worsened over the year, in response to slower
growth, with the unemployment rate rising from 6.1% in the December quarter of
1995 to 6.3% in the September quarter of 1996.
The Federal election on October 12, 1996 failed to provide a clear majority
for either leading party and has been followed by protracted talks aimed at
bringing a coalition government together. The Labour and National party blocks
both won sizable minorities, and either could form a government with the support
of Winston Peters' NZ First party. There are few major policy differences
between the two main groups, with both likely to alter little, except to widen
the Reserve Bank target inflation band. The only major concern is that either
block may swing too heavily towards the more radical NZ First agenda in order to
attract their support.
Debt Markets
Australian bonds performed well over the year under review, with the yield
on ten year bonds falling from 8.6% in October 1995 to 7.4% in October 1996. The
bond market experienced three distinct phases over the period. In late 1995 and
the first two months of 1996 the market in Australia rallied in line with
global bond markets, on expectations of a downturn in North American and
European
6
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Economic Review
economies. The second phase, from February to June, was marked by a sell-off in
Australian bonds, again led by US Treasuries, with ten year Australian yields
peaking at 9%. The final phase, since June, saw a sharp rally in Australian
bonds as the benefits of supportive domestic fundamentals and falling short-term
interest rates were compounded by rising global bond markets, and particularly
strong demand for higher yielding markets. The ten year yield finished at 7.4%
and the yield premium over comparable US treasury bonds declined to a
historically low 0.9%, from a high of over 2% earlier in the year.
The New Zealand bond market also rallied with US Treasuries until February
1996, with ten year yields falling from 7.2% at the end of October to just below
7% in February. However, during the spring decline in global bonds, the
consequent sell-off in New Zealand was exacerbated by political concerns over
the election looming in October. As a result New Zealand ten year bond yields
rose to 8.8% in May 1996 when political concerns were at their height. In the
period since June 1996, New Zealand government bonds have rallied sharply,
against a background of rallying global bonds, the anticipation of an eventual
drop in domestic inflation and demand for higher yielding bonds, particularly
from Asian investors. The bond market became less concerned about the
composition of the incoming government towards the end of the period, and the
New Zealand ten year bond yield finished the period at 7.3%.
Australian and New Zealand Dollars
The Australian dollar strengthened significantly during 1996, rising
strongly against the US dollar during the spring of 1996. The Australian dollar
started the period under review at US$0.76, then fell to US$0.734 in
mid-January, before strengthening to over US$0.80 in mid-May. This performance
was driven by an improving current account balance, higher commodity prices, and
strong demand for A$ denominated debt instruments from Japanese investors. The
currency weakened slightly during July and August when lower world growth
forecasts led to a drop in commodity prices and it became clear that the RBA
would be able to reduce short-term interest rates. However, the currency held on
to most of its earlier gains and ended October above US$0.79.
The New Zealand dollar rose in value consistently over the period, from
US$0.66 at the end of October 1995 to US$0.708 at the end of October 1996.
Support for the currency was provided by high and rising short-term interest
rates during a period when short-term rates in Europe and the US were falling.
There was strong demand from Japanese investors, no longer content with
historically low yields available in Yen assets. The political concerns that
hampered the bond market in the summer of 1996 did not affect the currency
significantly.
7
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Portfolio of Investments and Cash on Deposit
October 31, 1996
<TABLE>
<CAPTION>
Long-Term Investments -- 96.5%
Principal Amount Value (US$)
- ---------------- -----------
<S> <C> <C>
Australian Government and Semi-Government Bonds -- 67.0%
Australian Government Bonds -- 21.9%
A$ 6,000,000 Commonwealth Government Bond 12.5% due 9/15/97................... $ 4,994,337
12,000,000 Commonwealth Government Bond 12% due 11/15/01.................... 11,487,450
5,000,000 Australian Industrial Development Corp. 9.25% due 2/17/03................... 4,313,900
1,000,000 Commonwealth Bank of Australia 9% due 8/15/05...................... 861,789
6,000,000 Commonwealth Government Bond 10% due 2/15/06..................... 5,584,300
-----------
.................................... 27,241,776
-----------
Semi-Government Bonds with Eurobond Structure -- 34.8%
A$ 1,300,000 State Bank of New South Wales 9.25% due 2/18/03................... 1,120,326
16,450,000 Queensland Treasury Corp. 8% due 5/14/03...................... 13,487,232
6,500,000 South Australian Finance Authority 7.75% due 6/30/03................... 5,228,189
2,500,000 Treasury Corp. of Victoria 7.25% due 9/30/03................... 1,970,288
22,400,000 Queensland Treasury Corp. 6.5% due 6/14/05.................... 16,666,301
6,500,000 New South Wales Treasury Corp. 6.5% due 5/1/06..................... 4,809,573
-----------
.................................... 43,281,909
-----------
Other Semi-Government Bonds -- 10.3%
A$ 4,000,000 Tasmanian Public Finance Corp. 13% due 11/1/96..................... 3,169,958
6,500,000 Western Australia Treasury Corp. 12.5% due 4/1/98.................... 5,561,145
4,000,000 Victorian Public Finance Authority 12.5% due 10/15/03.................. 4,041,019
-----------
.................................... 12,772,122
-----------
Total Australian Government and Semi-Government Bonds-- (Cost $70,177,743)........................... 83,295,807
-----------
Eurobonds -- 22.9%
A$ 2,500,000 Deutsche Bank Australia 9.75% due 4/8/97.................... 2,003,413
5,800,000 Toyota Motor Credit Corp. 10.75% due 3/6/98................... 4,814,530
2,500,000 Unilever Australia Ltd. 12% due 4/8/98...................... 2,112,375
3,500,000 DSL Finance N.V. 10.25% due 4/7/00................... 3,030,131
6,000,000 Morgan Guaranty Trust Co. 8% due 4/18/01...................... 4,879,511
3,300,000 Export Finance & Insurance Corp. 9% due 3/26/03...................... 2,811,216
5,000,000 KFW International Finance 9.125% due 7/26/05.................. 4,338,664
5,000,000 Eurofima 9.875% due 1/17/07.................. 4,576,399
-----------
Total Eurobonds -- (Cost $25,813,859) .................................... 28,566,239
-----------
Australian Corporate Bond -- 2.9%
A$ 4,000,000 National Australia Bank 12% due 7/15/99 -- (Cost $3,142,954) 3,557,720
-----------
New Zealand Government Bond -- 3.7%
NZ$ 6,600,000 New Zealand Government Bond 10% due 7/15/97 -- (Cost $4,555,636) 4,724,220
-----------
Total Long-Term Investments-- (Cost $103,690,192) .................................... 120,143,986
-----------
Cash on Deposit -- 5.5%
A$ 7,815,686 Brown Brothers Harriman & Co., upon demand at 5.9375%........................... 6,193,541
US$ 673,993 Brown Brothers Harriman & Co., upon demand at 4.25%............................. 673,993
Total Cash on Deposit -- (Cost $6,863,882) .................................... 6,867,534
-----------
Total Portfolio of Investments and Cash on Deposit -- 102.0% (Cost $110,554,074)..................... 127,011,520
Other Assets less Liabilities --(2.0)% .................................... (2,510,371)
-----------
Net Assets -- 100.0% .................................... $124,501,149
===========
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Statements of Assets and Liabilities
October 31, 1996 October 31, 1995
---------------- ----------------
ASSETS:
Investments, at value (cost $103,690,192
and $77,935,601, respectively).......... $120,143,986 $88,025,738
Cash on deposit:
Foreign currency (cost $6,189,889 and
$5,762,142, respectively)............... 6,193,541 6,104,219
US dollars................................ 673,993 53,069
Interest receivable....................... 4,002,771 3,038,152
Accounts receivable for rights offering
proceeds................................ 286,910 --
Prepaid expenses.......................... 5,995 6,524
Other assets.............................. 7,317 7,317
------------ -----------
Total assets.......................... 131,314,513 97,235,019
------------ -----------
LIABILITIES:
Accounts payable for securities purchased. 5,796,750 --
Dividends payable......................... 621,637 621,637
Investment advisory fee payable........... -- 56,525
Directors' fees and expenses payable...... 14,580 14,215
Other accrued expenses.................... 380,397 152,643
------------ -----------
Total liabilities..................... 6,813,364 845,020
------------ -----------
Net assets............................ $124,501,149 $96,389,999
============ ===========
NET ASSETS:
Net assets were comprised of:
Common stock, at $0.001 par............. $ 11,955 $ 9,564
Paid-in capital......................... 107,903,518 85,551,096
------------ -----------
107,915,473 85,560,660
Accumulated undistributed net investment
income.................................. 634,699 1,066,228
Accumulated net realized loss on
investment and foreign currency
transactions............................ (515,017) (748,847)
Net unrealized appreciation on investments
and foreign currencies.................. 16,465,994 10,511,958
------------ -----------
Net assets............................ $124,501,149 $96,389,999
============ ===========
Shares of common stock issued and
outstanding............................. 11,954,566 9,563,653
---------- ---------
Net asset value per share................. $10.41 $10.08
====== ======
See Notes to Financial Statements.
9
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Statements of Operations
Fiscal year ended October 31,
1996 1995
---- ----
NET INVESTMENT INCOME:
Investment Income:
Interest and discount earned (net of foreign
withholding taxes of $399,472 and $392,294,
respectively) ............................... $9,287,931 $8,211,336
---------- ----------
Expenses:
Investment advisory fees ................... 688,599 584,994
Custodian fees ............................. 200,324 183,491
Directors' fees and expenses ............... 92,362 119,830
Audit and tax services ..................... 49,560 53,860
Printing ................................... 45,136 38,040
Transfer agent fees ........................ 37,946 44,180
Postage .................................... 27,888 24,455
Legal ...................................... 20,130 16,292
Stock exchange listing fee ................. 16,170 13,570
Insurance .................................. 4,528 4,394
Miscellaneous .............................. 17,777 18,760
---------- ----------
Total operating expenses ................... 1,200,420 1,101,866
---------- ----------
Net investment income* ..................... 8,087,511 7,109,470
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investment transactions* ................... 195,999 (768,608)
Foreign currency transactions** ............ 1,644,129 666,676
----------- -----------
Total net realized gain (loss) ............. 1,840,128 (101,932)
---------- ----------
Change in unrealized appreciation (depreciation) on:
Investments*................................ 3,858,862 5,498,565
Foreign currency denominated assets
and liabilities** ...................... 2,095,175 2,071,952
---------- ----------
Total net unrealized appreciation .......... 5,954,037 7,570,517
---------- ----------
Net realized and unrealized gain on
investments and foreign currencies ..... 7,794,165 7,468,585
----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................ $15,881,676 $14,578,055
=========== ===========
* Net increase in net assets before net foreign currency gain was $12,142,372
and $11,839,427, respectively.
** Net realized and unrealized foreign currency gain was $3,739,304
and$2,738,628, respectively.
See Notes to Financial Statements.
10
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Statements of Changes in Net Assets
Fiscal year ended October 31,
1996 1995
---- ----
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ........................ $ 8,087,511 $ 7,109,470
Net realized gain (loss) on investment and
foreign currency transactions ............. 1,840,128 (101,932)
Change in unrealized appreciation on
investments and foreign currency denominated
assets and liabilities .................... 5,954,037 7,570,517
------------ -----------
Net increase in net assets resulting from
operations .................................. 15,881,676 14,578,055
------------ -----------
Distributions to shareholders:
From net investment income ................... (8,511,651) (7,337,713)
From net realized gain on investment and
foreign currency transactions ............. -- (14,346)
------------ -----------
Net decrease in net assets resulting from
distributions to shareholders ............... (8,511,651) (7,352,059)
------------ -----------
Capital stock transactions:
Net asset value of shares issued
through rights offerings ................... 20,741,125 17,478,847
------------ -----------
Total increase in net assets ................. 28,111,150 24,704,843
------------ -----------
NET ASSETS:
Beginning of period .......................... 96,389,999 71,685,156
------------ -----------
End of period (including accumulated
undistributed net investment income of
$634,699 and $1,066,228, respectively) ..... $124,501,149 $96,389,999
============ ===========
See Notes to Financial Statements.
11
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Financial Highlights
<TABLE>
<CAPTION>
Fiscal year ended October 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value at beginning of period ............ $ 10.08 $ 9.99 $ 10.45 $ 9.97 $ 11.77
-------- -------- -------- -------- --------
Net investment income ............................. 0.85 0.84 0.82 0.77 0.92
Net realized and unrealized gain (loss) on
investments and foreign currencies .............. 0.79 0.82 (0.48) 0.47 (1.03)
-------- -------- -------- -------- --------
Total increase(decrease) from operations .......... 1.64 1.66 0.34 1.24 (0.11)
-------- -------- -------- -------- --------
Distributions to shareholders:
From net investment income ........................ (0.89) (0.89) (0.78) (0.74) (1.02)
From net realized gains on investment
and foreign currency transactions ............... -- -- (0.02) -- (0.56)
-------- -------- -------- -------- --------
Total distributions to shareholders ............... (0.89) (0.89) (0.80) (0.74) (1.58)
-------- -------- -------- -------- --------
Decrease in net assets from capital
stock transactions .............................. (0.39) (0.65) -- (0.01) (0.08)
-------- -------- -------- -------- --------
Offering expenses charged to capital .............. (0.03) (0.03) -- (0.01) (0.03)
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value ........ 0.33 0.09 (0.46) 0.48 (1.80)
-------- -------- -------- -------- --------
Net asset value at end of period .................. $ 10.41 $ 10.08 $ 9.99 $ 10.45 $ 9.97
======== ======== ======== ======== ========
Per share market value at end of period ........... $ 9.125 $ 9.25 $ 9.125 $ 9.75 $ 9.625
Total investment return (1) ....................... 9.54% 15.74% 1.77% 9.23% 2.00%
Net asset value return (2) ........................ 16.90% 17.93% 3.22% 12.65% (1.74)%
Net assets at end of period (in 000's) ............ $124,501 $ 96,390 $ 71,685 $ 74,958 $ 69,564
Number of shares outstanding at
end of period (in 000's) ........................ 11,955 9,564 7,173 7,173 6,979
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ............................. 1.22% 1.32% 1.40% 1.47% 1.48%
Net investment income .......................... 8.22% 8.51% 7.88% 7.45% 8.20%
Portfolio turnover ............................. 16.00% 56.55% 13.71% 9.69% 53.66%
</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.
See Notes to Financial Statements.
13
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Notes to Financial Statements
October 31, 1996
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.
(For tax purposes the Fund uses the Australian dollar as its functional currency
- -- see Taxes.) The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
of certain reported amounts in the financial statements. Actual amounts could
differ from those estimates.
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
security 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, 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, 1995 and
October 31, 1996, were US$0.76175 to A$1.00 and US$0.6601 to NZ$1.00, and
US$0.7925 to A$1.00 and US$0.7075 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
13
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Notes to Financial Statements (continued)
October 31, 1996
amortizing their value on the 61st day prior to maturity, if their original term
to maturity exceeded 60 days.
Market and Currency Risk: 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 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.
At October 31, 1995, permanent book and tax basis differences of ($543,061) and
$637,215 were reclassified from accumulated undistributed net investment income
and accumulated undistributed net capital gains, respectively, to paid-in
capital. At October 31, 1996, such reclassifications were
14
<PAGE>
- ------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- ------------------------
Notes to Financial Statements (continued)
October 31, 1996
$7,389 and $1,606,298, respectively. These differences relate primarily to
redesignation of foreign currency gains (losses) to ordinary income for tax
purposes.
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 up to $100,000,000 and at 0.65% thereafter. Prior to October 25, 1996,
the agreement provided for a fee at an annual rate of 0.70% on all assets. For
the years ended October 31, 1995 and 1996, the Investment Advisor earned
$584,994 and $688,599, respectively, under this agreement.
3. Portfolio Transactions
Purchases of investment securities, other than short-term investments, for the
years ended October 31, 1995 and 1996, aggregated $55,102,789 and $39,158,365,
respectively. Sales of investment securities, other than short-term investments,
totaled $43,352,323, and $15,418,908 respectively, during these periods. The
portfolio of investments at October 31, 1995 was substantially the same in terms
of types of investments to that included herein for October 31, 1996.
The United States Federal income tax basis of the Fund's investments and foreign
currency cash deposits at October 31, 1995 and 1996 was as listed below. During
the year, the Fund utilized capital loss carryforwards of $233,830. As of
October 31, 1996, the Fund has a capital loss carryforward of $508,989 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, 1996 October 31, 1995
---------------- ----------------
Tax cost basis $115,100,272 $ 83,704,621
============ ============
Unrealized appreciation $ 14,192,816 $ 10,425,337
Unrealized depreciation (11,585) 0
------------ ------------
Net unrealized appreciation $ 14,481,231 $ 10,425,337
============ ============
4. Capital Stock
There are 100 million shares of $0.001 par value common stock authorized and
11,954,566 such shares outstanding. In October 1996, 2,390,913 shares of common
stock were issued through a rights offering at a subscription price of $8.79 per
share. Gross proceeds to the Fund were $21,016,125. Total offering costs of
$275,000 were charged to capital. 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.
15
<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, 1996 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, 1996 and 1995, the results of its operations and the changes in its
net assets for each of the two years in the period ended October 31, 1996, and
the financial highlights for each of the five years in the period ended October
31, 1996, 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, 1996 and 1995 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 26, 1996
16
<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, telephone (800) 730-6001.
If you wish to participate and your shares are registered in your name,
simply complete and return the application form. 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, 1996, 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 1996 return should
be based on the Form 1099 which will be provided to you in January 1997. Those
Form 1099's will be based on calendar year tax information which will vary from
that reported below:
Distributions to Shareholders:
- ------------------------------
Dividends........................... $0.890
Foreign Taxes (Australia)........... 0.043
------
Total Distributions................. $0.933
======
Distributions by Source:
- ------------------------
Ordinary Income, Foreign Source:
Australia......................... $0.895
New Zealand....................... 0.036
------
Total Foreign Source.............. 0.931
Ordinary Income, U.S. Source........ 0.002
------
Total Distributions................. $0.933
======
17
<PAGE>
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
Michael Fortier
Secretary and Treasurer
New York, NY
Investment Advisor
Kleinwort Benson Investment
Management Americas Inc.
New York, NY
Kleinwort
Benson
Australian
Income Fund, Inc.
75 Wall Street
New York, NY 10005
(800) 237-4218
